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Operator: Good day, and welcome to Iridium's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ken Levy, Vice President of Investor Relations. Please go ahead. Kenneth Levy: Thanks, Clowey. Good morning, and welcome to Iridium's Third Quarter 2025 Earnings Call. Joining me on today's call are our CEO, Matt Desch; and our CFO, Vince O'Neill. Today's call will begin with a discussion of our third quarter results, followed by Q&A. I trust you've had the opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website. Before I turn things over to Matt, I'd like to caution all participants that our call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks, which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today, and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or expectations change. During the call, we'll also be referring to certain non-GAAP financial measures, including operational EBITDA, pro forma free cash flow, free cash flow yield and free cash flow conversion. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release in the Investor Relations section of our website for further explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measures. With that, I'd like to turn the call over to Matt. Matthew Desch: Good morning, everyone. We just finished another solid quarter, which puts us on track to meet our OEBITDA growth expectations for the year. I'd like to use my time today to share some broader thoughts about the satellite space and our plans to address and capitalize on the changing landscape. Vince will then recap Iridium's quarterly performance in greater detail and highlight the trends we have seen since our last earnings call. As you are well aware, the recent proposed acquisition of EchoStar Spectrum by Starling to build a global D2D capability is a significant event for the satellite industry. We believe this acquisition will likely be disruptive to the status quo and will hasten the introduction of a global service that over time will connect new smartphones configured to use this spectrum. It could also accelerate the adoption of IoT devices that better compete with our global IoT services, at least better than the current D2D efforts using cellular spectrum on a regional basis in a few countries around the world. We acknowledge that more competition is coming to our corner of the satellite market. We take this increased competition seriously and believe that this development will affect us as early as the latter years of this decade and most certainly into the 2030s. Now that being said, we do have exciting prospects as well as an enviable position in established growing markets because of the quality and durability of our partnerships and satellite solutions. We have tremendous experience developing thousands of Iridium-connected solutions that are already in the market. This knowledge and our knowledge and our network will serve us well in responding to the changes taking place in the industry today. To be clear, we will be proactive and pivot to strengthen our position, amid ongoing changes to the satellite market landscape. We have a long history of doing this and I'm confident we will be successful and can continue to grow revenues as the market for satellite services evolve. Iridium has focused on providing unique specialized services in the satellite industry. While we have some areas of overlap with other satellite providers, we have never sought to participate in price-driven commodity markets and we don't plan to now. Our current development of Iridium NTN Direct is a great entry point into providing a new standards-based D2D service that will expose us to a new and potentially larger market opportunity. However, broadband D2D is still a nascent unproven market. And absent a partner with spectrum and committed capital to support this type of build-out, we have no plans to go it alone. As we think about our long-term future and think about the services we'd include in a follow-on constellation, we will look to opportunities that provide us with the greatest return on capital. And for now, and doesn't fit that profile for us. Instead, we plan to build on our market strengths and focus even more deeply on the areas we are uniquely qualified to deliver. This includes continuing to prudently invest in new growth areas around our unique industrial-grade IoT and PNT services and exploring acquisitions in adjacent areas that are complementary. We will focus on regulated applications where demand for safety services are growing, and our unique global satellite capability can provide a critical solution such as maritime and aviation cockpit safety services. In addition, we believe Iridium has a strong and defensible position in the growing autonomous systems market as a failsafe connection for drones, crudeless vessels and other autonomous vehicles. These vehicles will need multiple redundant connections for safety and reliability, and we'll also appreciate our PNT technology to protect their location and navigation. As I said before, we will continue with our investment in Iridium NTN Direct. Our development work with standards-based IoT continues to provide an exciting opportunity and is complementary to other D2D efforts in the industry. We are making strong progress on this new service, and we're now in the process of on-air testing from live satellites. We are getting good traction from mobile network operators. You likely saw our announcements with Deutsche Telekom and Carrier One, and there are more announcements to come. We're finding demand from MNOs for a global Iridium service onto which their IoT customers can roam and we believe Iridium NTN Direct will augment our already successful and growing IoT portfolio and expand our addressable market into the broader terrestrial IoT space. We will also seek to build or acquire intellectual property and assets that provide Iridium other outlets for growing new revenue streams that won't compete directly with these new D2D services coming in a few years. For example, Iridium has a very unique platform with our powerful new PNT service which has the ability to reshape security applications and fortify terrestrial networks. We're seeing a lot of traction in a number of commercial and government industries that need an alternative to GPS for critical infrastructure, protection for their navigation systems and accurate in-building time sources in addition to other security uses. We are also developing a unique quantum-safe cybersecurity product using our PNT signal that can improve identity access management and provide authentication for high-value transactions, tapping into the $20 billion identity verification industry and creating a new revenue stream. Even capturing a small portion of this growing market would be meaningful to a company of our size. We are also continuing our focus on U.S. national security missions, building on our collaboration with the U.S. government over the last 25 years. Iridium's network is relied upon for primary and backup communications, secured transmissions, specialized IoT services, tactical radios and much more. Many government agencies depend on Iridium service for critical data transfer, asset management and situational awareness to name a few. And of course, our technology is embedded into so many applications and missions. So it is not easily replaced by other satellite systems or evolving D2D services. We continue to discuss our EMSS contract renewal with the U.S. government and expect a positive and productive outcome in the next year as the government continues to rely more heavily on commercial satellite services like ours. Similarly, our contract with the Space Force Space Development Agency is another important touch point with the U.S. government. We see the work we're doing on building the ground entry points and operation centers for SBA's new network has given us great visibility into the government's Golden Dome initiative and credibility to support its future needs. We are well positioned to expand the scope of our work with the government going forward as they invest heavily in Golden Dome. These are just a few areas for which we believe disciplined capital deployment can provide continued strong revenue and bottom line growth and we look forward to being able to share additional details as we execute on our vision. Beyond our valuable global L-band satellite spectrum and the growing number of partners and solutions we've developed over our 3 decades of operations, Iridium is unique in the satellite industry and that we generate strong cash flows with reasonable capital cycles. With a healthy, flexible and still young satellite constellation, we won't need to spend on a new network until well into the 2030s with bus and launch costs significantly less than we experienced with our second-generation system, we feel good about our options for lower cost construction and launch when the time comes, including potentially as hosted payloads on another constellation system. Further, we have confidence that our strong cash flow should continue over the next 5 years and into the 2030s when a replacement system may be needed. Even with the increased uncertainty provided by a new satellite entrants, we still expect to generate at least $1.5 billion to $1.8 billion in total cash flows from 2026 through 2030, giving us a lot of flexibility as we enhance our business and focus on new growth opportunities. Given the increased focus on solidifying our competitive position, we have decided that we will pause our share repurchase program to emphasize strategic growth initiatives and continue our discipline in the deployment of capital as we remain committed to deleveraging the balance sheet. We believe this is a prudent course for now, even as we continue with our quarterly dividend program. As you can see by our earnings report today, we continue to grow revenue in subscribers, and we expect to grow well into the future. Since the beginning of the year, we've signed up more than 70 new technology and distribution partners to the Iridium ecosystem to either build new solutions or license our technology for new Iridium-based products. These are indicative of the continuing value of our network and demonstrate the strong pipeline we have for continued growth. We are confident that Iridium's many product lines will continue to be relevant, and we are excited to begin to invest in related technologies and businesses where we see meaningful growth potential. While the EchoStar Spectrum sale is a major development, it does not come as a complete surprise to us. More D2D competition is coming, but we have time to respond as market reaction will be slow. We've seen this with a limited market reaction to Apple's D2D offerings and the response to the new T-Mobile satellite services which have been underwhelming as well. We agree that the communications market is changing and new industries, which hadn't previously seriously considered using satellite solutions are now beginning to explore or build applications that offer real value to their customers. This is an attractive environment for us, and we expect Iridium's opportunities will expand. As we invest in new technologies and adjust our market focus, we know that our competitive advantage comes from focusing on specialized products and services for which high reliability and customized solutions remain key points of differentiation. With that, I'll now turn the call over to Vince to discuss our quarterly results and outlook. Vince? Vincent O'Neill: Thanks, Matt. Good morning, everyone. As Matt noted, I'll review Iridium's financial results for the third quarter. I'll also highlight some of the trends we're seeing across the industry and share details on Iridium's leverage and capital position. Operational EBITDA was up 10% in the third quarter to $136.6 million, driven by a combination of revenue from recurring services and engineering and support. On the commercial side of our business, service revenue was up 4% to $138.3 million, largely due to growth in commercial IoT, PNT and voice and data. Voice and data revenue rose 4% from a year earlier to $59.9 million, largely reflecting price increases implemented in the beginning of July, which drove a 4% increase in ARPU. Commercial IoT revenue totaled $46.7 million in the third quarter, up 7% from a year earlier. This increase continues to reflect broad-based growth of our IoT services for both consumer and commercial applications. Commercial Broadband was down 17% from the year ago period, though largely in line with our internal forecast. We anticipated the decline in broadband this quarter, which was largely attributable to a nonmaritime contract from the prior year period that was not renewed. Excluding this $1.4 million take-or-pay contract, the decline in broadband this quarter was consistent with the trend we saw in the first half of the year. Hosting and other data services revenue was $18.7 million this quarter, up 14% from last year's comparable quarter, reflecting an increase in PNT accentuated by a discrete event associated with the customer contract. We are in the early days of PNT business development and see robust opportunity ahead for meaningful revenue growth. We are encouraged by the level of market interest in the service that spans sectors and solutions. There is an increasing need for resilient position and timing solutions, especially for civil and commercial applications, to address jamming and spoofing and protect critical infrastructure. Government Service revenue was up modestly in the third quarter to $26.9 million, reflecting the step-up in our EMSS contract with the U.S. government in mid-September. This is the last price step-up to our contract, which will yield $110.5 million during the final year of the 7-year term. I should note that the government has the option to extend the contract for a period of 6 months at the current rate, which they traditionally exercise. Our formal negotiations on the new EMSS contract with the government will commence in 2026 in earnest. We entered this process with a strong relationship built over 25 years and understand well their priorities, needs and expectations. A good example of this is the integration of Iridium's technology in Colcom's new Snapdragon Mission Tactical Radio for U.S. government and Allied users. Turning to subscriber equipment. Sales were $21.5 million in the third quarter, down marginally from the prior year's quarter. We now forecast full year sales will modestly under on last year's level. Engineering and support revenue was $40.2 million in the third quarter as compared to $30.7 million in the prior year period. The strong increase from the prior year quarter continues to reflect Iridium's growing work with the Space Development Agency as well as new R&D and study contracts awarded in the prior year. For 2025, we are tightening our full year forecast for service revenue growth to approximately 3% and are narrowing our OEBITDA guidance between $495 million and $500 million, the higher end of our previously guided range. The primary driver of our adjustment to service revenue relates to the timing of PNT revenue. As previewed during our second quarter call, PNT revenue that had initially been expected to come in 2025, will now be delayed and pushed into future periods. And existing large customers working on a major deployment of PNT. Their investment is significant. However, the timing of implementation rests on factors outside of our control. We continue to work closely with this customer to support their rollout. This will result in hosted payload and other data services growth below trend in the fourth quarter and full year service revenue trending to the bottom end of our previously guided range. PNT remains a very attractive market for Iridium and will drive incremental revenue growth. We especially like the fact that it is a wide area of broadcast service that supports an unlimited number of users, while using minimal network resources. We've been happy to see Iridium PNT expand into a number of new applications like 5G networks. For example, you may have seen this week's announcement that T-Mobile is increasing their deployment of Iridium P&T for network resilience. Beyond this item, I would offer a couple of comments on trends we are seeing in our commercial lines of business as well as our ongoing work with the U.S. government. As I noted earlier, we initiated a price increase in our commercial voice and data business in July. Coincident with this rise in ARPU, we have seen a modest amount of subscriber deactivations tied to this pricing action. Going forward, we expect ARPU for our voice and data business to average $48 for the foreseeable future. Revenue in subscribers in IoT continue to grow. While we expect fourth quarter growth to increase from the 7% posted in Q3 due to contracted revenue with a large customer, we believe IoT revenue growth will now come in just below 10% for the full year. Our IoT business is running well. And as Matt noted, we have a number of new partners that have joined Iridium's ecosystem that are building new applications and will help drive future growth. As I mentioned earlier, the decline in our broadband revenue growth rate in the third quarter was abnormally high due to the impact of a nonmaritime contract from the prior year period that was not renewed. We anticipate that the year-over-year decline in broadband revenue will continue into the fourth quarter and trend closer to 8%. A faster conversion of maritime vessels from primary to companion service this year is hastening a mix shift in our Maritime business and will continue to be visible in our ARPU through the end of the year. Over time, we believe subscriber gains from the adoption of new Iridium Certus GMDSS plans will help to offset these ARPU pressures and that Iridium will remain an important player in the maritime sector. Iridium's government business will generate $108 million in EMSS revenue from the DoD this year. We also expect that the strong trends we've seen in engineering and support, primarily tied to our work with the FDA, will continue into the fourth quarter and support another year of record engineering revenue. Finally, with the tax legislation passed this summer, we expect an additional year of tax savings. We now expect Iridium to pay cash taxes of less than $10 million per year through 2027 and don't anticipate being a taxpayer at the full statutory rate until 2029. This updated tax profile will add further support to incremental cash generation. We hope this color is helpful as we enter the final quarter of the year. During the third quarter, Iridium retired approximately 1.9 million shares of common stock at an average price of $26.22. While Iridium stock trades at an attractive valuation, we believe it is prudent to enhance our incremental financial flexibility in the face of future changes to the competitive landscape. As Matt has already noted, we are pausing our share buybacks. Over the normal course, pausing our repurchase program will add approximately $50 million to our cash position by the end of the year and drive our net leverage slightly lower. Given the free cash flow Iridium will continue to generate, we have the ability to delever and quickly reduce net leverage from today's 3.5x. This increased financial flexibility allows us to consider options such as potentially buying back some of our debt, which reduces ongoing carrying costs. Absent an acquisition, Iridium could quickly delever below 2x net leverage well in advance of our targeted time line of 2030. Further, financial flexibility supports our ability to pursue strategic initiatives, including bolt-on M&A that bolsters our position in certain target markets. Moving to our capital position as of September 30, Iridium had a cash and cash equivalents balance of $88.5 million and ended the quarter with net leverage of 3.5x OEBITDA. On September 30, Iridium made a quarterly dividend payment of $0.15 per share to shareholders. This increase to the dividend rate results in full year growth rate of approximately 5% over 2024. We are committed to an active and growing dividend program as it augments long-term shareholder returns. Capital expenditures in the third quarter were $21.5 million. As we have noted previously, we anticipate higher capital expenditures in 2025 to support our work on Iridium NTN Direct and 5G standards. Turning to our pro forma free cash flow. We present a description of our cash flow metrics, along with the reconciliation to GAAP measures in a supplemental presentation, under the Events tab on our Investor Relations website. In those materials, we project pro forma free cash flow of about $304 million for 2025, with a conversion rate of OEBITDA to free cash flow of 61% in '25 and a yield approaching 18%. As Matt has previously noted, we expect that the Spectrum deals announced this year will bring more competition to the MSS industry over time. To ensure we are providing the most relevant guidance, we continue to guide service revenue on a year-by-year basis, but our withdrawing our 2030 service revenue outlook. Iridium has a durable and resilient business that will continue to generate significant cash flow over the long term. That strength is driven in part by Iridium-connected solutions that are not easily displaced and drive our recurring revenue quarter after quarter and year after year. We anticipate that even in the evolving competitive environment, Iridium has the capacity to generate at least $1.5 billion to $1.8 billion of free cash flow over the balance of this decade. I'd remind investors that Iridium is currently generating about $300 million per year of pro forma free cash flow. Just maintaining this run rate generates $1.5 billion through the end of the decade. Iridium occupies a unique position in the satellite market today. We have great assets, strong cash flow and many opportunities for incremental growth. While we acknowledge that the competitive dynamics in the satellite industry are likely to move at a faster pace, we remain very excited about our prospects and the durability of our existing business. With that, I'll turn things back to the operator and look forward to your questions. Operator: [Operator Instructions] The first question comes from Edison Yu with Deutsche Bank. Xin Yu: I want to follow up on the strategic options that the team has mentioned and maybe take it from 2 angles. First, you mentioned M&A several times I'm wondering what the time line maybe is for some of these actions and that's in the context stuff, is this a case where you had a bunch of M&A in the pipeline already and you're speeding it up? Or are you now looking for different types of targets post all the events that have occurred in the last couple of months? Matthew Desch: Yes. we haven't been a big acquisition company. Obviously, we did [ Satellus ] a few years ago, but hadn't done any sense. We have been looking at some areas that are complementary to what we're doing. We're looking at some now. I can't really comment on any specific timing because it's not completely within our control. But I did want to signal to you that, that will be a bigger focus for us going forward for obvious reasons. I mean there are things we can do to accelerate revenues and growth that are complementary to the specific areas we've targeted, and we're going to focus on those a bit more heavily. But there's not lots of targets. We're obviously not going to do many, many at the time, but we will focus on that more. Xin Yu: Understood. And then when I take a look at the M&A angle from, I guess, the opposite side, does it make sense to you for Iridium to be part whether directly or indirectly of some type of other solution, whether it's another big tech company trying to get into DDD in some way? Do you think that is a sensible thing after what's happened in transpired in the last couple of months? Matthew Desch: Well, it's only sensible based upon the value that, that would create for shareholders, which is our job to maximize. So clearly, we'd be open to those who have that desire. But I don't know for sure, but I wouldn't say that the recent news of spectrum purchase of that size and given the still uncertainty of the market will attract more to the market. I mean it might be less. But there's only so many of us that do have spectrum. We obviously have an important position there. And so if someone really wanted to do it globally, we could obviously be part of that. But that's not really for us to decide. That's not really something we can plan and execute on. That's for others to decide, but we'll do what's in the best interest in the long term value that we can create. Operator: The next question comes from Brent Penter with Raymond James. Brent Penter: Appreciate the commentary on the competitive environment. So at a high level, which of your business lines do you think are totally insulated from the competitive risk where you don't think about it at all really? Which business lines are maybe mostly insulated and which business lines do you think are most potentially exposed? Matthew Desch: Well, that's a very detailed question here. No business is completely insulated. We've largely been extremely competitive in the areas that we serve because of our global network because of our L-band spectrum because we're able to be a regulated provider when others can't. There's a lot of hurdles people have to overcome to compete say and the cockpit safety services or maritime safety services. Others have tried to do that, and it's taken years and years. So those kind of areas are always going to be pretty insulated from services. Some things like PNT, for example, given a 15-year head start we have on that given the fact that would be really very difficult to kind of recreate a service like that. Those are going to be pretty well protected services. Industrial IoT, really -- in many ways, that's protected by just a massive ecosystem and solutions that we provided, but we do have a wide variety of both proprietary and soon to be standards-based services, which also make that an attractive service that's in a business -- in an area of which there's going to be multiple suppliers. It's not going to always be direct head on the head competition, it's going to be actually multiple solutions in many things. For example, in the autonomous areas, we're finding ourselves being put on with terrestrial and even kind of broadband capabilities into autonomous solutions. So I think that covers a lot of area. The government is another area that after 25 years and being embedded into so many areas, having such high credibility in terms of what we can do and what our experience has led, which FDA is a good example of as we're lining up around Golden Dome, which potentially could be $175 billion, we find there's an awful lot of business that we can address. And we're mature enough as an organization to now go after that business where we couldn't have before. So I would say we feel like, first of all, we have a lot of sustaining strength in the existing businesses, a lot of momentum for -- in the coming years. Long term, as you look over 10 years, I think our business will evolve a bit, and that's why we're going to be more aggressive about evolving it ourselves into it. But I think that there's -- that's why we feel very strongly about the cash flows we're going to be generating over the next 5 years and can really kind of reiterate those. Brent Penter: Okay. Great. I appreciate all that detail. And so to take a big broad question and make it a little more specific. If we look at the Voice and Data segment, what -- can you give us a rough breakdown of what percent of your base there are more leisure or casual users versus what portion are maybe more industrial types or users that really need that more robust device and service that might be at less risk? Matthew Desch: Well, when you talk about voice and data, I mean, you're mostly talking about satellite phones and PTT devices and the like. And I don't think there's a whole lot of leisure in there. Almost everything that we supply is I would call for kind of a security, industrial kind of use, NGOs, first responders, militaries, and the like. I don't see a lot of people who are talking about the fact that they have a satellite phone for fund or use a push-to-talk device for roaming with family. So I think very little of that is really, I would call, consumer-grade kind of things. So it's another reason why I -- by the way, there's a little bit in terms of like subscribers. You can see we're seeing a difference in subscribers. As I was looking through and talking to the team about where that kind of year-over-year sort of subscriber, it's still small, but where is it coming from? It's all in kind of industrial areas. For example, the DOGE funding with USAID. There were some -- we're talking -- all these are, by the way, a pretty small effect. So there was USAID, the UN, for example, as some funding issues. So kind of NGOs in general. Of course, the -- we did have a small price increase this year, and I see some small impact, it seems like with some people who may be looking -- I'd say, again, maybe these are governmental agencies that decide they can use a few less given the price. I would say, tariffs have had a small impact. Really stretching a little bit, like the drawback -- the troop drawdown in Gaza, hurricanes. This has been one of the quietest hurricane seasons, but all these things have a small impact you could say is D2D an impact. The fact that you can do it with a smartphone, and it must be a small impact, but it really is, given all those other kind of issues, I can't see a real big impact really right now from D2D on that business. And I would say kind of the implication of your question is those are kind of consumer users and not industrial NGO, first responder, safety and security kind of application. So I hope that helps answer kind of where we see that business. Brent Penter: Yes. Yes. Very helpful color. And so my last question would just be kind of take a similar question with the IoT business. Can you all update us on what portion of that base is personal communication kind of or consumer users? Vincent O'Neill: It's about -- Brent, there is about 900,000 -- of the IoT subscriber base, roughly about 900,000 are personal subscriber users. Matthew Desch: And those are low ARPU users for the most part. As you can see, that business continues to grow and still expand in terms of number of devices and users, most of that business though is still -- as we can tell, not just everyday users who use this occasionally now and then, which is where a lot of, I think, D2Dis going. These are users that need a rugged purpose-built device for tracking or these again are a lot of first responders and those sort of people as well. So I think over half, which is our higher margin business is the broader industrial IoT area and that's the area that kind of continues to grow at pretty traditional rates right now. Operator: The next question comes from Mathieu Robilliard with Barclays. Mathieu Robilliard: If I could dive in some of the verticals a bit more. In terms of the broadband, one, you mentioned that there was a one-off kind of a contract that was not renewed. But I was wondering if you were still seeing an impact from the loss of core connectivity services that you had in the past, but I thought would be down by the end of last year or beginning of this year. So I just wanted to make sure what was the exposure still to connectivity service on the maritime. And then on the IoT and clearly, I think from what you've said, this is potentially the area where D2D could become the biggest competitor. At the same time, you are developing your home, D2D IoT or NTN IoT solution. And I think you signed the deal with Deutsche Telekom recently, and I wanted to clarify what exactly it is? Because my understanding is that your services are not yet commercially available. And so if you could clarify exactly the nature of what you signed with Deutsche Telekom. And also, which is another way to look at the threat of D2D or the opportunity. Clearly, when we look at pure mobile terrestrial IoT ARPUs, we're talking about less than $1 or low single-digit dollar per month per user, which is not the case in your IoT business, and I understand there's lots of different price points. But is your D2D initiative, is that something that could protect you to some extent, but also just bring lower ARPU for the same amount of subscribers? Matthew Desch: Okay. you have a couple there, Mathieu. I think you started with broadband. I want to make sure you understand that onetime which sort of distorts this quarter was actually revenue we had to recognize a year ago in the contract. So the contract was terminated. That wasn't the maritime contract happened to be kind of a little bit larger onetime kind of event that when you normalize that, we continue to sort of change the mix, if you will, in the maritime industry. I'm expecting that, that will eventually turn around. You can see the new products that are coming out. We've had some announced even in the last month. Intellian, which is a really important supplier in the maritime space, got approval for their combined backup GMDSS terminal that I think will be very attractive, and we have some more in the market coming. So I think broadband will eventually kind of flatten out, and we're not seeing any new trends in that area. In terms of IoT, yes, the contract -- the announcement of DT and the others that I think you'll soon be seeing are really kind of roaming arrangements. Those are MOUs. These are that relate to their agreements to allow their customers to roam onto our network, they're terrestrial customers. As I said before, we're getting a lot of interest, in fact, even growing interest there. The D2D market is not a 1 player wins all. What we're hearing from the mobile network operators is that they want multiple partners. They -- even the ones that have invested in people, I think you're going to see are going to roam on to our network as well. They appreciate the robustness of our network and the availability of it. I mean it won't be long before we deliver that service and the revenues. You're right, I think we'll be probably lower ARPU overall, but there will be an expansion of the market as opposed to necessarily -- they'll be going after applications that we wouldn't be able to address today with our proprietary solution. So for example, we can't address the smart meter market. There's many agricultural sensor markets we can address today. But our network is will be perfectly suited for those applications. And when we deliver a service, there'll be a lot of mobile network operator applications in this space, which they would find attractive to allow a Roman to our network. So we see that as a net positive and an important growth area for us. So I think I covered all of them, but let me know if I didn't, Mathieu. Mathieu Robilliard: No, that's very clear. I guess what I understand in terms of the agreement you signed with Deutsche is not -- this is based on your existing satellite IoT solutions. You're just signing a new partner, which is great in itself, but it has nothing to do with you... Matthew Desch: That's not true, Mathieu. The with DT was for Iridium NTN Direct. Whenever you hear the term Iridium NTN Direct, that's our service name for our new narrowband IoT standards-based solution based upon 3GPP Release 19 standards and the new chipsets and all that sort of thing. So that's what we're testing right now. It's actually starting to really do initial testing on live satellites. It's going to evolve into a service that we think will be ready next year, and we'll generate new solutions in devices that can both handle terrestrial and satellite communications. Operator: The Next question comes from Colin Canfield with Cantor. Colin Canfield: Following up to [indiscernible] maybe just asking it a little bit more directly, but as we think about kind of take on value on Iridium and maybe the process, typically, if we think about it maybe starting today and the cost starting now, is it fair to assume that like 9 to 12 months could be a kind of potential time line to realizing that the full value of Iridium? And as you think about kind of the key value within Iridium's kind of constellation RF network downstream devices, where do you think kind of are the key things that other partners might want to take out of the business or kind of integrate it into their wholesale back? I mean like there's a lot of, obviously, big dollars that are flowing around and like, yes, you can make the argument that the space equity market probably continues to drift higher from here. But it's just one of those things where it's tough to get public market credit for such an enduring and valuable asset. Matthew Desch: Yes. That's a good question and a difficult one to answer. I mean, I think our value is in the breadth of and experience and the ecosystem that we've had and all the solutions and growing market segments. We have -- I mentioned a couple -- a number of really, I think, important and enduring assets that we have, whether it's the U.S. government business, our PNT technology, which is quite unique, the breadth. I mean we've been the winner in IoT satellite services for a while now, and that isn't slowing down what we can do in other markets. I look at others right now. Yes, with a little else jealousy if people do have no revenues and only long-term kind of growth prospects. And obviously, the market isn't appreciating that about us right now. And that's why I think this sort of announcement of a bit of pivot and more investment into longer-term growth areas, which is clearly what people are appreciating now as opposed to return of capital and that sort of thing. I think it's prudent right now. So not sure if that completely answered your question, but hopefully I do think that there is some underappreciated assets of value. Perhaps we've been more underappreciated than some right now. And I think a lot of that has to do with people who have not really sustained the business as much, but they do have larger spectrum assets than perhaps we have and perhaps that's of interest to some. Ours are valuable spectrum assets, but we haven't chosen to market them to others. And clearly, people believe that maybe there's been a rerating of the value of satellite spectrum in the mobile satellite services banner, and we haven't promoted that. We still have value regardless. It's just we're not out there pumping that as being what the future of our company is. I believe that we can still create excess large growth going long term, and I think that will be proven. Colin Canfield: Got it. Got it. Definitely agree. But as we think about rank order of partners, right? Like the EchoStar SpaceX deal, I think you're talking a pretty clear indication that this basically plans to go after a handset, right? And so within that construct, kind of the big competitors that are read have substantial ecosystems are probably 1 in 1 alone and as a third company, right? So as we think of kind of that construct, is there a rank order of folks that you probably have a great relationship, someone like Paul Jacobs a global star or kind of some of the Amazon folks? Like how do you rank order the potential teammates that you would probably want to work with in the future? Matthew Desch: Yes, that's a tricky question to answer. I mean that sort of is leading to possible partnerships and aspects that I don't really want to signal. I've said in the past, especially having been here almost 19 years now. I do know everybody. I have talked to everybody. And I will say this is a very active time in the industry where there are a lot of discussions going on, but not necessarily -- I don't want to try to indicate that there are imminent deals are things underway. I think that would be inappropriate even if there were to talk about that right now. There are larger players in our industry that weren't there 5, 10 certainly when I joined the industry, and you mentioned people like Amazon Kiper and Apple and certainly, there wasn't a SpaceX, Starlink in those days. And those are kind of people with the assets and strategic ability to go kind of anywhere they want to go, which is a new thing for our industry, and I think that will be an interesting development. But I think we can exist within that environment very well and possibly even take advantage of that. Colin Canfield: Got it. I definitely agree. Appreciate the color as always now. Matthew Desch: Yes. Thanks. Operator: The next question comes from Tim Horan with Oppenheimer. Timothy Horan: Matt, just following up on that question. On the spectrum front, do you have a sense of what percentage of the world EchoStar Spectrum covers at this point? And I believe you and Globalstar are the only ones with really global spectrum coverage. If you can just elaborate on that, that would be great. Matthew Desch: Yes. It's a complicated question. The way spectrum works is that the ITU provides -- think of it almost there's a directory at the ITU on a country-by-country basis of who has priority. And we do have like the #1 priority with our network in many countries developed over 30 years. And so we're -- a lot of places probably that Starlink will never be today because those countries can make decisions now as EchoStar spectrum is kind of applied for it to decide whether they want them to be there or not. So it's hard to say they are a certain place or not. They're certainly can support the oceans now that they couldn't before. They could do markets that really don't have a strong regulatory environment. But there's probably some markets that are going to say no to them. And that is not an easily describable position. It's going to take some time. First of all, that spectrum is geostationary spectrum. So that requires it to be reallocated and reapproved. There will be other people that will try to move ahead of them in line. It might even be us in some cases. And so it will take some time for that to kind of be reallocated and reapproved. But I mean, I want to say I wanted to make it clear, I didn't want to spend all the time of how hard it will be for them to create a system. I wanted to be sure that investors understood that in no way are we in kind of denial of the potential of that solution. Certainly, their ability to create a much more global system, for example, than EchoStar could have done that on their own. Frankly, they have rockets and satellites and other things that others don't have. So it's going to be faster than we were anticipating in a network would have been deployed, but we were always expecting a network would be deployed that could do this over the long term. Just thought it would probably be 2035 instead of 2029 or whatever it turns out to be. So I hope that's clear. And even when it is, I really think that as you kind of imply there will be lots of holes, they won't be probably still as global as we will. But I wanted to make it clear. Our goal isn't go straight at them and compete. It's to be complementary to them, doing things like Iridium NTN Direct, which we think has enduring value regardless of really what happens here. Timothy Horan: That's really helpful. So on PNT, it seems like the opportunity now is much larger than it even was 2 or 3 years ago. I guess do you still think you can hit those revenue targets on PNT. And what does it kind of take to do that? Matthew Desch: Yes, we do. I'm as bullish about actually more bullish about PNT than I've ever been. I will say it's a little lumpy as the business gets off the ground. There are some really big opportunities that we see ahead of us. It's just the timing of those aren't clear. I think you're going to see a number of announcements in the future, which will give you a bit more clear understanding of why we're as confident as we are about that. But a lot of trials going on. We really do see we have a significant competitive advantage. I think we saw the Department of Transportation announcement this week with T-Mobile. I mean that's just a small fraction of the potential even in that market. And we're really seeing that the technology is very complementary to our IoT business. There's a lot of business, for example, in autonomous vehicles of all types that really need a really reliable timing and location signal to make sure that what they're depending on in GPS or any other GNSS system can be relied on. So yes, I think we have a tremendous head start and a great opportunity. And I did tease out an opportunity that we're building on top of that. I don't really want to go too much more into the cybersecurity applications. But again, it's things that we can do on that platform that others can't do and that we think could create interesting new revenue streams, potentially even above and above the projections we provided before. Timothy Horan: So the next few years, you're not going to really see any increased competition. You give us a sense of the revenue growth. Will it be better than this year? Are there any just some of the tailwinds or headwinds? I mean are we thinking mid-single-digit revenue growth? Any kind of color given you pull some of the longer-term guidance would be really helpful. Matthew Desch: Yes. I mean I'd really like to focus more on providing that in February. I agree with you. I don't think that there is sort of a near-term direct competitive change. But I don't think we're getting any benefits from providing really long-term guidance that in a changing competitive environment. And so I'd really like to get back at least for some of the guidance. We'll always be probably a much longer-term guider than anybody else. I just think everyone should be providing as much long-term guidance as they can. And we're not going to completely pull off of that. But I just would rather not kind of try to lead you to some specific number over the next 2 or 3 years. But as you can tell, we're still pretty bullish on our cash flow projection. So I think you can back into it that we're not really coming off any kind of general trends here. Operator: The next question comes from Gregory Mesniaeff with Kingswood Capital Partners. Gregory Mesniaeff: Matt, you mentioned that you guys picked up about 70 new distribution partners have been signed. Can you talk about any changes in the terms with these third-party resellers in terms of revenue split or economics? And how is that trending as you pick up new distribution partners? Matthew Desch: Yes. I mean when we pick up a new partner, and we describe someone who say, wants to integrate us into their drone systems or put us on a new ocean sensor or whatever it might be, I mean, there's a lot of new potential companies. Those are typically kind of -- we license their ability to deploy our technology. They're allowed to integrate us into maybe their chipset, maybe their end-to-end system and they can provision and turn on and there is typically a pricing schedule with that, but that really varies. That hasn't really changed in the 25 years. Each one taps into a fairly consistent, but flexible pricing system that allows them to provide a service to their customers at competitive rates. So really, the terms aren't changing. I mean I do think that there are some big new opportunities, particularly as we get into the PNT area, where pricing is evolving for example. Some people would like to build in 5 to 10 years of PNT protection into a service in a sort of a capital model. We're open to doing that. Someone kind of pay as a user or by region. We're open to that. So those get built into the specific pricing contracts with the new partner, but I don't think that's any different now than it would have been in years past. Operator: Next question comes from Chris Quilty with Quilty Analytics. Christopher Quilty: I want to follow up on the T-Mobile DOT announcement. You mentioned a fraction of the sites. I think it was 90% for the announcement. Can you give us a sense, I mean, of the sort of volume of units, just if you look at specifically the cellular market or took it out to the data center market, what sort of penetration do they need? Do they need in every site or a portion of the sites based upon the operations? And I'm just trying to get a scale for how big that might be? Matthew Desch: Yes. I mean it's a global market to protect the cellular infrastructure from jamming. It's still starting to be recognized. I mean this specific contract, just to be more clear, the Department of Transportation is the agency within the U.S. government that is tasked with protecting critical infrastructure like GPS. And they look at the issue in the U.S. market and the potential for terrorism and other activities and are trying to find what are the solutions that are out there that can. And so they provided money to a number of different organizations, but we were kind of told and indicated that our -- with T-Mobile, we were one of the most ready and available today and the only really global solution that could kind of attack this problem on overall. Specifically with T-Mobile, we had already been doing some work with them on some of their in-building systems, but this was a goal to demonstrate the value of our technology to protect macro base station sites. And so it's kind of doubled the number of applications, but really, as it's successful and demonstrated here and if there's any kind of issues, I could see this being deployed much more widely to thousands and thousands of cell sites. And I think you also see other cell phone companies that aren't protected today realize that this is a very cost-effective way to add a layer of protection to what is critical infrastructure. Our cell phones, our ability to operate terrestrially are really critical. So it's a big market. Christopher Quilty: And real quickly, I mean, in your core business, you're wholly focused on the wholesale market. Obviously, having acquired Catellus, they had a direct and indirect approach to the market. What's your go-to-market approach long term there? Matthew Desch: In PNT directly or in that specific market? Christopher Quilty: No, in PNT Direct generally. Matthew Desch: Yes, lots of new partner discussions, a lot of new areas. We're not necessarily going to go direct as well. I don't think there'll be many opportunities for that. We have developing new technology. I think you'll hear about that shortly that I think will expand the market tremendously. We've had some talk about putting our algorithms into their systems directly, but it will really it'll be similar to the way we go to market in a 2-way communication solution, but will be a much larger expanded base of of companies that will want to embed us into their solutions. So it will not be direct Still, it will be companies who like the ones today who are experts in the timing market or in the PNT market, there will be a lot of new companies as well that will want to integrate us into their solutions. Christopher Quilty: And to be clear, the ripe opportunity is that all the service and license revenue? Or is there a hardware component? And what does that mix look like over time? Matthew Desch: There's a hardware component to it potentially, and we make margins on. But as anything else, where if there's high volume, which this is something that could become a high-volume business that will be high volume of kind of low-margin hardware equipment. But we really want to service revenue, global service revenue and whether that's baked into our partners' product or it's something we offer on a regional basis or something that's really developing right now. Christopher Quilty: Got you. And on the UAV market, you talked about it before, but ostensibly, you've got 2 opportunities, TT&C capability with like a Certus device but also a PNT or all PNT, why is that market not doing given the 100 to thousands of all PGA lying around Europe and the Middle East nowadays? Matthew Desch: Well, I mean, in our IoT business, primarily, there's a number of partners who have put us into all kinds of drones. And I think that's expanding as the drone world. I mean that's obviously more of the defense space. And I think we are being used in that space. I think -- I do think PNT is still fairly new to that and will become an important part of that. Things where that market really expands, whether it's delivery drones or the urban air mobility market or just a lot of other drone applications, I think, have other issues with beyond visual line of sight regulations, which are just now coming to 4, which we've been part of, and we're starting to see those getting clearer. We will be a big part of that as the BV LOS standard to merge. And I think that will make the market expand quite more broadly. But everything today is almost being done on waiver or on trials or prototypes and that sort of thing. And I think that's going to change in the coming years. Christopher Quilty: Got you. And if I can, one final ViaSat and SPACE 42 came out with their Equitus, whatever announcement for the joint venture company, still no Iridium mentioned in any of these announcements. But can you talk about how you view that effort? Is it something that you view as competitive or something you could contribute to? Can you contribute your spectrum to a pool there without causing interference or other issues with your network? What's your current thinking? Matthew Desch: It's hard to tell what that really is yet. I mean it's an interesting idea. I've talked to Mark Dankberg, the CEO of ViaSat about it. I mean he tried to explain sort of the vision that they have for that. It's a very complicated vision. It requires a lot of new technology and new development and a lot of investment. I'm not really interested in investing in the opportunity and perhaps they're not even looking for that. But this concept has certainly not only not been tried, but it's going to be a very complicated business model to implement. And you're going to be competing with potentially some other well-funded and deep-pocketed company. So again, as I said in my remarks, it's not really clear how big the broadband D2D market is. I mean I'm sure that there will be a market for the service, but how well the service will work, what people will pay for it, what the assets in space that you really have to cover to provide a long-term value, it isn't going to replace threshold communication. So it's going to really be an augmented field kind of application. And I know that there's really high valuations with some people that are still projected to even be in that business. But until we see how global those services are, what the value propositions are, I'm not interested in kind of necessarily jumping into that. But could we be part of that long term? I've been given the opportunity. That certainly -- if that does develop, it's going to be many years for it to develop into something that we could even think to participate in. So I'll just keep an eye on it and see what the market thinks about it. Right now, I think you would probably agree with me that the investment world isn't going to throw money at new players right now. And I think that was really more demonstrated with Lincoln omni space getting together this week as well. Operator: The next question comes from Hamed Khorsand with BWS. Hamed Khorsand: Just one, on the consumer IoT side, are you able to differentiate the gains in the quarter coming from your partners that are not on a fixed contract with you? Matthew Desch: You mean some smaller partners like Zolio and Bivy and everywhere and somewhere and a number of others that provide consumer IoT services? Hamed Khorsand: Yes, versus your large customer that's on a fixed contract. Matthew Desch: I mean, yes. I mean we know how many subscribers they are. It's a small part of sort of our overall IoT business. And they also are continuing to -- we're not seeing any real impact. I mean if the implication is what are they seeing, say, from D2D, and I'd say they're not really seeing much at all either at this point. Hamed Khorsand: So they grew in the quarter? Matthew Desch: I don't have that information at my -- there's different things going on with each of those. And so I'd really -- you'd have to ask each of them where they're at. I mean, we don't usually speak to any specific partners. Operator: The next question comes from Louie DiPalma with William Blair. Louie Dipalma: I missed the earlier part of the call, but caught some of the Q&A. Given the rapidly changing industry dynamics, Matt, did you indicate that you plan on exploring strategic options? Or is the message just that your phone line is open? Matthew Desch: I think what I said was is that we recognize the competition long term is in our business and that we will be pivoting to do more using our growing cash flow to acquire and make additional investments in areas which are unique and for which we can protect and for which we can provide value, and that gives us confidence in our ability to continue to grow and compete long term. That's a brief summary, but you probably should go through my comments in more detail because I think I was very specific about addressing the overall changing global marketplace and what our intentions were. Louie Dipalma: Sounds good. And has there been any discussion on Aireon being part of the FAA's air traffic control modernization? Matthew Desch: Yes. I've talked to Don and, of course, we're on the board, and so we get a lot of visibility to that. The big new air track control system for which they're funding how small -- there is some discussion in there about things that Aireon would be particularly capable at. Things like in Alaska, the Caribbean and some areas. There's no discussions about Oceanic right now in terms of the -- which is really where I think Aireon would excel and for which there's a lot of airspace they could provide service. But there have been discussions, I think -- continuing discussions with the FA and Aireon about serving those areas long term. So I mean Aireon is pretty confident that, that long term, they'll be supplying that service as well. So yes, I think there's opportunities there for Aireon definitely. Louie Dipalma: A final one for your narrowband nonterrestrial network solution, will the chipsets be available next year? And what's the general timing of the -- like the Deutsche Telecom roaming partnership going live? Matthew Desch: Yes, the chipsets will be available next year. In fact, we have prototype chipsets today. We're in discussions for more chipsets, and you'll see that over time with other manufacturers making those available as well. Not a lot of changes that they have to make to accommodate us, but the those will be available in '26 time frame. And we do plan on having the service available in '26 at some point in lot of testing to go, probably more the latter half instead of the former half, but there will be chipsets available to support that. Louie Dipalma: And will those chipsets be different from like mass market smartphone chipsets? And is there a timing on when like your spectrum band would be included in like mass market chipsets? Matthew Desch: No, those are mass-market chipsets. These are the chipset that these suppliers that we'll be talking about the first that we've announced is Nordic. That is a standard Nordic chipset that will have our capability in it along with all the many others that they have in that same chipset, the terrestrial spectrum as well as satellite spectrum that would be in there. So if someone implements that, they can roam under our network. Operator: The last question comes from Justin Lang with Morgan Stanley. Justin Lang: I'll just stick to one here. Matt, just coming back to the acquisition pipeline, my apologies if I missed this, but curious if you could just generally size some of the opportunities you're looking at or just give us some general parameters. Is this more about a series of smaller deals that give you to hold in new markets? Or are you really weighing something transformational, and that's the message we should take away? Matthew Desch: Yes, I don't want to guide to either one of those necessarily. There are companies in both those categories. I would say I would lean towards more transformational deals as opposed to given the effort involved with very small things. We're not looking to radically change our business model, though. So I think I'm not going to be that different in terms of what we're looking at is that what I've told you in the past. Our goal isn't to go retail, for example. I mean we're probably likely stay wholesale. But there are some there are some business areas that are complementary for which we can take a bigger part of the value chain and for which would lead us into using our network in new ways. Some of those are big and some of those are small. But we'll let you know when we get a bit more specific about those things. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Matthew Desch: Yes, I know it is a bit longer. I just wanted to -- there were a lot of questions, and I wanted to give everybody a chance to talk about it, given the changing nature of the industry and some of the things we talked about today. I hope you since our continued enthusiasm and confidence, I mean, it was a big announcement recently, and I know the market reacted to it, but I really think we have a strong potential and a strong future ahead of us and a lot of opportunity ahead. And we're looking forward to talking to you, I guess in the meantime and certainly at our next quarterly call. Thanks for joining us. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Eagle Bancorp, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc.. Please go ahead. Eric Newell: Thank you, and good morning. Before we begin the presentation, I'd like to remind everyone that some of the comments made during this call are forward-looking statements. We cannot make any promises about future performance and caution you not to place undue reliance on these forward-looking statements. Our Form 10-K for fiscal year 2024 and Form 10-Qs for the first and second quarter and current reports on Form 8-K, including the earnings presentation slides identify important factors that could cause the company's actual results to differ materially from any forward-looking statements made this morning, which speak only as of today. Eagle Bancorp. does not undertake to update any forward-looking statements as a result of new information future events or developments unless required by law. This morning's commentary will also include non-GAAP financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from the company online at our website or on the SEC's website. With me today is our Chair, President and CEO, Susan Riel; Chief Lending Officer for Commercial Real Estate; Ryan Riel; and our Chief Credit Officer, Kevin Geoghegan. I'll now turn it over to Susan. Susan Riel: Thank you, Eric. Good morning, and thank you for joining us. The third quarter reflected continued progress in addressing asset quality issues and positioning the bank for sustainable profitability. While our results remain below our long-term expectations, we are confident that we are nearing the end of elevated losses from decreased asset values. On credit, we've balanced appropriate urgency that is driven by our near-term view of the office market outlook with an approach that remains methodical and deliberate, we are directly addressing persistent valuation stress of office buildings. We believe that working directly with counterparties that have local knowledge leads to better execution. It is disciplined work but is the right path to long-term stability. Specifically, we moved $121 million of criticized office loans to held for sale in the quarter and are working with buyers to sell these assets. Importantly, in the quarter, we also took deliberate steps to reinforce confidence in our asset valuations and reserve levels. First, we engaged with a nationally recognized loan review firm to conduct an independent credit evaluation of our CRE and C&I portfolios. Additionally, we performed our own supplemental internal review of all CRE exposures of $5 million and above. We'll provide more detail on both initiatives later in our remarks, but I'm pleased to report that the findings from both outcomes support the adequacy of our current provisioning. Our core commercial and deposit franchises continue to improve. C&I loans increased by $105 million, representing the majority of our loan originations for the quarter. Average C&I deposits grew 8.6% or $134.2 million for the second quarter. This momentum reflects relationship growth, client retention and new account activity. These are clear signs that our brand, our service model and our people are earning and deepening trust in the marketplace because our decisions are made locally by bankers who know their clients and communities, we are able to respond quickly, tailor the structure for each loan, and deliver a level of service larger institutions simply cannot replicate, and we see opportunities to extend that same relationship-driven approach across all our client segments. We're executing on our strategic plan, addressing potential credit issues, diversifying the balance sheet, improving margins and aligning resources to protect and grow franchise value. These actions are positioning us to further improve funding quality, reduce wholesale funding reliance and drive toward a lower cost of deposits. Our pre-provision net revenue is believed to improve with time. Our priorities are straightforward: complete the credit cleanup, deepen core relationships, and deliver improved earnings performance, which should drive improved share value for shareholders. The fundamentals of this company are sound. Our strategy is working and we are focused on building long-term sustainable value. I'll now turn it to Kevin, who will talk more about credit. Kevin Geoghegan: Thank you, Susan. As discussed over the prior 2 quarters, we continue to take a disciplined approach to resolving loan challenges. Total criticized and classified office loans have declined for 2 consecutive quarters from a peak of $302 million at the end of March 31 to $113.1 million at September 30. During the quarter, we moved $121 million of loans held for sale. These loans are in different stages of disposition with potential buyers, and we expect to complete sales on a portion of them by the end of the year. Results for the quarter include a $113.2 million provision for credit losses, primarily related to the office portfolio. Our office overlay continues to be robust at $60.3 million or 10.4% of the performing office balance. Another $24.7 million is associated with individually evaluated loans and the model's quantitative component. Our reserve methodology incorporates those losses from evaluation impairments directly, among performing office loans, those rated substandard carry a reserve of 44.5%, and special mention carry a reserve of 22.2%. All pass-rated office loans greater than $5 million were reviewed in this quarter, resulting in just 1 loan migrating into special mention. Our allowance for credit losses ended the quarter at $156.2 million or 2.14% of total loans. That's down 24 basis points from the prior quarter, reflecting a decrease in criticized and classified office loan balances. At the end of the second quarter, nonperforming loans were $226.4 million. At September 30, they declined to $118.6 million, down $108 million from the prior quarter, reflecting transfers to held for sale, charge-offs and loan payoffs. You can see more detail on Slide 23 in our investor deck. Nonperforming assets were 1.23% of total assets, an improvement of 93 basis points from last quarter. We also transferred 1 $12.6 million land loan to OREO. Loans 30 to 89 days past due totaled $29 million at September 30, down from $35 million last quarter. Finally, total criticized and classified loans rose to $958 million, from $875 million last quarter. Within that total, Office declined $198 million, while multifamily, including mixed-use predominantly residential increased by $204 million. The increase in criticized and classified multifamily loans largely reflects the impact of higher interest rates on debt service coverage rather than any meaningful deterioration in the underlying property performance. Net operating income levels remain at or above underwritten expectations across most of the portfolio. There continues to be some pressure within the affordable housing segment, though it represents a relatively small share of the downgrades this quarter. As we indicated last quarter, we do not believe multifamily loans are affected by the same structural or valuation issues present in the office portfolio. The relative strength of multifamily continues to support stable collateral values, and we believe this pressure is largely limited to a near-term income rather than asset impairment. We will continue to be vigilantly monitoring these portfolios. Eric? Eric Newell: Thanks, Kevin. We reported a net loss of $67.5 million or $2.22 per share compared with $69.8 million loss or $2.30 per share last quarter. In the second quarter, we outlined a more proactive approach to accelerate the resolution of problem loans. This quarter's actions were deliberate as we address valuation risk. Even with this quarter's credit-related losses, our capital position remains strong. Tangible common equity to tangible assets is 10.39%. Tier 1 leverage ratio declined modestly to 10.4% and CET1 to 13.58%. Tangible book value per share decreased $2.03 to $37, reflecting the impact of credit cleanup rather than core earnings erosion. Continued deposit growth and an increasing proportion of insured balances reflect the depth and durability of our funding base. With $5.3 billion in available liquidity, we maintained more than 2.3x coverage of uninsured deposits, positioning us exceptionally well. Our teams have reduced brokered deposits $534 million year-to-date, and we expect continued progress in the fourth quarter. The improvement reflects coordinated efforts among our C&I teams, branch network, and the digital platform. From an earnings standpoint, preprovision net revenue was $28.8 million, down from the prior quarter. Adjusting for $3.6 million in losses from loan sales, PP&R was $32.3 million, a sequential increase, reflecting the underlying strength of our core operating franchise. Net interest income grew to $68.2 million, up $383,000 as the decline in deposit and borrowing costs outpaced a modest reduction in income on earning assets. NIM expanded 6 basis points to 2.43%, primarily driven by a reduction in interest-earning assets associated with a decline in nonaccrual loan balances in the CRE loan portfolio. Noninterest income totaled $2.5 million compared to $6.4 million last quarter, primarily due to $3.6 million in loan loss sales and a $2 million loss on sale of investments with proceeds used to reduce higher cost funding. We expect steady contributions from BOLI and a growing fee income as treasury management sales expand. Noninterest expense declined $1.6 million to $41.9 million, reflecting lower FDIC assessments and disciplined cost management. We remain focused on maintaining efficiency while supporting strategic priorities. We recognize that investors want certainty that credit risk is fully understood and adequately reserved. That's why in the third quarter, we engaged a highly experienced nationally recognized third-party loan reviewer to complete an independent credit review of our commercial portfolio. The goal was to provide us an independent perspective to quantify potential future losses under both baseline and stressed economic scenarios. The review is conducted separately from our internal risk rating control process and included over 400 individual loans representing 84.9% of the commercial loan book about $7.4 billion. It assessed potential losses over a 30-month horizon, a 6-month near-term view plus an additional 24 months based on Moody's baseline and stress scenarios. Each loan was evaluated for collateral liquidation value, cost to carry and dispose and borrower and guarantor liquidity to determine potential shortfalls. Utilizing Moody's baseline stress scenario, the independent loan review analysis concluded total potential commercial loan losses of $257 million as of July 31, the date of their review. Importantly, where the independent firm identified potential loss contract, it was in credits we had already flagged internally. Their conclusions validated our own view of the portfolio. This was confirmation and not discovery. Utilizing the Moody's S4 downside stress scenario, where there's only a 4% probability the economy performs worse than the baseline, potential losses increased by $113 million to $370 million. Between July 31, the date of the independent loan review and quarter end, we charged off $140.8 million and continue to hold $60.3 million in our qualitative office overlay and $24.7 million in individually evaluated reserves. Together, that totals $225.8 million, which represents approximately 88% of the total potential losses identified in the baseline scenario. The independent review assumed liquidation scenarios for consistency across institutions. Our reserve process, by contrast, reflects workout strategies that have historically resulted in better recoveries. That's a methodological distinction, not a difference in recognizing risk. Also during the quarter, we performed a supplemental internal review of all CRE loans greater than $5 million, covering 137 loans totaling $2.9 billion. Following this review, there were 5 downgrades of $158.2 million of special mention and 3 downgrades of $110.8 million to substandard. Together, these reviews give us a data-driven view of potential losses. They reaffirm our belief that we are adequately reserved and the bulk of loss recognition is behind us. With that foundation in place, let me turn to how these actions position us for improved performance heading into 2026. On Slide 11 of the investor deck, we presented our forecast for the full year of 2026. We expect net interest income to grow despite a smaller balance sheet, driven by mix improvements and lower funding costs. As Kevin noted, the total reserve coverage to loans declined primarily due to a reduction in the office qualitative overlay. Our qualitative overlay captures a rolling 12-month evaluation loss experience. As that period rolls off, it will naturally reduce the over life. All pass-rated office loans were reviewed this quarter to ensure current information and support our internal ratings framework. Looking ahead, we anticipate that loan growth in 2026 will continue to be concentrated in C&I, and we're pursuing that measured growth with a strong focus on disciplined credit standards. We're nearing our target investment portfolio range of 12% to 15% of assets, at which point we'll begin reinvesting cash flows to optimize earnings without compromising liquidity. Noninterest expenses are expected to remain well controlled. FDIC costs are expected to peak over the next several quarters and then decline as asset quality and liquidity metrics continue to improve, trends we've already seen reflected and lower premiums in the last 2 quarters. Finally, as mentioned last quarter, our capital return philosophy has shifted in line with performance and priorities. The dividend reduction to $0.01 per share was a proactive step to reserve capital flexibility is not in response to capital adequacy concerns. As earnings normalize and credit stabilizes, we will reassess the most effective forms of capital return. I'll now turn it over to Susan for a wrap-up. Susan Riel: Thanks, Eric. This was a pivotal quarter for Eagle Bank. We've made significant progress on the credit front, controlling valuation risk head on, completing an independent portfolio review and validating that our reserves are adequate. At the same time, we're seeing tangible positive outcomes across our commercial and deposit franchises. As we look ahead, we believe that in 2026, provisions will be manageable and earnings will improve and our focus on sustainable profitability will come through in our results. Lastly, before we turn to Q&A, we wanted to announce the voluntary resignation of our Chief Credit Officer, Kevin Geoghegan, who will be moving back to Chicago effect December 31. We have hired 2 seasoned veterans, William Parati, Jr. and Daniel Callahan to serve as Interim Chief Credit Officers and Deputy Chief Credit Officer respectively, until a permanent replacement can be hired. Bill spent the bulk of his career at Frost Bank in Texas and Dan at Commerce Bank in Missouri. Collectively, their leadership and very deep experience will facilitate the bank's continued focus on enhancing our overall credit risk management. Kevin was instrumental in both helping shape and implementing our credit strategies working tirelessly with the team to both proactively deal with the bank's problem loans and improve our credit risk management, governance and practices. We thank Kevin for his contributions and wish him well. Before we conclude, I want to express my sincere appreciation to our employees. Your dedication and professionalism make all the difference. With that, we'll now open the line up for questions. Operator: [Operator Instructions] Our first question today comes from the line of Justin Crowley of Piper Sandler. Justin Crowley: Obviously, a lot of steps taken this quarter. You had some of the losses on the sale of those 2 loans. But after all the charge-offs and marks keep taking moving credits into held for sale, and I know you had the independent review, which sounded pretty thorough. But can you talk even a bit more on just what gets you so comfortable or comfortable on when it comes time to close these transactions that further losses won't be there or at least hopefully not too significant. Ryan Riel: Thanks, Justin. This is Ryan Riel. I'd like to point out that in those 2 situations that the note sales that we -- or the property dispositions that we executed in the third quarter, the carrying value of those going into the third quarter was based on LOIs that ended up being traded down prior to execution of the transaction. In response to that, what we've implemented in our process to determine the carrying value of the loans in HFS and then just carrying values in general is we're getting brokers opinion, which, in our opinion, is a better valuation tool than appraisals in this marketplace. Brokers opinions give ranges of values. We've placed the carrying value at the bottom of that range in each case, along with consideration given to cost of disposition in an effort to make sure that, that situation that played out in those 2 examples does not happen again. Justin Crowley: Okay. And then as far as timing, and I imagine the sooner the better, but obviously, pricing is part of the conversation but can you get any more specific on the time line here for getting these assets off the balance sheet and maybe what a portion means? Ryan Riel: So it's hard to do that holistically. And each and every 1 of these cases, as Eric mentioned in his commentary, we are evaluating the circumstances of each individual asset in and of themselves and looking for that highest and best outcome, obviously, for the bank and for our shareholders. So in many of these cases, we have ongoing discussions in many of these cases, those discussions are far enough along that we can confidently say that disposition will occur during the fourth quarter of 2025. I don't want to -- a little bit superstitious. I don't want to jinx myself and put too fine a point on that, but there will be material action taken in that category during the fourth quarter. Justin Crowley: Okay. That's helpful. And then I know last quarter, you gave us a loose idea of where charge-offs could perhaps come in this quarter. And obviously, things changed and could maybe change more. But at the moment, where do you think those could come in that next quarter? And where does that leave things as we get into 2026. Eric Newell: Justin, this is Eric. I think what I would say about that in terms of next quarter and 2026, we're just not seeing early activity that would cause us to believe that there's continued impact on book value from credit, so in terms of charge-offs, I don't want to give you an estimate on that, but I just don't believe charge-off activity in the quarter will have a meaningful impact on provision expense, like it has in the last 2 quarters. Justin Crowley: Okay. So the idea would be you'd be more than comfortable with the reserve, taking those hits and not having to replace those losses through the provision? Eric Newell: Based on what we know right now, yes. And where our confidence comes from the 2 activities I talked about in the prepared comments, the independent loan review, which looked at 87% of -- or 88% of the book as well as that supplemental loan review that looked at almost $3 billion of pass rated CRE loans. Justin Crowley: Okay. And then with the pickup in total criticized balances? And obviously, despite the charge-offs taken on office, multifamily was again a driver after a similar trend last quarter. And I know potential losses have taken should be far less severe, but just wondering if you could spend just a little more time on that and provide any further detail on metrics just to help us get more comfortable with what we're seeing play out there. Ryan Riel: Sure. Justin, this is Ryan again. I'd like to point out that the transaction volume in our marketplace from a multifamily perspective, has sustained at prices that are still represent cap rates that are sub 6%. That is consistent with valuations that we underwrote to. I'd also like to point out that if you look at Slide 25, specifically and focus on the special mention and substandard categories where you're seeing debt service coverage be challenged. Many of those loans, the actual performance of the property is at or above our underwritten level. So the NOI is coming out at or above our expectation that was set at origination, the debt service coverage ratio that you see reflected is somewhat stressed based on the interest rate environment that we're in today. If you took that same NOI and compared it with where the permanent market is, you would get a better outcome in those debt service coverage ratios materially better outcome, frankly, because there's somewhere between 150 and 250 basis point gap depending on which permanent provider you look at. Justin Crowley: Okay. And then you pointed out on Slide 25, but somewhat related, but there is large $56 million specialty use loan in Montgomery that fell into special mention in the quarter. Can you just talk a little about what that credit is, what the collateral looks like? Just anything you could share? Ryan Riel: Yes. So that particular loan is a special use loan. It's actually a self-storage property at Montgomery County. The performance of that property has been impaired by higher-than-expected operating expenses, which are being disputed. The primary driver there is real estate taxes. They're being disputed by that customer and have seen a material drop over the last several quarters of that. It's an ongoing dispute that they're working there. Again, the top line performance of that property is at or above where we underwrote. Operator: the next question. the next question will be coming from the line of Christopher Marinac of Janney Montgomery Scott. Christopher Marinac: Just wanted to go through briefly the government contract business that you have and how that appears at this time? And does is there any kind of volatility to expect with the shutdown that's ongoing. Eric Newell: Yes. Chris, this is Eric. We haven't seen much of any concerns in the government contracting space because of the government shutdown. As a reminder, the bias of our portfolio is in defense and security. We looked at line of credit usage relative to earlier this year, it's actually down 30% that would be an early indicator of cash flow challenges to clients. And so we're not seeing that. But our relationship managers keep a constant flow of communication to understand anything that we might be to respond to. Ryan Riel: That's right. And obviously, Chris, the risk in that portfolio does increase as the shutdown looms. Friday, tomorrow would meet the first full paycheck of government workers not being met. And we're hopeful and some of the indications are that the shutdown, albeit prolonged at this point to be reaching conclusion, hopefully in the coming time. Christopher Marinac: All right. Great. And then just back to the kind of main credit issues. From the held for sale that you now have, is the timing on that going to be in the next quarter and can you just kind of walk through kind of how -- or maybe what the risk is that you have an additional write-off as those are finally disposed. Ryan Riel: I think I'll point back to the comments I made to Justin, that we've enhanced our process based on the experience we had in the third quarter with the 2 dispositions that we went through. So we are basing our carrying value at the lower end of the range of values that we've determined through third-party work, and I feel very confident based on conversations with market participants and potential buyers that our carrying value is better than where we'll do in many instances. Christopher Marinac: Great. And then I guess last 1 for me, just has to do with kind of the inflow in future quarters. I mean, do you have visibility about how the inflow may be the same or different in Q4 and Q1. And I guess part of that question is just sort of the ongoing maturity wall that you have in the portfolio. I presume that was addressed by the deeper dive that you just did. Kevin P. Geoghegan: Chris, it's Kevin. And just a clarification, did you mean the inflow into HFS or the inflow into criticized classified. Christopher Marinac: Really criticized and classified. Kevin P. Geoghegan: Yes, I just wanted to make sure that was the purpose of doing the additional review is to get as much current information as we could on the entire portfolio, so that in our parlance or wouldn't be surprises. So I think that inflow will -- that migration will slow down dramatically. Eric Newell: Yes. I would build on that. This is Eric, that our expectation is that you're going to see criticized classified decline into 2026. Operator: Next question is coming from the line of Brett Scheiner of Ibis Capital Advisors. Unknown Analyst: I'm just trying to understand, you talked about a temporary cash flow issue in the multifamily space versus a long-term impairment. I'm trying to understand the difference between the 2 and how do we square that? Ryan Riel: Okay. So the comments that I made before where the NOI, our underwritten NOI is as compared to the actual performance of many of these properties is at or below our underwritten NOIs at or below the actual performance. So the performance is better in many instances than we expected. The debt service driven by the floating interest rate structure that is on many of those loans is higher than anticipated and putting stress on that ratio. Additionally, there are some challenges, as we've mentioned in our comments in the affordable housing space that specifically within the District of Columbia, has put pressure on the performance. The bad debt expense in Washington, D.C., unfortunately, is well above the national average. The DC Council's passed the rental Act recently that will help alleviate some of that over time. And that's primarily where we see the short-term pressure and long-term relief. Unknown Analyst: Doesn't that higher debt service and the pressure that you talked about affect asset values? Ryan Riel: It certainly can. Yes. Unknown Analyst: But how do you think of that as just a temporary cash flow issue versus a valuation impairment? Ryan Riel: Because the cash flow will improve over time, and therefore, the valuation will improve over time. Unknown Analyst: Based on a refinance or some other issue? Ryan Riel: based on the passage of time and improved performance. Unknown Analyst: Okay. Well, I'll follow up offline on that. And then any other comments on Kevin's departure. I know that about a year ago, that was seems to be a big catalyst for a cleanup. Kevin P. Geoghegan: This is Kevin. Thanks for the question. As Susan talked about, I voluntarily resigned and I'm proud -- very proud of what I was able to contribute to the enhanced credit risk management processes and policies here. And I also want to take a second and just thank my colleagues as well. They all know who they are as they continue to manage through our asset quality challenges. Susan Riel: I would also add to that with Kevin's resignation and our desire to be deliberate in our process of finding a replacement and not miss a beat in continuing the strong credit risk management processes that we have put in place. We decided to hire Bill Parati and Dan Callahan on an interim basis so that we would have the time, the appropriate amount of time to seek a permanent replacement for Kevin. . Unknown Analyst: Okay. Great. And then only 1 other thought. As you go into 4Q, if you're at sort of peak marks and you don't think at this point, you'll need to be adding to reserves or charge-offs will leave through and then you'll have to rebuild into the provision. I assume that you'll be accreting capital in fourth quarter? Eric Newell: Yes. I would direct my -- this is Eric. Brett, I would reaffirm what I said earlier on the call in terms of the independent loan review as well as that supplemental loan review really helping validate management's view of credit and my earlier comment that I don't believe at this time that book value will continue to be degraded by credit. Unknown Analyst: Okay. So that's a yes. EPNR should exceed provision? Eric Newell: What I'm saying is that I believe that the credit costs will not be degrading book value. Operator: The next question is coming from the line of Catherine Mealor of KBW. . Catherine Mealor: Maybe just 1 follow-up on credit, and you've kind of touched on this, but I'm going to just add a little bit more directly. So as you did the independent loan review and the external loan review, what did you see as you did those reviews that was not maybe captured before and how you were categorizing some of these properties. So it was just seems surprising to me the big increase into special mention and then a few into substandard, again, particularly on the multifamily piece. And so just kind of curious what changed and what specifically you saw within that loan review that made you feel like it was now more appropriate to categorize the loans that way. . Ryan Riel: Katherine, thanks. That review was really putting all the current information that we had on every single loan in our lap at 1 point. And we do reviews annually on all these properties, all of our loans. But this was all at one time to make sure we really understood the depth of the portfolio. And with that current information, we saw some segments of deterioration, and we took according steps. . Catherine Mealor: All right. Okay. And then, again, as we think about part that I found really helpful that you brought out is the one on kind of movement in the office book that kind of shows you most where we are in the cycle from where we started and kind of the losses and write-downs and transfers out of the office book. And so it feels like from the office book, were really kind of far through the cycle and kind of working through those issues. The multifamily piece feels like we're a little bit more early. And so is there any way you can kind of articulate what you think the ultimate losses or write-downs in multifamily maybe relative to what we're seeing in this office book. Ryan Riel: Catherine, this is Ryan. I don't think they're comparable at all, right? The structural issues in the office market in the Washington, D.C. region are significant, and you see that in our performance over the last several quarters. structural issues just don't exist in the multifamily segment. If you look at transaction volume, it's a bit down, but investors are still very interested in Washington, D.C., well-located, high-quality Washington, D.C. region multifamily product. Some of the jurisdictional issues that I referenced are presenting some headwinds for the segment. We're facing those head on. We have good quality sponsorship in those situations. And some of the other issues that are shown on Slide 25, the special mention and substandard category are simply transactions that the interaction of the net operating income and the debt service coverage based on the interest rate structure that's in place in many of those presents a challenge that's below policy levels, sometimes below 1:1 in those situations in all of those situations, we have structural enhancements that allow us to qualify those as potential weakness is not well-defined weaknesses while we work to restructure, and we're in active discussions to restructure. As you know, in the office category, when we went into restructure conversations or workout conversations, the value of that collateral had diminished substantially. That is just not the case in the properties. Operator: Next question will be coming from the line of Nick Grant of North Reed Capital. Unknown Analyst: All right. I wasn't on mute. So I don't know what the IT issue was, but thanks for the question. So I mean, first off, I just want to applaud the proactive measures to work through credit like I mean when I step back to $37 a tangible book fells, I mean, much more reflective of the identified risk across your loan exposures, reduces future credit migration. And Susan, in your opening remarks that it here, improving franchise value is a focus, I mean, I really agree with that. I mean given industry activity on the M&A front, increasing activity like we should see more deals here. How do you feel about the franchise upstream optionality as a way to increase shareholder value? Eric Newell: Yes. I mean I can start with that and Susan and can finish. But I think from our perspective, we're focused on the strategic plan and building shareholder value through the diversification efforts in C&I, improving our funding profile and focused on improving pre-provision net revenue, which should drive enhanced or improved ROA and ROTCE. Susan Riel: But obviously, Nick, the Board will focus on anything that adds value to our shareholders, and we'll consider whatever other options come our way. . Operator: We have a follow-up question coming from Justin Crowley of Piper Sandler. Justin Crowley: I just wanted to hop back in and ask 1 quick 1 outside of credit. Just thinking about what will help out the margin looking forward here, you get better yield in C&I, but do you have any detail on how much in fixed loan repricings and adjustable that all reset maybe through the end of next year. I'm not sure if you can give some color on the magnitude and the yield pickup and I guess, maybe excluding anything that's set to hopefully move off the balance sheet. Eric Newell: Yes. I don't have that information in front of me, Justin, so I don't want to make assumptions for you there. But in terms of just more broadly with the NIM expectation, I think you have the similar phenomenon of investment portfolio rolling off, whether it's rolling back into investment portfolio, if we're getting close to that 12% to 15% with higher yields or the cash flows off the portfolio going as use loans, that's going to be helpful on the asset side. And then the -- on the liability side, it's the continued expectation in the fourth quarter as well as 2026 that we're going to be paying down wholesale funding, brokered funding which should be helpful in terms of cost of funds as well. About 40% of our loan book is fixed, but it's a short loan book growth. As Ryan has said in the call, a lot of our lending is value add. We're not the permanent financing takeout. So when you look at the average book, it's probably 3 to 4 years. Operator: Thank you. And that does conclude today's Q&A session. I would like to turn the call over to President and CEO Susan Riel for closing remarks. Please go ahead. Susan Riel: Okay. Thank you for your participation and questions during this call, and we look forward to speaking to you again next quarter. Thank you. . Operator: Thank you all for joining. You can now disconnect.
