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Unknown Executive: Good morning, and welcome to TGS Q3 2025 presentation. My name is Bård Stenberg, Vice President, Investor Relations and Business Intelligence in TGS. Today's presentation will be given by CEO, Kristian Johansen; and CFO, Sven Børre Larsen. Before we start, I would like to draw your attention to the cautionary statement showing on the screen and available in today's earnings release and presentation. For those of you on the webcast, you can start typing in questions during the presentation, and we will address those after management's concluding remarks. So with that, I give the word to you, Kristian. Kristian Johansen: Thank you, Bård, and welcome, everyone. So I'll start with the Q3 highlights. And before I go through the numbers, I just want to say I'm very pleased that we have a solid recovery after a very weak Q2, and I want to thank all our employees for pursuing sales opportunities aggressively in a challenging market and at the same time, being extremely focused on our cost base, which you will see from the numbers that we have a solid beat on EBITDA and EBIT due to lower cost in the quarter. So starting with the numbers on the top line, we had revenues of $388 million. That compares to $308 million in the second quarter of this year. So sequentially, that's a 26% increase. As I said, our EBITDA was strong at $242 million. That's a 62% profit margin and again, driven by a very strong cost focus of the organization. We had a Q3 EBIT of $105 million. So it's the first time in several quarters that we're over $100 million in EBIT, and that represents a 27% profit margin. We had an order inflow of $436 million, and that takes our total order backlog up to $479 million -- sorry, total order backlog of $473 million at the end of Q3. Our cash flow was strong, and that means that with a free cash flow of $81 million and $30 million dividend payment, we managed to reduce our net debt from $432 million or down to $432 million, and this compares to $479 million in Q2 of 2025. We're maintaining our dividend of $0.155 per share, and we have also adjusted our CapEx guidance down. So that's been reduced to $110 million versus previously $135 million. So overall, strong numbers and strong -- slightly stronger than we expected for Q3, which is always good after, as I said, a very disappointing Q2. On the business update, and I'm not going to cover all the projects that we had in the quarter, but what you can see here is that Q3 is usually dominated by a strong North Sea season. So we have almost half of our assets working in the North Sea during the summer season and into Q3. You see we had 2 vessels in Brazil, and we're probably going to keep vessels in Brazil for the time being due to strong interest for data acquisition and even our existing data library. We also have OBN operations, so 2 OBN operations in the U.S. Gulf. And then you see we have 1 vessel in Egypt and 1 vessel in India during Q3 of 2025. I'll also cover the business units. So starting with multi-client. We had multi-client sales of $226 million in the quarter that compares to $277 million in Q3 of 2024. And the difference there is pretty much explained by higher transfer fees in Q3 that we -- in last year than we had in Q3 this year. Multi-client investments of $86 million this quarter compared to $129 million in the same quarter of last year. And again, that corresponds to a sales to investment for the last 12 months of 2.1. That's similar to what we had last year. But again, it's above the historical average of about 1.9. So very pleased about continued strong sales investments of our multi-client data. In terms of new awards and key projects that we were executing in Q3, we had PAMA Phase II offshore Brazil. This is a streamer survey in the Equatorial margin area. And then we had another project in the same area called Megabar Extension Phase I. And it was a pleasure for us and for TGS, Petrobras and Brazil to see that Petrobras finally got environmental approval to start drilling in this area. And this is an area where TGS has been acquiring lots of data over the past 12 to 18 months. So again, extremely excited to see that things are moving on. And for those of you who remember the last lease sale in Brazil, you also saw companies such as Chevron and Exxon picking up blocks in that area. So this is a --probably one of the last frontiers and one of the most exciting frontiers in Brazil for sure. So great interest from clients on both surveys that we've been carrying out for, yes, over the past 18 months. Then last but not least, we had a project called Amendment West 1 in the Gulf of America in the quarter. So this is an ultra-long offset OBN survey over legacy streamer data, and this is a TGS-only project with no partners. If we move on to the historical multi-client performance, just to put the quarter in the perspective, and this looks at -- last 12-month sale is a light blue and then dark blue is investments. And then the line there, the gray line is last 12 months sales over investments. And you see it's coming up from about 1.9 in the previous quarter to about 2.1 now. So really where we want to be in terms of profitability of our multi-client business, which historically has been yielding returns of somewhere between 1.9 and 2.0. Our internal goal when we start a new multi-client project is always around 2. Marine Data acquisition, relatively weak quarter as we expected, and we guided the market after Q2 that Q3 would be relatively low in terms of activity level, and then we came in slightly above what we expected. We had contract revenues for OBN of $87 million versus $127 million last year. Our streamer contract revenues in the quarter were $127 million, and we had total gross revenues of $215 million. And as you see, a strong EBITDA margin of about 36% for our assets in Q3. In terms of new awards and key projects executed during the quarter, we had -- we were awarded a streamer contract in the Mediterranean, as you all know, commenced acquisition of that in Q3. And then we have secured a large streamer contract offshore Indonesia in the quarter, and this is scheduled to start in Q4, has a duration of 8 months. It's a big contract. And again, it's mostly 3D, but the last month of the 8 months is going to be a 4D over some existing production. We've also been awarded a streamer acquisition contract in Africa. So this is a Q4 start, and it has a duration of about 50 days with some options to extend. And then we have an OBN contract in the Gulf of America. This is also due to commence in Q4, and it has a duration of 4.5 months, a quite large contract for our OBN crew in the Gulf of America. In terms of our new Energy Solutions business, we had contract revenues of $18 million. It's up from $16 million in the same quarter of last year. Multi-client revenues of $5 million versus $3 million last year. So total revenues of $23 million, which is up from $19 million in Q3 of 2024. And again, as with the other business units, a stronger EBITDA margin year-on-year as compared to Q3 of 2024. We've been awarded a UHR-3D contract offshore Norway. This commenced acquisition in early July, and we were acquiring that data going into Q3. We acquired also a CCS contract offshore Norway. And then we continue our collaboration with Equinor through our --subsidiary, Prediktor through something called Prediktor Data Gateway solution, and this is delivered to Equinor's Empire Wind Project. Also happy to see that Imaging & Technology continues a strong growth with good margins. So on the gross imaging revenues, we're $32 million versus $26 million last year. But if you look at the external imaging revenues, they are about $20 million. So it's a doubling of revenues compared to last year. And you've seen that we've been on that kind of growth track for quite some time. We have a -- yes, $20 million this quarter. We're going to be slightly short of $80 million for the year. And again, next year, our goal is for imaging to be above $100 million in external revenues with strong EBITDA margins. So we continue to take market share in the Imaging & Technology space. And part of that -- part of the reason for that is a strong strategic focus on the external market. TGS used to be more focused on the internal market and processing of multi-client projects. But now we made a strategic choice that we're going to go after the external imaging market, and you see the results of that with significant growth and good margins. We see a significant reduction of HPC costs from added scale. So TGS is a big customer of the big cloud compute providers such as Google, AWS, et cetera. And we see obviously great benefits and synergies from the combination of TGS and PGS in that regard. So again, as I said, we expect continued growth in external imaging revenues, and you've already seen a substantial margin improvement on the imaging side. With that, I'm going to hand it over to Sven Børre, and then I will be back talking about the outlook shortly. Thank you very much. Sven Larsen: Thank you, Kristian. Good morning, everyone. It's always a pleasure to report strong financial numbers. So although the revenue numbers are not that strong in a historical perspective, highlighting the upside potential in the longer term, they are quite strong in a relative perspective and relative to where we've been in -- particularly in Q2, of course. But more importantly, we have a very strong performance on all other parameters, including cost and cash flow parameters. So we are very, very pleased about that. So let me take you quickly through the numbers. On the revenue side, we came in at $388 million. That consisted of $217 million of multi-client revenues and $171 million of contract revenues. The multi-client revenues were particularly strong in the quarter, mainly driven by strong sales from the Vintage library. The prefunding of new projects were actually lower this quarter than we have seen in some of the previous quarters. So library sales, very strong in the quarter. Then going to net operating expenses. I'll come -- go into more detail on that on a later page here. So let me just mention that the net operating expenses were $147 million versus $221 million in the same quarter of last year. So a significant reduction there, of course. Depreciation and amortization. Depreciation, $61 million continues to be reasonably stable, around plus/minus $60 million, as you can see on a quarterly basis. Amortization was quite low in the quarter. The straight-line amortization is stable, whereas the accelerated amortization is quite low in the quarter. That's partially explained by the lower prefunding rate, as I talked about, but I'll -- and also, of course, explained by the mix of the different types of projects that we have in the portfolio right now. This gave us an EBIT of $105 million in this quarter, corresponding to an EBIT margin of 27%, slightly ahead of the operating result in the same quarter of last year despite having significantly higher revenues last year. Then as I promised, I'll go -- in more detail through the cost base and how the cost has developed during the quarter and how it is likely to develop going forward. On the chart here on the left-hand side, you see Q3 specifically, this Q3 compared to the Q3 of 2024. So as you can see on the left-hand bar in both those 2 charts, you see the gross operating expenses. And you can see it's at $217 million is significantly down compared to the $289 million we had last year. It's -- the decline is particularly visible, obviously, on cost of sales. And it has to do with several factors. First of all, of course, we have gone through, as we have talked about in previous presentations as well, we've gone through quite a bit of efficiency -- efficiency projects internally. We have realized a lot of cost synergies, of course. And also, after the integration project has been more or less completed, we have continued to look at different efficiency gains, and we've been quite successful in that. But I also have to admit it's also, of course, partially related to lower activity, particularly on the OBN side, where utilization of the crews that we got is a bit lower in this Q3 relative to the Q3 of last year. And finally, there is also some, call it, nonrecurring items in the quarter, which reduced the cost of sales by a little bit more than $10 million. It's probably-- it's not genuinely nonrecurring items. They are nonrecurring in this quarter, but it's -- most of it is a reversal of costs that have been expensed previously. So over time, it's not a nonrecurring cost, but in this particular quarter, it is nonrecurring. And as you can see, if you compare to the same parameters of last year, we are significantly down even when adjusting for the one-off costs we had related to the merger integration process in last year. So you see that last year, we had $162 million of cost of sales. There were no merger integration costs in that number. On personnel cost, we had $95 million, where we had $11 million approximately of merger integration-related costs. So the underlying costs in that quarter were $84 million, still well -- still well above the $69 million we have in this quarter. And on other operating costs, we had approximately $5 million of -- or $6 million of merger integration-related costs. So the underlying cost there was $25 million in the previous quarter. So we're actually a little bit up this quarter compared to last quarter on an underlying basis, and that has to do with compute. We are using more high-performance compute resources now than we did last year. And that obviously has to do with higher imaging activity and more use of AI and machine learning and algorithms that require more high-performance computing, and that's an -- a deliberate development, of course. If you look at the right-hand chart or the right-hand side of the page, you see a chart showing the cost development on a last 12-month basis over time here. And as you can see, the last 12 months as of end of Q3, we had $982 million of gross cost. Our guidance remains firm at -- around $950 million for the year as a whole. So you see the trend there. We have come significantly down, and we expect to come further down in -- when we report Q3 -- Q4. In fact, we -- if anything, we expect to be below $950 million and not above. So we're quite happy with the development on the cost side, and you can also see the evolution of our guidance through the year on the right-hand side of the chart there with the dark bar where we have -- where we're down basically $100 million relative to the original gross cost guidance. So we have done a lot on the cost side, which is obviously helping us quite a bit in terms of delivering a strong EBITDA in this quarter. Looking at the profit and loss statement, we had $388 million of total revenues consisting of $217 million of multi-client revenues and $171 million of contract revenues. I've talked about cost of sales, personnel costs and other operating costs, which already. This gave us an EBITDA of $242 million compared to $280 million in the same quarter of last year. Straight-line amortization was $60.5 million, where its roughly where it has been on the --on the previous quarters. As I mentioned, accelerated amortization, quite low this quarter related to the mix of projects we were doing and a lower prefunding rate. We had a small impairment on one of the multiclient projects that we do. That's not uncommon. As you can see, we had something similar in the same quarter of last year. And depreciation of $61 million, which gave us this operating profit of $105 million. We had financial income of $4.3 same level as last year. We had financial expenses of $19.4 million, which is slightly above last year, which may surprise people because we did a refinancing that reduced the interest cost quite significantly in Q4 of last year. However, bear in mind that we took a lot of that interest saving in the PPA. So we wrote up the PGS debt in the PPA, which reduced the interest charge in the PPL -- P&L already ahead of the refinancing. So that's the main explanation for that, call it, not so intuitive development. And this gave us a result before taxes of $85 million compared to $97 million in the same quarter of last year. Cash flow, as Kristian alluded to, quite strong in the quarter. We had cash flow from operations of $242 million in the quarter, almost the same level as the $265 million we had last year when you subtract the multi-client investment and CapEx and adjust for timing and working capital movements. We had cash flow from investment activities negative by $94 million compared to $59 million in the same quarter of last year. And then -- if you then subtract the cash flow items related to financing of $97 million, we end up with a net change in cash and cash equivalents of $50 million in this quarter compared to $82.6 million -- or $83 million in the same quarter of last year. So looking at cash flow in a slightly different way, looking at the evolution of our net debt, you can see that we reduced that quite significantly in this quarter. So the cash flow before dividend, which is a key measure that we are looking at internally was $77 million in this quarter. We paid the dividend of $30 million, which helped us reduce net debt from $479 million to $432 million at the end of the quarter. Let me -- and this is to be compared with our net debt target of $250 million to $350 million. That's the range we are aiming at, and we're getting down there. It takes a little bit longer time than we initially planned for, and that has to do with the market development, but we are still firm in our belief that we will get there in -- in due course. Let me also mention that in Q4, you should expect a somewhat negative development in net working capital items. So it's a seasonal thing. And so you shouldn't expect the cash flow after net working capital adjustments to be as strong in Q4. Balance sheet, not many significant developments worth mentioning here. The only thing I'm going to mention is the goodwill. You can see that it's down by $4 million. That has to do with the PPA adjustments that we did. So when you do an acquisition as we did with PGS, you can do PPA adjustments up until 12 months after the acquisition closed. And -- and what we have done here is that -- we have increased our long-term receivables by $4 million and reduced the goodwill by a corresponding number. And apart from that, the balance sheet, of course, remains very strong and even stronger than it was at the end of Q2, given the net debt development. This allows us to continue to pay a dividend of USD 0.155 per share, corresponding to NOK 1.56 per share in this quarter. The ex-date is 1 week from now on the 30th of October, and we will pay the dividend to the shareholders on the 13th of November. So by that, I'll hand the word back to you, Kristian. Kristian Johansen: Thank you, Sven, and we're going to touch on the outlook, and I'll start with a slide that we find very interesting, but it's a bit challenging to understand. So I'll take you through it very slowly. But if you start on the left-hand side, you see the chart there, you see that the light gray color shows the current decline curve. So that is debated whether it's 8% as we show here, and these are numbers from IEA or whether it's 15%, which is Exxon's number that they publicly state that the real decline curve is. But anyway, if you use 8%, 8% is then equivalent to losing more