Stacy Pollard: Good morning, everyone. I'm Stacy Pollard. I'm here with Dassault Systèmes' CEO, Pascal Daloz; and the CFO, Rouven Bergmann. Unfortunately, our Head of Investor Relations, Beatrix Martinez, could not be with us today. She's out for a couple of weeks. So I have the pleasure of being in this room again. It's been a few years since I sat in the chairs beside you guys. So it's very interesting to be a different perspective on this side of the podium. Now let me move on and formally welcome you to Dassault Systèmes' third quarter webcast presentation. At the end of the presentation, we will take questions from participants in the room and online. Later today, we'll also hold a conference call. Dassault Systèmes' results are prepared in accordance with IFRS. Most of the financial figures in this conference call are presented on a non-IFRS basis, with revenue growth rates in constant currencies unless otherwise noted. For an understanding of the differences between IFRS and non-IFRS, please see the reconciliation tables included in our press release. Some of the comments we will make during today's presentations will contain forward-looking statements, which could differ materially from actual results. Please refer to our risk factors in our 2024 universal registration document published on the 18th of March. I will now hand over to Pascal Daloz. Pascal Daloz: Thank you, Stacy. Good morning to all of you. It's always a pleasure to be here in London and to have a chance also to interact directly with you. So we're going to review the Dassault Systèmes performance for Q3. Let me give you some -- at least my reading of the numbers. I think this quarter is a solid quarter with healthy margin, and I think Rouven will come back on this. And we -- with a strong EPS growth, and we continue to grow the recurring revenue part, which is, I think, the important thing because this is reflecting the strength and the resilience of our business model. Now if you look at the numbers, the revenue grew 5%, thanks to a strong demand across our core industries. Our subscriptions business is up 16%, accounting for almost half of the recurrent part of the revenue. If you remember, a few years ago, it was only 1/3. So this is growing extremely well. We hit a 30.1% operating margin, which I think is reflecting our focus on running profitable and efficient business. And finally, the earnings per share came at EUR 0.29 and growing at 10%. So behind this number, I think there are certain things I would like to highlight and which are our strengths. The first one is Industrial Innovations, especially Transportation & Mobility, we continue to expand our footprint. And despite the ongoing challenges in this sector, we have also a strong momentum behind 3DEXPERIENCE and SOLIDWORKS this quarter. The second thing is, I think our focus on accelerating SaaS adoption is starting to pay off this quarter, you will see. This is driving the revenue growth and the strong market traction. And to further support this momentum, we have established a new leadership at Centric to fast track the adoption of the SaaS business model. Lastly, in the field of artificial intelligence, I think we are shaping the future with a powerful combination between the industry most comprehensive data sets, the scientific rigor, the advanced modeling and simulations being combined with the real-world evidence, we call it the real-world validations. And AI for us is really not an add-on. It's embedded in the core of the 3DEXPERIENCE platform for a long time because you remember the 3DEXPERIENCE platform, this is really how we are managing the knowledge and the know-how for many of our customers. This quarter, we are coming with new category of solutions. And you remember the Virtual Twin as a Service, the generative experience and the virtual companions, and we will say more about this. And they are really transforming the way our industry, our customers, they are designing, producing and operating the life cycle. Now for the full year, we are confident enough at least to reaffirm the earnings guidance, and we expect the EPS to grow between 7% to 10%, with the total revenue rising 4% to 6% on an adjusted basis, and it's mainly due to 3 factors. The first one is the lower growth from MEDIDATA, which is in line with Q3, in fact, the impact of the SaaS acceleration for Centric and the volatility impacting some of the timing to close. Now let's dig into some details behind those results. Let's zoom first on the manufacturing sectors. As I was telling you, Transportation & Mobility has once again proven its resiliency. And to give you the numbers, this quarter, we are growing at 18%, one-eight. Why so? Because it's usually when it's a difficult time for our customers that they have to take radical decisions. And this quarter, we have some -- Ford took the decisions to go with us to expand outside of the engineering borders, and we have signed a contract with them for the next 5 years to use the platform across all the different programs. I will tell you more on this probably next quarter. But there is also another very important flagship customer we signed this quarter with Stellantis. And I know some of you were expecting us to move along this way, and I will come back on this. Why those companies are basically adopting widely the 3DEXPERIENCE platform, is because they are using our solution first to speed up innovation. And speed is becoming really one of the key topic. You remember a few years ago to develop the car, it was almost 48 months. Now we are talking about 16 months. So it's a little bit like fast-moving goods. And to master the complexity, you need a different approach, and this is where I think we are making a difference. Sustainability is also a topic. The electrification is driving the cycle. You know it. And more and more with the SDV, we are creating a personalized experience for the customers. And this is really the combo, if you want, of what we can provide with our solutions. We are also seeing a strong growth in defense. It's growing double digit this quarter, where programs are becoming more complex and collaborative. And I think our 3DEXPERIENCE platform, combined with what we call the model-based system engineering, MBSE, which is now a standard in the industry is more and more widely adopted, and this is really opening a new opportunity for us, not only in Europe, but also in the rest of the world. Life Sciences, the market remains unstable and challenging. I think Rouven will say more about this. We still see the new clinical trial start being contracted. Nevertheless, we landed with some big contract this quarter. And more importantly, I think we're also being encouraged by some large win backs. AbbVie is one of them. And you remember, it was one of the flagship customer of Viva a few years ago. They signed with us a contract for the next 5 years. And I think this is the proof that what we do is extremely critical. And I think also this is a proof that what we have built as a foundations is critical for them also for the AI-based programs, and I will come back on this. In Infrastructure & Cities, the demands keep growing, in fact, for autonomous and sovereign infrastructure, you remember, especially in the energy space. But we are more and more seeing new use cases or new opportunity emerging. One of them is the nuclear decommissioning. As you know, it's a big topic because you have many reactors around the world aging. And we are using our solution to do virtual twin as a service to manage the safety and the efficiency of this process and to manage the end of life of those nuclear reactors. So this space is really, again, a way for us to establish leadership in a domain where we are the challenger because in this space, I think we do not have the same footprint than the others. Now let me show you some key wins. Stellantis, for you know the company, I mean -- and you remember, we had a significant footprint with PSA, but the rest of Stellantis was much more in the hands of our competition. So what do -- they took the decisions to -- I mean, to standardize on 3DEXPERIENCE platform on the cloud, which is, I think, important for their system engineering backbone. And this is extremely important because, as you know, the system engineering is the foundation to do the SDV. And all the car players are moving along this way, and they are using our system approach, system-to-system approach as a way to standardize across all the domains to unify the bill of materials, but more importantly, against, they are building the foundation for their AI initiatives because one way to reduce the cycle of time to develop the car is to be much more generative and you need an infrastructure to do this. And that's what the 3DEXPERIENCE platform is ready for. So we are extremely proud to support this transformation. And it's a significant one because it's a ramp-up at the end with more than 20,000 users we need to equip with the systems. Moving to Life Sciences. I already say a few words. So AbbVie, it's a global biopharma. It's one of the top 10 global pharma. And it's a win back. And it's a win back of a win back, let's say this way, because again, a few years ago, they took the decisions to open some clinical trials with Viva. And now they are back with us. And there are a few reasons for that. One of them is the time. They were sharing with us that we are 10x faster in the way to run the processes and the clinical operations. It's also a big cost saving, which is an interesting takeaway because you remember one of the arguments which was used was this EDC is becoming a commodity and it's price sensitive. And the reality is the price is one thing, the savings and the efficiency is another one. And it's -- here, you have the proof. And the last argument, all the pharma sector, a little bit like the auto sectors, they are building their AI programs in order to automate, in order to use in a better way the data set they have. And they have seen through our platform, the ability to develop their own program on top of what we do. So those are the reasons, if you want, behind these win backs. Finally, from a customer standpoint, this is an interesting case also. Korea Hydro & Nuclear Power is the largest energy public enterprise in Korea, and they have launched the digital transformation to manage, I was telling you, the decommissioning of 26 reactors. So the reactors is first generation. They are progressively replacing it with a new generation. And to do this, it's a complex process. They have to decommission this large installed base. They showcased this example, this case in Koreans 3DEXPERIENCE forum a few weeks ago, and I was having the chance to participate to this. And frankly speaking, you should really look at it. It's amazing what they have been able to do because it's a very complex process. Safety is at stake. Compliancy is at stake. It's a very, very sensitive process because you have to manipulate the reactor when the reactor is still working. At the same time, you need to do it in a very precise manner. And to manage this complexity, to predict the complexity of the process to prevent the risk, to keep track of everything because you have to be compliant. They are using the platform and they are using the virtual twin in order to make this. So why I pick those examples? Because behind all of them, there is a clear pattern. We are not only the partner for them. I think in many cases, we are the game changer for them. We are the one allowing them to accelerate their industrial transformation, whatever it's in the mobility, life sciences and the energy sector. Now let's speak about 3D UNIV+RSES. So you remember, we announced it in Feb this year, and I was making this statement, 3D UNIV+RSES is not an extension of what we do. It's really a leap forward. And there are a few things I want you to keep in mind. What are our differentiations? The first one is we are building our AI engine on the large and the most structured industry corpuses. And it's the result of 40 years, having 400,000, almost 400,000 customers worldwide in a very different sectors, building the virtual twin of all the objects you can see on the slides. And this is a unique purpose to train our systems. So -- and remember, AI without having high-quality data is just only a noise. But if you have the right data, it's becoming game changer. The second takeaway is the data set is not enough for what we do. You need to build AI on science. And this is extremely important because if you are only relying on patterns matching and recognitions, it's not enough for what we do. The AI needs to be built on physics, biology, material sciences, engineering principles. And why so? Because when life are at stake, whatever it's -- when you develop a drug, when you fly in objects, when you have driving an autonomous car, you cannot take risk. The system should not guess, should not hallucinate. You need to understand how the parts fit together, how the materials behaves. And this is really what we have been able to build, which is an AI which is rooted in sciences. The third element is we are coming today, I mean, today, a few weeks ago on the market with the new category of solutions. So you remember, we presented it during the Capital Market Day. And now I'm really pleased to introduce you to our virtual companions. And in fact, it's a family of 3 for the time being. You have AURORA which is our business strategies, focusing on the outcome and efficiency. You have Léo for engineering experts, and Léo is really diving deep into design and simulations. And you have MARii is our scientific authorities handling the -- probably the most advanced questions on research. The interesting things, if you ask the same questions to all of them, you have different answer. So more than a long explanation, let's look at the video. [Presentation] Pascal Daloz: So as you can see, it's not just about AI. It's about having an AI, which is behaving like your team because you need -- when you do engineering activities, you need to assemble different domain expertise at the same time. And if you try to converge too rapidly to the solutions, at the end, you are letting some open opportunities untapped. And this is basically what we are doing with the virtual companions, which are a way to complement and to enrich the roles we have developed. Now this is also an interesting thing because you can use AI as a way to take smarter decisions and faster. And here is, again, a concrete example. It's AURORA. And AURORA is widely used by many industries for currently to deal with the tariff, with the trade policies, the supply chain issues. because this is changing so much that you need almost every day to reactualize your what if scenario. So AURORA, in this case, is not only anticipating but reacting. She anticipates the turnaround, the uncertainty. She try to manage with data-driven insights, the consequences. And this is important because for many industries, the margin is at stake. So to keep it you ahead, the system, if you want, is helping you to collaborate, is bringing you the right expertise, is telling you what are the different avenue you have in front of you in order to fix the problems at the right times. Now let's speak about SOLIDWORKS. This is an interesting -- this is a very important year for us. It's a milestone because we are celebrating the 30 years anniversary of SOLIDWORKS. And why this is important? Because if we step back, after 30 years, I think no one will debate that SOLIDWORKS is the undisputed leader in the 3D CAD. And I put some numbers on the slide just to give you the proof, 8 million users. It's by far the largest design community around the world, 1.5 million commercial license, which is truly addressing the large company, but also the start-ups and all the shakers. It's almost 300,000 clients worldwide and again, covering the large spectrums of all different industry we serve. So it's a lot of legacy of innovations that we are keep pushing from a product development forward. And I think now with SOLIDWORKS, we are also introducing the artificial intelligence to build the next phase to make it faster, smarter, easier to use, in fact. And the topic for us is not only to automate tasks, but more importantly, to give more time for the creativity. And we have some features we are introducing and some functionalities. The first one is obviously the generative design. Second one is what we call assistive features. which is an intelligent and pattern of recognition when you do, for example, an assembly. And all those kind of things are really helping the users to work smarter, but not harder. Behind this, I think if there is one message I want you to keep in mind is this AI approach is a way to do the docking bridge with the 3DEXPERIENCE platform. As you know, this topic is at stake for several years. And I think now I believe we have find the routes to connect the SOLIDWORKS' large installed base we have with the 3DEXPERIENCE platform. It's a way if you want to turn the SOLIDWORKS users into the lifelong experience partner. So I think -- and Rouven will come back on this, but you will see the performance of SOLIDWORKS this quarter is really extremely good. It's growing at double digits. Now to conclude, I think why everything I share with you matters. There are a few things. I'm sorry, I should not anticipate your presentation Rouven. The first one is 3D UNIV+RSES is giving a few and large advantages. The first one is, you remember, we are helping our customer not only to manage the full life cycle of their products but more and more to manage the life cycle of the intellectual property. And you should remember what I'm telling you. In this AI periods, the most important is assets is intellectual property because everything you built is leveraging the intellectual property. And if you do not have a way to manage it safely to take it as a real asset to manage your life cycle the same way you manage the life cycle of the products, you take the risk to be out of the game. And this is what we are bringing to our -- to mix the different knowledge coming from different sources, but at the end, still tracking will belong to what to. The second thing is, in many domains, we are turning compliance into a competitive advantage. If you take aerospace, if you take health care, if you take energy, those are extremely heavily regulated industry. And one of the answer to the tariff war is to put more regulations. That's the way to protect, if you want certain markets. The flip side of this, if you are an industrial company, you have to manage with this complexity. And AI is a fantastic tool to read millions of documents to extract 1,000 rules and us, what do we do with those rules? We do design -- we do compliance by design, if you want. The system is checking automatically that everything you do, every design you do, every decision you do are compliance by design. The third element, I think generative AI is really a game changer as soon as you can trust it. And your AI in many industry we serve needs to be certifiable. If you cannot certify the output of what you have produced with AI is useless. And the way to do it, if you remember, we are training our AI on very comprehensive data sets, which is pretty unique. And those are very high quality of data sets. And it's validated by the science, which is even more important. And we are deploying those artificial intelligence capabilities into a secure and sovereign environment, which is what we do with 3DS OUTSCALE. So this combination is pretty unique on the market. It's very differentiate -- it's a huge differentiations compared to many of our peers. And this is, in my view, a game changer in many, many customer engagements we have right now. The last but not least, I think we are coming on the market with a new category of solutions. You have seen this morning the virtual companions, AURORA, Léo and MARii, but you will see more and more the generative experience, the virtual twin as a services. We have a road map for this -- for '26, '27, and this will accelerate the contribution of AI in our revenue streams. So with this, I think it's time for me to hand over to you, Rouven to give more flavor on the numbers and probably the outlook for the rest of the year. The floor is yours. Rouven Bergmann: Thank you, Pascal, and also welcome from my side to our call today. Thank you for joining us online and here in the room in London. Let me start with 3 key messages. First, top line growth and margin expansion are our top priority. Second message, the 3DEXPERIENCE platform is driving our business model shift to subscription and recurring revenue growth. This engine is working well with 16% growth of subscription this quarter. The third message is we are mission-critical, as you saw in the examples to our clients. In fact, in 2025, we are winning significant contracts with many of the top industrial companies across the world, and this is laying the foundation to long-term value creation with cloud and AI. It is these powerful long-term partnerships that give us confidence in our long-term targets. Now before I dive into the specifics of the quarter, a few more things to summarize briefly for you. Our financial results for the quarter were solid with 5% revenue growth and an expanding operating margin, which is up 100 basis points and 10% growth in EPS. Industrial innovation is driving the growth of 9% in the quarter and 8% year-to-date, while MEDIDATA and Centric were softer than expected. As discussed previously, the repositioning of MEDIDATA is ongoing. The change of the model to reduce the dependency on clinical trial activity will take time as we are doubling down on the enterprise and the PLM opportunity in Life Sciences. And for Centric, we're accelerating the SaaS transition. And to this effect, we have promoted a new leadership team, as you heard from Pascal. Now looking at the full year, we adjust our revenue outlook to 4% to 6% ex-FX, in line with our current trajectory of 5% top line growth year-to-date. At the same time, we maintain our EPS growth target of 7% to 10% ex-FX. This is thanks to the strengthening of the operating margin driven by additional efficiencies we are generating in the business. With this in mind, let me take you through the details. In Q3 and year-to-date, total revenue software were both up 5% ex-FX. Recurring revenue was strong, up 9% in the quarter, and it highlights a very solid acceleration when compared with 7% year-to-date. Subscription revenue growth was 16%, and it was driven by new deals signed in the quarter and the increasing visibility from large contracts that are ramping. As a result, subscription revenue now represents almost half of the recurring revenue base. It's up 3 points from last year. And starting in 2026, subscription revenue will surpass maintenance revenue in absolute terms. 3DEXPERIENCE was the growth engine behind that, up 16% in Q3, and the signings of Ford and Apple contributed to the strength in subscription growth. Upfront license revenue declined 13% as our clients continue to adopt the subscription model at an increasing rate. The best proof of this is that recurring revenue now accounts for 84% of the total software revenue year-to-date. The operating margin improved 100 basis points for the quarter and is driving strong EPS growth of 10%, thanks to the productivity gains and cost discipline. In fact, OpEx was up 3.1% in the quarter, and we continue to rebalance resources to support our growth strategy. Now turning to the growth drivers. In Q3, we saw very good 3DEXPERIENCE revenue, and it's now representing 40% of software revenue year-to-date. The growth was broad-based, up 16%. Cloud revenue was 8% in Q3, 7% year-to-date. 3DEXPERIENCE cloud revenue grew 36% in the quarter and 29% year-to-date. The key wins for 3DEXPERIENCE cloud, such as Ford, [indiscernible], Dallara Automobili and Stellantis demonstrate the value of the platform for our clients where transformation is critical as is the need to leverage AI. Now let me review the Q3 actuals versus our objectives briefly. Total revenue came in at EUR 1.461 billion in the quarter, mainly affected by currency headwinds. Excluding currency, growth was 5% at the low end. Operating margin was 30.1% and above the objective to 60 basis points from performance and a negative currency effect of 20 basis points. EPS was EUR 0.29, driven by better operating performance against a small currency headwind. Now looking at the geographies and product lines. The Americas rose 7% in Q3 with good performance in Transportation & Mobility, High Tech and Aerospace & Defense during the quarter. Europe was a bit softer at 4% in Q3 with double-digit growth in Southern Europe, solid performance in France and also Germany. This was supported by subscription momentum, especially in Aerospace & Defense. Asia was up 4%. India had an outstanding quarter. Korea was up double digit. Here again, strong performance of Transportation & Mobility as well as Aerospace & Defense. China experienced softness in Q3, but also on a tough comparison base when looking at last year's number. Now let me review the performance of our product lines. As mentioned previously, Industrial Innovation delivered excellent results in 2025 across key domains led by CATIA, ENOVIA and DELMIA as well as SIMULIA, highlighting the value of the 3DEXPERIENCE platform is delivering to our clients. So it's broad-based across domains. We are mission-critical to the transformation of our clients with superior capabilities to generate virtual twins. Life Sciences growth was lower than expected. It was down minus 3% in the third quarter with MEDIDATA impacted by continued study start declines, but importantly, continuing to gain market share. Overall, from an industry standpoint, the volume business continues to face pressure. When we entered 2025, we had assumed that volumes would stabilize, helping to support our forecasted growth in the second half. Conversely, we observed a decline in high single digits in Phase III studies and mid-single-digit decline across Phase I and Phase II since the beginning of this year. While we are expanding our market share, the impact of the decline in study starts is not yet compensated by the growth from the expansion with our enterprise and mid-market clients who proved resilient. As you heard from Pascal, we had a major MEDIDATA platform win back, the top 25 pharma, AbbVie, after a brief period with a competitor, AbbVie decided to return to MEDIDATA for all clinical trials, leveraging AI everywhere. This validates the trust clients place in us and the value of the MEDIDATA platform. Additionally, in Q3, we expanded partnerships with Sanofi. You see the press release this morning and also expanding our business with IQVIA, including Patient Cloud. Looking at Life Sciences outside of MEDIDATA is the opportunity to win with PLM is our clear priority. For the first 9 months, growth is up double digit, highlighting the strong potential of our portfolio to address the challenges of this industry. Now moving to mainstream innovation. Growth in this segment was mainly driven by SOLIDWORKS, as you heard. The shift to subscription is well underway at SOLIDWORKS. Centric growth was slower than expected in the quarter due to some shifted renewals, and we saw an acceleration in the share of clients adopting the SaaS model. Now turning to cash and the balance sheet IFRS items. Cash and cash equivalents totaled EUR 3.910 billion as of Q3 compared to EUR 3.953 billion at the end of 2024. This decrease of EUR 43 million on a euro basis was driven by a negative currency impact of EUR 269 million. At the end of the quarter, our net cash position totaled EUR 1.321 billion, a decrease of EUR 138 million versus a net cash position of EUR 1.459 billion at the end of last year. Now let's take a look at what drove our cash position at the end of the third quarter year-to-date. We generated EUR 1.334 billion in operating cash flow for the first 9 months versus EUR 1.348 billion last year. The cash conversion from non-IFRS operating income was 97% for the first 9 months. Cash conversion is a top priority, and we expect the conversion to improve going forward. And starting Q1 2026, we expect working capital to support cash conversion reaching the 2024 levels with the potential to improve further. As discussed previously, 2025 operating cash flow is impacted by significant contracts that we signed in the quarter as well as higher payments related to tax and social charges as well as negative FX. For the full year, we now expect operating cash conversion -- for the full year 2025, we now expect operating cash conversion to be in the range of 78% to 80%. To sum up, operating cash flow year-to-date was mainly used for the -- for investments, EUR 581 million, of which EUR 240 million was for acquisitions, EUR 216 million for the purchase of the Centric noncontrolling interest with the remainder of CapEx of EUR 123 million to support our cloud growth. We paid EUR 343 million in dividends and made a net repurchase of treasury shares of EUR 186 million. For any additional information, you will find the operating cash flow reconciliation in our presentation that we published this morning. Now let's transition to our financial objectives for 2025. Net-net, our year-to-date revenue is up 5%. For the full year, we now adjust our revenue outlook to reflect this trajectory and expect growth of 4% to 6% ex-FX for both the total revenue and software revenue versus 6% to 8% previously. In absolute terms, we are adjusting the full year revenue outlook by approximately EUR 140 million to the midpoint. This reflects an impact of EUR 30 million from Q3 and an FX impact of about EUR 20 million. The remaining delta can be explained by 3 factors: a, the lower growth from MEDIDATA in line with the Q3 performance; b, the impact of the SaaS acceleration at Centric; and last but not least, we also factor in an increasing macro volatility with the potential to impact the timing to close large transactions. Please also remember that we had a high comparison base in Q4 of 2024. Now looking forward, the change of model for Centric is on -- sorry, the change of model for MEDIDATA is ongoing. And we are confident as well into the accelerated SaaS transition of Centric given its strong positioning in a very large market and clients are endorsing it. For Industrial Innovation, we have built a very strong foundation in 2025, where we signed significant contracts, and we expect in 2026 to expand on these partnerships, transforming with virtual twins and generative experiences. And last but not least, the SOLIDWORKS momentum is strong. Recurring revenue outlook remains stable. It's at 7% to 8% growth. And underscoring what I said at the beginning, we are implementing a sustainable recurring growth model with increasing visibility. Above all, I mentioned the strength of our operating model, highlighted by the margin improvement. As such, we are maintaining our EPS growth expectation of 7% to 10% growth or EUR 1.31 to EUR 1.35. To achieve this, we expect Q4 OpEx to continue to trend in the same range of Q3, delivering margin expansion of about 100 basis points, which is driven by ongoing productivity initiatives, having the right people at the right place to make it simple. So this is all based on FX assumptions for an average rate for the year of euro to dollar at $1.13 and euro to yen at JPY 166.7. Now briefly on Q4. As you can see, the revenue range of 1% to 8% is fairly large. This is predicated on potential uncertainties in the timing of deal closing, mainly for the upfront license business, while subscription growth of 8% to 12% is solid on a high comparison base. Operating margin is expected in the range of 37.2% to 38% and EPS growth of 7% to 17% ex-FX to hit EUR 0.41 to EUR 0.45 EPS for the quarter, reflecting the ongoing operating leverage. Now as I reflect on the performance so far this year, I want to highlight that our operating model is resilient, and we apply strict financial discipline to support our long-term growth. We occupy a unique leading market position in which that makes us mission-critical today and tomorrow for our clients. Profitable growth and improving cash conversion, as mentioned, is a top priority with clear objectives to show results starting 2026. AI and cloud are 2 main growth drivers. We are confident we will deliver on their ambitious growth targets. We are committed to continue to invest right for innovation, for clients and for shareholder value. Now Pascal and I look forward to take your questions. Operator: [Operator Instructions] We pause for a brief moment and take questions from participants in the room first. Adam Wood: It's Adam Wood from Morgan Stanley. Maybe just to start off, you finished off even identifying that it is a reasonably large range for the fourth quarter in terms of revenue growth. Could you maybe just talk a little bit about what is in there at the bottom and top end of those ranges in terms of pipeline conversion assumptions on big deal closings? I mean, at the bottom end, are we assuming that none of the big deals close? Just to give us a little bit of a feeling for what's in there and how conservative that bottom end is? And then maybe just secondly, Pascal, you talked about the huge breadth of customer data that you have that you can train models on and use for AI. First of all, could you just talk about how challenged that is where customers are still on-premise? And then how much does that force them and accelerate the shift to cloud with the impact that has on the revenue transition? Rouven Bergmann: Thank you, Adam. I'll take the first question. The -- can you hear me well? Just working with microphone. Yes, there's a wide range on license. The recurring subscription part is fairly consistent compared to our performance year-to-date. I think that's important to note. On the range, the low end of the range is derisked with large transactions. We have a long list of large deals that we have all validated extremely detailed to see where they can fall and the size of those transactions in different scenarios. What I said, given that increasing macro volatility and the timing that -- and the impact on timing of closing this could create, we were prudent to reflect at the low end, a more conservative and prudent perspective of large deal contribution. So the midrange -- the midpoint requires some of those large deals, but we have the potential to do better because our pipeline is strong, but it's depending on the timing of closing of those large deals and the size of those large deals. Pascal Daloz: Coming back to your question about the transition from the on-prem to the cloud and how it is linked with AI. Definitively, AI is accelerating the trend, right? And there are a few reasons for that. One is because no need to wait to have transition everything before to start AI. And the way we do it, we do what we call supplemental. So when you have a large installed base or large deployments of the 3DEXPERIENCE platform on-prem, we come with an instance on the cloud in order to basically enable all this AI new category of services we are developing. And this is really accelerating the trend. And you have seen in the number, it's 36% growth this quarter, the cloud related to 3DEXPERIENCE platform. It's 30% since the beginning of the year. And it's extremely correlated also with the subscriptions acceleration with 16% this quarter. So in a way, this is helping the transition. And if you remember a few years ago, we were convinced the collaboration will be the catalyst for the people to move to the cloud. I think AI is the way to go. Mohammed Moawalla: Rouven, Pascal. Mo from GS. Firstly, just it's encouraging to see on the industrial business, there is pretty good momentum, particularly with Stellantis, Ford. As you look kind of into next year, as we think of some of the headwinds and the tailwinds, how should we think about the kind of growth across the different sort of segments of the business? Because obviously, in mainstream Centric has a transition still to navigate. On the Life Science side, it sounds like kind of visibility is still reasonably low, but the industrial business is ramping. So how should we think about the sort of puts and takes for growth next year? And then secondly, as we think about the Life Science business, have you sort of -- clearly, it's sort of behind plan. How do you think about the kind of strategic sort of view of this business over the medium term? You're willing to kind of write it out? Or is it something that perhaps maybe you need to kind of change the scope of to try to extract more of the growth areas that are probably better positioned? Pascal Daloz: Do you take the first one, Rouven? I'll take the second one. Rouven Bergmann: Okay. In terms of the building blocks more, when we look at the trend of 2025, Industrial Innovation up 8% year-to-date, 9% for the quarter, very much supported by the strong growth in 3DEXPERIENCE adoption. That's a very healthy and sustainable trend. That was always our objective to convert that growth into recurring revenue and subscription growth. As I mentioned that in year-to-date, there is -- and in Q3, there is always good contribution from new deals that we are signing, but also contribution from deals that we have signed in previous quarters that are ramping and are contributing to growth in the current quarter. With many of the significant deals we signed in 2025, this will be the case in 2026. So from an industrial standpoint, manufacturing industries, including for SOLIDWORKS because in SOLIDWORKS momentum is also favoring. I think we are fairly confident in our ability to continue to transform these huge industries. And in a way, many of the deals that we signed are a starting point for what's expected in 2026 and beyond. So without giving you guidance for 2026, but I think from that perspective, the 2025 trends are healthy and stable and sustainable. Related to MEDIDATA, the growth profile, yes, is very much affected by the volume business as we are changing the model to become more enterprise and more sticky by really looking at an enterprise solution to transform life sciences with the objective to generate evidence and outcomes faster for patients. And that's not just in the clinical trial, it's in research, in biology, but also in manufacturing and quality management and the whole life cycle of real-world evidence and trials and patients. So the opportunity is large, and we are making the changes to be in a better position in 2026 now. Now for 2026, I think we want to be cautious on the growth contribution from that part. We're not expecting a decline in 2026 from Life Sciences. I think we are in a better position in 2026 than 2025. That's our starting point. And for Centric, the situation is difficult in 2025, but it will improve in 2026. The SaaS acceleration is imminent. It's already happening as we are speaking, because customers are transitioning faster to the SaaS and cloud solutions than to the on-premise. And we expect around mid-teens growth for this business next year. And if you add all of that, I think we are -- we should enter 2026 with confidence. Of course, the macro standpoint is going to weigh, and we have to assess that. But the building blocks are in place and are shaping. That's the message to you. Pascal Daloz: The second part of your question, Mo, is if we do -- if we consider Life Sciences still being strategic for Dassault Systèmes, right? Ultimately, this is the question you ask. And the answer is yes. And there are a few reasons for this. One, if you look at who are the industry spending the most in research and development, Life Sciences and High-Tech are the 2. In the previous century, it was the auto and aerospace. In this century, they are the 2 spending the most. And if you remember, the core market we serve is really the innovation space, and we are obviously serving the one spending the most in innovation. So from market attractiveness, there is no doubt. The second reason is because we did not diversify in the life sciences only for the purpose to expand or to diversify the market. It was also a way for us to learn new scientific -- at least to develop new scientific foundation. Let me tell you why. If we want to address the sustainability challenge, we need to understand how life is generating life, right? This is -- it seems maybe a little bit far from the day-to-day numbers. But from a scientific standpoint, this is extremely important for us to crack how life is designing things. And my bet is the next generation of generative design will -- from a scientific standpoint, will come from this space. So this is the second reason why this is so important to continue to invest and to crack this sector in a good way. Now the question, what are we doing to change the game? Rouven already answered partially to these questions. The first one is we need to minimize the dependency on the volume of clinical trial. That's obvious because right now, the model is extremely sensitive to this. So when the market is booming, we are getting the full benefit of it. You have seen it during the COVID time and just after the acquisition of MEDIDATA. But when the market is shrinking, basically, you are penalized. And I know every quarter, I'm repeating this, the worst of the worst is, in fact, we are gaining market share. But you have hard time to figure out because you see the number decreasing. In a way, we are reinforcing our position into this space. So the way to do it, there are 2 different axes. One is to be more sticky and less dependent on the number of clinical trials, which is the enterprise approach, which is nothing more than the PLM approach we are applying to the sector. And we see a lot of traction downstream. All the topics which are related to the manufacturing, to the supply chain management, how to accelerate the transfer from the lab to the production system are extremely critical. Why -- the reason why we signed with Sanofi, the extension was they have 12 molecules in their pipelines. They need to basically put on the market in the next 3 years. They want to speed up the ramp-up for the production and to gain almost a year compared to what they used to. And the way to do that is very simple. You do most of the ramp-up production when the molecule is still at the lab level in terms of development. So you do what we do in other industries, except we do it specifically for the life sciences. So this is one axis to be enterprise-wide and to focus on the downstream and basically climb up, if you want, the value chain. The second one is MEDIDATA is a medical platform. The 3DEXPERIENCE platform is an enterprise platform, but MEDIDATA is a medical platform. And if you look at what kind of information we have into the systems, those are the medical insights for right now only the clinical trial and the intent is to expand the usage of this medical platform when the patient, they are under treatment. So this is what we call the patient centricity because there is no reason we cannot follow the patient when the patient is taking the drugs. And we can follow this, we can follow the adverse effect, we can follow -- we can make prescriptions, how to do -- to take the drugs, when it is the appropriate time, right? There are many, many services we could imagine around this way. And this is the strategy we are building around myMedidata. Those are the 2 axes we are using as a way to, if you want, be more sticky and less dependent on the volume of things. Now this is requesting to change the offer, right? And this is what we are doing. In the way we report the number, there is a little bit something which is hidden. In fact, you do not see the traction of the rest of what we do in Life Sciences because in the Life Sciences and Healthcare line, we are only reporting basically MEDIDATA and BIOVIA. But we are selling more and more DELMIA, ENOVIA, SIMULIA and also CATIA and SOLIDWORKS in the med device, and this is reported into the Industrial Innovations. So if you combine all those things, the picture is, in fact, better. Balajee Tirupati: I'll repeat my question. The first question is on MEDIDATA. How are you seeing the dynamics in the U.S. evolving? It would appear that some of the overhangs, regulatory overhangs have been reducing of late. And separately, we have also seen some of the CROs in IQVIA, ICON reporting decent booking numbers of late. So where are you seeing incremental growth headwinds for MEDIDATA coming from? And as we go in 2026, are you seeing a better visibility or some improvement in the decline in starts that we have seen in 2025? Rouven Bergmann: Yes, Balajee, thank you. I think the IQVIA and ICON outlooks were mixed, to be fair. So I don't think that anyone is saying we are yet through the decline in clinical trial activity. For sure, when we just look at clinical trial starts, Balajee, and the public available number that where all pharma companies are reporting their clinical trials that are starting, the numbers are down. And as I mentioned before, for Phase III, they are down significantly, and this is where the lion's share of value is concentrated for a software vendor as well, also for CROs because this is where there's the largest operation and there's -- most of the people are involved, and it is where the lion's share of the value is created. This is what's affecting us. And we have yet, to Pascal's point, to show that we can rebalance that headwind that we are facing from the volume decline with growth by creating a more sticky offering, connecting the dots across the life sciences enterprise to have that growth outweighing the decline just from the volume in terms of number of trials started. This is the challenge that we are facing. This is what we're seeing right now in our numbers reflected of minus 3%. At the same time, when I look just at the segment level from enterprise and mid-market, both parts are growing. But also for those 2 parts, they have less clinical trials in their portfolio than what they were doing in 2019, even before COVID. So we are already rebalancing, right, with our offering and improving our -- increasing our footprint with more value that we are creating for clients for which we are -- that we are able to monetize. But when you then include the pure volume part, still it overweighs and it reduces the growth in this quarter to minus 3%. I think regarding the U.S. regulation, right now, biotech funding is still not great, right? And that's also a reason why there's less trials started in the U.S. and in Europe. But we see an increasing trial activity, for example, in Asia, specifically in China. And that's a market opportunity that we are also addressing, but it's a different market with different economics. And now looking into 2026, it's difficult to predict what trial starts will be in 2026. I think what we should assume at this point is that our mix in 2026 is improving versus 2025 to be in a better position to offset that volatility. And offerings like clinical data studio are an enterprise offering. They are not clinical trial related. And this offering is going very, very well, and we are leading with this offer in the industry. One important part of the AbbVie announcement is the AI everywhere part. So when you are making decisions today as a company to go -- to think 5 years out, AI is at the center. And our AI strategy is resonating very well. And this is a catalyst for 2026. So I'm a bit -- you hear, I'm a bit more optimistic than what we're seeing in 2025, but it's too early to declare victory. Balajee Tirupati: Thanks for very comprehensive answer. If I can have a follow-up question. So following up on the AI debate that we have right now, and I appreciate it is a bit different for vertical software companies. But are you seeing your clients taking a pause in decision-making also on account of trying to understand what -- where the debate moves of software versus foundation model and also as your own 3D UNIV+RSES offering matures. So are customers also weighing decision and taking a pause in decision-making? Pascal Daloz: So it's a very good question. In fact, for many of our large customers, they started the AI initiative 2 years ago, in fact, by doing a lot of by themselves or sometimes partnering with start-ups. After 2 years, they are coming to the conclusion, it's promising, but you need to integrate this foundational model in the way you operate the company. And we are at this point. Let me give you an anecdote. I was with Ford a few weeks ago. And the CIO was telling me he stopped almost all the AI initiatives because now he wants to rationalize. But he want to rationalize in the productive way. He say, obviously, it's a lever for us. We have investigated many use cases. Now we need to focus on the one being more promising. And usually, the way to do this is very simple. You look at the moonshot, the one really changing the game. If you focus AI on the things which are making some improvement in what you do, you will never have your payback because AI is costly. However, if you focus on things you cannot do or you can do with a very different level of efficiency, the payback is there. And we are really at this stage. So for us, I will say it's driving against the adoption of the platform as the data lake. They are building more and more on the foundation because there is no need to redo the job. We have already done it. And more importantly, it's already integrating in everything they do. Because at the end, if you want to design the car, you still need CATIA. The fact that CATIA is driven by an AI engine is one thing, but you still need CATIA to produce the model, to produce the geometry, to produce basically the instruction for the shop floor. This is really where we are game changer. And this is extremely difficult to do without having our foundation, in fact. So to come back to your questions, I think, yes, there is a pause in a way people are doing less experiment -- but now they are taking the decision to focus on the core use cases, which are really productive and making the moonshot, I call it the moonshot, I mean, having a significant lever on the efficiency or opening new avenue. For example, this is what we are seeing in the material science. There are certain things you cannot do if you do not have an AI engine to do that. We are at this crossroad, but we are much more benefiting from this than something else. Charles Brennan: It's Charlie Brennan here from Jefferies. Apologies, 3 questions for me. Firstly, I'm struggling to match the narrative on to the actual numbers. You're attributing the weakness in the quarter to MEDIDATA and Centric, but MEDIDATA is a recurring revenue business and recurring revenues actually beat expectations. Centric is partially a license business, but it doesn't feel big enough to account for the size of the license decline. Is there anything else going on there, maybe a change in revenue allocation between the 2 lines? Or what else went wrong in the quarter to justify the shape of the numbers? Secondly, I'm hearing accelerating subscription as one of the themes coming across -- is that just Centric? Or is it more broad than that? And traditionally, it's tough to accelerate growth when you're moving to subscription. Do we need to think about a phase in '26 and '27 with accelerating license declines? And do we have to think about that in the shape of growth going forward? And then thirdly, I should probably sneak one in on cash flow. 84% conversion in 2026 is a surprisingly precise guide given the recent track record on cash flow. Are you confident that, that takes account of all of the working capital terms on deals that you're going to sign in 2026? Or is there scope for payment terms on deals in '26 to disrupt that 84% cash conversion? Rouven Bergmann: Okay. Thanks, Charlie, for the questions. Let's start -- go through this one by one. On the quarter, there's nothing else than what I outlined. I don't know where the disconnect is, but maybe I just reiterate it in simple form. Yes, MEDIDATA is a recurring business, but it also has a volume aspect of clinical trials that are starting and ending in a way they are not recurring, right? I think we were always clear about that. There's a subscription part where we contract over a period of time. And then there are studies that are starting and ending, and there is volatility to that. Charles Brennan: [indiscernible] Rouven Bergmann: Of course. But when studies are ending, they stop recognizing revenue. So there's a lot of studies ending. There's new studies are starting. If you're down minus 3% in a quarter on EUR 250 million, you can do the math in terms of how many this is, but there's a number of trials. We are running thousands of trials, Charlie. So in a market, as Pascal said, where the volume is stable, right, where we can gain growth through market share expansions, it's a solid generator of growth. And this has been the model of MEDIDATA for a long time. Now today, the volume part or the consumption business, you might say, represents about 30% of the overall business. And that business is down high single digits. And that's impacting the quarter, high single digit to low double digit for that volume business. Now it's offset by the increase in subscription contracts from deals that we are expanding and winning in the market. So that's to the MEDIDATA part. There is no magic to that other than this. On the subscription acceleration, as I said in my remarks, it's twofold. It's deals that we are signing in the quarter and ramps that are contributing to the growth from deals that we have signed in previous quarters. We are transitioning our installed base to cloud. But in many cases, it's not a 100% transition. In the case that Pascal mentioned in his -- in the presentation, the company, Stellantis, that's 100% for that part, right? It's not contributing to subscription this quarter. It will contribute over the period of time. But we have other deals where we have on-prem and cloud hybrid deals where there is a portion in the license subscription and a portion in the cloud subscription. And that has a higher impact on the in-quarter revenue in the subscription line. But it's still recurring and it's building over time. And this high structure of deals helps us to get away from the subscription license where the upfront portion is most significant and helps us to spread revenue more equally over time to create a more recurring base. And of course, when you look at our subscription on a quarter-to-quarter basis, it's -- I know where you're coming from, it's not sequentially up every quarter because of the on-premise part of subscription, which we well understand that depending on the start time of renewal or renewal dates, there is a fluctuation from quarter-to-quarter on our subscription business. You can go back years and you can see that. So rounding up the point, there is a contribution from deal signing in the quarter that are hybrid, where we have on-premise and cloud portion, where the cloud is over time and on-premise has more of a point-in-time impact. And then we are seeing ramping deals from deals that we have signed before. So also here, there's no impact from -- for the Centric part -- for the multiyear deals of Centric that we have recognized over the last quarters and last year specifically and before, that revenue is part of upfront license because it's a license subscription where you upfront revenue and it impacts the license part. So that's not driving the subscription business, Charlie. But going forward, as we are transitioning this business more to an ARR model to a SaaS model, it will support the subscription growth. And that's the whole point of what we are doing. From a cash flow perspective, Well, I think 2024 is an outlier in terms of several effects that we are facing related to tax impacts, social charges that are higher compared to 2024. That is all going to be in our base in 2025 compared to 2026. So we don't have those onetime effects any longer. At least they are not foreseeable at this point in time. And as it relates to the ramping deals that I talked about on the subscription line, they will generate significant higher cash in 2026 than in 2025. I have that level of visibility. Now that's the baseline for the assumption to be back at the 2024 levels. Now is there a possible variability? Yes. But the baseline assumption is the 2024 performance. Pascal Daloz: Maybe one additional comment I should make. Charlie, there is no trick. I think my commitment is very simple. I want to continue to gain market share in all the industry we serve. And I think quarter after quarter, I can -- I hope I'm proving to you that this is what we do, including in sector where it's extremely competitive. And the second thing is we are accelerating the transition to subscription and to the cloud. That's what we do. So my view, we are doing the right things. It's the appropriate time. Against, we were pushing this for a few years ago, but the market was not ready in our space for the cloud. Now it is, they are. And if you remember, the subscription used to be 1/3 of the recurring revenue 3, 4 years ago. Now it's 50%. And we are on a path in the next 3 years to be almost 2/3 of the recurrent part of the revenue. So I think we are walking the talk. That's what the commitment to do. This is what we are doing. We are redirecting the deal. And I think at the end, the numbers are reflecting this extremely, I mean, transparently, Charlie. Operator: We have an online question coming from the line of Laurent Daure at Kepler Cheuvreux. Laurent Daure: Yes. I have 3 quick questions. The first, if you could elaborate a little bit giving us an update on your pipeline of large deals by maybe verticals and your discussions with those clients, the long sales cycle, is it just the macro? Or is there anything else on the discussion you have with them? My second question is if you could give us a bit more color on the change in management at Centric and also on the 15% growth you're expecting for next year, the visibility you have on that, given that you will continue to move subscription? And my final question is, when you refer to a couple of years to rebalance the Life Science business, do you see a risk that maybe for 2 or 3 years that this business end up being kind of flattish? Pascal Daloz: Okay. So Laurent, I will take it, and Rouven, feel free to add whatever you want at the end. So the pipeline coverage is 2x, which is good. For Q4, usually, this is where we are. So -- and it's relatively balanced between the large deals and, let's say, the midsized deals, which is also important because when you have too much on the large deals, this is sometimes difficult to manage. In terms of industry contribution, it is relatively consistent with Q3. So you still have a fraction which is transportation and mobility centric. We have a large part also coming from aerospace and defense. And we also have a good visibility on industrial equipment. So that's for the core industry. And again, we -- the pipeline coverage is definitively not the topic. What we observe, and we have been explicit about this, sometimes 1 or 2 big transactions can shift from one quarter to another one, independently of us. And that's what Rouven is mentioning when he says the volatile geopolitic is basically putting some volatility on the time to close. But it's only a question of time to close. It's not a question related to the pipeline. Coming back to the Centric management change. In fact, it's very simple. You know Chris is turning 70. Chris, the founder of Centric, turning 70. For a few years, he was preparing Fabrice Canonge to be -- to take the positions. So we say it's the right time. We completed the acquisition of the remaining piece of Centric. So from basically a timing standpoint, it was appropriate to make the changes right now. And as part of the new setup, the new leadership, we have put this transition to the cloud as one of the objectives for the team and the EUR 1 billion threshold, which is the size of this business we want to achieve in the coming years, also one of the objectives for this new team. The last thing is related to Centric performance for next year. Rouven Bergmann: Life Sciences, the next 2 to 3 years. What is our expectations, the rebalancing of Life Science. Pascal Daloz: The rebalancing is already happening again. So except -- and this is what I was telling you, we are reporting in a line which is not making it visible for you. So probably something we need to change for you to have a visibility to understand how the momentum is going in order to basically balance between the volume-based business versus the enterprise-based business in Life Sciences. Now if we step back a little bit, I think the booking growth is good for Centric -- for MEDIDATA. So the topic is not the booking, it has to accelerate, obviously. But it's against this termination of studies and not having a new one starting again, which is the topic. I do expect we are reaching the bottom, frankly speaking. I told you this last year, I remember. And again, it was not -- it was based on facts because we were tracking all the pipelines. The way we do this, we look at how many Phase I, how many Phase IIs. We make some assumption about the move from one to another one. And this is how we are computing, if you want, the potential new studies starting every year. Now there is a big change, and you highlight it. We see Asia contributing to the trend, especially China, right, which was not the case in the past. And we were relatively dependent, as you say, on the U.S. dynamic for the creation or at least the most promising molecules coming on the market for the Phase III. Now we see basically this being much more balanced between the different continents. And this is also giving hope for me because we see -- and if you track it, we are seeing a lot of investment in the biotech in China, but also in Korea as well, Japan as well. So I do believe if we combine the 2 together, we will be in a much better situation. And Centric because that was also the question. Again, we have this massive renewal last year. That's the reason why we have the base effect this year. And if you combine this with the fact that we want to accelerate, I want to accelerate the transition to the cloud and the SaaS business model, this is creating the gap. But this basically, in 2026, we will be in a much better situation because we will not have the base coming from the big renewal. Anyway, the trend and the acceleration of the cloud is already happening. So that's the confidence I can share with you. Operator: Our next question comes from Frederic Boulan at Bank of America. Frederic Boulan: I've got 2 and a short clarification. Firstly, around AI, if you can spend a minute on your commercial model of the offering you've presented, any kind of attach rate you foresee on a midterm view? Second, coming back on the free cash flow side and your 84% conversion from next year. Any specific moving parts or action plans you want to call out to underpin your confidence in free cash flow acceleration? And then short clarification on MEDIDATA, can you confirm the comment you made on expect similar growth or similar revenue decline? Is this a comment about Q4 versus Q3 level of minus 3%? Pascal Daloz: So Rouven, I take the first one. For the cash flow. So the way it works for the AI new category of solutions is very simple. You remember the portfolio is structured around role, processes and solutions. So in front of the role, we have the virtual companions and the virtual companions are there to advance the role and to extend the roles. The generative experiences are there to basically automate the processes. And the solutions ultimately is what we want to do with the virtual twin as a service. So keep this in mind for the purpose of the clarity. Now how do we price each of them? The virtual companion is priced on a fraction of the cost of the people we are either augmenting it or basically substituting sometimes. That's how we price. For the generative processes, the generative experiences, it's a usage-based model. So it's a token base like many companies do. And why so? Because I really want to ease the adoption and to accelerate the adoption with this consumption model. And it's something we master relatively well because it's almost the same approach we have for simulation for a long time, right? And for the virtual twin as a services, it's an outcome-based model because at the end, you are not selling any more the tools, you are selling basically the end result of what the tool is producing. So it will be an outcome-based model. Now from an attach rate standpoint, it's still a little bit early because we came on the market with this. But we could expect that for many roles you have in the market being used right now, you will have an extension with the virtual companions for sure. You could expect that for processes, which are the most complex one, the generative experiences will be a way to accelerate significantly the time to market and the efficiency. This is true for the design. This is true for the manufacturing. This is also true for the compliance, as I was highlighting it. And virtual twin as a service, it's something we do specifically in the new industry because they are not equipped. Usually, they do not have all the skills, and we are gaining a lot of time by doing so. One example of what I'm saying -- in the Life Sciences, when we are speaking about the manufacturing systems and the production systems, more and more, we go straight with the virtual twin as a service, which is an easy way for us to deploy our solutions and to reduce the time for the adoption. That's how we are basically pricing and how we are planning. And you remember what Rouven say, say the contribution of those new category of solutions, we are expecting EUR 0.5 billion in the coming plan, which is ending in 2029. Rouven Bergmann: Okay. Thank you, Frederic. I'll go through the cash flow question. Regarding the 84%, what are the kind of puts and takes and level of visibility and action items that we have underway. I think first, important to mention is we have a certain level of visibility from large contracts that we have signed where there are clear payment terms that are going to drive cash in 2026, early 2026. So that gives us a clear perspective on the puts and takes between '25 and '26, which I call the timing effect that we had. So that's one part. We also have some other nonrecurring payments in 2025 that will not recur in 2026. We also have visibility to this. Now above that, -- when I look at our DSO and the impact of the DSO in context what we just discussed on Centric. Centric has been a big driver of the increase in DSO or has contributed to the increase in DSO, I should better say. And now as we are moving to a recurring model, we will see the benefit of that also in terms of better aligning revenue and cash. So the conversion from that perspective should also will benefit from this change that we have decided. And then the last point is we are applying strict discipline on cash management, and that will have an impact also in 2026, and I already see that happening in 2025. The last point regarding the MEDIDATA comment, yes, this was related to Q4. So the trend of Q3 to be expected similar in Q4 2025. Pascal Daloz: So this is concluding this morning's session. So thank you very much for the one being there with us in London and for the people being connected. Look forward to seeing you on the road, either Rouven or myself, we will do some roadshow in the coming weeks. And see you no later than early next year. Thank you very much.
Sandra Åberg: Good morning. Welcome to Essity's presentation of the Q3 results. We will start with an overview of the financial highlights and the business highlights and Ulrika will present the business highlights. Following that, we will have a session with our CFO, who will take us through the financials. Ulrika will then present the initiatives that we announced this morning, initiatives launched to accelerate Essity's profitable growth. We will, as usual, end today with a Q&A session where you have the possibility to engage directly with us. [Operator Instructions] With that, let's dive into the quarterly performance. Ulrika, over to you. Ulrika Kolsrud: Thank you, Sandra, and welcome also from my side to this presentation of Essity's Q3 results. And to summarize the quarter, we continue to deliver positive organic sales growth. We also strengthened our profit margins. We delivered a strong cash flow and a result above SEK 5 billion. Price, volume and mix all contributed to the 0.9% organic sales growth, with price being the most significant contributor. And we had organic sales growth in all our 3 business areas. Once again, we delivered record high gross profit margins and this quarter, it flowed through down to the bottom line. So the call to action that we had in July to pull the brakes on our SG&A cost development really made a difference. And we ended up at a profit margin of 14.6%. Setting aside the quarterly results now for a moment. This quarter has also been about how to set ourselves up for future success. As I shared in the Q2 webcast in my -- during my first month in this new role, I have done an extensive review of the business. And then together with the leadership team worked on what to change, what to improve, what to prioritize in order to accelerate our progress towards our financial targets and towards our vision. As a result of that, I am today launching 2 initiatives, that will improve our performance. The first one is the reorganization designed to sharpen our focus to become more fast and also more agile. And related to that, the second one, a cost-saving program that will reduce our organizational costs. More about that later, but let's now dive into the Q3 results, and we start with Health and Medical. Q3 now, for '25, marks the 18th consecutive quarter of growth for our Medical Solutions business. We are growing across the 3 therapy areas; Wound Care, Compression Therapy and Orthopedics. And what is very important for future growth and profitable growth in the medical categories is innovation. That plays a key role. There are still so many unmet needs, both for healthcare as well as for patients and consumers to innovate on. One example is for people with wrist fractures. Today, it's difficult for them to keep up with hygiene and keep up with the daily activities of lives with wrist braces that exist commonly in the marketplace. And with the launch of Actimove Manus Air, we are solving that problem. This wrist brace that you see now on the page here has a lot of advantages. It's water resistant so that you can wash your hands. It's food-grade resistant so that you can cook and keep up hygiene. It doesn't restrain the movements of the fingers and the hands, so you can keep on working if you work by the computer. Also, it has an open design. So if you're a health care professional, you can inspect the wound and change wound dressings with the brace on -- and all of this, while providing that stabilization that is needed in order to heal in a fast way. So certainly, this innovation is a very good addition to our offer in Orthopedics. Then if we move to incontinence care in health care, also in Incontinence Care, we were growing sales and volumes in the quarter. You might remember last quarter, then I talked about the challenging market conditions that we had in some markets, and that is still the case. However, we have very strong underlying growth in many other markets that is compensating for this. And in times where health care funding is under pressure, it's even more relevant to have products and solutions that are saving time for caregivers. And with the launch that we had this quarter with TENA, a new product concept, we are addressing exactly that. The TENA Pro skin stretch day and night is a unique product concept that we have put to market now that makes it easier to put on and take off the product. When it's in a closed fashion, then it is just as a TENA pant, you can pull it up and down just like normal underwear, making it easy for the wearer to use the product. The challenge with the pant though is that it's not so easy for a caregiver to apply the product. And this one is reopenable. You can open and close it, and that means that the caregiver can also very easily apply the incontinence protection. And that saves time for the caregiver. Now this is not the only impactful innovation that we are launching in the quarter. We're also launching a new product in the lighter range of our assortment, and that is the TENA Discreet Ultra. It's a very discrete product, super discrete to wear, yet it does not compromise on the superior TENA protection. And why is it then important to have a superior product in this part of the assortment? Well, this is where we attract consumers where we bring consumers into the category. And we, of course, want the women to experience the first little leaks to choose purpose-made products and to choose TENA as their purpose-made products. And many consumers do that. They choose TENA. And we see that because our incontinence sales in retail is continuing to grow at a very good rate. This is especially true for the U.S. And if you might remember that in U.S., we are investing to grow, and those investments are paying off. So in the quarter, we could enjoy a 21% growth of incontinence in U.S. retail. In Feminine Care, we're also continuing to grow in a very good way with high growth rates. Here, Mexico is an important market for us. We are clear market leaders, and we will continue to strengthen our position in Mexico by launching a new night product, SABA Noches. And also here, it's a very important segment to be superior in because not only do we provide a good night sleep for the wearer, but also it's a quality stamp for the brand. So as you can hear, we are continuing to grow strongly in the 2 higher yielding categories in consumer goods. So Feminine Care and Incontinence Care. On the other hand, in Consumer Tissue and in baby, we are declining. In Consumer Tissue, we are suffering in the branded sales from the weaker consumer sentiment. And also, we see a price competitiveness increasing across the consumer tissue business. The good news is that if we look at Mexico, we are growing very well in our Regio brand during the quarter. And also now we are really gearing up for the sneezing season making sure that we have the right hankers in the shelf to be ready for the sales boost that will come during the next quarter. And also, we continue with our efforts to have a high promotional pressure and to focus a lot on the value segment so that we can fuel growth in Consumer Tissue. Then what about baby? Well, you all know that we have had a period where we have had declining volumes on the back of lower birth rates and also very intense competition. We're still declining in baby, but we have improved. In the quarter, we turned around Libero in the Nordics big time. We had the actions of higher frequency rate, of promotions, of a limited edition. I was going to say that is called Wildlife that you see on the picture here and also stronger marketing campaigns. And all of that paid off. So the Libero consumers have found their way back to their brand. Another category where we can report a big improvement is in Professional Hygiene. Also here, we continue to see a challenging market situation, of the least in the U.S. in the HoReCa channel. However, we are improving volume sequentially in Professional Hygiene. And that is thanks to the activities that we have done with selective price adjustments and also more focus on the value segment that we talked about last time. What's also very good to see is that we continue to grow our premium products, so our strategic segments as we did also previous quarter. This is, of course, very important for us short term, but it's also important to fuel future profitable growth. And speaking about that, what's super important to fuel future profitable growth is that we are -- really have strong relationships with our customers. What's happening right now in the customer landscape in Professional Hygiene is that a lot of our distributors are consolidating. And then it's even more important than ever to be the preferred supplier. And therefore, it's so nice to see that one of our customers, Impacts, have this quarter named as the best supplier. And with that positive news, I hand over to our CFO, Fredrik Rystedt. Fredrik Rystedt: Thank you so much, Ulrika, and I will give a little bit of numbers background to what Ulrika just mentioned here. So I'll start with our sales. And as you've already heard, we are continuing to grow organically with 0.9%, so just under 1%. Now if you look at the absolute sales number, it is down by 4.5%. But of course, this is just due to the fact that the Swedish kroner is strengthening. So if you actually look at our sales in constant currency, we actually grew with a bit over SEK 300 million. So it's basically currency impact. So turning a bit back to the organic sales growth of 1%. As you see, the volume growth was 0.2%. And this is exactly what it was also in Q2 and similar to what it was also in Q1. So we've had this volume growth level now for a few quarters. It is, however, a bit different. And so you remember perhaps that we have struggled a bit with professional hygiene with baby and degree also with Inco Health Care. And those have all 3 improved this quarter. But on the other hand, that improvement has been partly offset by lower volume development in consumer tissue. So it is a bit different. We are happy to see the improvement in those areas that I mentioned. So to give you a little bit more flavor, if we start with Health and Medical, generally speaking, volumes picked up actually. So it is still challenging when it comes to Inco Health Care markets in general. But despite that fact, a bit as we expected, we have picked up volumes and it looks clearly a bit better at this point of time. Medical continues to grow, especially in the wound care, and we've seen that growth for so many quarters now. So it's a very, very good and continuous development for medical in general. It's wound care as I said, but it's also this quarter, actually a lot in compression. So good development overall in the volume sense. Now if I go then to consumer goods, geographically, we are growing everywhere when it comes to incontinence and feminine. So it continues with strong growth in both of those areas. Ulrika mentioned earlier that baby is looking a bit better. And of course, this is due to a much better performance in our Nordic branded area with Libero. So we've taken market shares there. It's still challenging on the European market for the retail branded European market for baby and that will also remain for a few quarters to come, most likely, but it's looking a lot better. So you may remember that we had a volume decline of about 4.5% or in that vicinity, volume decline in baby in Q2 and a similar decline also in Q1. And this quarter, it's been about 1% decline. So it looks clearly better. On the other hand, as we have already talked about here, Consumer Tissue is a bit more down, negative growth, and this is because we have prioritized margin rather than growth in volume. And we do continue to see actually a down trading in that market. So volume is not so good in consumer tissue. Finally, Professional Hygiene, looking a lot better, and the volume decline is still there, it's minus 1% roughly. And of course, that's a lot better than what we saw in Q1 and Q2. So clearly, looking better. As before, it is a base assortment that is declining and the premium products or strategic products as we sometimes call them, dispensary base is continuing to do quite well in terms of growth. So overall, mix is actually continuing to behave very, very well in professional hygiene. So turning a bit to price and mix. As you see, 0.7%, this is basically most of it actually related to price. And you can see from the slide here that Consumer Goods and Professional Hygiene, both performing well in terms of price performance. And Health and Medical is slightly down. This is all actually Inco. So this is selective price declines that we have -- that we have done. We did talk and Ulrika mentioned it earlier that we also have sequentially a little bit lower prices in professional hygiene. This is deliberate. We wanted to -- on top of expanding our value offering in Professional Hygiene, we also wanted to grow more generally by selective price decreases. So if you look at just sequential price decreases, we also see a little bit of that in Professional Hygiene, deliberate. So that's pretty much it on the volume and an organic sales side. So turning to our margin, that is improving both sequentially and year-on-year. So if we look at -- decompose the year-on-year improvement, you can see that a lot of is coming, of course, from the gross profit margin. And most of it, as we've already talked about, relating to obviously price to a smaller degree on mix and volume, but it's -- a lot of it is price. We also actually have a positive development in our COGS. And this is no surprise. Raw material is performing better, and so is energy. And -- but we also have other cost items there. One thing that we have talked about a lot is, of course, the savings that we do. In this particular quarter, we had about [ 115 ] or so in savings, which we were happy about. Generally speaking, it has been a tough year when it comes to saving in COGS. And we still aspire to reach our annual target range of about EUR 50 million to EUR 100 million. We're not there. We aspire to get into that range for the full year, but it is challenging, and this is, of course, due to the relatively low volume development that we have in our production. So that makes it a bit more challenging to get to our target range. A&P, not surprising. We've increased the absolute spending level and also as a percentage of sales. And this is a profitable proposition. We know that the return of A&P spend is attractive. So this is why we do that. We talked a lot about SG&A previously, and we've also announced measures to actually -- to make the growth rate become much lower. And there has been a lot of success there. So clearly, when you look at our SG&A development, is much better now than we have seen in the previous quarters. The growth in particularly IT and personnel cost is lower now. Let me just point out, though, that there is a portion -- a smaller portion, I should say, of the improvement that relates to lower bonus provisions. So the improvement is not as strong as you see here, there is a smaller portion that is due to that. But I'll come back to the future in a second. But generally speaking, if you disregard that, underlying performance of SG&A is much lower than the inflation rate. So the measures we've taken have clearly paid off. Now finally, there's a bit of other here. This is just a one-off in last year actually. We had an insurance payments last year and we didn't have it this year. So that's the final part. So overall, a very, very good quarter, I should say for the group in terms of margin. And basically, you can see year-on-year, that health and medical and professional hygiene are still slightly down and consumer goods up. But if you look at it sequentially, which we're happy about, both Health and Medical and Professional Hygiene have turned a little bit and actually now improved. So all in all, a good margin development. Turning to cash flow, a bit -- just some short comments, generally speaking, quite a good quarter, both in terms of underlying cash generation, but also in terms of working capital. We were not so happy about working capital in the second quarter, much better looking this quarter. So when you look at accounts receivables or accounts payables in working capital, the days are roughly about the same. It's still a bit too high when it comes to inventory. We are working our way down to that. So hopefully, we'll see a good development in working capital also as we go forward. And finally, the balance sheet as a consequence of that strong cash flow generation. We have been able to, in comparison to the 6 months balance sheet, we have been able to reduce our net debt with about SEK 3 billion or so, and of course, our net debt-to-EBITDA ratio is now down to SEK 1.2 billion. I think this is a good -- perhaps opportunity to give you a little bit about the flavor for what we expect for Q4. I mean, again, we don't give that much of forecast, but let me just give you a little bit. Strating with COGS. Perhaps, we expect to -- that COGS will actually, from a year-on-year -- compared to Q4 of 2024, we expect COGS to be lower this quarter coming up in '25. And the reason is mainly driven by input cost or and particularly so [indiscernible] cost. So we expect COGS to be lower. When it comes to A&P, we also -- we expect it to be flat to higher compared to last year. So Q4 versus Q4, we expect to spend more in A&P. As I said, this is a good return on those investments. And finally, when it comes to SG&A, this is worth mentioning that we will have, also in comparison Q4-Q4, a fairly low growth rate. So clearly, we will retain that lower growth rate than we've had in the previous year. But just worth noting that from a sequential standpoint, Q4 SG&A, excluding A&P is always much higher. So sequentially, you should expect higher cost but year-on-year, a quite a low growth rate. So finally, I guess, just a reminder, perhaps, we have our financial targets. They remain intact. So more than 3% in organic sales growth and more than 15% in EBIT margin, excluding items affecting comparability. As you know, as you've seen here in Q3, we're close to our margin target. And of course, we got some work to do when it comes to our annual organic sales growth. And that, Ulrika, I guess, you will talk more about. Ulrika Kolsrud: Yes. Thank you, Fredrik. So question then, of course, is how to deliver on those financial targets. And you all know this, but I think it's worth repeating. We will deliver on our targets by prioritizing the categories segments, market and channel combinations that has the highest potential for profitable growth and where we have a clear right to win. We will deliver on our financial targets, not the least by delivering differentiated innovations that are driving market share development and pricing power. Also by having the most effective and efficient go-to-market. It should be easy to do business with Essity. Also to really find efficiency savings across our full value chain and not the least to continue to grow our people and to continue to build that winning culture that we have. Now I've said before that this strategy is highly relevant and is something that we continue to execute on. My focus has been how do we accelerate the execution on this strategy because I see significant potential for us to fuel growth and improve our performance. For example, we could unlock the full potential of our portfolio by sharpening our focus on the most attractive categories and segments. Also, I see opportunities for unleashing the full power of our organization by creating more end-to-end accountabilities, by decentralizing decision-making and reducing our operational complexity in the organization. And we could, by freeing up resources to reinvest in A&P and in our growth initiatives, we could become -- drive profitable growth more forcefully and also be more competitive. And those are the reasons why we are now then launching 2 initiatives. The first one is the reorganization to become faster, to become more agile and also to sharpen our focus. What we will do is that we will create 4 new business units that are global and based on our product categories. They will have the full P&L responsibility and also have the end-to-end accountability, and that is what is different from before. Those 4 business units will be Health and Medical, Personal Care, Consumer Tissue and Professional Hygiene. And consequently, we will start reporting financially in these segments as from 1st of January, 2026. Now the benefits with doing this is that we are decentralizing decision-making. We are cutting out duplication, and we are becoming more consumer and customer-centric. And by that, we will be faster in our decisions, we will be faster in our execution, and we will be faster in responding to evolving consumer and customer needs. We will furthermore sharpen our focus then on the most attractive categories and segments. Now what I've explained now is how this organization will become more effective, but it will also drive efficiencies since we are simplifying the structure. And those efficiency gains is the key component of the cost saving program that we're also launching. And this cost-saving program is expected to generate a saving of SEK 1 billion and had full effect in the run rate by end of 2026. It's primarily SG&A we're talking about, and that is on top of the COGS saving program that we have that Fredrik was alluding to before, and that is generating SEK 0.5 billion to SEK 1 billion annually. Market A&P, so market investments are excluded. In fact, it's important that we maintain -- at least maintain both A&P as well as R&D investments in order to fuel growth. And we want to reinvest the savings that we generate into our growth opportunities in higher-yielding areas where we also have a proven track record of high return on investments. So with these 2 measures, we will unleash the full power of the organization, we will free up resources that we can invest in profitable growth, and we will unlock the full potential of Essity's product portfolio. Now let's summarize the quarter before we move into Q&A. In the quarter, as you have heard, we delivered positive organic sales growth. We strengthened our profit margins, had a good cash flow and delivered a profit above SEK 5 billion. We also launched 2 measures to improve performance and fuel growth. And needless to say, looking forward now, 2 of our key priorities will be to implement this organizational change as well as to achieve the SG&A and COGS savings that we have been talking about. In parallel with that, of course, a priority is for us to continue with our efforts to drive volume growth and profitable volume growth in a challenging market environment with the ambition to perform while we transform. Thank you. Sandra Åberg: Thank you, Ulrika, and thank you, Fredrik. We will now move into questions. [Operator Instructions] And please try to limit your questions to one at a time because that will give Ulrika and Fredrik, the possibility to give you the best answers. Are you ready to start with the questions? Ulrika Kolsrud: Yes. Sandra Åberg: So let's move into questions. So we have a first question from Aron Adamski. Aron Adamski: Sandra, Ulrika, Fredrik. My first question is on the divergence between lower COGS picture and the prices which are higher. In that context, it would be great to hear why your expectations for pricing across your biggest categories over the next couple of quarters? And also, are you currently seeing any pressures from retailers to roll back prices or maybe the competitive pressures accelerating? Ulrika Kolsrud: If I start, I could say that, as I mentioned, when it comes to Consumer Tissue, there is a high price competition across that business. And of course, also in other parts of our business, it's a high price competition. And we always look at ways to balance, of course, volume growth with having a good pricing performance. We've talked before in Q2, but also this quarter about the selective price adjustments that we do in Professional Hygiene, which is to fuel growth and to adapt to the market situation that we have there. Anything you want to add, Fredrik? Fredrik Rystedt: No, not really. I mean we didn't specifically talk about sequential price movement now in our presentation here, but we've seen a bit of price decline sequentially in Inco Health Care and Professional Hygiene and baby as you alluded to, and these are deliberate basically. I think it's fair to say -- we also saw a very, very tiny price sequential decline in Consumer Tissue. And exactly as you say that, of course, there is more room for that potentially when [indiscernible] comes down even further. But again, it's very difficult to discount. We always try to maintain a very solid price management. So it's difficult to comment in advance. Ulrika Kolsrud: I hope that answered your question, Aron, did it? Aron Adamski: Yes. Sandra Åberg: Thank you, Aron. So now it's time for Oskar Lindstrom, Danske Bank. Oskar Lindström: Good morning. A couple of questions from me. First off, on the cost savings. Of the SEK 1 billion, how much should we expect to sort of drop down to the bottom line or to EBIT? And how much will be reinvested in increased A&P spending. That's my first question. Should I go on with the other? Ulrika Kolsrud: No. Let me answer that one first because as I said, primarily, we are going to reinvest that saving into profitable growth. And then you will see the effect on margin as we grow volumes and then we'll have the operating leverage of margin. Oskar Lindström: Right, and about the timing here, should we expect the sort of reinvestment into A&P then to sort of come at the same time as the cost savings are being implemented or before? Or what's the timing going to look like? Essentially, what I'm looking for is, is this going to have a positive and negative impact on EBIT margins during 2026. Ulrika Kolsrud: If I start with the way we will work with this is that as the savings materialize, we will then have freed up resources that we can reinvest. So it will coincide to a big extent. Fredrik, do you want to comment on margin development in light of that? Fredrik Rystedt: No. I think one thing, Oskar, maybe just to remind you, is that we've always said that what will bring our margins higher is basically operating leverage, so it's volume. So what we are now doing is using the freed up -- as Ulrika just said, we are using the funds that we free up to fuel volume growth, and that volume growth in its turn will enhance margin. That's the plan. So it's not our intention to boost, if you say, the margin with the cost saving program, but rather to reinvest it as the savings occur. Does that make sense? Oskar Lindström: Yes, thank you. And just a final question on the sort of balance between lower-end private label and your own branded or higher-end branded product. I mean a lot of other consumer segments have seen this deteriorating from the producer's perspective in that consumers are down traded and you've also mentioned this during the past -- how is that developing? Are you seeing any -- is it worsening the same signs of an improvement? Ulrika Kolsrud: It's -- I would say, if we talk -- I mean we're talking consumer tissue, it's pretty much the same. I mean we see that there is a down trading, and that is what we see in our branded business is declining and the private label market is increasing. And I don't see any major movements. It's quite similar to what it's been. Sandra Åberg: Thank you, Oskar, for your questions. [Operator Instructions] And as I can see, Patrick Folan from Barclays, you have a question. Patrick Folan: I just joined some -- sorry, from repeating question already asked, but 2 for me. On health and medical, can you maybe walk through any kind of contracts that were gained or lost during the period? And maybe how you see kind of the outlook for the segments you're considering your experience there? And maybe more specifically kind of looking at the reorganization and the change in structure, I mean what was behind the decision to strip out personal care and tissue from the Consumer Goods unit? Is there more focus trying to go into certain segments? Or is it just trying to have more disciplined cost strategy in terms of how you allocate resources? Ulrika Kolsrud: Thank you, Patrick, if I start with the first question, I think if you look at Health & Medical, it's a lot of contracts, especially on the medical side, but also on the Inco side, it's a lot of contracts. So we don't necessarily talk about all those individual contracts and what we have gained and lost and so on over time. I think in the Incontinence Care, health care arena, it's quite stable when it comes to our contract base. And in Health and Medical, as you can see, we are continuing to grow. So we are growing with new contracts and taking new business as well as with growth within those contracts that we have. Then if we move to the organization, there is the intention, as you heard me -- or maybe you didn't hear explain, you said you came on a bit late. But we want to create this end-to-end accountability. And to do so, we want to work then with the different product categories more separated because then that allows us to have that end-to-end accountability with the business unit and the one P&L responsible is responsible for innovation, marketing, supply chain and sales. So that is one reason. Another reason is that it allows us to focus on the most attractive categories and segments. Both that Personal Care comes more in the limelight, and that will drive performance and focus on Personal Care, but also in Consumer Tissue, it allows us to focus more on the most attractive segments within that category. And then I would say thirdly is that Personal Care and Consumer Tissue, our businesses that have quite different character. And by running them separately, we can optimize the way we work based on the specific business drivers in those 2 businesses. Patrick Folan: Okay. Clear. And just a follow-up on that. In terms of the benchmarking exercise, for the SG&A kind of cost program. How did you guys arrive at that kind of SEK 1 billion number, I suppose? Fredrik Rystedt: Maybe I can try and answer that, Patrick. So 2 things. We looked at the reorganization if we start in that end and we looked at what kind of savings potential, that organizational change actually brought with it. So that was a starting point. We also looked at our other buckets of SG&A, and we looked at where we could optimize that spend. So as an example, our IT spend as we go forward, you will perhaps remember that we've had a very, very significant increase of our IT spending for various reasons over the course of a couple of years. We now feel it's appropriate to actually reduce that as an example. So there are many different things that has gone into that analysis. But the main part is actually related to the reorganization that we have described here today. Sandra Åberg: Thank you, Patrick. I hope you have your answers to your questions now. Then we will move to Niklas Ekman, DNB Carnegie. Niklas Ekman: Can I ask you about use of funds because you are now generating cash flow in the range of SEK 12 million, maybe SEK 13 billion, you have dividends that are slightly below SEK 6 billion and buybacks of SEK 3 billion. So you're essentially now improving your balance sheet significantly. Can you elaborate a little bit about -- on your thoughts here on M&A potential? Are you saving for future M&A potential? Is there scope to increase either the dividends or buybacks? Or what's your thoughts here on the use of funds? Ulrika Kolsrud: Well, if we start with the dividends, we stay with our policy to increase our dividends over a year and stay true to that. Then we see buybacks as a recurring way to allocate capital so that we will continue with as well. Then the good thing is that we have, as you say, a strong balance sheet. So we can both invest in organic growth and deleverage, and we can have the funds to invest in an M&A, should we find something that is value creating. Niklas Ekman: And just how is that market now and the potential for you to do M&A and also considering the valuation of your own shares at the moment? Ulrika Kolsrud: Well, I think we talked about that last quarter as well, right, that, of course, we want to be careful in making sure that our M&As that we potentially do are value creating. And then there has to be the synergies to bridge that gap between the valuation of a potential acquisition and our own valuation. Niklas Ekman: Very clear. Can I also ask about U.S. tariffs? That was not a big, but still an issue in the Q2 results. What is it looking like now? How is it impacting you? Fredrik Rystedt: Maybe I can take that, Niklas. We've had this quarter, Q3, SEK 110 million roughly and we are looking at a lower number, about SEK 70 million in Q4. And the reason between -- the difference between these numbers is simply that the Canadian government has actually taken out the tariffs on our exports from the U.S. to Canada. So this is the difference. So as I said, Q3, SEK 110 million, roughly about SEK 70 million in Q4. Sandra Åberg: The next question comes from Antoine Prevot, Bank of America. Antoine Prevot: A question from me on Latin America, I mean, continue to be strong compared to, I mean, maybe some of the part of Staples, which have been a bit weaker there. Anything specific you want to flag? Is it you mainly continue to gain market share there? And do you expect that to continue in the coming quarters? Ulrika Kolsrud: I don't know want to necessarily comment on the coming quarters because we don't know how that will play out. But what we can say is that we are doing well in what is a quite challenging market now in Latin America, where the consumer sentiment is changing and so on, but we are growing very nicely. We talked earlier now this morning about the feminine brands, for example, that is doing very well. And also in our Consumer Tissue business, we are growing in, for example, Mexico. Also, our incontinence business is growing very well in Latin America. So overall, it's looking good for us in Latin America. Antoine Prevot: Perfect. Just to follow up. I mean, it's more like innovations led to that market share? Or is there something else there? Ulrika Kolsrud: Can you repeat, sorry? Antoine, can you repeat your question? Antoine Prevot: Yes, sorry. Is it just -- what's driving these different strong performance in North America in the different categories you defined? Have you launched new product there? Or what has been kind of like backing that? Ulrika Kolsrud: It's a combination as in many cases. If we look at Consumer Tissue, it's been -- we've had quite good promotional season that has helped to boost growth in that category specifically. In feminine, as I shared, we have a new launch, and we have a very strong offer that we continue to invest behind, and we get the payoff from those investments. So -- but in most cases, it's a combination of really marketing our attractive offer, adding on new innovations and upgrades to fuel growth and then also promotions. Sandra Åberg: Let's now move to Charles Eden, UBS. Charles Eden: Just wanted to clarify your comments because I think there is perhaps an incorrect interpretation this morning, looking at how the share price has developed during the call. You said the cost savings are not going to improve the margin of the group, which one could conclude means your cost of business is going up and that you need to spend more just to stand still. Am I correct? What you're trying to say is you will reinvest these SEK 1 billion cost savings into the business with the aim of driving superior volume growth and market share gains. And then these factors should contribute to stronger margins over time as opposed to just trying to cut cost to drive the margin improvement? Is that the right way to look at it? Maybe that's been misinterpreted. Ulrika Kolsrud: Exactly. Charles Eden: Because I think people have sort of interpreted you saying we need to spend more just to stay where we are on the margins and that's not what you're trying to say, right? You're trying to say, look, we want to drive it through market share gains to push the margin higher rather than we have to spend more to stand still. Ulrika Kolsrud: Exactly. Charles Eden: Thanks for the clarification. Ulrika Kolsrud: Thank you for clarifying for us. Very helpful. Sandra Åberg: Then I think that we have another question from Aron Adamski, Goldman Sachs. Is that right, Aron? Aron Adamski: I have 2 very quick follow-ups. Firstly, on Baby Care. I think clearly, the business performance improved sequentially, but it's still below the midterm outlook that I think you laid out at the CMD last year. I was just wondering, since your targets were formed initially, do you think there has been any fundamental shift in the category fundamentals, specifically in Europe that could perhaps make the initial goals more difficult to achieve in the longer term? And then the second follow-up is very quick, just on Consumer Tissue and sorry, if you mentioned this already. How is your private label business performing both on volume and pricing. Is that still a significantly accretive part to this category? Ulrika Kolsrud: If I start with the first one, I'm not so sure, but the time horizon here what we are referring to. But generally speaking, I could say that we do see the lower birth rates and that is something that continues to develop. That has an impact on the fundamentals of the category. When it comes to weaker climate that we see and that some consumers are more price sensitive, that is more of a temporary situation. So that we expect to change over time. Then with the private label division, I mean that is still a value-creating part of our business, even if we now have lower -- we have lower volumes in that business in the third quarter. As we said, it's a high price competition in this category. Fredrik Rystedt: And there, we mentioned it earlier, Antoine, that we have maintained a margin protective stance a bit. So we have been eager to do that. And of course, with high price competition, it is a bit challenging on the volume side. But once again, this is more, you can say, normal fluctuations in that business. So nothing dramatic. Sandra Åberg: So I think that we are out of questions. So do we have any more questions? [Operator Instructions] No, I think we're out of questions. That means that we can wrap up. Any closing remarks, Ulrika, before we end? Ulrika Kolsrud: Yes. I think we are leaving -- we are leaving a positive quarter behind us now. And we are launching initiatives that will fuel our profitable growth going forward. And just on the previous discussion that we had, I think it's important to point that out that we have a lot of belief in our growth platforms that we have. And looking forward to freeing up resources so that we can continue to accelerate growth in those areas. And that will drive also margin improvement by operating leverage and mix improvement. So that I want to leave you with. Thank you for listening. Sandra Åberg: Thank you, Ulrika, and thank you, Fredrik. And thanks to our audience for listening in. And if you have any further questions, you know where to find us. Have a good rest of the day. Bye.
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the TechnipFMC Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development. Please go ahead. Matt Seinsheimer: Thank you, Regina. Good morning and good afternoon, and welcome to TechnipFMC's third quarter 2025 earnings conference call. Our news release and financial statements issued earlier today can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q and other periodic filings with the U.S. Securities and Exchange Commission. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. I will now turn the call over to Doug Pferdehirt, TechnipFMC's Chair and Chief Executive Officer. Douglas Pferdehirt: Thank you, Matt. Good morning and good afternoon. Thank you for participating in our third quarter earnings call. Total company revenue in the period was $2.6 billion, adjusted EBITDA was $531 million with a margin of 20.1% when excluding foreign exchange impacts. I am very proud of the continued strength in our execution and the delivery of another quarter of high-quality inbound. With total company orders of more than $2.6 billion in the period, 15 of the past 6 quarters have achieved a book-to-bill above 1. We generated free cash flow of $448 million and distributed $271 million through dividends and share repurchases, continuing to deliver on our commitment to return a significant portion of free cash flow to shareholders. Subsea realized quarterly inbound orders of $2.4 billion. This commercial success is the cornerstone of our ability to deliver growth in both revenue and profitability. In the quarter, we announced 4 awards driven by continued strength in South America. We received multiple flexible type contracts from Petrobras, which included the direct award of a high-pressure gas injection risers for pre-salt projects. We were also awarded a contract to supply subsea production systems to be deployed in an array of greenfield developments, brownfield expansions and asset revitalizations across Petrobras' extensive portfolio. In Guyana, we were awarded the Hammerhead project from Exxon Mobil, where we leveraged our in-country experience and solid track record for providing schedule certainty. This award represents the seventh greenfield development on the Stabroek Block and will utilize our Subsea 2.0 technology. TechnipFMC has supplied all of the subsea production systems for ExxonMobil in Guyana, since the first contract award in 2017. Our commercial success year-to-date reinforces our confidence in delivering more than $10 billion of subsea orders in 2025 as well as achieving $30 billion of inbound over the last 3 years. Beyond the current year, we believe that offshore projects will continue to receive an increasing share of capital investment. This change in spending allocation is due in part to the significant improvements made in developing the large, high-quality and prolific reservoirs found offshore. These strong attributes were always known and the resource quality was always there, but cost overruns and schedule delays in the past would ultimately challenge project economics. In today's offshore market, much has changed, driven by a number of factors, including improvements in the quality and interpretation of seismic data, shortened delivery times for large production infrastructure, significant reductions in the time required for drilling and completion activities and as reflected in our inbound awards, the introduction of new commercial models and innovative technologies. At TechnipFMC, we wake up every day with a single purpose, the relentless pursuit of cycle time reduction. This mindset led to the development of our pre-engineered configure-to-order product platform, Subsea 2.0 as well as the creation of the industry's only fully integrated execution model, iEPCI. These innovations provide the elements to shorten cycle times and improve project returns. But even more importantly, to help provide our customers with greater schedule certainty in our project execution. It is this combination of higher economic returns and greater project certainty that is providing sustainability to current activity levels, underpinning our outlook and securing $10 billion of Subsea inbound in 2026 and our confidence that activity will remain strong through the end of the decade. In closing, the continued strength in our Subsea inbound orders reflects the confidence our customers have today and our ability to successfully execute their projects on time and on budget. This is making the author resurgence more durable as evidenced by the shift in spending to these markets. TechnipFMC is also driving this change in behavior. With iEPCI and Subsea 2.0, both having a profound impact on investment decisions by derisking and accelerating subsea projects. The success of these unique offerings has also contributed to the notable increase in the level of direct awards to our company. With greater project certainty, we now see the execution phase of subsea developments as an opportunity to further leverage lean operating principles. In doing so, we can learn, refine and enhance our own processes, driving a culture of continuous improvement to further shorten cycle times and improve project returns. While focusing on the customer is always a top priority, we also believe that our shareholders should share in our success. Yesterday, we announced our Board of Directors authorized additional share repurchases of up to $2 billion. This significant increase to our share authorization exemplifies our confidence in the outlook as well as our commitment to maximize shareholder value. I will now turn the call over to Alf to discuss our financial results. Alf Melin: Thanks, Doug. Inbound in the quarter was $.6 billion, driven by $2.4 billion of subsea orders. Total company backlog ended the period at $16.8 billion. Revenue in the quarter was $2.6 billion. Adjusted EBITDA was $531 million when excluding a foreign exchange loss of $12 million. Turning to segment results. In Subsea, revenue of $2.3 billion increased 5% versus the second quarter. The sequential improvement was largely driven by increased project activity, particularly iEPCI projects in Africa, Australia and the Americas. This was partially offset by reduced project activity in Norway. Adjusted EBITDA was $506 million, up 5% sequentially due to higher project activity. Adjusted EBITDA margin was 21.8%. In Surface Technologies, revenue was $328 million, an increase of 3% from the second quarter. The sequential increase was primarily driven by higher activity in the North Sea and Asia Pacific, partially offset by lower activity in North America. Adjusted EBITDA was $54 million, an increase of 3% sequentially due to higher activity in international markets. Adjusted EBITDA margin was 16.4%, in line with the second quarter results. Turning to corporate and other items in the period. Corporate expense was $28 million. Net interest expense was $11 million and tax expense in the quarter was $76 million. Cash flow from operating activities was $525 million and capital expenditures were $77 million. This resulted in free cash flow of $448 million. We repurchased $250 million of stock in the third quarter. When including $20 million of dividends, total shareholder distributions were $271 million. We have also increased our share repurchase authorization by an additional $2 billion, providing us with $2.3 billion of current authorization. Since the time of our initial authorization in 2022, we have distributed more than $1.6 billion through buybacks and dividends, representing nearly 60% of free cash flow generated over the period. During the quarter, we reduced debt by $258 million including early repayment of the 6.5% senior notes maturing in February 2026. We ended the period with $438 million of gross debt, largely comprised of private placement notes that extend out to 2033, with interest rates of 4% and below. Cash and cash equivalents was $877 million. Our net cash position increased to $439 million. Moving to our guidance. For Subsea, we expect seasonal impacts to our fourth quarter results, with revenue declining mid-single digits sequentially. Adjusted EBITDA margin is expected to decline approximately 300 basis points to 18.8%. For Surface Technologies, we anticipate revenue to decline low single digits sequentially, with an adjusted EBITDA margin similar to the 16.4% reported in the third quarter. Lastly, we expect corporate expense to approximate $35 million. Moving to our full year outlook. I'm going to highlight a few items. Most notably, the updates we have made to our guidance ranges. For Surface Technologies, we now expect adjusted EBITDA margin to be in the range of 16% to 16.5%, above our prior full year view. And for total company, we are increasing our guidance for adjusted EBITDA by $30 million, which we now expect to approximate $1.83 billion for the full year when excluding foreign exchange. Lastly with the continued strength in our cash conversion, we are also increasing free cash flow guidance for the year to a range of $1.3 billion to $1.45 billion. All other guidance items for the current year remains same. Before I move to my closing remarks, I want to recognize the tremendous progress the team has accomplished so far. The consistency in execution and further adoption of lean operating principles make us well positioned for continued improvement in most everything we do. Additionally, our commercial differentiation and the relative stability of offshore markets give us unique visibility, allowing us to provide an early view for Subsea for the upcoming year. For 2026, we are guiding Subsea revenue to a range of $9.1 billion to $9.5 billion with adjusted EBITDA margin in the range of 20.5% to 22%. We will provide the remainder of our 2026 financial guidance with our fourth quarter earnings. In closing, the continued momentum in operational performance drove another solid quarter for TechnipFMC. The strong execution was also reflected in robust free cash flow generation, leading us to increase our full year expectation to $1.375 billion at the midpoint of the guidance range. We are on pace to return more than 70% of free cash flow to shareholders in 2025 through dividends and share buybacks. And with our increased free cash flow guidance, shareholder distributions now have the potential to double versus the prior year. Yet even with this substantial increase in distributions, we have maintained the flexibility to further strengthen our balance sheet by reducing gross debt almost $450 million since the beginning of the year, including the opportunistic prepayment of our highest cost debt. And finally, as we look further ahead to 2026, we have provided our outlook for Subsea, which at the midpoint of the guidance implies double-digit growth in adjusted EBITDA. Importantly, this level of EBITDA growth in Subsea is essentially double the anticipated growth in revenue, further expanding margins, improving returns while providing strong support for robust shareholder distributions. Operator, you may now open the line for questions. Operator: [Operator Instructions] Our first question will come from the line of Scott Gruber with Citigroup. Scott Gruber: I wanted to start on the share repurchase authorization. It's going to be another good year of free cash this year, strong returns to shareholders above 70%. With the increase in the repurchase authorization and what should be a strong free cash year next year, how are you guys thinking about the right level of cash return in '26? Alf Melin: Sure, Scott. So obviously, we are very pleased with the year we've had with free cash flow generation this year, really supported by our strong commercial and operational execution that we had all year. This execution is foundational because the operational delivery uncertainty around that is really leading to the consistent achievement of milestones that then trigger billings and associated cash collections. So that's really, again, the fundamental strength in the cash flow conversion out of EBITDA clearly has increased significantly this year. However, when you exclude maybe working capital benefits and a few onetime benefits that we have seen in our free cash flow conversion from EBITDA may not be able to stay at that level. But if you think about what we have said historically, we said that we're going to be around 50% of free cash flow conversion from EBITDA, and we think we're now approaching more like 55% when you're normalizing for working capital to a more neutral position. Scott Gruber: That's great. And how to think about the kind of level of return to shareholders from the free cash flow for next year kind of what's the framework you guys are thinking about? Alf Melin: Yes. So we are just recommitting that we will have at least 70% of free cash flow returned to shareholders. So that's -- we will continue at that level at the same level as we've had in '25. Operator: Our next question will come from the line of Victoria McCulloch with RBC. Victoria McCulloch: Just on the Subsea award intake, when we were speaking last quarter, you mentioned that there were some awards that haven't been announced to the market that we would see in the coming weeks. I think there was 1 from Equinor in July. Has there been anything that possibly still yet to be announced from of the order intake. Certainly, it seems your to the order intake is obviously very strong and running ahead for of others in the market. It's very strong by TechnipFMC. And then as a follow-up, not totally linked, what are your working capital expectations for this year within the new free cash flow guidance? Douglas Pferdehirt: Sure. Thank you for the question, and happy to clarify. First of all, thank you for pointing out another solid quarter of inbound. We are differentiated in that. And I think that's very much a result of what we've done to create the company that we have, and it shows up in the level of direct awards it comes to our company. So in other words, the total available market that's accessible by the rest is shrinking every day as our direct awards continue to increase. So if you think about it that way, that's what gives us the confidence, the reassurance and the ability to continue to outperform. In terms of those specific, the comment around potential future announcements, there are actually still more to come. That really is governed by our clients. It typically has to do with their conversations with the local governments or their partners. And when they give us the green light, then we go ahead and make those announcements. But nothing -- there's no surprises there. There's no -- it's just a normal part of the process. It's struck out a little bit longer than we had anticipated when I made that comment. But again, thank you for pointing out the strength and resiliency of our outlook and our ability to win and secure the highest quality projects, realizing that we are being very selective in what we focus on. Alf Melin: Yes. And this is Alf. Regarding the free cash flow and the working capital assumptions. As you clearly point out, we have had a very exceptional year this year and a very strong year in terms of working capital performance. So whatever you can kind of gauge from the year-to-date numbers now is kind of one way to see the upside this year. When we guide for going forward, we will typically put ourselves with a neutral position. That's the right starting point. Operator: Our next question comes from the line of David Anderson with Barclays. John Anderson: I was hoping you could unpack the '26 Subsea guide a little bit for us in relation to kind of what I'm hearing from the rest of the market. Recognizing the midpoint of the guide, the revenue guide on Subsea is in line of consensus. I'm assuming the service component is up roughly cut 10%, like we've been seeing in the past years. So if as backlog conversion looks pretty steady for next year. We keep hearing about offshore picking up the late '26 building into I'm just curious if that's a trend that you think should also play out in your Subsea revenue. You mentioned shortened cycle times. I guess does that imply backlog conversion should start to accelerate in the second half of next year? And does Subsea 2.0 convert faster in the mix? Douglas Pferdehirt: Sure, Dave. I think you dropped off there at the end. You might have to bring me back. There were quite a few a few things packed in there, year back, Dave. So if I don't catch everything, just you can ask me a follow-up. So first of all, thank you for asking us about 2026. I think we're the only ones talking about 2026, to be very clear, which again says a lot about who we are as a company, the unique visibility that we have, our position within the market and the confidence that our clients have in us to be able to award us projects far earlier than they have done historically or that they would do with the competition. So again, it's a privilege for us to be able to talk about 2026. When you -- as you said, as we kind of unpack that guidance, you're right, backlog coverage is strong. And it's not just the quantity of backlog coverage, it's the quantity of backlog coverage, and that was both in my prepared remarks as well as in Alf's, it's that ability to have confidence in increasing not just revenue, but also margin and margin at a faster rate than revenue growth. So this isn't just about volume. This is about higher-quality inbound and just, quite frankly, exemplary execution, which I'm extremely proud of our team and all of our employees for what they've been able to deliver. So those things set us up very well and give us the confidence to be able to go out now and no one else is talking about 2026, and we're able to go out with guidance for 2026, with a high level of confidence that we will be able to achieve that. You asked a question about Subsea services and kind of its growth rate, like in 2025, I would think of it as in line with the growth of the overall business. So in other words, we gave you the revenue forecast. So you can look at that top line growth and reflect something similar for subsea services. In terms of cycle time reduction and how that helps the conversion from backlog, indeed, it does, and that's a big part of the secret sauce is in terms of our ability to grow, whilst retaining a modest CapEx investment, meaning we don't have to invest to grow. We decided to do more with less. So we're not about building and spending capital and adding assets. The smart way to do it is to do more with less, which quite simply shows up in returns have not been achievable historically that we are demonstrating, and we'll continue to demonstrate as we go forward. So that's -- now we're not -- everything is tied to that accelerated cycle time, still the offshore installation side where there's work to be done. And it's an area we're focusing on how we can make that as efficient as we have the configured order Subsea 2.0 product architecture. And there's not everything in the Subsea 2.0, not every of our product architecture has achieved the level of Subsea 2.0 if you will, customization. So there's a lot of upside here left in the company, and those are all of the things that we're focusing on that we'll benefit from as we go forward. If I didn't cover everything you had hoped, please feel free to follow up. John Anderson: Pretty close, pretty close. Let's hope I don't drop out here. So my second question is just about the Subsea margin guide for next year. What percentage of revenue are you expecting to be Subsea 2.0? And can you tell us how much -- what percentage of the inbound year-to-date has been Subsea 2.0? Douglas Pferdehirt: Sure. So I think the easier way to think about it and maybe how it creates leverage for the company, is how much of it is actually flowing through the facilities. So we are right now -- let's say, when we exit 2025, exit this year, we'll be approaching about 40% on of our capacity, we'll be working on Subsea 2.0. Now the inbound levels of Subsea 2.0 have exceeded the 50% mark and continue to grow, and we would expect Subsea 2.0 orders to grow as a percentage of total orders also next year as well as iEPCI orders as a percent of our total orders will grow substantially. So these are big, big leverages -- these create a lot of leverage for us as we continue to move forward in ensuring that we continue to grow, expand our margin, increase our leverage and drive returns. Operator: Our next question comes from the line of Arun Jayaram with JPMorgan Securities. Arun Jayaram: My first question is regarding your 2026 Subsea guidance. Doug, at the midpoint of the guide, it implies 175 basis point improvement in margins. I was wondering if you could help us understand how you think about the drivers of the margin expansion between Subsea 2.0 mix -- Subsea services mix and maybe pricing improvement? Douglas Pferdehirt: Sure, and good morning, Arun. So clearly, all of those factor in. I'm going to really focus on the first 2 because to me, those are the ones that are sustainable. I think too many companies for too long, have just focused on the last one, and that is never a long-term strategy. So we have redesigned our company. We changed our operating model to create that leverage that we can have that sustainable leverage regardless of the level of activity that there is in the marketplace. So when you think about it, there's really the 3 components. There's -- we do have some legacy backlog, some legacy projects still in our backlog, and those will be working off. And we're getting down now to below the 10% mark of what is left in our backlog. So there'll be some of that remaining in 2026. And then -- but there will also be more Subsea 2.0, as I just responded today and more iEPCI execution going through. All of that is -- those are the things that are like, let's say, very tangible. But what you have to keep in mind is the entire organization, it's not just the manufacturing part of the organization. The entire organization is on this industrialization journey, and it's real, it's real. And many of you have had the opportunity to visit and see how we operate today versus how we used to operate and the rest of the industry still operates, and it's very different. And it creates that what we call solidification, standardization and industrialization. And it goes across everything that we do, including the functions and every activity we have in the company. This is what creates that leverage. So when you get over 20,000 women and men working together every single day, finding those incremental improvements and being rewarded and celebrating those successes, that creates that momentum that gives us just a high level of confidence in room that we're going to be able to continue to accelerate and grow the performance of the company. Arun Jayaram: Great. Maybe 1 for Alf. Your net cash position has grown to just under the $500 million, I think it's like $439 million. You highlighted plans to return at least 70% of free cash flow. I just wanted to talk about what you think about the balance sheet and future uses of free cash flow because you have a very underlevered balance sheet. And I guess the ultimate question is could we see you returning essentially all of your free cash flow, just given how strong the balance sheet sits today. Alf Melin: Thanks, Arun. Thanks for the question. I think it's well placed. Yes, for sure. I mean we have taken care of a lot of things on the balance sheet, pointed out in my prepared remarks, $450 million of reduction of debt this year in addition to delivering on our commitment to at least 70% to shareholders. This debt reduction really reflects more than 50% of debt reduction since the beginning of the year. And clearly, our balance sheet needless to say, is just in great shape. We don't see any major change to our capital allocation, meaning we intend to continue to be a capital-light company. We have guided in the past that we will have CapEx in the range of 3.5% to 4.5%, and we continue to intend to stay at the low end of that range. So given also that we have taken care of most of our debt obligation, and we have really -- we like the maturities that we have out there for the rest of our debt, and we really don't see work in the debt structure significantly at this point. So it certainly leaves opportunity to -- when we say at least 70%, we clearly are focused on minimum that amount, but any excess cash, clearly, shareholder distributions will be one of the areas where we go to. Operator: Our next question comes from the line of Derek Podhaizer with Piper Sandler. Derek Podhaizer: Just to kind of keep going on Dave and Arun's comments about just the catalyst within the backlog improvement and the margin outlook. You talk about the industrialization, you have the Subsea 2.0. But Doug, can you maybe talk to us about what 2.0 could mean for the surf side or the installation side of things? Just thinking about those continued catalysts as we work towards the year, just the continued improvement of the business. Douglas Pferdehirt: Sure, good morning, Derek. I don't want to say too much, but I think there is a significant opportunity to further industrialize the full iEPCI scope. So remember, back in history, we were running them in parallel. We were working on the Subsea 2.0 configure to order for the SPS or the subsea equipment portion of the -- of our activity. And then as a result of the merger, we now have the ability as a single entity, and you cannot do this if you are not a single entity because it has, let's say, conflicting behaviors between a traditional surf company and a traditional equipment provider. So as a single entity, now for 8 years. It's been 8 years ago that we actually merged. It gives us the opportunity to expand that across the whole portfolio. So I am sure you all will have an opportunity to hear much more about that in the future. But I'm going to be a little bit quiet today, which I know is not my normal behavior, but there is a -- it's an incredible opportunity, but I am going to stop there. We're working hard at it. Derek Podhaizer: Got it. Fair enough. I appreciate that. Second on the subsea opportunities list, it's pretty noticeable and evident that scope of over $1 billion is meaningfully increasing really since the middle. Could you talk about the drivers behind that? I'm assuming the certainty that you guys bring to the table. But where could this ultimately go from a project scope perspective as we continue to see that wedge just increase over time? Douglas Pferdehirt: Thank you. I didn't think of it as a wedge, but I'll take that. It's certainly been an ever-increasing wedge. And we've talked a lot about that, including the prepared remarks and that's really being driven by the fact that the best reservoirs are offshore, at least the best reservoirs that are accessible to the marketplace. So the capital is going to flow in that direction. It was always -- there was always some hesitation by our customers in the past, again, because of the unpredictability of the execution of offshore projects. What we have brought back to the industry, we've given our customers their mojo back, we have our mojo, and it's simply a fact of being -- performing well every single day, giving our client confidence by providing certainty. We have to reduce cycle time every single day. whilst providing certainty. If we can do that, and we will do that, we have done that, and we'll continue to do that. That will give our customers great -- ever greater confidence to invest more and more of their capital allocation to the offshore. It just makes economic sense. The breakevens of the projects, the returns on the projects the reserve base of very minimal decline rates compared to other areas that they can invest in. It just makes sense. So look, the opportunity list continues to strengthen. As you pointed out, Interestingly, the 3 new projects that are on the list are all gas. I wouldn't overreact to that. I think -- but I do think there is something to be said about that. I do think gas is a bigger portion of the future of the hydrocarbon mix in particular, in the offshore. And again, a lot of these offshore gas as LNG. So we often think about LNG in a terrestrial way because LNG is the physical thing that you see is often on the key side. But a lot of the supply of that gas is coming from offshore gas, particularly outside of the U.S. So anyways, it's an interesting combination of projects that were added, but here's something -- maybe here's just a little teaser for you. The livid you don't get to see, which is our proprietary opportunity list, which drives our direct awards, that list has grown at an even faster rate. Operator: Our next question comes from the line of Ati Modak with Goldman Sachs. Ati Modak: Can you talk directionally about the outlook for Surface Technologies for '26 given the Saudi activity potential? And then you also raised the margin guide for '25. So maybe help us understand the drivers there as well Douglas Pferdehirt: Sure. So we talked a bit about it last quarter. I'm super proud of the team. They've taken the necessary actions to ensure that they can provide adequate returns to the company and to our shareholders. We've focused where and what we do. And as a result of that, they're able to deliver quite exceptional results and actually improving results when others in this realm, I think, are going the other direction. So I will tell you the outlook is less certain. It is why we did not include that in our early guidance. We were able to for Subsea, but the Surface or the Onshore business remains much less predictable. Certainly, the -- historically, the level of continuity in our international business or non-North America business, it's much more predictable. It has less less downside swings to it, if you will. But it's still very early. And we are talking to our clients now. We're working through that on a budgetary work. There they're doing it themselves. So there's not a lot of information to be exchanged. But we positioned ourselves with the right customers, in the right basins, providing the right technology. And we've had very good success with our iComplete offering, which is the digitalization of the entire frac pad, not just the [indiscernible] digitalizing their work or the wireline company digitalizing their work, but we put an overlay interface, where we can control the whole well site, allowing record performance in terms of continuous pumping. So we're going to continue to bring those high-end solutions as well as continue to benefit from the in-country investments that we've made in local manufacturing in the Middle East, where we are very well positioned with those clients, and we'll continue to succeed on a relative basis because of those investments that we've made. So just a little less clear at this point, and I think we will provide that guidance along with our -- the full company guidance and -- with our Q4 results as we do historically. It's just a different business than our Subsea business. Ati Modak: Got it. That's helpful. And then can you give us an update on the electric Subsea infrastructure opportunity, where that stands as of now, I've seen some announcements from some of your peers earlier this year as well. Just wondering if that is starting to become a little bit more topical and what that could mean in terms of orders and margins for you? Douglas Pferdehirt: Sure. It's progressing. What you've seen is to greenfield, all-electric awards. TechnipFMC received the first-ever All-Electric Subsea award and that was for the BP Northern Endurance partnership project we announced a few quarters ago. And then more recently, there was an award in the North Sea. We have said this, and I'll repeat it. I think the level of transition in terms of greenfield developments, to all-electric are not going to be as strong as I originally had anticipated. But there are 3 areas that are most definitely going to benefit from all-electric. And the third one being actually very, very interesting and very new. So those 3 areas are carbon capture and storage. We believe they will go -- they have gone all electric, and we'll continue to go all electric. So all of those opportunities that we're working on or we have secured are based on an all-electric infrastructure. And we have the industry's only certified all-electric CO2 injection tree, and that's important. The second area is in the area of brownfield tiebacks. We've talked about this before. It increases the radius from the host facility by about 4x and potentially even greater than that. And that has a lot of implications and positive implications in terms of customers being able to tie back to existing infrastructure, very low -- at a very low breakeven or very high returns. It helps us not only in the fact that we have the old electric solution, but we have other solutions like flexible pipe and subsea processing that all kind of come together to create that opportunity. And then the third area is where we're actually now able to retrofit hydraulic trees with electric actuation, if hydraulic actuation was to be deteriorating, there's always redundancy, so it doesn't fail. I don't want to say -- I don't want to put the wrong impression in your mind, but when it starts to deteriorate its performance over time, the customer would have to retrieve that tree, bring it back to the surface, take it back to the shore and retrofit, reinstalling, that is certainly months and can be quarters before that production is put back online. We have developed a novel solution to be able to go into a -- in situ on the C4 with the use of remote-operated vehicles and swap out hydraulic actuation controller for electric actuation. It is really interesting. And obviously, you don't lose that multiple months, multiple quarters of production. So it has a lot of upside for our clients, too. So I just think the original focus of electric as well, all new projects will go all-electric. I just don't think that's the case anymore, but we are finding by having invested and developed the technology, we're finding these other applications that could be quite exciting as well. Operator: Our next question will come from the line of Sebastian Erskine with Rothschild. Sebastian Erskine: Can you hear me now? Douglas Pferdehirt: Yes, we can. Sebastian Erskine: The first one, just a bolt-on, it's a very strong year for TechnipFMC on order intake. But I think a theme that has emerged perhaps is that some operators have kind of chosen a bit, they're going to slow walk deepwater FIDs. Some competitors have called Sub-Saharan Africa is a good example of that. And I also saw an estimate that was putting company tree awards down mid-teens percentage year-over-year in '25. So it would be great to kind of get your perspective on how the cycles evolve year-to-date versus your expectations at the beginning of the year? And I guess, looking forward, perhaps, what are the specific key basins that are going to drive '26 for you? Douglas Pferdehirt: Sure. So look, I just have to be candid. We're not experiencing that. And I think that's clear. I mean, 3 years ago, we called the market and we said that the market was going to be resilient. We were going to be able to secure $30 billion worth of awards over a 3-year period, and we're well on track to do that. So -- and as far as our expectations for this year, they're right in line with original expectations, which is we said would be in that $10 billion range. And now we're saying we'll be more than $10 billion. So I'm not sure what others are experiencing, but our results, I think, speak for themselves. Now let me maybe explain why. Remember, 80% of our business is direct awarded to our company never goes out to competitive tender. So just think about what that does to the total available market. The total available market that's left is very small compared to what we have privileged access to because of the trust and the confidence that customers have in us, our unique offering and our ability to be able to reduce cycle time, improve their project returns, hence leading to those direct awards. And that's why when I say that proprietary data set that we work on our opportunity set that we're working on, which is not on our public list. Even though that public list is growing, those other projects are are only accessible by our company. And keep in mind, we are at the table very early because these are direct awards. We are doing the concept study. We're doing the pre-FEED study. We're doing the FEED study, and we're going straight into an iEPCI 2.0 execution. So I guess we just have greater visibility. Sebastian Erskine: Really appreciate that. And a follow-up on that. I mean, looking at your backlog at a very large level, I'd like to get your perspective on kind of resourcing to execute that level of work. And I read somewhere that had increased staffing at your manufacturing facilities in Brazil, Malaysia and the U.K. by some 20% to 40% in 2024 versus a kind of base of '21, so post-pandemic. Are you happy with the resourcing at the moment? I guess looking at it, given the tightness is, are there some concerns in the industry around potential bottlenecks or capacity constraints? And how are you positioning to execute that work. Douglas Pferdehirt: Well, first of all, I can't confirm those numbers. Those are new numbers to me, but I'm not sure where they came from or what you heard, but let me just answer the question more broadly. First and foremost, and this is a commitment I make to every single customer, we do not take on any work that we can't execute. And so look, we know bid work. I mean there's work out there with our competitors, we're now bidding it. It's very clear if it doesn't meet our threshold in terms of the quality of the work or the type of execution that is expected or where it is expected or the currency in which we're going to be paid or the risk that we're asked to take on, and we will just now bid that work. So first of all, it's -- what we inbound, we have a commitment to deliver and it's important, deliver on time, on budget. I mean the reason why we get repeat awards is only because we're performing at a very high level. We have never not gotten a repeat award. We often replace the competition. I mean it is a very different scenario in terms of how we are operating versus how we used to operate, which is all the industry -- the rest of the industry still operates. So I really can't say much more than that other than we just have a different operating model. It took a lot to get here. Thankfully, we did it 10 years ago. And so now we're singularly focused on execution. We're not focused on anything else than delivering to our clients and meeting their expectations. So long answer to your question is we are very confident in our staffing levels. We're very confident in the resource levels. The whole strategy of the company and reducing cycle time is the ability to do more with the same. So it's not about staffing levels. It's about being more efficient. Operator: Our next question will come from the line of Marc Bianchi with TD Cowen. Marc Bianchi: I wanted to start with some more questions on services. So Doug, can you remind us what the mix of services between like installation versus servicing your installed base is in the business like roughly? And the reason I ask is the the comments earlier about kind of '26 and a service growth rate looking like the overall subsea, I would have thought that services could be doing a better growth rate than sort of decelerating, so maybe you could unpack that a little bit for us? And then the second part of it is like if you look longer term, is there anything we should be thinking about how the integrated awards that you've taken in the past several years affect the servicing opportunity and then anything with like the vintaging of your installed base as we come up on maybe some anniversaries of more service opportunity? Douglas Pferdehirt: Sure. And thanks, Mark, for bringing us back to service, its important. The only thing I would disagree with in your statement, I think you said deceleration. There certainly hasn't been a deceleration. Look, you do get a compounding effect. The larger the installed base, the more opportunity set there is, and certainly, the higher the volume, the longer the tail and the more opportunities you have. So let's talk a little bit about the mix of services. So yes, you have the original installation activity. And then you have all of the activity around the inspection, maintenance and repair of the installed infrastructure. And then you have another bucket that's all around refurbishment of equipment. And then you have that final bucket that's all around intervention services. And what is very beneficial, not just driven by iEPCI, but just probably driven by the market presence that we have is that whenever the wellbore needs to be intervened on or in which happens at a much higher frequency than the equipment because the equipment is built to last for 25 to 35 years. We come out -- we provide the services associated with giving the client assets to the wellbore. So that's what I mean by that intermittent work. So -- and wellbores can fail within the first year, wellbores can fail within 5 years. The more intelligence and all that, that are put in the wellbores, it's just more opportunities for things to potentially need to be replaced or repaired, which means we are involved. So look, there is no doubt that we have -- the Subsea Services business has grown substantially. We I gave some prior guidance for this year at about $1.8 billion. As you know, that's almost double where we were not too long ago. So yes, very proud of our Subsea Services business. It is a business that's going to -- it's not just the quality of the earnings associated with it, but it's having that leverage in that footprint and that sustainability and continuity. So perhaps my remark about it being growing in line with the core business, which is also growing at a good rate, maybe made it seem understated, but that wasn't the intent. Marc Bianchi: Got it, great. And my second question is just around fourth quarter. And if I sort of look at what the revenue guide is here for Subsea, it would look like you're highly covered with backlog like more than usual. But I think there were some conversations during the quarter about some extra vessel downtime beyond normal seasonality. Maybe you could just unpack a little bit what's going on there, and maybe how we should think about how that progresses through the -- into the first quarter? Alf Melin: Sure, Mark, Alf here. So yes, you are right. First of all, we are well covered on the backlog. We did have a strong Q3, and -- but we are, as you point out, guiding Q4 down versus Q3. And that revenue is declining largely through the utilization of vessels. We have this seasonal activity levels pretty much every year, where we see that decline, particularly in the North Sea. But overall, it's affecting our ability to go offshore and generate revenue. So that's there. And then we talked about the revenue -- the associated EBITDA decline. However, when you look at the big picture of where our guidance was in terms of revenue, we were at $8.6 billion of midpoint. And if you kind of take this all together between the Q3 and the Q4 performance, you'll see that there is an uptick and an expectation that we will be above midpoint for the full year when it's all said and done. Operator: Our next question comes from the line of Saurabh Pant with Bank of America. Saurabh Pant: Doug, you gave some good color on 2026, and you gave that color early, a lot of good questions, but your revenue is still below the orders you have been booking for several years now, right? So there should be upside going forward. What I want to focus on bags as you enter deeper into the execution phase of this backlog, right? What are you focused on? What are you looking at, especially among wondering both the installation, the side of things. the vessel side of the market, especially given some consolidation out there. Just maybe talk to the execution side of things as you execute on the backlog and orders you're booking. Douglas Pferdehirt: Sure. I think the biggest thing to focus on, and we've talked about this previously on calls was just if leads the quality of the inbound, which obviously goes into the backlog, which then has to be executed. And what we know is we know there's more iEPCI, we know there's more 2.0, and that creates a significant level of confidence in our ability to be able to execute those projects. I said earlier, it came out on a couple of the earlier questions. it's all about relentless pursuit of the reduction of cycle time. Sure. That makes sense. It means our customers get a higher project return. It means they're happy for us to share a greater portion of the economic value that we create, but it also has to do with our internal efficiency. And again, being able to do more with the same or the same with the last, whatever scenario you might be in. But that's how we're able to ensure that we can deliver this backlog successfully for our clients and maintain that reputation and the honor position that we have with our client base today. Saurabh Pant: Right, right. No, that makes sense, Doug. As maybe a quick one for you or maybe correct me if I'm wrong on this. I think I heard you talk about 55% normalized free cash flow conversion, right? And I think you were assuming neutral working capital in that, [indiscernible] I'm wrong. And then how does the order exceeding your revenue dynamic play into it, right, as long as orders are above your revenue, should we think that working capital should continue to be a tailwind? Maybe just spend a couple of minutes on that, Alf, please. Alf Melin: Sure. So first of all, maybe the clarification maybe I made around our normalized working capital -- normalized free cash flow conversion. Again, I said that before, we have talked about it being 50%. And now as a guide at this point in time, we say that if you think about our EBITDA, we think we will be getting around 55% conversion from that EBITDA number if you assume working capital neutral. You're right about the dynamics of working capital being a variable to our business. And clearly, in a period of significant growth in inbound, providing that you can get the high-quality backlog that we've been able to do that gives us the ability to achieve early milestones and ongoing milestones in the projects and allowing us a consistent execution. We have the ability to stay neutral or better which is always the ambition we have as we execute the incremental subsea work. When you now look maybe a little bit at the inbound picture year-over-year as we kind of have similar inbound year after year. we may see some diminishing opportunities to incrementally build on that, but that's certainly always our ambition. But at this point, if I'm looking ahead, I wouldn't go much about neutral working capital at this point if you're looking ahead but that's certainly something to -- that we will come back and guide further on when we come back in February. Operator: Our final question will come from the line of Mark Wilson with Jefferies. Mark Wilson: Obviously, the adoption and the resilience of what you put in place here just jumps off the page yet again. And I'd say the ExxonMobil ahead Subsea 2.0 awards seems to be the ultimate validation of that. However, one part, Doug, I'd say that we haven't touched on is the question about installation capacity out there in the market, still essential for all clients. And obviously, you work with Saipem in Guyana at Hammerhead as well. So could you just update us on TechnipFMC's view on that merger that's going on to Saipem 7 in the market, and whether you see any impact from that regarding the vessel infrastructure you've spoken to in the past and indeed, if anything, worth commenting on your submissions regarding that process? Douglas Pferdehirt: Sure, Mark, and thank you for your patience. So just a clarification. So well, first of all, thank you for the comments. Those are well received. Yes, the seventh project in Guyana was critical. The fact that 2.0 shows that evolution, that continued market adoption and with obviously a very important client to us. The only thing I need to clarify is we don't work with Saipem in Guyana. So we do and our scope is our scope and then the installation scope is bid separately. So that question would really need to be answered by ExxonMobil not by ourselves. In regards to the merger, look, the regulators will make their decision. Our customers will make their decision. So they ever the regulator decides and then there's whatever behavior the clients decide on how they want to react. We are in a position where when asked or encouraged by our clients or the regulators to comment. We have a responsibility to comment, and we're just providing clarifications on market, market segmentation and the way that the market operates, but it will be what it will be. Keep in mind that we have this relentless pursuit of reduction of cycle time meaning if we can now deliver a subsea project in 2 years versus 3 years, I've created 33% more capacity with my existing fleet. So this is about being more efficient, having higher returns, not having more assets. Operator: And I'll now turn the call back over to Matt Seinsheimer for any closing comments. Matt Seinsheimer: This concludes our conference call. A replay of the call will be available on our website beginning at approximately 3:00 p.m. New York time today. If you have any further questions, please feel free to reach out to the Investor Relations team. Thank you for joining us. Regina, you may now end the call. Operator: This will conclude today's call. Thank you all for joining. You may now disconnect.