than the current production from Brazil and Norway every year for the next 10 years. It's quite steep even at 8%. But then in order to satisfy demand going forward, then the big question is how much do we need to invest and how much does the E&P sector need to invest? So if I take you to the right-hand side and you go all the way to 2025, you see that we as an industry or the E&P industry globally invest around $600 billion in CapEx. That's a total CapEx of the entire industry. And that's been pretty much the average. It's just -- right now, it's about $575 million, and it's been $600 million pretty much on average for the past 3 or 4 years. If you take that information, the $600 billion and you take it back again to the left-hand side, you see that $600 billion is the second blue color from the top. That's where it's going to take us in terms of continuing to invest at today's level, which basically is flat. It's a flat demand compared to today. So today's or the current investments are probably going to satisfy a flat demand development going forward. But if you think that demand for oil and gas is going to continue to grow in the future, we need to invest more. And we actually need to invest probably somewhere around $750 million because that takes us up to the expected demand going forward. So it's a very powerful slide in terms of understanding that today's investment level is not sufficient to satisfy any growth in demand. And I think most of you and most other readers would argue that there will be growth. There will be continued growth in demand. We've seen that, and we've been wrong several times. Demand has surprised on the upside, and it will continue to do so. So again, today's investment level from the industry is not sufficient in terms of satisfying any demand growth going forward. And that is further backed by the second slide we have. So last week, I attended something called Energy Intelligence Forum in London. And I think 8 out of the 10 -- 8 CEOs of the 10 largest oil companies in the world were there. And I just included some quotes from 4 of the CEOs that were there and attended the conference. And the first one from Darren Woods who said that the oil market oversupply is likely to be short term with demand from emerging economies set to make meeting global energy demand more challenging in the medium to longer term. I mean, Nasser was very clear that we had a decade where people didn't explore. It's going to have an impact. If it doesn't happen, there will be a supply crunch. And then Patrick Pouyanné from TotalEnergies, this non-OPEC supply, which today is impacting the market from Brazil, Guyana and shale oil will plateau. There is a limit to this growth. And then finally, Vicki Hollub from Occi said that discoveries have gone way down. Investment in exploration has gone way down, but it's not just investment that's a problem. We just aren't finding big resources anymore. So very much backing the statement that we had on the first slide that the industry needs to invest more if you believe in demand growth for oil and gas and I think most of us are now convinced that there will be continued growth in demand for both oil and gas. Going more to the micro level in terms of streamer contract tenders, it's down, and it's down for 2 reasons, mainly the fact that there's been quite a few awards recently. So TGS has been awarded a couple of streamer contracts quite recently. And also on the OBN side, we have announced 2 contracts recently. But the market is not great. There is nothing that indicates that 2026 is going to be a great year for contract tenders. I have to be honest and state that. But keep in mind that this does not include multi-client. And we have big projects in Brazil. As I said, we have 2 vessels in Brazil as we speak, probably going to keep those 2 vessels there for the time being. And we have -- we see great -- or a great uptick in activity in Africa in terms of multi-client. So the fact that multi-client is not part of this means that this slide gives a very skewed picture in terms of how the market for TGS actually is. So I feel like with the recent increase you've seen in our order backlog, which is mainly and very much driven by multi-client prefunding, I think we see a future that is far brighter than this slide will indicate. On the OBN market development, 2025 will be back to 2023 level in terms of activities or total revenues for this sector or segment, and that is down from 2024. So that significant growth trajection that we saw in 3 years that has stopped and has come down slightly. This is partly due to some big projects in Brazil that have been awarded, but they have not been acquired yet. So they haven't started yet. And these are big projects that TGS was unsuccessful in winning and some smaller competitors won big projects in Brazil that again has not yet started. So we’ll wish them good luck on that. In terms of the guidance for the 2025, obviously we're entering the last quarter of the year. So our multi-client investments, we keep our guidance of $425 million to $475 million. We're probably going to be in that kind of mid-range of that investment guidance. We're going to have approximately 70% of the investment expected to be acquired with our own capacity. In terms of CapEx, as we've said a couple of times today, we're reducing our CapEx guidance from $135 million to $110 million. And on the gross operating cost, we again target $950 million for the year. So that's unchanged from the previous quarter. In terms of utilization, we expect improved utilization year-on-year of our 3D streamer fleet and again, partly helped by multi-client. And then we expect lower OBN acquisition activity, which you have seen, especially over the past quarter or so. So that will be down compared to 2024. And to give you slightly more flavor on that, so we'll start with the order backlog and inflow. So again, as you see, the order inflow was strong this quarter at $430 million -- or above $430 million and that leads to a backlog of $473 million. Again, very weak numbers in Q2 this year, but a relatively solid comeback in Q3, where you see quite significant growth in the order inflow with the resulting increase in the total order backlog. And then you see on the right-hand side, you see the pie chart, and you're obviously familiar to that, and it gives you some guidance in terms of expected timing of recognizing this backlog as revenues. We also provide you with a summary of our booked positions. So basically, this is where our fleet and OBN crews are booked for the next 2 quarters. So you see on the streamer side, you see that we have about 16 months booked for Q4 and you see the composition of contract versus multi-client. And again, as I alluded to you see more multi-client there than contract. And again, if I look into the 2026, that's probably going to be the case. It's going to be more than 50% as we can tell today on multi-client because of good prefunding and a healthy backlog in terms of some of our big multi-client projects, particularly in Brazil. And then on the OBN schedule, you see that we're just short of 2 crews working for Q4, and it's going to be approximately the same for Q1, and it's pretty much 1 crew for multiclient and 1 crew for contract, and it's close to being fully utilized for 1 quarter. In terms of geomarkets, we're going to have contract work for our streamer fleet in Africa, Asia and then multi-client in Brazil. For the OBN, we're going to have contract work in Gulf of America and we're also going to have 1 crew working multiclient in the Gulf of America. We expect total multiclient investments in Q4 of $120 million and utilization, as I said on the left-hand side, you see pretty much how it's going to be for the next quarter. And then obviously, there is still time to book more capacity for Q1 of 2026. So with that, I'm ready to summarize the presentations. Again, pleased to announce solid performance on financial key figures. We had net debt reduced to $432 million based on a free cash flow of about $80 million and $30 million paid in dividends. We've been very disciplined in terms of cash outflow, meaning that we're reducing our 2025 CapEx by $25 million, and this has been reduced several times during the year. So the latest number now is about $110 million for the full year. Obviously, there is -- the short-term market development is sensitive to oil price, but the long-term market outlook, as you've seen from this presentation, remains very positive. And we're maintaining a dividend of $0.155 per share. With that, I want to bring Sven up here and the Bård is going to take you -- take us through some Q&As, and we'll take it from there. Thank you very much. Unknown Executive: Thank you, Kristian. We have a nice audience here in Oslo. So we can start with questions from the audience. Yes, John? Unknown Analyst: Yes. May I ask a little bit of detail on Sven Børre on the OpEx. You mentioned that the gross OpEx is $217 million was $217 million in Q3. And if I add the $10 million that you mentioned as nonrecurring, it will be $227 million. But what did you say -- were there any merger costs included in that $227 million? Sven Larsen: No, no. The merger costs I talked about were just for the comparable ‘24 number. Kristian Johansen: Right. Unknown Analyst: And going forward, what's still the running quarterly cost base in TGS? Is it $227 million? Sven Larsen: I mean we've guided for $950 million annualized. Unknown Analyst: That includes higher OpEx in the first quarter. What's the running on the quarterly basis? Sven Larsen: Yes, it's a bit lower than that. And it will depend a little bit on the activity level. But if you take a little bit lower than $950 million and divide by 4, you should be at an approximately right level. Unknown Analyst: It's not too far away from $227 million then? Sven Larsen: No, it should be reasonably representative. Unknown Analyst: And then a question on multi-client sales in the quarter. You want to specify or give an indication of the transfer fee? Did you book a transfer fee for the Chevron Hess deal in Q3? Kristian Johansen: No, we're not allowed to be specific on which transfer fees we booked, but I think the market has been pretty right in terms of there were a big transfer fee this quarter, and that was related to one transaction. We probably had 2 or 3. We have transfer fees in every given quarter, but there was one that was particularly large. I think the market has speculated that in total, we had transfer fees around $25 million, $30 million. So that's pretty much where it was. Unknown Analyst: And that means that other late sales were probably not too bad either. So I just wonder the key driver -- I assume one of the key drivers in Q3 was the U.S. Gulf -- the American -- the Gulf of America lease round in December. Is that correct? And also more specifically, did you see all the sales that you expect or most of the sales that you -- late sales that you expect in connection with the December round, did they come in Q3? And was there a significant impact on that? Or will you also see it in Q4? Kristian Johansen: Yes. There were a couple of drivers. And number one, you're right. I mean, our late sales was pretty strong regardless of whether you adjust for transfer fees or not. And our transfer fees were far lower in Q3 this year than they were last year, where the transfer fee was very high. I think one driver of the strong late sales in Q3 was a weak late sales in Q2. And I think that's a reminder to the market that when you looked at it, particularly late sales, but overall, the multi-client performance of TGS, you probably have to look at it in a slightly longer perspective. So if you look at the average of Q2 and Q3, you're more back to normalized level and Q2 was embarrassingly low and Q3 is back where we should be. So that was one driver is that Q2 was very low. Transfer fees, we've been discussing that. And the third one, yes, we had impact from the lease sale in the U.S. go that is coming up in Q4. Was that significant? Not really. I mean we're talking 10 to 20 rather than 40 to 60, right? Is there more to be sold? Absolutely. But we don't know when that's going to happen, and we don't know if it's going to happen. I mean it's obviously uncertainty around that. Sven Larsen: What we can say to add to that is that in the licensing round in '23, most of the sales related to that round happen after the round. So the dynamic around this is a bit uncertain, of course. Kristian Johansen: And we have talked about that multiple times that the licensing round, particularly in the U.S. haven't really had the same impact as it used to have. So now we do more of the sales beforehand. So we have much higher prefunding of the surveys that we do in the U.S. GOM today than we used to have historically. And then as Sven Børre said, we have some of our sales after the round is taking place rather than lining up for the licensing round. So it's probably more evenly distributed now than it used to be. In the past, it was always you shot without prefunding and then you had a significant kicker at the -- before the licensing round. And then after that, there was nothing. Unknown Analyst: And my final question before I give the word to somebody else. You mentioned that it's too early to expect a great year for contracted streamers in '26. What do you think it will take? What kind of oil price levels do we need to see to see a great year for streamers in seismic? Kristian Johansen: We've been doing some internal analysis in that regard and looking at the dilemma of an oil company today or an energy company today is that they have this dividend obligations, they have buyback obligations and then they have CapEx and seismic is obviously part of that discretionary CapEx. And with the oil price dropping from $70 and down to $60, although it's higher today, then you obviously put a lot of strain on that kind of dilemma. So are they going to cut the dividend? Probably not. Are they going to cut back on the buybacks? Potentially, yes. Total has already announced that. Are they going to start spending more on exploration? Well, if you listen to what they say and if you listen to what they told me last week, they are, but we haven't seen it yet. And I think with the current oil price, we should be a bit cautious expecting that to kick off in 2026. So we're planning for a market that is going to continue to be quite challenging in that regard. But saying that, when we talk about the contract market, and it is important to say that we should be using at least 50%, perhaps up to 70% of our fleet on multi-client projects. And that's where I'm probably more optimistic today than I was 3 months ago in terms of the backlog that we see building up on the multi-client side. So we're not too concerned about the utilization of our fleet in 2026. But obviously, if you look at the contract market per se, it's not great. There is no reason to question that. Unknown Analyst: And what oil price is needed to change that? Kristian Johansen: We've been saying that you probably need somewhere between $70 to $75 to see a significant increase in exploration. But again, back to what I heard from the CEOs last week and the oil price was $60 at the time. They're saying that we have -- we've been -- we've done a terrible job in terms of exploration, and we need to get better and we need to spend more. Yes Lukas. Unknown Analyst: You said that multi-client performed better than what you expected in Q3. So I guess you had a view on the transfer fees. So what exactly was better than what you expected? Kristian Johansen: You know how it is when you get really beaten up like we did in Q2, you set expectations slightly lower for Q3 and I think that was partly what happened. And we pretty much knew the range of the transfer fee at the time. And obviously, there are always tough discussions on -- and it goes back and forth in many, many iterations before you end up with a number. But that pretty much came in as we expected. I think the market probably estimated that to be bigger or more significant than it was, but we pretty much came in where we thought we would be. Unknown Analyst: And what are your expectations related to the licensing round in Brazil? Kristian Johansen: Yes, there was one yesterday with five-blocks where we had data in most of those areas. And obviously, we see some opportunities related to that. I think the news of the environmental permit to Petrobras is very good for TGS. I mean this has been the area where we have invested more than anywhere else in the world over the past 18 months. Obviously, we've taken some risk on that environmental assessment. And obviously, it's great to see that, that had a positive outcome. So I think -- yes, I think that's as specific as I can be. Okay. Unknown Analyst: And your EBITDA margin on the contract business was nicely up. Is that better pricing, lower costs? Sven Larsen: Yes. We probably don't see better pricing. I think that's fair to say. It's not significantly down either, but it's not kind of the right environment to increase pricing to put it that way. So it's cost control and cost efficiency and obviously also partially these reversals that I talked about in this particular quarter. But that has to be seen over time where it's basically mostly related to costs that have been charged previously. Unknown Analyst: And you are cutting your other CapEx guidance with $25 million. What is that... Sven Larsen: No, we've been working constantly on our cost base and our cash outflow base, so to speak, during this year. And CapEx obviously has been under a lot of scrutiny to try to work that down. At the same time, we need to invest in the business, and we need to be maintaining our fleet well and keep it up to the highest standards, and we need to replace streamers. But we have worked on that streamer replacement program and how we can maintain the current streamers in a better manner and keep them longer and or push or spend more time on that replacement program than we initially planned for. That's essentially what's doing it. And of course, there are a lot of -- we are cautious on all other types of CapEx spending for the time being. Kristian Johansen: There's not a lot of peers to TGS in the streamer space. But if you look at the peer or peers, you will see that our CapEx is far higher. And it's been a reason for that. But of course, there are things we can do in terms of getting that down, and that's what we've done. Unknown Analyst: And if you break down the $110 million between streamers, computing power, vessel maintenance and other, what would the split be? Kristian Johansen: Almost half is related -- purely related to streamers. Unknown Analyst: Can I ask on the CapEx? What should we expect going to '26? Is it fair to assume the same level? Sven Larsen: Yes, we will come back to that when we guide in February. But our ambition is to continue to keep that at a lower -- significantly lower level than what we initially guided for this year, of course. Unknown Analyst: Yes. And did I see an offshore wind contract that you're going to do in July? What vessel will you use for that? Is Ramform Vanguard still going to be stacked? Or do you think you will take that out to do that work? Kristian Johansen: Yes. We haven't made that decision. And again, we stacked it and we're going to stack it and keep it stacked until we see improvements in the market, and we have 6 vessels who can do the job if we need to. But that's something we