Ryan Mills: Thank you, and good morning, everyone. Welcome to our fourth quarter and fiscal year 2025 earnings call. Erik Gershwind, Chief Executive Officer; Martina McIsaac, President and Chief Operating Officer; and Greg Clark, Interim Chief Financial Officer, are on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics documents, both of which can be found on our Investor Relations website. Let me reference our safe harbor statement found on Slide 2 of the earnings presentation. Our comments on this call as well as the supplemental information we are providing on the website contain forward-looking statements within the meaning of the U.S. securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks are noted in our earnings press release and other SEC filings. Lastly, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik. Erik Gershwind: Thank you, Ryan. Good morning, everyone, and thank you for joining us today. I'll begin the call with some perspective on our recent performance and a view into our mission-critical path forward. I'll then offer some commentary on our end markets and overall economic conditions. Greg will cover our results for the fiscal year before passing it over to Martina to provide her perspective on our recent performance and our expectations for fiscal year 2026. I'll then wrap things up by providing some additional color on today's announcement regarding our upcoming leadership transition. As we turn the page on fiscal 2025, I'm encouraged by the progress that's happening inside of our company. We entered the year with 3 top priorities, and those were to maintain momentum in our high-touch solutions, to reenergize our core customer and to optimize our cost to serve. We're making strides on all 3 fronts and are doing so in the face of an uncertain environment. While there is still plenty of work to be done, our recent progress is beginning to evidence itself in our financial performance as we return to daily sales growth, and we're poised for operating margin expansion once again. First, our high-touch solutions, including vending and implant, continue the strong track record that we've seen all year long. Martina will provide more details shortly. Second, and most notably, we've begun to see our core customer average daily sales growth rate inflect and turn positive. As you recall, we launched 4 initiatives aimed at reenergizing our core customer base. And those were realigning our public-facing web pricing, which was completed during our fiscal 2024, upgrading our e-commerce experience, accelerating our marketing efforts and optimizing seller coverage. The largest milestones occurred at the end of our fiscal second quarter as we launched our upgraded website and our enhanced marketing efforts. Since that time, we've seen a steady improvement in core customer performance. Third, we've made progress in optimizing our cost to serve. We're on track with the supply chain productivity improvements that are yielding between $10 million to $15 million in annualized savings. We improved seller coverage and effectiveness by leveraging an enhanced data-driven territory model and tools that help reps more easily identify white space opportunity. And we have a growing pipeline of additional productivity programs that we expect to fuel more gains in fiscal 2026. I'll now turn to the specifics of our fiscal fourth quarter on Slide 4, where you can see average daily sales performed better than expected and improved 2.7% year-over-year. The return to growth in our core customer base, along with continued strength in the public sector, resulted in better-than-expected volumes and was the primary driver of the beat. Benefits from price came in as expected during the quarter, contributing 170 basis points to growth year-over-year and 90 basis points sequentially. As a reminder, we took a broad-based low single-digit pricing action towards the end of our fiscal June. That said, gross margin came in below our expectations at 40.4%, declining 60 basis points both year-over-year and sequentially. The primary driver here was tariff-driven purchase cost escalation, which came in faster and hotter than we expected during July and August. We also saw some other headwinds such as public sector-related customer mix. We have since taken action with pricing moves in the fiscal first quarter and have begun to see gross margins improve. Operating expenses in the quarter were approximately $306 million on a reported basis. And on an adjusted basis, operating expenses stepped up approximately $8 million year-over-year to $305 million for the quarter, but remained flat on a percentage of sales basis. The primary drivers of the year-over-year increase were driven by higher personnel-related costs and depreciation expense. Sequentially, adjusted operating expenses performed slightly ahead of expectations and declined approximately $6 million compared to the fiscal third quarter. Reported operating margin for the quarter was 8.6% compared to 9.5% in the prior year. An adjusted operating margin of 9.2% declined 70 basis points compared to the prior year. This did, however, exceed the high end of our outlook by 20 basis points. We delivered GAAP EPS or earnings per share of $1.01 compared to $0.99 in the prior year's quarter. And we also saw year-over-year improvement on an adjusted basis. With EPS growing nearly 6%, coming in at $1.09 compared to $1.03 in the prior year. The positive trend we saw in the fiscal fourth quarter has continued into the first couple of months of fiscal 2026 as our daily sales growth rate ticked up further to 5% in September, and it's we're expecting to grow between 4% and 5% in October despite impacts from the government shutdown. As we look ahead, we expect the step up in operating expense to moderate and productivity to build. All of this positions us well in our efforts to restore profitable growth and operating margin expansion in fiscal 2026 and beyond. Turning to the environment. We characterize conditions as stable with some pockets of improvement, while the ongoing overhang of uncertainty remains. Tariffs have moved from a possibility to a reality as we're now experiencing meaningful price inflation across many areas of the business. Customers are generally understanding of price increases, as long as we provide sufficient transparency into tariff-related impacts. That said, the need to provide customers with offsetting cost savings measures is very real. And this plays well into our high-touch and technical value proposition. Our suppliers are describing continued cost pressures on certain raw materials that are heavily China-based or influenced. And if this sustains, it could lead to further price inflation in the coming months. From an end market perspective, we've seen stabilization and even firming up in some of our larger verticals. Aerospace remains strong, while end markets such as heavy equipment and agriculture, which have been particularly weak over the past 2 years, or at least stabilizing. Some areas of acute softness do remain such as heavy truck. Looking at Slide 5, I I'm encouraged to see how MSC is faring in this environment. Average daily sales in the quarter began to outpace the Industrial Production Index once again, supported by our improved customer performance and continued strength in the public sector. With that, I'll now pass things over to Greg for an overview of our financial results for the fiscal year. Gregory Clark: Thank you, Eric. Good morning, everyone. Please turn to Slide 6, where you can see key metrics for the fiscal year on both a reported and adjusted basis. Average daily sales declined 1.3% year-over-year primarily due to softer volumes in the first half of the fiscal year and the slight FX headwind. These headwinds were partially offset by positive price that contributed 60 basis points to growth and some carryover benefits from acquisitions in the prior year. Moving to profitability for the year. Gross margin of 40.8% contracted 40 basis points compared to the prior year due to negative price cost and customer mix. Operating expenses stepped up approximately $56 million and $55 million on an adjusted basis as expected. Combined with slightly lower sales, this resulted in a 190 basis point increase in adjusted operating expense as a percentage of sales. However, we exited the fiscal year with adjusted operating expenses as a percentage of sales performing in line with the prior year. Reported operating margin for the fiscal year was 8% compared to 10.2% in the prior year. On an adjusted basis, operating margin declined 230 basis points compared to the prior year. Together, this resulted in GAAP EPS of $3.57 or $3.76 on an adjusted basis, compared to $4.58 and $4.81 in the prior year, respectively. Now let's turn to Slide 7 to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $430 million, representing roughly 1.1x EBITDA, continue generating healthy cash flow in the quarter despite the increase in receivables through lifts and sales, we delivered free cash flow of $58 million during the fourth quarter, representing 104% of net income. This resulted in free cash flow conversion of 122% for the fiscal year ahead of our annual target. Turning to capital allocation on Slide 8. Our highest priorities remain organic investment to fuel growth and advancing operational efficiencies across the business. Returning capital to shareholders also remains a priority. We purchased approximately 496,000 shares throughout the year. Combined with our quarterly dividend, which we increased by approximately 2% this month, we returned $229 million to shareholders in the fiscal year. I will now turn the call over to Martina for a deeper dive into our quarterly performance and expectations for the new fiscal year. Martina McIsaac: Thank you, Greg, and good morning, everyone. Turning to Slide 9. We're encouraged by our daily sales trend that continues to improve across all customer types. During the fiscal fourth quarter, we were most pleased by the return to growth of the core customer with daily sales improving 4.1% year-over-year, driven by both price and volume. National Accounts declined 0.7% year-over-year. This customer base continues to see a greater impact from the macro environment as only 44 of our top 100 customers showed growth in the quarter. However, on a sequential basis, national accounts performed in line with core customers and improved a little more than 1%. And Public sector continued its strong trend in the quarter with daily sales growth of 8.5% year-over-year and 10% sequentially. While this business has been impacted by the government shutdown, with sales growth turning negative in October compared to up low double digits in September, we view this as temporary. Let's now dig a little deeper by looking at some of the key initiatives and KPIs supporting the daily sales improvement in the quarter on Slide 10. First, I continue to be pleased by the ongoing expansion of our solutions footprint. Our installed vending count grew 10% year-over-year or 3% sequentially to more than 29,600 machines. Average daily sales in the quarter for vending were also up 10% year-over-year and represented approximately 19% of total company sales. With respect to implants, our program counts at 411 expanded 20% year-over-year and grew 3% sequentially. Daily sales from customers with an implant program grew 11% year-over-year and represented approximately 20% of total company sales. Improvements to our core customer growth rate have been driven by several programs, which Erik mentioned earlier. The first is sales territory optimization. Moving to the middle of the slide, you can see the increase in coverage effectiveness, which enables us to be more present at customer sites. The number of customer location touches locked by field sales were up double digits year-over-year and mid-single digits sequentially. This increase was achieved with fewer sellers illustrating the potential that still lies in our sales effectiveness efforts. As we have shared, we've also invested in website upgrades and enhanced marketing efforts to restore core customer growth. In the fourth quarter, average daily sales on the web turned positive year-over-year with growth in the low single-digit range. We experienced similar improvements in the trend of certain KPIs such as direct traffic to the web and conversion rates of our top channels. Our streamlined checkout experience drove declining abandonment rates in the quarter and enhancement to the search function of our site also started showing early positive signs. The percentage of users adding to cart within the first 0 to 5 minutes, improved in the low single-digit range, giving us confidence that users are finding what they're looking for more efficiently. Before I move past our quarterly results, I would like to spend a few moments on gross margin. Q4 gross margins came in about 50 basis points lower than our expectations. 20 basis points of the miss can be attributed to mix and other factors. 30 basis points of the miss was due to price cost. While our price realization performed as planned, cost realization did not. A combination of a rapid surge in the number of supplier increases, compressed supplier notification period, higher sales volume and a greater mix of direct ship orders all led to higher cost realization than planned during the quarter. In response, we've made further pricing moves during the fiscal first quarter and are seeing gross margins improve off of 4Q levels. Before we get into our outlook, I want to highlight some exciting changes made to the leadership team that will strengthen our commitment to growth and the customer experience. You turn to Slide 11. We First, we welcome [indiscernible] to MSC as our new SVP of Sales. [indiscernible] brings 2 decades of engineering and field sales management experience from her time at Hilti with a proven track record of consistently delivering above market growth. In this role, she will build on the progress made by MSC towards sales excellence. With Gida's arrival, Kim [indiscernible] will be taking on the newly created role of SVP customer experience. Leveraging Kim's 30 years in the industry, this new team will be dedicated to ensuring that every interaction a customer has with a is seamless and memorable, driving customer retention and share of wallet growth. I would like to congratulate both [indiscernible] and Kim on their new roles and look forward to sharing their future success. As for the rest of the management team, John Reichelt is settling in his role as Chief Information Officer. He and the team continue making progress on the evaluation of our systems design. And lastly, our search for a permanent CFO is underway, and we have begun discussions with both internal and external candidates and hope to fill the role in the next quarter or 2. Let's now move on to our expectations for fiscal '26 by starting with our outlook for the fiscal first quarter on Slide 12. We expect average daily sales to grow 3.5% to 4.5% year-over-year. The lower end of the range assumes the government shut down less through the remainder of the quarter, whereas the higher end of the range assumes that the shutdown ends before the end of our fiscal quarter. Our expected range also takes into consideration quarter-to-date sales with September up 5.1% and October trending towards 4% to 5% growth. As a reminder, we returned to growth last fiscal November, making it our toughest comparison to the prior year for the fiscal first quarter. We expect adjusted operating margin to fall within the range of 8.0% to 8.6%, which takes into consideration the following: gross margin to improve from 4Q levels, and to be 40.7%, plus or minus 20 basis points and an increase in adjusted operating expenses compared to the fiscal fourth quarter of approximately $7 million to $10 million primarily driven by an annual step-up in depreciation and amortization from fiscal year '25 to fiscal year '26, a step-up in incentive compensation expense, 1 month of the merit increase and an increase in marketing investment, partially mitigated by continued productivity. The increased marketing investments are the result of the progress we're seeing in our core customer and are all directed towards high-return areas of our accelerated marketing program. Turning to Slide 13 for our expectations of certain line items for the full year. We expect depreciation and amortization costs to be roughly $95 million to $100 million, representing a year-over-year increase of approximately $5 million to $10 million. This largely reflects carryover from the investments made in technological and digital capabilities as well as continued growth in vending. Other underlying assumptions include interest and other expense of roughly $35 million, capital expenditures of $100 million to $110 million and a tax rate between 24.5% and 25.5%. Free cash flow is expected to be approximately 90% of net income. And lower than the previous year, driven by working capital needs to support top line growth. To assist in modeling the cadence of sales for the remainder of the fiscal year, the bottom of the slide provides historical quarter-over-quarter averages and key considerations for the second quarter and the back half of the fiscal year. And lastly, we have 1 extra business day year-over-year in the fiscal fourth quarter, as shown at the bottom of the chart. Looking beyond the fiscal first quarter, we expect incremental margins of approximately 20% at mid-single-digit revenue growth as gross margin restores to expected levels as we exit the fiscal first quarter and the benefits of our productivity initiatives build through the fiscal year. And with that, I will now turn the call back over to Erik for closing remarks before we get into Q&A. Erik Gershwind: Thank you, Martina. I'd like to close out the call on a more personal note. It has been an honor and a privilege to serve as MSC's leader for the last 1.5 decades. And while I'm stepping away from day-to-day leadership, I will continue to serve MSC as Non-Executive Vice Chair of the Board. As I prepare to transition I've taken some time to reflect on my 30-year history at MSC. Working alongside such an exceptional team has been 1 of the greatest privileges of my career. We have, together, grown and transformed this company from a traditional spot by distributor into the trusted mission-critical adviser and industry leader that you see today. Most importantly, we achieved this while living up to the values set forth by my grandfather, when he began selling cutting tools from the trunk of his car all the way back in 1941. Succession planning and leadership development have been pillars of MSC's values since its inception over 8 decades ago. Leaders are chosen carefully, and they're thoughtfully developed over time. Like my grandfather, like Mitchell and David before me, 1 of my most important responsibilities is developing our next leader and then stepping aside when that person is ready. And so it is with great pleasure that I hand the baton to Martina who will succeed me as MSC's fifth CEO. As you all know, Martina has been with MSC for over 3 years, and she knows every operational corner of the company. We've worked hand-in-hand during a critical phase at MSC, and she's been instrumental in shaping our operational improvements and our strategic growth initiatives. The board and I have the utmost confidence in her and we look forward to seeing her build on the momentum that's seen in our recent results and to provide a very bright future for MSC. I'd like to thank everyone on the call for your friendship and your support over the years. It's been a pleasure working with each and every 1 of you. Martina, I'm going to turn it back over to you to close the call. Martina McIsaac: Thanks, Erik. First and foremost, on behalf of all of us at MSC, I would like to take a moment to acknowledge your extraordinary leadership and the lasting impact you've had on the company. Over our nearly 30 years here, you've guided us through remarkable growth in transformation. And Erik, your leadership means a great deal to all of us. It has shaped the company we are today. Personally, I would also like to thank you and our Board of Directors for your confidence in me and for this opportunity to continue driving MSC's growth and operational performance. During my time leading our day-to-day operations for the past 3 years, I've been deeply engaged listening to our associates, our customers, our suppliers and our shareholders and this has helped shape the strategic initiatives, which are starting to be reflected in our results today. With these building blocks and a strong leadership team now largely in place MSC is set to achieve new levels of growth and further strengthen its leadership position. I could not have asked for a better opportunity. As I look ahead and prepared to step into the CEO role on January 1, our focus will be on value creation, maintaining our recent growth momentum and delivering a balanced capital allocation strategy. all while living up to our core values. I believe this is possible by turning our attention to 3 key areas. First, we must harness the incredible commitment of MSC's talented associates to strengthen our culture. We want to raise our own expectations and inspire curiosity, self-responsibility and a spirit of continuous improvement. Second, we must build on the momentum from the initiatives that have resulted in a return to growth you see today. We do this by executing on our recent organizational changes to drive disciplined sales excellence and a relentless commitment to customer experience. And third, MSC needs to deliver on its commitment. We must bring productivity and consistency to our everyday work and use data to drive speed and accountability through our operating system. I could not be more excited to step into this role, and I look forward to building stronger relationships with everyone on today's call. And with that, please open the line for questions. Operator: [Operator Instructions] Your first question for today is from Ryan Merkel with William Blair. Ryan Merkel: And great to see the inflection in the business and, of course, to Erik and Martina congrats on the new roles. My first question is just on gross margin, the 30 basis points of the negative price cost. I don't recall ever hearing Erik, a surge in supplier price increases and costs working through the P&L sort of faster. Can you talk about what sort of happened there? And then how you addressed it. It sounds like you raised prices a bit more. Erik Gershwind: Yes, Ryan, so I'll start, and then I'll turn it over to Martina just to provide some historic context. You are correct that this is unusual. And obviously, you and I together have seen in this industry a lot of inflation cycles. This 1 was has been a fairly unique we look back, the concentration of increases that we saw really in a very short window of time was unusual, even unusual relative to a post-covid inflation period, which had also been historic. So I do think it's played out a little differently from prior cycles. I'm going to turn it over to Martina to talk about how we're handling that, and we're encouraged about what we're seeing in a bounce back in Q1. But I'll let Martina talk in a little more detail. Martina McIsaac: Yes. So Ryan, the 30 basis points, I was price behaved exactly as we expected. We were very pleased with the work that our team did. Price contributed 170 basis points right on our forecast, and we were able to work with customers. I think you heard in Erik's prepared remarks, customers are understanding of what we're doing and why we're doing and we're helping them navigate a very uncertain time. Cost, to give you a little bit of context of what Erik just said, we took a price increase at the end of June. So sort of between mid-June when we lock that increase in the end of August, in those weeks, we took more inflation than we took in 9 months post COVID in 2022. So that kind of gives you a feeling for scale. And it was both the number of increases, the changes in these increases, the changes in supplier behavior compressed lead times. So we amassed this amount of inflation in the business, and we had committed to pricing stability, so we did not plan to take another increase until Q1. So we didn't react and we have now since taken, I think, the right actions in Q1 gross margin is restoring. We headed into the quarter with a headwind on price cost. We will exit the quarter in a much better position. And I think we have taking a hard look at our processes. When you think about where we want to take the company, I think good, we're happy with the accountability and the way our team reacted in September. But this is a great example of where our operating system where we could have where we need increased visibility because we would have taken more price in the quarter. Ryan Merkel: Got it. Okay. Very helpful. And then for my follow-up, I heard you say mid-single-digit revenue growth was achievable this year if you just use the sequential and then 20% incremental margins. So that's great to hear. On the 20% incremental margins, I know you're not giving specific guidance, but are you expecting to have gross margins sort of up year-over-year given initiatives and then SG&A as a percent of sales, do you think that you can work that down year-over-year because you talked about some productivity and then maybe leveling off of the cost increases. So a little more color there on what your expectations would be helpful. Martina McIsaac: Yes. So let's start with gross margin. I think we've taken the price increase actions now in the first quarter. We expect to be price cost stable over the cycle and stable through the rest of the year. I think, obviously, our best opportunity is to accelerate growth and leverage our cost structure, but we do have a very healthy pipeline of productivity projects that will continue to build through the year. And so we're looking we're expecting incremental margins in the teens in the first quarter, and we expect that to build through the year. Ryan Mills: And Ryan, just to give a little bit more perspective on that incremental margin commentary, if you look at where we ended up at the fiscal year and at a mid-single-digit growth assume gross margins stay stable. It implies roughly a $30 million to $40 million step up in OpEx. We feel pretty comfortable achieving that where the business currently sits today. Operator: Your next question is from Tommy Moll with Stephens. Thomas Moll: I wanted to ask about some of the seller effectiveness KPIs that you updated us on today. customer touches sales per rep per day both moved up significantly this quarter. What's behind those inflections? And what inning are we in, in terms of some of the operational changes that you've made and the improvement that they can drive going forward? . Martina McIsaac: Yes, absolutely. So we're in the I'd say we were in about the third inning. So we've got taken the first steps, and I'm really excited about [indiscernible] join the team to take the next steps we have a sales management process in place now that looks at a whole range of leading and lagging indicators, and that is different by role and by level. If you boil it up, the 2 things that we look at are how often are we in front of the customer as a leading indicator, we need to be on the plant floor in order to drive growth. And then we're measuring sales per rep per day. So we'll continue. I I believe sales is a science. There are fundamentals that need to be in place. We've taken the first step, which is really around good territory design. We have to make sure our sellers are pointed at the right potential, and we'll continue to optimize as we move forward. Thomas Moll: I wanted to follow up with a question on macro. Erik, I'm looking back at some of your comments. I think you talked about some of your verticals you're seeing some firming up, maybe even some pockets of improvement. It's hard to parse though because clearly, you have some internal initiatives that are helping on the core customer side that may not apply ex MSC. And if we look at the national account data, down again quarter-over-quarter. And I think the comment there was that's primarily a macro phenomenon. So there's a lot of speculation in the market about where we have potential for some kind of short-cycle recovery. I'm just curious on your thoughts about how we can parse the results today and better understand the macro environment. Basically, the question is, how much of this is self-help where you're clearly benefiting versus a broader macro, where there's still some acute challenges. Erik Gershwind: Yes, Tommy, it's a really good question in a very murky environment. I think the headlines that we were trying to get across this morning are a couple. One is, I would say, I wouldn't necessarily call things firming up, but we have pockets and end markets that are meaningful to us that we would refer to as stabilizing. So take heavy machinery and equipment, ag-related end markets where things have been really soft for the last couple of years. And it's not like things have inflected that much positively, but they're at least stable. So that, in a sense, is up from where we've been. What I would say is you then have pockets, Tommy, of, look, there continue to be pockets of strong growth, i.e., aerospace but also there remains some pockets of acute softness. So a great example of that. I actually think you called this out in your note, is heavy truck. That would be an example of an end market that when we talk about the influence on our national accounts program would be weighing us down. So as it relates to national accounts. I would say we're seeing some encouraging signs here in September and October. We definitely so the numbers we shared slightly down year-on-year for have turned positive in September and October thus far. You can imagine October, especially with public sector moving from healthy positive to negative with the shutdown, core and national accounts actually are doing better and better. So I think that's turning. But overall, stable look, an overhang of uncertainty that's there. If you're trying to parse out how much of this is macro versus micro, there's probably some of both going on, Tommy. I would say, hopefully, you could hear in our prepared remarks, we're encouraged by what's happening in the core customer and particularly is probably more self-help and micro than it is macro. Obviously, there's a little bit of price benefit, too. But clearly, when we track back the inflection in the improvements, they do go right back to the initiatives that we've been talking about now and what got put in place sort of midway through our fiscal year with the website upgrades and marketing. So I think that part of it is a good deal of self-help. And then I described the rest as stabilizing with still an overhang of uncertainty. Ryan Mills: And Tommy, maybe where you can see a little bit of that self-help if you think about the core customer consecutive months of year-over-year growth. And then you look at the MBI, it still remains below 50. So that's starting to break that trend a little bit might show some of that self-help and that shining through. Operator: Your next question for today is from Chris Dankert with Loop Capital Markets. Christopher Dankert: I guess I just have the congratulations to both Erik and Martina here. I guess, Martina, on your comments around the level of price increases we've taken here being on par with 2022, I guess, does that imply that we're talking about 5 points or more of pricing in 2026. Can you kind of give us some context for how we think about pricing into the new year? Martina McIsaac: Yes, I think it's so uncertain. I don't know that I can give you a good answer on that. I think we our intention is obviously to meet the inflation as it comes. I think we've done that now with our actions in Q1 but it's so uncertain, I really I don't know what to tell you. Ryan Mills: And Chris, what I would say is if you think about where we the price increase we put at the end of June, low single-digit range, we talked about another low single-digit increase in in 1Q. So if you assume 1.5%, 2%, you're in that 4% range. And as we said, we'll make additional pricing moves as warranted. . Christopher Dankert: Got it. That color that's really helpful. And then I guess just on the kind of $30 million to $40-ish million of SG&A growth in the new year, and again, obviously, that's something to change, but does that assume digital investment and marketing investment are kind of leveling off here? Maybe kind of walk through some of the components of what you're thinking about for SG&A growth? Erik Gershwind: Yes, Chris, so when Ryan referenced that, that sort of ties back to the idea of how we get to a roughly 20% incremental margin and mid-single-digit growth. And really, what that's reflective of is the variable expense to service the growth, the normal inflation we experienced in the business, the investment spending that we do and then offset by the productivity that Martina is driving through the business. It does. So there are certain pockets of investments that we'll be leveling. So e-commerce is a good example of that, although we are we talked about a DNA step-up, that's part of it is our digital investments that are now value and improving core customer growth. I will call out, Martina mentioned in Q1, part of the OpEx build is a step-up in marketing expense so that would be an area where we're actually increasing investment, and we're doing it because we like the returns that we're seeing, quite frankly, it's part of the driver behind core customers. So as Martina mentioned, we're channeling those investments where we're seeing the highest return. Operator: Your next question for today is from Ken Newman with KeyBanc Capital Markets. Katie Fleischer: This is Katie on for Ken. I wanted to dig in a little bit more on the supplier price notifications. What's the risk that it's more difficult to pass these on to customers as we go through the year, especially if they accelerate, like I know tungsten prices are up a lot year-to-date. Just curious how you're thinking about that in the context of further increases from your suppliers? Martina McIsaac: Yes. Thanks, Katie. So far, we have been really pleased with the price realization. So I'm not I'm not worried that we're going to be able to pass it on in a constructive way with our customers. We're obviously working with them always to optimize their costs as part of our technical value proposition, and I think we're in a great place right now. So we were happy with price realization, and we continue to be we do see more inflation coming, obviously, and it is it will put pressure on us. But that part of the equation, I'm not worried about. Erik Gershwind: And maybe I'll just chime in Katie, funny, you mentioned 1 of the raw materials that obviously, we're keeping our eye on and we're hearing about from suppliers in tungsten. So's it's almost like there's a knock-on effect here from the tariffs which is out of the gate, what we've been experiencing from our suppliers is direct tariff-related inflation, and we do see bubbling, the knock-on effect being impacts on certain raw materials that are drivers of the products that we sell. So tungsten is a great example for cutting tools. As Martina said, our experience with price realization has actually been quite good. Should there be further inflation? If tungsten pricing sustains, I think you're right, we would expect more pricing from suppliers, it's an unknown. But if it does, we would and we'd expect to pass it along. One of the things we tried to highlight in the prepared remarks, customers are understanding right now because the headline everything is going up. The key is, number one, we have to be transparent about it, which is why Martina and team made the choice to stick with our pricing cadence and not react in Q4, being clear and transparent. And the other is the other side of the conversation is how are we as a distributor, bringing productivity to our customers. And that's something that's right in our sweet spot. So for all those reasons, if the inflation does sustain in this uncertain world, we do feel confident in the ability to pass it along. Katie Fleischer: Great. That's really helpful color. My follow-up is regarding the government shutdown. How do we think about any impact year-to-date from this? I know the lower end of your guide implies that it should last through the remainder of 1Q. But any way to think about what you've seen year-to-date within the business? Martina McIsaac: Yes. I'm sorry, you broke up in the middle, Katie, but I think you're asking how do we see the government shutdown impacting the business? What are we forecasting? So we had as you heard in the prepared remarks, we had a very strong fourth quarter in the public sector, and that growth continued into September. We've seen some softening now with the shutdown. That will have a positive a small positive mix effect. We don't expect that to be more than about 10 basis on our margin. And the outlook that we gave really is predicated on both ends of the scenario. So the high end of our growth range if the shutdown ends and the low end of our growth rate if the shutdown continues to the end of the quarter. Erik Gershwind: And then, Katie, the additional color I'll add there is just who knows when the shutdown is. But 1 thing we can be pretty sure at some point, it will end. And as I look back on my career in some of my recent years here, 1 of the things really proud of is the performance of the public sector team. I mean, they continue to deliver and to outgrow markets and to take market share. And we don't see any of that changing. Obviously, Martina mentioned, we went from double-digit growth in September to negative in October. That's just a reduction in spend. So the exciting thing for us is, at some point, that restores. We expect our share capture to continue. And then if our momentum in core and national accounts continue and public sector goes back to doing what they've been doing for a while, it creates a potentially encouraging picture. Operator: Your next question is from Patrick Baumann with JPMorgan. Patrick Baumann: I'll echo comments from others, congrats Martina on the new role. And good luck, Erik, it's been great working with you over the years. I appreciate all the help. So on the OpEx side, maybe I missed this, but it looks like the head count that you report in the earnings deck came down a bit at year-end. Just wondering what drove that? And then what's the outlook for head count in, I guess, fiscal '26. And then on the marketing side, wondering if you could give some perspective on where your spend levels are today and where you think you might need to take that to sustain better results that you're seeing currently in the core? Martina McIsaac: Okay. Thanks, Patrick. I'll take the head count piece. So our cost structure is too high right now for the size of our business. So obviously, the best and the highest way to remedy that is for us to accelerate growth, and we're at full speed ahead on those initiatives. But in the meantime, we're taking a look at how we perform work, and we're taking a look at performance. And so what you see in those head count numbers are 2 sets of actions. One of them was a reduction force in our sales force. I believe strongly that we owe our sellers good territory design. So we point them at the right potential we owe them a strong sales management process with clear expectations and good coaching and when you put those 2 in place, you can fairly and quickly assess performance. So we took out our underperformers and our sales territory optimization, just moved right in. And that's why in the prepared remarks, we told you we're actually covering more customers more effectively with fewer people. I'm very happy about that. And then on the other side of the business, which is the rest of the head count change, we have an operating system, same thing. We're setting clear expectations. We know how to measure performance, and we action. Asking me about head count for the rest of the year. I mean, we will continue to self-help, and we'll continue to look at our processes as we go forward. Erik Gershwind: And then maybe Yes, I'll take the marketing, Pat. So what I'd say there is we're at our Q1 levels, obviously, we're going to be at a level that's up from where we were running in fiscal '25. And Hard to say, to give you a clear outlook. And the reason it's hard to say is our investment in marketing, the beauty about the way we're investing, number one, it's been a driver of the core customer we see the return profile on our investments relatively quickly. And so that number will be fluid based upon the returns that we see. So put another way, if we continue to see the returns in the form of improving growth rates with core customers, will continue to ratchet up marketing. And if for some reason, those returns subside, you'd see us tone it down. But either way, it would be captured in our outlook on incremental margins. Patrick Baumann: Got it. And then a couple of cleanups. Just a follow-up on the government shutdown impact. Can you remind me like your federal exposure? I didn't think you had like a big exposure to federal government. So I'm just wondering why you saw the slowdown in sales in public sector from, I think you said double digit to negative in the October period. Ryan Mills: Yes, Pat, our government exposure is about 2/3 of federal and more weighted towards military and defense, just to give you some color around that. Patrick Baumann: So are you seeing pullback in military like where in federal are you seeing pullback. Erik Gershwind: We're seeing so the pullback from September to October was pretty much all in federal, Pat. And what I would say, it was not I mean I won't get too specific here. It was not across the board. But there were pockets the negative in October is an average across our roughly if we're a 10% public sector, I'm rounding here, but around 7% being federal. It wasn't down consistently across the board, but we saw pockets of federal that are off like 50%, 60%, where there's clearly no sign of market share loss. So yes, we did see a pretty quick drop. And look, again, at some point, that's going to reverse end and reverse. Patrick Baumann: Yes. That makes sense. And then last cleanup, just on price. Can you give any color on any particular product categories that stand out in terms of the increases you're taking, whether it's are you seeing more inflation in metal working in certain MRO products and exclusive brands? Any color on the pace of price inflation among those different categories. Erik Gershwind: Yes, Pat, I would say it wouldn't be shocking to you as to where basically the more you get to things that come out of China and the more you get to things that are made of steel the more inflation we're seeing. So for instance, fasteners and our OEM business are seeing really high levels of inflation. Some categories like safety, if we've done a lot of sourcing Asian sourcing, China sourcing, we'd be seeing it. So it wouldn't surprise you. Interestingly, some, of course, in our private brands. But remember, 1 of the things that we've been talking about, a good percentage of our private brands particularly in cutting tools are made in U.S.A. So those have been shielded and that's been another kind of quiver in our marketing arsenal, if you will, is focused on our maiden USA offering. But it wouldn't be shocking where we're seeing the increases. Operator: Your final question for today is from David Manthey with Baird. David Manthey: Congratulations to Martina. Erik I'll for my fair well I see you in Chicago in a few weeks here. Yes. So my first question is, you mentioned direct ship orders. And I guess, I'm just trying to get a read on what percentage of your sales does that represent today? And maybe if you could outline the types of products that are primarily affected by direct ship. Erik Gershwind: Yes, Dave, I'll take it. So we don't really break out specifically direct ship orders as a percentage of sales. I'll tell you it is the minority but particularly, it's grown in recent years as we've penetrated customers more and more. whether it's our implant program, whether it's some of our public sector relationships where we're doing more and more sourcing and value add for a customer. So typically, as those programs ebb and flow, so goes our direct ship volume. So I don't think there's anything sort of structural systemic that I call out, like if you're looking forward, is something to note as a major headwind or tailwind, but we did see and look, the team mentioned that sequentially from Q3 to Q4, our public sector business was up considerably. There's a correlation there. So when it comes in the form of public sector, you can imagine it's a lot of MRO product. more so than metalworking. And so that's a little color. But I wouldn't make that much of it for the future, but it did we brought it up because it was a piece of the 50 basis point gap versus where we thought it was a piece of the story. David Manthey: Okay. But it sounds like it's measurable. And if you're saying it's driven by government and implant or things like that, it does sound like we should see that continue to at least gradually move up over time, right? . Erik Gershwind: Yes, I guess, I mean, it has been certainly. But the 1 thing I would say to counter it is, remember, this is really if I look back over the past few years, you've had areas like implant and public sector growing and core or at least core growing at less than the company average. So counterbalancing would be if the traction we're seeing on the core customer continues, that would be somewhat of an offset. Ryan Mills: And Dave, if you're getting if I think what you're getting at, I don't think you would hear us call out the rec ship going forward when it comes to our gross margin performance. David Manthey: Okay. Fair enough. And then second, reshoring, are you seeing any benefits for reshoring at this point? And when you talk to your core metalworking job shops, are they relaying any optimism on that front? Or it's still vaporware at this point? . Erik Gershwind: So I would say if Dave, if the definition of reshoring is new plant build out, we're not seeing it. If the definition of reassuring is an existing global manufacturer that has capacity in multiple locations inclusive of the U.S. shifting manufacturing to the U.S. that we are there's tangible data points there, some of which were releases, I think, this week and last week. So that we're seeing, we're not seeing new greenfield build out. David Manthey: Right. Yes, I was thinking that if not necessarily that you're selling directly to that factory that's reshoring or expanding in the U.S., but your machine shops and the metalworking job shops might be seeing an increase in business as they're selling more product to domestic manufacturers. But yes, I don't know, I was just seeing if you're hearing anything along those lines. Erik Gershwind: I don't think we're seeing it like we're not seeing it in the numbers yet. I would say that there is there does remain some optimism about more production coming to the U.S. though. That headline is still there, right. Ryan Mills: Dave, I think about areas about auto. You heard some from some releases this week shifting more capacity manufacturing capacity into the U.S. I think as that comes to fruition, you'll start to hear some of that optimism trickle through into the job machine shops. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Ryan Mills for closing remarks. Ryan Mills: Thank you, everyone, for joining us on today's call. Our next earnings call will be on January 7. In the meantime, we look forward to seeing you all at upcoming investor conferences. Have a good day. Bye. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the CBRE Q3 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Chandni Luthra, Global Head of FP&A and Investor Relations. Please go ahead. Chandni Luthra: Good morning, everyone, and welcome to CBRE's third quarter 2025 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks, and an Excel file that contains additional supplemental materials. Today's presentation contains forward-looking statements, including, without limitation, statements concerning our business outlook, business plans and capital allocation strategy, as well as our earnings and cash flow outlook. These statements involve risks and uncertainties that may cause actual results and trends to differ materially. For a full discussion of these risks and other factors that may impact these statements, please refer to this morning's earnings release and our SEC filings. We've provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. Throughout our remarks, when we cite financial performance relative to expectations, we are referring to actual results against the outlook we provided on our second quarter 2025 earnings call in July, unless otherwise noted. Also, as a reminder, our resilient businesses include facilities management, project management, property management, loan servicing, valuations and other portfolio services and recurring investment management fees. Our transactional businesses comprise property sales, leasing, mortgage origination, carried interest and incentive fee in the investment management business and development fees. Before we begin, a brief technical matter. We want to note that we recently responded to a comment letter from the SEC regarding our presentation of net revenue. Going forward, while we will continue to provide supplemental information to help you understand the portion of our revenue that is pass-through in nature, our formal reporting will focus on gross revenue. I'm joined on today's call by Bob Sulentic, our Chair and CEO; and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 3 as I turn the call over to Bob. Robert Sulentic: Thanks, Chandni, and good morning, everyone. CBRE continued to produce excellent results in the third quarter. All 4 segments delivered strong growth and operating leverage, and we exceeded expectations we had going into the quarter. We often talk about our breadth and depth across asset type, client type, line of business and geography. This breadth and depth gives us scale that supports our strategy in many ways. These include recruiting from inside and outside the sector, developing integrated solutions for clients, making capital investments and creating an information advantage. Our scale is particularly helpful in driving growth in areas that are either secularly favored or cyclically resilient. This came through clearly in our third quarter results. The data center asset type and related client group provides a good example. We produced nearly $700 million of revenue from data centers in the third quarter, 40% more than in 2024's third quarter. This contributed to profitability in all 4 segments accounting for about 10% of overall EBITDA for the quarter. From a geographic perspective, Japan and India are particularly well positioned for sustained secular growth in commercial real estate services. We have large businesses in both countries, and in Q3, their combined revenue rose more than 30% to nearly $400 million. Given our results year-to-date and momentum in our business, we are raising our full year core EPS outlook to $6.25 to $6.35, from $6.10 to $6.20. Emma will discuss our outlook after she reviews the quarter's highlights. Emma? Emma Giamartino: Thank you, Bob. Good morning, everyone. Our third quarter results exceeded expectations across the board, highlighted by 34% growth in core EPS and 19% in core EBITDA. We delivered double-digit revenue gains in both our resilient and transactional businesses, underscoring the balanced strength of our business. Throughout my segment discussion, I will cite growth rates in local currency. This does not reflect the 1% to 2% FX benefit to the USD growth rates. As Chandni mentioned, we will no longer report net revenue. However, internally, we continue to focus on revenue excluding pass-through costs as our primary growth metric as we believe it best captures the value of the services we deliver to our clients. Now I'll detail our performance for each segment, beginning on Slide 4. In Advisory Services, revenue growth exceeded expectations, rising 16%, led by outperformance in both leasing and sales. Global leasing revenue rose 17%, accelerating from the second quarter despite a tougher year-over-year comparison. In the U.S., leasing reached its highest level for any third quarter, growing 18%. U.S. industrial increased 27% as third-party logistics providers continued to take more space and larger occupiers came back to the market. Data center leasing picked up materially, resulting in a more than doubling of revenue over last year. In addition, U.S. office leasing once again rose by double digits. Outside the U.S., APAC leasing was strong driven by India, Japan, while results were mixed in Europe. Our property sales business delivered 28% revenue growth. Like leasing U.S. sales saw strength in office, industrial and data centers. Outside the U.S., we saw particularly strong sales growth in Germany, the Netherlands and Japan. High-teens mortgage origination revenue growth was driven by an increase in origination fees, primarily from CMBS lenders, banks and debt funds. Advisory SOP grew 23%, reflecting strong operating leverage. Turning to our Building Operations & Experience segment on Slide 5, we saw 11% revenue growth. In the enterprise business, growth was driven by work for data center hyperscalers as well as new client wins and expansions in the technology, life sciences and health care sectors. Our local business achieved a mid-teens revenue increase, supported by continued growth in the U.K. and the Americas. Revenue in the Americas was up 30%, reflecting strong market share gains for this business. BOE SOP grew 15%, delivering operating leverage driven by continued cost efficiencies across the segment. Please turn to Slide 6. In the Project Management segment, revenue increased 19%, while pass-through costs rose 23%. We achieved broad-based double-digit revenue growth supported by the U.K., the Middle East and North America. Legacy Turner & Townsend revenue in North America has more than doubled since 2022, demonstrating the benefit of being part of the larger CBRE platform. And we see significant runway for further gains in this large, lightly penetrated market. Across client sectors, we saw strong activity with the U.K. government, reflecting a large national health care mandate and ongoing demand for hyperscalers for data center projects. This growth was slightly offset by continued softness from certain technology clients that are focusing capital spending on AI investments. Project Management SOP grew 16%, delivering operating leverage when viewed as a percentage of revenue excluding pass-through costs. In Real Estate Investments on Slide 7, segment operating profit was up 8%, in line with our expectations. In investment management, we raised $2.4 billion of new capital in the quarter and are on track for a strong fundraising year. AUM ended the quarter at approximately $156 billion, up $500 million for the quarter. AUM growth in the quarter was tempered by currency headwinds. Absent these headwinds, AUM increased $1.3 billion. In development, operating profit also met expectations. Our strategic land acquisitions in recent years coupled with our land development and entitlement capabilities position us to capitalize on demand for large data center development sites. We expect to monetize several of these sites later this year or next year. We continue to believe our development portfolio has more than $900 million of embedded profits that will be monetized over the next 5 years. As always, the timing of asset monetization, especially between quarters, can be difficult to predict with precision. Now I'll turn to our balance sheet and capital allocation on Slide 8. In keeping with our expectations of better full year performance, we now expect to generate approximately $1.8 billion of free cash flow for the year. Net leverage stood at 1.2 turns at quarter-end, and we continue to expect to delever through the end of the year. Please turn to Slide 9. As Bob mentioned, we've raised our full year core EPS guidance to $6.25 to $6.35, reflecting our outperformance to date and confidence in our fourth quarter pipeline. Our outlook includes contributions from the data center site dispositions in our development business. The midpoint of our new guidance range reflects 24% growth and would be more than 10% above our prior peak EPS. This is a notable outcome produced within only 2 years of the commercial real estate market trough. With that, I'll turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question today is coming from Anthony Paolone from JPMorgan. Anthony Paolone: Just have a question as we start to look to the rest of the year and just the strength that you had in 3Q. Do you feel like anything got pulled forward from the fourth quarter, or perhaps how we should think about when or in what business lines do comps start to get more challenging or start to normalize from these pretty high levels of growth? Emma Giamartino: So Tony, we haven't seen a significant pull forward across our segments. We are seeing strong momentum. But as you noted, we are starting to come up against some tough comps. So going through each segment, starting with Advisory. On the leasing front, we are -- we had a tough comp in Q3, and that continues in Q4. On the sales front, that you've seen that pick up pretty significantly in the third quarter, going into the fourth quarter, we continue to see strong activity. But just as a reminder looking against 2024, Q3 sales growth was 14% and Q4 sales growth was 35%. So that growth rate is going to start to decelerate somewhat into Q4. And then on the Project Management front, I do want to note that we have a very tough compare in the fourth quarter. In the prior year, our SOP grew 30% in the fourth quarter. Anthony Paolone: Okay. And then just my follow-up, can you maybe comment on the M&A pipeline, especially given the free cash flow? And also whether that had any impact on not buying back stock in the quarter? Emma Giamartino: So Tony, our capital allocation priorities remain as they've always been. We prioritize M&A and co-investment into REI, and we use the remainder of the free cash flow that we generate for share repurchases. We do continue to believe that our share price is undervalued, and we'll buy back shares in the absence of M&A. As you know, I can't comment on particulars of what we're targeting, but we continue to focus on the areas of our business that are resilient, that can benefit from secular tailwinds. And we're looking for targets that are extremely well operated that can really benefit from being a part of the CBRE platform. We're extremely patient to find the right deals. We're actively advancing our M&A approach, improving our integration, improving our identification of new deals. And we're very confident that we will find the right targets over time. Operator: Our next question today is coming from Julien Blouin from Goldman Sachs. Julien Blouin: Congratulations on the quarter. Bob, I wanted to ask you, Advisory sales results were very impressive again this quarter. But just taking a step back, there appears to still be this latent need to transact from both older vintage real estate funds that need to return capital to investors to start their next fundraising cycles, and then more recent vintages are still sitting on a lot of dry powder. So I guess, taking stock of all that versus what's sort of happening in the macro, where are we in the CRE transaction market recovery? And how much more room is there to run? Robert Sulentic: Well, we think about that a lot, as you would expect, Julien. And I think in general, we would say that we expect a longer, slower recovery in the sales part of our business than we've seen historically. And we're early into that recovery. We expect it to run for some time. Obviously, when -- I mean, September when interest rates ticked down, sales activity picked up. But we do have strong pipelines. People talk about pent-up demand. There's pent-up demand on both sides. There's pent-up demand from buyers. You mentioned the capital stores that the real estate investors have. And there's a lot of owners of assets that are ready to sell the assets. And the gap between buy/sell expectations has closed pretty significantly. So we expect a nice, strong, steady recovery investment sales over the next couple of years. Obviously, if something happens in the micro -- macro economy that would interrupt that in one direction or another, it could change our expectations. But that's where we are right now. Julien Blouin: Okay. And Emma, maybe following on from Tony's question, turning to the fourth quarter, as you mentioned, there's tougher year-over-year comps. But I guess, how would you describe the deal activity so far in the fourth quarter? How do pipelines compared to this time last year? And then also if I could take another one, on the Advisory segment. It looked like maybe the incremental margins this quarter were a little bit lower. Is there something happening maybe on the hiring side? Emma Giamartino: So to take your first question, pipelines are strong. We're continuing to see strong activity in the beginning of the fourth quarter through October, both on the leasing and sales side. I do want to say that we provided a guidance range up to $6.35, and that largely incorporates the flow-through from outperformance in the third quarter. But if everything goes as we're expecting, if transaction activity continues as we're seeing right now and as we expect, and at these development sites that we have a high confidence we'll monetize this year to turn out, we will be at the high end of our EPS range. On the margin side within Advisory, our incrementals were a little over 25% this quarter, which is lower than what we've seen earlier in the year. And the major impact there was an increase in incentive comp because of the deferments of the overall segment and business. Operator: Your next question is coming from Ronald Kamdem from Morgan Stanley. Ronald Kamdem: Just sticking with the Advisory segment a little bit, clearly, where the outperformance came this quarter. Maybe can you talk a little bit just about sort of the talent in terms of people? Does this -- are you appropriately staffed? Do you want to hire more people? What's competition like? Just sort of color on how you're thinking about this gradual recovery and your positioning. Robert Sulentic: Well, again, something we focus on all the time. And I would say we are appropriately staffed, but we're also adding where we find the right talent. We've got capacity in our leasing brokerage team to do more, and we've got considerable capacity in both our sales team and our mortgage origination teams. So we have had a really good run with talent across our brokerage business, but in particular, in the leasing business. And when you look at -- and we've taken considerable market share over the last couple of years and improved our leasing product. And what's gone on there is we've, around the world, made significant upgrades to our local leasing leadership teams. We have a managed brokerage platform that we use that's supported by a technology tool that helps us identify where in the market -- we have holes in our coverage, and we aggressively try to close those holes. We also use it to manage our interface with our clients. The tools we support our leasing business with, the technology tools, the data we support our leasing business with, the research we support our leasing business with, the advisory tools like workplace design, labor analytics, have allowed us to move ahead in that business, not only in landing new business, but in landing new talent and retaining the talent we have. So we're in a really good place with our brokerage talent. We've made some significant recruits on the investment sales, and especially on the mortgage origination side of the business also. So we're well-staffed. We have plenty of capacity in that staff, but we're also looking to add talent. Because as we've already talked about on this call and in our prepared remarks, the market is strong and our pipelines are strong and we are expecting growth. Ronald Kamdem: Helpful. My second -- my follow-up, I guess, would be, just going back to the Project Management business. I think we noticed you didn't break out Turner & Townsend versus the legacy. Just any comments there? And then if you could just update us on the thoughts on the margin opportunity sort of near and long term, that would be helpful. Robert Sulentic: Well, the reason not to break it out is because we're now well into that integration and the operating model that supports that business has been pretty much integrated around the world. And not surprisingly, the operating model we're using is the Turner & Townsend model, which we think is the industry's best, a big part of the reason why we made that deal in the first place. Now we're starting to move on to integrating the financial platform around the world, integrating human resources platform, as we call, the people platform around the world, et cetera, technology platform, that's an area where we'll use the CBRE platform. And so we expect that part of the integration to yield some cost synergies for us next year. I will say, and I've personally been involved in the interface with our clients in a number of areas, the market's recognition of those 2 businesses coming together and the new capability we have is starting to become pretty noticeable, and it's showing up in our new business wins. And an area where it's particularly showing up in is clients we already had that gave us a certain type of project, that are now giving us bigger, more complex projects and giving us cost consultancy work because of this combined capability. But all of that leads us to now look at that business as one integrated business going forward. Operator: Our next question is coming from Stephen Sheldon from William Blair. Stephen Sheldon: Just starting on data center monetization. It sounds like you're seeing strength in that class across a lot of different service lines. So just as we think about the next 2 to 3 years, where do you see the biggest avenues for CBRE to grow supporting data centers? And should investors be expecting monetization around data centers to continue becoming a bigger part of the overall business mix versus the 10% of EBITDA that you called out this quarter? Robert Sulentic: Well, Stephen, we expect data centers to be around 10% of our earnings this year, and more next year. And it's really important to know what's going on. There is this big bump-up in activity right now, and we're enjoying the benefit of that. I'm sure everybody that's in the real estate business or the data center services business that reports earnings is going to comment on that very favorably. But in addition to enjoying the benefit of the current pop in activity, we are building businesses that we believe will be sustainable as the cycle with data centers unfold. And inevitably, it's going to be a big build cycle over the next 5 years, maybe longer. And then beyond that, it's going to be a big operate cycle. We don't, except in an indirect way through our investment management business, we don't invest in a big way in the ownership of data centers. We do have significant land investments within Trammell Crow Company. And Trammell Crow Company's real strength, and has been for years, is they're phenomenal at identifying, acquiring, entitling and improving land sides. And they've turned their energies in a significant way to data center land sites, and we expect to see significant monetizations that will be at the front end of that cycle, the build part of that cycle. Turner & Townsend does a lot of Project Management work, cost consultancy for data centers. That will extend on for years. And as data centers then go into a redevelopment phase, upgrade phase, et cetera, that project and program and cost consultancy work will continue on. So that's a big, enduring opportunity. We have a very large data center brokerage business in our advisory business. And we finance them, we sell them, we lease them. We've coordinated our -- we've put the Chief Operating Officer of our Advisory business over that effort to coordinate it, and we see that as an enduring business. And then within our BOE segment, we have 2 lines of business that we're bringing together. One is the management of data centers. And we've talked about that, we manage something like 800 data centers on an ongoing basis. And then the small project improvement work in data centers inside the white space with the business we acquired called Direct Line. We're merging those 2 and forming a digital infrastructure services line of business that will carry separately within BOE. And that business is particularly well suited to perform well, not only now as data centers are being built, but we think that the actual operation of data centers and refit of data centers as that life cycle evolves will really play to that business. So we're enjoying the benefit of the big pop that's going on in the short run, but we're building businesses, similar to the strategy we've had with our other resilient businesses, that we think will endure well into the future in data centers. Stephen Sheldon: Got it. Yes, very helpful context. It seems like there's a lot to be excited about there. Maybe as a follow-up, just as you think about CBRE's relationship with occupiers, I think you've been talking more about how you can create better touch points with them and hopefully drive more wallet share gains over time. So any update on what you're doing there and the time line, if some of these things work, the time line to potentially see wallet share gains? Would large occupier prior clients pick up even more? Robert Sulentic: Our relationship with occupiers is evolving pretty rapidly right now, and our view as to how we serve the big occupiers has evolved. A big part of that is driven by our acquisition of Turner & Townsend and our acquisition of Industrious. And when you look at what we provide to big occupiers, we provide things for them across all 4 segments. So obviously, in BOE, we provide facilities management. And obviously, in the Turner & Townsend or the Project Management segment, we provide program management, project management, cost consultancy. So you look at where those 2 businesses are today where they were historically, we went out and spent the better part of $1 billion to buy an experience business, Industrious. We now have that as part of our facilities management as part of that -- part of our occupier offering. And it doesn't exist elsewhere in our segment, and it is proving to be a real advantage as we go to market in that business. We now have a Project Management capability and a cost consultancy capability to do a different kind of project work than we or others in our sector were able to do previously. And that is appealing to our clients. In our brokerage business, we've talked already today about the gains we've made in leasing. Leasing is a huge business for us. Leasing is a very, very important part of what we do for occupiers. That business has pulled away from where it's been historically. And then in our development business, in Trammell Crow Company, we have something that's important to the occupiers that doesn't exist in a significant way elsewhere in the segment, and that is our build-to-suit capability. And we do a lot of build-to-suit work for big occupiers around the world, particularly here in the U.S., but some around the world. And what we've decided to do in that business is to go at our clients and say, "We can offer any 1 of these 4 things to you in a way that we think is unique and advantages you." And if you want to buy them that way, we'll sell them to you that way. And if you enjoy the benefits of what we sell you because it's better than you can get elsewhere, we know you're going to buy the other stuff. And we've learned a lot of these clients like to buy that way. They want to just buy facilities management or project management or build-to-suit services. But the cross-sell that comes is, when they're satisfied with each of those, they're more likely to buy the others. And then in certain cases, we will have clients, and we've had some recent experience that's been very compelling, that will say, "You know what, we want to buy some of this on a bundled basis." And that's how we're thinking about that today. Operator: Next question is coming from Alex Kramm from UBS. Alex Kramm: Yes. Not sure if this is on the same topic, but maybe can you just talk about your BOE outlook and pipelines a little bit more. I know earlier this year with all the tariffs, et cetera, I think there was maybe some uncertainty and maybe things took a little bit longer. So just wondering how pipelines have trended and if you think things have generally normalized on the BOE side. Emma Giamartino: Yes, absolutely. I'd say normalized and improved even beyond that. So within our BOE segment, especially within enterprise, our pipelines are very strong, and we're expecting to have a volume of sales that is at a significantly elevated level. As you mentioned, Alex, there is a decent lead time between a sale and when that shows up in our revenue when that contract is converted because these are very large contracts. And so that elevated volume of sales should start to show up in our BOE revenue towards the second half of next year. Alex Kramm: All right. And then a very quick follow-up. On the data center divestment, I don't think you've sized that. Can you just -- the one that potentially is going to slip into 2026, what -- how should we think about the EPS impact, if it comes through or not? Emma Giamartino: So think about the range of outcomes for EPS that -- we've cited the $6.25 to $6.35. The bottom and top end of that range is really dependent on the development monetization. Operator: Your next question is coming from Steve Sakwa from Evercore ISI. Steve Sakwa: Yes. And I just want to maybe go back on the buyback. I just am trying to understand if maybe there were some deal activity that was maybe being kicked around internally that, I guess, precluded you from buying back stock in the third quarter or that was more of an active decision kind of not to buy back stock in the third quarter? Emma Giamartino: I will say it was not an active decision not to buy back stock. We feel, as we've always said, we feel that our share price is undervalued. We continue to believe that it's undervalued. And so when we have cash flow available, or in our projections, it's available, we will be buying back shares. But as you know, it's difficult to talk about our M&A pipeline or our activity there until we get something done. Steve Sakwa: No. Understood. And then, Bob, I guess, a question that we get a lot is around the facilities management business, and I guess, maybe the ultimate TAM of that business, and I realize, depending on how you size it, it's a couple of billion dollar business. But how do you think about the ultimate TAM of facilities management or how do you think about your market share in that business globally? Robert Sulentic: Well, Steve, we've forever tried to measure that TAM, and you can get some pretty crazy large numbers. What I will say is we've consistently expanded our TAM. So the work we do with data centers definitively has expanded the TAM. We operate a lot of data centers and we're positioned to operate more and that's a growing asset class. The J&J acquisition, which moved us into government work in a bigger way in the hospitals expanded our TAM. And of course, that dimension is very, very large potentially. The Direct Line acquisition, where we do work inside the white space and data centers, expanded our TAM. So right on down the line, the things we've done in that business have expanded our TAM. And each one of these, depending on how you measure it, could have a huge impact. That's one of the things that has made us increasingly optimistic about our ability to grow CBRE is, A, we've expanded our TAM in a way that we think is pretty hard for others to do; and B, we've grown into that space as we've expanded it. So I would tell you that we've done all kinds of work with our strategy group in-house. We've done a bunch of work with very, very top strategy people outside. And there's not a single view of that that would suggest we're anywhere near bumping up against our total addressable market. And we believe we can continue to expand that market. Operator: Your next question is coming from Seth Bergey from Citi. Seth Bergey: I guess my first one is back on the data center development side. So do those have access to power, or is that kind of a constraint there? Robert Sulentic: Well, that is without a doubt the constraint, and it's become more of a constraint. It's a constraint for anybody that's doing land work in data centers. It's a constraint for the co-locators. It's a constraint for the hyperscalers as they try to expand. And what we do is we put ourselves in a position by acquiring land or securing control over land, getting entitlements to that land, making certain improvements to that land and putting that land in a position where the ultimate users of the land, who are often hyperscalers, are well positioned to work with the utility authorities to gain power. And that's really how our strategy in that part of the business works. And it tends to work well. But it's very competitive to get power. Seth Bergey: And then I guess my second one is just back to the leasing. Is the -- specifically for office, is that -- are you seeing broad-based kind of activity there? Or is that concentrated in like more gateway cities or different classes of office there? Or any color you can add on the pipelines you're seeing there would be helpful. Robert Sulentic: Well, it is broad-based, but it hasn't been the same every quarter. So last quarter, we talked about secondary and tertiary markets being relatively strong compared to the gateway markets. We were a little surprised by that. And I got a question or we got a question at the beginning call about what we were surprised by. But I think what we were surprised by in the third quarter was the resurgence on a relative basis of the gateway markets. They were really strong. New York, in particular; San Francisco, in particular. But if you look over the course of the last 12 months and you look at our pipelines, I think our expectation -- it's fair to say our expectation is you're going to see broad-based growth in office building leasing. And we don't believe we're borrowing from the future. What we believe is -- there's a lot of different ways to look at it. People still talk about return to the office. We don't really talk about it that way. I think what I would say is it's more of a return to the mean, number one. In other words, COVID is so far in the rearview mirror, all the arguments pro and con on office space have kind of disappeared and people are thinking about it more like they thought about it before. But secondly, and this is true of real estate in general, which is another reason why we're so excited about our opportunity, real estate facilities have become much more critical to companies than they used to be. And I spend so much time with occupiers, they're all talking about the importance of their real estate to their cultures, to their -- the way their people work together, to their productivity. That is a very big theme out there today. If you go out and look at our warehouse business, our distribution center business, it is so much more strategic to our clients than it ever was historically. I started leasing warehouses, they were just big shell buildings, not nearly as big as they are now, but they are just big shell buildings where people stored stuff. And you go in to those buildings now, they've got thousands of robots in them and they've got miles and miles of conveyor systems. The buildings are very technical, and they're core to what those companies do to serve their clients, they're strategic. So real estate has become a much more -- obviously, data centers, it's not even worth talking about, that's become so obvious. Real estate has become a much more strategic asset class than it used to be. And that's true of office buildings, just like it is other aspects of commercial real estate. Operator: Your next question is coming from Jade Rahmani from KBW. Jade Rahmani: To follow up on office, can you talk about the strength in the sector in the U.S. and if you're seeing the recovery being driven by Class A and Class A-plus premier workspaces plus new development that has robust leasing? Or if you believe it's becoming more widespread and that below Class A, Class B such assets, in secondary submarkets, is the next leg of growth that you see coming? Robert Sulentic: Yes. Well, what's going on, Jade, is kind of what we thought might go on a year ago. So when the very best main and main buildings get filled up and there's still demand for really high-quality space, then you see people starting to convert buildings that are of lesser quality to a higher quality. That's really happening here in Manhattan. The demand has clearly moved into secondary and tertiary markets where there are a lot of good buildings available, or at least were available, they're quickly going. And you are starting to see new development now. And I'll give you a perfect example, from our own business. So for years and years and years, we've had one of the very best office site in Uptown Dallas, and you can develop between 0.5 million and 0.75 million square feet of space on that site. And we've been sitting on that site. We own it on our balance sheet. We're not in a hurry to do anything with it. And we now have a couple of large users, high credit users, that are very interested in that site. Pretty good odds we'll go ahead and kick that site off and bring 500,000, 600,000 square feet of new prime Class A space into the market. And we're not the only ones doing that. Three years ago, if we were having this conversation or 4 years ago, that wouldn't be part of the conversation. But it is now. And if you look here in New York, some of the prominent developers are either -- have either announced new things. We'll be in that and we're confident what we know enough about sites that they will be announcing. And again, that's going on in markets around the country. So it's spread. It's spreading from Class A buildings to lower class buildings that are being upgraded, starting to see new development, and it's a very real trend. Jade Rahmani: And then on the industrial side, it had been oversupplied and dealing with, not just tariff uncertainty, but negative absorptions due to that excess supply. It seems like the market has clearly turned a corner. Could you comment on what you think drove the growth in the quarter? Robert Sulentic: Well, big leases in the best buildings. There's a lot of interest in those. And then on the smaller leases, in the smaller buildings, there were a lot of renewals. Those tend to be shorter leases, older spaces, second-generation spaces. So you saw that coming from both ends of the market. There has been a higher vacancy than usual the last couple of years. We know that. We think that the vacancy is going to start going down by midyear next year. And I think what's happening in part is these big sophisticated users, whose large spaces are critical to their business, have figured that out and are starting to take -- obviously, there's others that report their numbers in our sector that have done quite well in the last quarter and are expecting to do quite well going forward, and that's what you're seeing here. You're not only seeing that here in the United States, you're seeing it around the world. Jade Rahmani: If I could ask one follow-up, it would be on EBITDA margins. Are you expecting kind of steady-ish full year EBITDA margins going forward? Or do you believe that there's still areas of growth that -- areas of margin expansion beyond 2025? Emma Giamartino: So Jade, we look at our margins within our services segments. And as you know, the development margins are -- can be pretty lumpy. And so within Advisory, for the full year, I think we're very close to our peak margins, at least going back to 2019. And we think that that's a pretty healthy margin, and we expect that to be sustained. Within BOE, we're going to deliver, as you know, good margin expansion this year. And as Bob noted, across facilities management, property management, we're going to see more synergies next year. And so you should expect that margin to continue to increase. And then Project Management as well as those cost synergies start to come in. And so you should expect to see some incremental margin expansion going into next year. Operator: Thank you. We've reached the end our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Robert Sulentic: Thanks for joining us, everyone, and we'll talk to you next when we report year-end earnings. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Thank you for standing by, and welcome to American Airlines Group's Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would now like to hand the call over to Neil Russell, Vice President, Investor Relations. Please go ahead. Neil Russell: Thanks, Latif, and good morning, everyone. Welcome to the American Airlines Group Earnings Conference Call. On the call with prepared remarks, we have our CEO, Robert Isom; and our CFO, Devon May. In addition, we have a number of senior executives in the room this morning for the Q&A session. After our prepared remarks, we will open the call for analyst questions, followed by questions from the media. To get in as many questions as possible, please limit yourself to 1 question and 1 follow-up. Before we begin, we must state that today's call contains forward-looking statements, including statements concerning future events costs, forecast of capacity and fleet plans. These statements represent our predictions and expectations of future events, but numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release that was issued earlier this morning, form 10-Q that was filed with the SEC earlier this morning, as well as in our Form 10-K for the year ended December 31, 2024, filed with the SEC on February 19, 2025. Unless otherwise specified, all references to earnings per share are on an adjusted and diluted basis. Additionally, we will be discussing certain non-GAAP financial measures, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release, which can be found in the Investor Relations section of our website. A webcast of this call will also be archived on our website. The information we are giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently. Thank you for your interest in American and for joining us this morning. With that, I'll turn the call over to our CEO, Robert Isom. Robert Isom: Thanks, Neil, and good morning, everyone. This morning, American reported an adjusted pretax loss of $139 million for the third quarter, or a loss of $0.17 per share. This result was at the higher end of the guidance provided in July and was driven by stronger revenue performance. We see that performance continuing and have adjusted our fourth quarter and full year guidance accordingly. I'm proud of the team's hard work and resilience throughout the third quarter. They executed well despite tough operating conditions. . At American Airlines, we're proud to be a premium global airline with an enduring legacy of innovation and a commitment to caring for people on life's journey. We've built an airline position to excel over the long term and are focused on delivering for our shareholders, customers and team. That said, we recognize there's significant revenue opportunity ahead of us and we're excited about the good work underway to accelerate our revenue growth and view that as considerable upside as we move into 2026. The revenue momentum we've seen and the opportunity ahead is a product of our sales and revenue management initiatives, scaling our new agreement with Citi, restoring capacity in our hubs, and using consistent improvements in the customer experience as a value multiplier to everything we do. Much of this foundation has been laid thanks to the efforts of our commercial team and Steve Johnson. Last year, I asked Steve to step in and lead the commercial organization to quickly stabilize and reenergize this part of our business. We knew we'd hire a new Chief Commercial Officer in the future, and I'm grateful to Steve for taking this on. . He and the team has strengthened our commercial position, and we're now in a great spot to make a transition. And today, we've named Nat Pieper, as American's new Chief Commercial Officer. Nat has more than 25 years' experience in leading commercial and financial teams at Alaska, Delta and Northwest Airlines, and most recently, the Oneworld Alliance. He is a seasoned airline executive who understands the complexity of highly integrated organizations. I've known Nat for more than 20 years, and he's exactly the kind of leader we want at American. He will officially join us on November 3, at which point Steve will return to his role as our Vice Chair and Chief Strategy Officer. So with that, let's talk more about some of the work that the team has delivered. Leading off with our focus on sales and distribution, we continue to build out our sales organization and are aggressively using our loyalty program to win back customers, especially in competitive markets. In the third quarter, we grew our corporate revenue by 14% year-over-year. This result is further confirmation that our sales and distribution efforts are being well received by our customers. Exiting this year, we expect to have fully recovered the revenue share that was lost by our prior sales and distribution strategy. We'll now shift our focus to growing our share beyond those historical levels, which we believe that, combined with revenue management investments and retailing optimization will produce significant value for the airline. Next, deepening our relationship with Citi and expanding our co-brand card portfolio will further the growth of our industry-leading loyalty program. We're excited for our exclusive partnership with Citi to begin on January 1. The teams at American and Citi have been hard at work, executing a successful cutover of our in-flight acquisition channels to Citi earlier this month. In addition, we've recently launched our new mid-tier Citi AAdvantage Globe MasterCard, expanding our card offerings to meet travelers at every level. Our partnership with Citi will provide more benefits to our customers and is designed to drive growth in our credit card acquisitions and penetration over the coming years. The upside is significant. As we approach the end of the decade, we expect remuneration from our co-branded credit card and other partners to reach approximately $10 billion per year. At that time, the incremental annual benefit to operating income is projected to be approximately $1.5 billion compared to 2024. On the loyalty side, active AAdvantage accounts increased 7% year-over-year in the third quarter with our highest growth in enrollments coming from Chicago, which was up approximately 20% year-over-year. AAdvantage members are more engaged, generate a higher yield versus nonmembers and are a key driver for premium cabin demand. In the third quarter, spending on our co-branded credit cards was up 9% year-over-year as customers continue to favor AAdvantage Miles as their preferred rewards currency. We remain focused on strengthening our network by scaling our hubs. We're proud of our hub network that we have with 8 of our hubs located in the 10 largest metro areas in the U.S. This year, our growth was focused on Chicago, Philadelphia and New York. American has a long history in all 3 cities with a base of corporate and premium customers that are loyal to the American brand. Our improved schedules, along with our new sales and distribution strategy and other product improvements are helping us win local high-value customers. Performance continues to track in line with our expectations. This targeted expansion will continue through the fourth quarter and into 2026 as we add more cities and more frequencies to improve our offering for customers. Our ability to grow capacity in premium markets will be further supported as we take delivery of new aircraft and reconfigure our existing fleet. These efforts will allow us to grow our premium seats at nearly 2x the rate of main cabin seats and grow our lie-flat seats over 50% by the end of the decade. Additionally, we're excited about the significant investments in airport infrastructure happening throughout our system, headlined by rapid construction of the new Terminal F and enhanced Terminals A and C at DFW. When complete, DFW will be a world-class facility and the largest single carrier hub in the world. All of this is intended to deliver a consistent and elevated travel experience for our customers, whether on the ground or in the air. And it's not just facilities. The investments we continue to make in customer experience are the value multiplier on top of everything we're doing. With the ongoing rollout of our new flagship suite designed to elevate privacy, comfort and luxury, we're continuing to reimagine and advance the premium travel experience. Customers have responded very positively to this product on our new Boeing 787-9 Ps, which led American wide-body aircraft in customer satisfaction. We will offer the same product on our 321XLRs and our 777 fleets in the coming years. We're also investing in the onboard experience of our regional aircraft, including the installation of high-speed satellite WiFi to maintain a consistent premium experience across our fleet. We're proud to offer high-speed gate-to-gate satellite WiFi on more aircraft than any other airline, keeping our customers connected while traveling. Thanks to our new sponsorship with AT&T, this amenity will be complementary for our AAdvantage members starting in January. We announced several exciting updates to our leading lounge network, including plans to open new flagship lounges in Miami and in Charlotte, and we'll expand our Admirals Club Lounge footprint in both markets as well. We also introduced several additional premium enhancements, including new amenity kits, improvements to our food and beverage offerings and a new partnership with Champagne Ballanger. We continue to explore partnerships to elevate the art of travel, like our new coffee partnership with Lavazza that aligns with our focus on refined offerings and exceptional service throughout the travel journey. Nothing matters more to our customers than flying on a reliable airline. While this quarter presented challenging operating conditions, the American team quickly recovered, minimized disruptions and maintained a resilient operation for our customers. Thanks to continued investments in technology, including the expansion of our Connect Assist platform, we've enhanced the connection experience and successfully preserved customer connections. The team is focused on investing in the right areas, and we're committed to executing on our initiatives to deliver on our revenue opportunities. Before closing, I'd like to take a moment to recognize the dedicated aviation professionals who continue to uphold the safety and security of our industry during the government shutdown. We're hopeful that action will be taken to reopen the government as soon as possible. And now I'll turn the call over to Devon to share more about our financial results and outlook. Devon May: Thank you, Robert. Excluding net special items, American reported a third quarter adjusted loss per share of $0.17, a 50% beat versus the midpoint of our prior guidance. We continue to progress on our commitment to deliver on our revenue potential. We produced record third quarter revenue of $13.7 billion, which was about 1% ahead of the midpoint of our initial guidance. Domestic year-over-year PRASM improved sequentially each month and turned positive in September. While premium continued to outperform Main cabin, we've seen improvement in the main cabin since its low point in July. That momentum has continued into October, and we're encouraged by the bookings we have taken for November and December. Our international entities performed in line with the guidance we gave in July. After a very strong second quarter, unit revenue in the Atlantic region was down year-over-year due in part to the macro uncertainty during the peak booking window and a continued seasonal shift in demand from the third quarter to the fourth quarter. That said, Atlantic was our most profitable region during the quarter, and we expect Atlantic unit revenue to be solidly positive in the fourth quarter. In Latin America, unit revenues were down year-over-year as the short-haul Latin market was oversupplied during the quarter. American's presence in the region, the premium services we offer and the scale we have in Miami and our other Southern hubs allow for profitable results in this environment and a continued long-term competitive advantage in the region. Lastly, Pacific year-over-year unit revenue declined mid-single digits in the quarter. We expect fourth quarter unit revenues to be approximately flat year-over-year off a very strong 2024 base, supported by strength in the premium cabins. Premium continues to perform well with year-over-year premium unit revenue outpacing main cabin by 5 points in the third quarter. Capitalizing on this demand, American is continuing to invest in expanding our premium offerings across the customer journey. While already recognized amongst the U.S. network carriers for having the highest rated and most consistent lie-flat product across our long-haul fleet, we are elevating this experience with the investment in our new flagship suite, which we launched with our high premium Boeing 787-9s. As Robert said, in the coming quarters, we'll expand this product further with the introduction of our A321 XLRs and the retrofit of 20 777-300 aircraft, which will increase premium seats on this fleet by over 20%. We're excited to announce that we'll continue scaling our new flagship product on our 777-200 aircraft. These aircraft, which will be receiving a nose-to-tail retrofit, will see a 25% increase in lie-flat and premium economy seats, along with new in-flight seatback entertainment system. Additionally, we continue to expand premium on our domestic aircraft. We are retrofitting our A319s and A320s, where we will grow first-class seating by 50% and 33%, respectively. With these investments in our existing fleet, along with our new deliveries, our premium seat growth will outpace our non-premium offerings. Our total capital expenditures in 2025 are expected to be approximately $3.8 billion, which includes the delivery of 51 new aircraft this year. Longer term, capital expenditures remain consistent with our prior guidance and our current expectations for 2026 are approximately $4 billion to $4.5 billion of total CapEx. We continue to make progress in strengthening the balance sheet. Total debt at the end of the third quarter was $36.8 billion, down by $1.2 billion from the second quarter. We ended the quarter with $10.3 billion of available liquidity. At the start of the year, we made a commitment to reduce total debt by approximately $4 billion to less than $35 billion by the end of 2027. Just 9 months after making that commitment, we are more than 50% of the way to achieving that goal. Now on to our outlook for the remainder of the year. For the fourth quarter, we expect capacity to be up between 3% and 5% year-over-year as we continue to build back our hubs and adjust our schedules to meet evolving seasonal demand trends. We expect fourth quarter revenue to be up between 3% and 5% year-over-year. If we achieve the midpoint of our guidance, we'll deliver flat unit revenue in the quarter after being down 2.7% in Q2 and 1.9% in Q3. Fourth quarter CASM ex is anticipated to be up 2.5% to 4.5% year-over-year, in line with the guidance we provided in July. We are continuing our multiyear reengineering the business effort to utilize technology and streamline processes to enable an improved customer and team member experience while driving a more efficient business. These efficiencies are being realized through best-in-class workforce management, efficient asset utilization and procurement excellence. These efforts have resulted in $750 million of annual savings versus 2023. As a result of the investments and process improvements we have made, most mainline work groups are operating at higher productivity levels today than they were in 2019. With labor cost certainty through 2027, American is able to focus on our long-term efficiency efforts while executing on our commercial and customer initiatives. With this fourth quarter guidance, we expect to deliver an adjusted operating margin of between 5% and 7% and earnings per share between $0.45 and $0.75, over 2x higher than the midpoint of our implied fourth quarter guidance from July. This brings our full year EPS guidance to a range of $0.65 to $0.95 per share. Based on these earnings and capital projections, we expect to generate free cash flow of over $1 billion for the year. I'll now hand the call back to Robert for closing remarks. Robert Isom: Thanks, Devon. We're positioning American for long-term success. Our commercial efforts in sales and distribution and revenue management are taking root, driving business and premium revenue outperformance. We're poised to take advantage of the new relationship being launched with Citi in 2026 to grow the world's first and largest airline loyalty program at unprecedented rates. We started down the path of restoring our network presence, further expanding our industry-leading footprint in North America, the world's most important aviation market, all powered by the youngest and most fuel-efficient fleet. These efforts are being bolstered by our focus on elevating the customer experience, evidenced by the continual announcements this year of exhilarating upgrades. Finally, we'll always remain focused on efficient capacity production. We've been a leader in this space for years, and we'll continue to make smart investments that drive efficiencies in our business. We're looking forward to closing out 2025 in strong fashion, and with this groundwork, we plan to deliver meaningful long-term value for our shareholders in 2026 and beyond. Thank you for your interest in American Airlines. Operator, you may now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Scott Group of Wolfe Research. Scott Group: So I think I saw you said that September unit revenue was positive. Fourth quarter guide is sort of flat. So maybe just explain that change. And then within that, I think I just heard you say domestic unit revenue, you think is flat in Q4 as well. Maybe just some thoughts premium versus domestic and how that shakes out. Robert Isom: I'm sorry, Latif, I think we were on mute there. So we'll start this over. Steve, do you want to take this question? Stephen Johnson: Sure. Latif, can you hear me now? . Operator: Yes, sir. Please proceed. Stephen Johnson: Yes, Scott, thanks for the question. What we've seen, I think, is what you've heard from the other airlines is July was a really very difficult month for the industry. August was better than July, September better than August, and indeed, we did inflect positive during the month of September. October looks better than September and the fourth quarter looks strong. That has been driven interestingly, largely by improvements in -- for us, anyway, in main cabin revenues. The premium revenues, as we've discussed, have been strong all year long, really not faltering notwithstanding any of the economic uncertainty we went, but that economic uncertainty and Liberation Day and all of that has played a very -- it's been very difficult on main cabin revenue, the demand from our most price-sensitive customers. In any event, the projection that we have for the fourth quarter of being flat year-over-year is a sequential improvement -- quarterly sequential improvement. Something we're excited about is a combination of good performance, I think, in the domestic entity, good performance across the Atlantic, in the North Pacific, and in South America, and a little more uneven performance in the South Pacific largely because of capacity, and then year-over-year, not great performance in short-haul Latin America, again, a capacity issue. That entity, while down year-over-year, remains a really important part of our business and a profitable part of our business as we have real network strength from Miami and DFW and Phoenix into those regions. So I think we're excited about the sequential improvement being able to project a flat unit revenue year-over-year. Scott Group: Okay. And then I want to see if you want to provide any sort of early thoughts for next year. So if I look at Q4, right, we've got capacity up 3% to 5%, what are you saying unit cost up 2.5% to 4.5%. Is that sort of the right way to think about capacity and unit cost for next year? And ultimately, what I'm trying to figure out is what's the visibility or confidence in sort of a price cost inflection next year? Devon May: Scott, we're just in the planning process for next year as we sit here today. So we're not guiding to capacity or unit cost performance at this point. But we'll stay consistent with what we've been saying on that front is we have this fleet plan that can allow us to grow somewhere around mid-single digits. Our guardrails on capacity production are at one end, we just want to understand what sort of economic growth and what sort of demand growth we're seeing, and we like where we're at on that front. The other side is where the competition is at. And lastly, just what sort of growth opportunities we have. We're really excited about the growth we put into the market this year, primarily in Philadelphia, Chicago and New York. Those markets will continue to grow in 2026, and we're also excited about growth opportunities in Miami and in Phoenix. On the cost side, I think you see it in our numbers. We believe we manage cost and efficiency better than anyone. It's been a very formal and long-standing effort. And so next year, we look out, yes, we're looking for margin expansion as we head into 2026. Operator: Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Maybe digging a bit deeper into the capacity and premium investment comments now that you have also the 777-200 fleet going, the schedules are loaded up 5% in the first half of next year. The fleet grows a similar amount, assuming no retirements. So how are you thinking about the mix in premium versus main cabin and short haul versus long haul? Robert Isom: So I'll start. Thanks, Sheila. Well, first off, in terms of capacity mix, international, domestic, it takes a strong domestic and very strong hubs to support a thriving international operation. And so we'll keep a balance in terms of that growth. It's really exciting in terms of premium offerings. So our premium seating, we expect, especially now with the 787-9s, 9Ps, the XLRs, the reconfigurations we're making, the premium seating is going to grow roughly at twice the rate of what our non-premium offerings would grow. And even more specific in terms of our live flat international capable seating, that is going to grow by 50% as we look out towards the end of the decade. So we feel really excited about it, and it all plays into what we're seeing in the marketplace that people are willing to pay for experience. And we're going to make sure that we have a hard product that they enjoy. Sheila Kahyaoglu: Great. And then maybe if I could ask another one on just domestic hubs. You mentioned Chicago enrollments are up 20% year-over-year for AAdvantage. Lots have been said about this market. When you look across domestic hubs, where are you seeing the greatest level of unit revenue improvement, either sequentially or year-over-year? And how are you thinking about capacity next year? Robert Isom: Well, I'll just start. Look, we're pleased with our efforts in Chicago. Certainly, we've done a nice job in growing that back. And as you look towards next year, that's a hub that will be over 500 departures. And we have just an incredible base of customers that are waiting for us to really get back in the marketplace. Those AAdvantage enrollments overall, we grew 7%. But in Chicago specifically, 20%. I mean that's a really remarkable number. We're going to take advantage of that desire for our product, as I mentioned. And as we look out into the future, we anticipate that Chicago will return to its rightful places as one of our largest and more profitable hubs. So capacity, at least in Chicago, as we take a look at, we're going to fly what we can. It will be, again, over 500 departures. Capacity throughout the rest of the system, it's really focused on restoration of flying in Philadelphia, Miami, Phoenix. We've already have DFW and Charlotte appropriately sized. So we're really excited about what we're going to be able to bring back to markets that, quite frankly, because of regional aircraft and delivery delays, we haven't been able to serve as thoroughly as we'd like. Operator: Our next question comes from the line of David Vernon of Bernstein. David Vernon: I hate to bang the same drum, but maybe I'll ask the same question in a slightly different way. If we think about what percentage of premium seats are in the mix kind of as we end 2025? And how does that change? If you can put a number on that, that would be helpful as well as any sort of commentary or directional commentary on the relative buy-up from what would be considered a non-premium versus a premium seat. I think what we're trying to all kind of model out here is what kind of unit revenue lift you could get because the product mix is changing so much next year. I appreciate the twice the normal seat growth rate, but I think what we're trying to do is really kind of help handicap what kind of margin expansion should be coming from that product investment. Stephen Johnson: Thanks, David. Great question, even if it is bang in the same drum. This is a really good story for the industry, really good story for American. As I've said earlier and the guy said in the opening remarks, premium has been strong all year despite economic uncertainty. If we look back a long time, some of us have been around in the business for a long time, I can just remember discussions about whether we could ever, as an industry, find a way to get people to pay more for better products and services. And I think the answer to the question these days is a resounding yes. Part of what we're seeing is -- and I have to say it feels like a post-pandemic new normal. It's just been so consistent and so consistent through difficult economic circumstances. But it's -- premium has always been driven by -- and there remains a component of that, that's business demand. But business doesn't always let their employees fly in premium. And so really, what we're seeing is, I think, a renaissance or maybe a new beginning for premium leisure. And this goes to my comment about our customers being willing to pay more for better services and better products. Our premium cabin is now 65% load factor is -- we think is premium leisure. It's outperformed the main cabin by 5 percentage points, 5 RASM points year-over-year. Our paid load factor in premium is up 2 points year-over-year. It is now nearly 80%. And we were selling on a paid basis only in the mid-60s before the pandemic. Nearly 50% of our ticket revenue comes from premium. And in recognition of those market dynamics, our focus is on taking advantage of that and growing that. Robert and Devon talked about the additional premium seats that we're adding to the fleet. We're designing better products. We have easier ways and super simple digital ways to upgrade and lots of opportunities to upgrade on a wallet-friendly basis. It's really, I think, becoming just a really important and really exciting part of our business. David Vernon: Okay. And then maybe as you think about beyond the hard product investment, right, and that -- however that mix shift is going to change in the number of seats, Robert, when you're talking to the team or maybe and working with that as he's ramping up, when you think about the product investments or experience investments that you need to make, what are the 2 or 3 areas that you are most focused on with the team? Robert Isom: Thanks, David. Well, the good news on this is that we're really bringing to fulfillment a number of investments we made over time. And then adding to that this reimagined and reinvigorated customer experience effort here. As you know, we launched a new team that has been taking a look at just in-flight amenities and products. And so whether that's, again, relationships with great brands for coffee or champagne, whether that's getting back into the creature comforts with amenity kits and things like bedding and duvets, those things are all happening. We're mixing that on -- so that in-flight experience is then being mixed with an on-the-ground focus. And so whether it's the investment in the facilities that we're making throughout the system, notably our premium lounges, which, again, we have already the biggest network of premium lounges. We're just only going to add to that in places like Charlotte and Miami. So I'd say that that's the second thing. And look, you do need to have the hard product. And so as we've talked before, first off, no one has a more consistent lie-flat product than we do. I'm super excited about the new deliveries of 787-9s and the XLRs. But on top of that, whether it's our A320s, our A319s, our regional aircraft and how we're equipping them with satellite WiFi, that's all fantastic. And then what we announced today, the 777-200 reconfigurs, that is a big deal for us because extending the lives of those and putting those into service really gives us a capital spending holiday in terms of fleet replacement. So it's a win-win-win for our customers, for our company and most certainly our investors. Operator: Our next question comes from the line of Dan McKenzie of Seaport Global. Daniel McKenzie: Congrats on the outlook here in the quarter. Going back to an earlier question on Chicago and the response that you expect it to return to its rightful place as the largest and one of the more profitable hubs. That, of course, is pretty different messaging than what we heard from one of your chief competitors there. So just a couple of questions. One, can the airport support 2 strong competitors longer term? And what does history tell us? And then finally, with the 20% improvement in enrollments, is that enough for you to help close that margin gap there in '26 or 2027? Robert Isom: Thanks, Dan. I'll just again, restate what we've been saying all along. Of course, Chicago can support 2 hub carriers. It's been doing it forever. American has served Chicago now for almost 100 years. And so we're looking to serve it well into the future. I've talked about a hub. It's going to be our third largest hub. There aren't many 500 departure hubs out there. It's critically important to our customers in Chicago and those that connect in the region. It ensures that there is service, competitive service. And I think that, that's probably the thing that maybe a competitor doesn't like that we're going to be there. We're going to be investing in Chicago. And there aren't going to be really any impediments to us building out the network and the footprint that we need there. So thanks for the question. Really excited about Chicago and what's coming up in 2026 and beyond. Daniel McKenzie: Yes. Very good. And then, Robert, you mentioned a $1 billion cost labor disadvantage to competitors on CNBC this morning. Is it your sense that this cost disadvantage should go away in '26, at least in theory? And can the domestic supply backdrop support the higher fares needed to offset that increased cost or whether or not more capacity needs to exit? Robert Isom: Well, you'll have to ask that question of our competitor that is obviously has profits that are built off of a labor cost advantage. And it's a labor cost advantage that is in just rate. And so I can't imagine that, that is something that moves into the future. It's not -- certainly not something that we would ever contemplate at American over the long run. Now in regard to ultimately improving margins in the business, this is where American, I think, has a tremendous opportunity. So first off, we already have market rates built in. We already have labor cost certainty. And I think that, that enables us to launch the efforts that we're undertaking. And so whether that's the restoration of our network, we know that we have the pilots and flight attendants and everybody that is going to be -- are going to be situated to fly the network and to rebuild some of the places that we've, quite frankly, lost some share in. We know that we're set up well as we move into 2026 with our new Citi deal, which is going to produce a tremendous improvement in terms of net income going forward. And I mentioned earlier about sales and distribution, and I gave Steve credit for helping set the team up. We've made tremendous progress. One of the things I'm so proud of is that from a managed corporate revenue perspective that we performed 14% better year-over-year. Nobody else is doing that. And the good news on that front, we're not all the way there. We have not only some share left to catch up as we exit the year, but we're not going to stop on that front. And underscoring all of that is the work that we're doing in premium that we've talked about. And so I feel really positive about American's positioning no matter the economic backdrop. And everything that I see bodes well just in terms of what we do well. I think domestic supply and demand is coming back into balance. I think that the places that we serve are the fastest growing in -- certainly within the country, and we're poised to really take off as we go into 2026. Operator: Our next question comes from the line of Jamie Baker of JPMorgan Securities. Jamie Baker: First question probably won't come as much of a surprise, reminiscent of what I've been asking this season. So this whole idea of premium leisure yields eclipsing corporate yields, at least in some markets, is interesting to me because I think most investors still think of corporate yields as kind of the gold standard. So my question to American is, how prevalent is this across your domestic -- well, across all markets, I suppose. And does it make you think any differently in terms of how aggressively you pursue corporate share if premium leisure yields may be the future? Any thoughts on that? Robert Isom: Jamie, thanks for the question. And this is one where I think we've learned some lessons. Quite frankly, corporate travel is incredibly rich in terms of yield. And while we love what's happening from the premium space, premium leisure, we need both. And that's why we're doubling down in terms of our investment in our sales team. We like what we see, and we think that there is upside for American. Now I'll note one other thing, which is we talk about business travel, and it has not recovered in terms of passengers to the levels that it was in 2019. I think that there's a lot more room for growth. I don't know if we ever get back to the total percentage of business as a percent of total revenue, but there's a lot more that can be gained. And as we take a look at what's going on in the world right now and with even continued return to office and this desire to meet face-to-face and renew connections, I'm very optimistic on that front. Now from a premium leisure perspective, yes, we've got to be ready for it. And that's why we have a fleet that I think is tailored to meet those needs. And we're going to make sure that we have a great product offering to attract those customers, and that will be a key to margin expansion. And it's -- look, American is a premium carrier to begin with, and we're only going to become more... Stephen Johnson: And Jamie, I'd just add that while we do see the phenomenon right now where there's a lot of premium leisure demand, it's really good yields. We got to remember that business has been with us forever, and it's going to be with us forever. It's really important to remember that business travelers are very frequent travelers. Even if they're a little bit less than our premium yields now, they're still 1.5 to 2x the yields we get from other sources. They tend to be AAdvantage members and AAdvantage members give us more business. They tend to be co-brand cardholders. And the regular business travelers in an effort to accumulate miles and participate in loyalty programs tend to move their leisure travel to the airline that they fly on business. And in some ways, you can even think of our business travelers as being some of the source of our premium leisure demand. So I think a really exciting part. Robert mentioned, right now, I mean, we calculate that business travel is only 80% of what it was in 2019. And that's an absolute number, not adjusted for the size -- for the growth in the economy. So very significant upside. And as Robert said, I mean, we'd love to fill the airplane with business travelers and premium leisure travelers. Jamie Baker: Got it. And Devon, while I have you, a quick follow-up on the air traffic liability. Your drawdown from the second quarter to the third quarter was the most modest that I've seen, at least going back a decade. And it was quite a bit less than the drawdowns at Delta and United. I assume the American's domestic international balance may have something to do with that. Maybe it's attributable to some of the second quarter challenges and subsequent recovery. Whatever the case, it jumped out at me, maybe it shouldn't have any thoughts? Devon May: Well, I think it's in part due to some of the seasonal trends that you're seeing. So a strengthening fourth quarter just means there's going to be more bookings for fourth quarter travel that happened in the third quarter, so less of a drawdown on that front. Relative to United and Delta, there may be some entity mix there and perhaps just some of our relative performance in the quarter. But I think more than that, it's just the seasonal trends we're seeing in demand. Operator: Our next question comes from the line of Tom Wadewitz of UBS. Atul Maheswari: This is Atul Maheswari on for Tom Wadewitz. First, on the shape of the fourth quarter RASM or yield, you mentioned that September RASM turned positive and October looks better than September. So implicit on those points is that November and December would be a little worse than October for you to be flattish for the full fourth quarter. So the question really is the expectation around November and December being a bit slower than October. Is that simply due to American being cautious given difficult compares you and the industry have from the demand strength that you saw during the holidays last year? Or is there something in the current booking data that suggests that December or the holiday yields are tracking lower than what you're seeing for this month? Stephen Johnson: And really good question, and I'm sorry that I wasn't more clear about that. I mentioned October as being part of a sequence that we're seeing and I think that the industry is seeing. I didn't mention November and December because we just don't have a lot booked at this point in time. And so I just didn't pick up on it. We're -- I will say about November and December, I think we're getting very encouraged by the way the holiday periods are booking and seeing as we have throughout the year during trough periods seeing a little bit of softness there. But we're, I think, focused on our best estimate right now of where the quarter is going to end up is flat year-over-year. And we'll take another look at that as we see more bookings for November and December come in. Atul Maheswari: Got it. That's helpful. And then just as a quick follow-up. As you run rate the normal historical share in the indirect channel that you expect to get back to in the fourth quarter, how much revenue lift does that provide next year, especially in the first 3 quarters of the year? I guess another way to ask it would be, like in the past, you mentioned like about $1.5 billion of shortfall due to the prior strategy. How much was recovered this year and what's left to be recovered in '26? Robert Isom: Well, Tom (sic) [ Atul ], thanks for the question. we don't have a full run rate of our recovery in because it's something that progressed over the course of the year. As we take a look out into next year, it's going to be built into any of the guidance and the forecast that we give. I think a good indication, though, is just the level at which we're outpacing some of our principal competitors in things like managed corporate travel. So I feel really good about that. And as we exit the year, where I do think we'll be fully restored, then the objective is moving on to actually doing better than that. And from that perspective, what we will measure ourselves on going forward, okay, will be overall unit revenue production. And of course, we'll always break out from a corporate perspective. Stephen Johnson: Yes. And just to think about it, as we've gone through the year and improved our sales improved our share indirect channels. You've seen that sort of step up over the course of the year. So next year, we're going to have the benefit of that continued step-up plus the run rate of that, which we've already captured and returned to American. Operator: Our next question comes from the line of Catherine O'Brien of Goldman Sachs. Catherine O'Brien: I wanted to ask more of a theoretical question on CASM. So you guys have done a lot of work on building efficiency into the system. And just wanted to understand, is the fourth quarter a good example of what the business can do, like low to single -- low to mid-single capacity growth drive low to mid-single CASMex? Or there's more to go here and CASMex could ultimately be lower on that level of growth? Just really trying to get a sense of what you think CASMex could look like on the base case mid-single-digit capacity growth over the next couple of years, understanding there's always going to be some lumpiness year-to-year. Devon May: Yes. And I appreciate you kind of starting the question with -- it's at least somewhat dependent on the level of capacity growth that sits out there. Right now, we're working through the 2026 plan. What I will give some color on is just the lines of the P&L right now where you are seeing some costs growing at a greater rate than inflation and some areas maybe where we're going to see some potential goodness. But labor right now, as we've talked about, we have contracts with all of our large frontline team members. So the step-up in labor isn't much more than inflation, although we do have a couple of labor groups, pilots, for example, that will get a 4% increase next year. That's consistent with the industry. So if it's going to outpace inflation, it won't be by much. Other areas like airport rent and landing fees will continue to grow at a rate greater than inflation. Maintenance is kind of TBD at this point, but that will kind of come and go depending on the year. What you're seeing in the fourth quarter right now, I think we can do better than that longer term, but let us work through the plan for 2026, and then we'll work to get some longer-term guidance out there. Catherine O'Brien: Great. And then, Devon, probably a second one for you. You've made great progress on the balance sheet even in a tough year demand-wise. I think looking back at my notes from the 2024 Investor Day, the longer-term goal is to get to net debt below $30 billion and leverage below 3x in 2028. I guess, is that still the goal? And really, is that your ultimate goal? Or do you believe there's a benefit to taking leverage lower than that over time? I realize this is a longer-term one, but just trying to get a picture of how you're thinking about capital allocation over the next couple of years. Devon May: Yes. Well, just one step at a time. We're incredibly excited to have hit our first goal of total debt reduction of $15 billion. We did that a year earlier than planned. We completed that last year. The next goal we set out for total debt was that it would be inside of $35 billion by the end of 2027. That's another goal we brought in by a year. We're really pleased with the progress right now. It's happening because we have pretty limited capital needs right now. We talked about being able to grow the airline at 5%, but we're doing that with aircraft CapEx in that $3 billion to $3.5 billion range. That's a really nice spot to be in. And in a year like this, even where earnings aren't exactly where we want them to be, we're producing really nice free cash flow that we're using to improve the balance sheet. So that's where we're at now. We fully expect to hit our $35 billion goal. That would, to your point, put us inside of $30 billion of net debt and hopefully well inside of that. We have this goal at that point, obviously, to be within net debt-to-EBITDA leverage ratios of about 3x, which you get to that BB credit rating. To get there, we have to continue to focus on improving margins and improving earnings. And I think we're focused on all of the right things there. right things there. Where we go beyond that point, we'll see. I think a BB credit rating puts us in a really good spot with the borrowings we're going after. Operator: Our next question comes from the line of Conor Cunningham of Melius Research. Conor Cunningham: Just talking about thinking about building blocks for 2026. I think a big one is just the loyalty component. I was curious if you could just remind us what you think the incremental dollar value is from just the loyalty step-up alone. It seems like a pretty big lever for you all and a pretty massive driver for earnings in general. So just any thoughts around that would be helpful. Robert Isom: Yes. Conor, we'll just go back to what we've been saying. The new Citi relationship, I think, launches us into an opportunity to grow cash remuneration by 10% per year. Ultimately, we see -- as we go out towards achieving $10 billion of remuneration, we see another $1.5 billion of net income flowing through. So that's all -- those are all really sizable numbers. Conor Cunningham: Agreed. Okay. And then maybe we could talk about just -- there seems to be a lot of talk about just like CASMex and RASM and all that stuff. And I think that the industry in general probably needs to move more towards if we're going to invest in the product, we should expect margins to improve in general. So if you could just talk about how you're thinking about investment spend in the customer service product and what that could mean to -- are you earmarking a sizable chunk of costs associated with that, knowing that you'll get paid back for it on the customer side? Just any thoughts around the investment spend that you need to have in the product going forward? Robert Isom: So Conor, yes, the name of the game here is to grow margins, increase profitability. and ultimately increase shareholder value. So everything we do, we've been incredibly thoughtful, diligent, efficient in terms of when we deploy capital. But as Devon said in his comments, we have, look, a capital expenditure profile that others would love to have. What we are spending, I believe, is going to, number one, drive the revenue benefits that continue to drive revenue benefits that we see. And if you take a look at our guide and the outperformance or the improved performance in the third quarter and what we're anticipating in the fourth quarter, that's a result for us of revenue performance. Now again, we'll continue to be incredibly efficient in terms of how we deploy our capacity. But the opportunity for us going into next year, I think, look, we have better opportunity than most. Domestic capacity, I think, is more in balance. That benefits American. We've got catch-up to work to do from a sales and distribution perspective. That benefits American. We finally have our Citibank deal that's coming into play. That will start in January. We have a network that is fantastic, but again, hasn't been able to serve all of our customers' needs. And as we restore in places, we're going to be a more formidable carrier from the perspective of premium and business traffic and a better carrier for all of our alliance partners to deal with. So there's a lot of opportunity for American. And I think in many respects, that will benefit American more than others. Operator: Our next question comes from the line of Michael Linenberg of Deutsche Bank. Michael Linenberg: I guess a question to Devon. Just given the age of your 777-200ER fleet, how much of the decision to make the nose to tail investment was a function of just lack of new wide-body availability? And what is the cash payback period of those investments? Devon May: Michael, you know what, this has actually been something we've been planning on doing for a while. This is an aircraft we think we can run well into the next decade. And obviously, it's time to go through a cabin refresh. We have a nice product on there right now, but the new flagship suite is going to be a fantastic addition to it. We think it pays back really nicely over the useful life of the airplane and sets us up well for our CapEx requirements in the next decade. Robert Isom: And I'll just add that there's a lot of capital that has to go in this business from the perspective of aircraft, certainly facilities. And we're going to get full use out of what we buy. I think that's something that's paid off for certainly one of our competitors over time. We're not looking to have the youngest fleet forever. We like what we have. We're looking to have a product that appeals to customers and one that is -- we're really smart about in how we get full use out of it over its lifetime. Michael Linenberg: Great. And then just a second question, given that we're day 23 in the shutdown, and I know you guys have a sizable presence at Reagan, we have seen the volumes really trend down, especially the last week at Reagan. What are you seeing there? And is it just really contained to the D.C. area on the government shutdown? Robert Isom: Well, first off, I just -- I'm going to start with -- I've been in constant contact with Secretary Duffy about the impact of the government shutdown and doing everything we can to mitigate. And from that respect, a huge shout out to TSA, CBP, our air traffic controllers. For the most part, they've been keeping the air system running and airports running fairly well. In terms of the business impact, government travel, it's important to us, but it's something that is certainly less than $1 million a day in terms of revenue. So the impact, while it's there, is something that I'm quite confident when the government reopens, there's going to be some pent-up demand. And hopefully, we get back on track pretty quick. In terms of Reagan, overall, we have had some difficulties in terms of operating delays and issues with air traffic control. I'm also confident that those are things that are temporary. And that as we progress through the year, that should also be a benefit to American as we go into 2026. Operator: At this time, we will be taking media questions. [Operator Instructions] Our first question comes from the line of Leslie Josephs of CNBC. Leslie Josephs: Just wondering with the push to premium, what is your end goal? Is it to catch up to Delta United margins? And what would you be satisfied with? And what inning would you say American is in, in that transformation? And is there any limit to the amount you're willing to spend to get there, thinking of everything from onboard amenities to eventually a new plane? Stephen Johnson: Thanks, Leslie. Good question. I would just frame it in the way we frame all questions about how we think about the business and how we invest. We're interested in providing a service for our customers and meeting demand. And we're very excited about the growth in premium demand, again, because it allows us to serve our customers better and allows us to earn higher yields. And we are going to invest and provide product and grow the number of the capacity of our premium cabins as our customers demand us to do. And we'll invest as much capital in that as is appropriate and will allow us to earn a return and will allow us to provide the service that our customers are demanding. As I said earlier, we spent a lot of time way back when in the ancient days of the airline industry, wondering if our customers would pay more for a better product. And the answer to that question is a resounding yes, and we're going to respond to that and respond to it for so long and to the extent that our customers demand it. Leslie Josephs: And where do you think American is in that process? And also, if I could add about the operation, do you have any idea of the cost of improving the operation and what steps you want to do to improve reliability? Robert Isom: So Leslie, thanks. Well, the great thing about the airline business, we run every day, and we're going to run this year and for the next 100 years. So there is no end of the game. And so in terms of where we're at right now, really excited about getting the hard product up to par and beyond, love what we're doing with our lounges, you'll just see continued attention and investment. And from -- I want to talk about the investment side of things. From the hard product side of things, the reconfigurations, the new aircraft deliveries, those are built into our capital plan. So that's nothing necessarily extreme. What we're doing from an operating expense perspective is we're taking a look at where we can take expenditures today in the case of our new coffee brand. We've always provided coffee. We have a much better brand now associated with it in Lavazza. And in terms of overall expenditures, while there may be some differential in brand, it's not considerable. And so when we take a look at other aspects of our operation, we're doing things in a more efficient way and yet at the same time, able to provide our customers with a much better experience. So I'm not looking for a number specifically. I look at our entire P&L, maybe save fuel and look at the entire expense category as something that is dedicated to improving and taking care of our customers. Stephen Johnson: And Leslie, I'd just add, over the course of the last year, we've added customer amenities and improvements and responses to our customers in advance at a dizzying pace. But it's just -- as Robert said, it's an infinite game. It's going to continue. I probably have 3 dozen new ideas for customer experience improvement just sitting on my desk that I'm going to look forward to hand off to my successor here in a week or so. But this is going to go on, and I think it is a part of the business that is going to address a lot of the questions that people had here today about how we're going to afford to pay the labor bill, how we're going to afford to pay for the increased cost of operating the airlines. I think it is through these ideas of just providing a better customer service, more opportunities for customers who enjoy better products, more premium, more amenities that customers look forward to enjoying on American Airlines and throughout the industry. Operator: Our next question comes from the line of Niraj Chokshi of New York Times. Please go ahead, Niraj. Niraj, please make sure your line is unmuted. And if you are on a speaker phone, use your handset. Niraj Chokshi: Sorry about that. I was just wondering if you could talk a little bit about how you're balancing sort of the focus on kind of core hubs with opportunities to grow in sort of the non-hub markets where there might be populations and demographics that you want to -- that might be beneficial. Robert Isom: Sure. First off, we were fortunate to have our hubs positioned in the fastest-growing metro areas. And our hubs, I think we represent 8 of the 10 largest metro regions, and that's something that we're going to benefit from going forward. And then I just take a look at what we've done recently. We made sure coming out of the pandemic that DFW and Charlotte were restored as fast as we could. And we've done a nice job of that. DFW has some new capacity coming on with new Terminal F and remodeled Terminals A and C. We're going to take full advantage of that. American will continue to be the largest carrier in DFW, and we think that we're only going to grow our presence there. Charlotte, we've taken a little bit of a break in terms of growth there. We definitely need to make sure that, that operates efficiently and runs well. But then as you take a look at opportunities for growth in 2026, the near term and even right now, it is going to be focused. This past year 2025 was on New York and Chicago. As we take a look into 2026, it will be those 2, but along with Phoenix and Miami and Philadelphia. And I'll note that while Miami operated one of its largest schedules, both Phoenix and Philadelphia are far from being to the size that they were. And the cool thing about that is we're not building $100 million gates to go fly there. That's an opportunity for us and you'll see substantial increases in terms of deployment. But of course, as we always talk, we operate with the guardrails of making sure that we're paying attention to the supply and demand environment, overall GDP and also at the other side, making sure that our market share and our presence is competitive with our primary competitors. Niraj Chokshi: Since you mentioned GDP, I'm just curious, do you feel like is that relationship as steady as it's always been? There's some talk about it's maybe not as closely tied? Or I'm just sort of curious what your thoughts are on that. Devon May: I'd say for some revenue streams, it's not as closely tied. And there's some parts of GDP growth that don't drive air travel. But in general, there's still a large component of our travel that's somewhat dependent on the economic environment and economic growth. So it's a component of how we think about revenue. We obviously do a lot of other things as we go through our forecast, but airline revenues aren't completely disconnected from economic growth. Operator: This concludes the Q&A portion of the call. I would now like to turn the conference back to Robert Isom for closing remarks. Sir? Robert Isom: Thanks, Latif. We appreciate everybody's interest in American, and we look forward to getting back to work and delivering on our commitments. Thanks. . Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Union Pacific's Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. At this time, it is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. Thank you, Mr. Vena. You may now begin your presentation. Vincenzo Vena: Thank you very much, Rob. Listen, thanks, everyone, for joining us. Beautiful 36-degree day here in morning in Omaha, Nebraska, absolutely perfect day to be railroading this type of [ data ] that I love, not too hot, not too cold. It's just [ a slam dogs ] so Eric and team should continue to deliver what they've delivered this past quarter, and we'll get into that in a minute. So here with me, we're going to review the third quarter 2025 numbers. Here with me is Jennifer, our Chief Financial Officer; Eric, our Operations Chief; Marketing Sales Chief, Kenny Rocker. As you'll hear from the team this morning, our third quarter results serve as a proof point that we are successfully executing on our strategy. We are focused on driving continued improvements in our pursuit of what's possible. Now let's dig into our results on Slide 4. Union Pacific reported 2025 third quarter earnings per share of $3.01, excluding $41 million of merger-related costs, our adjusted earnings per share of $3.08 increased 12% versus last year. Core pricing gains and continued operational efficiencies drove the strong financial results in the quarter. Freight revenue excluding fuel, grew for the sixth consecutive quarter and set a best-ever record. In addition, we set best-ever quarterly records in workforce productivity, fuel consumption, terminal dwell and train line. As a result, our third quarter adjusted operating ratio was 58.5%, a 180 basis point improvement versus last year. Importantly, our safety and service results also improved, demonstrating the team's commitment to our goal of running the safest and most reliable railroad in North America. Next, the team will walk through the third quarter in more detail, and then I'll come back and wrap it up before we go to Q&A. And with that, Jennifer Hamann, you are up. Jennifer Hamann: Thank you, Jim, and good morning, everyone. I'll begin with a walk down of our third quarter income statement on Slide 6, where our operating revenue of $6.2 billion increased 3% versus last year. Digging into the top line further, freight revenue totaled $5.9 billion, up 3%. Volume was down slightly in the quarter, driving a 25 basis points reduction in freight revenue. Fuel was also a modest headwind with surcharge revenue of $602 million, down $33 million as lower fuel prices impacted freight revenue 50 basis points. Strong core pricing, combined with a more favorable business mix to drive a 350 basis point improvement in freight revenue versus 2024. Importantly, our ability to yield pricing dollars net of inflation that are accretive to our operating ratio is directly supported by a consistent and reliable service product. Wrapping up the top line, other revenue declined 2% to $317 million. Lower revenue from the transfer of Metro operations was partially offset by a favorable comparison to a onetime contract settlement of $12 million in 2024. Switching to expenses, our appendix slides provide more detail, but I'll walk through the highlights as operating expense increased only 1% to $3.7 billion. Compensation and benefits decreased 1% as 4% lower workforce levels and record productivity more than offset the impact of wage inflation. Compensation per employee increased 2.5% versus last year, and we expect full year compensation per employee and up around 3%, which is consistent with the increase we've seen year-to-date. Fuel expense grew 1% driven by a 3% increase in gross ton-miles, partially offset by a 2% decrease in fuel prices from $2.60 to $2.56 per gallon and a 1% improvement in the consumption rate. In fact, our fuel consumption rate set a best ever record in the quarter as we yielded benefits from our fuel initiatives. Purchased services and materials expense increased 6% due to merger-related costs and equipment and other rents declined 11%, driven by favorable contract settlements of $13 million, improved cycle times and lower [ fleet ] costs were partially offset by higher state and local taxes. Reported operating income grew 6% to $2.5 billion. Below the line, other income grew 10% to $96 million on real estate gains. Our reported net income totaled $1.8 billion with earnings per share of $3.01. When you exclude the $41 million of merger costs in the quarter, our adjusted earnings per share totaled $3.08 and our adjusted operating ratio came in at 58.5%. Overall, really great quarterly financial results enabled by successfully executing on our strategic priorities. Turning to cash generation and the balance sheet on Slide 7. Third quarter cash from operations totaled $7.1 billion, up 6% or $381 million versus last year. As we discussed when we announced our merger with the Norfolk Southern, we have paused our share repurchase program. We are prioritizing the reduction of debt and paid down $1 billion in long-term notes during the third quarter. With that, our adjusted debt-to-EBITDA ratio finished the quarter lower at 2.6x. Our cash balance ended at just over $800 million after funding our capital program and paying the increased third quarter dividend, our 19th consecutive year of providing our shareholders with an annual dividend raise. As we close out 2025, we expect our cash balance to steadily grow with our strong cash generation. Looking now to the remainder of the year on Slide 8. With just over 2 months left in the year, we are proud of how we have executed on our strategy this year. We've handled volume growth while improving our service and efficiency. Notably, the third quarter continued this trend as we handled the highest absolute volumes of the year while setting several best ever operating records. Meanwhile, some of the key economic indicators like automotive sales and housing starts, are generally softer than when we established our Investor Day targets last September. Against that backdrop, we have achieved very solid results with reported year-to-date EPS growth of 8% and 80 basis points of operating ratio improvement. For the fourth quarter, volumes are currently running down 6% as international intermodal volumes reflect the tough comparison against last year's strong growth. This level of decline plus merger cost and pause share repurchases obviously creates a headwind to earnings and margin expansion compared to last year's record fourth quarter. The team understands the task and is working hard to drive more volume to the railroad in a safe, efficient manner. Despite the somewhat challenging close to the year, we still expect to achieve our 3-year EPS CAGR view of high single to low double-digit growth. We also are reaffirming our view on accretive pricing, industry-leading operating ratio and return on invested capital. It is an exciting time at Union Pacific as we execute on our strategy and deliver for our customers in a way that I have not seen us do in [indiscernible] Kenny Rocker: As Jim mentioned, set a best ever quarterly record. Eric and the operating team continue to deliver excellent service, enabling our commercial team to lead with confidence and deliver strong pricing results. Let's jump right in and talk about the key drivers for each of these business groups. Starting with our bulk segment. Revenue for the quarter was up 7% compared to last year on a 7% increase in volume. Strong core pricing gains were partially offset by lower fuel surcharges and business mix. Strength in coal was driven by strong customer demand due to favorable natural gas pricing and the continuation of Lower Colorado River Authority shipment, which started in April. Lower domestic grain demand was more than offset by strength in export lead shipment and business development in Mexico along with increased volumes from new grain products facilities. Lastly, increased [ potash ] shipments drove favorable year-over-year volumes in the fertilizer market. Turning to Industrial. Revenue was up [ 3% ] for the quarter on a 3% increase in volume and a 1% increase in average revenue per carload. Strong core pricing gains were partially offset by business mix and lower fuel surcharges. Demand and business wins increase petrochemicals, construction and metal shipments. However, these gains were partially offset by decreased volume in our energy and specialized markets. Premium revenue for the quarter declined 2% on a 5% decrease in volume and a 3% increase in average revenue per car, reflecting business mix and lower fuel surcharges. Overall, intermodal volumes were challenged by [ Lower of West Coast ] imports, resulted in a 17% decrease in international volumes. However, our domestic segment delivered record-breaking volumes this quarter, driven by exceptional service and business lines, reduced autoparts production and OEM quality hold contributed to lower automotive volume. Turning to Slide 11. We expect continued strength in some of our bulk and industrial segments, which is encouraging. However, we will be -- it will be outweighed by lower -- international volumes and tough comparisons. The commercial team's strong focus of first 9 months of the -- year-over-year challenges with soybean exports. Moving to Industrial. We're positioned to finish strong in our petrochemicals market. That's driven by the investments we've made in our Gulf Coast franchise and the strength of our service product, which continues to help us win with new customers. In fact, we recently won new petrochemical business that began earlier this month. It's a meaningful addition that reinforces our competitive position in the region. We also anticipate solid performance in the metals and minerals markets, where our team is laser focused on business development to outperform the market. On the other hand, our energy and specialized markets are expected to remain challenged, primarily driven by fewer petroleum shipments as we continue to balance volume at the right margin -- is expected to continue facing challenges driven by reduced auto parts production and OEM quality holds. As we look ahead, our strategy is clear and our confidence is grounded in our outstanding service performance whether it's powering growth in bulk, driving wins in industrial or unlocking new opportunities in premium, execution is what set Union Pacific apart. Together, we are building a stronger, faster and more competitive railroad, and we're just getting started. And with that, I'll turn it over to Eric. Eric Gehringer: Thank you, Kenny, and good morning. Starting on Slide 13, where our results do an excellent job, demonstrating the team's unwavering focus on our strategy to lead the industry in safety, service and operational excellence. Our vision is clear. And fundamentally, the railroad is operating exceptionally well, showcasing robust fluidity, consistency and reliability. Most importantly, we are achieving these results safely. Our safety-first mindset is delivering measurable progress as both personal injury and derailment rates continue to improve versus our 3-year rolling average. Rail is the safest land-based freight transportation method, and we will continue doing our part to make it even safer through ongoing investments in our network, employees, technology and communities. Freight car velocity, the best measure of fluidity on the railroad improved 8% to 226 miles per day, a third quarter record. Further, September marked our best ever. Let me repeat that, our best ever monthly performance at over 230 miles per day. Driving the performance was a record terminal dwell of just over 20 hours, increased train speed and the continued reduction of daily car touches across our network. These improvements are not only driving strong productivity gains within our operations, but also delivering significant efficiencies to our customers, reducing equipment cost and accelerating the delivery of their products to market. On the service front, both intermodal and manifest service performance improved year-over-year to 98% and 100%, respectively. These strong results reinforce our strategic approach and underscore the importance of maintaining a proactive buffer of resources. As Kenny and his team bring business to the railroad, we aren't waiting weeks to react. We have the locomotives, crews and freight cars prepositioned and ready to provide the high quality of service we sold to our customers. Now let's review our key efficiency metrics on Slide 14. As noted earlier, strong network fluidity is continuing to drive productivity across our railroad, and that's evidenced by the results on this slide. Locomotive productivity improved 4% versus last year, reflecting the continued benefits associated with our efforts to reduce locomotive dwell time. Last quarter, our team set a goal to reduce locomotive dwell below 15 hours. And this quarter, we delivered, achieving a record 14.9 hours. This underscores our dedication to maximizing asset efficiency. Workforce productivity -- which includes all employees, improved 6% and marked an all-time quarterly record. Our active train engine and yard workforce decreased 4% against flat volumes versus last year. We remain focused on effectively leveraging technology to optimize our workforce, while also recognizing the importance of balancing our resources as we plan for the future. Train length in the quarter grew 2% versus last year to just over 9,800 feet, an all-time quarterly record, a remarkable accomplishment when you consider the mix headwinds associated with softer international intermodal shipments which were down 17% year-over-year. We will continue adapting our transportation plan as we harness technology and infrastructure investments to safely generate mainline capacity for future growth. Wrapping up. Operationally, the team continues to raise the bar, delivering exceptional results quarter after quarter. It's the perpetual dissatisfaction that I've spoken about before. That's our mindset. It's imperative we continue driving efficiency while demonstrating consistent and reliable service. This enables Kenny and his team to be more competitive in the marketplace with a new long-term business. While we do have a historic opportunity ahead, the focus remains on today, further optimizing the best rail franchise in North America, I'm confident we'll continue improving in the pursuit of industry-leading safety, service and operational excellence. Jim? Vincenzo Vena: Eric, Jennifer, Kenny, thank you very much. Okay. I think you did a great job. But why don't we just turn to Slide 16, I'd just like to wrap it up before we get the questions. So first, as you heard from Jennifer, we are executing our strategy of driving strong financial results. In the third quarter, we handled the highest absolute volumes of the year while setting several best ever quarterly operating records. Kenny highlighted how the team is focused on outperforming our markets while pricing to the value we're providing our customers. Eric and team have the network operating extremely well as evidenced by our record operating results. Over the past several quarters, we've demonstrated agility with our buffer of resources. We will continue driving efficiencies while providing consistent and reliable service to win with our customers. To wrap it up, we are confident in our ability to lead the industry in safety, service and operational excellence. In the upcoming weeks, we will hold our special meeting and shareholder vote. We'll also be filing our merger application with the STB. At that time, we will provide more details on the opportunity with the Norfolk Southern to create America's first transcontinental railroad. Our results today demonstrate we are focused on the day-to-day business of optimizing the great Union Pacific franchise. And with that, we're ready to take your questions. Rob? Operator: Thank you, Mr. Vena. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Tom Wadewitz with UBS. Thomas Wadewitz: I wanted to see if you could offer some more thoughts on just how you see the merger application, the process of building support from shippers [ from unions ]. Just how that process is progressing? I think the deal you had with Smart, the agreement was a nice win for you. I don't know if you expect any more of those coming or if you expect kind of any gains on the shipper side? Or is it more like we're in a waiting period for the filing? And then I don't know, you said a couple of weeks for the filing, any more kind of just expectation of when that filing will come with STB. Vincenzo Vena: Well, Tom, listen, you're a smart guy. I think you covered just about everything to do with the merger and 1 question. We could be up here for 15 minutes. But let me -- let's just quickly summarize where we are. When we started at Union Pacific looking at whether what we do next and what the future looks like, we needed to make sure there were certain things fundamentally that where Union Pacific was as a railroad and how our business was. And we needed to have a service level that was high enough that customers could see what we could do and that they were assured that when we merged, we would be able to provide a real high level of service. And the entire team, and I give Eric as the leader and everybody from the operating department at Union Pacific, and it takes more than that. It takes fundamentally spending the right money, making the right decision. So it truly is a company we are delivering at the levels of service close to 100%, okay? You can never get to 100%. You're always going to have some problems, but close to 100%. So we have that as a foundation, Tom. On top of that, we wanted to make sure financially, we have a company that's in a good place. And you could see Jennifer say we paid back $1 billion of debt in the third quarter, so -- and we're down to a [ 2.6 multiple ], which is great, and we'll continue to use the cash or store it instead of buying back shares. So when you put the foundation of who we are and on safety, our -- we don't like to talk about it on a time and place number, but I'm going to give you a number. We're down into the -- like the [ 0.6 ] something between [ 0.6 and 0.7 ] this year, which is industry-leading at this point and the best safety numbers for people that come to work and go home. So we needed to have a safer railroad. Our accident numbers have dropped substantially. We need it to be financially in a good place, and then we needed to move ahead. And I think what you've seen from the people that truly understand railroading, they understand the value of what we're proposing. And the value is we look at it not only on what the STB tells us we have to do and what we have to present, okay, the rules that were set up 20-some years ago. But we feel, is it better for our customers. And absolutely, for the majority of our customers, it is going to improve with the speed and how many assets they're going to have to have and how fast we can move anytime anybody that crosses that today hands off. And remember, we hand off a huge percentage of our originations to somebody else to go do the final mile or vice versa. So it's good for our customers. And our customers understand that we are competing against the world, Tom. This is not just we compete against Canadian ports. There is going to be 5 or 6 or 7 trains that come across Canada that should be, and we think they should be handled by U.S. ports, but instead, they're handled the Canadian ports by Canadian railroaders across the country to drop into the U.S. And if we can become more efficient even than where we are today and more fluid and be able to have a different product, we can move some of that traffic. So we have more American jobs and more people working for Union Pacific, the combined company. So when I look at everything, what we've done is we've guaranteed jobs for every unionized employee on the day that we -- that the merger closes. And why would we do that? We are absolutely sure we can grow the business because of the watershed area of the United States that's underserved and a railroad that is seamless. Listen, I'll quote one of the other CEOs when they went through their merger. And I'll give you the quote off the top of my head, but I could easily pull it up on my phone because it's one of my favorite ones to read whenever I see somebody write from another railroad how it's not real good for us and they're worried. It was -- even though [ UP ] has a great franchise coming out of Chicago, and it's a great way to get the Mexico, nobody can beat and compete, and they're going to have to compete hard to win with our single line where we don't have to hand off to somebody else. So Tom, when you frame that, the SMART-TD agreement, it would just formalized what we had in place that we had already guaranteed. And we're in discussion with other unions to formalize it and I'm more than willing to formalize it. So it's not just my word and it's not just my -- what we've been saying, we're willing to put it on paper and say what we're going to do with our unionized employees. And we'll work through that. And in fact, Tom, we took this round of negotiations that we wanted to negotiate directly with our unions because our employees are really important to us, and we wanted to make sure that we were doing the right thing, so it's a win-win for our employees and ourselves. And I can tell you, right now, we have an agreement, either in principle, not yet out for ratification or sorry, they're going to go up for ratification with every union. So basically, we have finished this round of negotiations, and we have -- because the unions understand how beneficial overall this deal is and how it's going to help us move ahead. So we're real happy with where we are. So Tom, listen, unless I missed something and you wanted me to cut in -- you talked about the timing. So what I can tell you about the timing is it sure will not take us into January to get this done, okay? We're into getting the deal done as soon as possible. If you ask Jim Vena, I want it in, okay, before the 1st of December, the application. If you talk to some people on the team, they're saying, Jim Vena, would you give us a little bit of time? And the answer is no. So I'm hoping that we can do everything we can to have it in by the end of November or the latest in early December so that we can have the application in and get that process moving. So Tom, hopefully, I answered everything there. Sorry for the long answer. Thomas Wadewitz: No, on the shipper side, anything new there? Or is that -- that's the only thing you didn't hit. And thanks for all the perspective. Vincenzo Vena: Yes. Listen, Kenny, why don't you say where we are with the customers and how many letters of support we have already? Kenny Rocker: Yes. I just want to reaffirm something you said, Jim, about 40% of our business either comes into or moved out of Union Pacific that we're competing globally. But absolutely, I mean, we have over 1,200 stakeholders. Those are ports, government officials, they're short lines. But if you just look at the customers, we've got over 400 customers that have sent in a letter of support and there's still a pipeline behind that. And they run the gamut, they represent all the industries that we serve. Vincenzo Vena: Okay. Tom, thank you very much. Operator: The next question is from the line of Ken Hoexter with Bank of America. Ken Hoexter: So Jen, you talked a little bit about sequential OR or I guess, fourth quarter, you threw out some initial thoughts there. Can you talk to the puts and takes? You mentioned the favorable equipment settlements, the lower mix impact, your revenue thoughts. So maybe just talk about all the puts and takes that we should expect in the fourth quarter. If we're starting with volumes down mid-single digits, ultimately, should we see earnings flat, down, up year-over-year in the fourth quarter? Jennifer Hamann: So thanks for the question. And I know this won't surprise you, Ken, but I'm not going to give you specific guidance about the quarter, but I can give you context around it. And you hit many of the high points. So when you think about the top line, right now, volumes are down 6%. And that's -- it's really mostly that international intermodal piece that we've been talking about and quite frankly, expecting all year when we knew against the tough comp that we had against last year. Now with that, though, we do expect to have -- mix was a little bit positive in the third quarter, although we did have very strong intermodal in July, and so that probably was a little bit of a mix headwind versus what we would have been expecting coming into the year. But I would say fourth quarter, we're certainly seeing a better mix rotation with the international Intermodal coming down. But we do still have coal, which is below the system average arc that is going to be very strong in the quarter. We like all our business, you know that, Ken, and we're diligent in making it all profitable, but there's some that contribute more to that top line than others when you're looking at the arc. And then below the line, talk about expenses. We'll continue to have merger costs, probably not quite to the level that we had in the third quarter, but that will be there. But Eric and team, as you've heard, are running very well. And so we feel very good about the ability to be productive, although productivity, as you know, also is challenged when you have volumes coming down. And so the team accepts that challenge knows that they have that there, but that will create a little bit of a headwind. And so that's why when we look at it, would we like to have volumes up and blue skies and 37 degrees, as Jim said, great railroading weather throughout the quarter, you bet. But we will have some challenges, and that's going to make it tough when you think about stacking that up against what was a record quarter for us in the fourth quarter. But when you peel all that back and look at how we're running fundamentally, the railroad is running extremely sound fundamentally, and that will absolutely continue in the fourth quarter. Ken Hoexter: And then specific to the [ rent ] question? Jennifer Hamann: So we just had a couple of small -- I said I called it out $13 million some contract settlements. Those were unique to the third quarter. Operator: Our next question is from the line of Brandon Oglenski with Barclays. Brandon Oglenski: Since you guys announced your merger agreement, it seems like your competitors are maybe collaborating a lot more than they have in the past. Do you view this as potentially a risk, especially as you're going through a pretty complicated process with the STB here? Vincenzo Vena: No. In fact, that proves our point about competition. If you take a look at it, I'm surprised they weren't doing it before, if that was out there. So what happens is when you have a competitor that you know is going to be stronger and is going to give a better service product and probably at a better price, okay, because of less touch points that we have when you remove the touch points that everybody else needs to compete. But truly, I'm surprised that it took us announcing, okay, a merger for other people to say that they were going to do special moves and cooperate. So I think it bolsters our position in front of the STB. Remember what the STB needs to take a look at it. You talk about enhanced competition and this merger provides enhanced competition and you just see it the way the railroads are reacting. Nobody would react in business if it was bad for the railroad that was merging and good for themselves. Listen, we're competitive. If anybody thinks that another railroad would come out and be, all no, UP better not merge if it was actually worse and better for them let's get -- let's put that on the table. So there's only 1 reason that the railroads are complaining a couple of them is because they see the competition and they need to step up. When we do that, it's helpful. So I'm looking forward to this as we go through and work through on the merger. We're covering every point on the merger, and we're very comfortable that the STB is going to see how good it is for America and how it changes the paradigm of railroad versus truck. Brandon Oglenski: Thank you, Jim. Operator: Our next question is from the line of Jonathan Chappell with Evercore ISI. Jonathan Chappell: Thank you. Good morning, everyone. Eric, Jennifer just noted in one of her prior answers, productivity is challenged and the volumes are coming down. In your prepared remarks, you said you had the locomotives and the labor position for new business wins. We look at Kenny's outlook slide and there's actually more minus signs than positive signs for 4Q. So when we think about your ability to be nimble, your productivity or efficiency, as you're going through kind of a choppy macro backdrop but with all eyes on the UP and your service during this merger review process, can you be as nimble and reap as much productivity if volumes continue to be weaker than expected? Or do you need to have a little bit more slack in the system at the present time? Eric Gehringer: Yes. Thanks, Jonathan, for that question. So you're right in your characterization of what Jennifer mentioned. When we are faced for temporary volume being down, we know that playbook, and it's important that all of you understand that. And you start with what you won't do. And what we won't do is sacrifice anything related to our buffers, whether that's locomotives, crews or railcars. So could we be a little bit more conscious about that? Honestly, I don't think we are because we do that every single day. We focus on making sure all 3 buffers are intact and prepositioned across the railroad. Now what do we do? Of course, we'll react to the markets. We'll act promptly. You first start with your transportation plan, making adjustments that typically drive productivity in the areas of train starts and crew starts. Then from there, you do as what you said, which is go to your locomotive fleet, make sure you've rightsized your locomotive fleet for the volume and the mix that you have on the railroad. You adjust your car fleet. You've seen us do that many times. Heck, we do that 4 or 5x every single year just due to the seasonality of intermodal business. Then you go to your hiring and you look carefully. We go through that process every single month. I'm personally involved in that process. But if we were to see volume being weaker in certain markets, certain geographic areas for a prolonged period, we would make adjustments to hiring. So I could keep going through the rest of the playbook. I don't even have it in front of me. I know it so well, and so does the team. So we will make adjustments to ensure that we continue to provide the great service we're providing, but also at the lowest cost so we keep Kenny and the team competitive in the market as they go and win volume. Jonathan Chappell: Thanks, Eric. Eric Gehringer: Thank you, Jonathan. Operator: Our next question is from the line of Scott Group with Wolfe Research. Scott Group: So maybe just, Jim, like to ask it more directly, like [indiscernible] rail that seems like publicly opposed to the merger. Like in the past, maybe that has mattered, like do you think that rail opposition matters today, given all the other sort of puts and takes as it relates to this merger? And then maybe just separately, if I can, Jennifer. The yields ex fuel were up 3.5%. I know there's maybe a little bit of mix here. But it feels like we're like now more clearly in a positive price cost backdrop? Like does that continue? Any reason to think that, that isn't sustainable looking ahead? Vincenzo Vena: Okay. I might as well start and then Jennifer, you can jump in. Appreciate the double question there, Scott. It was pretty slick. That's what I like about you. So let's talk about the other railroad, and you specifically talked about BN. [ Unless ] BN is a great company as a great franchise, has a long history, and we compete with them every day, and we compete hard. And if I was in their shoes, if I was the leader of both in Northern Santa Fe or I guess, just like Union Pacific Railroads, a subsidiary of Union Pacific Corp., they're a subsidiary of behemoth called Berkshire with $350 billion. So they can do whatever they want, whether they want to buy something or not buy something. And maybe if I was there, I would phone up the big boss and say, we need to do this because it's better for the country and better for us. But that's -- but if I take a look at it like I started, Scott, is -- they have to react to what we've done. We're the first mover to truly deliver. And they can -- I would see the benefit if I was outside of this merger, and how do I gain the most for myself. And that's what [indiscernible] Northern or Berkshire is doing is, is at this point, they don't want to do anything. So they're looking at it as a way, and that's what the other railroads are doing is looking at a way that they can benefit. The problem that they have is this time, it truly is an end-to-end bolt-on. It is not a big overlap. So that story of I need access to the railroad just doesn't fit. On top of that, Scott, as an industry, too long, we wanted to open up a coffee shop inside of Starbucks because we're afraid to spend our own money to build in. So you think about that. I want a new coffee shop in New York City. And I'm going to walk over to the Starbucks and say, [indiscernible] you've got a real nice store, would you let me open up my own counter in your store? No, open your own counter because if you have enough money, open it across the street, if you want, but you pay your expenses. So the way we look at it is when the railroads come up and save very sort of misleading positions, it helps us. The STB and the members that are there now are very smart. They know we're not going to remove 300 lanes of traffic, okay? They know that we're going to have more options for our customers, not less. So at the end of the day, they're fighting a good fight trying to make the noise, but the STB in our case is so strong that I'm very comfortable that unless they change their strategy, then they actually help us because it doesn't make sense when things are out there that don't add up the fact. Finally, as we are more than willing to sit down and have arrangements and have discussions because we have a very small amount of customers that are going to go from 2 to 1. In fact, it's less than 10 customer locations, not even just customers. So what we've agreed to is we are going to provide access to those locations to another railroad to give them the optionality that they had before so that nobody in this merger loses anything. So we'll talk to all the railroads and see who wants to sit down and have a discussion about it. Finally, Scott, I mean I know I'm being along with it this morning, but it's sort of fun. Isn't this a fun thing to be doing, talking about a great quarter that nobody really is paying attention to, okay, world-class quarter, with a world-class team that delivered, but nobody is going to ask us too much about that. And then the merger that we're going to change the industry and move it forward the way we should. So bottom line is I'm very comfortable where we are, and I think that we end up with a -- at the right place with the STB because they're smart and they're going to work through the issues that are on the table. And also just a final point, Scott, we haven't even put in our merger, okay, application that talks about all the things we're going to do and people are already talking about what we're going to do, truly amazing. They must be mine readers. They must be looking at our brains here and saying that wonder what Eric is going to do and Kenny and Jennifer and Jim and the entire team, okay? So we'll wait until we put the merger application in at the end of November. And then at that point, we'll sit down and talk to anybody who wants to sit down and talk to us. Sorry for the long answer, Scott. The second part, Jennifer? Jennifer Hamann: I've forgot it. No. I'm kidding. Vincenzo Vena: I [ won't ] speak as many words. I promise you all. Jennifer Hamann: I'm sorry. You asked about price going forward, Scott. So -- and then you referenced the 3.5%, the price/mix yield that we had on our freight revenue in the quarter. So we did get some positive benefit in the third quarter from the mix. And as we look forward, we do think, obviously, it will depend on how the business comes through. But as we're sitting here today with intermodal going down, we definitely think mix should be a positive in the fourth quarter, tempered maybe a little bit on the coal side. In terms of price, the pricing environment has remained, I'd say, challenging, but Kenny have done a really good job supported by the service to go out there and talk with our customers about the value that we're providing them through faster cycle times, more reliable service, and they're doing a good job yielding some very positive price. We're not getting any support from the intermodal side of the world. That truck competitive market is still very, very challenging. And I would say, as we move into the fourth quarter and into the first part of next year, you're going to start to see some tougher comparisons for us on the coal side of the world as well, when you think about some of the flexibility we have in those contracts with natural gas. But you put kind of some of those, what I'll call, [ manufactors ] aside and you just look at what the team is doing and the combination of driving value to the customers and being very value motivated, profit driven in terms of what we can do for the company and for our customers to grow the business and get solid price, we feel good about that. Vincenzo Vena: Thank you very much, Scott. Sorry for the long answer, but I thought we'd cover off a few points there. Scott Group: No, that was great. Operator: Our next question is from the line of Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Maybe a quick 1 for Kenny, and then a follow-up for Jim. So Kenny, just looking at the intermodal, it looks like there's some share shift between yourself and other Western competitor, if we look at just an originated basis. I know there's a lot of moving parts with international and domestic, but wanted to see if we're reading that directly. And then, Jim, you mentioned that the customers are lining up, there's a good amount of support, but 1 that's been pretty vocal, obviously, [ maybe this is ] the Starbucks example you're referring to. But the chemical shippers in the Gulf Coast, they've been a lot more vocal winning enhanced competition. Is that something -- I'm sure we'll hear about in the application, but is that something you can deal with directly? Or do you take that to the STB and have them weigh on it? And just how should we think about how that progresses since it's a pretty big and important in vocal group. Vincenzo Vena: So Kenny, do you want to talk about the... Kenny Rocker: Yes, I'll start off. Thanks for the question. We've seen a little bit of a market degradation for sure. Those are tough comp comparisons. We did see quite a bit that's pulled ahead earlier in the year. And at the same time, with all the investments that we've made in our intermodal market, the new markets for international and Arizona and Twin Cities and some other areas in the service product that we have, we're going to make sure if we move the volume that it's going to move at the margins that reflect both the service, the investments in the infrastructure that we've made and the overall products. And so that's what you're seeing. You're seeing both of those right now. Vincenzo Vena: Okay. So on the associations, the chemical association that you mentioned, last time I looked, they don't pay any of our bills. They don't have a direct relationship with us, and we are dealing with our customers, and that for me is really important. Do we have to understand what the associations are saying and what they're doing in Washington, D.C. and what their story is. But again, it's truly amazing that they know already that gives you an idea of where they're coming from, what we're putting into the merger document and what we're doing with access to CSX, access to Burlington Northern or Berkshire on the way westbound and access to the other railroads whether it's the short lines that we operate [ with ] and handle, whether it's Canadian National or Canadian Pacific. So at the end of the day, we'll deal with them, and we're more than willing to sit down with the associations and explain the benefit. And the benefit is 15% to 20% on their merchandise traffic, okay, moving. History will show them that the railroads have not increased price, and this is in general for all of the railroads at the same level as the liability issue has crept up and what that would cost us and also how -- what we're pricing for the product that they're selling. So that's why we like to talk to the big shippers that we have. And when we talk to the big shippers, they understand it. But you know what, it's a little bit and especially for the associations is there's a trough out there, and they're trying to see what they can get with it. We've spent a lot of time with the -- and when we explain what we're doing with the political and regulatory people, they start to see -- so you're talking -- Jim and Kenny and Eric and Jennifer, so you're saying you're going to be faster, really so they need less cars. They need less expense, less inventory expense. Hold it, you're going to be able to move across the country, 15% to 20% quicker. You mean you're going to remove 1,000 trucks of rail-to-rail or our portion of it in Chicago and other places that today runs on the highway instead of going rail to rail. So we have less trucks on the road. Oh, you're looking at forward on how we're going to do, okay, to compete against trucks, where technology is changing quick if anybody wants to go take a look at what trucks are doing now to become more autonomous as they move ahead. Let's go to Texas, let's go to places where they're being used right now. If we don't move ahead, the associations okay, we'll find themselves in a place where they'll be asking us railroads to do what we're doing without their push. So that's where I'm at with it. It's complicated, but I don't know Brian, real interesting, but you would come out so strong when you haven't even read what the merger document is, okay, is the merger application is makes you wonder where the heck are coming from. They just must be negative all the time. I guess what they probably are looking at our third quarter and find some dirt on the third quarter where we've really delivered strong as a company. Kenny, anything you wanted to add? Kenny Rocker: Yes. I just want to say, our first approach is to talk directly with customers, not necessarily through the association. At the same time, we have -- we've already done and we already have meetings on the books to talk to those customers through those associations. But again, the main approach is sitting down with our customers, large and small and talking to them. We're covering it from all angles. Brian Ossenbeck: Jim, the 15% to 20% increase, just to clarify, that's a speed or a throughput? What does that number referred to? Vincenzo Vena: Yes. So what I'm talking about, Brian, is that what people miss [ that don't railroad ], okay? And I'm trying not to be [ flippant ] this morning because I woke up just flippant. I looked at our numbers and I was trying to find some dirt on Eric to make sure I pushed him and the team real hard. So that's the attitude I woke up with this morning after about 4 hours of sleep last night like I was ready to go. So let me not be flippant. Bottom line is if you understand railroading, if you can remove touch points of touch points through a yard, our average and we're the best in the industry is 19.9 hours this month, okay? So you're going to add 19.9 hours if you're going to move railcars and have to touch them. We touch them now before we hand them off. On top of that, Brian, we don't build blocks for other railroads because history has always said that railroads always look internal as soon as they get into the slightest bit of trouble. So you cannot rely on railroads to do what's better when they've agreed to build blocks for you. So when you add that up and we've looked at the railcars, that's where that number comes from 15% to 20% quicker because when we build the block coming out of Houston for the chemicals, we'll build the block that goes all the way to Philadelphia or build a block that goes all the way to the Northeast. If the new Union Pacific is building a block with lumber coming westbound, okay, we're going to build the block that goes all the way through and remove touch points. We work on touch points every day. So that's what I'm talking about, the 15%, 20% on the merchandise business, let alone what everybody looks at and likes to talk about the intermodal business, which is really important to us that we remove touch points and have speed. So sorry for the long answer, but I'm putting the points out there this morning, Brian, okay? We might not get through everybody. I think there's only room for another handful of people. That's about it. Brian Ossenbeck: We appreciate those details, Jim. Thank you. Vincenzo Vena: You're welcome. Operator: [Operator Instructions] The next question will be coming from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: Thank you. Good morning. When you look at your service metrics, as you noted, they're about the best they've ever been or 100% or so. Can you talk about your level of confidence and the steps you can take to implement your service best practices to [ NSE ] post-merger? And Jim, just the time line do you think realistically for some of these world-class levels to convert over? Vincenzo Vena: Eric, why don't you take this? But real simple is I think we have a history of doing this. I've been real [indiscernible] for a long time. You [ have me in a way you go ], you answer it. Eric Gehringer: Absolutely. And thank you for that question. So you're absolutely right. Definitely world-class level is definitely best in the industry. Now being able to take that over and partner with the NS inside the merger, that's what we do every day. It's just a bigger scale, right? We look every single day. It doesn't matter if I'm looking at a terminal or a service shoot at an interchange point. Every single day, we're looking for what are the issues or the opportunities dissecting the performance and individual terminal, how do we get 2 hours off of dwell, how do we get the trains out 5% faster. It's going to be the same thing just at a broader scale. And look, I've been working with the NS for nearly 15 years. I've had a relationship with them in lots of different roles. They're good railroaders. Their knowledge of their network and our knowledge of our network combined aligned with the goal of being able to move cars faster in the most efficient way to be most competitive in the market. That's the job. We all know it. We're all going to do it. Vincenzo Vena: Stephanie, I grew up working for CN did 40 years there. And when I came over to Union Pacific, I didn't know that there was 2 [ Green Rivers, ] okay? There's a Green River on our East West Main and there's a Green River in Utah. So at the bottom line is the way I look at it is, I think you can see from example of real life examples. We don't make up stories Union Pacific. We want you to judge us on what we've delivered. And you can see since I joined in 2019, what we've been able to do with this operation, and we will optimize. They're great railroaders, they're great people, the people I've met at that Norfolk Southern. But I've always said that every railroad should be able to have their operating ratio within 100 basis points of each other. So I'm looking forward to getting the magic that's at Union Pacific and doing the same magic with all those employees and with them at Norfolk Southern. Operator: Our next question is from the line of Jason Seidl with TD Cowen. Jason Seidl: I totally get the perpetual dissatisfaction comment, but hopefully, you guys can take a day to enjoy some very, very solid results for the quarter. My question is going to be on yields, but Jennifer is going to actually be happy that I'm not looking for guidance here. How should we think about your ability to sort of directionally change domestic intermodal yields if sort of the market starts to inflect on the truckload side, sort of given all the governmental actions taken against foreign drivers right now? And also, when we look into [ ag ], can you help us sort of frame up how to think about near-term ag RPU. And so how does export RPU compare historically versus sort of domestic ag RPU? Jennifer Hamann: Let me start off here, Jason. When you talk about the intermodal side of the world, as you know, when we expanded our portfolio of domestic partners, we did some market-based pricing there. And so when we see that truck market improve, that will have a direct impact on us. And we've also been very successful in converting business even in a very weak truck environment, and doing that in a way that has been contributing positively to our bottom line and feel great about those partnerships and our ability to grow that business. It really is service based, it's market-based with our great reach and as you know, that's an exciting part for us when we look at the Norfolk Southern merger and their vast intermodal network. When you look at the ag side of things and you ask about export, it really comes down to length of haul. And with some of that business, particularly when it goes to the PNW, that's a good length of haul. We're seeing more export today go to Mexico, and that's a good length of haul. I would say the only caveat to any of that is, particularly when the business is going into Mexico versus the PNW, that does slow the cycle times down somewhat when you think about the turns on those cars and bringing them back. Kenny, anything you want to add? Kenny Rocker: Yes, just the fact that we have structurally changed the network and the intermodal. If you look at the ramps and the products, Inland Empire, that's out there now. I talked about Phoenix but then also there's other services. I mean, we've added new services. You look at moving out of L.A. in the Kansas City, you look at the West Coast going in the Louisville. So we've transformed that. You already talked about the portfolio, Jennifer. The only thing I'll say about the grain business is the team has done a heck of a job growing infrastructure inside Mexico through business development, giving us an outlet when there is nothing there, on the soybean market. So we've been flexible and adaptable. Jason Seidl: Okay, if I could follow up there. Just how do you think about the timing? Like if the market inflected on the truckload side, is it going to be a couple of months lag? Is it going to be a couple of quarter lag with your ability to adjust price on the domestic side? Kenny Rocker: I can't get into the actual contracts. But what... Vincenzo Vena: [indiscernible] Kenny Rocker: It is. But what else is what we're really looking at is what's happening with truck production. So truck production is down about 28%. We're waiting for that to turn. And we remember this since we've added these new portfolio of customers, we've been on a flat market. So I've said this now for [ 3 years ]. We haven't seen any uplift. And when we do, we're going to take advantage of it. The [ last thing, ] Jim, we've had a record intermodal revenue on the domestic side. [indiscernible] Vincenzo Vena: I got it. Listen, I've asked them the same question, okay? So it's sometimes hard to get that out of them. But what I do like and [indiscernible] surprise you can't come back is, listen, our revenue is up 3% and all this sort of stuff. But okay, Kenny. [ You didn't get a better ] answer than I can, Jason. Jason Seidl: I appreciate it anyway. Take care, guys. Operator: The next question is from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: Maybe sticking with Ken, I guess I was curious about sort of the pricing environment as we move into next year. So I guess, do you think as you go through contracting at the end of the year, that pricing is kind of [indiscernible] is better in '26 than '25? Is it kind of the same? I know the backdrop from intermodal really kind [indiscernible] trucking environment hasn't done much here just yet. And then just kind of curious or generally speaking, the response from customers, I don't know if it's sort of the conversation tones have changed at all in the last couple of months? Or are they still relatively constructive and as you think about next year? So just any thoughts around pricing would be great. Kenny Rocker: Yes. So without talking about 2026, it really does start with a strong service product. We lead with the metrics both to and from industry and over the road industry as we're working through those contract renewals. And we're very [ clear about the ] pricing levels that reflect the service that we're delivering and we sold to customers. And I said this in my remarks, we are confident because the service product is so strong. Now the question about what we're hearing from customers as they look forward. They're still looking for a little bit more clarity on the market. When we talk to our customers and when we look at our business, we're looking at the current metrics that are out there are, the indicators and we're judging ourselves on how we perform against those. So regardless of what they're seeing, we look at are we outperforming in those key markets. Christian Wetherbee: Just in the context of the service product that you're putting out there, I guess it's a little unclear. Does that drive better pricing sort of conversations as you go into next year? I guess, it may be -- is kind of what you've been doing. Vincenzo Vena: [indiscernible] this is the way and we've had this discussion pretty black and white. The entire time I've been a railroader, every marketing and sales group will always tell you that the reason they can't [indiscernible] and price properly and win new business is because the service product is not high enough. Well, our [indiscernible] service product is so high that, that should not even be part of the discussion. There might be 1 or 2 customers out of the whole thing that could say, listen, you're not perfect. But at the end of the day, it's high. So that's their challenge. That's why we have a marketing and sales department as they go out there and go get business. It brings you business online because we have a great service product and price it at the value that we're giving the customer. So go ahead, Kenny, any disagreement with me on that point? Kenny Rocker: Not at all. And all I want to say is absolutely the service product helps us. So we appreciate that, and we're pricing based on that service product that we're delivering. Vincenzo Vena: Chris, how do you like to work with -- for me? Christian Wetherbee: Good characterization of the service product. Appreciate it, guys. Operator: The next question is from the line of David Vernon with Bernstein. David Vernon: So Kenny, a couple of months ago, UP and Norfolk put out some marketing material around enhanced collaboration in the network. I was wondering if you could maybe just talk a little bit about how those changes are being made and how that level of integration is -- would compare to maybe a post-merger world. And then if you have any comments on kind of what you're thinking about doing with the UMAX program longer term, we'd love to hear kind of some more perspective from you on that. Kenny Rocker: Yes. So let me just first off and say we have alliances that we're working with, with all the rail players. I mean, we have the Falcon out there with Canadian National that's working well. We have the same lanes, same markets that with the CSX that we do with Norfolk and [indiscernible] . So I want to make sure that's clear, and we aren't doing anything prior to the actual merger that takes place. Having said that, at the same time, yes, we are able to look at new markets out there. We talked about -- or I talked about just recently, the market into Louisville. Again, that's all aimed at over-the-road traffic that we're trying to win. We have the same approach with all the rails. The second thing is, and I want to be crystal clear on this. Absolutely, we want to make sure our customers have optionality. We're going to completely support UMAX. That product is a strong, viable product that our customers are utilizing the day, that's not going away, and we see it as a viable option in the marketplace. Vincenzo Vena: Thank you very much. Thanks for the question. Operator: The next question is from the line of Walter Spracklin with RBC Capital Markets. Walter Spracklin: Thanks for the detail today. I just want to double-click a little bit on next year. And I know, Jennifer, you don't have guidance out there, but you do have that S4 document that we normally wouldn't have this time of year and the numbers are out there. They are below -- you reiterated your high single-digit, low double-digit multiyear guide today. Those numbers are notably below range. I guess my question here is whether you can give us some context on how we characterize what you put in that document, what's changed or what's different from the assumptions that underpin them again because you did reiterate the guide and those numbers are below Street. So I'd love to hear any color you can provide there. Jennifer Hamann: So thank you, Walter, for that. One of the things that is, I think, stated very explicitly in the [ S4 ] is that those numbers are not guidance. Those are our guidelines and those are particularly when you look at the out years, they are what I would call unstressed financials. I mean, we're looking at market indicators. We're looking at kind of run rates, those types of things. It is by no means what I would call a detailed look talking with Kenny's team about where are you getting new customer wins, where are you getting greater penetration. It's not doing a deep dive with Eric's team to say, with that business overlaid, how can you drive greater productivity. And I could take you on through the [ West ]. So it's directional, certainly, but it's also something that didn't include merger costs when you think about particularly some of the 2025 numbers, considered that we were still doing share repurchases. So it's directional. But beyond that, I would not try to extrapolate from that S4 numbers. Operator: The next question comes from the line of [ Richa Harnain ] with Deutsche Bank. Richa Harnain: So Jim, you said that no one is really talking about this world-class quarter. I guess after that, a couple of people did, but maybe we can tie a bow on it. This past quarter results were pretty remarkable. You managed 12% EPS growth with virtually no volume help. Labor productivity continues to be a strong driver. I think you had like another 3.5% drop in headcount. [ You're coming out ahead on ] comp per employee. I think [indiscernible], you said 3% for the year. And last quarter, you guided at 3.5%. Eric, you talked about the overall records and various measures of productivity. But I think is this really the pricing lever starting to kick in Jennifer that you've talked about in earnest in the past around repricing contracts like [indiscernible] the work you're doing to reflect the good service you guys are introducing. And if yes, what inning are we in there? And then just like why shouldn't the high end of your long-term high single-digit to low double-digit EPS target be more appropriate, especially into 2026. Again, that 12% on 0% volume growth really stands out. Jennifer Hamann: Thanks. You did a great job summarizing our quarter and some of our very strong results. When we laid out our targets back in September of last year, we put some baseline macroeconomic numbers that underpin that. And we said that if we reach those numbers from a macro standpoint, we expect it to be kind of at the low end. So at the high single kind of range and that it would take a better macro environment to be at the double-digit side. Unfortunately, a lot of those macro indicators, I called out the housing starts and the auto sales on the call have actually gotten a little bit worse. The good thing about UP and our great franchise is and the way that we are running today and the way that we're executing on the fundamentals is we're being very agile. We're taking advantage of every opportunity that comes our way, and we're pushing ourselves daily. And whether it's improving on the safety front, whether it's driving greater service, working with our customers to drive more value to them and then pricing for that value. What you're seeing is us executing on all of those fronts and the end result is great financial results. And so that's our mindset. That's what we're going to keep doing. But there is a macro backdrop that underpins that, that we're fighting against a little bit right now, which is Kenny say it's kind of 3 -- year 3 -- to our improvement. And we're going to keep pushing. But we also have to do that within the context of where the economy is at and how we're performing against that. Vincenzo Vena: Thank you very much for the question. Appreciate it. Operator: The next question is from the line of Bascome Majors with Susquehanna. Bascome Majors: One for Jennifer here. You've got a little over $2 billion of debt maturities between now and the first half of '27, call it, $10 billion to $15 billion in debt to raise to fund the deal when it hopefully is approved and closes. And you don't have a potential on financing. So you're on the hook to go through to that no matter how the capital markets play out between now and then. And so how do you think about sort of hedging your bets on managing the balance sheet for that capital need between now and in 2027. If you could just kind of walk us through debt pay down and do it all at once versus kind of opportunistically chip away at that over time, I think that would be helpful. Jennifer Hamann: So Bascome, thanks for that question. So there's a number of things that we're looking at and planning towards over the next year as we progress through the application period and move towards having the merger approved. You mentioned paying down debt. We're certainly going to do that as debt comes due, that is our intent. We'll do that with the available cash that we're generating. We'll also be looking at because, to your point, when the day comes, we're going to need to come up with that cash. So what are the different levers that we can pull to protect ourselves on the interest rate side, what can we do in terms of facilities to be ready to be able to access the cash because when you look at the calendar and you consider different blackout windows, et cetera, we were not going to be able to control exactly when that timing is. So we're planning for that. We're making sure that we have the cash available to us to close that, working closely with our bank groups and feel very good about the plans that we have underway there. But then also structuring it to I think the last part of your question in a way that will allow us to quickly pay down some of that debt so that we can get back into a position when we're in the market and repurchasing shares. And we believe that we'll be able to do that sometime in year 2, which, for us, looking at it based on when we believe the transaction will be approved will be in 2028. So that's how we're looking at it. That's our plan, and we feel very comfortable about our ability to execute that. Vincenzo Vena: Thanks for the question, Bascome. Operator: The next question is from the line of Ari Rosa with Citigroup. Ariel Rosa: Team, congrats on the strong network performance, really, really impressive to see UP running so well. So Jennifer, you were talking about some of the weakness in some of these macro indicators, housing starts and other things. I'm just curious to hear your perspective on kind of the overall economy, where you see risks? And specifically, I wanted to hear, is there any kind of level of deterioration in the macro that would cause you to either reassess your synergy targets for the NS or even, I mean, in kind of an extreme scenarios or any level of deterioration where you would think about walking away from the deal? Vincenzo Vena: [ One of the few of us get into that gave real ] quick. You always have markets that are going to be up and down. We look at what the consumer overall is doing. And so far, the consumer is staying in a pretty good place. So we're very comfortable. Now there's some specific markets underneath. [ Automobile and parts have ] gone up and down, whether that's been positive or not, there's going to be changes with what's happening as far as where the production is going to happen, that's going to change. So at the end of the day, we're very comfortable and we don't see anything that changes our idea of what's possible at Norfolk Southern. We think the merged company -- I know -- I think, personally, on the operating side, there's a lot of value that we can drive, okay, productivity and value for the combined company just because of its combined network. But why don't I let Jennifer and Kenny jump in and talk about the overall market and where you see the economy? Jennifer Hamann: Yes. I mean, we're still working through our plan for 2026. But just to build on Jim's point, I mean this [ $85 billion ] investment we're looking to make is for the long term. That's for our generation and the generations to come. It's not based on a short-term economic play. And certainly, long term, I think, American industry, American manufacturing, there's just tremendous potential there. So the near term will be what it will be, and we'll work with that. As I said, we're still putting our 2026 plan together. But we will control the fundamentals of how we run our railroad, which is very productively, very efficiently and very safely. Kenny Rocker: Yes. I'll just say that because of our franchise, there are some natural benefits when you combine that with a strong service product to go out there and win [ where that the rock ] network, whether it's our petrochem network, whether it's everything that we're doing to invest in intermodal, that gives us a lot of confidence. And again, remember, we're out there trying to penetrate and create our own wins, whether it's put in new facilities on our network or going out there and selling where we've invested, we want to control what we can control. To Jennifer's point, we'll see what happens [ with how and start ]. We'll see what happens with auto. We're excited that we've got a strong network and a strong portfolio of customers [indiscernible] it will change. But once it does, we feel confident that we'll be able to capitalize on it. Vincenzo Vena: Yes. And the final point I would add is, listen, the economy is going to give us what the economy gives us. We need to also have a railroad that operates efficiently and has the capability to flex up and down properly so that we win in the marketplace at a high service level. So we want to win market share, for sure, stand-alone until we have the approval mid next year, hopefully, of the merger. I know our Chief Legal Officer is looking at me sideways right now when I sit mid next year. So that's my dream, but it could be a little bit later. But at the end of the day, that's a win on both sides for us. And that's fundamentally why -- who we are at Union Pacific. All right. Thank you very much. Operator: Last question is from the line of Brady Lierz with Stephens. Brady Lierz: Kenny, in your fourth quarter volume outlook slide, the word business win or contract win or just really win in general is used a couple of different times. Can you help us understand what's driving these wins, particularly at a time of economic and trade uncertainty? And how does your pipeline of wins per se look as we start to turn our attention to 2026. Do you think these wins can drive volume growth in '26 even without help from the macro? Just any clarity there would be helpful. Kenny Rocker: Yes. I appreciate that. Some of those wins are actually wins that occurred a few years ago, we're realizing them as you have plant expansions. We had a couple of plant expansions that took place in the last part of 2024 that has helped us in 2025. We've had a few this year that have come on. And some are immediate, just wins that we've gone out because we have a very strong network and the infrastructure [ therefore ]. The other part of that, and we've talked about and I talked a little bit about it at the Investor Day is that the team has done a really good job of adding new facilities onto our network. In some markets that are mature, like the grain markets, you call it, over the last couple -- few years, 20 new facilities on the renewable side over the last few years, 18 different facilities. So that's how we're creating that value. That's how we're creating that revenue. As we look ahead and look at the pipeline, is still a strong pipeline as we look at the facilities that are set up to come on and expand. So that's encouraging to us. Vincenzo Vena: Thank you very much. Operator: Thank you. This will conclude our question-and-answer session. I'll turn the call back over to Mr. Vena for closing comments. Vincenzo Vena: Great. Listen, Rob, thank you very much. Pretty exciting times here at Union Pacific. I love the fundamentals of what everybody delivered and then I have to give our team the accolades. It's not one person. It's the entire team that delivers and operationally on the marketing sales, I know I like pushing Kenny, but he does need to go get us more business. But at the end of the day, and Jennifer and the entire team and what everybody has done. So what's some key dates and what we see coming up. Fourth quarter is what the fourth quarter is, we'll deliver as good a quarter as we possibly can with everything that's in the mix, and we've talked about that. And next year, truly, we have an opportunity to put together a franchise with the great team over at Norfolk Southern. I've spoken to [ Mark George ] a few times. We need to legally keep it high level. I never tell them what to do. But at the end of the day, they're focused, they're on it. They know what they have to do, generate cash and be able to run a real good railroad so that we can show everybody what the combined railroad is going to look like to win, and we're very excited about that. So next big date is November 14, special meeting and with our shareholders and see where the boat comes in. We're very confident that the vote will come in to support this. There's no reason shareholders will have any problem with it. So with that, let's tie up this call, fantastic job by our team. Thank you very much for the good questions. And I apologize for the length of my answers, but I was ready to go this morning, okay? And you could tell by where I was at. So November 14, I'm sure we -- you can listen in or ask us questions once we put out where the vote ended up. Thank you very much, everyone. Have a great day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.