consider at any point of time, and we're not ready to make that decision today. Unknown Analyst: And one last technicality about how you allocate your streamer vessels. You talked about at least 50% doing multi-client and then also maybe up to like 17%. If you can help us a little bit in '26. What’s… Kristian Johansen: It's too early. What I mean by saying that is that we have that flexibility, and we're not totally dependent on the contract marketing for our fleet. We should be in a position to use at least 50% to 75% on multi-client. We will guide you on -- on a rolling basis for two quarters going forward, but we're not going to give you any more clarity than that. Unknown Executive: Okay. We have a couple of questions from other people on the web. Jørgen Lande in Danske Bank. You mentioned prefunding was a bit lower. Do you expect prefunding levels to trend downwards compared to what you have indicated? Sven Larsen: Probably not a trend, but we are -- we have had, call it, quite high prefunding levels over the past quarters, and it's probably almost naturally high for -- some periods. So I would think that we're -- yes, we think it will be at that 80% to 90% level over time, give or take, but it may vary from quarter-to-quarter depending on the mix of the different projects that we're doing. Kristian Johansen: It also has a lot to do with how much risk do we want to take in terms of if we believe that we're at the bottom of the cycle, and we believe that these CEOs who talk about the need for more exploration. Is this the time to go out and do some frontier work with lower prefunding. I mean that's discussions that we have with the Board at any point of time. And similar discussion to what all companies have in terms of are they going to invest more in exploration for the long-term. Yes. So we have those discussions, and that will obviously have an impact on the prefunding rate. But there is no indication in the market that it's harder to get prefunding than it's been before. Not at all. Unknown Executive: And we have a question from Mick Pickup in Barclays. You talk of advanced multi-client levels, yet consensus that you supplied has investments down in '26 versus '25. This doesn't seem consistent. So without giving guidance, can you talk directionally about '26 multi-client investment levels? Kristian Johansen: Yes. I'm not going to do that. But of course, the consensus is not -- we don't make consensus. We just collect consensus. So if consensus is lower in '26 than it's '25, it doesn't necessarily represent what we plan to do. But it's too early for us to say what we're going to invest for '26. We're in that period right now where we're looking at our investment level. I would be very surprised if it differs significantly from what it does this year. And especially on the downside, I would be very disappointed if we see a much lower number. Unknown Executive: Next question comes from Ole Martin Rødland in Pareto Securities. While order intake was good this quarter, backlog is still at low levels. Based on best expectations, do you assume lower external streamer and OBN revenues in 2026? And will that possibly be offset by higher multi-client investments and revenues? Kristian Johansen: Yes, it's too early to say. What we have been saying today is that we have that flexibility, and we can do it -- if we need to. And the beauty of our business model and the beauty about being fully integrated as we are, and we're the only company in our space that can claim that is that we have the flexibility at any point of time to switch between contracts and multi-client. And there's been speculation as to our price is down in the contract market, how bad is the contract market, et cetera. Well, if it is bad and if pricing is down, then we just do multi-client if we can get funding for multi-client projects. And I think we've delivered today, and we've shown you today, and we even showed you in the past four or five quarters that we generate a return of 2x on our multi-client project. So if pricing is low and if we see that we sacrifice too much on our margins by doing some of those contracts, we don't do that. Sven Larsen: And another point to bear in mind in our multi-client investments in 2025, we have – we still have quite a bit of external investments where we're using external vessels and external providers. It takes -- following the merger, it takes a little bit of time to in-source everything. So you should probably expect more or less 100% of the capacity that we source to be internal in '26. So even if you, for the sake of argument, assumed flat multi-client investments, you could see higher utilization of our own assets on multi-client. Unknown Executive: Okay. Then we have another question from Steffen Evjen in DNB Carnegie. Do you have any leads to sign more OBN contract work over the winter season on top of the current book positions that you disclosed today? Kristian Johansen: Yes. I mean the sales cycles in OBN are longer than streamer. We like to say they're typically 5 or 6 months at least. So that gives you an indication in terms of when you will see new contracts. We have a number of leads. Some of these leads are related to single contracts and some of the leads are related to what we call capacity agreements or bigger long-term agreements with some of our customers. So there are negotiations going on. And obviously, we're going to announce that to the market as soon as we have contracts to announce. Unknown Executive: We don't have any further questions from the web. Any last questions from the people here in Oslo? If not, that concludes the Q&A session. So I give the word to you, Kristian, for your concluding remarks. Kristian Johansen: Yes. Thank you very much for your attention today. And again, as I said initially, it was a relief to come back with better numbers than we had in Q2. We were obviously as surprised and disappointed as you were in Q2, and it's good to see not only that we have a revenue growth of 26% compared to the last quarter, but we see a very strong profitability and all key metrics are very positive compared to previous quarters. So I wish you all the best and looking forward to see you at our Q4 presentation. Thank you very much.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Carpenter Technology Q1 Fiscal Year '26 Earnings Presentation. [Operator Instructions] I would now like to turn the call over to John Huyette, Vice President, Investor Relations. John? John Huyette: Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the fiscal 2026 First Quarter ended September 30, 2025. This call is also being broadcast over the Internet, along with presentation slides. For those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Tony Thene, Chairman and Chief Executive Officer; and Tim Lain, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter Technology's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2025, and the exhibits attached to that filing. Please also note that in the following discussion, unless otherwise noted, when management discusses the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income, excluding special items and sales, excluding surcharge. I will now turn the call over to Tony. Tony Thene: Thank you, John, and good morning to everyone. I will begin on Slide 4 with a review of our safety performance. We ended the quarter with a total case incident rate of 1.6. As we continue to drive improvement in multiple leading indicators, I expect to see continued progress. As always, we remain committed to our ultimate goal, a 0 injury workplace. Let's turn to Slide 5 for an overview of our first quarter performance. First quarter was a great start to fiscal year 2026. Let me highlight the 4 major takeaways. One, record earnings. In the quarter, we generated $153 million in adjusted operating income, exceeding the fourth quarter of fiscal year 2025, which was then a record quarter. And it is a 31% increase over first quarter of fiscal year 2025, a meaningful step-up year-over-year. The earnings exceeded our strong first quarter guidance, driven by increased productivity, product mix optimization and pricing actions, a positive step towards our full fiscal year 2026 earnings outlook. Two, expanding operating margins. The SAO segment continued to expand margins, reaching an adjusted margin of 32% in the quarter. The 32% margin compares to 26.3% a year ago and 30.5% in the prior quarter. And we don't believe this is the peak margin level over the long term. Our ability to continue to expand margins can be attributed to our solid execution, strong market position and unique capacity and capabilities. As a result of the expanding margins, the SAO segment recorded $170.7 million in operating income, an increase of 27% year-over-year and an all-time record for the segment. Three, strengthening market demand. We continue to see demand environment strengthen, especially in the Aerospace supply chain as it gains confidence in the Boeing and Airbus build rate ramp. As a result, September was the highest order intake month in over a year. Specifically, in the quarter, we saw bookings for Aerospace and Defense accelerate, up 23% over the previous quarter. Four, pricing continues to be a tailwind. In this strengthening demand environment, our pricing remains elevated and consistently increasing as evidenced by our financial results. Our customers continue to be focused on securing their supply of our critical materials. As evidenced in the last quarter, we negotiated 5 large LTAs with Aerospace customers with significant price increases, reflecting their strong outlook on the market. If I were to write the headline for this quarter's performance, it would be Carpenter Technology delivers all-time record quarterly earnings, driving SAO margins to an impressive 32%, even in a quarter where they smartly completed planned maintenance activities. In addition, they shattered the narrative held by some of a seasonally weak quarter, a weakening demand environment and decreasing pricing power by achieving record earnings, strong sequential growth in Aerospace and Defense orders and negotiating 5 aerospace LTAs with substantial price increases. Let's turn to Slide 6 and a closer look at first quarter sales and market dynamics. In the first quarter of fiscal year 2026, our total sales, excluding raw material surcharge were up 4% over the first quarter of fiscal year 2025 and down 3% sequentially. As expected, the sequential sales decline was driven by the planned maintenance outages we discussed on the last earnings call, offset by increased productivity, improved product mix and pricing actions. Sales in the aerospace and defense end-use market were up 1% sequentially and up 11% year-over-year. Notably, sales in the engine submarket were up 14% sequentially. Our engine customers continue to be concerned about surety of supply as they navigate high MRO demand while managing the ongoing and accelerating build rate ramp. Across all submarkets, the aerospace supply chain continues to increase activity as build rates ramp and confidence grows in the OEM's ability to perform. As evidence of this, we saw Aerospace and Defense bookings accelerate in the quarter, increasing 23% sequentially. And as I mentioned earlier, we also completed 5 LTA negotiations with aerospace customers in the quarter, all with significant price increases. Moving on to the medical end-use market. Our sales were down 20% sequentially and 16% compared to the prior year first quarter. The large majority of the sequential decrease is from medical distribution customers as they continue to see quarter-over-quarter volatility. Recall that coming out of COVID, there was a rapid recovery in patient procedures, generating significant activity in the supply chain. As the medical field caught up on the backlog of procedures and growth rates normalized, the supply chain, especially our distribution customers, has been working to manage working capital levels. As we've highlighted in previous quarters, this has impacted a portion of our medical business and it is continuing longer than anticipated. Even so, we have still been able to produce record quarterly earnings and see the medical market as an increasing tailwind going forward. Our medical customers report a positive long-term outlook on the market as the fundamental demand drivers remain strong. Further, our broad portfolio of medical alloys is unique and critical to our customers' focus on improving patient outcomes. Shifting to the energy end-use market. Sales were down 5% sequentially and up 8% year-over-year. As discussed during our last several earnings calls, the energy market is currently driven by the accelerating demand for power generation, and we see this only getting stronger with order intake up 41% in the quarter. As we have stated before, sales in the power generation submarket will fluctuate quarter-to-quarter due to the frequency of orders and our practice of strategically slotting them into our production process. Of course, the key end-use market for our increasing profitability is Aerospace and Defense, where we see demand strengthening as evidenced by accelerating order intake and increasing pricing actions. Altogether, we are operating in a strengthening demand environment across the high-value end-use markets that we believe will drive meaningful growth in both the near term and long term. Now I will turn it over to Tim for the financial summary. Timothy Lain: Thanks, Tony. Good morning, everyone. I'll start on the income statement summary. Starting at the top, sales excluding surcharge increased 4% year-over-year on 10% lower volume. Sequentially, sales were down 3% on 5% lower volume. The improving productivity, product mix and pricing are evident in our gross profit, which increased to $216.4 million in the current quarter, up 1% sequentially and 23% from the same quarter last year. SG&A expenses were $63.1 million in the first quarter, essentially flat sequentially and up slightly from the same quarter last year. The SG&A line includes corporate costs, which were $26.6 million. This is flat sequentially and up slightly when excluding the special item from the first quarter of fiscal year 2025. For the second quarter of fiscal year 2026, we expect corporate costs to be about $25 million, which is in line with our quarterly average of fiscal year 2025. Adjusted operating income was $153.3 million in the current quarter, which is 31% higher than the $117.2 million in our first quarter of fiscal year 2025 and up 1% from our recent fourth quarter. As Tony mentioned earlier, this represents another record quarterly operating income result, breaking the previous record set last quarter. This is even more impressive considering we were able to deliver the results in a quarter with planned maintenance activities. Moving on to our effective tax rate, which was 15.4% in the current quarter. This quarter's effective tax rate was lower than anticipated and comparable to the same quarter last year due to discrete tax benefits associated with the vesting of certain equity awards in both quarters. For the balance of the fiscal year, we expect the effective tax rate to be between 22% to 23%, and the effective tax rate for the full fiscal year 2026 is expected to be on the low end of the full year guidance we provided of 21% to 23%. Finally, the earnings per diluted share was $2.43 for the quarter. Again, our recent first quarter was a record quarter for profitability. Our teams continue to drive higher profitability with the manufacturing organization's focus on increasing productivity while managing the product mix to optimize profit and realizing the benefits of pricing actions that we continue to pursue and capture. Now turning to more detail on each of the segments, starting with our SAO segment. Net sales, excluding surcharge for the first quarter were $533.9 million. Compared to the same quarter last year, sales were up 5% on 11% lower volume, reflecting the impact of product mix optimization and pricing actions. Sequentially, sales were down 3% on 5% lower volume. The sequential decline in volume was in line with expectations given the planned maintenance activities in the quarter. SAO reported operating income of $170.7 million in the first quarter. But I think the most impressive measure for the SAO segment is the adjusted operating margin of 32%. This marks the 15th consecutive quarter of margin expansion. The record margin is being driven by the growth levers that we consistently highlight, specifically the SAO team's ability to increase productivity at key work centers to drive an improving mix while realizing higher selling prices. These areas are as relevant as ever as we actively manage our production schedules to optimize the highest value margins while carefully managing costs and executing thoughtful planned maintenance activities. Tony will talk in detail about the pricing environment. Altogether, we continue to see opportunities to expand profitability and margin further as we execute against our growth levers. Looking ahead to our upcoming second quarter of fiscal year 2026, we anticipate SAO will generate operating income in the range of $168 million to $172 million, in line with the record first quarter. The SAO guidance for the second quarter considers our available effective capacity. This accounts for the impact of time off for the holidays, which is important to our employees and downtime associated with upgrades to key testing work centers. This is an area where it makes sense to spend modest capital to upgrade certain equipment to ensure capacity is available to support our highest value materials, which means we see significant payback on small investments. Now turning to Slide 10 and our PEP segment results. Net sales, excluding surcharge in the first quarter of fiscal year 2026 were $87.2 million, down 10% sequentially and down 6% from the same quarter a year ago. In the current quarter, PEP reported operating income of $9.4 million compared with $11.7 million in the fourth quarter of fiscal year 2025 and $7.3 million in the same quarter a year ago. The year-over-year increase in profitability despite lower sales reflects the impact of a favorable shift in product mix. We currently anticipate the PEP segment's operating income to be relatively flat in the second quarter of fiscal year 2026. A few additional comments to keep in mind. PEP represents roughly 6% of the company's overall segment profitability on a trailing 12-month basis. In other words, SAO dwarfs PEP and SAO will continue to be the growth driver for Carpenter Technology. From an outlook perspective, we anticipate PEP results will improve, but would point out that our total company outlook is based largely on our growth expectations for the SAO segment, which will continue to outpace PEP performance. With that said, the PEP business is a small but strategic part of Carpenter Technologies portfolio. We believe that PEP can be a growth accelerator in the future. Before we move to cash, I just wanted to pull together the pieces that make up our outlook for operating income in the second quarter of fiscal year 2026. We anticipate total operating income of $152 million to $156 million. This includes SAO at $168 million to $172 million, PET roughly at $9 million and corporate costs of $25 million. Now turning to the next slide to talk about our cash generation and capital allocation priorities. In the current quarter, we generated $39.2 million of cash from operating activities and spent $42.6 million on capital expenditures, which resulted in negative adjusted free cash flow of $3.4 million. For fiscal year 2026, we continue to anticipate generating between $240 million to $280 million of adjusted free cash flow, which includes $175 million to $185 million of spending for our brownfield capacity expansion project. To be clear, the brownfield capital expenditures are on top of the $125 million of annual capital expenditures to fund our normal maintenance and sustaining capital as well as smaller growth projects. As an update on the brownfield expansion project, construction activities are in full swing. Site work is underway, currently focused on building foundation work at our Athens, Alabama site. The project is currently on budget and on schedule. As the project progresses, we expect that capital spending will begin to accelerate in the second half of fiscal year 2026 as construction activities broaden and equipment delivery and installation begins in earnest. Moving on to our capital allocation philosophy. As we've discussed before, our primary focus areas for capital deployment are investing cash in attractive and accretive growth and returning cash to shareholders. Our commitment to investing for growth is evident in our brownfield expansion project I just mentioned. In terms of returning cash to shareholders, we continue to execute against our $400 million stock buyback authorization. In the current quarter, we repurchased $49.1 million of our shares, bringing the cumulative total to $151 million. In addition to the buyback program, we also continue to fund a recurring and long-standing quarterly dividend. Our capital allocation philosophy is enabled by our healthy liquidity and strong balance sheet. Liquidity as of the most recent quarter is $556.9 million, including $208 million of cash and $348.9 million of available borrowings under our credit facility. Our credit metrics remain very strong with net debt-to-EBITDA ratio remaining well below 1x. Altogether, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns. With that, I will turn the call back to Tony. Tony Thene: Thanks, Tim. Over this past quarter, a couple of important topics have garnered the attention of the investment community. I would like to address them to make sure Carpenter Technologies position is 100% clear. There has been much written on the current pricing environment in the nickel-based super alloy market. We have 2 basic categories that we break our customers into, those that work with us under long-term agreements and those that don't have long-term agreements with us, which we call transactional. Customers in both categories are extremely important and strategic. The customers who do not work with us through a long-term agreement, our transactional customers in almost every case, are long-standing customers with highly specialized and exact specifications. Quoting for these transactional customers require significant time and effort with multiple levels of internal technical reviews and discussions with the customer. As a result, we do not entertain spot pricing as it is typically defined. There is not a moving daily price, and we do not typically quote for immediate or short-term delivery. In fact, our transactional business pricing is generally higher than LTA pricing. Certainly, we do not provide transactional customers with better pricing than our LTA customers as that would be illogical. For customers who work with us through long-term agreements, their primary focus during renewal discussions remains the surety of supply of our products. With each contract renewal, we have been able to realize price increases that demonstrate the value of our products in the supply chain and reflect the underlying supply-demand imbalance that is only expected to tighten in the future. I will note again to support our view of the pricing dynamic for our materials that in the quarter, we completed negotiations on 5 LTAs with aerospace customers with significant price increases. It is also important to note that, in turn, our customers also benefit greatly as they are getting surety of supply of our products, which is highly valuable to them in an extraordinarily high demand environment. You can see the results of our pricing actions in our SAO segment financials as our total sales dollars per shipment pound remained elevated and increased significantly year-over-year. For more insight, I will note that the year-over-year increase is 10 percentage points higher for the aerospace and defense end-use market. The results demonstrate we are consistently increasing the pricing level of our Aerospace products. If we were discounting Aerospace products are seeing immense pricing pressure, you would have seen a significant sequential decrease in the price per pound. Clearly, that is not the case. With that said, it is important to repeat something that I've said before. Price per pound may not move in a linear fashion quarter-to-quarter as the product mix in any given quarter influences results. However, we expect that the pricing trend will continue to be favorable. Final point on this topic. We have communicated publicly many times and state again today that we believe pricing actions will continue to be a positive tailwind into the future due to the supply-demand imbalance that exists today and that is expected to intensify in the future for nickel-based super alloys. In addition, another topic that has been written about is the Aerospace demand environment and more specifically, the potential weakness in the titanium market. Let me address the titanium portion first. Carpenter Technology does not melt titanium or produce large titanium forgings for aerospace structural applications. To be very clear, any current or future weakness in the titanium raw material or structural markets has no material impact on Carpenter Technology. In stark contrast to titanium raw materials, nickel-based superalloys, which is our primary focus, are in sharp supply, have only a few qualified producers globally with high barriers to entry and rapidly accelerating demand. As I mentioned earlier, our Aerospace and Defense end-use market orders have been steadily increasing over the last couple of quarters. In this quarter, they were up 23% sequentially. That is after a similar sequential increase in the prior quarter. This strong sequential growth in bookings was driven by increased volume, which is a very encouraging sign and continued pricing actions. Obviously, the accelerating bookings is a very positive trend developing and signals continuing expansion as the airframers drive for higher build rates. To support this position, let me provide more color on what we are seeing in each of the aerospace submarkets. I will start by saying that in general, the tone with all of our Aerospace customers is one of increasing positivity as they see large demand upticks on the horizon. Our Aerospace structural customers experienced the most disruption from the OEM build rate issues we have seen over the last 1.5 years. This is due to the relatively low MRO needs on structural versus engine parts. Over this period of time, they have been carefully managing their near-term working capital needs. Encouragingly, some have begun reordering on increasingly positive momentum from Boeing, while others state they are expecting more earnest ordering to begin soon. Collectively, our aerospace structural customers universally agree that strong demand is on the near-term horizon and are considering when and how to ramp activity back up. Our aerospace fastener customers report steady improvement in their demand. Some customers are already placing orders with us to cover all of calendar 2026. They are continuing to expect improvements in demand, and our quoting activity has increased notably over the last few months. Fastener customers are generally expecting very solid double-digit growth next year based on ongoing improvements in the aerospace OEM build rates. Our aerospace engine customers continue to remain busy as they generally have been over the last several quarters. Engine OEMs are very active across the supply chain, working to ensure material availability. Customers continue to report high MRO activity and a need for more material from us. In summary, our engine customers continue to be very positive as evidenced by the 14% sequential increase in aerospace engine sales in the quarter. I don't usually mention the space submarket as it is a much smaller portion of our business, but I will note that we have seen large increases in activity over the last few quarters, and our space customers report expectations for significant ongoing demand. Finally, I will mention our Defense customers because we have seen significant increase in activity here as well. Our Defense customers are expecting very strong increases in demand based on new programs being worked on as well as the expected fiscal year 2026 defense budget. With those insights, let me state where we believe the aerospace market stands today. The aerospace market has seen large cyclicality over many years, and we have seen the same pattern play out cycle after cycle. That is the supply chain gets a little ahead of OEMs and then decides to pull back or pause. That is followed quickly by a time when the supply chain realizes they do not have enough material on order, and there is an urgent scramble to place orders. This results in what the industry describes as the bullwhip effect, where there is effectively a run of material. In this case, I'm speaking specifically of nickel-based aerospace materials. This cycle we are emerging from right now is similar as before, except for one major factor. That is the total demand targets from OEMs are significantly higher than before. Our conversations over the last quarter with our closest customers have focused on advising them to ensure they have their orders placed now, so they are not last in line. The pattern I have described is not a surprise to our nickel-based customers who all understand the question is when, not if this run occurs. And then last week, we have the reporting of the FAA approving a 737 MAX rate increase from 38 to 42 per month, which we believe will support the bullwhip effect I just mentioned. Lastly, we have received questions about our confidence in our earnings guidance as the marketplace continues to move. To start with, just a couple of points on our earnings guidance philosophy. One, we believe it is important to provide. Two, we established challenging targets that we have line of sight to achieving with disciplined action plans in place. Three, we don't believe multiyear earnings targets should be back-end loaded. Therefore, we commit to meaningful earnings growth in the first year of multiyear guidance. And four, not only do we have a track record of achieving our targets, we exceed them. That philosophy should give you confidence in our future performance. Now specifically to address our guidance. As a reminder, at our February 2025 investor update, we announced our fiscal year 2027 operating income target of $765 million to $800 million. More recently, on our last earnings call, we provided additional insight as we guided to a strong fiscal year 2026, projecting $660 million to $700 million in operating income. As I stated then, this range for fiscal year 2026 represents a 26% to 33% increase over our record fiscal year 2025 earnings and as we believe the highest earnings growth trajectory among our industry peers, quite impressive. Now we have just completed the first quarter of our fiscal year 2026 and remain confident in our full year earnings guidance. Most importantly, we have line of sight to the high end of the range with increased volume, pricing actions and productivity, all contributing to higher profitability. As I just mentioned, the reporting that the FAA approved a 737 MAX rate increase from 38 to 42 per month is important. That was a material unknown that has now been revealed and should support a continued increase in Aerospace bookings. As we look at fiscal year 2027, we also remain committed to that level of profitability, which, by the way, would be an approximately 50% increase over our recently completed record fiscal year 2025. But let me be clear, as this aerospace market continues to accelerate, our focus is not on achieving the fiscal year 2027 guidance. The focus is on exceeding that lofty target. Now let's turn to the final slide to summarize this great story. Let me close with why I think Carpenter Technology is a compelling story for existing and potential shareholders. Specifically, let's take a look at the 3 major areas most important to shareholders. One, we have an enviable market position in the industry. We are in the midst of a significant acceleration in demand, especially in the aerospace and defense end-use market. Demand for air travel has never been higher, and OEMs are pushing to ramp production build rates significantly over the next several years, which is just the beginning. With accelerating build rates driving higher demand for our materials, a fundamental supply-demand imbalance in nickel-based super alloys will tighten even further. Our world-class collection of unique manufacturing assets and related capabilities are difficult, if not impossible, to replicate. Our leading capacity and capabilities are further differentiated by stringent qualifications necessary to supply advanced materials for aerospace and defense and other key end-use market applications. Two, we are committed to a balanced capital allocation approach. We have a healthy liquidity position and a strong balance sheet, combined with an impressive free cash flow generation outlook. We are focused on returning cash to shareholders via a long-standing dividend and a robust share repurchase plan. In addition, our strong performance allows us to invest in highly accretive growth projects like our recently announced brownfield expansion that accelerates earnings growth but will not materially impact the nickel-based supply-demand imbalance. And three, we have delivered impressive financial results with a strong earnings outlook. We have just completed another record quarter of profitability, driven by significant margin expansion in our SAO segment. Our outlook for fiscal year 2026 implies a 26% to 33% increase over our record fiscal year 2025, and we are well on our way to achieving and even surpassing the ambitious earnings target for fiscal year 2027. I don't know of anyone in our industry who can say they have a stronger earnings outlook than Carpenter Technology. Of course, fiscal year 2027 is not expected to be our peak. We have plans and line of sight to further earnings growth beyond 2027. In summary, I believe Carpenter Technology checks every important shareholder criteria box. We have created significant shareholder value to date, but we are only at the beginning of this growth journey. The best is still to come. As always, we remain focused on supporting our customer needs, operational execution and living our values as we drive to exceptional near-term and long-term performance. Thank you for your attention. I will now turn the call back to the operator. Operator: [Operator Instructions] And it looks like our first question today comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna: Great results, guys. Tony, I did want to get your perspective on a couple of things, a, like what has happened, if anything, in your own jet engine alloy lead times? Are they still kind of fairly extended? And also just what is your best guess as to why some of those channel checks are so not representative of the business? If it is -- I mean, it's -- there's such a dichotomy with what you guys have continued to put up and some of the chatter out there. And then lastly, just on your comments on Boeing. You guys have already endured a number of quarters of, if you will, destocking. I just wanted to get a sense for like your perspective on had that not happened over the last year, whether you would have had even more profits? And if that's what we're pivoting to, we're starting to see that recovery in the Boeing orders. A lot there, take it anywhere you want. Tony Thene: Okay. Thanks, Gautam, for the questions. One, yes, on engine lead times, they're still extended. And in fact, I think we're at the point now where they're going to start pushing out again pretty quickly because the Boeing news, whereas, of course, many people say, well, that's what they expected. But it's a big deal for the FAA to come out and actually say that. So the discussions we've had with customers just in the last couple of days, remember that was just reported, I think, last Friday, has turned, and you've seen more push to start increasing orders. So I think that's a very significant positive for us. As far as the news around the industry, it's hard for me to speak to that. That's why we took even extra time on today's call to explain very clearly, and I appreciate that you recognize that. We take it really seriously. These earnings calls, we try to communicate very clearly. We believe we are different than other products, the capabilities, the capacity that we have, the broad customer base we have. So the best thing to do for us is listen to what we have to say, follow what we have to say, and I think we'll do a good job of guiding you there. The third thing you mentioned was really -- is really important because a lot of people missed the fact that starting back in early of calendar 2024 is really when you started seeing some issues in the Boeing supply chain. And we were able to maintain and, in fact, produce record quarters during that time because of the flexibility that we have. Airbus was still making planes. We had a very robust backlog that we were able to pull in and use. Power generation then stepped up with more demand. And even in that very difficult time where you had 1 of the 2 airframers, Gautam, effectively making 0 airplanes because remember then later in 2024, they had their work stoppage that we were able to produce record results during that time, I think, went a bit unnoticed and maybe underappreciated. And now here we are where you've got Boeing performing very well, but only at the beginning, Airbus, who has quite a bit further, they want to go, let's say, for example, on their A320 targets. And I think now as we go into the second half of FY '26, that's why you heard the confidence from me and then in terms of our guidance and then also for FY '27. I mean I think there's more opportunities for increase over that guidance than there are risks. Hopefully, I answered all 3 of them for you. Gautam Khanna: Yes. No, that was a very great answer. And just maybe a quick ask on fastener demand trends, how those tracked in the quarter? Tony Thene: Yes. Sorry about that. I know you usually asked about it. Fasteners for this quarter were down 7% sequentially, 40% up year-over-year. But as we look at the order intake coming in right now, as you well know, fastener orders can be a little lumpy. Those are strong coming into our second quarter. And like I said in the prepared remarks, which I think is a very important point, you're seeing a lot of these fastener companies already trying to place orders for the entirety of their calendar year 2026. So that's a big deal, and that's a really strong evidence of how they see the market playing out. Operator: And our next question comes from the line of Andre Madrid with BTIG. thanks... Andre Madrid: You mentioned