Operator: Thank you for standing by, and welcome to the Honeywell Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead. Sean Meakim: Thank you. Good morning, and welcome to Honeywell's Third Quarter 2025 Earnings Conference Call. On the call with me today are Chairman and Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the third quarter, share our guidance for the fourth quarter and provide an update on full year 2025. As always, we'll leave time for your questions at the end. I'll turn the call over to Chairman and CEO, Vimal Kapur. Vimal Kapur: Thank you, Sean, and good morning, everyone. Honeywell continued its strong 2025 performance in third quarter. Growth in organic sales took another step up and finished ahead of expectations, driven by our commitment to developing new solutions that solve our customers' most challenging problems. Better top line results translated into earnings well above our guided range, while strong orders across the portfolio demonstrate early results of our focus on innovation. Our excellent third quarter performance is powering another increase in our full year guidance. We are raising our 2025 EPS guide for the third time this year even as we incorporate the impact of impairing spin-off of Solstice Advanced Materials. Barely a year since we announced our intent to separate Advanced Materials, today, we are a week out from Solstice's first day of trading as an independent company. Our swift progress to this point demonstrate our ability to diligently execute carefully crafted work plans with speed and efficacy. We have the right resources in place to deliver on both our portfolio transformation and our businesses, financial and operational targets. We will carry the learnings and momentum from Solstice to next year's separation of Aerospace. As we look to our future as 3 independent companies in 2026, we are proactively planning to realign the structure of our automation business at the beginning of next year to reflect how we will operate going forward. This move is another significant step in our simplification of Honeywell, which will provide the strategic focus, organizational agility and tailored capital allocation to grow faster and drive value for all our stakeholders. Please turn to Slide 3 for the latest update of our separation. A couple of weeks ago, Solstice held a well-attended Investor Day in New York, where David Sewell and his new management team presented a compelling vision for the new specialty materials company and how its rich history and new independent strategy will unleash its growth potential and unlock long-term stakeholder value. A week from today, on October 30, Honeywell shareholders will receive new shares of Solstice, which will begin trading as a separate public company. I want to thank the teams that achieved this important milestone well ahead of the original schedule to complete by early 2026. I'm extremely excited for the opportunities in front of Solstice, and I will be cheering on the success in the years ahead. As our planned separation of Aerospace in the second half of 2026 approaches, our Board has been intently focused on assembling a Honeywell Aerospace leadership team with the right mix of industry, company and capital market experiences to maximize value for our customers, partners, employees and our shareowners. We expect to make an Aerospace leadership and headquarter announcement later this year. The separation of Aerospace brings the opportunity to further simplify Honeywell Automation. As a result, we have proactively designed a new, simpler structure aligned to the future of the business, which I will discuss in more detail in the next slide. As we seek to better position the future independent aerospace and automation companies for success, we have opportunistically completed transaction to simplify the legacy liabilities left on our balance sheet. During the third quarter, we entered into an agreement to divest all our Bendix asbestos liability on attractive terms for all parties. We also terminated an indemnification and reimbursement agreement with Resideo in exchange for $1.6 billion in cash. In combination, these transactions resulted in net cash inflow and will simplify and derisk our balance sheet, providing the company with fewer administrative burdens and greater financial flexibility to focus on creating value for our core business. On Slide 4, I will go over segment realignment in more detail. We announced yesterday that we are planning to reorganize the Honeywell Automation segment into a simplified structure focused on cohesive, synergetic business models. I'm pleased to take this next step in evolving Honeywell's streamlined portfolio with the aim of unlocking incremental value and driving long-term growth and margin expansion. As such, effective beginning of first quarter of 2026, we plan to report 4 business segments: Aerospace Technologies, Building Automation, Process Automation and Technology and Industrial Automation. Ahead of upcoming aerospace separation, this new structure serve as an elegant way to continue simplifying the RemainCo portfolio and align our external segment to the way we are increasingly driving our operation through consistent business models. Our differentiated approach underscores our ability to grow our installed base in 2 ways: by selling mission-critical products through channel and by delivering strategic projects for our customers. We then mine this installed base by providing customers with high-value outcome-based solution with a combination of software and services. The 3 RemainCo reporting segments will be organized into 6 strategic business units with each of our businesses aligned to our unified automation strategy, enabling us to solve enterprise-level challenges and help our customers achieve new level of optimization with the Honeywell Forge platform. Aerospace reporting is unchanged ahead of separation in the second half of the next year. The new structure will allow us to better prioritize R&D efforts, capital expenditure and go-to-market strategy with a growth mindset. Building Automation will continue to be a leading provider of unified building automation solution, delivering safer, more sustainable, integrated buildings and infrastructure assets and maintain its Products and Solutions business unit structure. Process Automation and Technology is a combination of core Honeywell Process Solutions and UOP, the global leader in process technology. These businesses have developed powerful commercial synergies, enjoy leading position in process market globally with vast installed base and share very similar business model characteristics. PA&T will report projects and aftermarket business units. Industrial Automation's portfolio of products and solutions businesses include mission-critical offering with proven reliability and tenured channel relationship, positioning us to benefit from ongoing global reshoring thematics. With this realignment following the separation of Aerospace next year, Honeywell will be a premier pure-play automation company, leading the future of automation through high ROI outcome-based solution for customers across a large addressable set of markets. And as we continue our journey of transforming the portfolio, I would like to highlight another lever of value creation with the recently announced Quantinuum capital raise on Slide 5. Four years ago, we formed the world's most advanced full-stack quantum computing company. It has rapidly progressed quantum technology along the path to universal fault-tolerant computing, a more than 2-decade pursuit then it is soon to be realized. Technological progress has driven fundraising momentum. Less than 2 years after completing an equity capital raise at a $5 billion pre-money valuation, the company announced in September a second raise at double the prior valuation. As important as the capital contributions will be to advancing the development of quantum computing at scale, the collaboration with new shareholders such as Quanta and NVIDIA in addition to others like JPMorgan, Amgen and Mitsui may prove even more critical. Quantinuum's fundraising efforts have led to a new partnership that will support the development of critical applications for improving drug discovery, government and military cybersecurity and encryption for large financial institutions. While we are tremendously excited about the future of the business, we recognize we are not the best long-term owner, and it will eventually need its own capital structure to fully exploit its growth potential. As a result, Honeywell will seek to begin monetizing its stake in the company at the appropriate time in a manner that will create meaningful value for Honeywell shareowners. The most recent capital raise will sustain Quantinuum through that point in time. I will now turn the call over to Mike to go through our third quarter results beginning on Slide 6. Mike Stepniak: Thank you, Vimal, and good morning to everyone joining us. Honeywell delivered exceptional third quarter results, again, exceeding the high end of organic growth and adjusted earnings per share guidance as we have done each quarter this year. Organic sales accelerated to 6% year-over-year, led by return to double-digit growth in Aerospace and fourth straight quarter of high single-digit growth in Building Automation. Orders grew 22% organically from the previous year to $11.9 billion. While wins for long-cycle aerospace and energy projects led the way, the increase was broad-based with order growth accelerating in each of our 4 segments and an overall book-to-bill above 1. The results are encouraging and an early demonstration of our focus on growth through innovative new products and the impact of our increased R&D investments. This impressive commercial performance pushed our backlog up to yet another record, which positions us well for future growth. Segment profit increased 5% from the prior year, with segment margin meeting the high end of our guidance range, led by ongoing margin expansion in Building Automation. Earnings per share in the third quarter was $2.86, up 32% from the prior year. Adjusted earnings per share was $2.82, up 9% year-over-year as strong segment profit growth and lower effective tax rate more than offset higher interest expense. You can find additional information on the year-over-year changes in the third quarter adjusted earnings per share in the appendix of our presentation. Third quarter free cash flow was $1.5 billion, down 16% from the prior year because of the capital expenditures timing and modestly higher working capital to support our sales growth. We maintained our disciplined capital allocation approach in the quarter, returning $800 million to shareholders while committing $400 million to high-return capital projects and completing 2 technology tuck-in acquisitions. Now let's move to Slide 7 for a discussion on our third quarter segment performance. I will provide a brief overview of results with additional commentary included on the right-hand side of the slide. Aerospace Technologies grew 12% organically, led by strength in both commercial aftermarket and Defense and Space. Commercial OE returned to growth as expected as our sales recoupled to the delivery rates of our large customers. Orders momentum continued with strong double-digit orders growth across all 3 end markets and book-to-bill of 1.2. On a year-over-year basis, segment margin decreased 160 basis points to 26.1% as commercial excellence and volume leverage were more than offset by cost inflation and acquisition-related headwinds. However, sequentially, margin improved 60 basis points on strong quarter-over-quarter volume supported by improved supply chain performance. Industrial Automation sales returned to growth in the third quarter, increasing 1% organically and exceeding our guidance range, led by continued strength in our Sensing business. Segment margin in Industrial Automation declined 150 basis points from the prior year to 18.8% as commercial excellence and productivity benefits were more than offset by inflationary pressures. Building Automation again delivered high single-digit growth for the quarter. Organic sales increased 7% from the previous year, driven by strength in both building solutions and building products. Regionally, North America and the Middle East led while Europe grew organically for a fourth consecutive quarter. Margin expanded 80 basis points year-over-year as we leverage our strong volume performance. Energy and Sustainability Solutions performed in line with expectations in the third quarter, down 2% organically. Strong refrigerants performance in Advanced Materials was offset by licensing and catalyst delivery delays in UOP. Segment margin was flat versus the prior year at 24.5% as onetime government reimbursement for past legal costs and the lift from margin-accretive acquisition offset cost and volume headwinds. Let's turn now to Slide 8 to discuss our updated outlook for the year. Our guidance for the year now incorporates the impact of Solstice's separation from Honeywell at the end of October. The spin is expected to reduce 2025 sales by $700 million, adjusted earnings per share by approximately $0.21 and free cash flow by $200 million. Even with this impact, we're again raising our 2025 organic sales and adjusted earnings per share guidance as we fully pass through our strong third quarter segment profit and net income growth into our improved outlook. On a like-for-like basis, our free cash flow expectations for the year remain unchanged. Now I'll turn to Slide 9 to provide more details on fourth quarter and full year guidance. We are taking up full year organic sales growth guidance by 150 basis points from the midpoint of our previous range. We now expect growth of approximately 6% for the year or 5% when excluding the prior year impact from the Bombardier agreement. This new outlook builds upon our strong sales momentum in recent quarters while maintaining a pragmatic approach in the face of elevated geopolitical tensions and macro uncertainty. Full year sales are now projected to be $40.7 billion to $40.9 billion. We anticipate a fourth quarter organic sales growth of 8% to 10% or 4% to 6%, excluding Bombardier, which translates to sales of $10.1 billion to $10.3 billion. For the full year, we now expect our company segment margin to be up 30 to 40 basis points or to be down 40 to 30 points excluding Bombardier. We're anticipating modestly lower margins versus prior guidance, a result of reduced expectations for project licensing, catalyst shipments and certain short-cycle Industrial Automation products, which carry high incremental margins. We are offsetting most of these headwinds by leveraging our strong volume growth and utilizing our accelerated operating model to implement productivity actions. In the fourth quarter, we expect segment margin to be in the range of 22.5% to 22.8%, up 160 to 190 basis points or down 120 to 90 basis points, excluding Bombardier. We now anticipate full year earnings per share of $10.60 to $10.70, up 7% to 8% or up 5% to 6%, excluding the impact of both the 2024 Bombardier agreement and the impending Solstice spin-off. Earnings per share in the fourth quarter is expected to be $2.52 to $2.62, up 2% to 6% from the prior year or down 6% to 3%, excluding the effects of Bombardier and Solstice. I will give additional details on changes to the full year EPS guidance later in my prepared remarks. We expect free cash flow between $5.2 billion and $5.6 billion, down 2% to up 5%, excluding the effects of Bombardier and Solstice. We provide additional information on the changes in the year-over-year free cash flow in the appendix of the presentation. For the first 3 quarters of the year, we have deployed $9 billion for share repurchases, acquisitions, dividends and capital projects. Going forward, we will continue to be opportunistic in allocating additional capital beyond debt already committed to the highest return opportunities. Please turn to Slide 10 for details on our segment level outlook for the year. In Aerospace Technologies, we are raising our expectations for full year sales growth to be low double-digit range or high single digit when excluding the impact of the 2024 Bombardier agreement. We expect robust Defense and Space growth to continue as our supply chain is improving and our global demand is benefiting from ramping national defense budgets. Commercial aftermarket sales should expand at a healthy rate with air transport growth outpacing business aviation. We anticipate commercial OE sales growth to accelerate for the remainder of the year as our shipments progressively realign to build schedules. For the fourth quarter, we expect Aero organic sales to be up double digits or high single digits, excluding Bombardier, led by Defense and Space. Commercial aftermarket growth should moderate from third quarter levels towards the longer-term trend. Excluding the year-over-year impact of Bombardier, commercial OE should grow faster than the prior quarter. We anticipate the second quarter marked the low point of Aerospace margins and fourth quarter margins will be comparable to the third. For the full year, margins are expected to be approximately 26% as volume leverage is more than offset by transitory integration headwinds from the CAES acquisition and cost inflation from tariff pressures temporarily outpacing pricing. In 2026, as pricing aligns with tariff costs, OE shipments of electronic solutions recouple with build rates and integration costs from the CAES acquisition subside, Aerospace margins are well positioned to increase from 2025 levels. For Industrial Automation, third quarter outperformance is compelling us to raise our full year top line expectations for a second consecutive quarter from down low to mid-single digits to down only low single digits. Positive order growth in the third quarter was encouraging, though it was uneven within both long- and short-cycle businesses, such that it would not yet be prudent to confirm a sustainable upward trend. As a result of these mix dynamics and a more challenging prior year comparison, we expect fourth quarter sales to be down low single digits. Continued momentum in smart energy and steady performance in Sensing and warehouse automation should offset modest demand headwinds in productivity solutions and services and short-term project pushouts in core process solutions. We now expect to see margin contraction in Industrial Automation for the full year on increasingly unfavorable mix with similar margin performance in the fourth quarter. In Building Automation, we continue to anticipate full year organic sales growth in the mid-single-digit to high single-digit range, supported by strength in the U.S., Middle East and India and highlighted by robust demand in data centers, health care and hospitality. For the fourth quarter, we expect sales to be up mid-single digits with momentum from strong orders across both products and solutions. We anticipate a fifth consecutive quarter of organic growth for products to be broad-based across fire, BMS and Security. Solutions should continue to drive solid year-over-year growth in both projects and services. We expect margins for the full year and the fourth quarter to expand meaningfully as tailwinds from volume leverage and productivity actions continue. In Energy and Sustainability Solutions, we will limit our guidance commentary on Advanced Materials given its pending separation as an independent company. We are maintaining our full year ESS sales growth guidance of flat to up slightly and anticipate fourth quarter sales to be down low single digits year-over-year. A difficult macro backdrop for energy has weighed on our near-term guidance, but the long-term outlook remains strong. A third quarter increase in UOP orders of 9% is a signal of growing underlying demand from our customers, and we have good visibility into projects order strength continuing. On segment margin, we anticipate a meaningful fourth quarter contraction, resulting in a roughly 1 point reduction for the full year. Lower high-margin catalyst and licensing sales are offsetting commercial excellence and uplift from the LNG and Sundyne acquisitions. While cost inflation and market headwinds have presented a margin challenge in 2025, we're taking meaningful steps to address ESS cost structure and expect to return to margin expansion in 2026. Let's move to Slide 11 to go through updates on our 2025 EPS walk. Our earnings growth attribution comments separate out the year-over-year impact of Solstice spin-off at the end of the month, which is anticipated to reduce adjusted earnings per share by $0.21. We now expect segment profit growth, both organic and contribution from acquisitions to add $0.63 to adjusted EPS for the full year, $0.10 better than our previous view as we fully flow through better-than-anticipated third quarter operating results. Third quarter outperformance versus the midpoint of our guidance range benefited from a lower effective tax rate and reduced below-the-line expenses, which were also benefiting the full year. Fourth quarter segment profit contributions to earnings are in line with our prior expectations as better Aerospace growth offsets margin headwinds in Energy and Sustainability Solutions and Industrial Automation, as discussed earlier. We anticipate reduced year-over-year below-the-line headwinds of $0.39 per share as repositioning will be at the low end of our prior range. Additional below-the-line details are available in the appendix of the presentation. We now expect our full year effective tax rate to be 19% compared to 20% previously, adding $0.13 to adjusted earnings per share. To summarize, we anticipate 2025 adjusted EPS to grow at a mid-single-digit rate when excluding the impact of the Solstice spin and Bombardier agreement. Now I'll hand the call back over to Vimal to finish our prepared comments on Slide 12. Vimal Kapur: Thanks, Mike. Honeywell again exceeded its initial commitment in the third quarter as Aerospace execution returned that business to double-digit year-over-year growth. With orders increasing in each of our 4 segments, we are getting good returns from dedicating the right level of resources to creating new solutions to sell into our large global customer base. As just one example of our recent commercial success, Gulfstream recently announced that Honeywell's engines and avionics will power its new super midsized G300 business jet platform, which will offer superior range, efficiency and safety to current comparable aircraft. This win is a testament of our ability to stay at the forefront of leading-edge technologies that matter most to our customers. We are going into the final quarter of 2025 from a position of strength with operating momentum leading us to raise our guidance for the third time this year even as a shifting macro environment requires a high level of agility to deliver these results. We are pleased by the performance of our acquisitions since 2023, which continue to help us shape our portfolio and deliver higher growth and margins. Our commercial and operational momentum are building into 2026, which will be a historic one for Honeywell. At the same time, we are operating with the same commitment to operational excellence that has defined Honeywell for decades. While 2025 was affected by a number of headwinds, including heightened economic uncertainty, incremental tariffs, and significant cost inflation, we have already begun taking action to position our aerospace and automation businesses to return to underlying margin expansion in 2026. As we prepare Aerospace to begin its journey as a leading independent company next year, we expect to begin 2026 operating under a new structure that aligns to how we will deliver the future of automation, giving us a running start post separation. Increasingly, customers across end markets face similar structural challenges such as skilled labor shortages, aging infrastructure, operational inefficiencies and elevated energy and maintenance. As value creation shift towards harnessing the power of data to solve enterprise scale challenges and achieve new level of transformation, we are streamlining our business units centered around cohesive business model for addressing these issues. This segment realignment exemplifies our effort to simplify our whole organization to focus on actions that creates the highest value for our stakeholders. Reducing distraction from legacy liabilities, reviewing strategic alternatives for parts of our portfolio that do not fit our business model and acquiring complementary technology through bolt-on and tuck-in acquisitions all demonstrate our commitment to optimizing our business for future growth and value creation. And finally, Quantinuum's recent capital raise and technological leap forward, delivering the promise of quantum computing, which the company will demonstrate in coming weeks, move Honeywell closer to realizing the value of its pioneering investment in this space. With that, Sean, let's take questions. Sean Meakim: Thank you, Vimal. Vimal and Mike are now available to answer your questions. We ask that you please be mindful of others in the queue by asking only one question and one related follow-up. Operator, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: Just wanted to maybe kick off with the 4Q margin for ESS. And I'm just doing the quick math here, it implies 3 to 4 points of decline year-over-year. So I just want to make sure, number one, that math is correct. And secondly, is the Advanced Materials Solstice spin losing 2 months of that? Is that having a material impact on that year-over-year? Mike Stepniak: So I would first highlight that within the ESS, we see LNG doing extremely well in that business. So that we see really good project activity, and that's progressing well. Orders are up. What do we see in the fourth quarter, we see a little bit of transitory, I would say, softness in margins, and that's predominantly driven by mix. So we see catalyst pushouts to continue. It's affecting us in the fourth quarter. But generally, I would say that ESS will normalize as we progress through 2026, back to its historical margins. And then on Advanced Materials. Advanced Materials was a little bit, I would say, accretive to the overall portfolio, but we're working for that as we are setting up for 2026. Sean Meakim: And Nigel, this is Sean. I'll just remind you that the ESS business in Europe, in particular, typically has a seasonal build and both volume and mix favorability from 1Q to 4Q. If you recall, we had an unusually strong second quarter, which we called out at the time. And so really that full year fourth quarter impact is not that severe. It's really just a timing factor of where things came in at second quarter versus traditionally being higher in 3 and 4Q. And so I emphasize just the timing is more of a factor than anything else. Nigel Coe: Okay. That's actually my follow-up question. Number one, did we see these pressures in 3Q and this government service -- the government settlements maybe offset that? Just wonder if you can maybe quantify that. And then do you think that this -- we see that mix shift in the back in the first half of next year? Or do you have that visibility at this point? Mike Stepniak: So like I said, I think from the order activity standpoint, the order activity on big new projects is quite strong, and we'll continue to see that in the fourth quarter. From a revenue conversion standpoint, given these are big capital projects, they start converting to revenue probably in the second and second quarter and then the second half. From a catalyst standpoint, based on how customers order and ordering pattern, we see that improving next year as well, but don't see that volume in the fourth quarter. And like Sean said, we usually see fourth quarter seasonality in the business, and we didn't see it this year because a lot of that volume came to us in the second quarter. So there will be a little bit of a gap in the fourth quarter as far as ESS margins. Vimal Kapur: But all things said, Nigel, we expect ESS margin to expand in 2026. It's a transitionary thing. At the end of the day, we are positioning the business for growth. The LNG segment is doing extremely well. Sundyne is doing extremely well. The overall projects, as Mike mentioned, is performing at an order rate of 8% growth in Q3. We expect solid Q4. So it's just really a transitionary effect on the catalyst volume. And we think that will adjust in 2026 and we should have a more year more on expected lines, we're expanding our margins in 2026. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start with the IA segment as it seems there's a lot of different moving parts inside it. You flipped to organic growth in Q3, I think, for the first time in a couple of years, but it sounds like that will reverse in the fourth quarter. So just trying to understand, is that a function of something moving the wrong way again in short cycle lower? Or is it more a function of the large project delays in the longer cycle business? And trying to understand on margins, I think there was a comment on similar margin in Q4. So does that mean it's a 19%-ish margin? And are there any onetime kind of headwinds on that as we're thinking about next year? Mike Stepniak: Yes. So I would say from IA standpoint, the orders are looking -- I would say, they were looking strong in 3Q. But as you know, we have a lot of timing variability as far as the larger orders, especially in our warehouse automation business. So we're monitoring that. But generally, I would say, vis-a-vis where we started the year, we feel much better about the business and the progression. So from a margin standpoint, margins should grow sequentially in the fourth quarter for IA. There aren't really any one-timers, and the team is positioned to expand margins in 2026 as well. So we have good visibility to margin expansion in IA going to 2026. Backlog is improving. that's giving us, I would say, good leverage from a fixed cost standpoint, and we have good visibility to pricing. Julian Mitchell: That's helpful. And then just my quick follow-up on the Aerospace division. Maybe give us some update on where we stand on that destocking? Do you think it's largely behind you now on the commercial aero side? And should we assume that, that 26% margin rate, again, that's a good placeholder into next year, barring violent swings in mix? Mike Stepniak: Sure. So super happy with how the Aero team performed in the third quarter, and I think you will see more good news from Aero team as we go to fourth quarter and next year. I would say, from a margin standpoint, 2Q '25 was probably the bottom, and you should continue to see sequential improvements on margins going to 2026. And on recoupling, I think that's largely behind us. I think commercial, we will sequentially improve growth rates in the fourth quarter as well. And we should have a good print on Aero in 4Q and going into 2026. The setup looks really good. Orders, again, were extremely high, high double digits. And our past due backlog, even with us outputting at these rates continues to hang over $2 billion. So we still have a lot of, I would say, to work with going to 2026. Operator: Our next question comes from the line of Steve Tusa with JPMorgan. C. Stephen Tusa: Can you guys just talk about the trend in the BA margin? It's been really strong in the last couple of quarters, maybe a tad bit weaker this quarter than we were expecting. What's the -- what are the moving parts there? And how do you feel about that going into '26? Mike Stepniak: Steve, so super happy with the BA performance. And I think as we talked about it before, BA team still has a lot of runway. As far as the 3Q, it's really just a matter of mix between projects and products. Nothing, I would say, concerning there. And like I said, sequentially, BA will continue to expand margins. And in 2026, they have a really good -- I would say, really good setup and plan to continue to expand those margins. So no concerns on that business. Vimal Kapur: I was going to reinforce that the BA just reinforces the overarching Honeywell strategy on how we are pivoting our business through higher growth and margin expansion. So they are ahead of the curve on executing that, and I'm very confident that other businesses are going to demonstrate the same. So we do expect 2026 to follow the trend line you have observed in BA in 2025. C. Stephen Tusa: And then just lastly on the profile of the income statement. You guys made -- obviously, Solstice is coming out, you guys made these changes around the liabilities. Any thoughts around changing the pension accounting and how you're reflecting that in your income statement? And is that something that could happen before aerospace goes or that kind of reevaluation of the earnings format? Mike Stepniak: So it's definitely on one of our agenda items as we go over into 2026. We're actively discussing it. We understand your concern and your thoughts on pension treatment. I would say, just based on what you see, we'll continue to simplify our balance sheet and how we report earnings to make sure you have a better visibility to cash flow conversion and EPS. So it's definitely on our agenda, but we're not ready to speak about it today. Operator: Our next question comes from the line of Scott Davis with Melius Research. Scott Davis: I can't -- I know this can be a little bit lumpy, but I can't remember a quarter with 22% order growth. I know you gave some per segment granularity, but was there any kind of discrete projects or anything big that generally move the needle there? Or was it more across the board as kind of indicated in your slides? Vimal Kapur: It's more across the board, Scott. I mean I think Aero continues to do extremely well, and they're maintaining their momentum of continuing to increase their win rates and backlog. We had a strong orders growth in building automation, which flows a lot of that into the revenue stream, which you have seen. ESS orders growth were very good and also in IA. So I would say that the order growth is across all segments. Long cycle, even stronger than short cycle, but short cycle is also growing. And I do expect the trend to continue in Q4. We don't expect any substantial change in the trajectory. And that's the foundation of the growth-oriented Honeywell we have been focusing on over the last 2 years. the effort we have put in, in terms of our portfolio revitalization and focusing on the R&D spend on the right set of projects, you can see the early effect of that, and I'm confident that things will get better as we go along into 2026. Scott Davis: Okay. That's helpful. And then just switching gears slightly. You guys have done 6 pretty meaningful deals in the last 2 years. And I think you previously said that was kind of 1% to 2% tailwind accretion in '25, I believe, somewhere in that ballpark. How does that flow through on '26 given what you're seeing in the deal models? And it sounds like you're a little ahead of the deal models on that group of transactions overall. Vimal Kapur: Yes. So overall, Scott, I would say the M&A deals are performing very well. On an average, our deals are -- all the deals we did since I started at 12x multiple, and we are either on TBA or ahead of TBA in majority of them. And the foundational strategy we had that they will help us to grow our organic growth rates and margin expansion, they're really working very well for us. So I'm really encouraged Maybe, Mike, do you want to add some specific feedback further on this? Mike Stepniak: Sure. So like Vimal said, I think majority of these deals starting actually fourth quarter and going into next year is becoming organic for us from a growth standpoint. And like Vimal said, they continue to be accretive and TBAs are ahead of plan, both on revenue synergies and on cost synergies. So we feel really good about these acquisitions and how they fit the portfolio, not only financially, but also from a technology complementary standpoint. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Amit Mehrotra: Vimal, I wanted to ask if you can just talk about the pricing strategy across the organization. You made a comment recently around pricing vis-a-vis wanting to preserve or protect volume. I forgot the exact wording, but it was something to that effect. And the question is really in the context of if I look this year, revenue expectations are increasing, margin expectations are coming down a little bit. Fully understand there's mix, there's acquisition, there's timing. But just wanted to understand if there's maybe a pricing opportunity in the future that is not being exploited today, either because of the R&D investments you're making or maybe just a more surgical focus on that post the spin-off of the businesses. Vimal Kapur: So thanks, Amit. I would say that fundamentally, our strategy has been that we want to preserve our margins. while we keep our volumes to our expectations. So that has been the North Star we have been focusing on, and we have demonstrated that for the most part. I would say that if I look ahead in 2026, pricing will become a good enabler for 2026 margin expansion. The only headwind we faced in pricing, I'll call out in 2025 was just a lag effect. It's just the timing. We're learning something and we can lag 30 days, 45 days. We are not going to face that event in 2026. So overall, I do remain confident that our model of getting our margin expansion through pricing while we're protecting our volume is really working. And some of the margin expansion we have seen in this year, the margins have been more flattish. It's primarily our focus has been growth. And there are some transitionary issue items which have happened at this point, whether it is tariff-related cost hitting us in some pockets and M&A impact, et cetera. I'm very confident those are transitionary. And we're going to see strong impact in our margin expansion into 2026. Mike, anything to add? Mike Stepniak: That's exactly right. I mean we've been now with the teams focusing on 2026 pricing for about 1.5 months. We have a really good plan and strategy laid out across our segments and regionally. And based on everything I see, pricing will become stronger next year. And a lot of that is really driven just by tariffs stabilizing and that picture on inflation being much more clear. So the teams know what they need to deploy, et cetera. And then I would say if you just look at segments, Aero was behind on price this year. It's going to be a tailwind for them next year. And other than that, I think teams are generally caught up at this stage on pricing going to next year. So I'm really positive on price being better incrementally next year versus this year. Amit Mehrotra: Okay. That's very encouraging. And just one follow-up related to that, just on margins. You're very clear about the trajectory for margin in Aero next year. If I look at all the different pieces, they're all kind of converging Industrial Automation kind of sticks out a little bit in terms of structurally lower margins in building automation and Aero. I think, Vimal, you've talked about maybe some self-help opportunity there, but maybe kind of talk about a little bit of the Industrial Automation margin opportunity from kind of the high teens, where you see that maybe structurally the opportunity for that? Vimal Kapur: I mean, I look at Industrial Automation margin expansion more the normal way. We are -- as you have seen our segment announcement last evening, we are going to focus in Industrial Automation on primarily the product businesses by taking process automation out and reforming a segment of Process Automation and Technology, I think this really positions us extremely well. And on Industrial Automation, that simplification now allows us to focus on how we have executed well on a classical product business model in Building Automation, really playing that playbook in Industrial Automation. So I do expect the pricing is going to play. We've talked about it a few minutes back. On the productivity side, we will see positive effect of both fixed cost and variable cost productivity. On the variable side, we feel confident on direct materials. And on the fixed side, baselining the cost structure of the business aligned to the volumes we are seeing, we feel good about that where we sit today. So overall, the setup is good. for IA. I think the -- what I'm really focusing upon is getting the business more to the higher growth momentum compared to what we are exhibiting right now. And at the right time, we also start looking at the M&A optionality, which we can bring to the business to further strengthen our portfolio. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe first question on Aerospace. And I realize some of it will fall in the next leadership team, which you'll announce later this year. How are you thinking about the biggest opportunities and the implications for margins as we think about '25 being a transitory year with some headwinds and just the evolution of OE mix next year? Vimal Kapur: Sheila, I would say the transition which is occurring, we spoke about that in the last quarter, too. We definitely see the OE mix becoming less intense compared to how we started the year. So that certainly a benefit to us. The tariff-related pressure, which came into the cost under the margin rates of Aero would be less of a factor in 2026. And then the CAES acquisition, which was acting as a headwind for our margins in 2025 would not be a factor. In fact, it will be a tailwind. So as I look ahead, all these factors, the confidence that we bottomed out in 25% margins in quarter 2, and then we are lapping towards 26% and higher. That direction is very clear, and we are working hard to demonstrate towards that and better in '26 and beyond. Sheila Kahyaoglu: Great. And then maybe if I could follow up on the aftermarket, just nice acceleration there. And you called out, I think, some moderation in Q4. What kind of surprised to the upside in the quarter on the commercial aftermarket? Was it commercial aviation, business aviation, was it recurring revenue? If you could just talk about that. Mike Stepniak: So I would say it was on the aftermarket, the growth is really broad-based. And a lot of the growth is -- demand has been very stable. A lot of the growth is also driven by us being able to unlock our supply chain. And I hope that continues. But from a demand standpoint going into fourth quarter, this business should grow high single digits on a normalized basis. So demand is still strong across the industry and not really any particular drivers with the exception of supply chain performing much better than it did in the second quarter. Operator: Our next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: First, I'd just like to say congrats to the team on getting Solstice to the finish line or the starting line, depending on your perspective. We've seen multiple spins by companies, and we know all the work that goes into it. So congrats. Vimal Kapur: I appreciate the good word there, Deane. And the teams have worked really, really hard to get it done ahead of time. Our earlier estimate was Q1 '26, and we pulled it forward by at least 1 quarter. Deane Dray: Great. And then I missed the very beginning. Did you have any update on the process of looking at strategic alternatives for productivity solutions and services and warehouse automation? Any update on potential timing? Vimal Kapur: We kicked off the process of strategic review. I would say that in the Q1 in 2026 first quarter earnings call, we should be able to provide you a much more definitive path forward. I think the work is in progress, but I do not have any additional details I can share with you right now. So we expect to -- when we are back in about 90 days, we should have more information for you. Deane Dray: Got it. And then on Industrial Automation and your comment that's more of a product focus, it was interesting to see the call out about sensors being in their fourth quarter of growth, and you called out health care sensors in particular. So we're now getting some additional insight into these businesses. Can you comment on the growth opportunity in the sensor business? Vimal Kapur: Yes. So if you look at our Industrial Automation look ahead, depending on what decision we make on our scanning and mobility business and warehouse automation business, the balance IA would be a product-oriented business where products are critical. These are related to compliance. These products are certified. And that's a fundamental model we're really working towards. And we also are conscious that IA would also become a pivot towards our U.S. onshoring growth. So all those items are in play as we are thinking ahead about the IA portfolio moving forward. Now sensors is one of the biggest business there. We have positioned in 3 verticals in sensors, aerospace, medical devices and industrial. And we have good run-up to this business in 2025. We expect to maintain that momentum in 2026. And we expect to provide more segment-specific details in IA as we have simplified the segment. And as we have more conversations and discussions in the future, I look forward to providing you more details. But fundamentally, sensors is one of the key part of the business, and we remain very optimistic on how this will perform in the times ahead. Operator: Our next question comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to follow up on the Industrial Automation portfolio. And specifically, I guess, the realignment Slide from 15. I mean, I guess it seems like the only -- or I guess the only full business line being put into the new Industrial Automation segment, is that sensing business, assuming warehouse and PSS get divested. So I guess maybe any color on how much revenue is kind of being maybe pushed out of the process solutions bucket into that new Industrial Automation portfolio? And then more broadly, how do you feel about the scale of this Industrial Automation business? And is it an area where you could be looking to add assets? Vimal Kapur: Yes. So Chris, what we provided yesterday is more a cumulation of our 2 years of work of simplification. We have been working on our portfolio, the spins work we have done, some of the strategic reviews, et cetera. I see the definition into 3 end markets, 3 verticals is an outcome of all of that. So we are pleased, first of all, where we have landed ourselves, buildings, process and industrial. Clearly, buildings and process have higher scale today compared to industrial, to your question. And -- but we are starting from a position from which we want to build upon in industrial from a -- on a very product-oriented business. And we'll continue to see more opportunities on how we strengthen that. So more to come there. This is -- I first want to finish the unfinished task of the strategic review of scanning and mobility, warehouse automation. We yet to complete that work. We also want to focus on organic growth return of industrial automation to its baseline. And I'm confident all that is going to take shape well in 2026. And then we'll turn our focus into what else we need to add to this portfolio so that it becomes a meaningful part of Honeywell. Christopher Snyder: I really appreciate that. I guess maybe to follow up on Building Automation. And specifically, could you provide any color or comments on the data center exposure or opportunity there? I mean our channel checks, we're hearing more and more about controls needing to be more complex as the facilities get bigger and more complex. I think historically, that has not been a big vertical for you guys, but it seems like you've done a better job breaking in there over the last year. So can you maybe talk about how you broke in and what is the opportunity? Sean Meakim: Yes. So increasingly, Chris, data center is becoming a bigger part of our building automation business, certainly now contributing to the growth rate to a certain degree. We are -- I would say that our position in safety and security in data center is -- we are well positioned in that. You're talking about more like 2% spend of data center is in this space. So spend-wise percentages are small, but we have a good position in our fire safety systems. We have a good position in our security system. We are increasingly improving our position in the building management, and we continue to work our way through to gain more share in that market. So certainly, a lot of hyperscalers, a lot of REITs are becoming our customer. You may have seen a recent announcement also in our partnership with LS ELECTRIC on which we want to work more joint solution between electrical system and control system because we see a need for that by our customer. So we continue to improve our strategy, continue to improve our portfolio. And I remain confident that data center end market growth, which is occurring, will certainly have building automation business as additional -- as a vector to maintain their growth momentum. It's -- we were starting from a very low position, but we are certainly gaining more and more momentum there. Operator: Our next question comes from the line of Joe Ritchie with Goldman Sachs. Joseph Ritchie: So look, Vimal, you've done a lot from a portfolio perspective. A lot has been announced. I like this new structure. I think it very neatly separates the different businesses. I guess the question is, as we head into the Aero spin in the second half of '26, could you potentially see additional announcements on the portfolio? Vimal Kapur: I would say that, as we mentioned a few months back that based on the current portfolio assessment, actions we have done, they are completed. But in a company of our size, you never say you're done. I think the portfolio revitalization is a continued activity. So I do expect us to do more additions, which are bolt-on to our portfolio, which fits into the core of buildings, process and industrial. And if your question is, is there any more exit plan, we feel good about the portfolio of what we have at the position we are today. These are all mission-critical parts of automation. They drive very similar common outcomes like safety, operational excellence, reliability and they really help us to gain a lot of mining installed base through our Forge platform. So that commonality we have achieved with a lot of effort. And I don't see that there will be any material change we want to make on what we own, but certainly like to consider adding more on a bolt-on basis or maybe tuck-in sometimes as we finish our spins, and we'll continue to report to you if we make any progress on that. Operator: Our next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Vimal, maybe just back to the macro. Can you talk about the cadence of orders and revenue in Q3? Did you see any changes in your short-cycle businesses as the quarter shook out here into Q4? And are there any particular trends you're seeing by region? I think you mentioned some recovery is continuing in at least BA in Europe and China, but what are you seeing overall for Honeywell? Vimal Kapur: I mean I would say the biggest change, Andy, I saw was that we have growth across all parts of the world. That's not happened for a while. We have a solid growth in U.S. Europe is performing more like low single digit to mid-single depending on the business. So Europe is returning to an reasonable growth. Middle East, India does always very well for Honeywell. And China is more flattish for Honeywell less Aero. But if you add Aero, we are growing high single. So it's -- I think that is a distinctive part of what we are observing. I think it's the diversity of our portfolio in the end markets we serve is certainly helping us. And our focus on growth and creating new products, mining installed base, all those strategies are coming together. And I do expect, I mentioned earlier, a good Q4 also for the orders ahead. So it's not a onetime. We do expect to maintain this momentum for the rest of the year. Andrew Kaplowitz: That's helpful. And I know you mentioned lower energy prices have continued to lead to some delays in HPS and UOP. But as you just said, improved orders, does it give you more confidence that these businesses are going to turn higher in '26? And maybe what are your customers telling you about their CapEx expectations for '26? Vimal Kapur: I mean if you look at our ESS business, Andy, the positives are strong demand in LNG and gas. We certainly have a lot of demand and order strength in those. We also see investments made by our customer for more localization of refining and petrochemical capacity. So we see investments made across in India and parts of Africa, parts of Middle East. So those continue there. The only lack of momentum we have seen, which we discussed before, was catalyst demand. I think it's partly impacted by the oil price, partly impacted by some overcapacity. And we do expect things to settle as the year progresses in 2026. So long-cycle demand is strong. That is evident in our orders rate of ESS. I think short-cycle demand is more flattish, but we do expect it to recover during course of 2026. Sean Meakim: Melissa, we'll take one last question. Operator: Our final question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: I guess I'll just ask one since we're running over time. I'm curious how short-cycle industrial trends kind of shaped up throughout the quarter. Did things kind of remain stable versus how you exited 2Q? Or any notable trends that you would highlight? Vimal Kapur: I would say short-cycle trends were actually better in 3Q versus 4Q. And we do expect similar trends. As you've seen in our guide, we are not expecting any substantial change quarter-on-quarter. But we always remain prudent in our guide. We don't know what we don't know. So -- but I think an overarching theme is very similar dynamics in the end markets, which Honeywell serves in -- between quarter 3 and quarter 4. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kapur for any final comments. Vimal Kapur: Thank you, operator. As always, I would like to express my gratitude to our shareholders, our customers and all the Honeywell Future Shapers across the world, driving our stellar results in the quarter. And our path ahead is promising, and we look forward to sharing more with everyone in the quarters to come. Thank you all for listening, and please stay safe and healthy. Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. Welcome to Hasbro's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I would like to turn the call over to Fred Wightman, Vice President, Investor Relations. Please go ahead. Frederick Wightman: Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Hasbro's Chief Financial Officer and Chief Operating Officer. Today, we will begin with Chris and Gina providing commentary on the company's performance, and then we'll take your questions. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q, in today's press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I'd now like to introduce Chris Cocks. Chris? Chris Cocks: Thanks, Fred, and good morning. Hasbro delivered another strong quarter in Q3, extending our growth trajectory in 2025. Net revenue and operating profit both showed robust year-over-year gains, underscoring the power of our Playing to Win strategy, which positions Hasbro as a diversified digitally forward play company uniquely resilient in today's tariff-sensitive market. Key drivers were MAGIC, Marvel, MONOPOLY, PEPPA PIG, Beyblade and G.I. JOE. Brands exemplifying durable, diversified growth that differentiate Hasbro from traditional competitors. Year-to-date, revenue is up 7% and adjusted operating profit has increased 14%. We anticipate full year revenue growth in the high single digits and adjusted operating profit growth exceeding 20%. MAGIC continues to outperform expectations, posting 40% growth year-to-date. This success is fueled by unprecedented new player acquisition and standout collaborations with brands like Spider-Man and Final Fantasy. Our Universes Beyond strategy, leveraging MAGIC's depth with beloved IPs is generating extraordinary engagement. Looking ahead, we'll build on this momentum in 2026 with original MAGIC IP sets and blockbuster collaborations, including Teenage Mutant Ninja Turtles, The Hobbit, Star Trek and Marvel Superheroes. Interest indicators like event attendance, search metrics, MagicCon participation, sales in new channels like mass and convenience and player growth are all at record levels. We expect momentum to continue into the fourth quarter, fueled by upcoming MAGIC releases, including The Last Airbender and Final Fantasy's holiday set, alongside sustained momentum in Secret Lair and backlist offerings. Wizards of the Coast is more than MAGIC. The refreshed 2024 additions of D&D's Monster Manual, Players Handbook and DM Guide are off to the strongest ever start for D&D books. D&D Beyond's new accessible virtual tabletop has driven weekly traffic up nearly 50% since the September launch. Meanwhile, our digital licensing business, highlighted by Monopoly Go! and our recent launch of SORRY! WORLD with Gameberry Labs continues to outperform with both games topping mobile player charts. In Digital Gaming, the game awards this December will showcase some new announcements from Hasbro, including updates on our upcoming sci-fi RPG EXODUS, further cementing our commitment to innovative digital play experiences. Consumer Products met our Q3 expectations, although retailer shifts pushed some revenue into Q4. We anticipate a solid bounce back in the fourth quarter, driven by innovation, entertainment tie-ins and strategic partnerships. Key highlights include momentum from PEPPA PIG and Marvel's blockbuster content lineup, steady growth from Beyblade, G.I. JOE's rebound post supplier transition and solid traction for new products like Nano-mals, DJ Furby, baby Evie, Star Wars Kyber Forge Lightsabers (sic) [ Star Wars Lightsaber Forge Kyber ], Priorities and PLAY-DOH Barbie. Retail shelf resets since late August have led to a mid-single-digit POS increase entering the holiday season and share gains for Hasbro across our focus categories. We expect Consumer Products to finish the year down mid-single digits, primarily impacted by tariffs. However, because of our proactive supply chain diversification initiatives, we expect that by year-end 2026, no single country outside the U.S. will represent more than 1/3 of Hasbro's supply chain. Additionally, new vendor and manufacturing partnerships will unlock attractive pricing opportunities globally from Bodegas in Santiago to Dollar stores in Peoria, expanding our retail footprint and total addressable market significantly. After a long turnaround effort, we expect Q4 to be the start of a long-term growth period for our toys business, driven by innovation, a killer entertainment slate and new partnerships. Just this week, we announced an exciting collaboration tied to Netflix hit film, KPop Demon Hunters. Product is expected to hit shelves in 2026, but for fans who can't wait, preorders are already live for our MONOPOLY deal card game inspired by the film. In summary, Q3 reinforces that Hasbro's Playing to Win strategy is delivering results. We're confident in our ability to sustain long-term growth through diversified digital initiatives, strategic partnerships and resilience against external pressures. Before I close, I want to thank our incredible employees and partners around the world. Hasbro's return to growth is a direct result of your creativity, focus and belief in inspiring a lifetime of play. Now over to Gina. Gina Goetter: Thanks, Chris, and good morning, everyone. We delivered another solid quarter, outperforming expectations on revenue and profit while operating with discipline in a dynamic macro environment. Our results reflect the strength of Wizards, ongoing cost transformation and continued progress toward our 2027 profitability goals. Net revenue in the third quarter was $1.4 billion, up 8% versus last year, driven by double-digit growth in Wizards and steady execution across Consumer Products. Adjusted operating profit increased 8% to $356 million with an adjusted operating margin of 25.6%, holding steady versus last year despite increased cost pressure. Adjusted earnings per diluted share were $1.68, down 3%, driven by a higher tax rate and FX impacts. Year-to-date, total Hasbro revenue is up 7% and adjusted operating profit has increased 14%, underscoring the strength of our diversified portfolio and the impact of our transformation efforts. The growth in MAGIC, coupled with sequential improvement in Consumer Products is fueling our overall financial performance. Turning to our segments. Wizards once again led our performance in the quarter. Revenue grew 42% to $572 million with broad-based gains across both tabletop and digital. MAGIC revenue increased 55% to $459 million, driven by engagement with our Universes Beyond sets, our core IP Edge of Eternities as well as continued momentum across Secret Lair and backlist products. Operating profit rose 39% to $252 million, delivering an exceptional 44% operating margin, reflecting the positive benefit of scale and mix within the MAGIC portfolio. Consumer Products navigated a complex quarter, and the team demonstrated agility as we adjusted to delayed on-shelf days from retailers and lapped a difficult comparison last year in licensing. Revenue of $797 million was down 7% versus last year, with growth in Europe offsetting softer performance in North America. Adjusted operating profit was $89 million with an 11.2% margin compared to 15.1% last year. The margin change was driven primarily by tariff expense and unfavorable mix, offset in part by productivity improvements across our supply chain and expense management. The Entertainment segment delivered revenue of $19 million, up 8% and an adjusted operating margin of 61%, which is consistent with the asset-light model we're building in this segment. Year-to-date adjusted EBITDA stands at $989 million, up 11% versus last year, demonstrating the combined impact of top line growth, operational excellence and disciplined investment. Year-to-date, we generated $490 million in operating cash flow, returned $294 million to shareholders via the dividend and spent $120 million on debt reduction through the combination of bond repurchases and prefunding our 2026 maturity via treasuries, a proactive step that provides flexibility while keeping us ahead of our long-term leverage targets. We continue to see tangible benefits from our cost transformation efforts. Through the first 9 months, we've delivered approximately $150 million in realized gross savings, keeping us on track to achieve our full year target. Operational efficiencies, expense management and productivity gains across sourcing and logistics are driving strong margin performance even as we absorb higher royalty costs at Wizards and trade-related headwinds in Consumer Products. These savings are translating directly into margin resilience and giving us the flexibility to reinvest behind our highest return growth engines. We're executing our tariff remediation playbook decisively, mitigating risk and protecting profitability. Maintaining our assumption that the China tariff rate stays at 30% and Vietnam at 20%, we continue to expect $60 million of impact in our 2025 P&L. Owned inventory levels remain healthy and firmly aligned with our year-end targets. We believe we have appropriate inventory in our warehouses to fulfill the anticipated holiday build and replenishment orders. With a robust entertainment lineup scheduled for 2026, we remain laser-focused on exiting the year with clean company-owned and retail inventories. We are continuing with our diversification efforts to build resiliency across the supply chain and coupling those with the incredible growth in MAGIC. By 2026, we expect approximately 30% of our total Hasbro toy and game revenue will be sourced from China and 30% of our revenue will be based in the U.S. as we opportunistically lean into our U.S. manufacturing capacity. As we enter the final quarter, our momentum remains strong, and we are raising our full year guidance. We now expect Hasbro revenue to grow high single digits with an adjusted operating margin between 22% to 23%. This results in our adjusted EBITDA increasing to approximately $1.25 billion at the midpoint. For Wizards, we expect full year revenue growth between 36% to 38% with an operating margin of approximately 44%. This improved guidance reflects the MAGIC over delivery in Q3 and sustained engagement and high demand through year-end releases. In Consumer Products, we are holding our latest guidance and continue to expect revenue to decline 5% to 8% year-over-year with margins between 4% to 6% as productivity works to mitigate cost pressures. Our capital allocation priorities are unchanged. And with our updated outlook, we will likely achieve our 2.5x leverage target at the end of this year. The Board has declared a quarterly dividend of $0.70 per share, consistent with our capital allocation priorities to return cash to shareholders. We remain focused on execution and operational efficiency in our core toy business. At the same time, we're thoughtfully investing for the future with a disciplined returns-driven approach, particularly in Digital Gaming and with strategic partners who help bring our brands to new audiences and categories. We are on track to close the year from a position of strength, delivering profitable growth, deepening engagement in our most valuable brands and advancing toward our long-term financial and strategic goals. And with that, I'll turn it back to the operator for questions. Operator: [Operator Instructions] Our first question is from Megan Clapp with Morgan Stanley. Megan Christine Alexander: Maybe Gina, I wanted to start with just ending with your comments there just on the implied 4Q outlook, at least on the EBITDA line, it does seem to be above what The Street was expecting. And from a profitability standpoint, implies that your growth accelerates versus the third quarter. It does seem like versus the third quarter, both segments are contributing. So can you just walk through some of the puts and takes by segment as we think about 3Q versus 4Q profitability? And related to that on the top line for CP, I think the guide implies flattish sort of top line growth for the fourth quarter. I think you talked about, Chris, POS accelerating. So how should we think about kind of the timing of retailer ordering shifts into the fourth quarter and POS being positive in the context of what I think is a flat guide for the top line? Chris Cocks: Megan, I'll start, and then I'll turn it over to Gina. I think for CP, we do expect modest revenue growth. I think toy and games will have a little bit more robust, and it will be offset by some licensing comp headwinds we have last year related to MY LITTLE PONY, which had just an amazing quarter based on MY LITTLE PONY trading cards, which has since settled into more of a run rate. We also expect Wizards is going to have a heck of a quarter as well. The early reads on Avatar: The Last Airbender look terrific. And then we have another bite at the Final Fantasy [ Apple ] with our holiday set. So overall, we're expecting pretty good top line growth and some nice operating profit growth as well. I'll turn it over to Gina to kind of dig into point B C, D and E of your first question. Gina Goetter: Megan, all right. Let's start. So you're correct. Like we're raising guidance. A lot of it is driven by the strength that we're seeing play through and continue to play through really all year on MAGIC in Q3 and really firming up our outlook for consumer products as we move into Q4. When you peel apart Wizards, the increase or the raise there is all based on revenue. So we've continued to see momentum. And as we look out at the set releases that we've got planned in Q4, coupled with -- remember, we have a holiday release this year that drives nice revenue. It also drives leverage throughout the P&L. The one thing that we've talked about a lot as we came into the year on Wizards is the royalty expense. So just from a modeling standpoint, what we saw in royalty expense in Q3 will largely be the same as what we see in Q4. So the raise in Wizards is really all due to the revenue momentum that we're seeing and just the trickle on the positive benefit that, that has down the line in the P&L. On our CP business, to your point, a relatively flat outlook. I mean, depending on which range you go, you could see us getting to some growth within the quarter. We have seen our POS momentum accelerate as we came out of Q3. We've continued to see that as we've moved here into Q4. And with the whole retail order shipments, we -- many in the industry were talking about these later shelf resets that absolutely impacted Q2. We started seeing their shipments pick up in Q3. And again, we've seen that continue into Q4. So our expectations for CP as we move through kind of the holiday period is that we're going to have shipments outpacing what our POS is. So that benefit will help, again, create some leverage within the P&L as well from a margin standpoint. Did I hit all of your points? Megan Christine Alexander: Yes. A quick follow-up just on the balance sheet and capital allocation. So you said leverage target by the end of this year. Free cash flow growth has been quite strong, and I think that should continue into '26. So how are you thinking about capital allocation priorities as we head into '26 with the balance sheet now at your leverage target? Gina Goetter: Yes. Where we sit today without getting too much into '26 guidance, unchanged priorities. We continue to, first and foremost, want to invest back into the business and invest into our growth drivers. So you'll continue to see us do that. Obviously, we have the dividend, and we're committed to the dividend. And then lastly, we will continue to pay down debt. So we feel great that we're going to be at a point from a leverage ratio standpoint that we'll be at 2.5x. We still think there's opportunities for us to bring that down even further to just create more optionality and flexibility for us as a business. So as we turn the corner into '26, we'll come back and see if any of those are changed. But for now, we're sticking with those. Operator: Our next question is from Arpine Kocharyan with UBS. Arpine Kocharyan: What do you think is driving this acceleration in retail POS for you and for the industry? And what are some of the indicators that you look at to decide whether this holds up in the next 40 days if you compare it to sort of prior holiday seasons or what do you know about the consumer? And then I have a quick follow-up. Chris Cocks: Sure, Arpine. I think a couple of things. Each product is a little different. For instance, with G.I. JOE, we just didn't have supply because we were going through a supplier transition for the first half of the year. And so we're in catch-up mode. On others, I think it has to do with just great innovation, Nano-mals, DJ Furby, some of our new board games are hitting the mark and hitting what we think players want. And then still others, I think, just are kind of buoyed by fantastic brands and really strong content. Marvel, in particular, is one that's really doing well this year, and we expect that to continue moving forward. Transformers has been benefiting from that throughout the year. Even though we don't have new content this year, last year's Transformers One has had a nice long tail for us. So we've been pleased with it. We've been seeing acceleration in POS for probably the last 7 to 8 weeks. And usually, what we see in September and October is a pretty good harbinger for what's going to happen throughout the holidays. Arpine Kocharyan: Very helpful. And then -- sorry, go ahead. Gina Goetter: My one add that I would have is on, just as you think about the overall category and pricing as a dynamic, we really haven't seen overall huge increases in ASPs. We've seen some mix shift, but not big increases in ASPs. And as you look at where the consumer could be heading and how our portfolio shapes, roughly, call it, 40% to 50% of our portfolio is priced under that $20 kind of MAGIC price point. So as we're innovating, as we're executing with our retailers, our prices are staying in that nice zone for consumers heading into the holidays. Arpine Kocharyan: That's very helpful. So just a quick follow-up. You have had incredible growth in MAGIC this year and will likely finish the year on a strong note. There is a bit of concern how you lap that next year. And arguably, Marvel's strength in the second half of this year has probably legs well into the first half of next year, I would imagine. But this business is very much driven by the timing of set releases. Anything you could tell us to help think through how you left these very strong numbers from this year into 2026? And Gina, just a quick question for you. The licensing expense under MAGIC for the back half, you had raised that from $40 million range to closer to $60 million plus. Is the updated number now $70 million plus, just given the outperformance in that segment? Gina Goetter: Is that -- are you talking about the Digital, MAGIC Digital? Arpine Kocharyan: Correct. I'm talking about the royalty expense within Wizards tied to third-party IP. Gina Goetter: The royalty expense, I see. Yes, the -- just the back half of the year was always going to be back weighted in terms of expense just given the timing of the universes beyond set releases. So we had Avatar and the Spider-Man are falling in the back half of the year, whereas it was just Final Fantasy in the front half of the year. So that's why you see that weighting. It will be roughly, call it, $50 million, $60 million of royalty expense in the back half of the year. And then, of course, will be accrued in the front half. I think total royalty expense change is $80 million year-over-year, I believe. So it's a pretty sizable step-up in expense. Chris Cocks: Yes, Arpine, in terms of your question about the underlying durability of MAGIC's growth, I think there's a couple of things going on. At the easiest level, this year, we had, call it, 6.5 sets because one of our sets was a little bit of crossover in terms of sell-in between Q4 and Q1. Next year, we're going to have about the equivalent of 7 sets. So just you're naturally going to have more content to sell, which generally is correlated with higher sales. Then when you look at kind of like the momentum that we have on backlist, I think we continue to see that as being kind of like a nice kind of floor for the business that will -- is continuing to raise. I mean our backlist business, I think, is 70% ahead of what it was last year already for the full year basis. And last year was a record. And then I think like the last one is Universes Beyond is just working. The whole theory of the business was it's going to increase our distribution. It's going to increase our number of active players. It's going to bring in new fans that were adjacent to MAGIC, and that has just worked. Like basically, every set we've done in Universes Beyond has set records in terms of new player engagement, in terms of search queries, in terms of number of people who are going into stores, in terms of sales in nontraditional outlets like mass and convenience for us. And we don't see that slowing down. If anything, I think there's potential to accelerate it just with the quality of partners we have next year and the early reads we're getting on those partners. Teenage Mutant Ninja Turtles, Marvel Superheroes, The Hobbit, Star Trek, which for a big nerd like myself, is near and dear to my heart. I think all of those have had excellent initial reactions and bode well for continued robust sales. Operator: Our next question is from Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Maybe first on Consumer Products for Chris and Gina. Just be curious to get your latest thoughts on higher prices and just generally how they're being digested by retailers and consumers. Curious what you're seeing so far, the types of conversations you're having with retailers this fall. And if that's influencing your strategy as you look at promotional activity into the back part of the year and then maybe opportunities to take pricing if needed in 2026? Chris Cocks: Yes. I would say pricing so far has been relatively muted in the category. We started seeing evidence of it like in July, August. I think you'll see more of it in September and October. We've been pretty surgical in where we've chosen to price. We've chosen to put it usually against brands that have some pretty robust content and latent demand associated with it and trying to hit price points where we think the consumer tends to be a little less price sensitive, particularly under that kind of $15 threshold, maybe the $20 threshold. And we haven't seen a tremendous amount of elasticity so far based on the early reads. In terms of ongoing pricing, I think we just kind of have to see how the holiday goes and how the consumer holds up. Right now, I think it's really kind of a tale of 2 consumers. The top 20% -- particularly in the U.S., the top 20% of households continue to spend pretty robustly. We've got a nice fan business with them. We've got a nice trading card and gaming business with them. The balance of households are watching their wallets a bit more, a little bit more promotional and price sensitive. And as Gina mentioned, about 50% of our items that we're selling are under that $20 price range. And we think that's going to expand as we go into 2026 with some of the new suppliers we're working with and some of the new product we're working with. So net-net, so far, so good. Stephen Laszczyk: That's great. And then maybe one on 2026 around EXODUS. Gina, it sounds like we're about a year from EXODUS being released. I was just curious if there's any way you can maybe help investors size the cost impact expected from the game next year, perhaps over the course of '26 and '27. I appreciate we'll probably learn more in December, but anything or any frameworks you could provide at the moment to help set the frame of mind looking into next year? Gina Goetter: Got it. Yes. Good question. And you're right, we'll provide more specifics when we get to December. So I'll give you a some tidbits on the framing and how to think about it from an accounting standpoint without getting too deep into unit expectations. But when you look at our balance sheet, you'll see that line that says capitalized software, and there's roughly $350 million that's sitting on our balance sheet. This includes development costs for EXODUS as well as all of the other games that are within our portfolio. So it is not just an EXODUS charge. It's the entire pipeline of games that we're working on. And how that will come off of the balance sheet through the P&L. So as EXODUS ships and we launch the units, that cost will depreciate alongside with units. It will flow through our cost of goods. So that's where you'll see it. It will impact our gross margins. That's what you'll see it flow through. And then the other important thing to call out is because it is a product development cost, it's an input cost, it will not be an add-back into EBITDA. So it will show up as a depreciation charge within cost of goods, but it's not going to be added back on an EBITDA basis. In terms of EXODUS and how to think about the dollar impact, when we're modeling it out, roughly kind of rule of thumb, 65% of that development cost is going to hit in the quarter that we launch the game. And in the 4 quarters in that first year, roughly 85% of that development cost will have been worked through the P&L. That's right now how we're modeling it out. Obviously, as we get sharper on the absolute units and the absolute time line for when we're going to launch, that will impact it, but that's the good rule of thumb. In terms of how we're thinking about the overall expense standpoint, you've heard us talk about how AAA video games, some of them can be very, very expensive. We are not playing in that range. You've heard us talk in the previous calls that our development budgets are anywhere from, call it, $100 million if we're working with partners up to, call it, $200 million, $250 million. So that's the range of outcome in terms of absolute expense and absolute [ depreci ] that you'll see come through the P&L. Now obviously, that's the P&L impact. As we launch the game, as we have the units, have the revenue, there's going to be a pretty material uplift in our cash flow. So we kind of have to look at it through what's going to happen in the balance sheet, that capitalized asset comes down, P&L, the depreciation hit goes in, but then we have a nice uptick in our operating cash. Does that help, Stephen? Operator: Our next question is from Christopher Horvers with JPMorgan Chase. Christopher Horvers: So maybe talk a little bit about what the gross net headwinds from tariffs were in the third quarter. As you turn through more sales, does that dollar headwind actually worsen as you get into the fourth quarter? And then stepping back, thinking longer term about the potential profitability of the CP business, is the expectation ultimately that you can get the tariff rate pressure back over time through pricing? Or does the long-term outlook for CP profitability change? Gina Goetter: Got it. So the tariff pressure in Q3 was roughly, call it, $20-ish million of cost. As we look into Q4, there's a bit more. So it's a bit of a heavier quarter. Still the net impact is going to be $60 million-ish within 2025. As we look into 2026, we are fully running our tariff playbook. And so as we calculate the various scenarios of where that absolute rate will play out, we're really putting all of our levers to work from how we think about pricing, how we're thinking about our product mix, how we're thinking about our supply chain and how we're managing all of our operating expenses to mitigate and offset the impact. Christopher Horvers: Got it. But I'm guessing just is the net headwind next year smaller than the $60 million? Or do we have to lap through something similar? I would think just based on the seasonality of the business that it would be less? Gina Goetter: It will be less next -- overall, for the year, the tariff cost itself will be bigger just because we'll have a full year. But the impact, we're still working through what the net kind of impact is as we put all of the levers to work. But the actual tariff cost itself, obviously, with 4 quarters' worth, we really didn't start seeing that impact to the P&L until third quarter. Chris Cocks: Yes, Chris, I think as you think about the midterm in terms of CP and total company, I think at a total company, we're very confident in our operating profit guidance. Our games business is performing very well, well ahead of plan. Our licensing business continues to perform very well and frankly, at or ahead of plan. Toys, we're, I think, in the early innings of getting to the growth portion of the turnaround, which is great. And so from a top line perspective, I think we feel good about the guidance we gave in February. I think from a margin perspective for the CP business, if tariffs persist at a 20% and 30% range, it probably carves off a couple of points of margin from the expectations for that business. So low double digits probably becomes high single digits. If nothing changes on the tariff front and nothing changes on the nature of the business. I think it's a little too early for us to call that ball for CP. We feel pretty good about the partnerships we're inking, KPop Demon Hunters just being the first -- that's probably one of the hottest new entertainment properties of the year. We love what's going on with Star Wars and Marvel in terms of their content and how those brands are coming roaring back. So I think we'll have a more fulsome update come February when we talk about 2026 and an update to midterm. Christopher Horvers: Got it. And then my follow-up is a follow-up to a prior question about MAGIC next year. Can you talk about how big is Final Fantasy this year? Obviously, it's played out exceptionally well and you have this holiday set. And as you think about the content that you have for next year, is the strategy a little bit of like all of those UB sets combined are sort of like in aggregate, become bigger? Or do you think maybe the Star Trek set, for example, could be actually bigger than Final Fantasy? Chris Cocks: Final Fantasy is a record-breaking set. It's already the biggest set in MAGIC's history. I won't tell you which one next year we think could rival or beat Final Fantasy, but we definitely see at least one that we think can do that. I think I'll stick it there. And then we haven't shared with you guys the content lineup that we have for 2027 and beyond, but we also feel pretty darn good about the partners we have lined up. I mean this is a great deal for MAGIC in terms of, hey, we get access to some of the premier IP in the world. It's a great opportunity for the partners because really, there's never been an opportunity for them to access the trading card business, certainly at the scale MAGIC: THE GATHERING is delivering for them. And so we pretty much have had our pick of partners. And so I think if you can conceive of a collaboration that we could do with MAGIC, we probably have inked the deal or in conversations on a deal on that. So I think, again, we're still at the relatively early innings of what Universes Beyond can do. I think there's upside in terms of what the sets can do in the future. And then I think that's also just going to be buoyed by a very long and lucrative backlist as well, which we've been seeing play out in 2024 and definitely in 2025. Gina Goetter: We should probably say that our owned MAGIC IP is also performing quite well. Chris Cocks: Yes. I mean that's a great point. People aren't just coming in and buying Final Fantasy. People are coming in and buying Edge of Eternities. They're buying other sets. And so we've also been setting records with what we've been doing with our own sets as well. So there's a nice halo here. Operator: Our next question is from James Hardiman with Citi. James Hardiman: So to that last question, Chris, I'm not going to ask you which sets you think can be Final Fantasy. It sounds like -- but I am curious, this KPop Demon Hunters' press release did mention Wizards of the Coast. would curious what the thoughts are there, how those 2 could integrate. And then just on the margin side of Wizards, we came into the year thinking that margins would be down pretty materially. And obviously, that's not going to be the case. Any thoughts on how to think about Wizards margins into next year? And any color on the royalty piece would also be helpful. Chris Cocks: Yes. We're pretty excited about KPop. I remember the weekend it came out, I watched it and sent a text over to Tim, who runs our toy business. And I'm like, why haven't we talked to these guys because this thing is awesome. If you look at my Spotify playlist, it looks like a 12-year-old kids. I got Soda Pop, that Golden on there along with some other stuff. So I'm pretty jazzed for KPop. We're working with Netflix. Mattel is doing basically dolls and figurines. We're basically doing just about everything else, plush, games, trading cards, as you mentioned, for something like MAGIC as well as electronics and role play. So I think that's going to be a pretty lucrative license that's been -- had incredible staying power. And frankly, it's just the first new partnership inside of our toys business that we're going to be really excited to share more details about over the coming couple of quarters. I think there's a lot of reasons to believe that our toy business is in the early stages of a long-term growth from entertainment to toy partnerships, to new licenses. So I think that's good. And on your question about MAGIC, I think MAGIC has proven that it can fit a large number of IPs. One of the best-selling Secret Lair products of all time was SpongeBob SquarePants. And if we can figure out how to get people jazzed up about SpongeBob SquarePants collectible cards, I'm pretty sure we can do it with one of the biggest movies of all time. Gina Goetter: And if you look at our -- the margins, we're not going to get into 2026 guide today. But we've always said that our Wizards segment is going to be in that high 30s, low 40s. If you look back over our recent history, you'll see that we're dancing around those levels over multiple years. And this is where we're going to expect to run that business, and that's what we're asking our teams to deliver, even knowing that, that is our growth engine. So we're going to continue to make sure that we're making the appropriate investments back into the business. But I would say, without giving guidance, we've always talked about a high 30s, low 40s Wizards segment. And that's what you should expect from us over time. James Hardiman: Got it. That's helpful. And then just real quick on the inventory front, there's a lot of discussion, obviously, about shifting orders between 3Q and 4Q. Where are retailers with respect to your product versus last year? I'm assuming there's a deficit versus a year ago and that we'll ultimately sort of bridge that deficit as we make our way through the fourth quarter. So maybe speak to that a little bit. Chris Cocks: Yes. Our retail inventories were down kind of mid- to high teens in the U.S. coming into fourth quarter. Our order book has accelerated versus what we've seen in previous fourth quarters. Domestic is actually doing pretty well. DI is maybe a little bit behind. But everything kind of augurs towards continued robust kind of replenishment from our retailers. And I think we would expect that, let's use the mid-teens as kind of like the anchor point. We think retail inventories will be down by the end of the year. But if current trends persist, it's -- we probably cut that ratio in half. And that's kind of what underscores our belief that fourth quarter will be a pretty good quarter for CP. Gina Goetter: I think this is our first quarter that we've talked about actual restocking happening as we've moved into the fourth quarter. So we're definitely seeing that. We can see that play through in our early October shipment data. Operator: Our next question is from Alex Perry with Bank of America. Alexander Perry: I guess as a follow-up to the last line of questioning, but more consumer products focused. Could you help us think about the building blocks for next year for the EBIT margin on the CP segment with the cost saves versus tariff impact versus potential volume leverage? And then I guess on the content side for Consumer Products, what are you most excited about next year thinking about that? Gina Goetter: Thanks for the question, Alex. We're not going to get too much into the building blocks for 2026 quite yet. We do think we've got some nice tailwinds as we're exiting the year that set us up nicely from a top line perspective. Obviously, we've talked about how not having top line creates a delever impact on the P&L. So as that flips to positive next year, that becomes a benefit for us. We're actively working all of our levers to offset the margin impact, and we continue to stay on our -- the margin impact from tariffs. And we continue to stay on our trajectory to deliver that $1 billion of cost savings in 2027. So as we get -- obviously, the next time you talk with us in February, we'll give a lot more detail on where the CP kind of outlook will be for '26. Chris Cocks: I mean I think a couple of bread crumbs that are public. Certainly, we are bullish on the potential of KPop. We've got a lot of really cool ideas. It's been fun working with Netflix on it in a fairly quick order. We already have a product that's got for sale with the MONOPOLY deal. And hopefully, we'll have a couple of preorders up for some cool items for fans before the end of the year. And then the content lineup that we have, particularly from the Walt Disney Company is amazing. You have Toy Story 5, which always helps to drive Mr. Potato Head sales in a big way. You have a new Star Wars movie with Grogu and the Mandalorian. you have a new Spider-Man movie and you have the Avengers returning to form with Robert Downey Jr. in the role of Doctor Doom. I couldn't imagine a much more stacked content lineup than what we have kind of forming a tailwind for us next year. Alexander Perry: That's very exciting. And I guess my follow-up question is on MAGIC. And specifically, could you talk through the MAGIC growth that you're seeing in the mass channel, especially how the Universes Beyond strategy sort of plays into it? And I think based on some of the disclosure, the retail distribution network for Wizards continues to grow nicely. I think store count sort of up 7% sequentially versus the last quarter. Can you talk about sort of where that is coming from and where you're seeing the growth there? Chris Cocks: Yes. So hobby store growth continues at pace. I don't think it's so much that there's more hobby stores. I think it's just more that are qualifying to become part of the Wizards Play Network and leaning into MAGIC. And what we tend to find is when a hobby store really adopts MAGIC, it becomes a big section of their mix, and they help to propel player growth and player engagement in a positive way. And then mass, it's just a very easy sell with mass when you go in and say, "Hey, here's a video game that you've sold tens of millions of copies of like Final Fantasy, there's obvious demand for it. Let's expand distribution inside of MAGIC" or "Hey, here's a superhero that is beloved and everyone from 2 years old through adulthood wants to collect and play with like we have with Spider-Man." So that's just caused us to be able to have both incremental placements within the store, new promotion within the store as well as opening up new doors for us, especially in underserved markets for MAGIC like a lot of Europe, where we haven't had as robust of a mass offering, and we've been able to do things with the Tescos of the world and the Carrefours of the world with some pretty meaningful and enduring results. Operator: Our next question is from Kylie Cohu with Jefferies. Kylie Cohu: You kind of already touched on this, but I was curious what you're seeing specifically in terms of promotional cadence. One of your peers might have said that it's intensifying heading into the holidays. Just kind of curious what you guys are seeing. Chris Cocks: Yes. Yes. So we've been pretty choiceful with our pricing through this year. And so that's benefiting us in terms of incremental promotion opportunities with basically every major U.S. vendor, Amazon, Walmart and Target in particular. And so that kind of underscores some of the order growth that we think we can see and the sustainability of our point of sale for this holiday as well. And then last year, we had some replenishment outages for things like board games that we won't be lapping this year that, again, we think will kind of help to underscore it. So as we've leaned in on trying to provide value to consumers, especially in hot categories where we're the category leader in like board games, like action figures, like compounds, the retailers have responded in kind, leaning back with us and giving us extra opportunities to share that value with consumers. Gina Goetter: Yes. And I think it's a bit early to say the quality and kind of when your word intensifying because of the shelf reset and that moving back, we're really just starting to see the impact of promotions start playing through. So obviously, everyone -- from a retail standpoint, they were really concentrating on all that sitting within Q4. Kylie Cohu: Got you. And then I know this is kind of small potatoes, but I was curious a little bit if you could expand on your expectations for the Entertainment segment, both in Q4 and then beyond in like steady state as well. Gina Goetter: Yes. Good question. Overall, you should expect more of the same on Entertainment. It's going to be roughly that same revenue base at roughly that, call it, 50% to 60% margin as we're moving forward. And really think about that, that is all the -- either the content that we're creating for brands like PEPPA or it is rights that we are giving to other studios to develop our IP. The delivery of the revenue gets a little bit lumpy just because it's based on when deals are inked. But overall, that's how you should think about the mix of how it's going to play out through this year and the balance of next year. Chris Cocks: Yes. I think we think of Entertainment as a long-term brand development pipeline. There's some revenue associated with it. It kind of -- it's advertising that pays for itself with fantastic content partners. And I think at last count, we have something like 45, maybe 50 shows and movies and reality TV offerings in development across a range of partners. And we work with the best of the best. We're working with Paramount, Warner Bros., Netflix, Universal, Disney, you name it, Lionsgate. So we'll have more to share on that as those kind of deals matriculate. We tend to not announce like a development deal. We tend to wait until it's actually in production. So those are starting to kind of go through and probably in 2026, there will be a lot more to share. Gina Goetter: But we're going to continue with the asset-light model. That's why you're going to see just a high margin within that segment moving forward. Operator: Our next question is from Jaime Katz with Morningstar Research. Jaime Katz: I was hoping to touch on product development spend. It has stepped up a little bit in 2025. But I think given everything that you guys have said about content and innovation coming on, can we think about this staying sort of structurally higher than it maybe has been in the past? Gina Goetter: Yes. I mean you hit on it. The increase or the step-up that you're seeing is largely driven by Wizards and Digital. There's some this year within toy just as we've kind of revamped our innovation pipeline as we started going out. You heard us talk about KPop and securing some of these new licenses, but the bulk of the uptick has been within Wizards. As we look into next year and kind of we're probably at that right watermark level. Like we've been slowly increasing that cost over time. And we're probably in that zone as we think about next year. Jaime Katz: Okay. And then D&D hasn't really been discussed, but there's obviously a little bit more emphasis on the brand as you guys expand into more space. Can you just maybe help us think about what the long-term growth prognosis is for D&D relative to MAGIC or maybe what incrementally it might add to Wizards of the Coast over time? Chris Cocks: Yes. So I think the big thing for D&D is going to be digital games. We have several games in development. We're working with some fantastic creators in that space. And again, like I said, for Entertainment, we tend to be a little gun-shy talking about projects too early. But very likely over the next, call it, couple of quarters, you're going to start to see more of our digital ambitions come to life with D&D and understand some of the things we have in development. And I think they're going to be pretty exciting. Baldur's Gate III was a seminal project. I think it really showed that if we build something that's great, consumers will come. And so there's probably 5 projects in development for Dungeons & Dragons across our portfolio, ranging from more casual and kid-oriented to very high-end action adventure and role-playing games. And that's in addition to a continued focus on building out kind of the core business, the core TRPG with a special emphasis on D&D Beyond as kind of like the best place to play at TRPG. Operator: With no further questions, ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Greetings, and welcome to The Simply Good Foods Company Fiscal Fourth Quarter 2025 Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Joshua Levine, Vice President of Investor Relations. Thank you. You may begin. Joshua Levine: Thank you, operator. Good morning, and welcome to The Simply Good Foods Company's Fourth Quarter and Full Fiscal Year 2025 Earnings Call for the period ended August 30, 2025. Today, Geoff Tanner, President and CEO; and Chris Bealer, CFO, will provide you with an overview of our results, which are provided in our earnings release issued earlier this morning. Our prepared remarks will then be followed by a Q&A session. A copy of the release and accompanying presentation are available on the Investors section of the company's website at thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements, which are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. On today's call, we will refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset-light high cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. The acquisition of Only What You Need, or OWYN, was completed on June 13, 2024. As we have now lapped the anniversary date of the OWYN acquisition, the use of organic refers to year-over-year growth for brands we have owned for more than 12 months on a comparable basis. For Q4, organic growth includes year-over-year growth for Simply Good Foods' business, excluding the period of time prior to the closing of the OWYN acquisition, as well as the impact of lapping the extra week in the fourth quarter of fiscal year 2024. Finally, all retail takeaway data included in our discussion today, unless otherwise noted, reflects a combination of Circana's MULO++C measured channel data, and company estimates for unmeasured channels for the 13 weeks ended August 31, 2025, as compared to the prior year. I will now turn the call over to Geoff Tanner, President and CEO. Geoff Tanner: Thank you, Josh. Good morning, everyone, and thank you for joining us. Fiscal year 2025 was a solid year for Simply Good Foods. We delivered 9% reported net sales growth, including 3% on an organic basis and grew adjusted EBITDA by 3%. On a pro forma basis, including OWYN, but excluding the extra week from the prior year, net sales increased over 4% with adjusted EBITDA up approximately 6%. We largely completed the integration of OWYN, invested in our people and capabilities, and put our cash to work, paying off $150 million of debt and repurchasing more than $50 million of our stock. Our vision is clear. To be the scaled leader in high-protein, low-sugar and low carb food and beverage. There is a generational shift towards these products that is quickly mainstreaming. One of the most impactful trends in food and beverage today. This is best highlighted by the continued strength of the nutritional snacking category. Our traditional aisle, which includes on-trend, high-protein performance nutrition, as well as adult nutrition and several other fast-growing subcategories. In aggregate, this broader category has grown at least high single digits for the past 5 years and grew plus 13% this year, reinforcing how relevant it is today and supporting studies that show more than 70% of Americans are actively seeking more protein and less sugar, as well as fewer carbs in their diets. In support of our vision, we have been on a journey to rapidly evolve our organization to win in this exciting and dynamic space. In the last couple of years, we have rapidly shifted our portfolio. Quest and OWYN now represent nearly 3/4 of our net sales with both growing double digits in fiscal year 2025. Quest, which generated almost 2/3 of the company's net sales in Q4 is the category disruptor, flipping the macros on large mainstream snacking categories. Over the past 2 years, we have accelerated the pace of product innovation while broadening our reach with marketing up about 50% since fiscal 2023, and household penetration now approaching 20%. Our recent acquisition of OWYN enhanced our presence in the fast-growing ready-to-drink shake segment, while positioning us to become a leader of the rapidly accelerating clean label movement. To support our fast-growing Salty Snacks business, we're expanding capacity for the second time in 2 years with construction on an additional production line now in progress. We increased our investment in innovation, strengthening R&D, and reducing time from concept to launch. We invested in new sales talent and selling capabilities, expanding our opportunity to drive distribution, both within and beyond our core aisle, and to deepen penetration within channels. And we ramped up productivity initiatives to combat inflation and free up funds to fuel our growth. Additionally, to compete and win in our space, we have consciously increased our organizational output across all facets of the company. We have challenged our [indiscernible] to reduce lead times and innovation and marketing, embrace agility in our supply chain, and evolve our marketing playbook to incorporate an insurgent mindset to compete against brands large and small. The goal is an organization that combines the agility and speed of an insurgent challenger with the advantages of scaled R&D, supply chain and selling capabilities. I am excited by the improvements we have made and how these actions position our company to win. In the near term, however, we must address two important challenges. We understand the magnitude of each have plans against us and are confident we will work through these headwinds as we continue to evolve the company. First, as we've discussed in the past, Atkins is losing shelf space in the highly competitive nutritional snacking aisle. Over the last several years, as sales for this category doubled in size with space at a premium, Atkins large distribution and merchandising footprint has come under pressure, with sales declines in recent periods, mainly driven by distribution cuts at several retailers, especially at [ clubs and MAX ]. 75% of Atkins' retail sales today come from approximately half of its SKUs, which turn in the top 2 quartiles of the category velocity rankings. As we enter fiscal '26, our tail SKUs that turn in the bottom of category velocity rankings have been trimmed back at [indiscernible]. As we consider potential future distribution risk across our top accounts, it's important to note that only approximately 10% to 15% of Atkin SKUs on average are still in the bottom quartile today. While painful in the short term, this process will better align Atkin shelf space with sales in support of a sustainable business powered by a strong core assortment. Encouragingly, at a large retailer, where we recently saw a double-digit decline in distribution, our average velocities are up nicely across the reset, giving us confidence we're on the right track. To help strengthen the brand and attract new consumers, in September, we began to flow into market several initiatives. These include new advertising that reorients Atkins from a more general lifestyle brand back towards weight management, as well as modernize packaging, innovation and an updated website. We've also brought to market a smaller pack size within our bar portfolio, providing consumers a more attractive entry price point, intended to stem declines in one of the more challenged parts of the business. Our strategy acknowledges the need to rightsize Atkins space rather than trying to prop up our underperforming tail. A key component of this approach is proactively working with senior teams at our key retailers to manage our assortment and flow back to support the continued expansion and prioritization of Quest and OWYN. Again, while these decisions may be painful for the Atkins brand in the short term, we're taking the right decisions and the right actions with the brands, the category, and for Simply Good. Our second major challenge is inflation. In order to ensure we had adequate supply to meet consumer demand, we contracted for cocoa at historically high prices which, in addition to tariffs weighed heavily on our margins in the back half of fiscal 2025. This pressure will continue in the first half of fiscal year 2026. At this point, we're confident our gross margins will improve beginning modestly in Q3 and more meaningfully into Q4, driven in part by the coverage we've already secured on cocoa through most of the second half at rates well below prior year. We continue to monitor the markets and note that current spot levels present further potential favorability as we exit this year and primarily into fiscal 2027. In addition, we've also responded to inflation with aggressive productivity actions and pricing, which we announced to the trade in August, and which will be in market by the end of Q1 of fiscal 2026. I'm pleased with the significant progress our teams have made on productivity, a capability that we significantly expanded over the past 2 years with benefits that will flow into our margins in the second half of fiscal 2026, and into '27. Looking ahead, we're in a strong position. We operate in an on-trend, high-growth category, benefiting from a generational shift towards high protein, low sugar, low cap products. We will lead this shift and create value for our shareholders by accelerating innovation, expanding physical availability of our products and from breakthrough marketing. Our world-class R&D team asset-light model, category leadership role with retailers and enhanced selling capabilities give us a competitive edge, and our strong balance sheet provides optionality for M&A. Turning to Quest, which represented almost 2/3 of our net sales in Q4. Quest delivered year-over-year consumption growth of 11% in the quarter and expanded Household penetration to 19%, up 170 basis points versus prior year. For fiscal year 2025, Quest grew consumption 12% and net sales of 13% on a 52-week basis, helping to deliver a 5-year CAGR of nearly 20% under our ownership. As the brand approaches $1 billion in net sales, we're very pleased with this performance, and we remain confident in our ability to continue to disrupt the nutritional macros across many categories. Credit goes to the Quest team, a nimble and competitive culture and a framework for growth based on disruptive innovation, expanding physical availability and increasing brand awareness. Our Quest Salty Snacks portfolio continues to outperform with consumption up 31% for the quarter and 34% for the full year. From representing 20% of Quest retail sales 3 years ago, [ Salty ] is on target to be our largest platform by the end of fiscal year 2026. The size of the addressable market is large. We have a rich pipeline of innovation. We continue to gain shelf and merchandising space in and outside our aisle. And as mentioned, we've invested to expand capacity. Our Quest [ bar ] business grew 2% in Q4 and for the full year, driven by our [ Hero ] line and our new overload [ bar ] platform. If you recall, our hero or chocolate-covered crispy line of bats and our recently launched overload bars with delicious inclusion heavy offerings are part of the wave of more indulgent protein bars. These products amp up taste and texture while delivering the nutritional macros consumers are looking for. While we're moving in the right direction on bars, our goal is to further accelerate our growth in this space. Over the past 18 months, we've built an impressive pipeline of exciting new platforms, flavors and textures that we'll bring to market in the coming years. Our Quest bakeshop platform continues to perform, and I'm excited for the launch of our first [indiscernible] shop line extension a great tasting, high-protein donut expected to hit shelves during Q1 of fiscal 2026. We're also encouraged by the early performance of our new RTD milkshake platform, which is disrupting the category in a way only Quest can, with leading macros and great taste. With strong commercial execution and more platform expansion to come in the spring, we're confident we can win in the fast-growing competitive RTD category. Lastly, with the recent launch of the second generation of our It's Basically Cheating advertising campaign. Campaign of [ humorous ] ads highlights how Quest uniquely enables consumers to succumb to their food desires by resolving the inherent tension between food that taste great, and food with good nutrition. Ads have already begun on Thursday in our football and will continue to be featured across a range of digital, social and other media properties throughout the year. Quest is our largest and highest-margin brands and the innovation leader in the category. As we rapidly evolve our organization, Quest will be at the forefront, continuing to deliver strong growth. Moving to Atkins. Fiscal year 2025 was a challenging year. Consumption declined 12% for Q4 and 10% for the full year, largely driven by losing distribution at club, and not repeating certain high-volume, low ROI merchandising events principally in math. Challenges continue to be concentrated primarily in bars and confections, whereas shakes were down 4% in the quarter and only 2% for the full year, supported by the success of the 30-gram [indiscernible] RTDs we launched a year ago. In the e-commerce channel, where space is not a constraint, we continued to drive solid growth with a key partner, up mid-single digits. As mentioned, as we evolve our company, Atkins will be a more focused brand around a core assortment, and we are being proactive in our efforts to get there. We acknowledge that there will continue to be short-term pain for Atkins with consumption expected to decline approximately 20% in fiscal year 2022. Consumer research continues to show that Atkins core strength lies in its scientific credibility and proven history of helping consumers achieve their weight loss or maintenance goals. In short, Atkins works. This gives us confidence that even as we are partnering with key retailers to repurpose Atkins space to accelerate growth for Quest and OWYN, we're making the right investments and taking the correct actions to stabilize and ultimately support the long-term sustainability and profitability of the brand. Turning to OWYN. Consumption grew 14% in the fourth quarter and 34% for the full year, with household penetration up 100 basis points to 4.2%. Double-digit RTD retail sales benefited from new distribution gains at a key [ mass ] customer and a tester club. I want to address the somewhat slower consumption growth we've observed over the last few months. The impact of lapping distribution, which I've discussed before, was exacerbated by a product quality issue related to a raw material sourcing decision for [ P protein ] made prior to the closing of the acquisition. Specifically, this [ P Protein ], which was used in a portion of production during Q2 resulted in taste and texture issues on certain lots as the product aged. While the affected product made up only a small minority, I want to be clear that it was 100% safe and met all of our allergen testing protocols. However, the product experience was poor and showed up in ratings and reviews. Therefore, as we ramp distribution and trial coming into Q4, our consumer response was not as robust as we would have liked. And as a result, velocity slowed. We have already mitigated the issue and begun aggressive programming and trade and customer marketing aimed at reaccelerating trial and growth rates. In spite of the challenge, OWYN still grew double digits in Q4, which is a testament to the unique positioning and strength of the brand. And early on here in Q1, OWYN sustained a mid-teens growth rate in September even as it lapped a big event at Club last year. With the integration largely completed, we will now leverage the full scale and capabilities of Simply Good to drive growth of the business. In fiscal year 2026, this will include significantly stepped up trade and marketing investments I spoke about. In addition to leveraging our retail teams to drive displays, both distribution gaps and bring highly differentiated innovation to market. In addition to shakes, powders also represent a huge opportunity for us at 12% of the brand's mix today growing significantly. OWYN's mission is to forge a new standard of clean. Its products are free from the top 9 allergens and have a cleaner and simpler list of ingredients. Simply put, OWYN is built for today's evolving consumer preferences. Recently completed research shows OWYN has leading equities in clean, plant-based nutrition. Aided awareness is low at 20%, reflecting significant headroom with ACV for shakes in the mid-60s and only 26% for powders. This is why we must invest more to drive awareness and build household penetration. We're only scratching the surface for what this brand can be, and we're fully committed to unleash its full potential. To summarize, fiscal year 2025 was a solid year, but much work remains to evolve the company to win in this exciting category. I acknowledge our guidance for fiscal '26 is below our long-term algorithm, and we are committed and confident we're making the right investments and taking the right actions in fiscal 2026 to set up fiscal 2027 for success. Approximately 3/4 of our portfolio through Quest and OWYN is driving strong top and bottom line growth. We're building a fast-paced, agile culture, backed with world-class capabilities necessary to win in this category. With Quest and OWYN driving growth, Atkins being reshaped for the future and productivity and pricing initiatives underway, we're confident in our ability to deliver sustained growth and value creation for years to come. I'll now hand the call over to Chris to provide you with details of our financial results and outlook. Christopher Bealer: Thank you, Geoff. Good morning, everyone. Overall, our fiscal year finished generally in line with our guidance, with some modestly higher costs impacting our margins as we exited the year. Organic net sales grew at least 3% in each of the last 3 quarters. We continue to invest in our brands, our talent and our capabilities to position the company for the long term. And we generated a lot of cash that we put to work. We are operating from a position of strength as we exit fiscal 2025 and assess the challenges facing us in fiscal 2026. I will now discuss our financial results. For net sales, total Simply Good Foods fourth quarter reported net sales of $369 million declined 1.8% versus last year. Excluding the small contribution from OWYN prior to the anniversary date of the acquisition's closing, as well as the lap of the 53rd week, organic net sales grew 3.5%. The key driver of this organic growth was Quest, which grew 15.9%, primarily from strong performance in our salty snacks business. While Atkins declined 18.3% as a result of distribution losses, and related trade inventory reductions. Gross profit of $126.6 million declined 13.3% on a reported basis from the year-ago period, driven mainly by lapping the 53rd week and elevated inflationary costs, most notably cocoa. Gross margin was 34.3%, a decline of 450 basis points versus prior year on a GAAP basis, largely reflecting higher input costs, and the initial impact of tariffs that were only partially offset by productivity and pricing. Excluding the inventory step-up related to the acquisition of OWYN, which was a 90 basis point headwind to gross margins in the fourth quarter of last year, gross margins declined 540 basis points. Selling and marketing expenses of $32.4 million were down 20.6% versus prior year, primarily the result of a planned pullback in Atkins marketing and lapping the 53rd week. G&A expenses of $40.6 million declined 1.6%, primarily due to lapping the 53rd week, that was mostly offset by OWYN integration expenses. Excluding stock-based compensation and onetime integration and other costs, G&A declined 16.6% to $27.6 million, driven by lapping the 53rd week and the initial realization of cost synergies related to the OWYN acquisition. As a result, adjusted EBITDA was $66.2 million, down 14.5% from the year ago period. Excluding the lap of the 53rd week, adjusted EBITDA declined in the high single-digit range. During the fourth quarter, we determined that there were indicators of impairment related to the Atkins brand and related intangible assets. After conducting a quantitative impairment assessment we recorded a noncash loss on impairment of $60.9 million. The impairment is the result of Atkins performance in fiscal year 2025 and updated projections of future revenue. Net interest expense of $3.6 million was down $4.3 million versus the prior year as a result of lower debt balances, while the effective tax rate was 20.2%. Net loss was $12.4 million, down from the net income of $29.3 million last year due primarily to the impairment charge I just mentioned. On a full year basis, reported net sales grew 9%, mainly driven by the OWYN acquisition, which added nearly 8 points of growth, partially offset by approximately 2% impact from lapping the 53rd week. On an organic basis, net sales increased 3%, driven by Quest, which grew 13.4%, as well as a small contribution from OWYN in Q4. Atkins was down 12.9%. Gross profit grew 2.8% year-over-year on a reported basis, driven by net sales growth that was partially offset by inflation, while gross margins for the full year declined 220 basis points as a result of elevated input costs, as well as dilution from the OWYN acquisition. Finally, adjusted EBITDA grew 3.4%, driven primarily by net sales growth, while reported net income declined largely as a result of the loss on impairment and other significant onetime costs primarily related to the OWYN acquisition. Fourth quarter diluted loss per share was $0.12, versus earnings per share of $0.29 in the year ago period, driven primarily by the impairment charge I mentioned a moment ago, which was a $0.45 after-tax headwind in the quarter. Q4 adjusted diluted earnings per share was $0.46, compared to $0.50 in the year ago period. On a full year basis, the company generated diluted EPS of $1.02, a decline of 26.1% versus the prior year, largely due to the aforementioned impairment charge and onetime integration costs. Adjusted diluted EPS of $1.92 increased 4.9% versus the comparable prior year period. Please note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes divided by diluted shares outstanding. Moving to the balance sheet and cash flow. As of the end of Q4, the company had cash of $98 million, an outstanding principal balance on its term loan of $250 million, bringing our net debt to trailing 12-month adjusted EBITDA to approximately 0.5x. Full year cash flow from operations was $178 million, compared to approximately $216 million last year. The decline was primarily due to higher uses of working capital. Capital expenditures finished the year at approximately $20 million, reflecting the timing of initial payments related to the strategic investments we are making to support additional capacity. I will discuss this in more detail in a moment. For fiscal year 2025, the company repaid a total of $150 million of its term loan debt, bringing total repayments from the OWYN acquisition to $240 million, or essentially all of the $250 million borrowed to fund the purchase. We remain very comfortable with our gross debt levels today. In addition, during the quarter, the company used approximately $27 million to repurchase nearly 900,000 shares. For the full year, the company used approximately $51 million to repurchase nearly 1.6 million shares, or almost 2% of our outstanding common stock. Finally, as detailed in this morning's press release and to reflect management's and the Board's continued confidence in the business, the Board of Directors recently approved a $150 million increase to the company's existing stock repurchase program. As of October 23, 2025, the company has approximately $171 million remaining under its revised stock repurchase authorization. Moving on to a discussion of our outlook. Since we last spoke with you in July, here is what has changed. First, as a result of accelerating pressures from inflation and tariffs, we announced the targeted pricing actions that will be in market by the end of Q1, and are expected to be a low single-digit benefit once fully implemented. These actions cover all three brands and will help us restore our margins, but in the near term, will cause our top line trends to be more subdued as a result of initial elasticity. Second, near-term growth slowed for OWYN as a result of the identified quality issue, which will also require incremental trade and brand investment to reaccelerate growth. Third, the impact from tariffs are now generally more certain. Apart from any changes in the prevailing tariff rates for Chinese imports, considering the ongoing negotiations where timing and magnitude remains uncertain. Assuming no significant change in prevailing tariff rates on China, we estimate our total tariff exposure will be less than 2% of our fiscal 2026 cost of goods sold on a net basis, including the benefit of currently identified mitigants against which we are already taking action. Given the trade agreements announced to date, the blended tariff rates will come in slightly higher than we were previously expecting. Fourth, we have a secured coverage on cocoa supply that as we move through the second half of fiscal 2026 will be progressively at prices below prior year, giving us good visibility on cost and margin improvement, as we move through fiscal 2026 and into 2027. We continue to diligently monitor the commodity markets with opportunity to further lock in more favorable costs and ensure supply. And finally, while not a change, I want to point out that we remain committed to investing in our growth platforms for the long term, even while we face higher inflation, especially in the first half. Therefore, for fiscal year 2026, we expect the following. Net sales growth is expected to be in the range of negative 2% to positive 2%, with growth from Quest and OWYN offset by Atkins. Gross margins are expected to decline in the range of 100 to 150 basis points, and adjusted EBITDA year-over-year is expected to be in the range of negative 4% to positive 1%. This includes increased marketing spend on Quest and OWYN to support growth, while focusing on profitability for Atkins. Management is focused on long-term growth for the total company and we'll look to provide more fuel should we find the opportunity to do so. As we look at the shape of fiscal year 2026, the year will be a tale of two halves, with the second half expected to be stronger on both the top and bottom line than our first half. Starting with net sales. We expect growth in the first half to be at or below the lower end of our full year range, with Q2 likely to be our weakest quarter of the year. The first half will be impacted by initial elasticities related to our recently announced pricing actions and the wraparound drag from Atkins distribution losses. While we will see the underlying benefit of recent distribution gains on Quest and OWYN, growth will be muted by the lingering effects from the OWYN quality issue, and a generally tough lap for Quest and OWYN, both of which benefited in the prior year from strong merchandising programs, particularly in Q2. By the second half, we expect trends to improve meaningfully, driven by an exciting slate of innovation launches across our brands, normalizing elasticities, lapping the initial impacts from OWYN's product issues and tailwinds from distribution. Therefore, we expect net sales growth in the second half of the year to be at the higher end of our full year outlook range. Moving down the P&L. The shape of the year will be even more pronounced, driven by elevated inflation and tariffs impacting our margins in the first half, before we benefit from the combination of lower cocoa costs, building productivity and realized pricing in the second half. This lag will be most acute in Q1, when we will have very little benefit from pricing and productivity to help offset the higher costs, including the historically high cocoa inflation and our first full quarter of tariffs. As a result, we expect Q1 gross margins around 32.5%, representing a year-over-year decline of nearly 600 basis points. Beginning in Q2, we expect to deliver sequential improvement in year-over-year trends for gross margin. And by the second half, we expect our gross margins to be in line, or slightly better, than our full year fiscal 2025 gross margins on a GAAP basis, implying gross margin expansion in Q4 of nearly 200 basis points year-over-year. Adjusted EBITDA should generally track the shape of our expectations for gross margins, with pressures in the first half and much stronger results by the second half. Specifically, we expect first quarter adjusted EBITDA to decline by approximately 25% year-over-year. By Q2, we would expect more subdued year-over-year declines in the high single-digit range before we return to growth in the second half. Similar to gross margins, we expect the fourth quarter to be our strongest period of growth, up double digits year-over-year. I would note that our outlook assumes current economic conditions, consumer purchasing behavior and prevailing tariff rates will generally remain consistent across the company's fiscal year. While our outlook includes a number of important assumptions, there remains several uncertain swing factors outside of our control that could represent risk to our outlook. Before we open up the call for questions, I wanted to finish by explaining our plans to spend $30 million to $40 million on CapEx in fiscal 2026. Nearly all of this investment will be to support growth in our most attractive areas and particularly to reinforce our competitive mode in our [ Salty ] business. We have been very clear that there is a big opportunity to drive continued expansion in our [ Salty ] platform. Consumers love the products and retailers are leaning in with us. The investment in incremental and more flexible capacity enables us to support our long-term growth aspirations on the business and has an attractive payback. Strong cash flow generation is a hallmark of this company and next year will be no different. Our low debt levels and high cash conversion rate provides us the optionality to create meaningful long-term value for our shareholders in multiple ways, including by investing in capacity through share buybacks and via M&A. For a comprehensive summary of our full year outlook, please see Slide 17 in our presentation. I want to commend our team for their hard work and tenacity to deliver the year and thank them for their support and collaboration in my first quarter as CFO. That concludes our prepared remarks. Thank you for your interest in our company. We are now available to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Peter Grom with UBS. Peter Grom: I wanted to just pick up on the comments around OWYN and kind of the product quality issues that you alluded to that impacted the quarter. Geoff, it sounds like these are now kind of in the rear view here. So just curious how you think about the path from here, maybe what you've seen more recently from the brand? And then I guess just related, when you think about the full year sales guidance, what's the range of outcomes as it relates to OWYN based on what we know today? Geoff Tanner: I appreciate the questions. As we said on the call, our guidance for the year had always expected Q4 to slow a bit as we were lapping now own distribution wins. However, as mentioned, Q4 was impacted by product quality issue. Related to the raw material sourcing for P Protein, a decision that was made prior to causing the acquisitions. More specifically, the P Protein was used in production during Q2, which did impact taste and texture on certain plots is the product age used in our estimate around 10%. But certainly material enough to impact consumption, and we certainly saw it come through in ratings and reviews. So as soon as we saw it, we jumped on it. I will say the product 100% [indiscernible] within the OWYN allergen-free guideline. A small portion of product was impacted but enough to impact consumption and [ sharpened ] ratings and reviews. So what do we do about it? We have rectified the issue. We've got a newer and more stable formulation that is shipping, been shipping since August will be fully in market by fiscal Q2. Obviously, work with customers that were more disproportionately impacted. We increased trade to reach that trial, and we've increased marketing as part of that. So we've dealt with the issue. It's mostly in the rear-vision mirror. There's probably a little bit of product out there, but that's why we're ramping up our investments in both trade and marketing. We continue to be extremely confident about the trajectory of this business. Strategically, it's expanded our presence in the Shake category. It reaches a new consumer, namely those looking for plant, clean label, feedback from retailers that this is a very distinct incremental segments. The integration has gone well. The synergies are on track. So this was -- this product issue. We've jumped on. We've dealt with it. But as you do look -- as you look forward, I could not be more excited about the OWYN brand. It's the clear leader in clean. And as we sit today, even versus where we were -- when we completed the acquisition, you're seeing the increasing emergence of clean and consumers looking for clean options, and we certainly hear that for retailers. We see distribution upside on the core business. ACV is still low. As you look at brand awareness, with only aided awareness around 20%. That's why we're significantly increasing marketing. But this is not just on the core shakes business. I think as we mentioned on the call, the powders business, smallest portion today, but that's extremely high growth, very incremental. And one of the things we did right at close of acquisition is we integrated the R&D teams. And we've been working -- you should assume we've been working on some exciting platform innovation that will build from there. So we saw the product issue. It impacted consumption. We jumped on it. We've addressed it. It's one of the reasons we increased investment just to really get that trial accelerated. Confident in the near term. Confident in the long term. And we're very pleased we acquired this business. Operator: Our next question comes from the line of Steve Powers with Deutsche Bank. Stephen Robert Powers: Geoff, maybe picking up on where you started the conversation just on the low sugar, high protein macro trends. Assuming it is strong and enduring a structural shift as you discussed in your opening, and I don't -- I think there are a lot of reasons to believe it is. I guess, how do you handicap future competition? Maybe how have those views changed since you first arrived at Simply? And maybe a bit more detail how you've incorporated those allowances and forecasts into your business planning for fiscal '26? If I could also, Chris, just picking up on where you wrapped up on capital allocation. Just given the dynamics that the business is contending with organically this year, both top line and cost related, as well as the decision to lean into CapEx a bit more to drive capacity. Just -- I was curious to see if there's any shift in your appetite or capacity to handle M&A.? It didn't sound like it from your comments, but I just wanted to clarify that. Geoff Tanner: Yes, I'll start, Steve. So to your question on the category and competition, this is a fantastic category, especially versus [ same-store ]. We're seeing now 5 years of high single, or low double-digit, growth. Category grew 13% and fiscal '25 and most of that was volume. To your point on competition, it's not a surprise to us, but it's a very competitive space, particularly with those growth rates. What I will say is competition is not new to us. It's not a new dynamic for Simply. This category has always had a pretty high level of competition. We've always been able to do well. And it's the reason why we've invested so heavily in R&D, more recently bolstered our sales capabilities. We're category captain at retailers. And we've got a very agile and robust supply chain. I think M&A capabilities and the success we've had to play a role there. As you think about the market, though, what I would point out is this -- one of the dimensions, Steve, is if the category is mainstreaming. It's not just limited anymore to the core traditional aisle. And as that category made streams, the addressable market for us is increasing substantially, which is why we're putting much more emphasis on getting out of our aisle. You can see that with chip, the displays we're getting merchandising, placement, secondary placement. And you can see that with the kind of products we're bringing to market more mainstream products like chips, like [indiscernible], like milk shake. So competition [ and ] dynamics, it's something we've always dealt with. What I would say, and then I'll hand it over to Chris, is one of the things I've tried to do at Simply, is to up [indiscernible] output to better handle competition than we have in the past. So that's a more agile organization. Everything needs to be faster. Innovation needs to be faster to market. And marketing more digital, more always on. Our -- the decision-making that -- in the organization needs to be quicker. And this is something that we continue to work on as an organization as we face up to large-scale competitors and [ insurgent ] brands. It has to be part of the DNA of Simply Good, and we're committed to being an organization that combines the best of a scaled organization, with the mindset and agility of an insurgent operator. So I'll turn it over to Chris for the second part. Christopher Bealer: Thanks for the question. So just maybe just to set the table up there. In '25, just to remind you, we generated around $180 million of of cash from operations. We spent about $20 million in CapEx. We paid off $150 million in debt, and we bought back just over $50 million in shares. So as we look at that, this business continues to generate a lot of cash. We're starting our '26 with a very low net debt level, and we're very comfortable with our debt levels. As we look at cash priorities, we're constantly evolving the best use of excess cash through a very structured framework. I would say our priorities have not changed. I would say that we look at these options really as and, and not [indiscernible] So we believe we can buy back shares. We believe we can invest in capital, we believe that if the right M&A opportunity comes along, we certainly have capacity to take that on. And we do look at M&A really through a constant lens. But in the short term, today, we look at our stock, we believe it's attractively valued. And we do think buyback represent a good opportunity for us to create long-term value. Geoff Tanner: That's just the one built on that with me from a CapEx perspective. As you think about our supply chain, Steve, we have an agile supply chain built to follow the consumer, which is a real asset for us. And that is part of our operating model. However, where we see an opportunity to invest, to strengthen a competitive mode, we will, which we've seen on chip. It's obviously the fastest growing part of our portfolio. And in that instance, we're willing to invest capital in partnership with a key strategic [indiscernible] to strengthen our competitive mode. Operator: Our next question comes from the line of Robert Moskow with TD Cowen. Robert Moskow: I just want to make sure I'm getting my math right, because the top line guidance was a thing that I think surprised us being lower, and [ 0 ] at the midpoint, the Atkins decline was not the surprise though. So given that, I think, Quest exited the year at 14% organic growth. And I think you even said that despite the problems on OWYN, you were also double digit there. Just mathematically, it looks like these two are going to be up high single digit in fiscal '26? I just want to make sure I got that math right. And if so, are you forecasting a deceleration in Quest in '26? Is that also part of the guide along with OWYN's issues? Christopher Bealer: Yes. So I think you got the math roughly right. We're looking at Quest up really high single digits. OWYN will be in the double-digit range. And as we talked about on the call, Atkins is going to be down in consumption of about 20%. I think a couple of factors that -- perhaps we'll explain it. We have -- as we said on the call, we have a [indiscernible] increase that we've announced to trade. It's not in market yet. So when we [ show up ] the consumption numbers yet. So we do have a price elasticity effect that will be heaviest in the first half. We're also assuming Atkins trade inventories will come down, driven by the distribution losses, which also helps explain a little bit the consumption versus net sales guidance. And then from a Quest perspective and OWYN perspective, if you look at the first half, they have some tough laps which we will have to work through, which is also why half 1 is a little bit lower, perhaps in the full year. Operator: Our next question comes from the line of Jon Andersen with William Blair. Jon Andersen: I've got several. But I'll just [indiscernible] on this. Maybe big picture. So Geoff, you mentioned earlier that -- and we're seeing this, obviously, too, that the category is mainstreaming to some extent. And as you pointed out, not necessarily constrained to the traditional aisle anymore as a result. So I guess my question is, if kind of the incremental household, or incremental consumer, for these types of products may not may not be in that traditional aisle, maybe more in a mainline aisle. How are you kind of approaching serving that customer, getting in front of that customer, interrupting that path to purchase? What kind of capabilities are you building if you invest in? How do you see the offering evolving and maybe moving around the store? Geoff Tanner: Yes, it's a good question. And we certainly see it if you just look at the increase in household penetration that Quest has experienced and OWYN has experienced. Quest up 19% and OWYN up close to a point. But you're right. So as the category has mainstreamed, as more and more consumers are looking for high-protein low-carb low-sugar options, they're looking for those options everywhere they shop. This is no longer just isolated to the more traditional [indiscernible]. In my opinion, this one of the biggest trends that are shaping this category, the mainstreaming of it. And that is why we -- over the last year, in particular, we've had a focused effort on expanding the physical availability of our products outside our aisle. And so you will see secondary placement in mainline aisles, for example, chips. We've built a new retail team that is focused on driving displays across the store. We have made progress in new channels, particularly in the club space. We've invested in away from home. So I think universities, gem and airports. And what I would say is we're still in the early innings of that. That is one of the biggest growth vectors that we are focused against right now, and we've built the capabilities to do that. The second piece to that is continuing to bring products that are more mainstream. Not just limiting our innovation to bars and shakes. And we've seen that with [ Quest Chips ], and we are in the early innings of [ Quest Chips ]. You've seen that with our Bake Shop launch, which has proven to be highly incremental. And that -- thinking more broadly with innovation and really tapping into what I think possibly the greater strength we have in our organization, which is our R&D team. And disrupting the macros of large snacking category. So this is all in support of mainstream -- mainstreaming. Being available everywhere consumers shop and are looking for our products, and offering them a broader range of products that flip the macros on large unhealthy snacking categories. Operator: Our next question comes from the line of Megan Clapp with Morgan Stanley. Megan Christine Alexander: I wanted to ask about Atkins. Geoff, I think you mentioned at this point, 75% of the brand sales come from SKUs in the top 2 quartiles of category velocity. Are you able to just tell us, are those SKUs growing at this point? Just trying to kind of square with the 20% decline you're expecting this year. Is that concentrated in kind of the lower-velocity SKUs? Are you still seeing some pressure within the core? And just how should we think about kind of that 10% to 15% in the bottom quartile? Is the bulk of the rationalization you think as we get through '26 is going to be behind you? Geoff Tanner: Yes. So -- yes. By far, the majority of the SKUs in the top 2 quartiles that represent 75% of sales are growing and healthy. The issue with Atkins as we've talked about in the past and on the call today, is it had a long tail SKUs that have underperformed. So the declines that have impacted Atkins have been by mostly driven by what you're seeing in the tail SKUs. And if you want to zero in on that 10% to 15% in the bottom quartile of the category. So that's where we're focused. That's where we're focused on rationalizing that tail and working with retailers to drive to a more optimal assortment and more sustainable assortment concentrated around the core. Operator: Our next question comes from the line of Brian Holland with D.A. Davidson. Brian Holland: I wanted to ask about the selling and marketing line, which if we go back, depending on what starting point you want to use, come down about 300, 400 basis points as a percentage of sales. This obviously dates back to when Atkins was the only asset in the portfolio. You talked this morning about leaning into the Owen brand despite the fact that you have margin pressures elsewhere, so you're taking an incremental hit to support that brand. You've had pretty clear success since you rolled out copy on Quest. So you have some proof of concept there back in early '24. And obviously, Atkins maybe is in a different place than it was if we go back 5 or 6 years, as far as what it requires from a support level. But again, just thinking about where that number has come down? And thinking about modeling this business going forward, and the earnings power? Just wondering what the right level of brand support for this portfolio requires? Geoff Tanner: Yes. I'll take it and turn over to Chris. So we've been really pleased with the impact that advertising has had on Quest. Over the last couple of years, Quest is up substantially, up double digit in dollars. And the new campaign that we rolled out just over a year ago had an almost immediate impact on consumption. You could see it. I've been doing this for 25 years. And it's very rare to see such an immediate impact of advertising on the business. Just rolled out, released a 2.0 version of It's Basically Cheating, and the test scores there were terrific. So advertising works for us in the space. As you think about how we're allocating our marketing spend? So Quest up double digits, significant advertising to support that business. And then as we look at the trajectory we see on OWYN, and the future we see on OWYN, and the customer conversations with OWYN, we think the right decision for us is to make a substantial increase in marketing in that business for the long term. You're right, where we have rationalized advertising is on Atkins as we've brought spending back in line with the size of that business and with the trajectory of that business. And then just one more point on advertising, shifting more and more to digital, so social media, winning with influencers, retail media outlets. So there's also a mix shift within our marketing expense. Christopher Bealer: And then the only thing I'd really add to Geoff's comments is, as we find opportunity through the year to invest more in marketing, we absolutely will. And that's definitely a priority for us is to set ourselves up well for future continued sustained growth. Operator: Our next question comes from the line of Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: Wanted to dig into something that you talked about related to the OWYN product issue on -- I don't know if you said it was reviews or if it was something on social. But maybe if you could just talk a little bit about how you might be addressing [ only ] from a brand issue, maybe the product quality issues are resolved. But what impact did it have on the brand? You've talked a lot about sort of incremental marketing, but maybe what specifically are you doing? And perhaps what is the narrative, or has the narrative been impacted in any way from this issue? Geoff Tanner: Yes. So let me just reinforce that the product issue is largely behind us. We've been shipping new, more stable product since August. And that the impact was less than 10% product that notwithstanding, it did have an impact on consumption and ratings and reviews, which did drop. The product and market was a little more concentrated in a few channels. We've overinvested in those channels to get the ratings back up, to drive trial. And I'm confident that this business will be very quickly back to where it was. And to underscore that even with the issue in market, the brand is growing mid-teens. As you look long term, again, we have tremendous confidence in this business. The clean movement is really accelerating. We're hearing it from retailers. We're planning on making significant investments in marketing to drive awareness from a pretty low base. We see distribution opportunities in front of us. And I'm really excited about disruptive innovation we'll be bringing out within the next year on the business. Operator: Our next question comes from the line of John Baumgartner with Mizuho Securities. John Baumgartner: Geoff, you mentioned the price increase that's forthcoming at retail. How are you thinking about elasticity on the back of that? Should it be higher than history given the health of the consumer? And related to that, if you can just please clarify the focus on the entry prices for Atkins bars? Are you finding that absolute prices today after the last few price increases taken, have prices become an impediment to consumption among existing buyers? Or is this more of a mix shift, whereas as the category mainstreams, new households come in, maybe more middle-income consumers, does it require lower prices to attract new households? Geoff Tanner: Yes. So on pricing, we have announced pricing on portions of the portfolio kind of in the mid- to high single-digit range. We expect elasticity to be in line with what we would historically see. But we have seen that. Initially, the elasticity impact may be a little higher and then tends to burn off, which is, as you heard Chris mention earlier, it's one of the drivers of our first half, second half inflection. To your question on have we seen pricing dampen growth? Absolutely not. This has proven to be a category that is pretty resilient to pricing in the long run. You don't get to 5 years of high single, low double-digit growth if that's happening. So this seems to be a category that's very resilient to pricing in the long run. To your question on the Atkins [indiscernible] entry price point. We -- the Atkins products, our entry price point was at a 5 pack, where the majority of competition was in a 4 pack, and that just created a higher absolute price on shelf as we did our research, we identified an opportunity to come out with a 4 pack at a lower absolute price. And it's early, too early to call it. We are certainly seeing the entry price point bring in new users to the brand. Operator: Our next question comes from the line of Matt Smith with Stifel. Matthew Smith: Just wanted to come back to the comments on sales expectations by brand and phasing. First, Atkins consumption is expected to be around -- down around 20%. You also called out that inventories may move lower, given some of the distribution losses. Do you have an estimate for where you would expect that inventory headwind to come in? And second, you called out a tough merchandising comparison in the second quarter, specifically for Quest. Is that related to lapping the large club event last year? And can you provide an update on how your distribution opportunity, or expansion is going within the club channel? I think you had some positive takeaways from a large event last year and you were going through an evaluation period. Curious how you're continuing to see that evolve? Geoff Tanner: Yes. Just address the [indiscernible] Atkins. Yes, we do see Atkins. We think net sales will be down more than 20% in the first half, which is, as you rightly pointed out, is the consumption decline we called out on the call earlier, as well as the distribution impact. That distribution comes down, obviously, will be load at retail for those points. So that will be coming down more than 20% in the first half and a bit better in the second half. In terms of Quest, yes, there is a -- we are lapping some heavy merchandising in Q2 last year. Also remember that as we just talked about, we have price elasticities that will be really an effect -- full effect in the second quarter, which is an impact. But we're very happy with where especially the [ Salty ] business is running, obviously still very strong and lots of momentum left on our business. Christopher Bealer: Yes. I can pick up the question on Quest. You're right. Last year, during New Year -- New Year, we had a test a large club customer where we have really not had any business at all. Quest performed very well. And we've had continued conversations with that customer about how to roll that out. And the way it looks like it's going to phase at this point is that it will be more spread out throughout the year, more consistent distribution versus having all of that distribution as we did in January, February and a little bit into March. So that that's where we're landing right now. We continue to work with that customer and really excited about the new relationship we're building with that customer. It does represent for Simply significant white space from a distribution perspective. And just more specifically back to the Quest [ chips ] and the lapse is the spreading effect of that volume that will now be more spread throughout the rest of the year as the process is concentrated. Operator: Our last question comes from the line of Jim Salera with Stephens, Inc James Salera: I wanted to circle back on the margin component of the guidance. Are you guys able to remind us what percentage of [ COGS Poco ] represents? And if you can give any commentary around kind of the layering of your hedges? There's been a lot of volatility in cocoa. So we're just trying to get a sense if prices continue to fall, could there be gross margin relief maybe earlier than 3Q, or to a greater magnitude in 3Q? Just any comments there would be helpful. Geoff Tanner: Yes. I mean in terms of cocoa, just to remind you, cocoa is -- we do buy cocoa directly. We also have cocoa as a significant component of our coatings layers and inclusions. As a percentage of our overall cost is in the mid-single-digit range. And then from a coverage perspective, which I think was the other part of your question, we do have -- we are covered out quite far into the year, certainly first half, to remind you, I think we talked about it on the call. We are covered in the first half of the year at a fairly high prices that we were -- we took as we were just ensuring supply. As we get into Q3, we'll be transitioning into much lower cost and actually deflationary year-over-year. And then as we go into Q4, that will take even more into effect, lower prices, which will then carry into FY '27. And then the only other point I would say on margins as you started with a more general point is we have pricing. As we said, really starting in Q1, really mostly in fiscal November and rebuilding into Q2. Productivity, we said -- we've always said is on a lag, and that will be really kicking in fully in the second half. So that's why we have pretty good confidence if you look at our costs. Costs are well understood through most of the fiscal year. Pricing is building, productivity is building. And we do see, even in the spot prices, specifically on cocoa, even further opportunity again as we think about Q4 and into '27. Christopher Bealer: The spot has come down quite considerably in the last couple of months, and certainly considerably from the position we have today through the first half. Operator: We have reached the end of the question-and-answer session. I'll now turn the floor back to Geoff Tanner for closing remarks. Geoff Tanner: I just want to thank everyone for their participation today on the call. If you got any follow-up, please feel free to reach out to Josh, and we look forward to speaking to you in January. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the Bread Financial's Third Quarter 2025 Earnings Conference Call. My name is Kevin, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations for Bread Financial, the floor is yours. Brian Vereb: Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta. Ralph Andretta: Thank you, Brian, and good morning to everyone joining the call. Today, Bread Financial reported strong third quarter 2025 results. we delivered net income of $188 million, adjusted net income and earnings per diluted share of $191 million and $4.02, excluding the $3 million post-tax impact from expenses related to repurchase debt in the quarter. Our tangible book value per common share grew by 19% year-over-year to $56.36 our return on average tangible common equity was 28.6% for the quarter. Consumer Financial health remained resilient in the third quarter as evidenced by strong credit sales a higher payment rate as well as lower delinquencies and losses. Credit sales increased 5% year-over-year in the face of ongoing inflationary concerns, a slowing yet stable job market and continuing weak consumer sentiment. The improvement was driven by strong back-to-school shopping early in the quarter with notable improvement in apparel and beauty. Additionally, purchase frequency increase and spending trends improved across all consumer segments amidst these favorable results, we continue to monitor changes in monetary and fiscal policies, including tariff and trade policies and their potential impacts on consumer spending and employment. Overall, a positive year-over-year credit sales trends and gradual improvement in our credit metrics gives us confidence in our outlook as we enter the final quarter of the year. Given current credit trends and slightly better-than-expected performance of our net loss rate year-to-date, we expect that we will be at the low end of our full year outlook range of 7.8% to 7.9%. While the net loss rate remains elevated compared to historic levels, the improving loss rate and delinquency rate trends are encouraging. As I mentioned earlier, we will continue to closely monitor consumer health purchasing and payment patterns and adjust our credit strategies accordingly to achieve industry-leading risk-adjusted returns. More broadly, we have remained consistent in our full year financial outlook as we continue to navigate market volatility. Our expectations around the health of the consumer have not materially changed. We have maintained our long-term focus on responsible growth and executing our business strategy. Given the actions we have taken over the past 5-plus years, we are well positioned to achieve our long-term financial targets and anticipate increasing shareholder value over time. Our focus on expense discipline and operational excellence continues to produce desired results as adjusted total noninterest expense was down 1% year-over-year despite continued technology-related investments, inflation and wage pressures. We will continue to invest in technology modernization, digital advancement, artificial intelligence solutions and product innovation that will drive future growth and efficiencies. Considering the progress we have made, we are confident in our ability to achieve full year positive operating leverage, excluding the impacts of repurchase debt and any portfolio sale gains. With our CET1 ratio at the top of our targeted range of 13% to 14%, we initiated the $200 million share repurchase program that the board approved in August, repurchasing $60 million during September and into October. This morning, we announced a board-approved $200 million increase to our share repurchase authorization. We also announced a 10% increase to our quarterly cash dividend, which is now $0.23 per common share with the goal of increasing our dividend annually as we see growth in our book value. These actions, along with our proven strong capital and cash flow generation underscore our ability to execute all of our capital and growth priorities concurrently, providing a solid runway to deliver additional value to our shareholders. Moving to our new business activity. During the quarter, we expanded our home vertical foothold by signing new brand partners, including Bed Bath & Beyond, an e-commerce retailer with ownership interest in various retail brands. Furniture First, a national cooperative buying group that serves hundreds of independent home furnishings and bed retailers across the U.S. and Raymour & Flanigan, the largest furniture and mattress retailer in the Northeast and the seventh largest nationwide. These new signings provide expanded opportunity for profitable growth going forward. We will continue to leverage our full product suite and omnichannel customer experience to extend category leadership in existing industry verticals, while expanding into new verticals. Strategically, our vertical and product expansion efforts continue to have positive impact on both risk management and income diversification across our portfolio. Finally, as released last week, we are pleased to have earned a credit ratings upgrade and positive outlook for Moody's recognizing the progress we have made in strengthening our financial resilience and enterprise risk management framework. In summary, we are pleased with our third quarter results. Our financial performance reflects steady progress in executing our strategic priorities and our ongoing commitment to return value to shareholders, including in the form of increased dividends and share repurchases. Now I will pass it over to Perry to review the financials in more detail. Perry Beberman: Thanks, Ralph. Slide 3 highlights our third quarter performance. During the quarter, credit sales of $6.8 billion increased 5% year-over-year even with the anniversary of the Saks portfolio addition in late August 2024. The increase was driven by new partner growth and higher general purpose spending. As Ralph mentioned, we saw strong back-to-school shopping in the early part of the quarter with sales growth moderating in the latter part of the quarter. Average loans of $17.6 billion decreased 1% year-over-year. Higher payment rates, coupled with the ongoing effect of elevated gross credit losses, pressured loan growth. In line with lower average loans, revenue was down 1% year-over-year to $971 million. Our revenue growth was also impacted by lower build late fees resulting from lower delinquencies, higher retailer share arrangements, RSA with partial offsets, including lower interest expense and our ongoing implementation of pricing changes and paper statement fees. Total noninterest expenses decreased $98 million attributed to the prior year impact from repurchase debt. Excluding the impacts from our repurchase debt, adjusted total noninterest expenses decreased $5 million or 1% driven by our continued operational excellence efforts. Income from continuing operations increased $185 million, reflecting the prior year post-tax impact from a repurchase debt of $91 million and the current year impact from a lower provision for credit losses, and a $38 million favorable discrete tax item. Excluding the impacts from our repurchase debt, adjusted income from continuing operations increased $97 million or 104%. Looking at the financials in more detail on Slide 4. Total Net interest income for the quarter decreased 1% year-over-year, resulting from a combination of a decrease in billed late fees due to lower delinquencies as well as a gradual shift in risk and product mix leading to a declining proportion of private label accounts, which generally have higher interest rates and more frequently fee assessments. These headwinds were partially offset by lower interest expense the gradual build of pricing changes and an improvement in reversal of interest and fees related to improving gross credit losses. Noninterest income was $7 million lower year-over-year, driven by higher retailer share arrangements, partially offset by paper statement fees. Looking at the total noninterest expense variances, which can be seen on Slide 11 in the appendix, employee compensation and benefits costs decreased $6 million as a result of our continued focus on operational excellence. Card and processing expenses increased $4 million, primarily due to higher network fees driven by our gradual shift in product mix. Other expenses decreased $93 million, primarily due to the prior year impact of repurchase debt. Looking ahead, we anticipate a typical seasonal increase in fourth quarter expenses sequentially from the adjusted third quarter expenses due to increased holiday-driven transaction volume higher planned marketing expenses and higher expected employee compensation and benefits costs. Adjusted pretax preprovision earnings or adjusted PPNR, which excludes gains on portfolio sales and impacts from repurchase debt was nearly flat year-over-year. Turning to Slide 5. Both loan yield of 27.0% and net interest margin of 18.8% were higher sequentially following seasonal trends. Net interest margin was flat year-over-year. A number of variables continue to impact our NIM, including the drivers I noted on the prior slide, as well an elevated cash position and changes in Fed rates. Given continued improvement in payment rate and delinquency rate trends, we anticipate lower billed late fees for the remainder of the year to pressure NIM, while the gradual benefit from pricing changes will continue to be realized over time. On the funding side, we are seeing cost decrease as savings accounts and new term CD rates decline. During the quarter, we completed a $31 million tender offer for our senior and subordinated notes using excess cash on hand to reduce higher cost debt, which also improved our cost of funds. Direct-to-consumer deposit growth remained steady year-over-year, ending the quarter with $8.2 billion in direct-to-consumer deposits, further improving our funding mix Direct-to-consumer deposits accounted for 47% of our average funding up from 41% a year ago. Moving to Slide 6. Optimizing our funding, capital and liquidity levels continues to be a key strategic initiative. As history shows, we will be opportunistic in evaluating and executing plans to continue to enhance our structure. Along those lines, as Ralph mentioned, we are proud to have earned a credit ratings upgrade from Moody's to Ba2 while maintaining a positive outlook. This was a result of the actions we have taken to improve our capital and funding profiles along with our improved enterprise risk management framework and strong financial performance. Our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $7.8 billion at the end of the quarter, representing 36% of total assets. At quarter end, deposits comprise 77% of our total funding with the majority being direct-to-consumer deposits. Shifting to capital. We ended the quarter with a CET1 ratio of 14.0%, up 100 basis points sequentially and up 70 basis points compared to last year. As you can see in the upper right table, our CET1 ratio has benefited by 260 basis points from core earnings. Common dividends and the repurchases of $234 million in common shares over the past year impacted our capital ratios by 146 basis points. Additionally, the last CECL phase-in adjustment occurred in the first quarter of 2025 and resulting in a 73 basis point reduction to our ratios and the impact from repurchase debt accounted for approximately 30 basis points of adjustment to CET1 since the third quarter of 2024. Finally, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 26.4% of total loans, a 70 basis point increase compared to last quarter, demonstrating a strong margin of safety should more adverse economic conditions arise. We have a proven track record of accreting capital and generating strong cash flow through challenging economic environments. We have demonstrated our commitment to optimizing our capital structure through the issuance of subordinated debt and the return of capital to shareholders. We will continue to opportunistically optimize our capital structure, which includes potentially issuing preferred shares in the future. Our commitment to prudently returning capital to shareholders is evidenced by today's Board authorized announcements of both a 10% increase in our common share dividend and an additional $200 million share repurchase authorization. This $200 million increase to our existing repurchase authorization in combination with unused capacity under the previous authorization means we have approximately $340 million available for share repurchases at this time. We are well positioned from a capital, liquidity and reserve perspective. providing stability and flexibility to successfully navigate an ever-changing economic environment while delivering value to our shareholders. Moving to credit on Slide 7. Our delinquency rate for the third quarter was 6.0%, down 40 basis points from last year [indiscernible] basis points sequentially, which was slightly better than normal seasonal trends. Our net loss rate was 7.4%, down 40 basis points from last year and down 50 basis points sequentially. Credit metrics continue to benefit from our multiyear credit tightening actions ongoing product mix shift and general stability in the macroeconomic environment. We anticipate the October and fourth quarter net loss rates will increase sequentially following typical seasonal trends. The third quarter reserve rate of 11.7% at quarter end, a 50 basis point improvement year-over-year and 20 basis points sequentially was a result of our improving credit metrics and higher quality, new vintages. We continue to maintain prudent weightings on the economic scenarios in our credit reserve model and given the wide range of potential economic outcomes. We expect the reserve rate to decline at year-end before increasing again in the first quarter of 2026 following normal seasonality. As mentioned, our disciplined credit risk management and ongoing product diversification has continued to benefit our credit metrics. As you can see on the bottom right chart, our percentage of cardholders with a 660-plus prime score increased 100 basis points year-over-year to 58%, in line with our expectations. However, macroeconomic uncertainty persists with inflation above the Fed's target rate, evolving trade and government policy impacts to both inflation and labor and continued low consumer sentiment. As a result, we continue to actively monitor these trends while remaining vigilant with our credit strategies. But at this point, we do anticipate a continued gradual improvement in the macroeconomic environment. Turning to Slide 8 and our full year 2025 financial outlook. Overall, our results have trended in line with our expectations and our outlook remains unchanged from the previous quarter. We continue to expect average loans to be flat to slightly down. Our outlook for total revenue, excluding gains on portfolio sales is anticipated to be roughly flat versus 2024. We continue to expect to generate full year positive operating leverage in 2025, excluding portfolio sale gains and the pretax impact from our repurchase debt. Our results underscore our ability to deliver operational excellence and maintain expense discipline while investing in the business. Given the continued gradual improvement in our credit metrics, we are confident that we can deliver a full year net loss rate in our guided range of 7.8% to 7.9%. As Ralph mentioned, based on current trends, we expect to come in towards the lower end of that range. Finally, with the $38 million favorable discrete tax item in the quarter, we have adjusted our full year effective tax rate guidance to 19% to 20%. While there is variability we would anticipate future years to align more closely with our historical target effective tax rate range of 25% to 26%. Overall, our third quarter results underscore the financial resilience and strong return profile of our business model. We remain confident in our ability to achieve our 2025 financial targets and to deliver strong long-term returns. Operator, we are now ready to open up the lines for questions. Operator: [Operator Instructions] Our first question comes from Sanjay Sakhari with KBW. Sanjay Sakhrani: It sounds like you're seeing constructive trends across the portfolio. And I'm sure you've heard of some of the concerns on some cracks we've seen in consumer credit across some lenders and subprime. I'm just curious, as you've looked across your portfolio, have you seen any signs of weakness? Obviously, it seems like things are trending in the right direction. And then maybe, Perry, just related to that, maybe just the progression of the reserve rate and the loss rate as we go forward if things are stable? Perry Beberman: Yes, Sanjay, thanks for the question. So I think it starts with a quick view of the macro environment that I think you mentioned everybody is kind of seeing is that at least through Q3, the consumers and macro metrics have been, I'll say, surprisingly resilient, meaning unemployment and inflation are only slightly different than the prior quarter, which means we've got a pretty stable macro environment. So I think some of the concerns that are out there to set consumers remain nervous about what the future might look like. And that's really showing up in both consumer confidence and consumer sentiment, which is down pretty meaningfully versus last year. So there's going to be more to come on it. But for our consumers, as we've talked about, something that was very important is that wages need to outpace inflation for them to get a handle on their finances and their budgeting. And so that's been good, right? Wages have continued to outpace with -- I think it was August date, it was around a little over 3 -- close to 3.5% like 3.4% growth and inflation only being 2.9%. So that's good for our customers. So again, what does it mean going forward is going to be dependent on what happens around the Fed policy and what that then means to inflation is the tariffs unfold and what happens with labor. So more to come on that. But then within our own portfolio, we are seeing stable gradual improvement. And I'd say that's across all vantage bands. So we -- as you know, we don't have a high concentration of subprime. We focus on pretty much the prime customer, maybe some near prime. But we are seeing across the board really good stability. And that, for us, means we're not seeing the cracks in there at this point. We're very cautious. We're watching it, watching it very carefully. I'll say the entry rates in the delinquency are better than what they were pre-pandemic. So that's a good sign for us, and we're starting to see some improvement in the later stage roll rates. Again, that I think the macro is going to be real important, but I think our credit strategies and the risk mix shift that we've been seeing are starting to play through. On your question on reserve rate. Sorry... Sanjay Sakhrani: Please, I'd love to advance for that. Perry Beberman: Yes. So as it relates to the reserve rate, the only thing that drove the change this quarter was credit quality improving. So as the credit quality improves, that's the core input into it. So the loans we have on the books, similar to last quarter, that's all it was. The macro inputs quarter-to-quarter, very similar. That didn't really drive any change in the reserve rate. And we kept our credit risk mix the overlays exactly as it was last quarter. So that, as you look forward, as we have more confidence in how the current policies the government are going to play forward, I think you'll start to see us be able to shift back off of those adverse and severely adverse scenarios to get into more of a balanced weighting and that will be a tailwind to the reserve rate, coupled with continued improvement that we expect to see in our overall credit metrics as it pushes through into next year. Sanjay Sakhrani: Okay. That's great. That's encouraging. And I guess, like as a follow-up to that, I know there's this push and pull between loan growth and credit quality. But I'm just curious, as we think ahead, knowing what we know right now, do you envision loan growth picking up as we move into next year? And maybe you could just talk about the portfolio acquisition opportunities to the extent there are any? Perry Beberman: I'll ask Ralph to take that one. Ralph Andretta: Sanjay. Good to hear your voice. So if I think about it, if I take a step back, we've seen credit sales move in the right direction, 5% for the quarter. We've seen credit is moving in the right direction, more work to do, and we're signing new partners. We announced 3 new partners today, and we have a really robust pipeline and a consumer that is resilient. So payment rates are higher, obviously, and fees are lower. I'll take a healthy consumer any day of the week in terms of payment and credit -- but given the fact that we're seeing growth, we're seeing the macroeconomic environment kind of be steady and new partners, I think you will see some loan growth going forward. Thank you. Operator: Our next question comes from Moshe Orenbuch with TD Cowen. Moshe Orenbuch: Great. Maybe to just follow up on that and Perry a little bit. In terms of clearly, there's things going on in terms of kind of still temporary moves in payment rate. But if you think about the new mix of your card base, is there like a way to think about the ranges of if you had 5% growth in spend volume, what that would mean in loan growth once that phenomenon is kind of fully kind of played out or what those normal gaps would be given we've got now a different kind of base, more of it being co-brand spending and the like. Perry Beberman: Yes. I think you're asking a question that's really relevant. It depends on the mix of the business that comes on. I mean you heard Ralph mention the new brand partners coming on in the home space. Those would typically be larger ticket probably a little bit lower payment rate, so that would have a mix effect. But then if you have more of a top-of-wallet co-brand card, that have a higher payment rate. So it's really going to be mix dependent on what we have on. So I don't think it's very easy to say that if you had 5% sales growth all through next year, that 80% of that translates into loan growth. But certainly, there's a factor on that, but it is going to be dependent on mix, and some of that is yet to be seen what that will look like as we get into next year. Moshe Orenbuch: Okay. And maybe in terms of some of the commentary on the margin and the impacts of the pricing changes versus kind of lower billed late fees. Just given the way you think about the kind of the credit improvement, I guess, is there a way to kind of dimensionalize how long it's going to take for until you no longer have that or that build length fee kind of bottoms out? And so that the pricing changes actually will start to increase faster and outweigh that? Kind of any way to kind of dimensionalize that thing. Perry Beberman: Yes. Again, another good question. Of course, the way to think about it is the build late fees are obviously going to follow delinquency trends. And that is what we're all eager to see is how quickly does delinquency get to a steady state, we'll get to sort of that through-the-cycle number. So that will be leading and then trailing within 6 months, I guess, you then have the -- that improvement in the build. The reversal of build interest and fees. So those kind of will be some headwind on the lower build late fees with delinquency, you do have the tailwind that goes with the gross loss improvement. Those 2 things come together. Then you also then have a shift in risk mix -- product mix within the business, which when you put on some more higher-quality co-brand has a little bit lower APRs and yield versus private label. So that comes through, but then you do have pricing changes that have been made that continue to build. So there's a lot of moving parts in there, coupled with prime rate reductions, when we're slightly asset sensitive. So I wish there was something to say, "Hey, where is that perfect inflection point. But with all those moving parts, we'll obviously give more guidance as we get closer to January so that we have a better line of sight to exactly what our view is of mix and tie that into what the macro improvement will be as well as the credit improvement within the portfolio. Operator: Our next question comes from Mihir Bhatia with Bank of America. Mihir Bhatia: I did want to just continuing this conversation around credit sales and loan growth. Maybe just -- how are you thinking about credit sales in 4Q and into 2026. I think you mentioned there was a little bit of moderation as you move through the quarter after a strong back-to-school season. So just trying to understand, do you think we're in a little bit of an air pocket right now before you get to holiday shopping? Or just how are you thinking about holiday shopping? What are you hearing from your retail partners? Perry Beberman: Yes. So credit sales, again, we're seeing some pretty good growth in credit sales right now. As mentioned, it was early in the quarter with back-to-school, was stronger. September moderated a little bit, still positive. And we're seeing a similar trend in October, still being up year-over-year. I think we're seeing different reports, but expectation is retailers are going to be pretty aggressive trying to draw the customers in, possibly early. So consumers are looking for discounts. They're looking for promotions and reward programs are going to be really important to make that happen. I mean consumers -- and I think we've said this for a while now, we've been very impressed with how consumers have been responsible with their budgets. And in this period of time, they're going to be looking for deals and ways to make that budget stretch or go further. So if retailers come out early in the holiday season with good deals, I expect consumers will spend on that. But then maybe it could be somewhat like some, I'll say, old historical days when I go to the day before Christmas, I go look for that great deal when we didn't have the money to get things in painful price early. So it really is going to depend on how that looks and what the inventory situation and how motivated retailers are to take care of their inventory. Mihir Bhatia: Got it. That's helpful. When I think about the interchange revenues, a pretty big step up in that one -- in that line item this quarter. I think even if you look at it as a percent of credit sales. Could you maybe just talk about how you expect that line to trend? What are you expecting to happen? I suspect it's got to do with the RSAs and some of the big ticket items. But just how should we be thinking about that line item from here going forward? What do you expect? Perry Beberman: Yes. Again, it's one of the -- I say NIM is hard to forecast. RSAs is another one that's pretty hard to forecast because of the netting that goes on in there. So that the RSA is going to be pressured as we see increased sales and so increased sales, there's some compensation to partners or in the rewards and loyalty funding as well as some compensation. And then also when you have revenue shares, when you have losses coming down, it leads to a higher revenue share, profit share with partners. So you've got sales-based rebates, you've got the revenue share in there, you got the profit share and everything I just mentioned around the rewards funding. In addition, when you -- we've been seeing some lower big ticket purchases, then MDFs are pressured because of that softness. So as the big ticket bounces back, if that happens in some of the verticals, that could be a tailwind. But as the spend grows, you also have some more partner share and revenue share. So there's a lot going on in there. Operator: Our next question comes from Jeff Adelson with Morgan Stanley. Jeffrey Adelson: Just wanted to focus a little bit more on the pipeline and the signings you announced this quarter. It seems like the home vertical was more of a focus for you this quarter. Is that something you're looking to focus on here, maybe creating a little bit more of a network effect around the home area and launching a joint card like one of your competitor has? And then are there any other verticals you'd call out as areas of focus for you going forward? I mean you mentioned the healthy or the robust pipeline. So maybe just sort of focus on what's in the pipeline. Ralph Andretta: Yes. Thanks for the question. The home vertical is a good one for us, right? Because it's discretionary, nondiscretionary. There's home repairs and there's other discretionary furniture. So we view that as a very active vertical for us and very strong vertical. And we'll most likely add to that as we move forward, which I think is positive for us. So we'll, again, be one of the leading contenders in that vertical as we are in beauty and a couple of others. So there's a -- we look across our portfolio. It's diversified now. It's -- we've derisked it in terms not only of product but also of industry. So we feel really good about that. The pipeline is robust across all those verticals. So we're looking forward to adding new partners within this vertical, establishing new ones. We've got a travel vertical that's doing very well. Beauty is still a big contender. And now with this home improvement and home furnishing vertical, we feel that also will move forward. So we are kind of insulating ourselves from any one vertical that there'd be an issue with. Usually, it was if the mall went bad and apparel was a bad vertical, that would throw us off. Now we're kind of insulated from those type of one-off verticals that tend to -- that may be impacted by the economy. Jeffrey Adelson: Okay. Great. And maybe just a follow-up on capital return. You've been on a little bit of a roll here with the buyback authorizations. I guess just maybe any sort of way to think about like what needs to happen for you to move past this medium-term 13% to 14%? Is it just settling the preferred, maybe getting your credit rating up to investment grade. I think you're now a couple of notches away. And have you thought about maybe establishing a larger repurchase authorization? Or do you prefer to be a little bit more on the quarterly cadence or half year cadence here? Perry Beberman: Yes. Real good question. So as we think about capital, one, let me start with -- we've not changed our capital priorities, right? We have always said we're going to fund responsible, profitable growth. So some of what will inform our capital authorizations or share repurchase automations in the future will be based on the growth that we have in front of us. We'll continue to invest in technology and our capability to serve our brand partners and customers. And we'll make sure we maintain those strong capital ratios and obviously return capital as appropriate. And to your point, though, on right now, our binding constraint is CET1 around that 13% to 14%, which we said was our medium-term target. And so we got to the top end of that this quarter. We have confidence in what we see going forward. And the important part was that we want to make sure we had enough authorization out there to provide us capital flexibility should we choose to do something to further optimize our capital stack. And when you talked about what would it take to lower our binding constraint to CET1 down to that 12% to 13%, which is what we said in our Investor Day would be our longer-term target. It does mean introducing some Tier 1 capital in the form of preferreds over time. But really, the rating upgrade is less relevant to that. That's more around what happens with senior debt. Senior notes in the future and other financings that are keyed off of those ratings. we don't need to get to an investment grade to take capital actions. Operator: Our next question comes from Reggie Smith with JPMorgan. Reginald Smith: I was looking through your slide deck and my rough math has like your BNPL sales volume up maybe 100%. That's probably a dirty calculation. But I guess there's a lot of investor interest in the BNPL space, certainly over the last couple of months. I was just curious, do you guys offer or have like a dual BNPL proprietary card today? And is there an opportunity there to kind of do more on that kind of blended dual-purpose cards? And I have one follow-up. Ralph Andretta: Yes. So I think you have to look at our full product offering, right? So I think you have a way to look at it. And so we have co-brand cards. And that's -- I think co-brand cards right now are probably the majority of our spend in terms of going forward, discretionary and nondiscretionary private label credit cards to absolutely have private label credit cards, and we see spend continuing on those cards. And then we have Buy Now, Pay Later. Now, Buy Now,Pay later is a pay in for an installment loan. You have 2 types of buy now pay later out there as well. And then lastly, we have our prop card, right? Our prop card is a small but growing portfolio. So it becomes a basket of products we have, and it's kind of a uniform process that we go through, and we can offer a consumer wherever they are in their in their kind of credit establishing credit where they are in their -- in that journey, we have a product for them. We have a product for them through a partner or directly to them. So we feel very, very good about our diverse portfolio in terms of product and our diverse portfolio in terms of different industry verticals. Reginald Smith: Got it. I guess what I'm getting at is I look at companies like Quanta and Affirm like they're really leveraging that point of sale to bring customers into the ecosystem. I guess what I'm asking is -- what are your thoughts around I know Brett historically has been kind of a white label solution for retailers. But is there an opportunity to be a little more aggressive on the front foot there to kind of bring more customers in into the platform? Ralph Andretta: Yes. Unlike the 2 you mentioned, we are focused on partnerships. That's where we're focused. We're focused on not just bringing people into our ecosystem. We're making sure people are in our partner ecosystem. We can provide the credit products for them for our partners. So that's what's important to us. We have some direct-to-consumer. As you know, we have direct-to-consumer in terms of our credit card. We have direct-to-consumer. Even on breadth on certain sites where you'll see our you'll see our button. But our main focus is ensuring that we provide our partners with the right products for their for their customers to drive loyalty no matter where they are in their credit journey, and we have that basket of products to do it. Reginald Smith: That actually makes sense. Okay. Real quick for me, last one. Thinking about like AI and automation and the potential there, like I've seen some reports that like AI and automation could have a multi triple-digit kind of basis point impact on efficiency ratios in the credit card, the banking space, like how are you guys thinking about that longer term? I guess the I would imagine there's like an opportunity there, but just maybe can you frame that out longer time for us? Perry Beberman: Yes, Reggie, thank you. So we agree there's definitely opportunity with AI, and we've been engaged with it for a while. So for us, we look at AI as an opportunity to accelerate our operational excellence objectives. We've talked about that, right, simplifying and streamlining and automating their business processes driving increased efficiency, allows us to deploy new capabilities that reduces risk and improve controls while enhancing the customer and employee experiences. And it also allows us to accelerate innovation and move things through the tech pipeline faster, and we were able to do that, you're able to drive growth. So it's beyond just efficiency. And as it relates to AI, one thing I'd tell you is our approach is to be a fast follower. So we're learning from the early adopters. We spent a lot of money on both what worked and what didn't work. And so we're very thoughtful in identifying and focusing on those use cases that have the highest likelihood of being impactful to our business. That means we look for immediate business value. We want long-term platform scalability as well being regulated. We've got to make sure it's regulator confidence in what we're doing. And all of this should continue to drive positive operating leverage over time. So the one thing also around Bread Financial and with our terrific technology team that we have, we're nimble in how we can deploy things across the company. And but AI is not new to us. And that's the thing that I think I want to be clear on as well is we have over 200 machine learning models out there across many functions, including credit, collections, marketing and fraud. We have enhanced over 100 processes to date with leveraging robotic process automation. So look, there's a lot of opportunity ahead of us, right, like generative and Agentic AI are exciting developments, and we're going to be ready to go with some of those. And -- but we're excited about what the future holds with this, and there are opportunities but I would look at it as continuing to help contribute to driving growth and driving positive operating leverage and helping with efficiency ratios over time. Ralph Andretta: Yes. I think our approach is very prudent. As Perry said, we're a fast follower. But listen, at the end of the day, we're a regulated industry. So we're going to protect our customers' data. We're going to act all our information. We're going to make sure nothing enters our environment that is harmful in this world of ever-changing technology. But our focus on AI is to enhance the customer experience, make sure our employees have the tools in their hands and better serve our customers and partners. And make sure that we are -- we gain efficiencies across the patch, and that we're using it for better decision-making and better revenue generation. Operator: Our next question comes from Dominick Gabriele with Compass Point. Dominick Gabriele: I don't know what to say. Congrats on the buyback and the execution here. It's many years in the making. At some point, though, when do you think the industry stops using the terminology resilient consumer? Because at the end of the day, we mentioned that across the credit spectrum, all the vintage scores improving. You said that -- actually, it sounds like there's acceleration in the improvement of your delinquencies at quarter end. I mean when do we get to the point when we just say the consumer is solid across the spectrum and credit looks pretty good and it's trending back down. I guess, what are you guys seeing as far as that and then I just have a follow-up. Perry Beberman: Yes, I think I'd go on record saying I think the consumer is stable and credit is improving. Now again, we're still seeing elevated delinquencies and elevated losses. So we're not where we need to be. But I think the caution in there that you're hearing from most folks is they've been resilient in dealing with this prolonged period of inflation, which is compounded. They're getting the handle on it. But it's more what I said earlier. It's caution with sentiment being down everybody is all nervous with the uncertainty that's out there, what's to come. And I think as soon as this certainty comes forward with what the tariff implications would be and other policy things, what it means to labor and businesses can start to invest confidently in jobs I think you're going to see the narrative flip. It's just -- I think it's the uncertainty component right now. That is why you're hearing some a little bit of cautiousness. Dominick Gabriele: Yes, yes. And there's always cracks, right? There's always something that in credit land where there's some sort of issue, but it feels like generally the consumer, I mean, is improving. And I guess when you, Mastercard came out actually with their holiday spend and it looks like they expect some deceleration and year-over-year versus our last estimate, about a 1% deceleration. And so if you think about what you guys are seeing at the end of the quarter, you mentioned that spending has actually decelerated a little bit. That's pretty much in line with what we're seeing on an inter-quarter basis. So do you think that retailers seeing that potential forecast within their own models would trigger more discounts? And how does those discounts kind of affect Bread in a period where maybe versus a period where less discounts were given? Thanks so much guys and great results. Ralph Andretta: Yes. I mean I think you will see the retail is probably push discounts and reward opportunities probably forward more forward in the buying cycle for the Christmas holiday. So pull that forward. But I think consumers are savvy. They're going to look for those discounts. They're going to look for those, how do we monetize and optimize my reward programs out there. So I think that's I don't think that's changed from any year. I think you'll see that. You've seen that in the past, and I think you'll see that in the future. You may see it a bit earlier and maybe a bit steeper by sort of consumers, there are certain verticals, but I think you'll end up seeing that. Operator: Our next question comes from Vincent Caintic with BTIG. Vincent Caintic: And actually, so 2 of them and they're kind of follow-ups to some earlier questions. So kind of to the point about your good credit trends and where you're underwriting. I mean, you're talking about a positive consumer late fees are coming down, but that's an output of the better credit that you're experiencing. And then you're expecting a gradual improvement to the macroeconomic environment. So I'm wondering if you still consider your underwriting to still be tight? And if so, at what point do you lean into growth. Perry Beberman: Yes. So one thing, Vince, thanks for the question. One, we just -- as we said for a long time, we're running the business for a long-term focus. So we've been making targeted adjustments to our underwriting segments as we go, looking at risk and reward, make sure we get paid for the risk we take. And so that's been dynamic as customer behavior to improve both on us as well as office, what you see in the bureaus and as well as macro considerations are all factors into our decision. So we've been executing a gradual unwind of -- that was just there for the macro tightening. But it's been deliberately improving the mix of accounts that's been moving us more towards Prime Plus. But again, it's not this wholesale change. But at the same time, you have tightening happen in other places where you might see a little bit of weakness in certain cohorts. But our underwriting philosophy has remained profit focused. We're looking to deliver some industry-leading ROEs and return on equity and can get our losses down to 6%. But as we think about the improvement that we're looking to see in our loss rate over time. It's not going to be fast and furious getting down to 6%. We're not doing things that would be overly detrimental to our brand partners. So when we talk about trying to get to 6%, we're trying to get each vintage to perform in line with expectations. And we could have taken a more, I'll say, draconian approach and really driven, I'd say, a new vintage down to, say, 4% losses, which get our overall loss rate faster, but that would be detrimental to our brand partners. If we were just mainly a branded business, we could probably do something like that to ourselves. But this isn't the business we're in. So we're very thoughtful about that. And I think you're going to see that consumer health and macro considerations will help drive what we do with underwriting. But we're really pleased with the new accounts that we're seeing coming in, with the average Vantage scores, around 720, with over 72% being prime. And so we're very thoughtful on how we manage line assignments. So obviously, customers that come in the door that are more near prime, are getting a much lower line assignment. But all those things factor in, and that helps with that low and grow strategy we have with credit. So we are a very seasoned credit team and we've been very thoughtful behind this goes. But all this together, as Ross said, we're going to get this inflection point of growth as credit improves, meaning we have less losses, macro improves, the book we're putting on, this is going to start to translate into growth as we start to march into next year. Ralph Andretta: Yes. I think if I had to put a sentence on our philosophy is our underwriting is prudent with a focus on profitability. That's why -- if I had to put a sound bite on our -- how we think about credit. Vincent Caintic: Okay. Great. And then, Perry, just kind of a follow-up, and it's great to see the additional share repurchases and your execution of that. You mentioned that it would take issuing preferreds to get down to the 12% to 13% CET1. And I'm just wondering what you need to see to feel comfortable kind of executing on maybe issuing those preferreds? Perry Beberman: Yes. It's just consistent with what we've said for -- I think since last Investor Day, it's just being opportunistic and making sure that it's the right time and our company is in the right position to do so. It's market dependent. Operator: And I'm not showing any further questions at this time. I'll now pass it back to Ralph Andretta for closing remarks. Ralph Andretta: Well, thank you all for joining the call today and for your continued interest in Bread Financial. We look forward to speaking to you next quarter. And everyone, have a terrific day. Thank you. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day. Thank you.
Operator: Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources Q3 2025 Results and 2026 Budget Conference Call. [Operator Instructions] And I would like to turn the conference over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead. Grant Fagerheim: Thanks very much, Sylvie, and good morning, everyone, and thank you for joining us. There are 5 members of our management team here with me today, our Senior Vice President and CFO, Thanh Kang; our Senior Vice President, Production and Operations, Joel Armstrong; our Senior Vice President, Business Development, Information Technology; Dave Mombourquette; our Vice President of the Unconventional Division, Joey Wong, and our Vice President, Conventional division, Chris Bullin. Before we get started today, I would like to remind everybody that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory that we set forth in our news release that was issued yesterday afternoon. We are very pleased to provide our shareholders with this update this morning as evidenced by our third quarter operating results and the 2026 released -- budget released yesterday. The first full quarter following the integration of the Veren assets into Whitecap portfolio has been highly successful. The company's assets and personnel are strategically aligned, driving operational efficiency and value creation. Our top-performing assets serve as key differentiators, reinforcing the company's competitive advantage and supporting long-term growth well into the future. Third quarter production of 37,623 BOE per day which included 227,419 BOE per day of total liquids and 883 million a day of natural gas. Strong operating performance has continued throughout the entire year supported by the seamless integration of the Veren assets and field operating teams, which has enhanced overall operating efficiency. As a result, we are increasing our 2025 guidance to 305,000 BOE per day for the full year, which implies 370,000 BOE per day for the fourth quarter, while our full year capital program of $2 billion remains unchanged. By leveraging the collective knowledge and technical understanding of the combined assets, and operations, our 2026 budget is set to deliver robust free cash flow from a very efficient capital drilling program. Our 2026 budget has been set between $2 billion to $2.1 billion, which is forecast to deliver average production of between 370,000 to 375,000 BOE per day and an exit production rate in excess of 380,000 BOE per day to grow production per share by 3%. The capital program is down from initial capital projections to that $2.1 billion to -- $2.0 billion to $2.1 billion from what was $2.6 billion. Our Unconventional division will be allocated 75% of the capital budget to drill approximately 100 wells, while the Conventional division will receive the remaining 25% to drill approximately 155 wells. We're particularly excited for our Lator asset where our 04-13 battery is on budget and ahead of schedule. Joey will provide more details on our plans for this asset in 2026. But needless to say, we're looking forward to development of this liquids-rich asset base in the near future. The capital efficiency embedded in our budget is approximately 10% better than the previous forecast, which can be attributed to recent operational performance, asset allocation and the realization of synergies. In aggregate, we have included $300 million in forecasted synergies for 2026 or 40% higher than our original estimate of $210 million. Capital synergies of approximately $130 million were driven by enhanced procurement, operational efficiencies and rig line optimization. Operating cost synergies equate to $135 million which is $60 million higher than our original estimate. We are seeing significant wins in areas with adjacent or overlapping operations along with procurement success and operational best practices. Lastly, we have realized $35 million of corporate synergies through reductions in G&A, share-based compensation and interest expense. These benefits are a direct result of the combination, leveraging enhanced scale, integration and the technical best practices that were previously divided between the 2 organizations. I want to thank our entire office and field teams for their technical rigor and dedication in achieving a significantly higher synergy realization and doing so much faster than initially anticipated. Our culture of continuous improvement positions us to further enhance these synergies through ongoing technical initiatives planned for 2026. I will now pass the mic on to Thanh Kang to further discuss our third quarter financial results and provide more details to our 2026 budget. Thank you. Thanh Kang: Thanks, Grant. U.S. dollar WTI remained relatively stable at $65 per barrel in Q3 compared to $64 per barrel in Q2, in contrast to a weaker AECO price of $0.63 per Mcf. Whitecap was, however, able to achieve a significantly higher price realization of $1.31 per Mcf due to our price diversification efforts. Although natural gas accounted for 39% of our production, it only represented 6% of our revenues in the third quarter. From an upside perspective, a dollar change to AECO would increase our free funds flow by $200 million. Operating costs in the quarter decreased by 8% to $12.50 per BOE compared to the second quarter due to early synergy realizations. Current income tax was $25 million in the quarter represents a low pretax funds flow rate of 4%. Tax pools at the end of the quarter were $9.8 billion, of which $4.4 billion were noncapital losses providing us with strong tax coverage for 2026. Our light oil and condensate weighted portfolio, combined with a lower cost structure, generated funds flow of nearly $900 million in the third quarter and after capital expenditures of approximately $550 million, free funds flow was $350 million. Returns to shareholders in the third quarter were approximately $400 million as $221 million of base dividends were enhanced by approximately $180 million in share repurchases under our NCIB reducing our share count by almost 2%. The company's balance sheet remains strong with net debt of $3.3 billion at the end of the quarter, including $1.7 billion in investment-grade senior notes. Supported by this solid financial foundation and our prudent hedge positions for 2026, we are well positioned to manage commodity price volatility and maintain long-term financial stability. For 2026, based on $60 WTI and $3 AECO we anticipate funds flow of $3.3 billion. And after capital investments of $2.1 billion we generate free fund flow of $1.2 billion. This allows us to return $900 million in dividends to shareholders and the opportunity to repurchase $300 million worth of shares to reduce our share count by a further 2% enhancing our per share metrics. Our commodity price sensitivity for 2026 are as follows: for every dollar U.S. change in WTI, our funds flow increases by $50 million. For every $0.10 per GJ change in AECO, our funds flow increases by $20 million and for every penny change in the USD FX rate, our funds flow is impacted by $45 million. I'll now pass it off to Joey for more remarks on our Unconventional third quarter results and 2026 budget. Joey Wong: Thanks Thanh. Our Unconventional portfolio continued to deliver impressive results during the third quarter with asset level performance exceeding internal forecasts. These performance benefited from optimization efforts in the quarter, while capital efficiencies and cycle times on new drills continued to exceed expectations. Following the successful integration of Veren's assets and teams we shifted our focus to optimizing our expanded asset base during the third quarter. A key part of that optimization has been applying our unconventional workflow to tailor development in each area to the underlying geological and reservoir characteristics and to refine those designs in real time throughout the various phases of execution. This workflow, which leverages technical best practices to enhance repeatability and economic returns has already yielded significant capital and operational efficiency improvements across the portfolio. Initial optimization efforts have driven measurable efficiency gains in our Montney and Duvernay drilling and completions programs, shortening cycle times and improving key performance indicators. At Kaybob, meters per day drilling performance improved by roughly 20% year-over-year, including a new pacesetter pad drilled at approximately 600 meters per day. Real-time frac monitoring and optimization of completions practices also contributed to an 8% reduction in average completion times across the Duvernay. At Musreau, we achieved a 20% decrease in drilling costs from an improvement in drilling performance on our most recent 6-well Montney pad compared to our first 16 wells in the play. Collectively, these results highlight the strength of our integrated in-house capabilities, bringing together geoscience, engineering and operations to capture design efficiencies and enhance execution across development programs. This collaboration supported by our extensive proprietary data set allows for continuous improvement and the effective transfer of best practices throughout the unconventional portfolio. At Gold Creek and Karr, initial enhancement initiatives focused on improving base production through the optimization of artificial lift, gathering systems and other best practices along with targeted infrastructure improvements, such as mitigating measures for high or low ambient temperatures. Across our operated asset base, we place a high priority on anticipating changes in production requirements through different phases of field life. This is particularly important as we introduce new volumes from our capital programs where protecting base production remains a core focus. These optimization efforts have delivered measurable uplift in productivity on base wells, driving Montney volumes roughly 4,000 BOEs a day above our internal forecast in the third quarter. Our 2026 capital program will continue to build on this operating momentum as we plan to run a steady seven rig program to drill approximately 100 wells across our Montney and Duvernay assets with 129 wells expected to be brought on production during the year. This program is expected to drive 8% to 10% growth from our unconventional assets as measured from exit to exit. At Kaybob, we plan to spud 45 Duvernay wells across a 3-rig program in 2026, utilizing a wine rack design on approximately half of the planned pads. Development will be focused within our core areas to maximize the utilization of expanded infrastructure capacity and enhance overall asset profitability. We plan to spend approximately $55 million to modestly expand, debottleneck and connect existing infrastructure in 2026, following up on the success of our expansion efforts at our 15-07 gas processing facility in 2025. These infrastructure optimization projects will support growth in the play over the near term with total capacity in the Kaybob region increasing to 115,000 BOEs per day to 120,000 BOEs per day and by the second half of 2026. We expect to fully utilize our expanded capacity in the second half of 2027. Moving over to the Montney, we plan to spud 53 wells in 2026 across a 4-rig program and bring 74 operated wells on production from our 2025 and 2026 programs. In Gold Creek and Karr, we plan to spud 29 wells and bringing 48 wells on production in 2026 with development focused on well-understood areas with existing infrastructure capacity. Following a detailed technical review of subsurface data in addition to recent and legacy well results in the play, we commenced drilling operations on our first of 2 plug and perf pilot pads in the Karr area in the fourth quarter of 2025. This 4-well pad will be followed by a 3-well pad, which has been strategically selected to test the application of this completion design with defined control parameters to evaluate performance. If designed and executed properly, plug and perf completions are expected to lower cost by $1 million to $1.5 million per well relative to a single point entry design. Early results of this pilot activity in Karr are expected to be available in the first half of 2026. With success, we also plan to drill a plug and perf pilot pad in Gold Creek in the second half of 2026 with the same level of control parameters as the Karr pilots. While meaningful in its potential impact, our rollout of this technology will remain measured representing roughly 1/4 of the total wells being brought on production in 2026 in Gold Creek and Karr. This reflects our deliberate step-wise approach to improving capital efficiencies and fully recognizes and limits the potential risk to asset level performance, while pad design and execution are fine-tuned. Results from these pilot pads will inform future well designs as we seek to derisk development and maximize long-term value of the assets. At Musreau, we plan to drill 11 Montney wells on the eastern portion of our acreage in 2026 as we continue to leverage multi-bench development and manage drawdown to optimize per well recoveries. We will also allocate approximately $5 million to enhance gas lift capabilities at our 05-09 facility in the second half of 2026, supporting further optimization of the strong condensate volumes being realized from this asset which have exceeded expectations due to our development and production practices. We plan to spud a 2-well delineation pad at Resthaven in 2026, which is a Southeastern extension of our Lator Montney land base. The pad is expected to come on stream in the second half of the year. Results from this pad will provide us with important technical information as we evaluate the economic viability of this sizable and prolific natural gas weighted acreage. Lastly, our Lator Montney asset will move towards development mode in 2026. Following a successful engineering and design and permitting process construction on the 04-13 Lator facility has been progressing ahead of schedule and within budgeted capital expectations. This has allowed us to advance expected commissioning and start-up to the fourth quarter of 2026 from our initial target of late 2026 to early 2027. Continued technical work and strong well results are reaffirming our expectations in the deliverability and long-term development potential of this area. We plan to drill 11 wells in the area and spend approximately $180 million of capital in 2026, including $60 million on supporting infrastructure projects such as water disposal and gathering lines to support the ramp-up of the 04-13 facility. Production is expected to ramp towards the design facility capacity of 35,000 to 40,000 BOEs per day throughout 2027 at a measured pace allowing for continued optimization of development plans where warranted. With that, I will now pass it over to Chris Bullin to talk about our conventional assets. Chris Bullin: Thanks, Joey. Our conventional division delivered another strong quarter benefiting from consistent operational execution across our Alberta and Saskatchewan assets, along with efficiency improvements following the successful integration of our expanded portfolio. In 2026, we plan to drill 156 wells across our conventional division, focusing on plays with short cycle times, quick payouts and high netbacks. This activity is expected to maintain conventional production in the range of 135,000 to 140,000 BOE per day while generating $900 million of asset-level free cash flow highlighting the outsized profitability of our conventional assets and the underlying strength of our diversified and complementary portfolio. Our 2026 capital program is structured to maximize optionality providing flexibility to adjust capital allocation and activity levels in response to changes in commodity prices. Our teams will continue to maintain a state of readiness, ensuring we can act quickly as market conditions evolve. This disciplined approach ensures we can protect free cash flow, sustain returns and capture upside when market fundamentals improve. We will continue to look for opportunities to incorporate shared learnings from our unconventional workflow within our conventional assets in 2026, including optimizations to our well design and targeted technical enhancements. These initiatives are expected to drive further efficiencies and improve performance across our conventional portfolio. In East Saskatchewan, we plan to spud 79 wells in 2026, building on the recent success of our Bakken and Frobisher programs. At Viewfield, we will continue to advance our open-hole multilateral program to maximize capital efficiencies and improve the economics of our drilling inventory. Our recently completed 3-mile Bakken pilot well in the area set multiple records within Saskatchewan, including the longest lateral leg drilled to date at over 6,400 meters and the longest total lateral length on a single well at over 34,600 meters. This well was drilled and completed on a dollars per meter basis in line with prior 2-mile open-hole multilateral wells in the area, reinforcing our confidence that lateral lengths exceeding 2 miles can achieve improved capital efficiencies. This supports the inclusion of additional extended lateral length wells into the 2026 program. Our 2026 Frobisher development will kick off with an active first quarter drilling program with 3 rigs building on strong momentum from 2025 results, which have consistently exceeded expectations. We plan to drill triple leg wells on 15 of 49 planned Frobisher locations, allowing us to increase reservoir contact and maximize the royalty benefits associated with Saskatchewan's multilateral oil well program. Across our Alberta conventional assets, we plan to spud 30 wells in 2026 with activity focused in the Glauconite at Westward Ho and the Cardium formations at Wapiti and Pembina. In the Glauconite, we will use a monobore design on all of our 2026 locations following strong production performance and repeatable cost reductions realized from our 2025 monobore program. In the Cardium, we will continue to utilize our optimized completion design at Wapiti derived from our unconventional workflow. Our 2026 development in the area will push to the South and the Northwest, expanding from our successful 2025 program. In West Saskatchewan, we have 47 wells planned for next year, targeting the Viking, Atlas and Success formations. Our 2026 program has been level set with a moderation in activity compared to prior years aligning with our strategy to focus on capital discipline, free cash flow generation and sustainability. Our conventional assets are a strong contributor to our ability to sustain production at lower commodity prices and provides significant torque to increases in crude oil prices. The low 20% decline asset base allows us to shift capital without materially degrading the short and long-term profitability of these assets, and provide the necessary flexibility to enhance the economics of our capital programs. With that, I will turn it back over to Grant for his closing remarks. Grant Fagerheim: Thanks very much, Thanh, Chris, Joey, for your comments. As we move through the remainder of 2025 and into 2026, as you all know, we are operating from a position of strength. Operationally, performance remains exceptional with faster cycle times across our assets, optimized rig lines and drilling programs, capturing additional efficiencies and the maximization of existing infrastructure to further enhance our profitability. Financially, our 2026 budget is expected to generate substantial free funds flow enabling meaningful returns of capital to shareholders while maintaining balance sheet strength and long-term resiliency. The top-tier asset base we have assembled supported by the long-dated drilling inventory of approximately 11,000 high-quality locations, provides shareholders with decades of profitable and sustainable growth potential. This strong foundation positions us to continue improving capital efficiency and expanding profit margins over time. Furthermore, our technical initiatives planned for 2026 create additional opportunities to outperform our base plan and drive continued value creation. As we complete our 2025 initiatives, our focus remains on delivering strong shareholder returns in 2026 guided by disciplined execution, operational excellence and prudent financial management. Our total shareholder return target is between 10% to 15% per year and our 2026 budget will deliver on this target through our $0.73 per share dividend annually, which equates to 7% yield at this time, 3% production growth to 380,000 BOE per day and the option to repurchase over 2% of our shares outstanding with excess free funds flow generated at $60 WTI oil. This equates to a 12% total returns to shareholders, which further increases to over 15% at $70 WTI with additional $500 million of free funds flow. With that, I'll now turn the call over to the operator, Sylvie, for any questions you might have. Thank you. Operator: [Operator Instructions] Our first question comes from Sam Burwell at Jefferies. George Burwell: I wanted to ask about the 7-rig program across the Montney and Duvernay. Is that fewer rigs than you're running now, fewer rigs than you were originally planning to run in '26. Is this effectively a Veren synergy manifesting itself? Joey Wong: Yes. I guess -- sorry, Joey Wong here to answer the question here for you, Sam. The 7 rigs we're running in 2026, actually match what we're running in the back part of this year in Q4. There have been periods of time in 2025 where we had more running. There's a bit of overlap. And if you recall, some of the discussions we had with respect to the combination was cleaning up a little bit of that where we had fragmented rig lines where you'll have portions of these rig lines stacking up on each other and kind of a concentration of activity at times. And so I guess answering the last part of your question there Sam, yes, this -- the steady, the reason we used the adjective steady there is definitely one of the synergies that we saw early on when we look at not just the underlying capital efficiencies of just getting things running without, like I say, overlap or gaps. But in addition to that, some of the outperformance we're seeing on the drilling side, we can draw back the consistent use of some of our stronger performing rigs, which the 7 that we have retained are going to fall into that category. And we'll look to then continue to build on those efficiencies through that steady program. George Burwell: Okay. Got it. And you talked a lot about share repurchases, both in the release and in the opening remarks. So can we expect those to be more ratable over time? Or should those remain something that's deployed in opportunistic situations. Just curious like if you don't see any dislocations, let's say, should we expect most of that free cash flow after the dividend next year to go towards the balance sheet? Thanh Kang: Sam, it's Thanh here. So as it relates to the NCIB there, we are targeting the $300 million that we've outlined in the press release there. The way that we're viewing it, Sam, is looking at it from a countercyclical perspective. So generally in a low commodity price environment, what we want to be doing is focusing on maximizing our free cash flow and repurchasing our shares as much as we can here especially when we see quite a bit of a disconnect between where the share price is and where our intrinsic value is. In terms of the execution of it, we're going to be more opportunistic. I would say that number one, when there's large blocks that are available to us, we'll try to clear those with our NCIB or if we're underperforming, then we'll step in and support the stock from that perspective there. But ultimately, our focus here is to reduce the number of shares that are out, which improves the long-term sustainability of our dividend and it's a permanent improvement to our capital structure. So that's the way that we would look at it. I think that given the volatility here, Sam, what we want to make sure is we're able to realize this free cash flow before we spend it. So we'll continue to monitor that very closely as we walk through 2026. Operator: Next question will be from Patrick O'Rourke at ATB Capital Markets. Patrick O'Rourke: So the budget came in at certainly what I think 6 months ago, 1 plus 1 budget of Whitecap and Veren much lower than that would have looked here. And just wondering sort of what the levers you pulled to be able to achieve that is. And then in the updated deck, you talked about free cash flow at a $70 crude price and allocating the incremental free cash flow to share repurchases and debt reduction. I wonder what sort of crude environment and macro conditions Whitecap would need to see out there to sort of have a little bit of a more aggressive capital program going forward? Grant Fagerheim: Yes. Thanks, Patrick. I mean a budget being lower, yes, our capital is lower, but our production, we didn't really lower. So you're right on the capital. And that was a lot of the work that the teams have done, our operating individuals had focused on the synergies that we talked about. We were currently -- we were previously estimating $210 million of synergies, now we're projecting $300 million and potentially more into the future. We're not projecting that at this time. But -- and as we -- I think we talked quite a bit about it through the -- where these improvements came as when we talk about rig lines and all of our best practices and really utilizing the infrastructure more appropriately. I think that combined with our workflows that we do have within the organization, that's where you're -- where we talk about driving these capital programs down lower. The operating teams have been busy on our operating group under Joel's guidance have been busy on procurement and understanding what we're going to look like with -- from a capital cost moving forward. But it certainly is dropping capital really more of what we've entered into is more of a defensive style budget for 2026 with a lower commodity price deck with the expectation that, as we know, living in a cyclical commodity price environment, there will be an opportunity to uplift it and we'll be ready to advance capital in the rate environment -- pricing environment. So as far as specific triggers on, you want to make sure that our leverage stays reasonable, and we're very much measured on that as we advance forward, and it's allowed us to get to this point and we'll continue to have that. So it isn't formulaic, but it will be, you'll look to see us buy back more shares. Trigger for more capital, we'll look at -- we were pretty much set for the first quarter, and we can analyze it after the first quarter period of time as to whether or not we increase capital at that time when commodity prices we'll know further what they're at that time. Patrick O'Rourke: Okay. And then maybe a bit more of a technical question here. But in terms of the plug and perf pilots that you're looking at here, I think it's 2 well pads. What are the -- how are you going to benchmark the KPIs in terms of what you would measure success that? And then if it is successful there, if you're able to sort of scale that up from 2 wells to pad scopes that are much larger than that, what would that mean going forward? Joey Wong: Patrick, Joey here. So yes, the first question there on how do we benchmark it, there's quite a few criteria that we look at, both through the execution phase of the completion itself. So as we're watching how efficient the clusters are treating, making sure that the rock is conforming to our designed expectations. And like I mentioned in the prepared notes there, we do have a series of expected criteria through that phase. And what we also have, and this is important is the ability to react. So we have contingency plans if things do start to veer from expected frac behavior, which implies a different frac geometry that we designed, we have the ability to steer that ship. And that's been one of the things that has been a differentiating factor for us anyways, with respect to the execution of our plug-and-perf programs to date throughout the legacy Whitecap asset base. So that's on the execution side. The benchmarking on the then subsequent on production side will be as we do with really, again, any of our development we look at. Initial on production, we look at how the wells themselves interact between each other and between adjacent wells, which give us indications of what that frac geometry is actually behaving like. And then what we then do is we look at the long-term trends of, again, those new wells and the existing ones. And it's important to note there that it's -- when we talk about trends, it's not just production. There's downhole pressure. There's temperature and then there's interpreted versions of all of those that go into our systems and we allow ourselves to benchmark through those. So it's a lot of words to describe that. There's quite a bit of eyes on this and quite a bit of criteria that we're going to be looking for in terms of calling that a technical success. In terms of scale, Patrick, what we've spoken to before is the Karr asset or the Karr portion of the asset base, which would be the kind of the south portion of the legacy Veren assets. There is quite a bit of precedent plug-and-perf application in those lands. And we've looked quite closely at those, gone back and seen what has worked and what hasn't worked. Up in the Gold Creek portion of the asset base, it's -- we'll say, less proven. And we do think that we have a pretty good indication of, again, what was working and what went -- didn't go quite according to plan there with, again, some ability to try to tailor our designs to that. So ultimately, in a perfect world, you'd start to see these capital efficiency savings throughout the asset base. But like we said there, we probably used the word quite a few times throughout this process. The approach is going to be measured. We feel like 25% of the Gold Creek and Karr activity is appropriate at this stage, given where we're at, and we'll look to march it up from there and avoiding trying to put to firm a target on it. You go from 25% to 50% to 75% over a certain period of time. We try to let the results dictate that instead of putting that target out there. Operator: Next question will be from Dennis Fong at CIBC World Markets. Dennis Fong: The first one I want to focus a little bit on the gas lift side. You've optimized part of Gold Creek and Karr really, frankly, driving some volume outperformance and frankly, more to do at Musreau next year. Can you talk towards a little bit of the stage of optimization across the asset base, especially the legacy one. And how should we think about the cadence of working through kind of the upcoming backlog to kind of deploy gas lift in an optimized basis across the entire asset base. Joey Wong: Dennis. So in terms of the gas lift that we've done so far, and I guess I can jump to the second part of your question there with respect to what you're calling a backlog of other stuff. We're largely there, Dennis. Again, it was a lot of the efforts that went in to the infrastructure build-out that was done for that supporting gas lift in both Gold Creek and Karr and then also just the adjustment or I'll call tweaking of the parameters done by the collective field staff to get it done. And that was one of the larger driving factors behind the 4,000 BOE per day beat expectations there internally on the Montney side was really getting all of that done in quite short order, and again, maybe I'll draw back to the comment there about the field teams. We look at these assets and we say, okay, there probably is -- I'll use your word there, the backlog there is stuff to do, and they did take it upon themselves to hustle through quite a bit of that. And like I said, there's not a lot of low-hanging fruit left. What we now see though, and we built into our forward-looking forecast is the anticipation of getting ahead of this a little bit better. So it's been part of our standard operating practice that we get out and we either adjust gas lift or whatever the artificial lift technology is, adjust those parameters in advance of the need of those things, so that you don't have a sag in production, followed by a restoration of it. We actually get in front of that just to shorten that time. And like I say, that's been built in. And so we'd be -- our intent is to not have a backlog, I guess, is the short way of answering it there, Dennis. Dennis Fong: My second question relates to infrastructure spending. It looks like you have a couple of hundred million dollars of that in 2026. Can you talk towards the cadence of, we'll call it, facility build-out and so forth. Obviously, you have the -- that's kind of the near wellbore infrastructure build-out versus the actual facility build-out, which is done by your infrastructure partner. But can you talk towards the cadence of infrastructure spending over the next couple of years because I think capital efficiency becomes that much more impressive if you kind of ex out some of the mid-cycle spending requirements. Joey Wong: Yes, I can speak to that one there again, Dennis. So within the year, I guess, answering the first bit there, within the year, the infrastructure spend that we have planned in both Lator and Kaybob is relatively front-end loaded. Like we mentioned there with Kaybob being available for that expanded capacity in the second half, well, of course, that would imply that we're doing the work in the first half. And same thing for Lator, getting ready for that Q4 on production date. With respect to future infrastructure build-out, it's not something that we put a fine number out there at this time. When you look at the infrastructure portfolio that we now have the benefit of working with, we look at a big chunk coming available to us in Lator there. And like I mentioned there, a decent amount coming in Kaybob and some targeted debottlenecking throughout. On top of that, we then also have some available capacity in Gold Creek and Karr because that area was being built out for a pretty good capital program. So when we look at the actual amount that needs to be spent in the out years, without putting a number to it, Dennis, it's going to be lower than we would have expected going into this pre-acquisition just on the basis of, again, being able to utilize the available stuff and move around and fill that white space more effectively. Operator: [Operator Instructions] And your next question will be from Travis Wood at National Bank Financial. Travis Wood: I wanted to hear your thoughts on Lator and so maybe you could kind of walk us through the critical path as you're looking out through the tail end of this year, what type of lead time items you need to work with the partner, additional approvals as you kind of step into Q4 of next year. And then on top of that, what do you think the ultimate productive capacity of that region would be over and above the initial 35 to 40 a day? Joey Wong: Travis, it's Joey Wong one more time. In terms of required approvals and stuff, everything is in hand. So yes, that was kind of part of what set us up for the beat on timing there. And it's important to note that they're in hand early as a result of getting in front of -- at the very start, getting in front of our design basis very early, and that started with a strong understanding of both the technical like the subsurface of the asset base itself. And then some familiarity with building some similar facilities, whether we look at the Musreau facility or some other very similar projects that have been done, we've got the same facility team working on it. So they could draw on a lot of that experience and really compress that initial planning and engineering time so that when we went out for permits, which we -- again, to repeat myself, we have all of them now, but we got those early and that allowed us to start construction early, had a very productive past few months and find ourselves where we're at right now. So in terms of what we're looking for, for critical path, it's just execution now. Procurement is -- all long leads are placed and deliveries are on track. So really not looking for any other checkmarks except for just following through. Your other question on the ultimate productive capability of the asset base. So Lator Phase 1 is what we're speaking about here right now, 35,000 to 40,000 BOEs per day in that 40% to 50% liquids range. When we look at the entirety of the asset base, the way that we envision it is a likely Phase 2 at some point to bring us up to somewhere in that 85,000 BOEs per day range. And recognizing again that when we first envisioned that, it was outside of the context of having these -- the combined assets that we have, again, the benefit of working with. So what we intend to do going into the back part of this year and continually refresh that, of course, is evaluate where that next leg of growth comes from. Is it a Lator Phase 2? It's very compelling. We like Lator Phase 1, and we'll definitely like a Phase 2. But again, having a bit of a wealth of opportunities to look at there, we'll put them all against each other and see what makes sense to grow into at the right period of time. Is it more up in the northern part of our acreage? Is it looking into -- depending on what commodity prices look like in the long term? Is it something down in Resthaven, we'll look to make that determination into the future. Operator: Next is a follow-up from Dennis Fong at CIBC World Markets. Dennis Fong: I just had one more question, maybe as a follow-up to Travis' on Lator there. Just wanted to ask if you had -- if you could kind of highlight any of the either engineering work or the geology or the facility design that really kind of provides incremental confidence in showcasing an on-plan ramp-up for that region in that facility? Joey Wong: What I'd draw back to, Dennis, is the results that we've had to date. We've called those delineation pads and that's intentional because we're testing different portions of the acreage base there as it pertain to both geological characteristics like how the rock behaves, how it behaves when drilling, how it behaves when fracked and of course, subsequent production. And then what we've also looked to do is craft some of our development program around both the drawdown, assessing what the optimal drawdown rate is and got a team of reservoir engineers that assess what the push and pull between strong initial production compared to ultimately looking at higher ultimate recoveries are and kind of looking to find a balance there. And then also crafting the -- this year's program around being near existing horizontals to make sure that we've accounted for parent-child interaction appropriately in our plan. So without putting out anything specific there, Dennis, I would definitely say that when you look at the amount of work that's been done, be that through actual drilling, through modeling, through -- I should also mention as well, by the way, we cored a well drilled and cored a well there in the past few quarters there as well. When you look at the amount of work that's gone in, it is quite a high level of rigor. And the good news for us anyways and should give -- has given us anyways quite a bit of confidence is with every either technical evaluation that's been done or observation of physical behavior of the assets, everything has either met or slightly exceeded expectations. So that's really what's given us the confidence to stand behind the forecast there. Operator: Thank you. And at this time, gentlemen, we have no other questions registered. Please proceed. Grant Fagerheim: Thank you, Sylvie, and thanks to each of you on the line today and who continue to support us on our journey. I do want to once again thank our entire Whitecap team for your dedication and efforts over the past 5 month period of time as well as for the full year. We are excited about the opportunity facing us with our company and look forward to updating you on the progress for the balance of '25 and into the future. All the best of each of you, signing off for now. Operator: Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Enjoy the rest of your day.