the 5 new LTAs. And I was just wondering if you could speak more to the duration of these and how we can maybe expect duration mix to shift moving forward. Tony Thene: On these 5 specific ones that I was referencing, they range between 2 years and 5 years. Andre Madrid: Got it. And I mean, obviously, these have come in from what you saw pre-COVID, pre-MAX, post-COVID booming. I mean, I guess just how do you expect the duration to -- yes, like what should it look like through the end of the decade, would you say? Would you say it's be consistent at these levels, pulling even further or push out a little bit longer? Tony Thene: Well, I think that contract lengths will stay at this range versus a historical 10-year contract. And that's all -- I mean, that should be obvious that, I mean, that's based on where you think the supply-demand imbalance is going to go. So I think it's interesting as well. I can provide a little bit more color of those 5 contracts, only one of them were a renewal from prior to COVID. So the other 4, this is the second time we've renewed them, if you will, since the post-COVID more robust ordering, especially now. So that's an important point to make as well. Andre Madrid: Got it. Got it. No, that's very helpful. And then I think if I could squeeze in one more. When you look at -- it's very clear on the aero side, what the moving pieces are, but can we maybe peel back what some of those pieces are for defense? I know you highlighted still strong demand there, especially inside of a strong budget request. So... Tony Thene: Well, we play across a lot of different areas in defense. I mean we offer products not just that are maybe traditional or historically been offered, but the next level where we're looking at alloys and tweaking those alloys to get better performance based on the outcomes that they're looking for. So you see us across multiple segments inside the defense market. And quite frankly, our relationship there has grown significantly over time, mainly because they're looking for increased performance. They're looking to operate at a higher level and our alloys and our innovations allow them to do that. Operator: And our next question comes from the line of Josh Sullivan with JonesTrading. Joshua Sullivan: Tim, John, congratulations on the quarter. I think I had the title of my note wrapped up, but just had some other questions, Tony. On the aerospace backlog is up nicely, that bullwhip dynamic that just always seems to happen in this industry. Are customers receptive to that messaging to get in now? Or is it your sense that most of the industry is just going to get hit with the rush as it comes? Tony Thene: Well, that's a really good question. And you know this, you've been around long enough. Aerospace customers, there are differences based on whether they're an engine customer or structural, they're in the distribution side. I think that I can tell you they're very receptive to that message. The discussions we've had over the last couple of weeks, they're very receptive. Now all of them are in a little bit different point on where their working capital levels are. But clearly, you've seen an inflection point that says we see this demand coming. We see Boeing continuing to perform well. We see Airbus pushing higher and higher. And I think that has become a pretty uniform feel that now is the time to start increasing the order intake. You've seen that. I mean, 23% sequential this year on Aerospace. If I remember right, last quarter, it was -- Aerospace was up over 20% as well. So you might not get 20% sequentially, Josh, every quarter for the next 3 or 4 quarters. The point is that linear trend upward, I think, is going to be pretty strong as we go through the rest of this fiscal year. Joshua Sullivan: Got it. And then kind of relatedly, into your comments just on LTAs versus transactional customers, you got the 5 new ones signed up here. How should we think about that optimal mix for -- between the 2 customer sets and then how that layers into Athens? And I think you had mentioned at Paris, there's a lot of interest in Athens. Tony Thene: Yes, there's really nothing overly magic about that. I mean whether somebody is on an LTA or not has a lot to do with their point of view, certainly, our point is a view well. Is that what's best for them to have an LTA. Some customers prefer not to do that. On the distribution side, Josh, that's not their mode of operation. So I think the point that I was trying to make there is that there's really not a big distinction for us between an LTA customer and a transactional customer. This idea that a non-LTA customer walks in randomly from the street and orders a random aerospace alloy just doesn't exist. These are customers that we've had for decades that order very specific material. So -- and it commands the same type of price, as I said in my prepared remarks. So there's really not a percentage that I'm trying to get to. We manage each of our customers as individuals, and we'll keep doing it that way. Operator: And our next question comes from the line of Scott Deuschle with Deutsche Bank. Scott Deuschle: Tony, do you already have line of sight to another quarter of sequential A&D growth in the quarter you're in right now? Tony Thene: Right. And that's what I just was telling, Josh. I don't -- I can't tell you it's going to be exactly 23%. But I think over these next several quarters, you're going to see continued growth in order intake for sure. Scott Deuschle: Okay. And then the EBIT per pound at SAO was up 42% year-over-year on down volumes. So if the volumes actually start to return to growth on the back of this order improvement, is there an upside opportunity in which you could have a repeat of the EBIT growth profile you experienced over the last couple of years? Tony Thene: Well, certainly, the math works out in our favor, right? If we're producing these types of numbers and you still have volume that's not at the point where we think it's going to go to, that's a pretty good equation. Scott Deuschle: Okay. And then last question for the LTAs that you said repriced this quarter, do we see that benefit hit in the fiscal second quarter? Or do those become effective in January for the third quarter? Tony Thene: I don't want to give specifics on each of the contracts, Scott. But as you know, it varies, right? Some of them will be more, what should I say, earlier, maybe in the second half of this fiscal year. Some of our customers will renegotiate a little bit further out. Operator: [Operator Instructions] And our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Philip Gibbs: I think you mentioned it earlier in the call. Were the engine sales up 14% year-on-year? Or was that sequentially, Tony? Tony Thene: Yes. Thanks for mentioning that, Phil. It was 14% sequentially. It was about 20% year-over-year. Philip Gibbs: Okay. Excellent. And you mentioned in your prepared remarks on Space and Defense verticals, and you've had some Space business be a little bit more recurring over the last few quarters. Any sense or color you can provide in terms of how much maybe the combination of Space and Defense is of the A&D business? Tony Thene: Yes. Well, I mean, Space is small, right? But the reason I mentioned it is because it's a growing area. And I think it's just another example of our exposure to this very quickly growing market. And I think probably going forward, you'll see me or see us speak about space more. So it's very small, Phil, but I think it's going to be very strategic for us going forward. Philip Gibbs: And then lastly, on the brownfield, can you just give us give us an update in terms of what you expect in terms of the construction period in the second half and deliveries and then give us a view of the time line just as we try to envision the project. Tony Thene: Yes. I'll give that one to Tim since he's overseeing that project for us. Timothy Lain: Yes. Phil, in terms of time line, just high level, construction now expected to be complete beginning late fiscal '27, early fiscal '28. In my remarks, I said we're -- construction is underway. Most of the focus in these last several months has been about getting the site ready, so doing the land preparation -- site preparation, getting building foundations poured, things like that, getting the structure in place. Over the next several months, several quarters, we'll shift pretty quickly to more building infrastructure, getting the equipment delivered, set up, installed. So high level, we're on track in terms of budget and schedule. And just to reiterate the guidance for the capital, specifically for the brownfield expansion, we said $175 million to $185 million of CapEx this year, fiscal '26 on top of the normal CapEx of $125 million. Operator: And our next question comes from the line of Bennett Moore with JPMorgan. Bennett Moore: Congrats on another impressive quarter. I was hoping you can maybe delineate on the A&D bookings growth sequentially, what this look like between engines and structural. I think you had a comment in there that part of this was volume driven. So just trying to gauge if there's Boeing levered customers to what extent they're coming off the sidelines. Tony Thene: Well, I made the comment around that it was volume-driven as well because that's important, right? And it's -- certainly, price is a big driver. But the point there was it's not just a price increase. The volume is coming from the marketplace. So that was an important point. I don't think I'm not going to get into bookings for each one of the submarkets that would get us into a level of detail that probably is not helpful overall. I'll just keep it at the total Aerospace and Defense level for you and keep it there. Bennett Moore: All right. I guess as we think about the fiscal '26 guidance then and the revision towards the high end, what were the prior assumptions around when the structural activity would resume? And how has that changed now? Or is that really just what's reflected in this new guidance? Tony Thene: Well, I mean, the guidance is the same. We've just said we're very open about what we're feeling right now and saying that we see it at the high end, right? So we're always adjusting our forecast based on what we're hearing from our customers. And the takeaway there is that you're seeing, as I think I said in my prepared remarks, a higher degree of positivity coming from them. So based on that, we have line of sight that we'll be on the higher side of that guidance. But it's all based on what we're hearing from the market and from -- directly from our customers. Bennett Moore: All right. And then if I could real quick, are you seeing any acceleration in the incremental value being realized in these LTA renewals? Or is kind of the repricing similar to what we saw initially post-COVID? Tony Thene: Tough question only because it really depends on the submarket that you're in, Bennett. I would tell you at a high level that you are seeing continued increased percentages, not always the same for each submarket, if that makes sense. Operator: And it looks like there are no further questions. So I will now hand it back over to John Huyette for closing remarks. John? John Huyette: Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2026 first quarter conference call. Have a great rest of your day. Operator: And ladies and gentlemen, that -- again, that concludes today's call. Thank you for joining, and you may now disconnect.
Operator: Ladies and gentlemen, welcome to the Kuehne + Nagel Q3 2025 Results Conference Call and Live Webcast. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Paul, CEO of Kuehne + Nagel. Please go ahead. Stefan Paul: Thank you very much, Valentina, and good afternoon, and welcome for the presentation of Kuehne + Nagel's 9 months 2025 financial results. I'm CEO, Stefan Paul, joined today, as always, by our CFO, Markus Blanka-Graff. We go through the slides first. And then as Valentina said, we focus on the Q&A in about 15 to 20 minutes from now. Let's go into Page #2, the 9 months results 2025. Overcapacity and softer demand in the third quarter of 2025 made the logistics market environment more challenging. Even so, we significantly expanded our global market share in Air Logistics and also in the SME segment in Sea Logistics. Year-to-date, group EBIT declined by 13% year-over-year, excluding currency effects as yield came under greater pressure. This was centered in Sea and Air Logistics, which combined year-to-date EBIT down 16%, again, excluding negative currency effects. The combined sea and air conversion rate was 28% over the first 9 months of the year. The consolidation of IMC has reduced the combined conversion rate by about 100 basis points since January of this year. Group EPS declined 18% year-over-year or 15% excluding currency effects. In addition to our expanding market share, plus in the Q3 result is the further improvement of our free cash flow conversion. It reached 105% in Q3 alone, the first time it has exceeded 100% since Q3 in 2022. Conversion over the first 9 months of the year was 66% versus 33% last year. In response to the Q3 financial performance, we are announcing measures to reduce recurring operation costs by at least CHF 200 million over the coming quarters. Markus will provide you with more details shortly. But first, let's turn to the usual review of the performance by business units. Page #3, we start as always with Sea Logistics volume in container units on the left, GP per TEU and then EBIT per TEU always in Swiss francs. Sea Logistics headline, overcapacity puts pressure on yields. Underlying Sea Logistics volume grew by 2% in Q3, while the addressable market was flat. This growth did not meet our aspirations. However, after we have achieved 5% underlying growth in the first half of the year versus addressable market growth of plus 2%. Trade was weakest in the transpac; however, we have relatively large exposure, followed by European and North American export markets. In contrast, European imports were quite strong. Overall SME share expanded Q-over-Q in Q3. Deployed capacity in Q3 far exceeded demand and intensified pressure on margins. This is evident in the central chart on this slide, where the average yields declined 10 percentage points Q-on-Q. The Q3 EBIT was CHF 111 million, reflecting the near full effect of the yield pressure as operating costs were down only 1% Q-after-Q. With this result, Sea Logistics conversion rate stands at 24% in Q3 or 25% on a net basis. Let's move quickly to Air Logistics, Page #4, ongoing market share expansion. In Air Logistics, volume grew by 7% in the third quarter, well ahead of the estimated 4% market growth. This is consistent with 7% volume growth in the first half of this year. Perishables and semiconductors, including hyperscalers, drove volume expansion in Q3 with the latter accounting for about half of the overall year-over-year growth. Average Air Logistics yields also came under pressure. They declined by 6% Q-on-Q due to excess capacity. E-commerce demand contracted sharply following the elimination of the U.S. de minimis exemption. An absolute reduction of operating costs by 3% quarter-over-quarter offset about 1/3 of the yield pressure. This resulted overall in a Q3 EBIT of CHF 92 million and a conversion rate of 23%. We also announced today that Partners Group exercised its option to put its 24.9% equity stake in Apex to Kuehne + Nagel. The transaction is expected to be settled in cash during Q4 against the recognized liability of CHF 886 million in our balance sheet. The transaction will be financed by bank loans. Let's have a look at Page #5, Road Logistics. Over proportional exposure to weak European market, we achieved a net turnover growth of 6% in Q3, excluding currency effects or 2% excluding the contribution from TDN. That's our recent Spanish acquisition, which we consolidated for the first time in Q3. We continue to expand our global customs activities in an environment of fast-changing tariffs, mainly in the U.S. but as well in Europe. Our core European road markets remained under pressure in Q3, which is also seasonally the weakest quarter over the year, July and August. Demand levels are still below the last year's level. We continue to mitigate these challenging market conditions effectively by focusing on pricing, capacity management and cost control. Road Logistics overall delivered an EBIT of CHF 20 million in Q3, which is a decline of 9% year-over-year versus an underlying 23% drop year-over-year. The conversion rate of 6% was 1 percentage point lower than last year in Road Logistics. Now Contract Logistics, Page #6, steady growth momentum. Contract Logistics produced an EBIT of CHF 62 million in Q3. This is the second strongest quarterly result ever and reflects 9% year-over-year EBIT growth or 12% excluding currency effects. Net turnover grew by 5% year-over-year in Q3 on a constant currency basis, in line with the growth over the first half of the year. This reflects continued market share expansion, which gains, as always, centered in health care and e-commerce. The conversion rate of 7% in Q3 is also comparable to recent quarters an improvement versus Q3 last year. This concludes my comments on the performance of the business units. With this, I now hand over to Markus for a closer look at the financials and in particular, our cost reduction program. Markus Blanka-Graff: Thank you, Stefan, and good afternoon, everyone. Thank you for your interest once again in Kuehne + Nagel and taking the time today to review our latest financial results. On the income statement, I would like to draw your attention to the most significant developments in the third quarter, which relates to yield pressure and ongoing currency headwinds. Yield pressure in both Sea and Air Logistics intensified in Q3, contributing to the net CHF 80 million decline of group gross profit. This includes a 4% negative currency impact in the third quarter alone, which equates to CHF 85 million. I will come back to this topic when reviewing our updated outlook in a few moments. Before that, let's take a quick look at working capital. Working capital, we can see some increase of the net working capital intensity to 5.1% at the close of the third quarter versus 4.8% at midyear and 5.1% for the same level at the end of Q1. Both DSOs and DPOs came under pressure over the most recent quarter with DSO up 1.6 days and DPO down 0.6. This development and volume growth contributed to a 6% quarter-over-quarter increase in the net working capital. I will elaborate a bit more on the working capital development with the review of free cash flow generation. Continuing with cash and free cash flow. In the third quarter, we produced CHF 226 million of free cash flow, which equates to a conversion rate of 105% versus 82% last year. For a better illustration, let me move on to the next slide. And in Q3, overall net working capital generated a net positive inflow of CHF 10 million despite the expansion of our core net working capital. This is the first inflow since the fourth quarter 2023. On a year-over-year basis, this represents an improvement of CHF 131 million. This contributed to the significantly improved third quarter cash conversion of 105%, as I mentioned before, which compares to the 82% of last year. However, that is below the historical average for a third quarter, as you can see on the slide, and we attribute the gap, which continues to close to relatively robust air freight volume and Contract Logistics turnover growth. We