Operator: Greetings, and welcome to the USANA Health Sciences third quarter earnings call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Andrew Masuda, Director of Investor Relations. Thank you. You may begin. Andrew Masuda: Thanks, Diego, and good morning, everyone. We appreciate you joining us to review our third quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at ir.usana.com. Shortly following the call, a replay will be available on our website. As a reminder, during the course of this conference call, management will make forward-looking statements regarding future events or the future financial performance of our company. Those statements involve risks and uncertainties that could cause actual results to differ perhaps materially from the results projected in such forward-looking statements. Examples of these statements include those regarding our strategies and outlook for fiscal year 2025, uncertainty related to the economic and operating environment around the world and our operations and financial results. We caution you that these statements should be considered in conjunction with disclosures, including specific risk factors and financial data contained in our most recent filings with the SEC. I'm joined by our President and CEO, Jim Brown; our Chief Financial Officer, Doug Hekking; our Chief Commercial Officer, Brent Neidig; our Chief Operating Officer, Walter Noot; as well as other executives. Yesterday, after the market closed, we announced our third quarter results and posted our management commentary document on the company's website. We'll now hear brief remarks from Jim before opening the call for questions. Jim Brown: Thank you, Andrew, and good morning, everyone. We continue to execute our comprehensive commercial strategy in the third quarter, which was highlighted by the global rollout of our enhanced compensation plan. While third quarter results were impacted by softer sales and Brand Partner productivity leading up to the Global Convention in August, we are in the initial stages of the full rollout, and I'd like to be clear in saying that I'm encouraged by recent activity we are seeing in the business. If you recall, we enhanced our compensation plan to ensure USANA is at the forefront of today's evolving and competitive landscape for entrepreneurs. Our commercial strategy includes an enhanced compensation plan, product innovation, updated and refreshed brand story and improved tools to assist with building a business. The enhanced compensation plan focuses on three key elements: share, grow and lead. This new framework is designed to help our Brand Partners to have greater success in building their sales organization with new Brand Partners and customers in a simple and explainable way. This is particularly relevant today as the desire to earn part-time supplementary income or to earn income on one's own terms is as high as it has ever been. Our recent changes have systematically addressed the most important features of a competitive compensation plan in this market: simplicity, early earnings potential and competitive pay for performance. We have simplified the plan, made it easier for new people to understand, act and share, improved the earnings capability of our new Brand Partners so that they have the potential to see success faster. And we've enhanced our pay-for-performance criteria, which will more greatly reward those who are doing more of the work. Simplicity and early success are key requirements of a younger demographic, and early indications are that this offering is resonating with that audience. We are encouraged by our Brand Partners' response to the enhancements and the recent lift we have seen in sales activity and leader productivity. We are seeing improvement across several key metrics, including engagement, as indicated by meeting attendance, Brand Partner attraction and customer acquisition, speed to earnings their first commission and general stickiness of Brand Partners and customers. Qualitatively, Brand Partners across the world are sharing how these new changes have brought renewed excitement, energy and success to their businesses. Our vision of Brand Partners being a focal point continues to resonate and build trust with these entrepreneurs as they have expressed improved confidence in sharing the opportunity. During the quarter, we reported an increase in inventories that can be attributed to, in great part, new product introductions to support our growth strategy, increased investments in location of our inventory to support tariff mitigation efforts and working capital investments in our venture companies, Hiya and Rise Bar. We have also begun the process of targeted in-house production for our venture companies. We believe our in-house manufacturing capabilities contribute to better margins, improved control of inventory levels and help to mitigate supply chain risk while providing a meaningful contribution to delivering the highest-quality nutritional products. Moving on to our other businesses. If you recall, these businesses provide USANA the ability to reach a broader demographic of health and wellness market while providing diversification and strengthening USANA's financial profile. Overall, we're encouraged by the year-to-date sales growth of these entities. I'll start by sharing an update on our direct-to-consumer business, Hiya. Although Hiya experienced some challenges in top line growth in the third quarter, the company has delivered 26% year-to-date sales growth, putting them on track to deliver another year of record sales. Notably, we have made significant progress on several integration initiatives. In the first half of the year, a large focus was placed on the implementation of a new ERP system and related controls to ensure that Hiya is fully operating as a subsidiary of a public company. There has been significant progress made that we believe will support the Hiya team moving forward. We have also been working on other areas that provide operational synergies. For example, during the quarter we assisted the team in the transition to a new logistics partner, which is anticipated to drive operational efficiency in the coming year. We also continue to leverage core competencies at USANA, including research and development activities, manufacturing and general operational expertise to support Hiya in the new product formulation, international expansion and cost savings opportunities. Another example, we anticipate to begin the manufacturing of Hiya products in-house over the next several months, which we anticipate will continue to improve margins in the late second quarter and back half of 2026. Altogether, we're pleased with the progress we've made on all these fronts and continue to expect Hiya to generate double-digit sales growth for the full 2025. The team has several exciting growth initiatives planned for next year, which we will address next quarter when we provide our initial outlook for fiscal 2026. Rise Bar, which was acquired in 2022, reported record third quarter net sales and year-to-date net sales have increased 169%. Although Rise Bar is still relatively small as a percentage of our sales portfolio, we're very pleased with the progress, including channel expansion and new product offerings that we believe will contribute to strong future sales heading into 2026. We are investing additional resources and working capital as well as leveraging USANA's operational expertise to capitalize on current momentum and to drive long-term growth and efficiencies. We believe there is meaningful growth opportunities in the health and food space over the next several years. As included in our third quarter earnings release, we reported that we have initiated and are executing a global cost reduction process, including a rightsizing of our workforce. This process will focus on prioritizing top strategic priorities while also targeting efficiencies that support a more agile and adaptable organization moving forward. We expect to incur an estimated onetime charge of $4.7 million in the fourth quarter, which has been reflected in our updated outlook. In closing, we remain confident that our comprehensive commercial team strategy will position USANA to drive long-term growth in our direct selling business and deliver long-term value for our customers and Brand Partners. Additionally, we are succeeding in our diversification strategy with the growth of Hiya in the children's health and wellness market and the growth of Rise in the healthy foods market. Together, these elements reinforce our positive outlook for the future and our commitment to create lasting value across our portfolio. With that, I'll now ask the operator to please open the line for questions. Operator: [Operator Instructions] And our first question comes from Anthony Lebiedzinski with Sidoti & Company. Anthony Lebiedzinski: So you have stated both in the release and this morning that you have seen a pickup in sales activity and leader productivity in recent weeks, which is encouraging. So can you just kind of walk us through maybe some -- share some additional details as far as the trajectory of your business trends as you went from July through August, September and maybe so far in October, if you could comment on that? Brent Neidig: Sure, Anthony. It's Brent. We have seen some promising trends from our new compensation plan that was launched earlier in July. And I think primarily what we've seen is we've seen more engagement and excitement around the offering than we historically have seen over the last couple of years. So it's been quite promising from that perspective. As Jim mentioned in his notes, we're really trying to focus on the upfront earnings opportunity. We know that as soon as people can engage with USANA, as soon as they see success and that they can see that success sooner on, they're more likely to stay with us longer. And so that's what's really resonated with our field right now and our Brand Partners. And historically, that's somewhat been a challenge over the last couple of years. And as people's expectations have changed in today's marketplace, they've been looking for an easier upfront earnings opportunity, and we feel like we've delivered on that front. So it's still early. Yet what we've seen in September, now the first couple of weeks in October, all signs are pretty promising, especially from our more mature markets like the United States. We've seen some reengagement from some of our longer tenured Brand Partners, which is really encouraging to see. Jim Brown: Yes. Just a further comment on that. During the quarter, we mentioned we didn't have the best quarter or it didn't meet our expectations. We did the kind of launch at the beginning of July of the compensation enhancement as well as some other stuff for our Brand Partners, and we saw a slowdown at that point in time where people were absorbing and not really getting into the business for a while. And then we've seen what Brent talked about. The pickup has really been after our Global Convention in August. So it really hit right at the end of August into September. So very promising signs, but again, early yet. G. Hekking: Yes. And Anthony, this is Doug. Just for context, and we talked about a little bit of this in the prerelease. When you roll a lot of information out, as Jim said, it takes some time to process. So we anticipated a little bit of softness as they took time to digest and understand and have some more of these in-person meetings. And our convention served and that investment there, I think, served as well to be able to have some of those conversations. But we saw maybe a little bit softer than we anticipated and lasted a little bit longer. But as Jim and Brent both indicated, we're pleased by kind of the traction we have now. There's a lot of work to do, but we're definitely leaning into it and working on executing the plan. Anthony Lebiedzinski: All right. That's very helpful context. And I guess that explains why the Americas and Europe region performed relatively better than some of your other regions, I guess, right, as far as looking at the percentage of your sales declines. Is that why? Because they're more mature of those markets? G. Hekking: Well, no, I think -- we had the event. We had some sales at the event. The other thing that you have to recognize is because the Rise Bar has been a relatively small percentage of sales. And because it's been there, we indicate -- you can see in the tables that we include that in the Americas and Europe number. And so part of that contribution -- without a doubt, what Brent said is accurate. But part of that contribution is also from the pickup in performance at Rise Bar as well. Anthony Lebiedzinski: Got it. Okay. And then can you just also talk about the incentives that you plan for the fourth quarter and whether some of those incentives may need to spill over into early '26? Or you think this is just a short-term one quarter event? Brent Neidig: Yes. Anthony, we're going to continue to look for strategic opportunities to provide incentives for our Brand Partners. Specifically now, as we've just launched our new compensation offering, it's really important for all of our Brand Partners around the world to understand it, to feel excitement around that offering and to really get going working according to that plan. So I think it's been indicated already, but we do have some incentives planned for the fourth quarter which should help us land with where we're guiding in terms of revenue. And it certainly will spill over into Q1 of next year just like it always does. We're always looking for opportunities for promotions to incentivize our Brand Partners. Anthony Lebiedzinski: Understood. Okay. And then just switching gears to Hiya. So as I look at the active customer count, that has declined. Can you talk about the reasons for that? And how confident are you that Hiya can get back to growth next year? Walter Noot: Yes. This is Walter. Yes, we're very confident with Hiya. We've had some slowdowns. In the third quarter, we expected more pickup because typically, their business is all DTC and they do a lot of marketing through Meta. And Meta has changed algorithms and so we're trying to figure that out. And we've been through this multiple times with Hiya in the past so we expect that to bounce back. And as Hiya continues to grow through DTC and retail and international expansion, yes, we expect that to continue to grow. Anthony Lebiedzinski: Got it. Okay. And then lastly for me before I pass it on to others. So in terms of just the rightsizing of your organization that you plan to do in the fourth quarter, how should we think about the level of annualized operating cost savings that you plan to achieve with this? G. Hekking: Yes. Anthony, this is Doug. So we're very early in the process. And so one of the components, as Jim mentioned, the rightsizing of staff is part of it. There's far more to it than there. And so I think what we'll look to do because we still got a lot of work and analysis and progress to make, we'll look to comment on that in February more fully. But we definitely expect to go back and see some cost savings and kind of cost reduction as a part of this process. And we'll talk about that in more detail in February. Operator: [Operator Instructions] And our next question comes from Susan Anderson with Canaccord Genuity. Susan Anderson: I guess maybe just a follow-up on Hiya. It sounds like as you integrate it further, maybe there's some more efficiencies to be had there. Maybe if you could talk about that a little bit more, I don't know, if you could quantify it and the impact it's going to have to margins at all. Walter Noot: Well, I won't give you all the details as far as -- this is Walter, by the way. I won't give you all the details on quantify. I think we'll have more information in February about that. But specifically, Hiya makes vitamins. That's their #1 product. They also do protein powders. And we have reformulated or formulated their products for our manufacturing process. We've got that ready. So we'll be making all of their vitamins here in-house, which we have all capabilities to do that. Also as far as operational efficiencies, there's just a lot. We're really good at operations as far as because of the size of our business, and so we're able to absorb a lot of support for supply chain. And they had a 3PL that they were using that we helped them move, transition to a different 3PL. And that reduced our cost by quite a bit and allowed them to be much more efficient. Susan Anderson: Okay. Great. That's really helpful. And then maybe if you could just talk a little bit about just the industry in general. Are you seeing any, I guess, slowdown from consumers as it relates to either VMS or wellness purchases? Are they looking for more value maybe than what they were 6 months or a year ago? And I guess maybe if you could talk about it by region as well. G. Hekking: Yes. Susan, to clarify, this is on the broader business, not specifically related to Hiya. Is that accurate? Susan Anderson: Correct, yes, just in the industry in general. Jim Brown: Yes. We're a part of some associations that help the industry in general. And quite honestly, the direct selling business has struggled over the past few years, probably since COVID. A lot of direct selling companies are basically enhancing their offerings, making it quicker and easier to earn modest income as well as share products. So we have seen that same struggle over that time period. But I think we're getting there when it comes to what we just offered in July through August of this year, and we're setting ourselves up for the future. Yes. And definitely, the product or the vitamin side of the business has struggled some. There is a lot of competition out there. And our biggest challenge is to make sure that we can easily show people our competitive offering. And again, our offering is a little bit different than some of the companies out there because of the direct selling industry. We offer fantastic products as well as an opportunity to earn. So that's one of the highlights when we go out there when we look at Hiya and Rise. And that information, I'll let Walter speak to that. Walter Noot: Yes. Hiya is children's vitamins. And the children's vitamin market has been, I would say, there's quite a bit of competition there. But Hiya creates a complete -- a different experience for their customers. And because of that and because they're DTC and because they're all subscription, that business has actually been really, really good for us. And they've been able to take market share from other companies and I think they'll continue to do that. So for the Hiya side, it's been a really good. Rise is protein powders, bars, RTD, and that business is really, really good for us too, especially with the protein business in the U.S. You just see a huge uptick and huge demand for proteins, and we're capitalizing that with high with Rise. That's why we're seeing such growth. G. Hekking: Yes. And Susan, a little bit more color on kind of just the broader category and what we're seeing with the consumers. We also play in a space where we have what I believe to be the best quality product out there. And one of the commercial team's strategy is get better and better and better at articulating that story so they really understand the value proposition. We're not a commodity-type product. That's not a place we're going to play. And we're going to continue to differentiate what we're offering and we're going to make sure that we convey that story so consumers understand the differentiation of our products. Susan Anderson: Okay. Great. And then I guess maybe if you could just talk about if you think there's opportunity -- Hiya has been pretty successful. The DTC business seem to be doing better. I mean, is there an opportunity, you think, to maybe buy a couple more DTC businesses maybe to tack on to that? Or how are you thinking about kind of like your future strategy? Jim Brown: Yes. This is Jim. You're definitely hitting it. Our future strategy is diversification. We're committed to the direct selling channel. We're going to continue to work on making that grow and be a big engine. As we get cash through our business, we are going to look at other opportunities in M&A or opportunities within the companies that they're there to actually expand within. So yes, that is part of our strategy. I think diversification will make a stronger USANA and we'll continue down that path. And even if you look at where we've been with direct sales and getting modest growth there just over time with the growth rates of both Hiya and Rise been, we'll see a shift in our overall portfolio of getting more omni-channel and more diversified. G. Hekking: Yes. I would also say kind of given the recent announcement during the fourth quarter, as we look to pivot to be more agile and adaptable and work on some of these cost reductions from a capital allocation priority in the near term, it will be investing in the commercial strategy as the top priority and, as Jim mentioned, kind of our venture companies because we see really good opportunity in both Hiya and Rise. And we continue to evaluate different opportunities. But those, without a doubt, will be our priorities from a capital allocation. Operator: And there are no further questions at this time, so I'll hand the floor back to Andrew Masuda for closing remarks -- actually, one question just popped in. And that question comes from Ivan Feinseth with Tigress Financial Partners. Ivan Feinseth: I have a few questions. As far as now, I see your strategy is to delineate between direct-to-consumer and still your sales marketing channel. But as an example, there's still a lot of confusion about supplements that I feel that your adviser channel can help. Like everybody is saying the #1 supplement that you should take is magnesium. But there's just tons of different formulations. You should take magnesium formulated with different amino acids or different formulations at night versus the morning. How do you feel your product line could meet some of those demands and that your adviser channel could help consumers better understand that? Kathryn Armstrong: Ivan, it's Kathryn. I think the data on magnesium is interesting and still, as we've discussed, a little confusing, right? So when we look at the clinical data and sort of who has been pushing the clinicals and what types of forms have been studied and whether or not there's been a lot of A/B testing of them versus each other, the data there is not consistent and solid. I think in alignment with USANA's core values, right, we are always prioritizing science and ensuring that our customers and Brand Partners have the best possible options. So we continue to look at different magnesium blends as well as all of the different elements that are important for human health. And we'll continue to look at that and to ensure that the research that's being vetted is being vetted objectively. Ivan Feinseth: And then how do you feel that RFK's Make America Healthy initiative is helping you to create some sales opportunity, getting more people interested in the need for supplements? How are you kind of capitalizing on that both direct-to-consumer and to your sales channels? Jim Brown: Yes. Ivan, this is Jim. I think, in general, we appreciate any direction that shows that vitamins and supplements are very important for people around the world. I mean, even if we look in at some of our other markets, there's initiatives from the government standpoint that we can attach to and educate and give people great offerings to meet the needs. We talked about this for years. Our diets really aren't hitting the mark and that's why supplements are so important. And I think, over time, people are getting more and more educated and understand that, and that just helps USANA and it helps the whole industry in general. Like Doug had said a minute ago, the thing that we supply is the best vitamins in the world and we'll continue to do that. We'll always look to see what our customers and Brand Partners need and make additions or adaptations to what we're offering. But I mean, any time you have the government or even other agencies talk about how supplements are needed for your overall balance and diet, it's just a benefit to us. And it -- go ahead, Ivan. Sorry. Ivan Feinseth: For a long time, the government has kind of been a headwind to the supplement industry, and now it really looks like it's going to be a tremendous tailwind led by the Make America Healthy initiative. Jim Brown: Yes, I agree with that. And again, that's just fantastic for the industry. And we've believed that all along. We've been in business 30 years. I can only imagine, I've been with the company right at 20, how difficult it was at the beginning when vitamins were really not looked at positively or there was just no information about it. And our Founder, Dr. Wentz, made the decision to move forward and give us the best product line out there. So yes, again, we'll go along with what's out there, and it's especially helpful when it's positive to the industry. Operator: Thank you. That was our last question. So I'll now hand the floor to Andrew Masuda to close. Thank you. Andrew Masuda: Thanks, Diego, and thank you all for your questions and participation on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at (801) 954-7210. Operator: Thank you. And with that, we conclude today's call. All parties may disconnect. Have a good day.
Operator: Welcome to the Atlas Copco Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead. Peter Kinnart: Thank you, operator, and a very warm welcome, good morning, good afternoon or good evening to all of? You attending this third quarter 2025 earnings call. Together with me is Vagner Rego, who will guide you through the presentation together. But before we start, I will repeat the same topic I always say when we start the call, and that is when we start after the presentation with the question round, please only ask one question at the time. So we make sure that all participants have the opportunity to raise their most important question. Is there more time available afterwards, you are, of course, more than welcome to line up again to ask your next question. With that, I hand over to Vagner Rego, who will start the presentation. Vagner Rego: Thank you very much, Peter, and welcome to this conference call. We're quite happy to be here once again. So if we go straight to the summary of this quarter, we have seen a mixed demand with stable orders pretty much aligned with what we have said on the guidance for Q3 during the Q2 conference call. So -- and then you can see industrial compressors flat. Gas and process, we see a decline in the orders received when you look to year-to-year comparison was good on the industrial vacuum side, but negative on the semiconductor vacuum side. When it comes to industrial assembly and vision solutions, there, we saw a negative development, mainly driven by automotive due to the conditions in the market. We had a solid growth for power equipment that we were quite happy to see that. And again, good growth on our service business. We see that our efforts to further develop our service business and the implementation of the installed base, I think we managed to capture that installed base that has been deployed over the years. When it comes to revenues, it was somewhat up, and we had 2 business areas with a good organic -- reasonable, let's say, organic development and 2 business areas with a negative development that led us to a growth of 1%. The profit margin has been affected by restructuring costs. We will come back with more details and acquisitions. We have done 6 acquisitions. 2 acquisitions I would like to highlight because they are very important for our strategy. The first one is ABC compressors that is increasing our ability to serve customers in hydrogen and CO2 applications. And the other one is Shareway, which is a joint venture. We acquired 70% of the company, and it's going to be a very important one for our development in China, adding as well technologies that we didn't have in our portfolio. So cash flow was quite solid. We were very happy to see we continue to generate very good cash flow. So going to the next, if we look into the financials, how was that translated? We reached SEK 40.5 billion in terms of orders received, as you can see, SEK 41.6 billion in revenues, orders received more or less aligned with previous quarter, but unchanged organically. And like I have mentioned, 1% organically in the revenues. Operating margin was 20.5%. But then if we readjust for the restructuring cost, we end up at 21.3%. And the operating cash flow, we have mentioned already SEK 7.3 billion, which is quite solid, and we were quite happy to see that development. If we then move to how we have performed all over the world. If I then start with North America, we saw still the environment there is, let's say, has challenges, uncertainty, but we are happy with the quarter with plus 10%, if you correct for currency. So -- and there, we see very strong development in Compressor Technique and Power Technique that it was really good to see. And Vacuum and Industrial Technique were slightly negative, impacted by semiconductor and the automotive market. When it comes to Europe, it was also good to see 10% development. And here, again, Compressor Technique had a good development, positive development, Power Technique, the same, and we had a negative development in Vacuum Technique and Industrial Technique. When it comes to Asia, basically, all business areas had a good development, positive development. The only headwind we had was in Compressor Technique, mainly due to large gas and process compressors and some large industrial compressors where we saw negative development. But combined, we still had a positive development of 1%. Latin America continues -- not Latin America, but South America being more specific, had a positive development, almost basically most of business area with positive development [indiscernible] Industrial Technique negative. And then Africa, Middle East, they had quite a big comparison to be. And there, we saw a negative development that is mainly influenced by Compressor Technique and Power Technique. Overall, if we adjust for currency, plus 2% in orders, which is more or less aligned with what we have seen year-to-date. If we then move -- if we combine again all the figures, we can see that we had plus 2% in structural change. That is basically our acquisitions. In revenues, the acquisitions performed better, plus 3%, quite a lot of currency headwind, minus 6% in orders, minus 7% in revenues, organic growth unchanging orders like we have mentioned, we end up at SEK 40.5 billion in orders received and SEK 41.6 billion in revenues. So if we then see the split among the the business areas. We can see now that Compressor Technique in the last 12 months as an order -- has contributed to 46% of our orders received and this quarter with 0% growth or no growth basically. Vacuum Technique, 21% of our orders with 1% growth, very good contribution from Industrial Vacuum and Service. Power Technique continues a good development in orders, 17% now of our business, plus 5% in the quarter and Industrial Technique with minus 3% in orders received. If we then move to Compressor Technique, it's what we have seen, industrial compressors were basically unchanged. Let's say, a little bit more negative towards the larger compressors, a little bit more positive towards the smaller compressors. That is not a big indicator, but just what happened in the quarter. We saw decreased order intake year-on-year on gas and process compressor, but sequentially, we saw a good development and improvement compared to Q2. Service business continued to develop very well. Once again, quite happy to see that. Revenues as well that shows that the quality of our order book is good, and we continue to develop 4% organic growth profitability, we are quite happy with this level of 25.3%. We should have in mind, we have done slightly larger acquisitions that has a bigger impact, and we are focused to do more integration items at the beginning, meaning deploying our IT, our -- especially when it comes to cybersecurity. So a little bit more cost at the beginning to safeguard our acquisition. So a bit more cost, but we are happy with that level of 23.5%. So ROCE remains at a good level. And we continue our innovation pipeline with Compressor Technique. And here, today, we brought an example of our development in China that sometimes you have to develop to come with more features that you can come with a different value proposition to the customer. Sometimes you have to innovate to cost reduce. And this is a good example of how we innovate also to cost reduce to be competitive in China, but also to create options as well in other regions. A very good achievement now with this new innovation. Then if we go to Vacuum Technique, we saw 1%. It's good to see positive development, although it's not in the semi market, but it's very good to see that industrial and scientific vacuum in terms of equipment continues to develop very well. We still don't see -- we are yet to see a positive development in the semi market, but we still have headwinds, especially for North America when it comes to the semi. In the other hand, it's very good to see the service business developing very well, especially in the semi part of the business, new fabs being built coming into operation, and we managed now to get the aftermarket from these fabs. But also not only on the semi service, but also the industrial service is developing quite well. And then we have headwinds in the revenue. Revenues were down 6% organically. That put pressures in the bottom line, but we see good traction on the restructuring activities that we have announced and performed during the year. But this quarter, we felt that we could -- because of the headwinds we have in the North American organization when it comes to some market and semi as well, we decided to further optimize our footprint there without damaging our ability to grow, to sell, to further develop the business. I think that we didn't touch, but we have reorganized our North America that include to reorganize one factory to adapt one of our service centers to integrate and also to work in our customer center, try to optimize, decrease management structure and safeguard that our ability to support our industrial and semi customers are not touching. I think that was the main target. And that's why we decided to do a new round of restructuring in Vacuum Technique to make sure we safeguard our bottom line. So then the adjusted operating margin was 20.1%. So return on capital employed 18%. And we continue to innovate in the semi market. You know that real estate is very important in the semi market. I mean, the footprint that your product utilized is very important, and we managed to come now with this integrated abatement system that we occupy 30% less space in the fab. That's also important to support our customers in that market segment. If we then go to Industrial Technique, we saw order decline of 3% and is mainly driven by the headwinds in the automotive. And I would say not everything is negative in the automotive. We still get quite a good level of orders when it comes to flexible production lines, meaning if the production line needs to be more flexible, we can support our customers on that. We have more products, more software-driven products as well that can support our customers. And we also see more demand for automation. That is good. But in the other hand, we see less production lines being built, and that means less project. And the project business is having more headwinds. So -- and that's what we have seen. And service was basically unchanged. That has also -- that is also influenced by the number of cars produced. And that's why we see a stable level in Service and Industrial Technique. Revenues were down 1% organically. Operating margin were at 18.8%, excluding the restructuring costs, a minor restructuring cost of SEK 53 million compared to Vacuum Technique. So we keep on fine-tuning our organization in Industrial Technique because we have the headwinds. And it's the same concept. We have optimized management structure, and we try to adapt to the circumstances that we see today in the market. And again, the innovation efforts continue. Here, we develop a product that is reducing the dispensing time in about 50% that definitely can support some of our customers, and we are also quite happy with that development. So if we then move to Power Technique, and that is more a positive picture when it comes to the orders development, solid growth in equipment. Basically, most of the Equipment division had a positive development. Good growth in rental. I think that we continue to develop. Revenues were up 3% organic and operating margin at 17%. And here, we have higher functional cost and then a little bit of dilution from the acquisition. But I think the main topic here is higher functional costs. We have created a new division to sell industrial flow products. We are building up competence in our customer centers. I think that will bring -- is bringing a good organic growth, but I think we haven't seen -- we are yet to see translation in improved margin that will come over time. We believe we can operate in a higher margin with a higher margin in Power Technique. And now it's important as well, the acquired companies, we also invest in innovation. On the functional cost, there is also a component of higher R&D because also the acquired companies, we buy technology, but we believe we should continue to innovate. And this is one example of an innovation of one of our acquired companies, Wangen that they managed to come with a new twin screw pump for applications, pumping high viscous media in demand high flow rates. So also there, very good to see our innovation. So with that, I will transfer to you, Peter, to talk about our profit margin. Peter Kinnart: Okay. Thank you, Vagner. So from the operating profit of SEK 8.5 billion, we go through the net financial items, which are slightly lower due to somewhat lower exchange rate -- financial exchange rate differences to a profit before tax of SEK 8.5 billion compared to SEK 9.2 billion last year. and an income tax expense of SEK 1.8 billion. That means that we have an effective tax rate of 21.1% for the quarter, which is on the low side. Main reason for that is that besides the normal things that we see recurring that we also had a lowering of deferred tax liabilities linked to the lower announced tax rate for the German market. Therefore, this is a fairly low tax rate. It also still includes some of the release of provisions from the past from China high-tech we used to have. And so for the next quarter, we think the effective tax rate will be somewhat higher, probably around 21.5% to 22% in the near term. And that gives us a total profit of the period of SEK 6.7 billion and basic earnings per share of SEK 1.37 for the quarter. Then I will move on to Slide #12, talking a bit more about the profitability in detail. I would say, first of all, overall, I think we were quite pleased with the overall profit level that we managed to achieve in these quite turbulent and difficult circumstances. As already explained by Vagner, we had some restructuring costs. Actually, also last year, we had some restructuring costs. So therefore, you see here in the bridge, the net. For this year, the total cost was about SEK 205 million. For last year, we had a cost of SEK 123 million, leading then to the net SEK 82 million in the bridge, slightly diluting the margin as well as the impact of the LTI programs also having a small negative impact. But the main headlines of the profitability development, I would say, were, on the one hand, a slightly positive currency development. As you remember, last quarter, we had quite significant impacts of currency, but this month -- this quarter, it's much more mild and actually slightly positive. So I will not go into more detail like I did last time. The acquisitions, however, are then a detractor of about 0.6%. And also the tariffs had a bit of a negative impact on the profitability for the quarter. Nothing dramatic, but I have to admit that we did not manage to completely compensate for the tariff impact and the turmoil in that particular area throughout the quarter. And so I think that are the main contributors to the profit development for the quarter. Talking about currency, also for next quarter, we do expect actually, in absolute terms, a continued negative development of the currency contribution due to the fact that the average rate continues to lower, all things being equal. And therefore, we would expect anywhere around SEK 800 million potentially of cost impact, also depending, of course, and that remains to be seen on the revaluation of assets on the balance sheet. If we then take the profitability and dive a little bit deeper into each of the business areas, highlighting the main contributors to the respective profit developments on Slide #13. Then starting with Compressor Technique. First of all, 25.3%, continuing at a very good and solid margin. There was a slight detraction from the acquisitions, which is, in our belief, a very important investment in future growth. We also front-load a bit more with costs in order to safeguard a good, speedy integration process from the beginning onwards. And that is the reason why we see a bit more of detraction from the acquisitions. Otherwise, I don't think anything else was very strong. Secondary, maybe also, of course, the tariffs had to have a minor impact as well. On Vacuum Technique, here, a bit of a mixed picture, a bigger impact from currency, as you can see. The main reason is that last year, we had quite a big negative impact, and that in the bridge then turns into quite a significant positive. Otherwise, it would be relatively comparable to the other business areas, but that's the reason for the high positive. On the other hand, volumes were the main detractor. We see, of course, the top line going down with SEK 591 million, and that has an impact on the profitability on the bottom line. That's the main contributor. But also here, tariffs are part of the equation. Again, a minor impact, but still an impact in our profitability development. And of course, we already mentioned the restructuring net impact in the profit bridge as well. Industrial Technique, also here, the impact of the restructuring cost, as I already mentioned. Further then also revenue volumes being negatively affecting the profitability. The currency also slightly negative impact from a margin point of view. Also, the acquisitions were a bit dilutive. So overall, going to 18%. But I think with the restructuring activities, we are also there working hard to try to turn the corner and improve the profitability. As already indicated, we evaluated quarter-by-quarter how things develop. And whenever needed, we take the necessary measures. And we need to do it cautiously because, for example, in Vacuum Technique, you've seen the very solid development of service. So obviously, we cannot just cut away everywhere in the organization. We need to do it in a careful way, so we don't jeopardize the growth of the respective businesses. And then last, in the table here, Power Technique with delivering a solid margin of 17% again. Here, as we already mentioned, the main topic of the lower profitability from an organic point of view was more the functional costs. We are investing in a new division as one aspect of it. We are also working on a number of transformation projects, rejuvenating some of the old ERP systems we have for specialty rental for some of our production entities, for example. And that also triggers a number of additional costs for the time being. But over time, of course, we expect them to become more efficient and as a result, also improve the margin coming from those different investments. Also investments in dedicated salespeople in Power and Flow also within IFD in the Industrial Flow division, we are working hard to build that organization so we can leverage the sales of all the different technologies we have acquired in the last few years. So I think that explains the overall profitability business area by business area. If I then move to the balance sheet, I would say, relatively uneventful. Of course, on the one hand, intangible assets go up due to the acquisitions. On the other hand, we amortize, so basically quite stable. We see some impact on the inventories, for example, which is beneficial. We are actually indeed improving the inventory levels across the organization with all the different actions that we have ongoing. The receivables overall fairly quite stable, especially from a relative point of view. So we are quite happy with maintaining that good performance on the receivables side. On the equity side, also there, not so much to mention, mainly the equity is changing because of the fact that we are generating more profit, while on the other hand, of course, we are also paying dividends. And on that point, I would like to just highlight the fact that tomorrow, we will actually pay the second installment of the dividend related to 2024, SEK 1.50 per share roughly in total volume, an amount of SEK 7.3 billion. And with that, I turn to the cash flow. In the cash flow also there, I think a solid performance. You could say, well, yes, it's a little bit lower than last year. But on the other hand, quarter-over-quarter or over the different quarters, I think this is quite a significant value of operating cash flow we are generating. On the one hand, we have a little bit lower operating cash surplus, but we have a little bit less taxes paid. On the other hand, we have a slightly less positive impact from the change in working capital compared to the same quarter last year. But we also see a gradually slight slowdown in the increasing rental equipment, but also in the investments of property and plant. We continue to do a number of investments that are necessary for the future to replace some of the old assets, but also to build some new capacity, but at a slower pace than we used to a while ago. Also, of course, given the current climate, I think that makes a lot of sense. And with that, we end up with the SEK 7.3 billion operating cash flow. And with that, I think we have come to the end of the comments to the financial statements. And I would like to hand over back again to Vagner, who will comment a bit more on our near-term outlook. Vagner Rego: Good. Thanks, Peter. And once again, I would like to repeat that our forward-looking statement when it comes to the outlook is not -- is a sequential guidance. It's not a straight projection of our orders received. And again, to do that, to come to that statement, we look to the external world. And once again, we don't see a change in the environment. The world continues with a lot of uncertainty that are not supporting our customers to take decision, especially on large orders. So -- and then when we also look to our business internally, we don't see a dramatic change. We talk with our 24 divisions, look to the pipeline, different market segments, and we see no reason to believe that there will be a dramatic change compared to Q3. So that's why we continue with our statement that we expect that our customer activity to remain at the same level -- to remain at the current level. And then I would like to invite you for our Capital Markets Day that will happen in Germany. We will first go to Stuttgart, and there, we will have some presentation. And after lunch, we will go to our innovation center in Breton, where we will share some of our innovations related to Industrial Technique and Vacuum Technique. And I'm looking forward to see you there. Peter Kinnart: Yes. Thank you, Vagner. And we actually have still a few places left. So if you're really eager to see those products, then please come forward so we can reserve your seats. With that, we come to the end of the presentation, and we would like to start the question round. Again, I would like to repeat, please refrain yourself to only asking 1 question at a time. And then we are looking forward to receiving your questions. Back to the operator. Operator: [Operator Instructions] The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I want to ask a question about sort of what you mentioned regarding the margin still and the fact that you didn't fully compensate the tariffs entirely. Is this -- do you see that as sort of a delayed impact? We should see sort of eventually the full compensation within the coming quarters? Or is it more sort of an intention to not fully compensate it, I don't know, because of competitive reasons or anything else? Can you elaborate a bit there, please? Peter Kinnart: Sure, Daniela. Thank you for your question. No, first of all, it's definitely not intentional not to fully compensate for the tariffs. I think it's just been a very turbulent quarter with a lot of changes, especially towards the end of August with Section 232 being added to the equation and asking quite a lot of effort from big parts of the organization to investigate more deeply and to qualify a number of products, et cetera. So that has caused, of course, a bit of delay in being able to answer fully to some of these issues. And therefore, we have somewhat higher tariffs. I wouldn't say that it is necessarily so that in the very short term, we would be able to fully compensate, but we are quite confident that over time, over the quarter that we will be able to compensate for the tariffs as they exist today. With that, I also need to immediately apply some caution because as the changes are happening overnight very often, we don't know, of course, what's coming, but we continue to monitor it very closely. Maybe one thing to underline as well is that I did indicate that the tariffs did have an impact on the profitability for the quarter, but I also want to underline that the impact was not humongous that it was not totally destroying the profitability level. But we do admit that we did not manage to fully compensate for the tariff impact for the time being. Operator: The next question comes from Michael Harleaux from Morgan Stanley. Michael Harleaux: I'll limit myself to one as requested. On the large gas and process category, would it be possible for you to help us understand where we are in the LNG ordering cycle? Vagner Rego: Well, I think to say exactly where we are in the cycle, I think it's a bit more difficult. What I can say is this -- our presence in the market, we cover several market segments including LNG. Particularly this quarter, we did have orders on LNG as well. We had orders for fewer gas boosters. There are quite a lot of investments ongoing to increase the energy production capacity with gas-fired turbines. So -- and we do have products for that. And -- but we also saw good order development in industrial gases, for instance. So it's a quite a diverse market, let's say, segments that we cover, and we saw a good development this quarter, including in LNG. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: So I just want to come back on the impact from tariffs. You mentioned Section 232 added through the quarter, but that was 18th of August. And then you probably had some inventory to cover you through September, right? So shouldn't Section 232 hit you harder, Peter, in the fourth quarter when the full effect kicks in from steel and aluminum. So shouldn't we see a weaker drop-through here in the fourth quarter? Or can you take out enough cost to raise prices to mitigate that incremental impact? Peter Kinnart: Thank you, Klas. I think a very fair question and logical reasoning, of course. But I think it's also fair to say that the introduction of 232 didn't allow us immediately to get to lower tariffs with the Section 232. There's a lot of documentation required to pass the customs in order to prove that you don't need to pay 200% tariff or that you pay 50% tariff. So as a result, I think we had a bit of a spike, you could say, maybe in September towards the end of the quarter when it comes to the impact of 232. While now, of course, we have worked with a lot of people in the organization on trying to sort out both through our suppliers, both through our engineering departments throughout different locations, et cetera, how we can document all the products in the best possible way in order to be able to get the best possible tariff, so to say, under the present rules. So as a result, I think in quarter 4, we are better placed to pass the products to custom duties. That being said, I think on the other hand, of course, there will be more products going through the full quarter, as you indicate. And therefore, you could say that in absolute terms, the cost will be higher. But I think overall, and it's hard to really estimate, of course. But overall, I don't think it would result in a dramatic increase of the tariffs in the fourth quarter for us. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: I'm wondering if you could give us some color on what you're seeing in semiconductor demand. I'd say fairly recent news flow has been positive both on the memory side, plus you have better clarity on what Intel is going to do or not do. Can you just tell us what you're seeing in VT right now and how we should think about development into next year? Vagner Rego: Yes. What I can say, I think when it comes to leading edge nodes, I think the market environment is very positive, very good. A lot of investments ongoing, players that are -- some that are more mature on scaling up really the leading-edge nodes. Some are trying. And there, I really cannot say where they are. So we also not -- we don't comment on specific customers. We are not allowed to talk about specific customers. But one thing that is important to remind, leading edge node is going well, and we get orders. We are happy with that business. But of course, the entire market still has quite a lot of capacity. So -- and if you take a little bit advanced nodes and legacy nodes, there -- there is overcapacity. And of course, we need the entire market developing very well in order we can see a bend in the trend when it comes to orders received in that market. John-B Kim: Okay. And can you comment on memory, please? Vagner Rego: Sorry, I didn't get the last comment. John-B Kim: Could you offer a similar comment on memory, memory customers? Vagner Rego: No, we are a bit more agnostic when it comes to memory and logic. We are present in both markets. And I think if there is a good development in that market, we will be able to capture that development. I think we are well positioned to capture any movement in that market. Operator: The next question comes from Sebastian Kuenne from RBC. Sebastian Kuenne: I spoke recently to some of your competitors in Europe, and they speak of a more aggressive pricing behavior of some of your American competitors inside of Europe. Could you maybe give us an idea of what the pricing situation is and whether that's related to the currency differential? Vagner Rego: Yes. I cannot really comment what is happening with our competitor. I must say we do have positive price development in our -- if you are referring to our compressor business, for instance, we do have positive price development, including in Europe. We also have positive development in the U.S. that we try to compensate as well for the tariffs. That's what I can say. difficult for me to judge what's happening. I think our position in Europe remains quite solid. I think we had a good development in Q3. As you could see, I mentioned that we had positive development in Europe. So we are quite happy with the development in the orders that we have had in Q3. So good. That's what I, let's say, I would like to comment when it comes to price. Operator: The next question comes from Magnus Kruber from Nordea. Magnus Kruber: Magnus from Nordea. Sorry to labor the point about the tariffs. I think you had a 40 bps headwinds on the organic part in the bridge -- margin bridge this quarter. Could you help us frame the tariff impact within that? I'm not sure if you want to comment exactly what it was, but some help on the magnitude would be helpful. Peter Kinnart: Yes, I think it's hard to pinpoint exactly, of course, because, okay, on the one hand, we do follow up quite closely what is the exact impact of the tariffs. As such, the custom duties that we need to pay when we clear the goods. On the other hand, there's, of course, a lot of indirect costs as there's a lot of people in the organization working hard on the whole topic. Secondly, there's also additional storage costs when you are holding goods for a longer time before clearing them into -- waiting for maybe additional information or other type of things. And then last but not least, of course, we also work a lot with extra support external to help us make sure that we don't make big mistakes in the way we assess the value on which the custom duties will be paid. But like I said, overall, I think the tariff impact was not dramatic. It didn't turn around the profitability completely. It was one of the contributing factors. So okay, as you say, minus 0.4% overall on the group from an organic perspective. Tariffs were a contributor to that, but not the only one in there. There was also volume mix and price combined, you could say. So I think, like I said, no very substantial impact, but altogether, still an impact in that I think we didn't -- we don't want to shy away from, so to say, to say that there is a minor negative impact from the tariffs in the profit margin. Operator: The next question comes from Alexander Jones from BofA. Alexander Jones: You mentioned that industrial compressor orders in Europe were up in the quarter, whereas last quarter, you talked about stable. Could you highlight for us whether that's driven by any particular areas? And how are you thinking about that European outlook in the coming quarters? Vagner Rego: I think it came especially from our effort -- we have created as well a new division that we call Air & Gas Solutions. And they managed to have quite a good development for some gas generation project. I think we did quite well. Also, medical air did quite well. There are some pockets where we can find good opportunities for growth. But the industrial market in general, there was not a huge uptick. But in some pockets, we managed to have good business. I think it's also fair to say smaller compressors developed quite okay as well. That was important. So -- but not something that I wouldn't like to say the overall market is bouncing back. It's more driven by the activities that we have done to try to gain market share and in some areas to have -- to capture the opportunities in a market segment that is developing a little bit better. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: So the question is, can we double-click, please, on Compressor Technique in 2 regions, North America and China. If you could just walk us through how you've done in small- to medium-sized compressors, gas and process and large industrials and how you feel your competition has done as well, how you feel you've done versus the market? Vagner Rego: I think in North America, to say against the market, I think it's a bit difficult. But in North America, we are quite happy with the development in Q3 because we have all these uncertainties around tariffs and Session 232 and the teams, they did a very good job, very solid job. We had a double-digit growth in North America when it comes to compressors. We also had good development in -- in gas and process compressors. And there is more around industrial gases and fewer gas boosters that they go to gas-fired power plants. So that was the pockets that we're doing quite well. And then if I comment a little bit more about China, there is a little bit more challenging. I think the scenario has not changed. We see less projects in industrial compressors, but also in gas and process gas and process is a little bit more difficult than industrial compressors. Operator: The next question comes from Rory Smith from Oxcap. Rory Smith: It's Rory from Oxcap. I just wanted to sort of double-click on that industrial compressor piece. And if you could add any more color to the difference you're seeing in the quarter between the sort of small and medium-sized industrial compressors and the large industrial compressors. Is that by market, by region? Any color there? And I might try my luck with a follow-up, if that's okay. Vagner Rego: I think overall, like I said, it's a bit more difficult in Asia, particularly in China that we have mentioned already. There is a very small difference between small and large, a little bit more in favor of the smaller compressor, but it's not a huge difference. It's not something that is becoming an indicator, I would not use as an indicator because the difference is very small. But it was more in favor of the smaller compressors. Rory Smith: Understood. And if I could just follow up on that. You obviously called out the investment you're making to innovate to cost compete in China. I was just wondering if you'd be able or willing to put some numbers around that R&D piece, yes, for the investment in sort of, I guess, not lower spec, but yes, innovating to cost compete. Any numbers around that, that would be the question. Vagner Rego: No, I don't have a number to share. But what I can say, we are focused as well to be competitive in China. We have done an investment in our facility in Wuxi that we call now the Wuxi campus, where we have concentrated most of the Compressor Technique facilities in one place. And that gave a lot of R&D capabilities to the team we have in China, capabilities that we didn't have before with more test cells with more R&D facilities to do test, to do design. We are increasing the autonomy that our Chinese teams, they have in terms of design, still with good collaboration with our Belgium team, but a little bit more independence. And I think that is going well. And that's why we would like to share that product because I think that comes out of that reorganization and that investment. Operator: The next question comes from Johan Sjöberg from Kepler Cheuvreux. Johan Sjöberg: My question is also regarding semi CapEx. I understand your near-term comments on leading edge and also the overcapacity. I think that is sort of comments you made before, Vagner, if I'm not mistaken. But given all this, a lot of news flows in during Q3 here, when you're talking to your customers about sort of 2026 and beyond, how have they responded to these news and also especially the future CapEx plan from their side because -- I stop there. Vagner Rego: Yes. It's difficult to talk about 2026. We only talk about Q4 first. In Q4, we believe that it's going to be stable. I think it's difficult. You know this market, how it works. It's key account business. When they decide to place order or to populate a fab when they -- first, they do the R&D stage and then they do the pilot, then they need to try to nail that production facility with the right yield and then they scale up and sometimes can come very fast. I think it's difficult for me to comment looking at 2026 or even 2027. What I can say from Q3 to Q4, we see the market -- we don't see any reason to change the trajectory that we have seen lately. Operator: The next question comes from Anders Idborg from ABG. Anders Idborg: Just wanted to ask about acquisitions. So we've seen a very nice flow of bolt-ons. I'm just a little bit surprised when we look at the -- over the last, well, 6 quarters, basically, there's been very little of EBIT contribution on the bridge, and I don't have really the impression that you bought unprofitable companies here. So what is the reason? Is there some just initial cost restructuring going on? Or could you -- would you care to explain that? Vagner Rego: Yes. Thank you for the question. I think we -- definitely, we try to add good businesses to our portfolio of technologies and companies that we have definitely. But we also have an effort to integrate these companies faster and I mentioned during the presentation that we -- for instance, cybersecurity is very important. And we try to -- that is a kind of nonnegotiable. We try to bring that to our spec as soon as possible. We have deadlines to meet because I think it's very important to protect the assets that we have bought. And of course, that incur in some cost at the beginning. We have seen now with the acquisition of Shareway. For instance, there was quite a lot of costs that we had at the beginning. So -- but of course, those companies are profitable. And that happened -- that has happened as well in the years before. So the first year is a bit more challenging. And then we recuperate over time deploying synergies. And acquisition is very important for us. We have reorganize our post-acquisition process to be able to capture the synergies in a good and structured way. We are reinforcing the teams there because we have acquired more companies that required even more structured process that what we used to have. So we are investing on that as well to be able to capture this value that we believe when we -- before the acquisition. So I think we are happy with the companies, a lot of activities. And year 1, we see that is normally challenging because we want to do some of the integration items quite fast. Operator: The next question comes from Sebastian Kuenne from RBC. Sebastian Kuenne: I have a question on VT. You mentioned lower volume as one of the key reasons for the lower margin. But at the same time, you have competition that sits in Japan like Ebara, you have Busch in the U.S., [ Pfeiffer ] in Germany. Is the price situation in the global vacuum pump market stable? Or do you see the pressure from manufacturers in lower-cost countries effectively? Vagner Rego: What is key for the price development is technology, and we need to continue to develop our products to come with better products to be able to exercise some pricing power. And I think that's our focus, and we will continue to develop the products that will allow -- that can deliver superior value to our customers, and that could help us with our price efforts. So -- and I think that's where we are focused on now. Sebastian Kuenne: Okay. So no change in pricing. Operator: Next question comes from Magnus Kruber from Nordea. Magnus Kruber: Just reverting to some of these announcements that has been in the media over the past couple of months with respect to some big framework agreements, particularly on the memory side. Is there any way you can sort of help us scope what these opportunities could mean to you if they come to fruition over the coming years? How -- can you frame them, for example, with respect to sort of how big that potential is compared to your legacy semi business? Vagner Rego: What I can say about the market, we -- let's say, we know all the players in the U.S., in Asia, including China. So we are present in all these players. We have a good position in most of the players. If this comes to fruition, we will be there to capture. I think that is our main focus. We don't know which one we will scale up first or later. That we don't know. I think the most important for us is what give us confidence as well is the fact that we are very well positioned. Any movement we will be able to capture. Magnus Kruber: Got it. And can I just have an additional question. You talked a little bit about ramping up on R&D in Compressor Tech going forward to drive additional growth. Is that sort of a China-focused initiative? Or could you highlight a little bit of potentially how much you would be willing to interest and invest and in which pockets? Vagner Rego: I would say the investment were more in capabilities in facilities, better places where they can test the machine testing environment. So those capabilities we have -- we have created -- we have increased actually. We always had, but we have increased in China. And I think we continue -- this is not a dramatic increase in R&D in Compressor Technique. They have been focused. They will continue being focused. But I think we can get more out of our Chinese organization. That's what we are doing, getting ready for that. Peter Kinnart: Okay. Thank you very much, Magnus, for that question. And actually, with that, we have also answered the last question on the call. I would like to thank you all for your presence and for listening to our presentation. As always, of course, should you have any further detailed questions on any of the business areas or the group overall, you're more than welcome to contact our IR department as always. So with that, thank you very much for attending, and have a great rest of the day. Thank you. Bye-bye.
Torbjorn Skold: Welcome, everyone, to BONESUPPORT's Q3 2025 Results Call. My name is Torbjorn Skold, and since September 1, I'm the CEO of BONESUPPORT. With me here today is our CFO, Hakan Johansson. And together, the 2 of us will use the next 25 minutes to guide you through the Q2 report and then open the line for any questions. Before starting the presentation, I would like to draw your attention to the disclaimers covering any forward-looking statements that we will make today. Next slide, please. So let's look at the financial and operational highlights from the quarter. Q3 was another strong quarter with solid execution across the business. Net sales came in at SEK 294 million, corresponding to a growth of 24% versus Q3 2024. Sales growth at constant exchange rate was 34%, showing that there is continued strong currency impact on our figures for the quarter. Our operating results, excluding incentive program effects, was SEK 79 million, corresponding to an adjusted operating margin of 27%. Reported operating results was SEK 65 million, and we saw strong cash generation with operating cash flow reaching SEK 71 million, leading to a cash position at the end of the quarter of SEK 379 million. One highlight in the quarter was the publication of the long-awaited CeraHip study, which now kicks off our market penetration efforts in this market segment, revision arthroplasty. We will look deeper into this later in the presentation. We continue to see strong traction for CERAMENT G in the U.S., where both new accounts and increased use among current users contributed to the strong progress. CERAMENT G sales in the U.S. reached SEK 192 million for the quarter. Furthermore, the proposed NTAP for CERAMENT G in open trauma has now been decided upon as well as a 6% general increase in CERAMENT relevant DRG codes by CMS for orthopedics. So all in all, an eventful and successful quarter. As I've transitioned into my new role and reflect on the business, I find our strategy sound and that the business develops very well. What really stands out is the solid evidence base supporting the CERAMENT platform and the significant long-term opportunity of CERAMENT globally in several clinical segments. This spring, we're planning to host a Capital Markets Day, where we'll share a structured overview of our key initiatives and our path forward. We'll follow up with more details on the official dates later. Operator: This is the moderator speaking. We are having some technical issues, but we are going to try to get the speakers back as soon as possible. [Technical Difficulty] Håkan Johansson: So the speakers have connected again. Can the moderator please confirm whether the sound and technology is up again. Operator: Yes, everything is great. Håkan Johansson: Thank you very much. Torbjorn Skold: Thank you, moderator. Moderator, can you please inform us how long did you listen to us? Operator: We came to -- you were at like the third slide in the third quarter report. Torbjorn Skold: Okay. I assume that we have gone through Slide 3, and we move over to the sales development. This chart shows the last 12-month sales in Swedish krona by quarter since 2019 in stacked bars by region, by product category. As you can see, the launch momentum for CERAMENT G in the U.S. is exceptionally strong. However, in the last 2 quarters, we've seen strong influence from the U.S. dollar to Swedish krona depreciation. Last 12 months growth in Q3 of 37% in the graph corresponds to an even stronger 41% at constant exchange rates. So most of this quarter-over-quarter slowdown in last 12 months' sales is due to the strong currency impact. CERAMENT BVF last 12 months dropped 2% year-over-year in constant currency. In total, antibiotic eluting CERAMENT grew with 59% last 12 months in the quarter in constant currency. Next slide, please. In U.S., sales amounted to SEK 246 million, representing a growth of 40% at constant exchange rates. There was some general variability during the quarter due to the usual stop and go dynamics, a reflection of the strong pace of new customer recruitment over the past 6 to 8 months. As part of our mission to modernize an outdated standard of care in the U.S., we have successfully opened one market segment after another. We started with foot and ankle, then we followed with trauma, and now we're moving into revision arthroplasty. Revision arthroplasty and the subsegment of periprosthetic joint infections are areas we have not specifically focused on in the past. Each year, approximately 1.5 million primary joint replacements are performed in the U.S. with just over 70,000 revision procedures requiring bone graft. The CeraHip results are groundbreaking. Although the study is not very large, patients have been followed for an average of 3.3 years with no infections reported. I'll speak more about CeraHip on the next slide. We have expanded our U.S. organization, and we plan to recruit additional team members with specialized expertise in revision arthroplasty to support the market entry and the medical education programs. We are expanding our presence in the market to introduce CERAMENT BVF for use in spinal procedures in Q4 2025. Several distributors are now in place to begin engaging with spine surgeons. Some of these distributors are already our partners today on the extremity side, while others represent new collaborations. The spine segment is new for us, and we will begin generating clinical data during 2026 to establish a foundation for further market penetration. We have also made strong progress in evaluating and preparing the regulatory pathway for introducing CERAMENT G into the spine segment. We have reached a stage where guidance from the FDA on the regulatory path is required. We plan to meet with the FDA at the beginning of 2026. The path forward will be shared and communicated at the Capital Markets Day this spring in 2026. The team have been working diligently with assembling data in reply to FDA's question on CERAMENT V, and we expect to send in the supplementary data pack in November. The material relates mostly to clarifications and making sure that the evidence is presented in the way that FDA wants to have it. Being a pioneer technology, there is no template as how to bring forward the evidence. The thoroughness of the process testifies to the rigor of solid data required to qualify a product into the unique category of antibiotic eluting bone graft. And we should remember that this category is defined by another CERAMENT product, namely CERAMENT G. So let's turn to Europe. Next slide, please. Sales performance in Europe continues to be influenced by the same dynamics observed in Q2. The third quarter typically shows some volatility due to seasonal factors. Additionally, the contraction and disruption in Germany have persisted as anticipated. Sales in EUROW came in at SEK 48 million, representing 5% year-over-year growth and 7% at constant exchange rates. Hybrid markets in Southern Europe, Australia and Canada are performing strongly. We're beginning to see positive traction from the investments made during the first half of 2025, reflected in improved sales performance. In the U.K., the previously announced prioritization of hip and knee surgeries is gradually restoring procedure volumes, which bodes well for the future of BONESUPPORT in U.K. However, the pace of recovery varies by region and is largely dependent on staffing levels. During the quarter, the European Bone and Joint Infection Society held its annual meeting. Several podium presentations and posters highlighted the efficacy of CERAMENT G and CERAMENT V in single-stage procedures and demonstrated improvements in patient outcomes. A poster presentation by Dr. Meller from Charite showcasing results from the CeraHip study attracted significant interest and a large audience. We'll review the detailed findings from the now published study on the next slide. Also, Professor Ferreira from University Hospital, Stellenbosch presented results from his study involving 103 trauma patients with bone infections. These patients were treated with a single-stage procedure using CERAMENT G or CERAMENT V. After an average follow-up of 11 months, 96% remained infection-free and no amputations done. [Technical Difficulty] Operator: Sorry for having some technical issues again. The speakers will be back as soon as possible. Torbjorn Skold: Annual Meeting of the American Association of Hip and Knee Surgeons, AAHKS in Texas, which last year attracted over 5,100 participants. In fact, our U.S. team is actively preparing for the event at this very moment as it kicks off today. Now I'll leave a deep dive into the numbers to Hakan. Hakan, please. Håkan Johansson: Thank you, Torbjorn. And again, sorry for what seems to be a day of technical disruptions and hopefully, now the -- everything stabilizes. So into the financials. Well, net sales improved from SEK 237 million to SEK 294 million, equaling a growth of 24% reported sales growth of 34% in constant exchange rate. Torbjorn has already spoken about the solid performance in especially the U.S. and the major drivers behind the sales growth, but as the weak U.S. dollar somewhat hides a continued strong trajectory in the U.S., I would like to share the U.S. sales performance in U.S. dollar. This slide shows the quarterly sales in the U.S. and U.S. dollar with continued solid performance quarter-to-quarter. The growth in dollar in the quarter of 40% should be viewed in perspective of volatility on BVF sales being 1.7% below same quarter last year, whilst CERAMENT G continued to show solid performance with a growth of 59.2%. The contribution from the U.S. segment improved with SEK 31.9 million and amounted to SEK 111.2 million. The improved contribution relates to increased sales after the effect from increased costs. Sales and marketing expenses during the quarter amounted to SEK 123.6 million compared with SEK 102.6 million previous year, of which sales commissions to distributors and fees amounted to SEK 84.2 million compared with SEK 65 million in the same quarter last year. From the lower graph showing net sales as bars and gross margin as the orange marker, it can be noted that the gross margin remained stable and strong around 95%. In Europe and Rest of World, a contribution of SEK 12.5 million was reported to be compared with SEK 15.6 million previous year. Sales and marketing expenses increased with SEK 4.6 million, including SEK 2 million related to the previously communicated commercial investment in the EUROW booster program. From the lower graph and orange marker, the minor drop in gross margin is noted mainly impacted by market mix. The flat selling expenses compared with the same quarter previous year is due to a depreciated U.S. dollar, but also an effect of seasonality. As mentioned previously, the quarter also included SEK 2 million related to the EUROW booster program. R&D remained focused on the execution of strategic initiatives such as the application studies in spine procedures and the market authorization submission for CERAMENT V in the U.S. These initiatives have been progressing well during the quarter and, among others, leading up to the launch of our product, CERAMENT BVF in spine later this year. And administration expenses, excluding the effects from the long-term incentive programs, remain on a stable level. The reported operating result amounted to SEK 65.4 million despite unfavorable currency effects totaling SEK 5.7 million, and I will come back to this in a following slide. The newly introduced tariffs in the United States are not expected to have a material impact on cost in 2025 due to high safety inventories. The full effect of the current 15% tariff equals a 0.8% impact on U.S. gross margins and will come gradually with full effect from 2027. The difference between adjusted and reported operating results are costs regarding the long-term incentive programs amounting to an expense of SEK 13.2 million in the quarter compared with SEK 7.3 million previous year, as you could see from the previous slide. Cash conversion remains solid with a fifth consecutive quarter with strong cash flow and an increase in cash during the period with SEK 69.3 million. Despite unfavorable currency effect with this report with a strong adjusted operating result and a solid cash flow, we continue to confirm a strong operating leverage and the business scalability. During the period, the Swedish krona has continued to strengthen against the U.S. dollar. Other operating income and expenses, therefore, contain foreign exchange gains and losses from the translation of the group's assets and liabilities in foreign currency, amounting to a negative SEK 5.7 million. Simply put, the negative SEK 5.7 million is mainly driven by the operating assets in the U.S. such as inventories and trade receivables. These are originally valued in U.S. dollars and at quarter end translated into a much stronger Swedish currency versus last quarter. The graph on this slide shows with the gray bars how the relationship between the U.S. dollar closing rate and the Swedish krona has varied over time. This is read out on the right Y-axis. The blue dotted line read out to the left axis shows reported adjusted operating results. The adjusted operating result, excluding translation exchange effects is the orange line. To explain this, in Q4 2024, the U.S. dollar to SEK was above SEK 11, which gave a positive effect of SEK 20 million in the quarter. And therefore, the blue dotted line is above the orange line. In Q1 2025, the U.S. dollar to SEK rate was SEK 10.02, creating a negative impact of SEK 30 million. In Q2, the U.S. dropped down to SEK 9.49, creating a negative impact of SEK 11 million and in Q3, continuing down to SEK 9.41 with a negative impact of SEK 5.7 million, meaning that the blue dotted line dropped below the orange line for these 3 quarters. The orange line eliminates the translation exchange effects and gives a more comparable view of the underlying trend in operating profit. In the table below the graph, you can see the FX adjusted operating margin of close to 29% in the period compared with 23% in the same quarter last year. And with this, I hand back to you, Torbjorn. Torbjorn Skold: Thank you, Hakan. And if we take the last slide, so to summarize Q3 2025 for BONESUPPORT, sales grew 34% in constant currency, reflecting steady and consistent progress. Adjusted operating margin reached 27%. Cash flow remains robust, underscoring the health of the business and its scalability. With the publication of the CeraHip study, strong endorsement from leading surgeons at Charite and detailed procedural guidance for using CERAMENT in revision arthroplasty, we're unlocking a new avenue for market expansion. This marks a significant step forward in our ongoing mission to transform the standard of care. We maintain our guidance on sales growth above 40% in constant exchange rates for full year 2025. And to conclude, my first period at BONESUPPORT has been as rewarding as it has been intense. I'm convinced that the most exciting part of our journey still lies ahead. And as I said, to provide a clearer view of what that journey will look like, we will host a Capital Markets Day in the spring of 2026. Lastly, again, apologies for the technical issues that we've had during the call, but now we're happy to open the line for any questions that you might have. Thank you. Operator: [Operator Instructions] The next question comes from Erik Cassel from Danske Bank. Erik Cassel: Yes. So India has probably cut out 70% of what you said. So you have to excuse us if we repeat some stuff. But first, I just want to confirm the sales level for CERAMENT G in the U.S. Was that USD 19.9 million in, 59% organic growth? Or is it a completely different figure? Håkan Johansson: Again, as commented, CERAMENT G reported a 59% growth. Erik Cassel: Okay. Good. First, I then want to ask, what are you seeing for trauma now during the initial 3 weeks of NTAP for CERAMENT G in the U.S. Håkan Johansson: Again, as communicated previously, what we see is a slightly different market dynamics than what we experienced launching into when there is a bone infection. So when there is a bone infection, the surgeon was looking for treatment options and CERAMENT G fitted very well. With trauma surgeons, it's a bit of a timing issue. We meet the trauma surgeon and the trauma surgeon haven't had a patient coming back with a bone infection during the latest weeks or months, et cetera. It's a harder call to convince the surgeon to try a new product. However, if the surgeon had had a bone infection lately, it's an easier call to convince the surgeon to start trying. So what we see confirms what's been previously communicated. It's a big market potential in trauma, but market penetration to start with will be somewhat slower than when there is a bone infection. Erik Cassel: Okay. But just specifically on the NTAP, you haven't seen that in and of itself accelerate uptake anything? Håkan Johansson: Again, the NTAP, Erik, is valid from 1st of October. So it's too early to see whether this has any impact in the penetration of the trauma segment. Erik Cassel: Okay. And then U.K. down 5.5% year-over-year. Germany, you said was worse. Is it possible to give any sort of more specific numbers on how bad Germany is doing and sort of how much that represents of the European sales? Håkan Johansson: Again, we have always been precautious to disclose exact numbers on geographic level. But again, if there are structural challenges... Operator: Speakers have been disconnected again, but if you have to stay on the line, I hope they will. Erik Cassel: The speakers was not disconnected. We heard them. Håkan Johansson: So do you hear us now, Erik? Erik Cassel: Yes, I hear you loud and clear. Håkan Johansson: Thank you. So again, some of the challenges [Technical Difficulty] Erik Cassel: Okay. Now I don't hear the speakers. Operator: Yes, a second, we're trying to fix the connection problems. Håkan Johansson: So dear moderator, where are we now in terms of technology? Because it feels like things are going silent. Operator: Yes. Now you came back. So maybe, Erik, can you repeat your last question, so we can go back from there. Erik Cassel: Yes, sure. It was on Germany. U.K. down 5.5%. You said Germany was worse. And I asked for if we could add any more color on Germany. How much is it down? And how big is Germany in terms of Europe sales? Håkan Johansson: Well, Germany is our second biggest market. So of course, when we have a setting in a market like Germany, it impacts on the totals. Erik Cassel: Okay. And then just lastly, do you have any visibility on U.K. and Germany coming back? You're saying that you're seeing a gradual, say, recovery in the U.K., but when can you be back to sort of normal levels or normal growth rates in those markets, do you think? Håkan Johansson: Again, what is impacting in the U.K. is that U.K. is a market where a substantial health care backlog is impacting hospital priorities. Already before the pandemic, there was patients -- 5.5 million patients in queue that has increased to 8 million patients. And the political priorities has started to recruit or reduce that queue, but still from a very high level. So again, we will be fighting against hospital priorities from time to time. But in the environment, we start to see that patients that have been waiting for surgeries where CERAMENT G is a good fit are gradually coming back. But as Torbjorn said in the call, it will probably be a slow process for the market to return into a normal and steady situation. Operator: The next question comes from Viktor Sundberg from Nordea. Viktor Sundberg: I have 2. So I guess it's not your main product in the U.S., but I just wanted to dig into the BVF product in the U.S. a bit. We've seen a negative trend in the U.S. for that product here for a couple of quarters. I just wanted to understand a bit more what is driving that and how to extrapolate that negative growth we see at the moment into the coming quarters and into 2026. And then I have another question. Håkan Johansson: Again, I think that it's 2. Again, as you said, we've seen that the BVF has been soft in the latest quarters, but also then showing volatility with a few quarters where we have good BVF sales. And we see that when we look at sales and hospital levels that there is an underlying volatility in the volumes. What we also see, and this is important for the longer term is that with the extending customer base and with surgeons recruited thanks to CERAMENT V, we also see these surgeons starting to use BVF in such cases where there is a controlled infection risk, et cetera. So we remain with a belief that all the time, BVF will stabilize and BVF will, like we've seen in Europe, deliver a small organic growth, but the main driver will be our antibiotic eluting products. Viktor Sundberg: Okay. And just looking into 2026, if we see substantial cuts to Medicaid as part of the One Big Beautiful Bill Act, even if you're not particularly relying on Medicaid directly, I guess, hospitals could see an increase in uncompensated care and maybe strained overall budgets due to this. What's your thinking around how hospitals will look at CERAMENT G as it carries a bigger upfront costs? Our feedback just by speaking to some orthopedic surgeons is that price is the main barrier for wider adoption of CERAMENT G in the U.S. And I'm just thinking that if major cuts to Medicaid will materialize in 2026, hospitals might focus even more on price next year. But I just wanted to understand how you plan to mitigate some of those budget headwinds, I guess, for next year. Torbjorn Skold: Yes. No, I'll start and then Hakan can fill in. So I think the plan to mitigate that is just to follow the BONESUPPORT strategy where we focus on evidence. And I think it was very interesting to listen in on what was discussed and presented at European Bone and Joint Infection Society. And it's very clear from those presentations and the discussions that are ongoing, and it's similar also at OTA that happened last week, which is a big trauma meeting in the U.S. is that it's very clear that there is a paradigm shift in the market in orthopedics going from long systemic antibiotic regimes in orthopedic surgeries to move to shorter, if any, systemic antibiotic regimes and combining that with local antibiotics with, for example, CERAMENT. So that paradigm shift is happening. There is clear evidence already now on the market. The topic is clearly highlighted. And more evidence will come in the future, partly by BONESUPPORT and CERAMENT and partly because the market moves in this direction. So I think it's nothing new really. It's something that has been happening. It will continue and our plan to address this is just to focus on the strategy, continue to build really, really strong clinical and health economic evidence and make sure that, that evidence is right and center, not just in front of orthopedic surgeons, but also the other decision-makers that play a role in those conversations. Anything to add, Hakan? Håkan Johansson: No, I think you covered it quite well. And again, the pricing is something we meet as part of the dynamics that we have referred to. And we have hospitals that are becoming frequent users and hospital administration noticing that this drives a certain level of costs. But so far in those discussions, when we come with strong clinical evidence and health economic evidence, this is discussions that we're able to handle through. So we're confident in the evidence around the technology and the difference to standard of care it represents. Operator: The next question comes from Mattias Vadsten from SEB. Mattias Vadsten: I have 3 questions. I think I'll take them one by one. First, I think quite confident wording around Q4, if I read it correctly. You also reiterate guidance of at least 40% sales growth. This require a quite strong finish to the year, I guess, very close to 40% organic sales growth at least and an acceleration quarter-over-quarter. So just what brings this confidence? And yes, if you have any further color on sort of how the start of Q4 have looked for you? That's the first question. Torbjorn Skold: Sure. I'll start with that more from a, let's say, tactical operational side and then Hakan can hopefully back it up in the numbers. So as we reviewed both the U.S. business and as we've reviewed the EUROW business in detail and the outlook for the quarter, the fundamentals look very strong from my view in terms of the number of accounts that we have, the penetration in the accounts whether we are increasing penetration or losing penetration. So I feel very confident in the numbers on an account level and regional level that we've gone through. I think also very high level, and Hakan will speak to this also, if you look at the comparables Q3 versus Q4, that also gives me more comfort in the numbers. So yes, I feel pretty confident in hitting that guidance that we've provided with 40% sales growth above prior year on a full year basis in constant currencies. Hakan? Håkan Johansson: Again, I think you covered this quite well, Torbjorn. And again, to bear in mind that if we look at the U.S. dollar -- sales in U.S. dollars, for instance, in the U.S. Q3 to Q4 last year, Q4 was a bit soft after a strong Q3 and then followed by a strong Q1, et cetera. And with the momentum that we have and again, we believe that Q3 somehow gives us a lot of confirmation in that underlying momentum, we are confident that we [Technical Difficulty] Mattias Vadsten: I can't hear Torbjorn or Hakan anymore. Operator: Yes, just a second. We're trying to fix the issue here. I hope they will be back at us soon. Håkan Johansson: Moderator, do you hear us now over a mobile line instead of over the Internet? Operator: Yes, now I can hear you. Mattias Vadsten: I can hear you, Hakan. I heard the full answer from Torbjorn and I heard, I don't know, the first sentences from you, Hakan. Håkan Johansson: Okay. So what I said is that when we look at, for instance, the U.S. in U.S. dollars, last year, Q3 was strong and Q4 was a bit soft. And with the underlying momentum we see in the U.S., we see good opportunities to be well in line with the target we have set for the full year. Mattias Vadsten: Okay. That's perfectly clear. Then I have 2 more. So the next one is the revision arthroplasty segment. I mean, as you said, quite supportive data to say the least. Sort of what are the sales volumes of CERAMENT in this segment today? And could you talk about what you think is required to sort of achieve a meaningful uptake in this segment? Torbjorn Skold: Sure. So I think it's fair to say that currently, this is a segment that where CERAMENT, we've had -- it's been on label. It's been on label in the U.S., and it's been on label in Europe. But at the same time, without clinical evidence, very few orthopedic surgeons will pick it up. That's just how orthopedics works. Now over the last couple of years, the team has worked with Charite, which is, I would argue, top 3, top 5 hospitals in the world when it comes to revision arthroplasty. They've done a study and to be frank, the results could not have been better. So that's the first important step. But to answer your question, our sales in this segment, I would argue it is very, very limited. There is some, but very limited. And I think the potential, if we look at the number of procedures that are done in revision arthroplasty in general and specifically in periprosthetic joint infection, which is going to be our primary focus area. Those are pretty considerable volume numbers that we have at hand. And what is required is, of course, that we have a sales force that is in front of the customers that are in the ORs talking about this and that we promote the evidence and the application techniques that we already have today. But also, let's be frank, we will continue to invest in education. We will continue to invest in further evidence in this space. And this is work that we've kicked off, and that's something that I foresee will continue for several years ahead because this is such an interesting and important segment for us strategically for many years. Mattias Vadsten: Very clear. Then I have a final one. I think it will be quite quick. If you take away the effects of incentive program and sales commission costs, the OpEx look a bit low, I would say. I know quite substantial FX effects year-on-year, but I think down SEK 5 million versus Q2. So question is, is this just usual seasonality? Or is it anything you would mention here, Hakan? Håkan Johansson: It's primarily that relates to normal seasonality in outside the U.S., people tend to have vacation and during vacation period, there's a lower level of activities, et cetera. So just normal seasonality. Operator: The next question comes from Kristofer Liljeberg from Carnegie. Kristofer Liljeberg-Svensson: Three questions. First, just a follow-up on the previous one on implant revision. Is this something you think will start to generate revenues for you already in 2026? Or will that be later? Torbjorn Skold: On revision arthroplasty? Kristofer Liljeberg-Svensson: Yes. Torbjorn Skold: Yes. I mean it will generate revenue in Q4 this year. And it will, for sure, generate revenue in 2026. If it doesn't, then we do something fundamentally wrong. Kristofer Liljeberg-Svensson: Okay. So -- but do you think you could see a faster uptake in this indication than for open fracture trauma, for example? Torbjorn Skold: So really good question. And I don't have any solid data points on that because of my somewhat limited history in BONESUPPORT. But if you think about the segments and how surgeons generally work and how they take decisions and you compare revision arthroplasty, which is an elective procedure and trauma and especially open trauma, which is acute trauma. So it's not an elective procedure. It's always easier to sell into a segment where you have elective procedures. So only looking at those sort of characteristics, you could argue that, well, it should be easier and faster to enter revision arthroplasty than it is trauma. So I think there's something in that, that you're absolutely right on, but I have a hard time quantifying it, to be perfectly honest. Kristofer Liljeberg-Svensson: Okay. And then I don't know whether we missed that due to the technical problems, but did you say anything about expected launch timing for CERAMENT V in the U.S. Torbjorn Skold: So CERAMENT V in the U.S., we follow the plans. So we deliver on the plans and the plans that were previously communicated was that we submit additional data to the FDA in November, that is according to plan. And then we feel comfortable that we have the right data in place and expect a positive outcome of that review with the FDA. Exactly when FDA will come with an answer, it's hard for us to predict. But typically, historically, what we've seen is that there's a 90-day period following the submission of the supplemental data until an FDA decision is taken. So that's typically the guidance that we give on the CERAMENT G for the U.S. Kristofer Liljeberg-Svensson: Great. And then finally, just on R&D costs, should we expect that to be more stable now quarter-over-quarter or year-over-year before you start the CERAMENT G spine study? Håkan Johansson: Yes. I think that's a fair comment. And again, you've seen quite a solid stable level over the last year, et cetera. And it's a fair estimate to assume that, that level continues. High activity level remains, but there is no true acceleration until we would start a clinical study preparing for getting CERAMENT G approvals. Operator: The next question comes from Sten Gustafsson from ABG Sundal Collier. Sten Gustafsson: I think most of it has been covered already, even though there were some technical issues here. So I just want to confirm that I heard it correctly. Did you say that you had CERAMENT G sales in the U.S. of -- was it $19.9 million in the quarter? Håkan Johansson: We did not confirm the dollar amount, but we say that we confirm that the growth in constant exchange rate was 59%. Sten Gustafsson: Okay. That's good. And then the number of procedures in the U.S. related to this hip joint infection category. Did I hear it right, 70,000 or... Torbjorn Skold: So what we say is that the number of primary hip and knee arthroplasty as per previously communicated data from BONESUPPORT is estimated to 1.5 million. So that's the number of primary arthroplasty. Revision arthroplasty is a smaller number, of course. But the initial focus that we have on revision arthroplasty is the subsegment that is called periprosthetic joint infection. The previous numbers from BONESUPPORT that has been communicated related to the size of that segment is 70,000 for U.S. only. So those were the numbers that we refer to. So we're not communicating any new numbers on this call compared to what's been communicated earlier. Sten Gustafsson: And that was 17, 1-7? Torbjorn Skold: No, 70. And the 70,000, just for absolute clarity, those are revision arthroplasties with bone infection where a bone graft is needed. Sten Gustafsson: Okay. Excellent. And then on NTAP finally, and I heard it, I think correctly that you expect the trauma NTAP will be more challenging than when you got it initially on osteomyelitis, which makes perfect sense. But do you think that the net impact here short term with the sort of -- will be then a negative driver? Or do you expect the underlying osteomyelitis procedures to carry on even though you don't have the NTAP on those particular procedures? Håkan Johansson: Well, sorry, I think that to clarify, I think we were talking about what the market dynamics and the differences between there is a bone infection and in trauma. When we talk the value of the NTAP specifically, I think that it showed to not have so much impact when penetrating the market when there is a bone infection, et cetera. But when we are talking trauma, open trauma and the surgeon has the patient in front of him, there's always a consideration between risks and costs. And here, the NTAP is taking away the cost aspect. So potentially, the NTAP for open trauma has a bigger value. But again, it remains to be seen over time. So it's been valid from 1st of October, so that after Q3, and we don't have the data to back that up. But we honestly believe that it has the potential of having a bigger impact than for bone infection. Operator: The next question comes from Maria Vara from Stifel. Maria Vara Fernandez: Just a couple of them. I think we, of course, see extremities as the near-term opportunity, what's going to be driving growth for the company for many years. But of course, I think we haven't dedicated much time to the opportunity in spine during the Q&A session. So I just wanted to maybe get some thoughts on how this recruitment of sales reps is going? And any kind of guidance on contribution we could see from the first quarter launch as well as from 2026? Torbjorn Skold: Yes. No, good question. And I think to put spine in perspective, spine is clearly a very interesting area for BONESUPPORT for the long term, but we also want to be realistic in the short term, we will likely see much bigger uptake from revision arthroplasty than we will see in spine. But spine is an important strategically and large opportunity for us. The approach that we take is that we first launched spine with CERAMENT BVF to build the market. So we are going to have a relatively focused launch. So we're not going to go fully and nationwide to all the accounts everywhere at the same time. We want to take a focused approach with certain distributors that we already work with, some new distributors that are specialized in spine. And we want to make sure that we build the right clinical evidence and the right and validated surgical techniques over time. And then, of course, the big strategic play for us is to go into spine with CERAMENT G. But that, of course, requires a market approval. But we see a couple of good scenarios ahead of us. So the question is not if, it's about how and when. And that's why we engage with a discussion with FDA in the near term to make sure that we feel comfortable on the right way to market and that we are also able to execute on that. Maria Vara Fernandez: Okay. That's helpful. And then if we think about the profile of the sales commissions in the U.S. we see a little bit of an increase with respect to the U.S. revenue for Q3, if I'm not wrong, 35% with respect to the U.S. sales. How should we think about this percentage changing over time, especially as of the U.S. launch in spine? I mean, there's not much of an investment there, but still with something. So if you can guide whether we could think about the same range with respect to revenue or any major changes here will be appreciated. Håkan Johansson: Well, thank you, Maria. And again, in the short to midterm, you can expect the increase in Q3 is mainly related to short-term volatility, the commission level remains stable. There is no change in commission levels. There are a few performance-related aspects in the commission structure, and that's why it can be some volatility between quarters. But in general, it should keep itself the commissions plus other fees that is involved around -- I mean, between 34% and 35% over time. And we don't see the inroads into spine with BVF changing that structure. Operator: The next question comes from Oscar Bergman from Redeye. Oscar Bergman: Torbjorn and Hakan, I know you've answered a lot of questions, but I only have a few more to you guys. So first off, on your current base of U.S. CERAMENT G users, is there any noteworthy crossover to spine surgery among these? Håkan Johansson: Very limited type of sales. Of course, when we have hospital accounts where ultimately you have both surgeons on the extremity side and on the spine side. Torbjorn Skold: Yes, but it's very... Håkan Johansson: Yes. And again, coming back to as we communicated, our strategy of launching into spine will be very focused. We have a list of hospitals and list or surgeons that we are addressing so that we reach the right surgeons to build additional clinical data and validation, et cetera, before we go wider. So with that, we also work very focused with what distributors and what sales reps we're contracting. Oscar Bergman: Okay. And just wondering if you can elaborate a bit more on the situation on eventual pushback on price, both for customers in the bone infection segment and in trauma. Has this been sort of a driver of customers either not signing up or perhaps even signing off during this quarter? Håkan Johansson: Well, Oscar, price is always a discussion. We're living in a commercial environment and so on. And -- but so far, it has had no impact in terms of listing and continued growth of listed hospitals. We meet that also, as I mentioned in the call, as part of go stop go, we have hospitals where we have surgeons becoming frequent and high users and not seldom, there is a reaction from hospital administration where we have them to involve with our med and health economic specialists to help explaining the data that is backing up the price level and the savings that is enabled by the clinical and health economic benefits by using CERAMENT G. So of course, that's part of daily life. But so far, we don't see a general pushback on price. Oscar Bergman: Okay. So those efforts in training and education on the health economic benefits, they are holding back customers from perhaps signing off them essentially? Håkan Johansson: As for now, and again, that's also the reason why we're confident with the approach that we're using, and that's why we also will continue to invest in additional med and health economic resources. Oscar Bergman: All right. And what do you say in terms of user rate at the existing customers? Are they at desirable levels in bone infection? Or is there still plenty of room to grow in the existing number of CERAMENT G surgeons? Torbjorn Skold: From my perspective, what I see is that there's plenty of room to grow in current markets, in current products, in current clinical indications. Now I might be wrong on that, but all the data that I've seen so far after a couple of weeks indicate that we're just scratching the surface on these 3 main segments that we prioritize short term, which is foot and ankle, trauma and revision arthroplasty. And then, of course, longer term, we're entering spine. So I think there's plenty of room to grow going forward. Oscar Bergman: All right. Just 2 more quick questions. I suspect you're in a hurry. The geographic reach in the U.S., are you at a good capacity already in the different key regions? Or are there any initiatives that you will accelerate on? Torbjorn Skold: I mean the U.S., as you well know, that's our most important market, both from a growth and profitability point of view. So it has priority #1. I think we have good coverage, but that doesn't mean that we will not continue to invest. We're investing in Q3. We will continue to invest because if we're not investing, we're not taking advantage of the potential that we have. So I don't think it's a coverage issue. It's about making sure we invest to address the potential we have in terms of increasing the penetration. Oscar Bergman: Okay. So there's no specific region in the U.S. where you feel like, okay, we should really focus on this specific region. Torbjorn Skold: I mean, when we look at the map, of course, we have certain regions where we think our penetration/market share is lower, but that's not something that we disclose on this call. But on a high level, we will continue to invest to make sure that we increase the penetration in the U.S. and certain regions have higher priority than others. Oscar Bergman: Okay. This is my final question. You are quickly accumulating a lot of cash over SEK 220 million since Q3 last year. Will you perhaps present some sort of plan on how you aim to deploy this growing amount of cash in your CMD in the spring? Håkan Johansson: Oscar, I think that, as Torbjorn mentioned during the call, and sorry for all the technical breakout is that, that's an area where we own the market, some clearer communication and the Capital Markets Day in spring time is a good opportunity to do that. In the shorter term, again, this gives us the comfort of continue to investing in the business. We believe in the business. We think we do the right things. We see strong confirmations also in the Q3 report on the work that we're doing and the cash just helps us to continue investing in this. Torbjorn Skold: And gives us the freedom to operate in a way to take advantage of all of the opportunities that we see in the 3 priority segments plus spine as well as on more longer-term strategic initiatives and scenarios that we, of course, also work on. But more on that in the Capital Markets Day this spring. So unfortunately, now we have to close this call. We're coming to an end. Again, thank you all for attending. And also from our side, we apologize for the technical issues that you guys have experienced, and we thank you for your patience with us. Thank you.