expect this to continue and note that the fourth quarter is typically the strongest quarter of the year when it comes to free cash flow generation. Now as Stefan mentioned, let me talk about our actions and how we are taking action to mitigate the impact of a challenging market environment. This comes in the form of a cost reduction program, targeting at least CHF 200 million of annualized savings. We estimate just over half of these savings are linked to staff-related costs, including FTE reductions. The balance of savings is split almost equally between facilities-related costs and a basket of other variable expenses. We anticipate achieving the full run rate of these savings by year-end 2026 or in other words, they should be fully reflected in the first quarter 2027 result. The costs associated with this program should not exceed a mid-double-digit million and are to be booked in the fourth quarter 2025 and the first quarter 2026. Before we move on to the updated outlook, let me emphasize that these measures will not impede our ability to grow in line with our already communicated strategy. So from today's perspective, we anticipate a fourth quarter recurring result comparable to that of the third quarter. Based on that expectation, our year-to-date financial performance and the challenging market conditions, we are reducing recurring EBIT guidance to greater than CHF 1.3 billion. Note that our guidance excludes nonrecurring items, such as the CHF 16 million charge in the second quarter and the items that we plan to book in the fourth quarter associated with our cost reduction program. Lastly, the Apex transaction will result in significantly expanded net debt by year-end 2025. And note that long term, we continue to prefer a small net cash position. We can also confirm that this transaction will have no impact on our dividend policy. With this, I would now like to close our prepared commentary and presentation with a summary of key takeaways. We are launching a sizable cost reduction program in response to the challenging market environment. The tough conditions are putting heavy pressure on sea and airfreight yields. At the same time, we maintain our long-term focus on market share gains in attractive sectors and continue to make progress. The expansion of our stake in Apex will be accretive to our EPS basis. And lastly, we are adjusting our outlook for recurring EBIT in 2025. With this, I want to thank you all for your attention and hand back to Valentina to open the Q&A session. Operator: [Operator Instructions] The first question comes from Alex Irving from Bernstein. Alexander Irving: My 2 are on the cost reduction program announced this morning. First of all, what functions would you be eliminating? Are you scaling back to calibrate to lower volumes? Or is there additional structural change? You also say the measures will not impede your ability to grow volume. What gives you that confidence? Secondly, what facilities are going? I noticed there was CHF 50 million of facility reduction expense in the release this morning. Are there services that will disappear either entirely or in certain geographies? A little more color here would be helpful. Markus Blanka-Graff: Alex, it's Markus. So let me do the cost reduction pieces. So first, your question on the cost reductions on the functions. I think currently, we are looking into trimming, I would call it, structural cost, taking out structural costs that can be management layers, but also locations connected to the second point, operating locations. And of course, we are adjusting our operating workforce according to our progress in being more efficient automation and out for -- putting work out into global services and shared service centers. I think it's a combination, but it's an acceleration very clearly. And let's say, a deeper cut into the cost structure of not only operational but also structural and overhead cost. So it's not a single function that will be untouched. Everybody will have a clear focus on the cost reduction program. On the facility side, the major savings are coming from putting operational locations, so network locations, be it international or domestic, putting them together, improving network density by reducing locations and operational locations. Something that I think in the industry when volumes are reduced is a common practice to consolidate locations and hence, reduce not only staff, but also location cost. Stefan Paul: Yes. Alex, Stefan speaking, maybe a little bit more caveat on the sales side, right, because you were alluding as well on -- what do we do on the commercial side in order to be still confident to grow the business. So we are not reducing commercial stuff, in particular, not in the SME sector. So in the meanwhile, seafreight has 45 customer care locations, around 700 SME people or dedicated small, medium-sized enterprise-focused hunters. We will not reduce there. We will, of course, intensify our efforts into the hyperscaler market. We talked about it now a couple of quarters already. You see that is paying off already to a certain degree in airfreight, in particular, where we have gained market share even more so in the third quarter, but we will definitely look into verticals which are not growing at present, for instance, automotive and certain industrial and solar panel activities from Asia into the U.S. But overall, commercial people will not be as affected as the operational side, as just mentioned by Markus. Operator: The next question comes from Uday Khanapurkar from TD Cowen. Uday Khanapurkar: This is Uday on for Jason Seidl. Maybe on the cost again, you've described it as at least CHF 200 million in cost out. Are you guys reserving upside there in case the market environment worsens further? Or is it more that you're starting out with a conservative number and could exceed it irrespective of the market? Markus Blanka-Graff: Uday, it's Markus. Clearly, this is our ambition and our target that is reachable from today's perspective with the program that we have launched. If there is -- assume for a moment, there might be a further deterioration coming through the year 2026, we will, of course, not stop. This is not all we have to give. If there is a further deterioration or more adverse commercial environment or whatever else could happen, we can continue doing that, and we will continue doing that. Stefan Paul: And to add a little bit to caveat on that as well from my side is we are talking about cost efficiencies now in the program. We are looking pretty much as well into the digital ecosystem. I mentioned that a couple of times already. We are at the very early beginning, but looking at the large language models and the digital agent capabilities from the software coming to the market or already available in the market, we will identify -- have identified and will further identify areas where we can leverage digital agents, and that should as well help us to reduce our cost to serve. Uday Khanapurkar: Okay. That's helpful commentary. And maybe for my follow-up on sea. Can you give us your expectations maybe on ocean capacity trends in 2026? And maybe like what magnitude of an ocean demand recovery do you think is needed to start seeing maybe a firming up or a recovery in ocean rates off of these depressed levels? Stefan Paul: Yes. So we all see and know that the carriers add significant more capacity into the marketplace, which is not helping the yield position overall pretty clearly. So maybe to give you a little bit of a number, China to the U.S. in the third quarter was down approximately, I would say, 25%, 26%, more so in the large customer base, less in the SME and smaller customer base. So what definitely needs to come back is this 20%, 30% down in the key account space. So we need to have a significant uptick in terms of volumes in the market in order to reverse the current pressure on yields. So the capacity as well to give you a precise number, which is growing or coming into the marketplace is roughly between 6% and 9% of the overall capacity, which is added now into 2026. So we need to have a significant uptick in demand, especially in the U.S. in order to reverse the situation from a yield perspective. Operator: The next question comes from Muneeba Kayani from Bank of America. Muneeba Kayani: Just continuing on this question around sea yields. So in the scenario that ocean freight rates remain under pressure over the next year, should we expect kind of your ocean yields to continue to decline? Or do you have any mechanisms in there to kind of protect the yield within the context of your strategy to gain market share? And then secondly, on the road segment, your competitor today talked about the road market stabilizing. It seems like you don't see that. Am I right? And kind of what are the trends you're seeing on the road side? Stefan Paul: Muneeba. Stefan, I'll tackle the road question first. I think what we have seen is now that we -- over the year, we had 6% to 7% less volume in the large domestic networks, particularly in France, U.K. and Germany. Germany was the worst, and that is not a surprise. It is stabilizing a bit now. It was stabilizing at the end of September, a little bit more uptick than expected in October. But is that a tipping or turning point? I would say, no. There is still less volumes in the networks versus the previous years. I would say, if it's not 6%, it's still 3% to 4% less. It's stabilizing a bit, but it's not a tipping or turning point as we see it right now. Markus Blanka-Graff: And maybe on the seafreight yield side, I think we have already a situation today where rates are on a very low basis. I think our portion of the gross profit that stems from the capacity is already heavily compressed under current conditions. And from that perspective, we believe that's pretty much at the bottom range of a potential corridor in that cycle. I mean, let's not forget it's still a cyclical business we talk about. So -- but that is our current feeling. What we are focusing on clearly is on expanding our SME share with higher yields, and we are successful in doing that, and we expanded on a quarter-over-quarter basis. And we are focusing on more services per shipment. You remember our strategy on the land side, value-added services that we have completed and extended at the beginning of the year with IMC is one of these steps. And these are the areas we can focus on. These are the areas that are, from a yield perspective, fully under our control, and we are going to expand on that. So from that perspective, I think I would not necessarily expect a further deterioration as you put into your question. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: So just a follow-up on the last question you just answered. So when we think about Q4, I think you mentioned that we should expect Q4 flattish versus Q3. I mean by looking at the different moving parts, I guess you're sort of guiding for a GP TEU not deteriorating further versus the Q3 levels. Does that mean also that the headwinds from FX now are fully in the base, we are not going to see any further FX pressure, would be my first question. And my second question, again, on the gross profit per TEU point, you have just said that you think you are getting to the bottom in a way, but we are still at quite higher levels versus pre-pandemic. I know a lot has changed in terms of volume mix, [ IMC ] acquisition but at the same time, also 20% currency devaluation. So again, what gives you the confidence that also the service part of the GP, not just the procurement part of the GP is going to be stable and won't go down in the future? Stefan Paul: Marco, so we're just looking at each other. So I take the second one. What makes us confident? I think, first of all, the yields are already very much compressed. And what we have just shared again is that our focus and the results in terms of our NVOCC SME volume is getting traction slowly, but more and more getting traction. So we are growing double digit in SME growth, which is helping us to maintain a certain yield position. Unfortunately, our large customers in the sectors I have just described are declining massively into the U.S., which we have not a huge influence over. But what makes us confidence is that we get more and more traction into the SME market. It took us quite a while, right? Now with the 45 new customer care locations with the highest sales force or largest sales force ever in history of Kuehne + Nagel and with a share of SME then which is north to 50% in the meanwhile, that makes us confidence that we have at least a chance to maintain a certain GP level which is not going down further significantly in the fourth quarter and the quarters to come. But there is, of course, no guarantee. We do not know the market dynamics completely. But anticipating what we see currently, that should help us to maintain a certain position. Markus Blanka-Graff: And maybe just completing it for the first question on the fourth quarter outlook, I think adding to what Stefan just said on the additional services component on the origin and destination services. From an FX perspective, we will continue to see a pressure on the FX for another quarter because in the consolidation, we consolidate standard with average exchange rates over the year. And obviously, as long as the U.S. dollar predominantly, that is the currency that impacts here the most is residing at a level of $0.8 or $0.79 towards the Swiss franc, we will continue to see for another quarter an impact. Marco Limite: And sorry, on the Q4 in airfreight, I guess in the past, we're talking about peak season. What's the view now also in terms of GP per tonne in air, if you can add any color. Stefan Paul: What we see currently is that the volume, the market share gains will continue in the fourth quarter, especially in the area of the hard cargo where we have been more successful than in the first. E-commerce is going down further. So no support from e-commerce to be expected, but there are 2 main verticals where we see nice growth, which is the perishable and the hyperscaler semicon market, which is going to continue. But what is clearly -- and that is what we said as well during the last Q call, there is no peak season to be expected. So no additional support in the marketplace, but we would estimate the same growth pattern in the fourth quarter, which we have seen in the last 2. On yields, I would say, stable yields and no further deterioration in terms of the GP per unit is concerned. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Just firstly, on the cost saving program. Can you please discuss why CHF 200 million is the right number? Because when I look at the addressable cost base that you have, this represents just around 3%, which could be seen as just covering inflation. And so can you just little bit explain why you think this is enough. And when I look at a very high level, the run rate of profitability of this business, given what you delivered in Q3, we are looking at numbers very close to 2019 levels. And so why have things kind of unwound so quickly in the past few years? And what can you do to regain some of the more positive trajectory you have seen? And then secondly, on financial leverage, obviously, you talk about the commitment to the dividend, the fact that you want to go back to net cash neutral. But when we look at net debt-to-EBITDA, including leases, you're already at a range of around 1.5 to 2x. How high are you willing to let this metric go before you have to, I guess, take more urgent action. Stefan Paul: Yes. Alexia, Stefan, I will tackle the first question, the cost savings and the basis of the cost savings. So I think what we have to do is here, we need to distinguish between the freight forwarding side, so Sea, Air and Road logistics, where our cost base is roughly CHF 4 billion. And we focus pretty much on this CHF 4 billion, right? So then the cost reduction is significantly higher than the 3%. Because in Contract Logistics, the cost is always related to the execution of the customer contracts and as more we win, as more we add, but this is a little bit independent from what we have put forward in the cost program, cost efficiency program, and this is pretty much focusing on the network side of the house. And we have a starting point, a cost position of roughly CHF 4 billion. So that's the reason why the percentage point is a little bit higher. And as Markus said a couple of minutes ago, there is a need for further cost reduction or cost saving measures, then we are able and willing to take them, right? So this is only what we have identified so far since August this year. Markus Blanka-Graff: Let me answer on the debt position. I think you're right, it's 1.5x what we currently look at from a debt perspective. And yes, we have said we prefer a small net cash position going forward. So that means we're going to focus even more on our free cash flow generation going forward. Our current net working capital is expanded, is expanded more than what we usually would require for that business. Our net working capital intensity corridor 3.5% to 4.5%. So we are at 5%. Clearly, that speaks for a certain business pattern that we currently experience, namely in the airfreight arena on the charter businesses that are taking a larger portion than what we have experienced in the past. So there's a couple of moving points there, but I think something that we will manage even closer, and that gave us the confidence to go out with this confirmation of the dividend policy as well as our long term, it's nothing that's going to happen next year or at the end of next year that we will get back to a net cash position. But it's something that clearly remains in our strong focus. Alexia Dogani: And do you mind if I just follow up on the point about the cost savings. I appreciate that it's 5% of the kind of the more forwarding side. Is there something that you can do on the revenue, do you think? Or really the only lever you have is the cost base to improve profitability? Stefan Paul: No, the revenue side, you mean the GP side, right? So it's more the GP side... Alexia Dogani: Yes, just help on GP... Stefan Paul: Yes, it's more the GP side, of course, right? So it's how do you do the pricing, where do you focus? SME, we touched already quite intensively and airfreight is the mix basically, less growth basically in perishables, but more growth in the semicon and the hyperscaler and the industrial side of the house or in the hard cargo because here, the yield per 100 kilo is much higher. So that is what you can do and what you do on a constant basis with our sales force, focusing on the high yield business and look into additional services, so the so-called value-added services before and after port-port or airport to airport, and we have certain examples for that, the customs clearance piece, the transloading piece, the white glove service, the value-added service in the U.S., for instance, right? So there are a couple of things which you can expand, which we do in order to offset the pressure on port-port or airport-airport rates. Operator: The next question comes from Marc Zeck from Kepler Cheuvreux. Marc Zeck: Just a couple of quick ones on your recent acquisitions, to put that way. Can you give us a feeling of what you expect for Apex in Q4? I believe it's very much geared towards the transpacific and probably also there's a bit of e-commerce business. So you might say all the wrong places to be in right now. What will be kind of the