Operator: Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Bankwell Financial Group Third Quarter 2025 Earnings Call. [Operator Instructions] I'd now like to turn the call over to Courtney Sacchetti, Executive Vice President and Chief Financial Officer. Please go ahead. Courtney Sacchetti: Thank you. Good morning, everyone. Welcome to Bankwell's Third Quarter 2025 Earnings Conference Call. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.mybankwell.com and go to the Events and Presentations tab for supporting materials. Our third quarter earnings release is also available on our website. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K; for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. And now I'll turn the call over to Chris Gruseke, Bankwell's Chief Executive Officer. Christopher Gruseke: Thank you, Courtney. Welcome, and thank you to everyone for joining Bankwell's quarterly earnings call. This morning, I'm joined by Courtney Sacchetti, our Chief Financial Officer; and Matt McNeill, our President and Chief Banking Officer. We appreciate your interest in our performance and this opportunity to discuss our results with you. Bankwell delivered another strong quarter with GAAP net income of $10.1 million or $1.27 per share, up from $9.1 million or $1.15 per share last quarter. Pre-provision net revenue return on assets was 1.7% for the quarter, up 27 basis points from the prior quarter. Our results reflect the continued expansion of the company's net interest margin as well as growth in noninterest income generated by our SBA division. We've also made further progress in reducing our nonperforming asset balances during the quarter and continue to have a positive outlook on credit for the quarters ahead. Our NIM continued to expand this quarter as we forecast for the last several quarters. This is the result of the combined impact of repricing approximately $1 billion of time deposits, increased asset yields and the growth of our low-cost deposit balances. Low-cost deposits include noninterest-bearing deposits as well as NOW accounts at rates of 50 basis points or lower. These accounts average balances collectively grew by $20 million over the prior quarter and $64 million or 16% since the fourth quarter of 2024. Loan originations remained strong. During the third quarter, we funded $220 million of loans, bringing our year-to-date fundings to just over $500 million. Our SBA division increased its momentum as gains on sale rose to $1.4 million for the quarter. SBA originations totaled $22 million for the quarter, bringing our year-to-date total originations to $44 million. The government shutdown has potential to temporarily impact our SBA results for the remainder of this year. While there may be potential for short-term impact, the SBA division has been a strong performer, reaching nearly 90% of our full-year origination goal of $50 million within the first 3 quarters of this year. Year-to-date noninterest income, including SBA gains on sale, totaled $6 million. Credit trends in the portfolio continue to improve. Nonperforming assets as a percentage of total assets fell to 56 basis points compared to 78 basis points last quarter. This improvement was driven by the collection of $5 million on 3 SBA guaranteed loans and the sale of a $1.6 million commercial real estate loan. Additionally, Special Mention loan balances decreased by $30 million. Finally, our efficiency ratio improved to 51.4% in the quarter, down from 56.1% last quarter as we continue to balance growth with fiscal discipline. Now I'll ask Courtney to provide a more detailed review of our financial results. Courtney Sacchetti: Thank you, Chris. For the third quarter, pre-provision net revenue totaled $13.9 million or $1.77 per share, representing a 21% increase from the second quarter. Net interest income reached $26 million, while noninterest income increased to $2.5 million, driven by $1.4 million in SBA sales gains. Net interest margin expanded to 3.34%, up 24 basis points over the prior quarter. This growth was driven by a 13 basis point rise in loan yields, with approximately 3 basis points of both margin and yield attributable to onetime interest income from resolved SBA loans. Deposit costs also improved 10 basis points now at 3.30%. Improvement in both deposit costs and loan yields have contributed materially to our NIM expansion this year, up 74 basis points from the fourth quarter of 2024. Interest-bearing deposit costs are down 37 basis points from the fourth quarter of 2024. Loan yields widened, with our year-to-date average originations yield approximately 136 basis points higher than the runoff yield, generating a 41 basis point increase on yield for the total portfolio from the fourth quarter of 2024. These results do not reflect our response to the September rate cut made by the Fed. In response to the rate cut, we reduced our CD rates by 25 basis points and repriced approximately $0.5 billion of non-maturity deposits. We expect $1.25 billion in time deposits to reprice favorably over the next 12 months by approximately 27 basis points. The annualized incremental benefit of this repricing is approximately $3.4 million. Please refer to Page 10 of our investor presentation for more detail on our time deposit maturity schedule. Although we expect to realize the benefit of lower cost time deposits over the next 12 months, we also have approximately $800 million in loans tied to prime that repriced at the end of September. We anticipate the short-term impact of these recent rate changes to hold our net interest margin relatively flat in the fourth quarter. However, as term deposits mature, we expect our margin to improve as liability repricing aligns with assets. For a future 25 basis point rate cut, we would anticipate a modest annualized increase in our net interest margin of approximately 5 basis points. Since the start of the year, we have strategically increased our proportion of variable rate loans from just over 20% to 35%. As we have constructed a more neutral balance sheet, the impact of future interest rate changes on our results is expected to diminish. Noninterest income of $2.5 million increased 24% versus the linked quarter, largely driven by $1.4 million of SBA gain on sale income, an increase of $0.3 million over the last quarter. As you can see on Page 14 of our investor presentation, noninterest income now represents 8.8% of total revenue compared to 4.6% in the fourth quarter of 2024. Total revenue grew 10% compared to the prior quarter, while noninterest expense increased just 1%, resulting in positive operating leverage. While our noninterest expense to average assets was 180 basis points, our efficiency ratio improved to 51.4% for the quarter. We're pleased with this progress and expect further improvement in our efficiency ratio as profitability expands. Turning to credit, third quarter results reflect continued positive trends. We reduced our nonperforming assets by $7 million, bringing our NPA to assets ratio to 56 basis points. We recorded modest recoveries and a small provision of $372,000 in the quarter. Our allowance for credit losses remains at 110 basis points of total loans, while our coverage of nonperforming loans increased to 177%. A few final thoughts on our financial condition. Our balance sheet remains well capitalized and liquid with total assets of $3.2 billion, up slightly versus the linked quarter. The holding company and bank both saw expanding capital ratios during the third quarter, with our consolidated common equity Tier 1 ratio now at 10.39% versus 10.18% in the prior quarter. Our tangible book value also increased, reaching $36.84. I'll now turn it over to Matt to provide an update on loan originations. Matthew McNeill: Good morning. As Chris mentioned, loan fundings in the first 3 quarters remained strong. The bank has funded $500 million in new loans as of 9/30. 2025 year-to-date loan fundings have already outpaced full year 2023 and 2024, respectively. Payoffs have been at record levels and are projected to remain high through the end of the year. Despite our strong origination numbers, net loan growth only increased $49 million in the quarter and $12 million year-to-date. I would like to point out that some of our payoff activity is being encouraged by the bank, where we would like to exit some less attractive credits. Overall, we believe the recycling of the loan book is a sign of good health, and it provides the bank the opportunity to make new loans at more favorable yields. Now I will hand it back to Courtney to summarize our guidance for the remainder of the year. Courtney Sacchetti: Thanks, Matt. Due to our elevated payoffs, we are revising our low single-digit loan growth guidance to flat for the year. We affirm our noninterest income guidance of $7 million to $8 million for the full year, and the resumption of the SBA program would be additive to that total. We also affirm our net interest income guidance of $97 million to $98 million, along with our guidance on noninterest expense of $58 million to $59 million. With our fourth quarter earnings in January, we will provide additional guidance on our 2026 outlook. I'll now turn the call back to Chris for [Technical Difficulty]. Christopher Gruseke: Thank you, Courtney. We've continued to make excellent progress and to deliver on our strategic objectives of diversifying our income streams, improving our deposit base and continuously attracting talented banking professionals who value the opportunities afforded by working with the team committed to constant improvement. Importantly, we've made significant strides on closing out some pandemic-era credits with no further losses. Nonperforming assets now stand at 56 basis points of total assets versus 207 basis points a year ago, and we look forward to further improvement in the quarters ahead. Thanks to everyone on the Bankwell team, whose commitment to excellence has enabled these results. This concludes our prepared remarks. Operator, will you please begin the question-and-answer session? Operator: [Operator Instructions] Our first question comes from the line of Steve Moss from Raymond James. Stephen Moss: Chris, maybe just starting with the good originations this quarter, I think Courtney gave a loan yield number, but I'm sorry, I missed those, I was kind of hopping on the call a little late here. Just kind of curious, where is loan pricing these days? And do we continue to see elevated payoffs maybe carrying over into 2026? Courtney Sacchetti: Yes. So Steve, it's Courtney. On Page 10 of our investor presentation, we do give a little bit more detail. We -- year-to-date, our originations are a weighted average rate of [ 7.86 ]. That's on about $0.5 billion of originations, and that's the rate as of 9/30, so impact from any repricing or anything there. Matt? Matthew McNeill: Yes. Loan demand is very strong. That's reflected in that pricing. So [Audio Gap] pick and choose kind of where we want to move forward. The lack of material loan growth year-over-year is really related to the timing and the velocity of the payoffs. This is the strongest year of payoffs that we've experienced. And that's -- it takes a couple of months to get the loan pipeline to respond to be able to backfill those numbers, which we successfully did this quarter. And we anticipate the fourth quarter to have some similarly strong payoffs. So we think we'll be able to meet -- and Courtney had said earlier that we're going to stay flat, and that's how we're looking at it. But the loan demand is still there. It's just the timing of payoffs and trying to get the pipeline robust enough to respond to that. Christopher Gruseke: Stephen, with regard to next year, it is -- we have demands due to originate higher volume than we have. So it's a matter of lead time. So we'll just plan to be out in front of it. We can control it with pricing. Stephen Moss: Yes, I hear you there. And then in terms of an update on your core deposit initiative with the teams you brought over, just kind of curious, how is that developing? And if you have any update on that front? Matthew McNeill: So the teams, the first teams were hired in April, and we've hired some subsequent teams since then, including in the third quarter. We're bullish on the teams. They're already starting to produce and add deposits to the balance sheet. We don't think that we will have a -- their full production in place until sometime in '26. We did very carefully target teams that had large portfolios of noninterest-bearing deposits. So those are primarily [Audio Gap] accounts, which take longer to [ move ] than a high interest-bearing account where it's just money sitting around that's not being utilized in a business. So they're well within our time threshold for how they're performing, and we're [Audio Gap] full impact technical [Audio Gap]. Stephen Moss: Okay. And just kind of -- maybe just last one for me here in terms of just thinking about just the cadence of lower [ cuts ]. I hear you guys on CDs getting repriced 100% beta. Kind of curious on the nonmaturity deposits, how you're thinking about deposit beta with the Fed? Courtney Sacchetti: Right. So the most recent rate cut at the end of September, we have just rough numbers, approximately $1 billion of non-maturity interest-bearing deposits. About $250 million, $260 million of that we have indexed to Fed funds. So that will move that part of the relationship that we have. And then with this recent round, we did another $250 million or so of our exception rate pricing, 100% beta down. So we were able to achieve effectively 50% beta on $1 billion of deposits. Operator: The final question comes from the line of Feddie Strickland from Hovde Group. Unknown Analyst: This is Feddie's associate [ Anira ] on for him. The first question, we saw some strong SBA contributions in the quarter, and we wanted to know, how much more do you feel you can ramp up that side of the business? And in your opening remarks, you did mention that there may be short-term government shutdown effects. Will that affect the ramp-up or anything to do with that side of the business? Matthew McNeill: I believe the answer to the second question is it really depends on the duration of the shutdown right now. So Bankwell is a preferred lender. We're able to continue to underwrite SBA credits. We are not able to get in-place guarantees, and we are not [Audio Gap] our guaranteed [Audio Gap] previously originated. There is a temporary freeze to the SBA income. If the government opens up in a relatively short amount of time, it may not have a large -- or it may not have an impact on the business. We may be able to fluidly flow through it, but it's really going to depend on the duration of the shutdown. As far as the ramp, we hired Michael Johnston from ReadyCap, which was the fourth largest producer of SBA loans in the country in previous years. And we believe that the SBA division does have operating leverage able to further scale the business beyond $50 million in production, and we'll talk about that in the fourth quarter. Christopher Gruseke: And we'll just need the government to be open to do that. Matthew McNeill: Correct. Christopher Gruseke: This is Chris. I'll continue a little bit on that answer and say that we did note that in the 3 quarters' worth of activity, we pretty much hit our original goal of almost [ $50 million ]. So we've got almost a full year's worth of original expectations in the results. So the government opens, as Courtney had mentioned, there's [Audio Gap] it will be [Audio Gap] up to when the government [Audio Gap]. Operator: There are no further questions. This concludes today's meeting. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Millrose Properties Third Quarter 2025 Earnings Results Conference Call. [Operator Instructions]. I will now turn the call over to Jesse Ross, Millrose's Head of Financial Planning and Analysis. Jesse, you may begin. Jesse Ross: Good morning. Thank you for joining us. With us today to discuss our third quarter 2025 results are Darren Richman, our Chief Executive Officer and President; Robert Nitkin, our Chief Operating Officer; Garett Rosenblum, our Chief Financial Officer; Adil Pasha, our Chief Technology Officer; and [ Steven Hensley ], our senior market risk analysts. Before we begin, I'd like to remind everyone that this call may include forward-looking statements and discuss non-GAAP financial measures. Please refer to our third quarter 2025 financial and operational results announcement as well as the third quarter and investor presentation, we released and posted on our website under the Investor Relations heading for a discussion of these matters. With that, I'll turn the call over to Darren. Darren Richman: Thank you, Jesse, and good morning, everyone. I'm pleased to report that Millrose delivered another strong quarter, demonstrating the effectiveness of our disciplined capital deployment strategy, and the growing demand for our homesite option platform. Our approach centers on recycling homesite sale proceeds and investing newly raised capital to maximize returns for our shareholders. This quarter, we generated $852 million in net cash proceeds from homesite sales, including $766 million from Lennar and redeployed $858 million in new land acquisitions and development funding with Lennar. We also saw $770 million in funding outside the Lennar Master Program Agreement, which underscores the broad-based market demand and scalability of our platform. As we continue to expand our homebuilder relationships, we now partner with 12 distinct counterparties. Our invested capital outside Lennar reached $1.8 billion with homesite inventory and other related assets totaling $2 billion at a weighted average yield of 11.3%. Our portfolio now spans approximately 139,000 homesites across 876 communities in 30 states, reflecting our national reach and operational excellence. A key differentiator for Millrose is our proprietary technology platform. This strategic asset enables us to manage nearly 140,000 homesites, automate transaction management and leverage AI for unique market insights and operational efficiency. Our technology allows us to scale faster, integrate acquisitions seamlessly and deliver unmatched agility to our builder partners. It also provides early warning indicators in real time when we see pace and price failing to meet underwriting expectations. This allows us to constantly recalibrate our due diligence monitors using real-time information. We have Adil Pasha, our CTO on hand to profile our systems and the strategic moat that it represents. Our disciplined underwriting and risk management are essential to our business model. By structuring transactions with meaningful deposits and cross-termination pooling mechanisms, we continue to mitigate risk and maintain prudent standards even as we grow. We further strengthened our balance sheet this quarter by completing $2 billion in senior note offerings, replacing short-term bridge capital with long-term debt at favorable rates. With approximately $1.6 billion in total liquidity and a conservative debt to capitalization ratio of 25%, Millrose is well positioned for continued growth and capital efficiency. Millrose is pioneering a new era in institutional end banking, offering a scalable, asset-light capital solution for homebuilders. As the only national public platform dedicated solely to residential homesite capital, we provide certainty and reliability that private capital sources cannot match. Our partners consistently tell us that this certainty is a key reason they choose Millrose. Despite ongoing market challenges, our business model resilience and risk mitigation features have enabled us to deliver strong performance and expand our partnerships. We maintain high conviction in the long-term housing market and are confident that Millrose is exceptionally well positioned to capture accelerated demand as conditions improve. Our platform is helping builders navigate affordability pressures and inventory challenges, providing flexible capital solutions that support their growth and operational efficiency. It is important to highlight that we are quickly approaching the point of terminal velocity where shareholders will benefit from the optimization of our balance sheet for an entire fiscal period. As our capital structure reaches its most efficient state, we anticipate that shareholders will increasingly realize the benefits of our scale and disciplined approach, enabling us to reinvest in higher return opportunities and maintain robust liquidity, all while supporting our competitive position in the sector. With these advantages, we are confident that we can continue to deliver value for our partners and stakeholders as we pioneer new solutions in institutional land banking and further solidify our leadership in the market. Our strong operational results enabled us to increase our quarterly dividend to $0.73 per share, representing an 8.2% dividend yield based on our book value. Based on our momentum, we are raising our guidance for year-end AFFO run rate to $0.74 to $0.76 per share and increasing our full year 2025 new transaction funding target under Other Agreements to $2.2 billion. We are pleased to note that this target is above our reach goal of $2 billion. We remain committed to distributing 100% of our AFFO to shareholders, reinforcing our alignment with shareholder interests. In closing, our third quarter results demonstrate that our capital redeployment strategy is working effectively across all aspects of our business. We look forward to continuing this momentum and sharing our progress next quarter. Thank you for your continued support. And with that, I'll hand the call over to Rob. Robert Nitkin: Thank you, Darren, and good morning, everyone. I'm pleased to report on the operational progress we achieved in the third quarter and to share how we believe these initiatives position Millrose for continued success. Q3 was an active and productive quarter for Millrose. We deployed capital at scale, expanded partnerships with new counterparties and reinforced underwriting discipline as our national team continued to leverage the Millrose technology platform to rigorously evaluate each transaction. We also strengthened our balance sheet, raising $2 billion of long-term debt at highly accretive rates. As Darren noted, our performance was fueled by accelerating transaction volumes and growing industry-wide adoption of our platform. Millrose was founded on the vision that a scaled national publicly traded homesite capital solution could be an all-weather solution to deliver homesites on a just-in-time basis, and that vision is now being realized. Today, Millrose transact with 12 distinct counterparties. And as we engage with our growing roster of homebuilder partners, we increasingly hear them highlight Millrose's advantages over other private capital players. With unmatched scale, a national team of industry experts and a portfolio spanning 30 states and 876 communities, we can execute the broadest range of transactions with speed and deep sector expertise. As a permanent capital solution dedicated to serving as the industry solution for residential home site capital, our partners avoid the constraints of private fund life cycle and the uncertainty of opaque capital sources. Builders consistently tell us that certainty and reliability of capital often matters more than cost. With $2 billion raised in the quarter and $1.6 billion of publicly disclosed liquidity today, we deliver that certainty. Finally, as you'll hear from our Chief Technology Officer, Adil Pasha, our technology platform reduces the operational burden on counterparties land planning and finance team by automating homesite purchase coordination and processing. At the same time, it captures transaction data that provides unique market insights to strengthen our underwriting. We believe that these structural advantages make Millrose the partner of choice for leading homebuilders. This is exemplified by large programmatic partnerships, such as our collaboration with Taylor Morrison's Yardly build-to-rent brand as well as our demonstrated experience as the first call for capital-efficient M&A. The strength of our platform is evident in our transaction terms and portfolio performance. We continue to generate compelling returns with a weighted average yield outside the Lennar Master Program Agreement of 11.3% as of quarter end. We grew investments in this category by $770 million in acquisitions and development funding, bringing our invested capital to approximately $1.8 billion as of September 30. Including Lennar, our portfolio weighted average annualized yield rose to 9.1%, up 20 basis points from the prior quarter. While growth is important, we remain laser-focused on underwriting discipline. And as our portfolio expands, we continue to enhance our risk monitoring systems. Each transaction is evaluated against real-time sales and pricing trends within our portfolio with overlaid local market insights from our asset management team. Our asset managers are constantly engaging with counterparties across the country, interfacing directly with the individual local builder divisions of our homebuilder partners. Through these channels, we've been able to capture unique quantitative and qualitative insights about the operating environment across markets and leverage these insights to maintain prudent underwriting standards and monitor risk. We also continue to structure transactions to mitigate risk, securing meaningful deposits as a share of total project costs and employing cross-termination pooling mechanisms. Importantly, given the demand we have observed, we also have the ability to remain selective in our partnerships, avoiding builders who view land banking as a tool for risk mitigation rather than capital and operating efficiency. This has helped to buttress our portfolio during the recent market stress. We are proud of our third quarter performance and grateful for the significant contributions of the entire Millrose team in driving our continued growth. With the strength of our pipeline, capital capacity and competitive position, we remain highly optimistic going forward. With that, I'll turn it over to Adil to share more on the Millrose technology platform. Adil Pasha: Thanks, Rob. I want to highlight a core component of our strategy, the proprietary technology platform that complements the operational excellence of our servicing and investment teams. We are not simply building a tool, but a strategic moat that enables us to manage the scale and complexity unmatched in the land banking industry. To put our operations into perspective, we manage a portfolio of nearly 140,000 homesites. We recycle approximately 1/3 of our book value annually, which means we are in a constant cycle of redeploying capital with speed and precision. Our transactions typically range from $10 million to $30 million each. We serve 12 distinct customers with more than 800 assets across diverse geographies and product types. Managing this business on spreadsheets would be impossible. Our technology platform provides 3 distinct strategic advantages. First, high velocity transaction processing. In the third quarter alone, we averaged 138 homesite takedowns per business day and processed over 3,500 land and development transactions. Land banking relies on seamless technological and operational alignment with our builders. Our platform allows us to provide our builder partners with the operational flexibility they need to meet their goals. A level of agility that is simply unachievable with traditional systems and spreadsheets. Enhancing and expanding these integrations is a key priority, which we believe will unlock further growth and strengthen these critical partnerships. Second, a powerful data advantage. The sheer volume of our deal flow, transaction data and builder sales reports have created a rich proprietary data set. This data moat gives us unique insights in underwriting transactions and monitoring market risk. We are also beginning to leverage AI to drive novel insights from this data set and further automate internal processes. Finally, unmatched M&A execution. We demonstrated this with the Millrose spin-off and the acquisition of Rausch and supporting New Home in its acquisition of Landsea. Our ability to partner with builders to rapidly underwrite and integrate hundreds of communities is a direct result of our proprietary data platform, which automates the ingestion and management of all aspects of land banking data. Our capacity to close deals and provide immediate operational readiness for our builders is an unmatched capability in this market. Our technology is a core strategic asset. It allows us to scale faster, integrate acquisitions seamlessly and operate with greater agility. We are confident this platform provides a durable competitive advantage that our competitors cannot easily replicate. We look forward to releasing a set of features to extend these efficiencies directly to our builder partners. We are excited to continue developing this platform to drive the future growth of Millrose. With that, I'll hand it over to Garett to talk through our quarterly financial overview. Garett Rosenblum: Thank you, Adil, and good morning, everyone. I'm pleased to walk you through our third quarter 2025 financial performance, which demonstrates the cash-generating power of our business model and our disciplined approach to capital allocation. For the third quarter, we reported net income attributable to Millrose's common shareholders of $105.1 million or $0.63 per share, driven by $179 million in option fees and development loan income. Our net income this quarter was negatively impacted by onetime expenses associated with our debt financing activities. These nonrecurring expenses related to our debt transactions impacted our GAAP net income. These are onetime items incurred in connection with our business reaching scale and don't affect the underlying cash-generating capacity of our business. Adjusted funds from operations, or AFFO, was $122.5 million or $0.74 per share, which provides the basis of our distributable earnings by adjusting for these onetime costs and other noncash items. As we discussed last quarter, AFFO offers enhanced transparency into the recurring distributable earnings power of our business. Our book value per share at the end of the quarter stood at $35.29. Our management fee expense was $25.9 million, which is calculated transparently at 1.25% of gross tangible assets. Interest expense was $43.7 million and income tax expense was $5.9 million. On September 22, we declared a quarterly dividend of $121.2 million or $0.73 per share, representing an 8.2% dividend yield based on book value per share that demonstrates our strong profitability and commitment to shareholder value. Millrose is committed to distributing 100% of our earnings to shareholders. Turning to our balance sheet and capitalization. We significantly strengthened our financial position this quarter through a strategic debt raise. We successfully completed $2 billion in senior note offerings, including $1.25 billion of 6.38% Senior Notes due 2030 and $750 million of 6.25% Senior Notes due 2032, both upsized due to strong investor demand. We used the proceeds to repay our $1 billion 1-year term loan and reduced outstanding borrowings under our revolving credit facility by $450 million. These transactions eliminated near-term refinancing risk while securing attractive long-term financing and combined with our $1.3 billion revolving credit facility provide us with approximately $1.6 billion in total liquidity as of quarter end, which provides ample financial resources to continue to grow the business. As of September 30, we reported total assets of approximately $9 billion and total debt of $2 billion with a debt-to-capitalization ratio of approximately 25%. We continue to expect to adhere to a conservative maximum debt to capitalization ratio of 33%, underscoring our disciplined approach to capital management. Based on our strong performance and continued momentum in other agreements, we are raising our guidance for full year 2025 new transaction funding under other agreements to $2.2 billion, up from previous guidance. Accordingly, we are also raising our year-end AFFO quarterly run rate guidance to a range of $0.74 to $0.76 per share. We remain focused on delivering value to shareholders through consistent earnings growth, prudent capital allocation and maintaining our conservative balance sheet while capitalizing on the significant opportunities ahead. With that, I'll turn the call back to Darren. Darren Richman: To close, our third quarter results demonstrate that our capital redeployment strategy is working effectively across all aspects of our business. From an organic growth and other agreements to optimizing our capital structure and increasing shareholder returns, we continue to execute on our mission to redefine how capital flows to meet housing demand. Our business model's resilience through challenging market conditions, combined with our strong liquidity position and growing pipeline of opportunities gives us confidence in our ability to continue delivering attractive returns to shareholders, while serving as an essential capital partner to the homebuilding industry. We look forward to continuing this momentum and sharing our progress next quarter. Thank you again for your continued support. And with that, operator, let's open the call up to Q&A. Operator: [Operator Instructions] Your first question comes from Julien Blouin with Goldman Sachs. Julien Blouin: So your new deployment guidance of $2.2 billion implies just another $200 million of deployment in the fourth quarter, which is quite a bit below your year-to-date run rate. I guess, is that a reflection of a pullback in activity you're seeing from homebuilders? Or is there some sort of like normal seasonality or activity dips in the fourth quarter? Is it driven by conservatism? How should we sort of think about that? Robert Nitkin: Yes, sure. Thanks for the question, Julien. So just 1 quick correction. So as of the end of the third quarter, our invested capital in this category outside of Lennar Master Program Agreement is $1.8 billion. So originally, our stretched target was $2 billion. It's $1.8 billion as of the end of the third quarter. And so our revised target is $2.2 billion, meaning that it's not a $200 million increase. We're guiding towards the $400 million increase. And that's our best guess based on still a very strong continued set of demand from the builders, certainly no slowdown, but that's our best guess based on where we are today. Does that make sense? Julien Blouin: Yes. Okay. I see. So it's $2 billion of homesite inventory funded. Okay. That makes sense. And then I guess just as we think about where the stock trades today and how you're thinking about equity issuance going forward, I mean, how should we think about that? Is it something where you would consider issuing equity as and when you trade at book value? Is it maybe something more like you could wait and see if the market describes some premium to book value? And then how do you balance those considerations against the risk of running out of deployable debt capacity as you're starting to push up against this 33% self-imposed debt-to-cap limit, and potentially being stuck if you're still trading below book value? Darren Richman: Yes, Julien, it's Darren. We have ample runway. We -- as we said in our prepared remarks, we have about $1.6 billion of firepower, which includes cash and room under the revolver. I think we've communicated in the past, and I'll reiterate it today, is our goal is really to optimize the balance sheet first before we pivot to equity issuances. We've had a couple of new equity initiations that are well above book value. And just as an editorial note, we buy into it. We definitely buy into the story beyond book value. And as we had kind of communicated with you and others in the past, the goal isn't just to get to book value and declare victory. We think that the ultimate returns that investors would expect and demand could result in the stock trading well above book value. And so to answer your question, it really is about optimizing the balance sheet, using our debt capacity and then seeing where we are as a company and where the stock is to then think about equity issuances. Operator: Your next question comes from Eric Wolfe with Citigroup. Eric Wolfe: I know you've had very little, if any, credit loss since you launched the business. But is there a way that you internally think about long-term credit loss? So if you're getting, say, 11% to 12% on option rate, maybe that's more like 10% to 11% after some assumption around terminations and your ability to recover value from that collateral. I'm just trying to understand internally how you think about sort of the total return profile of the business after credit loss? Darren Richman: Yes. This is Darren. I mean, I'll start, and then Rob can jump in. We -- in the history of our land banking experience, we haven't had a homebuilder walkway. We haven't had a homebuilder look to renegotiate a contract. It's not to say that it won't happen or it can happen, but I can only say, looking as using history as a guide, it hasn't happened yet. And I would argue that it really comes down to our underwriting standards, the use of technology that Adil spoke about, the due diligence screening that we do as part of our overlay is really the glue that holds this all together. And on top of that, we're also looking for a counterparty that is really a partner, and we're looking for counterparties that are looking to do business for capital efficiency, not risk mitigation. And we know that because these are counterparties that are willing to sign up upfront to pooling agreements. Again, even the pooling agreements, investors, homebuilders could walk away from those. So I don't want to suggests that even with pooling that folks couldn't walk away, but it really does become a self-selection opportunity for us to know what type of relationship the homebuilder is looking for. I don't know, Rob, if there's something you want to add? Robert Nitkin: Yes. I would just add that to come up with something like that would require ascribing some probability to not just the option termination, but an actual loss in the recovery value of the land that we own, fee simple have underwritten net of the deposit we hold against it, which is obviously as a result of our work, it's not a scenario we think it's likely. Again, not to say it won't happen, but there's no clear methodology that would make sense to us to use for that. Eric Wolfe: Got it. And I know it's only $340,000, so not much, but there's a small provision for credit loss expense on the income statement, it looks like maybe on development loan receivables. I guess what is that? And sort of how did you estimate that? Garett Rosenblum: Eric, it's Garett. That's a GAAP required adjustment under what's called CECL or as far as the credit loss pronouncement, which basically requires us to basically estimate potential credit losses. It can't be zero. We basically estimated it, and that could change as we go forward. But again, this is merely a GAAP required estimate and not an indication of what we actually expect. Eric Wolfe: Got it. And then for the $770 million that you deployed outside of Lennar, were those all with existing relationships? Or were there some new relationships in there? I think you said 12, and I can't remember what you said on last quarter's call, but just curious if there's some new relationships that were entered into the quarter and if they're public homebuilders, regional builders, just the profile of the new relationships that's your forming? Robert Nitkin: Yes. So last quarter, we mentioned we had 11 distinct counterparties. We added 1 this quarter. So we have 12 distinct counterparties. So we did add that counterparty, but really, a lot of this is -- most of that increase you mentioned is driven by just further penetration in the partnerships that we've set up. We've had a lot of success, just continuing to integrate operationally and continue to do more business with our really high-quality builder counterparties. Eric Wolfe: Got it. And then just last question for me. There have been a lot of headlines from the government tweets about wanting to sort of improve housing affordability. I guess, are there any policies that you're hoping for? Do you think it could spur more construction or would be good for your business? Just curious if there are certain things that you've seen that have been proposed that you think could help your business? Darren Richman: So few things. One, we all know affordability is a real challenge. And so the fact that the administration is focused on making housing more available and more affordable certainly makes sense to us. All of the headlines and the articles we've read would suggest that more -- it relates to more production. More production is obviously good for our business. It creates more certainty around the land that we own and gives us more confidence in the land that we own. Outside of that, I know that there are a lot of kind of conversations that are happening behind the scenes in the industry, and the industry is definitely working to do their part to come up with creative solutions to the challenges. Operator: Your next question comes from Craig Kucera with Lucid Capital Markets. Craig Kucera: Can you give us a breakout on how much of the third-party investment in the third quarter was affiliated with Yardly? Robert Nitkin: Yes. We haven't disclosed the specific volume by counterparty, but I will say that we have had a lot of success. There is a decent portion of that number, that is the penetration with Yardly, and that has ramped up and been a great successful partnership with the folks over at the Yardly team at Taylor Morrison. So it's going really well. It has started to close, and we're feeling really excited about it. But beyond that, we haven't given any disclosure at this point. Craig Kucera: Okay. Fair enough. You did have a breakout of the development loan receivables and income this quarter. Were those formally wrapped up in inventory and reported differently? Or are those all sort of originated here in the third quarter? Garett Rosenblum: Craig, it's Garett. They were grouped in with inventory at the beginning, and we felt it prudent to break it out going forward as it continues to be a significant part of our business. Darren Richman: And it's not a new line of business for us as being a -- trying to serve the interest of our builder clients. This is how certain of our clients want to access our land banking capital is through developer partnerships. This has always been part of our strategy and our product offering. It's just as Garett said, it got to a point where it's now big enough and scaled enough that the accounts have asked us to break it out separately, but it doesn't represent a new strategy for us. Craig Kucera: Got it. And I think in the Q, there's a reference that that's actually paid in kind interest. Is that the case here in the third quarter? Garett Rosenblum: Yes, just to give you a short answer there. Craig Kucera: Okay. Changing gears. Some of the commentary from Lennar on their third quarter earnings call referenced slowing down some of their volume and taking a pause to adjust to market conditions. Did that translate at all to Lennar executing any of their pause periods with Millrose? Darren Richman: Not outside of the contractual provisions that they're allowed to. So if you're asking about the pause periods where they're declaring a 6-month pause, absolutely not. But there are always adjustments, regardless of the period related to certain communities. And all of these -- anything that was done was done within the contractual allowances for them and for others. Craig Kucera: Okay. That makes sense. Just a couple more for me. You booked some rating agencies expenses this quarter. Can you give a sense of the time frame of what you might think you might get a rating and what it might mean to your debt cost relative to what you currently have, whether that's what you issued in the quarter or the spread on your revolver? Darren Richman: We're already rated. So just to clear that up. And so we're rated by Fitch, S&P and Moody's. Robert Nitkin: Yes. It's worth reiterating actually one of the big achievements we're quite proud of in the quarter is that going from a company without ratings to 3 ratings from those organizations, including an investment-grade rating from one of them, and being able to access the deepest public credit markets to raise $2 billion of bonds at an interest rate that we think that is highly accretive to our business has been a big win for us to strengthen our balance sheet, and that's part of what's really opened up the $1.6 billion of liquidity that we have today heading into the fourth quarter that really makes us optimistic about our ability to sort of attack the opportunity in front of us and becomes a really strong competitive advantage versus other players that we can just speak to that publicly available $1.6 billion of liquidity and the strength of our balance sheet. Craig Kucera: Got it. Just one more for me. A lot of the call, you referenced risk monitoring. I know you closed $770 million of deals this quarter with third parties. But can you talk about the total dollar value of deals you underwrote and may be elected not to move forward with? Robert Nitkin: Yes. We haven't disclosed the past portion, but there is certainly a substantial amount of past deals. I mean, part of our risk underwriting is that we're always, as we said, always evaluating a homebuilder's assumptions around price and pace and ultimately, the gross margin they project on those communities. And we, in this quarter, just as all in other quarters, turned down a substantial amount of deals because we didn't think they were set up for success in that -- our own unique independent data sources were not necessarily consistent with the builders underwriting. Anything to add, Darren? Darren Richman: Yes. No, the only other thing I'd add is it's a good question and it's a good point in the sense that there are counterparties that we have decided not to do business with because they've historically used land banking for risk mitigation. We know that. They know that. And again, it's -- we'd rather pass on those relationships than try to eke out a little bit more spread but taking a lot more risk in times like we've experienced in the last year. Operator: [Operator Instructions] Your next question comes from Aaron Hecht with Citizens Bank. Aaron Hecht: Just wondering, in terms of the contracts that you currently have in place, how much more capital or how many more partners, clients, can you sign up, given the schedule that they've provided and your assumptions underlying the cash inflows and outflows. I'm just trying to get a sense of how many more deals you can do or how the balance of your capital outstanding will trend just based on what's expected to come in your contracts today? Robert Nitkin: Yes. I would just say it's part of our cash flow planning every day that we track our peak capital, including all the development funding against all of our commitments. And so we're comfortable based on all the liquidity we have today and our capital pipeline that we can serve everything and there does remain additional capacity to bring on new customers. Darren Richman: Yes, ample. I mean, that's really the reason why we keep highlighting the $1.6 billion is because almost all of that is really meant for new third-party business. And that's exactly why we highlighted Adil and the work that he's done is because given the scale and complexity of the business that we have, and the fact that we do give up about 1/3 of our book value every year, this constant recycling and planning is so important and vital to making sure that our balance sheet is optimized at all times, and we're not sitting on cash. And we have, on the other side, over committed cash and are not able to fund. Aaron Hecht: Yes. I guess that's what I was trying to get at. Is there -- the inflows and outflows sound like they could get so complicated that there could be big fluctuations just based on the commitments that you have already. Second question around your data sets and the technology platform that you guys talked about. Is there any way to monetize that without giving up proprietary information for the Millrose shareholder, like data sets that you can provide to the general public on homebuilding or whatnot? Just kind of wondering any way to monetize that? Unknown Executive: Yes. It's a great question. It's not something that we're focused on right now. We're really looking to use that data set to drive our operational underwriting efficiencies, and we're always evaluating kind of strategic partnerships in the homebuilding space where we could create a value chain that really complements our capital solution. Darren Richman: But it is, look, the data is so important using it in our ecosystem to make real-time judgments. I mean there was a question asked earlier about deals we've passed on. Remember, every deal we pass on in addition to the deals we do, we're capturing all that data real time. And we're ingesting it and using it to make informed judgments as part of our due diligence. And we have [ Steve Hensley ] here who oversees that analytics, again, making sure that we're underinvesting in hot areas that are not performing well, and finding ways to put money to work in areas that are performing well and will continue to perform well where there's a shortage of housing relative to job growth. Operator: Your next question comes from Julien Blouin with Goldman Sachs. Julien Blouin: So you're clearly a really valuable partner to the builders. And I'm just wondering, in terms of the current environment, is one of the ways you're providing value to them is by sort of providing accommodations or allowing them to sort of pause or slow down their takedowns per the agreement you have with them? Darren Richman: Look, we haven't really had to do so outside of what the builders are contractually entitled to. But I've said this before, Julien, and you've definitely heard me say it, if a builder came to us in the ordinary course and said, "Hey, we were taking down 4 homes per community per month, the contract says we need to take down 3, we'd like to take down 2. And we don't have additional needs for that capital. It probably means we're going to slow down development as well. And we'd rather the capital working for as long as we can keep it. And so we're always thinking through accommodating any client request as long as we don't have an additional need for that capital. And why would we cause somebody to buy back a homesite at a time when it doesn't work for them. All we're doing is losing book value on which we would earn our option rate. So to answer the question very specifically, we haven't had to make accommodations outside of what our builder counterparties are entitled to, but we would definitely be open if asked, making sure that we have the capital to do it. Julien Blouin: Understood. And I guess in terms of what they're contractually entitled to, what is the sort of the flexibility they have within their current contractual agreements and sort of how much are they exercising that flexibility maybe to currently sort of slow down their pace? Robert Nitkin: Yes, you can see. The Lennar option agreement is publicly available. So you can see some examples of a finite amount of quarterly takedown extension such that the final takedown cannot be extended. And so that's an example of that kind of flexibility. And one of the many reasons that builders look at this kind of capital partnership better than debt, which is less flexible for a variety of reasons. But generally speaking, even above that, the benefit is that we've individually underwritten every asset. And so we have the ability and our team really can make a judgment call around pace and the right takedowns, particularly in the context of a business that had over $800 million of homesite sale proceeds just in the quarter. So we have such ample liquidity. And by that number, you can see the builders are still taking down their homesites largely on schedule. But that would be one example to answer your question. Darren Richman: But I just want to go to the point, maybe the heart of it is we really haven't seen any change in our business. And I think that's what people are pulsing around like what are we seeing from builders? And we really haven't seen any change, any real change in their behavior that causes us any concern. We would highlight it, and we just haven't seen it. It really has been sort of business as usual for us, which has been great. And it's not like we haven't seen what's going on in the backdrop. But you got to remember, we've underwritten all these assets. These are mission-critical assets. These are irreplaceable assets, by and large, and we would expect that the builders would continue to take them down almost regardless of what is going on in the backdrop. So I just want to make sure that we're making the point that it really has been and continues to be business as usual for us. Operator: At this time, there are no further questions. I'll now turn the call back over to Darren Richman for closing remarks. Darren Richman: Thank you. Look, I just want to thank everybody once again for joining us today for following the story. We're all available should have -- should anybody have follow-up questions. Thank you again, and we wish you a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the SEB Financial Results Q3 2025 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, Johan Torgeby. CEO. Please go ahead. Johan Torgeby: Good morning, and I'd like to extend a warm welcome to all of you today for SEB's Q3 financial results. Going to our first page with highlights. We today post a solid financial result in a quarter which is seasonally slower but we've also experienced less volatile and stable financial markets. Noteworthy is that investment banking activity has held up and showed resilience and we saw an increase in capital markets activity to the later half of the quarter. Customer satisfaction and employee engagement continue to show relative strength and it has been decided to continue the SEK 2.5 billion share buyback program per quarter by the Board as we announced today. Flipping to the next page, we have some recent events. And the first one is the infrastructure of payments which is now being disrupted to some degree by new technology coming from blockchain. We have, together with 8 other European banks launched a consortium with an initiative to see if we can launch a euro-denominated stablecoin on the chain and targeting the first half of 2027. Also, AirPlus has now been used as the new brand for our previous Eurocard. And this is an example of the marketing campaign, particularly towards the Scandinavian countries where Eurocard has been a long prevailing brand within the Corporate Card segment. It has now been rebranded under the headline green is the new gold. And if you haven't already, you will soon get an AirPlus instead of your Eurocard in the color scheme represented here on the slide. Turning to Page 4. We have, over the last couple of quarters, updated you on our progress within AI. We have shown you the internal projects that we're running, about 130, which is funneling in, in different categories of areas we think we can improve. But also gone through the recent investment that we've done together with a consortium to get compute capabilities available to us. Today, I'd like to introduce the third corner of this triangle, which is actually SEB not only working with offering better products, integrating it in the products, not only running the bank using AI, but actually enabling banking in the AI community, which is the core business we do. We speak a lot about different business units in the bank, but this is probably one of the lesser known ones. In 2022, we created a business unit called SEB Growth, where we now have an offering tailored for fast-growing companies with high innovative content and companies that plan to raise capital and/or lift or sell themselves in the future. This is an attempt to combine corporate banking with investment banking, with private banking, force entrepreneurs and these fairly young companies as they begin their journey. We've also included a few of the logos which we have recently supported such as Lovable, Sana, Modal and Legora. All these are well-known fast-growing companies in the AI space in Scandinavia. The next page, we can then look at the development of our credit and lending portfolio. As all of you are aware, we've had a little bit of a sideline movement in recent years. However, both last quarter and this quarter, we have some growth, albeit modest. Lending year-on-year for the corporate book is up 4% FX adjusted and the total lending portfolio is up 3% FX adjusted with households and Swedish mortgages just shy with half of that growth in the third quarter year. Looking on the next page on the jaws slide. We can see that the costs -- the trajectory of costs is tailing off. And we are roughly back to trend that we had prior to the elevated profits generated by the interest increase with a CAGR here represented from the time 2016 to 2021. And with that, I'd like to end this part and hand over to the CFO, Christoffer Malmer. Christoffer Malmer: Thank you, Johan. I would now like to turn to financials on the next slide. Operating income for the third quarter declined from the previous quarter, reflecting typical seasonal patterns, notably within net fee and commission income, where the second quarter performance was particularly strong. Net financial income was impacted by market valuations of our strategic holdings during the quarter, which had a positive contribution in the second quarter. This valuation effect accounts to around SEK 500 million of the delta in net financial income between the quarters. Net interest income increased slightly despite continuously downward trending interest rates explained in part by the higher day count in the quarter, some positive effects from FX, slightly lower deposit insurance guarantee fee and a lower short-term funding cost. Operating expenses declined slightly from the previous quarter, also following the usual seasonality. As the Swedish krona has continued to strengthen in the quarter, we are providing an updated FX adjusted cost target for the full year of SEK 32.6 billion compared to the original cost target of SEK 33 billion. We maintain our range of plus/minus SEK 300 million around the cost target level which is primarily related to the ongoing integration of AirPlus. Here, we see some potential scope for possibly accelerating that implementation program a little bit further. As mentioned at the start of this year and reiterated also here in the second quarter, we're now in a phase of consolidating recent years of investment, which is resulting in a lower cost growth. We also maintain our external hiring pause for nonbusiness-critical positions to facilitate this consolidation and to make room for continued investments in selected areas, notably within technology and AI. The full year cost target does imply that there are some effects to expect in the final quarter of the year. Net expected credit losses of around SEK 200 million or 3 basis points reflecting underlying stable asset quality as also reflected in the continuous decline of Stage 3 assets. We added around SEK 100 million to the portfolio overlays in the quarter, and we also had some sizable reversals. Imposed levies came down in the quarter as expected, reflecting the development of our Baltics levies and our full year guidance for imposed levies now also including Riksbank's introduction of the interest-free deposit now amounts to SEK 3.6 billion. So that's up from the SEK 3.5 billion communicated in the second quarter. Tax rate of 21%, in line with guidance. Net profit for the quarter of SEK 7.7 billion and a return on equity at 14%, and we ended the quarter with a CET1 ratio of 18.2%. On the next slide, we turn to the development of the net interest income. On a divisional basis, the NII in Corporate and Investment Banking declined by around SEK 200 million, primarily reflecting a lower net interest income within Investor Services, which was elevated during the second quarter, and that was a dividend season as we mentioned at the time. NII also within our markets business was a little bit lower as customer activity came down for the season. From a volume perspective, lending within CIB declined in the quarter as some of the event-driven financing volumes generated earlier in the year rolled off. And that, together with FX effects, explained the majority of the move in the loan book compared to the second quarter. Now year-on-year, lending to corporates within CIB increased by 3% on an FX-adjusted basis. Within Business & Retail Banking, NII declined by around SEK 100 million compared to the previous quarter, and that's primarily reflecting the impact from lower interest rates on deposit margins. Lending volumes were largely unchanged in the quarter and following 2 strong quarters of market share gains in the Swedish mortgage market, Q3 volumes grew a little bit less than the market. Now year-to-date, our net sales of mortgages represent a market share of around 13% which is in line with our share of the stock. Competition in the market remains firm and mortgage margins moved largely sideways in the quarter, remaining at historically low levels. Within our Baltic banks, net interest income was largely unchanged as the impact from lower interest rates was partly offset by higher lending and deposit volumes across both private and corporate customers. Loan growth in the Baltics remained robust with mortgage growth of around 9% and corporate loan growth at around 8% compared to last year. Within treasury, NII was positively impacted by the yield curve as well as favorable funding conditions within short-term funding. Looking forward, we continue to expect our net interest income to bottom out some 3 to 6 months after the latest or the last rate cut. Bear in mind that, that is based on how our balance sheet looks today. So volume growth and any proactive repricing could impact those dynamics. If we turn to the next slide, and we look at the fee and commission income in the quarter. Total fees and commissions declined by around SEK 400 million compared to the previous quarter. And if we look on a divisional basis, we effectively see 3 developments behind this. Firstly, within Corporate and Investment Banking, fees are seasonally softer in Q3 across most capital markets-related businesses, including issuance of securities and advisory, which was also particularly strong in the second quarter. This is also true for lending fees and combined, these effects accounted for around SEK 400 million in CIB. Nonetheless, CIB generated the highest net commission income on record for a third quarter. The second factor related to card and payment fees within Business & Retail Banking and again, seasonal patterns impacting activity levels primarily within corporate cards and AirPlus and this affects around SEK 100 million compared to the previous quarter. And thirdly, going in the other direction, we saw about SEK 100 million increase in fees and commissions in wealth and asset management as a result of higher assets under management and continued business momentum. Net new money across the group amounted to SEK 8 billion in the quarter. And on fees and commissions, when we close the second quarter, we refer to a more constructive fee environment. And while Q3 will see or should see some usual seasonal patterns, which we've seen, we said that if the market backdrop doesn't change dramatically, Q4 should see a continuation of this more constructive trend. And this comment, we think remains valid, which is encouraging going into the last quarter of the year. If we turn to the next slide, we set out the development of net financial income this quarter, NFI from the divisions was largely unchanged from the previous quarter at SEK 1.9 billion. The decline in the headline, NFI versus the previous quarter is, as I mentioned, largely explained by valuation effects related to our strategic holdings and that's primarily in Euroclear, which also paid a dividend during the second quarter. affecting that comparability. These effects were partly offset by XVA going the other way, and we continue to look at the long-term average of around SEK 2.5 billion per quarter. Turning to the next slide. We'll look at the development of the CET1 ratio in the quarter. We closed the second quarter with a management buffer at 290 basis points. And during the quarter from left to right, as usual, we received an updated SREP, update from our supervisor. And as you will have seen in our separate disclosure on that topic. This resulted in a lower Pillar 2 requirement related to lower capital impact from IRRBB, interest rate risk in the banking book. Then we had 41 basis points, reflecting the net profit in the quarter after deducting our dividend accrual while lower risk REA contributes about 14 basis points reflecting positive risk migration in the book during the quarter. Under REA other, you will find a combination of other developments on the balance sheet. So the FX effect, the overall REA size market risk REA and also a positive impact from us applying the SME factor to some of our CRE exposures. These factors in total added 22 basis points and largely evenly distributed between them. Finally, the decline of 18 basis points reflects the phasing in of the REA increase in the Baltic banks that we announced in the second quarter, and that is related to the ongoing work with our Baltic IRB models. This takes the CET1 buffer to 360 basis points at the end of September. And we also highlight that the remaining impact from the Baltic REA increase is around 70 basis points, so in line with the communication at the time of the second quarter. And we expect to phase this in over the coming 3 quarters. So that means that our buffers in effect on a pro forma basis stands at 290 basis points with the Baltic REA fully phased in. Other effects to bear in mind as we go into the end of the year is the impact from operational risk REA in the fourth quarter when we do review that level. On the next slide, we summarize our capital and liquidity position at the end of the third quarter. Our capital as well as our liquidity measures have all strengthened during the quarter, reflected in rising LCR from 130% to 136% and a higher NSFR from 112% to 116% and the CET ratio, as we just discussed on the previous slide. Finally, I would like to conclude with our financial targets, which remain unchanged, including a 50% payout ratio, a management capital buffer target of 100 to 300 basis points above the regulatory minimum and a return on equity competitive with peers with a long-term aspiration of 15%. Return on equity year-to-date stands at 14.1%. So with that, I hand the word back to you, Johan. Johan Torgeby: Thank you, Christoffer. That ends our prepared remarks, and I'll hand over to you, operator, for the Q&A. Thank you. Operator: [Operator Instructions] We will now take the first question from the line of Namita Samtani from Barclays. Namita Samtani: My first question, what should we think of funding costs related to net interest income going forward because surely, if rate is still coming down or they have come down, which is yet to be factored into our net interest income, this will continue to be a tailwind. And secondly, I just wondered, do you lend to private credit and what percentage of that is part of your book? Christoffer Malmer: Thanks for your question, Christoffer here. I'll take your first question on the net interest income. And you're right to say that we've had a positive effect from funding costs in the quarter, and you saw that also in the breakdown of the NII in treasury. And we estimate that effect to be positive for the quarter of around SEK 100 million or so. Now going forward, we'll continue to reiterate the message on 3- to 6-month lag from the last rate cut for the dynamics to work their way through the balance sheet before the net interest income would trough. So we should expect the net interest income to come down again in the fourth quarter. And then in the first quarter, and then we'll see again what happens to rates, of course, as we go into 2026. Those are broadly the effects that I would bear in mind. Johan, you want to comment on the private credit? Johan Torgeby: Yes, sure. Thank you, Namita. We have no meaningful noticeable exposure direct to any private credit. We do have a very, very small group of private equity firms that also have a private debt arm, but no direct exposure. So it is so small that it's not really noticeable. Operator: We will now take the next question from the line of Magnus Andersson from ABGSC. Magnus Andersson: Two questions, please. First of all, on corporate lending. Last quarter, you said you had an elevated level of activity-based lending. And it comes down a bit now quarter-on-quarter FX adjusted. Could you please tell us how you see the outlook for activity-based lending as transaction activity is undoubtedly picking up now? And also what you think about the more lending for general purposes when you think that will pick up? That's the first question. Secondly, on capital and risk-weighted assets. The level was significantly lower than at least I thought in this quarter, and I see that your -- I mean, risk weight comes down in corporate IRB, for example. Is this -- with the exception of the op risk coming in into Q4, is there anything else here that could be volatile? Or is this a reasonable run rate to use? Because I think you even included SEK 10 billion of the Article 3 announcement as well here. And related to capital, do you know already now if you will continue with the share buyback approval for the full year in the Q4 '25 report? Or if you would consider doing it as you did previously with half in -- half year approvals? Johan Torgeby: Thanks, Magnus. I'll start with the corporate lending. So first, I just note that you did accurately depict what we said and what happened last quarter. Those temporary elevated levels for transaction-based exposures, they have not fallen off. So this quarter with its 4% year-on-year does not have those, let's call it, temporary bridges on as there was very little transactions done into the summer. So this is a much more steady as we go. When it looks going forward, so the pipeline looks unusually strong. That doesn't mean that they naturally materialize for events and the event-driven lending that might come with it. But we did see a pickup in investment banking and also capital markets transactions towards the later half of the third quarter, which is an encouraging sign. And we, of course, always keep a close look as a leading indicator of what the Americans do. And you could see some similar signs or even more pronounced there. But I also want to say that the lending fees this quarter, even though it's a very, very quiet one is still 24% up year-to-date, the lending fees, which is, of course, what you typically -- the majority of what you earn on leases is not NII when it comes to transaction is up 9%, the first 3 quarters this year compared to last. So there is some underlying event-driven momentum, but it's -- I still want to be cautious because a lot of things need to happen, and we don't want any of the risks that have been identified to materialize in Q3 that would create volatility. So if I'm a little bit constructive and hopeful, I think general corporate purposes, that's a longer transition. So we are not seeing this broad-based, let's invest in increased capacity, then you need to borrow to invest further because the first investments, they're always done with the operational capital or cash at hand to meet the demand. So in my mind, I often come back in this discussion around the lack of demand in the economy. Retail sales and consumption in GDP. And that's kind of the last leg that we are looking for really to change the picture. And of course, looking at the economists they are looking pretty constructive for '26 and '27 on this topic, but let's wait and see. Malmer? Christoffer Malmer: Thank you. So Magnus, on the REA. If we look into the fourth quarter, you're right that we expect the op risk effect. We estimate that to around 15 basis point negative impact. The other moving parts that are subject to movements during any quarter is the FX effect, of course, you see that is positive in the quarter. That remains, of course, unknown. It's a REA size, which in this quarter is again positive contribution. And coming to your previous question, of course, I hope that we will see that be moving in the other direction. And the third one is REA asset quality, which, again, in this quarter due to upgrades of risk classes of a number of counterparts also contributed positively. So these are the moving parts and then you go to op risk REA. So when it comes to the buffer, the 360 basis points, and we look at the pro forma effectively the 290, assuming the remaining phasing of the Baltic REA, last year, at this point, we were around 470 basis points. So of course, the situation was very different. But still, there are, to your question, a number of moving parts in the REA that will play out in the fourth quarter. I will come back at that time with comments on future buybacks. Operator: We will now take the next question from the line of Markus Sandgren from Kepler Cheuvreux. Markus Sandgren: I was thinking about -- there is some growth in the Baltic lending business. So I was thinking your ambitions going forward? Do you expect to grow in line with the market given your size? Or is there any reason to believe that you can capture more market shares there? Johan Torgeby: Okay. yes, we are growing clearly higher, and it's not only this quarter, it's been going on for a while. So we are actually accelerating a bit. So we're now looking to 8%, 9% growth in this quarter year-on-year compared to -- if I remember correctly, it was about 6% last quarter. We are maintaining our market share as -- the long-term picture is that it's quite concentrated as you probably know to 2 large institutions, Swedish banks in the Baltics. And there has been, of course, increased demand for higher competition from everyone in the marketplace. But right now, we have an ambition to maintain this position. I wouldn't commit as it is a very high market share we start with. So this is a little bit defend and protect, but we are not going to give it up easily. So be careful in increasing market share, but definitely it's a fast-growing market. I'd also like to point out that it is a higher inflationary market. So in real terms, it is not as impressive as these headline numbers are, and you need to also take that into account because the loan book unless you relever the economy will grow with nominal inflation plus whatever you do. Operator: We will now take the next question from the line of Martin Ekstedt from Handelsbanken. Martin Ekstedt: I wanted to focus a bit on your retail business. Looking at statistics, Sweden data on mortgage lending during first half of '25, you saw quite strong market share of net new lending. I think you took like 16% on new lending against the back book market share of 13%. But as we enter the second half of the year, this trend kind of evaporated, and you took just 1% in July and 3% in August despite similar volumes in the market overall. Is there a story behind this that you could share with us perhaps? And then secondly, on that same topic, with Sven Eggefalk now joining you as a new head of the business line, should we keep hopes up for higher volumes share -- volumes of market shares to return? Christoffer Malmer: Christoffer here, I can comment on this. I think, as I mentioned in the remarks, if we look at our market share year-to-date in net sales and mortgages, that stands around 13%, and that is in line with our historical stock level. So there is, as you point to some movement between the quarters. I think when I look at the focus that we have for winning the mortgage market share business, we think all 3 components, it's the speed, it's the availability and it's the pricing. And it's about us continuously evaluating and making sure that we are competitive along all those 3. And as you will see that we haven't moved pricing much in the last quarter, but we're continuously working around speed and availability. But I would also mention that there is a volume effect into this as well, volumes are still relatively small, which can impact movements in between individual quarters. But year-to-date, broadly in line with the stock market share. Martin Ekstedt: Understood. And then a second question, if I may, and just picking up on Namita's earlier question on private credit. I wanted to just pose this question to you a bit more broadly. I mean, the main focus around the private credit discussion has been centered on the U.S., right? And you said you don't do this yourselves currently to any large extent. But I mean, generally, you stand perhaps as the leading Swedish lender to nonbank financial institutions. So I just wanted to check with you for a Swedish take on this. How widespread is this concept in Sweden? And what are your views on the viability of the model in Sweden and also a bit on the risks perhaps. I mean if you don't do this, who should be doing it or shouldn't we be doing it at all in Sweden, and why not. Johan Torgeby: Okay. Yes, this is a little bit of reasoning. Don't take this as a fact. So first of all, this has been a development very much driven by the U.S. I hear numbers like USD 2,000 billion. It's actually surpassing bank lending if you extrapolate the current trends. It is a very, very significant deep source of debt capital for the American economy. Europe is much, much smaller as a whole. And even the things that are growing fast in Europe is typically more American firms, replicating what they've done in the U.S. rather than European firms. Then you go to the Nordics, it's even more pronounced. So private debt is not a large funding source for the Nordic where we operate. And this is, of course, very much if you look at the classic private debt, private equity firms of Scandinavia, which is our home market, that it looks very, very different in terms of the balance between equities, infrastructure, alternatives versus private debt lending. So my take on this is that, first, the leverage buyout market is very well functioning in Nordics. This means that there's much less of a free lunch to be had sourcing the money that you then refund and redeploy into a leverage buyout type of financing because this is almost like a game between the 2 different products. They are slightly different, but they achieve the same thing for a private equity firm. One is you borrow from a private debt with typically 7% to 9% yield expectations or you borrow from a bank, which in the Nordics, we are very efficient, and we've been able to price the LBOs quite differently. But if you look at the overall market of LBOs, how they're financed, it's clearly in favor of private debt funds. But from the banking system, as far as I know, Nordic is very little -- has very little exposure in the Nordic banks to this. It's other capital providers that have put the money in. Operator: We will now take the next question from the line of Shrey Srivastava from Citi. Shrey Srivastava: My first one is your comments around the pickup towards the end of the quarter in capital markets activity. Of course, this quarter was affected somewhat by sort of lower episodic transactions debt than you'd expect. So I just want to talk about what the pipeline for the fourth quarter, what you've already seen in the fourth quarter and going forward, please? And my second question is going back to your comments on the scope for accelerating the implementation of AirPlus. You've previously, if I'm not mistaken, commented qualitatively about when you expect it to be accretive, excluding and including restructuring costs. Is there anything further you can now provide on that, given you've obviously had an extra quarter seeing the business and integrating it. Johan Torgeby: Sure. I'll start with the pickup. So the circumstances around capital markets and primary deals, M&A and IPOs is quite -- it's very, I would argue, benign. It's a good market. Markets are strong. They're not over -- they might be an all-time high on the stock market, all-time tight on credit -- recent tights in credit markets, lower interest rates and a little bit of European spurring optimism for what is going to come. It's not particularly strong here and now, but it's definitely more optimism around where Europe could go, not at least in Scandinavia and the Baltics, if you look at GDP protect -- projection, consumption, et cetera. And also, I would argue that Germany has had the biggest delta from 1 year ago, where they were very much not in favor. And now it's a little bit of, let's say, interest at least on what could Germany do with all these announcements around fiscal, stimulus, defense, security and resilience. The uptick is exactly what we would have expected. We've actually been a little bit disappointed, I would say, if you compare 1.5 years ago when we saw that the interest rate has peaked, then we had a very quiet couple of years behind us after the record years of the early 2020s. And now it looks quite constructive. And you saw that -- before summer, we did an unusually amount large deals in the Nordics, then, of course, summer dies. And I would say that the pipeline and the amount of discussions for the fall and next year, still indicates that there is a higher level of potential than there was before. Now don't take that too much, but I'll just look at issuance of securities and secondary market and derivatives, which is, of course, it's cut in, in the financial result today, we're up 29% year-to-date compared to last year on issuance and securities and services, M&A and equities. And we have 14% in secondary markets year-to-date. So there is something clearly better already happening compared to last year. And we are just saying that we feel quite constructive. We're not saying that this seems -- there are no indications right now that this would implode tomorrow, rather being quite supported of this could probably continue. Christoffer Malmer: On your second question around AirPlus, a reminder of where we are there. So as we highlighted in the second quarter, the first critical milestones around IT migration, the discontinuation of noncore markets and the rightsizing of the organization has been completed, and this process is on track. The next phase now is to increase pace of implementation between AirPlus and the rest of the SEB Group business. So what we are now reviewing is if there is reasons to try and accelerate that phase. As you will remember, we gave a range around the cost target for 2025 of plus/minus SEK 300 million as we said, largely attributable to the pace of implementation of AirPlus. So it was in that context, I made those comments. Operator: Thank you. We will now take the next question from the line of Johan Ekblom from UBS. Johan Ekblom: Just to come back on some of the comments you made earlier around AI. I guess trying to figure out what AI could mean for your business longer term. There's 2 aspects to it, I guess, that I'm interested in. One is, how do you think about the cost of AI? So we hear a lot of stories about the cost of AI being heavily discounted today and that we should expect cost to increase materially as you get on to kind of normal rate cards for what you're paying. And I guess when do you expect to see concrete benefits in terms of efficiency or revenue opportunities that will be kind of obviously visible in the financials. So that would be the first question. And then secondly, just a bit of a detailed one on asset quality. I mean we had a big green project that went belly up in Sweden earlier this year, and there's another one that's in the press now. Your corporate loan book tends to be very much focused on investment grade. How do you view this potentially higher credit risk project? And how do you manage risk around those? I realize you probably can't comment on individual exposures. But just from a more kind of top-down view. Johan Torgeby: If I start with the last and I'll hand the -- I think you asked mostly for the financial impact, I'll ask Christoffer to reason around on AI. The traditional loan book is investment grade. The really minimum rule of thumb is that you have to have 3 years of good cash flow, that has proven resilient business model, et cetera. So that's what we do. But there are, of course, also a very, very small part of the balance sheet that also gets dedicated to starting up of firms. These -- the ones you mentioned, the larger green ones, they have been unusually very unique that they are of that magnitude, but we have had very, very modest, if I say it that way, exposure that you won't really have seen even though there have been a little bit of actually blowouts in the whole green and clean tech sector as we speak, and it's continuing. The other thing is to see that the capital stack of all these projects, if they are large, are very different from the past. They are namely predominantly government guaranteed, and there are risk and offsets. So the nominal values often, if not always, exaggerate heavily what the banks actually are exposed to. But -- so there are 2 mitigating factors to any worry. And that is that the amount is very small, and it's often guaranteed somewhere between 60% to 85% by a government. Christoffer Malmer: If I reason a little bit around the AI and the financial impact, and you're right that we are at an early stage and trying to assess and quantify the ultimate impact is still difficult. But I'll make a few comments. I think in terms of the benefits that we can already see is there are certainly some areas where we do see tangible efficiency gains and productivity enhancements One is in software development, where we see the use of Copilot increasing developer productivity and output and deploys. Another area is in Wealth and Asset Management, where we can see an increase in the number of outbound customer calls as a result of AI support in documentation. So we see those productivity gains. Now how does that translate into P&L? Well, one of the comments that we made around the hiring pause that we're having consistently asked the question when we do replacement hires, if there is a technology or an AI solution that could be levered for that same activity. So we will see this gradually coming through. In terms of the cost of the actual AI. One of the reasons we decided to team up with a couple of other companies in the Wallenberg sphere to invest in the compute power from NVIDIA here in Sweden is partly to get access to sovereign access to compute, but also to ensure the cost. And to your point, we're buying compute power from the large compute providers around the world is, of course, an exposure that anyone would have if you want to grow and expand in AI. And that is also for us a level of comfort to have that cost under our own control. So those are some comments. But as you point out, it is still early days. But we are following it very closely. And the early signs that we're seeing is constructive productivity enhancements. Operator: We will now take the next question from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So my first question would be on the fee line. The softness that we saw in fees this quarter, was that reflecting margin pressure? Or was it just less volumes than expected. So if you could kind of just discuss a little bit margin pressure compared to the volumes on the fee side? And then my second question would be around kind of capital. What we're seeing is that the fiscal outlook or fiscal spending next year is quite good for Sweden, macro-outlook is improving. Should loan growth pick up for SEB. How do you think about kind of prioritizing growth over shareholder returns. And what kind of takes priority if you look at like growth versus dividends versus share buybacks versus any potential M&A? Christoffer Malmer: Thank you, Sofie. So if I'll start with the fees, the sequential development there is really in 3 areas where we see this. First, within CIB and as Johan alluded to, a little bit, even though activity level is benign in the third quarter, it was very strong in the second quarter. So you see the drop in fees and commissions sequentially of about SEK 400 million being partly attributable to activity levels and fees in CIB. The second component you see is card fees in BRB, particularly on the corporate side. And as you know, we are in our BRB card business more exposed to corporate activity than private activity. And that being slower during the summer month is a second explanation. And the positive effect and partly offsetting this is an increase in fees and commissions on AUM-related fees in wealth and asset management. So there's no margin development impacting sequentially in the quarter, but more how the fees have fallen between Q2 and Q3. Johan Torgeby: Yes. Sofie, and nice to hear that you're back in a different role. So welcome. I would say that the reason for the more optimistic outlook, as you also pointed to, is partly driven by the monetary stimulus that we have already seen, let that bite in the economy monetary policy, typically works with 12- to 18-month lag. But also, as you pointed out, the fiscal stimulus that is expected to come. So those 2, I think, are quite important pillars for economists when they do look at it. Will this increase loan demand? Well, that's the purpose of it, both the monetary policy want the economy to pick up in pace and particularly focused on consumption. Fiscal policy tends to be quite effective on consumption. But the pattern right now is because uncertainties, high risks are very mitigated in my book, but uncertainty is still around. It means that households have been quite keen to save rather than consume. So all this is kind of part of that package to become a little bit more constructive for the future, and it should be supportive of growth. But that prediction I'm not making. I'm just reasoning around it. So it's definitely a part of it. When it comes to priority between growth and shareholder return. I assume you mean shareholder repatriation and not just total shareholder return because I think growth in SEB, having more clients doing more with them is very much aligned with total shareholder return, that's the same thing. But of course, it's not -- you might want to save more capital for the business rather than repatriating it. And there, it's pretty easy. We always try to develop the bank first. I would love to use the capital that we generate to do more business to generate even more, so that's typically not a big conflict. Otherwise, as we've had for many years now, we generate more than we can redeploy and then we'll pay it out to shareholders. Sofie Caroline Peterzens: Okay. That's very clear. And maybe just on the fee side, one follow-up. So in terms of DNB Carnegie, you haven't seen any business opportunities kind of getting any -- being able to take any market share from them? Johan Torgeby: I would say no, but I also want to acknowledge that it's a formidable competitor, and they're very good, and this is not an easy market to win in. And it's getting -- it's tough out there. Operator: We will now take the next question from the line of Tarik El Mejjad from Bank of America. Tarik El Mejjad: I just wanted to come back on Johan Ekblom's question as well on AI from a different angle. The scalability of use of AI and the benefits also, I think, is based on how your core systems can actually be plugged to these AI tools. How do you consider today your IT system ready for this, I would say, evolution in terms of using for AI, especially in your triangle on the parts on integration into the products. And also, I mean, there is a perception that the cost to achieve is actually much lower using AI versus the traditional kind of cost savings measures in the past. Do you -- would you confirm that perception? And just very quickly on the capital part, I mean, Sofie, I think addressed that partly, but the -- I think you commented in the past that to go below the 300 basis point buffer or the high end of the range, that will be used for growth rather than special distribution or buyback. Given the headwinds on CET1 coming -- on RWAs coming in the next quarters from the add-ons on Baltics, should we assume that our priorities for volume growth and the buyback would probably be secondary here? Christoffer Malmer: So if I start with the question on AI, you're right that there is a broader upgrade of core systems in general required to some extent, this reflects our ongoing work with our technology road map that has been in place for some time. But there are also opportunities in multiple areas where AI can be applied without necessarily completing all those upgrades. And there are also ways where we can work with compartmentalizing certain parts of our legacy technology and making APIs available for new applications. And the third option that is also interesting to explore is actually to have some of that legacy code rewritten with the help of AI. So there are ways both in which we can address the challenges with traditional legacy systems, but also where we can proceed without necessarily completing those investments. Now when it comes to the triangle, I think you're right to say that from a product perspective, it's probably where progress has been the least thus far in terms of introducing and implementing AI capabilities in the product. Where we have thus far seen the best impact and the greatest achievements thus far has been in running. And what we're highlighting in this quarter as well is, of course, an interesting opportunity working with a growing and exciting AI community in Sweden and the Nordics. So we'll continue to, of course, monitor this closely, but there are certainly areas where we can accelerate with AI implementation in parallel with legacy upgrades. Johan Torgeby: Yes. And if I just may add, it's interesting, we have the IMF, IAF trip to Washington, where all bankers met last week that it is a clear distinction, the one selling AI capabilities between the ones buying them and selling them and how much value has been created lately. So this third point that Christoffer made, the third leg is actually us banking the AI community, which is doing very, very well. On the capital repatriation preferences, so let's say that if we are above 300 as we have stated target board mandate to be in the range of 100 to 300, we have one type of dialogue, and that is how to best come back to the range where the 300 is the upper end. That's the discussion we've had for 2 -- 3 years when we -- from the day we had to cancel the dividends post COVID. And of course, that's kind of the new now. If we're in the range, we have a more forward-looking discussion in the Board in December, where we typically have room for both. So don't assume that you cannot do a share buyback only because you're in the range. However, there is a different discussion. It's more about lending and if we want to retain it to improve business of over and beyond 15% return on equity. If there is a reasonable degree of probability, we know how to do that in the coming years. We'd like to be able to capitalize on that. If not, then, of course, it becomes more of a question of how to repatriate capital to the shareholders with a base, 50% of profits go in the form of dividend. And as you can see in history, we've used both extra dividend in combination with share buybacks to look at, but that's the forward-looking, and I also would say, just the numbers, you need pretty significant loan growth numbers for this not to be -- for SEB not to be able to do capital repatriation in the combination of 2 or 3 types. So it would be lovely if that would happen, but that's a luxury problem. Operator: We will now take the next question from the line of Nicolas McBeath from DNB Carnegie. Nicolas McBeath: My first question was on the NFI line, which came in a bit below in recent quarters in Q3. So I was wondering how you think about the -- how the lower interest rate environment is impacting this revenue line. With your current macro outlook for 2026, how confident are you that your previous indication of the past 16 quarters average is a good indication where the normalized NFI line should be? And how do you think about that given the ultimate macro outlook for next year with, yes, maybe lower interest rates and possibly also lower volatility than what we've seen in the past few years? Christoffer Malmer: Thank you, Nicolas. I think the -- within that number that you have in the NFI, for us, these are, to a large extent, customer-related income. So taking aside the strategic stakes in the mark-to-market and the valuation gains that we present separately in the XVAs, we have a significant proportion of our FICC business booked within NFI. And within the FICC, we have the fixed income, currencies and commodities. And if I look at the third quarter, we had after the very high level of volatility in the second quarter, a lower level of volatility in the third quarter in FX, which resulted to a somewhat slower activity related to our customer demand. Now within fixed income, on the other hand, activity levels remained high with credit spreads at very low levels, issuance continues, and there was a clear demand to prefund during those favorable conditions. Within commodities, we are, as you know, the one Nordic bank that does offer this, and we have seen that contribution growing. But of course, there's an element of volatility, but we think that the underlying structural development there is also constructed. So as we look forward, there are effects driving this. The volatility in FX space and the demand for FX products will be impacting that part of the FICC booked in NFI. We also have the steepness of the yield curve, which impacts the treatment of the inventory and the mark-to-market of the inventory within the fixed income in NFI as well. But at this point in time, we have our range and I think that remains our best prediction for the future. Nicolas McBeath: And then I had a question on like if you have any general remarks or thoughts how you're reasoning regarding the cost growth into 2026. I mean on one hand, you have lower rates, which are a drag on return on equity. But on the other hand, as you've alluded to in the call, potentially higher activity loan growth, economic recovery during next year. So do you think 2026 is a year to expand and invest more or keep the hiring freeze and try and defend the profitability? Johan Torgeby: I'll start and ask Christoffer to add. So the current, let's call it, plan of attack on cost control is the one that we, I think, launched last quarter or 2 quarters ago, and that is to change the pathway that we've been on for some years now of increasing investments in the bank and to tail that increase off. And as you can see this quarter, it looks to be supportive of actually happening. We are in a different place now where we have a different trajectory. The purpose is to sit when we do our business plan in December and hopefully be in a position where we have freed up some operational costs that we can discuss with the Board and the management team how to redeploy. So it is still a different type of forward outlook now than we've had in the last years, and that is more cost control, be cautious and handle resources a little bit more until we have a clearer look on the income outlook because we really need to have a high return on equity and a low marginal cost of income, so profitability secure if we were to start investing more. And then there are many other things must do investments in banks. So there's no lack of holes to put all this money in order to maintain a good and solid and robust infrastructure. But it is the same tonality we've used now for a couple of quarters. There's no change in that, and that goes beyond year-end. It's actually to have a little bit of extra flexibility going forward. That doesn't mean that the decision in December where we set the cost frame for '26 will be up, flat or down. It just means that there will be a discussion to be had and we'll communicate it as always in conjunction with the Q4 report. Nicolas McBeath: And then just a detailed follow-up question. Could you please give us the AirPlus implementation costs for Q3 and how you think about the implementation costs in 2026? Christoffer Malmer: Yes. The AirPlus implementation cost in the third quarter was around SEK 120 million, which means that we, year-to-date, have taken a little bit less as a run rate, which leaves a little bit more in the fourth quarter. And we have guided to around SEK 700 million in implementation costs for the full year. Nicolas McBeath: And for next year, how do you think about those costs developing? Christoffer Malmer: Well, as I referred to earlier, we are now reviewing whether there are parts of the implementation program that should be accelerated. So we'll be coming back to that together with the cost outlook for 2026 together with our fourth quarter results, Nicolas. Operator: We will now take the next question from the line of Riccardo Rovere from Mediobanca. Riccardo Rovere: Thanks a lot for taking my questions. I have 3, if possible. The first one is on the NII indication, Christoffer, that you provided early in the call, meaning NII to bottom out 3 to 6 months after the last half. Now raising in Euro area should be done, Riksbank has cut 25, okay, I understand the impact on the equity side, but the federal reserve should cut much more aggressively and you have a much larger amount of U.S.-denominated liabilities than assets is SEK 300 billion larger amount of liabilities in dollars. So I was wondering why the rate cuts by the Federal Reserve should not have a mitigating impact or the only 25 basis point rate cut by the Riksbank. And by the way, also this quarter, what you -- this indication should have happened and did not materialize, NIIs is actually up quarter-on-quarter. So I was wondering why you keep reiterating that given the Federal Reserve cut expected in the coming quarters? The second question I have is, on the 290 basis point buffer, if I'm not mistaken, this includes the whole SEK 50 billion of RWA done -- imposed by ECB on your Baltic operations. Just to confirm my understanding correctly. And if I understand it correctly, 290 is already at the top of your range in terms of management buffer. But you are expecting to go back to that level in only 3 months. And because if that is the way I understand, it's just a matter of how you want to return excess capital rather than if you can keep the current capital return. So what is your thinking about that? And then I have a question, a curiosity that's more a curiosity. Overlays go up by SEK 100 million if I'm not mistaken. Some of the Nordic banks have actually reduced them or brought it to 0. They're using it progressively, releasing those. Why are you keep accumulating those overlays? And when do you expect this to come to an end or this to be used at some point or released or allocated. Christoffer Malmer: Thank you for your questions. I'll start, and I'll let Johan contribute as well, and we're just going to make sure we have the questions correctly. So if I start with the overlay, that is an assessment that we do every quarter. And we take into account geopolitical developments, sometimes we change our macro outlook and assumptions and it's a continuous evaluation of our various exposures across our portfolios. And you have also seen in quarters that we have released some of those overlays and in this quarter, we're adding. And it's hard for us, of course, to comment on how other banks are proceeding with this, but that is our process. For the net interest income, you're right, we are reiterating the expectation of a 3- to 6-month lag from the last rate cut until we see the trough. What happened in this quarter were a couple of technicalities that led to an increase in net interest income sequentially. One is the number of days. We also referred to the deposit insurance fee that is booked over the year. That happened to tilt a little bit more favorably for NII in this quarter. We had a positive FX effect. And we also saw some beneficial treasury contributions, partly from the funding cost and what we have been referring to as repricing effects or timing effects. So as we then look forward, we continue to see pressure on deposit margins as the rate cuts will make their way through the balance sheet. And also bearing in mind that some of our transaction accounts both for corporates and households are down to 0, which means that, of course, the further down we come in the rate cycle, the more any incremental cut will have as an impact. And finally, to your comment around the U.S. denominated deposits, those are primarily wholesale deposits. So those are priced off of market rates, and that's effectively a margin that moves with market rates rather than having an impact as they are being discretionary priced, but they are market rate linked. On your question... Riccardo Rovere: This will go down. The Fed will cut, this stuff will go down, the cost of this stuff will go down. If they does, when they cut. Of the wholesale fund -- this wholesale funding, and it's SEK 400 billion. Christoffer Malmer: Correct. And then, of course, the impact will then be on the asset side when Feds are being cut when we have U.S.-denominated loans that they are funded by. Riccardo Rovere: Sure, but it's smaller the amount. The delta is smaller. The liabilities are much, much larger than the assets in dollar, much larger. SEK 300 billion. Christoffer Malmer: Right. And I think what we have also mentioned when it comes to the U.S. denominated deposits is the fund that we're also placing with the Fed. And that is effectively us operating in the U.S. with our balance sheet, and we will collect deposits from U.S. financial institutions and placing with the Fed. And that is effectively a relatively opportunistic business that we have been running there, and that goes to an element of lumpiness between quarters, but that accounts for a sizable part of the U.S.-denominated deposits as well. Riccardo Rovere: But what I see is longer than SEK 188 billion cash at the Federal Reserve, I guess, and you have SEK 409 billion deposits, which you say is wholesale is going to go down. This one number is more than twice the other. So I don't understand how this cannot be positive regardless FX and all the other stuff, calendar days, whatever. Christoffer Malmer: No, I think this is one of many moving parts in the balance sheet. So when we are looking at the impact in totality from rate cuts, there are various dimensions moving in different directions. And this is one impact that we get from the development of the Fed funds. We have other parts of the balance sheet that's impacted by the ECB rate and others from the Riksbank. So it's taking all these into consideration together where we conclude that running this through our balance sheet as it looks today, we expect the trough. It doesn't mean that all the variables go in the same direction. Some, to your point, might be contributing positively, but the net of it all, we expect to result in a trough 3 to 6 months after the last cut. Riccardo Rovere: And on the SEK 290 billion. Johan Torgeby: Yes. Sorry, can you repeat that question, Riccardo? Riccardo Rovere: The question is that SEK 290 billion is already the top of your rating, the top of your management buffer. And that 290 includes the whole SEK 50 billion, which should be, despite, as I remember, phased progressively, not if I'm not mistaken, you got SEK 10 billion this quarter, maybe you will land another SEK 10 billion next quarter, I don't know. But the real number is the SEK 290 billion. So that is already at the top of your buffer. So how do you see this? Is this -- were you expecting it to be already basically at the top of your buffer only with the whole impact of the ECB imposed add-on after only 3 months. Because there has been, let's say, some discussions around the impact of this stuff into -- mostly 2026 is affecting your capital return blah, blah, blah. How do you see that? Johan Torgeby: Yes, I think we understand that. Christoffer Malmer: I can just start, Riccardo, with confirming that we have taken in this quarter the equivalent of 18 basis points or SEK 10 billion phase-in of REA in the Baltics, and we're showing that the remaining, what we estimate to be another 70 basis point impact would take our pro forma buffer to 290 basis points, where we have booked so far in this quarter, SEK 10 billion of that. Johan Torgeby: So just to be clear, that is pro forma today. So I think you're absolutely right. It's the 290 if we would technically have deducted all of it and it would have been over. But as we -- for accounting reasons and other things, couldn't or wouldn't do that. So we just showed it pro forma. Then you have, as I think you alluded to, now capital generation, in the dynamic analysis going forward, we'll, of course, continue to increase this number, everything else being equal. And therefore, I think we will have a better position when we get to Q4, and we will have to look at the current capital position then in a quarter to then for the board deliberations on repatriation. Was that an answer? Riccardo Rovere: Yes, yes, yes, definitely, that's an answer. So 290 before, then you start accruing the dividend, 50% payout or whatever it is. And then the rest, we'll see. But the starting point is 290. Johan Torgeby: Correct. Operator: We will now take the next question, question from Bettina Thurner from BNP Paribas Exane. Bettina Thurner: I would just have 2 clarification questions, please. The first one on NII. So you have been quite helpful over the past 2 quarters to try and isolate the temporary effect on the net interest income base. For this quarter, should we look at the effects in treasury that you mentioned before, of repricing quicker. Is that the SEK 100 million? Or would there be other parts of the NII that you would also expect to get out again or reverse partially in the last quarter of this year or first quarter of next year? And then the second question would be on the dividend. At the start of this year, you said you had the intention to pay out a semi-annual dividend next or in the next year. Is that still the plan? Or are you still deciding on that? If you could just give us more update on that, please? Christoffer Malmer: Thank you, Bettina. So on your first question on net interest income, I think the number that you're referring to, the SEK 100 million or so as a positive impact in Q3 from those timing effects is the number that you should have in mind for that effect going forward. And for the semi-annual dividend, you're right, that is something that we mentioned at the start of the year, and we have ongoing dialogues with our shareholders, and that's something we'll come back to when we report our fourth quarter results and come back to the capital question. Bettina Thurner: If I can just double check. So it's not set in stone yet, let's say, on the semi-annual dividend? Christoffer Malmer: Correct. That's correct. Operator: Thank you. That's all the time we have for questions today. I would like to hand back to Johan Torgeby for closing remarks. Johan Torgeby: I'd just say thank you, everyone, for your participation and your interest in SEB and look forward to seeing you soon. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.