rough EBIT contribution from Apex that you expect? Then on IMC, could you give us an update what IMC is currently doing in terms of profitability and what ocean yields will look like ex IMC? Are we still above CHF 400 million with excluding MSC or already in CHF 300 million? And then just a quick follow-up on the free cash flow and working capital development. It was my impression that in the past, you talked about elevated working capital being kind of a relic or artifact of the pandemic and high freight rates. Now obviously, freight rates came down quite a bit. Why is free cash flow or working capital lagging and normalizing above and beyond what you said on the airfreight charter business? That's from my side. Stefan Paul: Yes, I'll start a little bit with Apex, right? So you're absolutely right, Marc. So Apex is transpac in particular, and it was more focusing on e-commerce, where we see a certain reduction in terms of volume is concerned. But we leverage Apex as Kuehne + Nagel pretty much as the carrier. So to give you one example is we have now 14 charter operations out of Hanoi, Vietnam, purely on the high-tech side, on the hyperscalers, semicon and high-tech customers, which is operated by Apex, and we jointly leverage the capacity towards the U.S. So we get the best out of both worlds, so to say. But of course, Apex margins are currently more under pressure based on the business mix and the situation. They are focused more on the U.S. and general cargo basis. But nevertheless, we utilize them as the carrier with their 747 charter operations for both legacies, which will add future value to the growth of the hyperscaler market. Markus Blanka-Graff: Marc, it's Markus. On IMC, I think strategically, we talked about it a bit before. I think the right thing to do, quite happy with the land side operation, how we can also consolidate operation KN with IMC and so on. Your specific question on the gross profit per TEU, when -- the first answer is do not forget we have CHF 22 on currency headwinds on that. So what you can clearly see is a deduction of, say, roughly CHF 50 for IMC contribution into gross profit per TEU brings you to a CHF 370 number plus the CHF 22 on the FX headwinds. I would say from a U.S. dollar perspective, we are still around the $400 -- sorry, correcting for the U.S. dollar impact, we are still on the CHF 400 line. You have the full transparency on the breakdown as well in that books that we have published. But that is from a quick calculation on the back of the envelope that is the reality. Free cash flow and working cap, I think, yes, the pandemic situation was extraordinary in many ways, one of which obviously was also on the rates and on the working capital needs. But again, that has passed some time ago. Currently, we are looking predominantly on the portion of charter business in the airfreight arena versus the business that was on belly regular carrier business, what it was in the past, and that is still the main driver for -- that is still the main driver for the extended net working capital intensity. There's nothing else out there. We will continue to manage DPOs and DSOs and at the same time, try to optimize the business model as it stands today. Operator: The next question comes from Michael Foeth from Vontobel. Michael Foeth: Two questions from my side. Can you just remind us what the basis for the Apex valuation was in the deals, Partners Group now, and in hindsight, what the benefits of selling the stake to [ PG ] now taking it back has been for Kuehne + Nagel, both financially and strategically. And the second question, just a clarification. You said that the yields on the hyperscaler data center part of the business is much higher, much higher than perishables, I think you said, is it above the group average as well, the yield on that business? That would be those 2 questions. Stefan Paul: Then I answer the last one. And yes, the overall semicon high-tech, in particular, hyperscaler margin end-to-end is higher than the average on group level. So significantly higher than group -- perishables, sorry. Markus Blanka-Graff: And Michael, on the Apex, maybe just for transparency, Apex, Partners Group had a put option. So it's not so much about us selling. So they exercised the put option at the back end of the summer. I think what we have certainly taken out from that cooperation and that partnership is an excellent view into further growth opportunities on the M&A side at Apex, the way how to operate and look at business, I think from a highly professional partner like Partners Group in managing the business in Asia. So there's a lot of things, I think, that we have positively learned and taken away experience. From that perspective, I think we can be strategically very happy that we had this partnership in place. From a valuation point of view, I think we have disclosed that since the put option was in place in our financial statements. In principle, it is a multiplier on the financial performance of the company. Operator: The next question comes from Gian-Marco Werro from Zürcher Kantonalbank. Gian Werro: One question also on Apex and the terminated partnership there with Partners Group. So can you anyhow, despite this termination of the partnership, tell us about the pipeline for bolt-on acquisitions there in Asia? How did it evolve over this partnership? And how does it look at the moment? Does it look less promising now compared to 1 year ago? And the second question is on DSV, and the volumes from the DB Schenker integration that might come to the market. Do you see already some volumes coming into your direction? Could you benefit in the last quarter now from some clients who have diversified their portfolio of freight forwarders? Markus Blanka-Graff: Gian-Marco, it's Markus. Let me take the Apex since we talked about it already before. So clearly, the visibility that Partners Group had to potential targets, it's much higher quality than what we have had internally. I think that is clear. And the pipeline for potential acquisition objects or targets is there. And I think without giving away anything over the next 12 to 24 months, we will see some actions there. In a bolt-on acquisition type, of course, we have not changed our view on that, but it's something where I think we get extremely good value for money. Going forward, I think it has proven to us that, that can be a future model for developing business in areas where a partner is really of substance and help to us. Stefan Paul: Yes, Gian-Marco, Stefan. I tackle the DSV Schenker question. Yes, in particular, in seafreight and airfreight we have seen significant volumes on the market. And if you compare now Q3 volumes in seafreight on both companies, you see that it's a head-on-head race. It's not so clear anymore that one is larger than the other one, which we need to take as a sportive race like soccer, right? So you have to have fun sometimes as well in business life. So overall, I can confirm that we have taken advantage out of that merger, as I said, in airfreight, now road as well is helping us with the white glove service with the value-added services, particularly in the U.S., which we hadn't had before. So overall, it has benefited us and look at the -- again, at the numbers, compare the numbers in seafreight third quarter in total, both companies and us, then you see that is almost equal now. And it will be interesting to see in the next couple of quarters and years to come who can leverage the customer side for its own benefit. Gian Werro: Just maybe one small follow-up. What is the hurdle to not also gain volumes in seafreight from the DB Schenker? Stefan Paul: The airfreight market is much quicker. And customers -- so in seafreight, you have 1 or 2 RFQ cycles, it's mainly 1 RFQ cycle for the Westbound and for the transpac a year, and you have to wait for the RFQ cycle and the airfreight customers in particular, decide more on a monthly or quarterly basis and the share of wallet needle has moved much quicker in airfreight than in seafreight. So the risk or the purchasing guidance is more obvious in airfreight than in seafreight, but that can come and should come during the next RFQ cycle. Operator: Next question comes from Laura Bucher from Octavian. Laura Bucher: More of a follow-up really. You've mentioned expanding SME as a way to potentially increase the GP. I'm interested in knowing how that flows to EBIT per TEU. I think you once mentioned that SME offered, I think, was 1.8x the average GP per TEU, but that it also had much higher costs. So I'm interested in how has that developed over time? And if you're addressing any of it with the CHF 200 million cost-cutting program. Markus Blanka-Graff: Laura, it's Markus. Good to hear you after we met a couple of months ago. So SME, clearly, 2 factors, and you're absolutely right, 2 factors, higher GP, but also higher cost to serve, and I can [indiscernible] to the end. Our cost reduction program that we have started today, and I think Stefan has also put a lot of color around which areas are lesser impacted like on the sales side. So to be absolutely clear, we maintain and focus our service quality and our ability to grow. That also means for SME customers, we will continue that high-level service that we are able to deliver. So there is not going to be an impact on the service quality. We save costs on areas where we think we can do that without impacting this service levels. 1.8x, that is still the correct number, at least from our experience that we see that also returns with a conversion rate or with a conversion rate in line with our ambition. So that is between 30% and 35% towards the bottom line. So as long as we maintain the service quality, then the customer loyalty is going to be the SME section will expand. So we are going to continue that journey. Nevertheless, when we automate or digitize or eliminate process steps, tasks within the execution, that will also benefit for the profitability of SME customers, for sure. But that's nothing that a customer will feel as a change or if a change then to be better for his customer service. So optimization, efficiency gains are also still be valid for SME. But overall, your business case is still very valid. Operator: The next question comes from Cedar Ekblom from Morgan Stanley. Cedar Ekblom: Just one for me. On the cash return, I wonder, would you ever consider going from a dividend to a buyback considering where shares are? Do you think that there is any opportunity to express a view that shares are maybe undervalued, particularly if you believe that you can deliver your medium-term targets that you set at the Capital Markets Day only a couple of months ago? Markus Blanka-Graff: Sure, Cedar. Fair question, and I think a fair consideration. I can only reflect what the Supervisory Board is sharing with us, and clearly, their preference is on the side of dividends. Not much more that I can say for that. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Stefan Paul for any closing remarks. Stefan Paul: Yes. Thank you very much for your questions, for listening in, your interest. Stay tuned and have a good winter. So the weather here is getting really now more to the skiing season. Thank you again for your interest, and talk to you soon. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good day, ladies and gentlemen, and welcome to ASUR's Third Quarter 2025 Results Conference Call. My name is Latanya, and I'll be your operator. [Operator Instructions] As a reminder, today's call is being recorded. Now I'd like to turn the call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir. Adolfo Castro Rivas: Thank you, Latanya, and good morning, everyone. Before I begin discussing our results, let me remind you that certain statements made during the call today may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to several risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company's control. Additional details about our third quarter 2025 results can be found in our press release, which was issued yesterday after market close and is available on our website in the Investor Relations section. Following my presentation, I will be available for Q&A. As usual, all comparisons discussed on this call may be -- will be year-on-year and figures are expressed in Mexican pesos, unless specified otherwise. Before discussing our results, I would like to begin today's call with an important strategic development. As recently announced, we entered into a definitive agreement to acquire URW Airports for an enterprise value of $295 million. This transaction marks a significant step forward in ASUR's international expansion strategy, building our established presence in the U.S., which began with the operation of San Juan Puerto Rico Airport in 2030. URW airports managed commercial programs are 3 most iconic and high-traffic airports in the United States. URW airports manage commercial programs at 3 of the terminals -- 3 of the airports in the United States, Los Angeles International Airport with 6 terminals, Chicago O'Hare International Airport at Terminal 5. And in the case of John F. Kennedy International Airport covering terminals 8 and the upcoming new terminal 1. Together, these terminals process around 14 million enplanements annually. This acquisition provides ASUR with a strategic foothold in the 3 of the largest U.S. air travel markets and strengthens our position in the high-growth nonregulated commercial segment in the U.S. airport industry. The acquisition will be financed by JPMorgan Chase. As with all our strategic decisions, we are approaching this opportunity with a financial discipline and operational rigor that has long defined ASUR's execution. Closing is expecting during the second half of the 2025. Subject to customary regulatory approvals, we look forward to keeping you updated on our progress in the quarters ahead. Now turning to our third quarter performance. We serve over 17 million passengers across our airports, with traffic remaining practically flat as continued growth in Colombia and Puerto Rico helping to offset persistent headwinds in Mexico. Starting with Colombia, passenger traffic rose 3% to close to 5 million, supported by a solid 11% increase in international traffic and a modest growth just under 1% in domestic volumes. In Puerto Rico, total traffic was up 1%, reaching over 3 million passengers. Growth was driven by international passengers, which increased nearly 12% year-on-year, offsetting the 0.5% decrease in domestic traffic. In Mexico, traffic declined 1% to nearly 10 million passengers for the quarter. The decrease reflects softer demand, domestic traffic, which was down nearly 2% and international which saw a slight contraction of 0.3%. Passenger volumes from the United States, our largest international source market decreased just 0.2%, while South America contracted 7.2%. On the positive note, Canada and Europe increased 9.3% and 1.3%, respectively. Looking ahead, we anticipate a more balanced operating environment across our portfolio. In Mexico, we expect traffic to gradually stabilize over the next year as aircraft ability improves. In Puerto Rico and Colombia, we expect continuous positive momentum supported by the healthy international demand and improving productivity. Now turning to review our financial results. As a reminder, all figures exclude construction revenues and costs, unless otherwise noted. Comparisons are all year-on-year unless otherwise noted. Total revenues increased in the mid-single digits, reaching over MXN 7 billion, driven by growth in Puerto Rico and Colombia. Mexico at 70% of total revenues posted a slight low single-digit decline with aeronautical revenues practically flat and non-aeronautical revenues down in the mid-single digits. Revenue growth was limited by softer passenger volumes and the stronger peso, which continues to weigh on the U.S. linked revenue streams. Puerto Rico at nearly 18% of total revenues reported revenue growth in the high single digit driven by increases in 5% in aeronautical revenues and 10% in non-aeronautical revenues. This performance reflects positive passenger traffic trends and sustained demand across commercial activities. Colombia, which accounted for a total of [ 30% ] of the total revenues, delivered revenue growth in the high single digits, reflecting a mid-single digit increase in aeronautical revenues while non-aeronautical revenues were up in the high teens. This good performance was supported by passenger traffic growth and solid -- partially offset by the strong Mexican peso. Continue our ongoing focus on commercial development. We added 45 new commercial spaces across our airports over the last 12 months, including 31 in Colombia, 8 in Puerto Rico and 6 in Mexico. This supported a low single-digit increase in commercial revenues as solid growth in Puerto Rico and Colombia was partially offset by a weaker performance in Mexico. On a per passenger basis, commercial revenue rose 1% to MXN 126. By region, Colombia led a 14% increase followed by Puerto Rico, up 10%, while Mexico posted a 4% decline, reaching MXN 144 per passenger. Turning to costs. Total expenses were up nearly 17% year-on-year. By region, Mexico posted a 4% increase, largely due to higher maximum -- minimum wages and service costs. Puerto Rico reported expense increase of nearly 8%, reflecting inflationary pressures and higher operating activity. While Colombia cost increased 76%, mainly driven by an adjustment in amortization method of the concession. Without this increase would have been 5.4%. Lastly, in Puerto Rico and Colombia cost benefited from depreciation of Mexican peso against the U.S. dollar. On the profitability front, consolidated EBITDA declined just over 1% year-on-year to MXN 4.6 billion in the quarter. Puerto Rico and Colombia delivered EBITDA growth of nearly 5% and 10%, respectively, while EBITDA in Mexico declined close to 4%, mainly reflecting lower traffic and higher operating costs. The adjusted EBITDA margin, which excludes construction related revenues and costs under IFRIC 12 declined by 157 basis points to 66.7%. This reflects lower margin contribution from the Mexican and Puerto Rico operations, where the margin contracted 152 and 151 basis points, respectively. In contrast, Colombia reported an 81 basis points margin expansion. On our bottom line, this quarter was negatively impacted by depreciation of the Mexican peso against the U.S. dollar, which resulted in a foreign exchange loss of nearly MXN 1 billion compared to the reverse effect during the third quarter of last year. Profitability was also affected by the MXN 333 million adjustment in the concession amortization method in Colombia that I just explained. Now moving to our balance sheet. We closed the quarter with a solid cash position of MXN 16 billion, down 19% from December 31, 2024, primarily reflecting dividend payments made during the period. Our net debt-to-EBITDA ratio remained at healthy 0.2x. In terms of capital deployment, in September, we paid an extraordinary dividend of MXN 15 per share funded from retained earnings. Note that in November, we will be paying an additional dividend of MXN15 per share. Lastly, we invested close to MXN 1.9 billion during the quarter, primarily directed to projects our Mexican airports, including the reconstruction and expansion of Terminal 1 at Cancun Airport, and the terminal expansion in [indiscernible]. In Puerto Rico, we are progressing on the new pedestrian bridge for Terminal A, while in Colombia, we invested in maintenance CapEx. In closing, our third quarter results reflect the resilience of multi-country platform and the value of our disciplined execution amid a more tempered demand environment. While traffic in Mexico continued to face near-term headwinds, we are encouraged by the ongoing momentum in Puerto Rico and Colombia. We remain focused on advancing on our commercial strategy, investing in infrastructure and maintaining a strong financial profile. These conclude my prepared remarks. Latanya, please open the floor for questions. Operator: [Operator Instructions]. The first question comes from Rodolfo Ramos with Bradesco BBI. Rodolfo Ramos: I have a couple, if I may. The first one is in regards to the URW acquisition. Can you shed a bit of light on the economics, revenue per pax, how much EBITDA contribution you're expecting from these assets on an annualized basis? And the second is on Colombia. Can you elaborate on this adjustment to the concession amortization method that we saw during the quarter, was this a one-off? Or should it be a new level going forward? I don't know if it has to do something with the economics of your concession title there? Adolfo Castro Rivas: Thank you for your questions. In the case of URW, I cannot yet share numbers with you until [indiscernible]. In the case of Colombia, basically, what we have done is to change amortization method because in accordance with our estimates, during 2027, we will not receive regulated revenues anymore, and the concession should be over by 2032. So we are aligning amortization in accordance with revenue generation there. And it's going to be not one-off. It's going to be from now the same level. Operator: The next question comes from Emst Mortenkotter with GBM. Ernst Mortenkotter: I wanted to follow up a little bit on URW. I understand you cannot discuss the financials. But leaving that aside, it seems like a great way to gain some strategic insight into the consumer that goes from your airports to the U.S. I just was wondering if you could discuss a little bit what kind of synergies do you see? Or what is the strategic rationale behind this acquisition? Adolfo Castro Rivas: Thank you, Anton. Well, basically, the most important for us is to get -- to put a foot in the U.S. market. The U.S. market represents 22% of the aviation market of the world. And these terminals are extremely important for the U.S. market. So pulling our name there is extremely important, and this should be the platform for future growth in the United States, probably in the same kind of contracts that we are entering right now. That is the most important thing. Operator: Our next question comes from Andressa Varotto with UBS. Andressa Varotto: I have 2 here on my side. The first one is about Motiva Airports that are for sale. We've been seeing the news source that ASUR is [indiscernible] interested in this airport. So just wondering if you could provide some more information, if you're looking, for example, at all of the airports are just a subside of them. And how would the company finance this? And my next question is regarding the traffic trends that you've been seeing for Mexico. We've been seen recently on news as well that Tulum airport has been facing some cancellations. And if you think that this could help Cancun airport in the near future. These are my 2 questions. Adolfo Castro Rivas: In the case of Motiva, I cannot comment. In the case of the traffic trends, what I see today, it's a slow recuperation in the domestic market because of Pratt & Whitney engines, something that should improve in my opinion during the next year. For the moment, the traffic is really weak and the demand is weak in the case of the region. If we see Cancun and Tulum together for the first 8 months of the year, and I'm saying that months because that is the latest public figure or the case of the airport of Tulum. The traffic for the region is a decrease of 3.1%. If we go to the latest month that has been published for the case of the airport of Tulum which is the month of August this year. August versus August last year, the traffic of the region was a decrease of 5.1%. So the traffic is soft. Nevertheless, what you are saying in terms of the recent cancellations to the airport of Tulum. Operator: [Operator Instructions] Our next question comes from... Adolfo Castro Rivas: Sorry, could you repeat? Operator: Our next question comes from Pablo Ricalde. The next question comes from Pablo Ricalde with Itau. Pablo Ricalde Martinez: My question is related to the [indiscernible] Cancun? Is it still expected to be open around Q3 2026 or there are delays on that construction of that one? Adolfo Castro Rivas: What we are expecting is to open this new facility during the third quarter 2025 -- 2026, sorry. Pablo Ricalde Martinez: Okay. So as expected. Operator: The next question comes from Gabriel [indiscernible] with Deutsche Bank. Unknown Analyst: [indiscernible] Just 2 questions. First, is there any way or some how that capacity allocation from carriers has been shifting from Cancun? And the second one is the decrease in traffic could somehow make the pace of writing the tariffs towards the maximum tariff faster for either this year or next year? Adolfo Castro Rivas: Well, in terms of capacity, we are not -- we're not seeing a shift in capacity. What we are seeing basically is a weak demand, as I said, from the domestic resulted from Pratt & Whitney and some other elements. And in the case of the U.S., the numbers for the quarter is 0.2% decrease, which is small, but it's the largest market we have. Let's see how the winter comes. And I hope that the winter will be very strong in the north part of the Americas, and then they come. Positive side is the case of Canada, which is up for the quarter, and I thought that it will be up during the fourth quarter as well. Unknown Analyst: And in the case of the traffic that has somehow decreased, that could accelerate the pace on which tariffs are increased up to the maximum tariff? Adolfo Castro Rivas: No. I don't see that. Our maximum tax compliance this year should be similar of what it was last year, so more than 99%. Operator: [Operator Instructions] At this time, we'll turn the call back over to Mr. Adolfo Castro for closing comments. Adolfo Castro Rivas: Thank you, Latanya, and thank you all of you again for joining us on our conference call for the third quarter 2025. We wish you a good day, and goodbye. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Steinar Sonsteby: Hi, and welcome to the Q3 presentation of the Atea numbers here from rainy Oslo. In this presentation, we will update you in more details on both the 2025 guiding and as promised, the development in Denmark. We will give you much more details than normally, not only to Denmark, but also more insight in our business model. In the future, we will not go as deep. So see this as an opportunity to understand more rather than a new way of reporting. So to the numbers. Gross sales came in at NOK 12.3 billion, up almost 10%, and EBIT at NOK 348 million, up 13.3%. Net profit grew by almost 18%, another record-breaking quarter from the place to be. But as always, I leave it to Robert to give you all the good news. Robert Giori: Thank you, Steinar. Atea reported strong sales and profit growth in the third quarter of 2025 with high demand across all lines of business. Gross sales in Q3 were NOK 12.3 billion, up 9.2% from last year. After adjusting for changes in currency rates, organic growth in constant currency was 7.0%. Hardware sales increased by 5.7%, driven by higher shipments of PCs and other digital workplace solutions. Software and cloud sales increased by 17.1% with high demand across all product categories. Services sales increased by 6.0% from last year based on higher sales of consulting and product support services. Group revenue according to IFRS was NOK 8.4 billion, up 5.6% from last year. And gross profit increased by 6.7%, to NOK 2.5 billion. Gross margin increased from last year due to an improved hardware margin and a higher proportion of software in the revenue mix. Operating expenses grew by 5.7%, to NOK 2.2 billion. After adjusting for changes in currency rates, OpEx growth in constant currency was about 3.5%. With strong demand across all lines of business, EBIT in the third quarter increased by 13.3%, to NOK 348 million. And net profit after tax increased by 17.7%, to NOK 226 million. We'll now take a closer look at sales and profit development across the countries in which we operate. Atea's strong sales and profit performance was spread across nearly all countries in the third quarter of 2025. In Norway, gross sales increased by 11.2%, to NOK 3.1 billion based on very high growth within hardware and services. EBIT grew by 8.1%, to NOK 123 million. In Sweden, gross sales increased by 7.7% to SEK 4.6 billion with high growth in sales of software and cloud and services. EBIT grew by 18.3%, to SEK 154 million based on higher sales and relatively low growth in operating expenses. In Denmark, gross sales increased by 13.7%, to DKK 1.8 billion, with rapid growth in sales of digital workplace and networking products. EBIT grew by 25.8% to DKK 15 million. In Finland, gross sales fell by 9.5%, to EUR 95.8 million. EBIT was EUR 1.7 million compared with EUR 1.8 million last year. The Finnish market environment remained challenging in the third quarter with weaker demand from the public sector. In the Baltics, gross sales increased by 9.6%, to EUR 46.2 million, with very strong growth in sales of software and services. EBIT increased by 27.8%, to EUR 2.2 million. Atea Group functions, which includes shared services and group costs, was a net operating expense of NOK 8 million compared with an expense of NOK 2 million last year. The difference was mainly due to higher corporate SG&A costs. Now a word on our cash flow and balance sheet. Atea's cash flow from operations was an inflow of NOK 220 million in Q3 2025 compared with an inflow of NOK 112 million last year. This cash flow improvement was driven by solid growth in earnings and by a reduction in inventory during the quarter. This offset lower sales of receivables into the securitization program and a seasonal increase in other working capital balances during Q3. Looking ahead, Atea expects a very strong cash flow from operations in the fourth quarter with seasonal working capital reductions in line with historic trends. At the end of Q3 2025, Atea had a net debt of NOK 438 million as defined by Atea's loan covenants. This corresponds to a net debt-to-EBITDA ratio of 0.2. Atea's net debt balance at the end of Q3 2025 was NOK 4.6 billion, less than the maximum allowed by its loan covenants. Atea has a strong balance sheet and significant additional debt capacity before its loan covenants would be reached. With Q3 now behind us, we want to provide an update on our financial guidance, which we gave earlier this year. Atea has guided for gross sales of between NOK 57 billion to NOK 60 billion for the full year 2025. We now expect to deliver gross sales in the top end of this guidance range. Atea guided for EBIT of between NOK 1.33 billion and NOK 1.45 billion in 2025. We now expect to deliver EBIT in the middle of this interval. Our guidance is based on a solid order backlog and a healthy market and competitive trends as we enter Q4. We expect that our businesses in Norway, Sweden and the Baltics will continue their solid earnings momentum. Furthermore, we expect that our business in Denmark will progress in its turnaround and that our business in Finland will return to sales growth in Q4. And that concludes the presentation of our third quarter financial results. I now hand the podium back over to Steinar to provide additional information on the Danish business and to summarize Atea's position as we exit Q3. Steinar Sonsteby: Thank you, Robert. So as promised earlier this year, we would deep dive a little bit in Denmark after Q3. I have now spent a little bit more than 6 months in my new home. And I will, as I said in the beginning, dive a little deeper than we normally do. And I will first provide you with some of the issues and then talk about what we are doing about it. Denmark has, for years now, underperformed, and we have not been able to really make a turnaround. In this presentation, I'm comparing Denmark to Norway and Sweden as that makes the most sense compared to size and where we want to go. So first, if we look at hardware, Denmark has had a falling margin curve for the last 5 years. The last 12 months rolling LTM gives us a margin in Denmark at 9.1%. And you see Norway and Sweden on the slide coming in much higher at 12.8% and 12.6%. The margins in Norway and Sweden have been constant for more than 10 years, and the margin in Denmark is falling. So you might think this is because the Danish market is different, pressure on price is harder, but that is really not the case. Because if you dig a little deeper, as normally with Atea's business model, and this is not only for Denmark, it is all about mix. And in this case, it's all about customer mix. If you look at the slide, you see that hardware from SKI contracts. And I just want to say that not all public business in Denmark are done through the SKI contracts. But through the SKI contracts have been growing fast over the last couple of years, and the margin on some of those contracts are low, we have that type of frame agreements in all countries. There is nothing wrong with having large frame agreements. They will have lower margin. The thing is you have to balance the mix. And if you look at this slide, you see that non-SKI business had been falling in revenue. The balance becomes unhealthy. We will keep on serving SKI and the customers that want to buy on the SKI contracts. Of course, it's a big part of our business, but we need to focus on non-SKI also and make that grow. If we look at software and cloud, the margins are slightly falling. And you could think that has to happen because of the Microsoft EA incentives being lowered. But you can see on this slide again that Norway and Sweden are higher. And again, the answer is not really in lower margin in general or price pressure overall. It's, again, a case of mix. So you see total software here, which are the numbers we report. And then you see the EA, which is growing fantastically in Denmark and at hardly any margin. The CSP business is also growing but not as fast and from a much smaller base. That should have been turned around much earlier in the last couple of years. And then other software, so all other software and cloud than Microsoft is hardly growing. Both CSP and other software has very healthy margins. It is the balance of in hardware -- in the case of hardware, customer mix and here, in the case of software and cloud, product and services mix. One way of balancing the revenue and the margin is services, but services is much more important than that. Services is a very, very tough part of our strategy. If we don't build services and added value for the customer and our partners, the margins will be low. That is how the business model for some in the industry are, very high volume, very low margin and very, very low cost. We don't think that is a sustainable business model. Therefore, services is important. In this case, on the slide, you see consulting. So first, the number of system engineers. Norway and Denmark has about the same total revenue, but not so on the number of system engineers. Norway have about 530, Denmark, back when I came, about 130 system engineers. And some of those system engineers have to spend time helping sales, taking certifications, give keynotes or work on customer events and vendor events. So our target for their invoicing rate is around 75%. But when you are below critical mass, it's very difficult to get there. So we need to address the issue. It's the same thing on managed services, one of the more important parts of our strategy -- because we want to be our customers' partner no matter how they want to consume IT infrastructure. Some want to buy and build themselves. Some want to buy and have us build. And some want us to run it all for them. So when Denmark is not growing on managed services, it becomes a strategic as much as a financial issue. So what we have done over the last 6 months? First, we have reorganized sales so that we have a strong account management that can carry the whole breadth and width of our service and product portfolio. We come from a two-siloed sales organization within certain areas. We have now changed. It was done before the summer, and it starts to give effect. It also gives us a much better tool to be able to put new services or products into the sales machine. It's a change that was supposed to have happened a long time ago. We've now done it, and I'm very proud and happy about how smooth this has worked out. And you can see from the numbers in Q3 that we are making progress financially as we are doing the change. Six months ago, we introduced a program, an improvement program called Act as ONE. We need all the force behind one arrowhead, as Scott McNealy once said. The program has five projects, and they all have leads, they all have activities, and we follow up on these weekly. We need to, as you've seen, address the hardware margin. We have gone out and said we'll increase the price, but mostly we'll have resources put on private customers. It's starting to yield, and you will see that already in Q4 as you have in Q2 and Q3. On the software margin, it's important that we put resources and pressure on selling CSP and all the other software vendors that we are carrying like Cisco, IBM, VMware and others. On the AMS side, we have done some changes to the organization and the players that play in AMS. We have increased the pipe, and we need to increase the hit rate, the win rate, which we see are going up. This is a slower part of our business to turn around because there are longer sales cycles and longer implementation processes. But we are moving in the right direction. And then consulting. As some of you might have seen, I have gone out in Danish newspaper saying that we will hire within the next 12 months. This was back in July, 100 system engineers. We are now at about 25 more than what we were at that time. Many of them come with customers, and we are looking forward to, during the rest of this year, to address them with our account management to upsell from consultancy to products and managed services. The culture is something that I have addressed to get turnover down and efficiency up. And I'm happy to say that Atea Denmark today seems like a different company. All in all, I'm very happy with what we have addressed and the results. And the forecast for Denmark in Q4 is an EBIT of DKK 40 million. When that is in the bank, EBIT in 2025 will have grown by 50% as we are doing as much investments into the business and into the company and the people as we see fit. It's a good journey. Within Q1 or the end of Q1, I would have been in Denmark approximately a year. And I will start recruiting a new country manager in November and hopefully spend the spring to get the person into the organization and to take over before summer. So that gives you more details on how we see business, how we see Denmark, and we are very optimistic on what's going to happen in Denmark, but also in the company as a whole going forward. So far this year, we have had a gross sale of NOK 42.3 billion and an EBIT of almost NOK 900 million. We are very satisfied. With that, I'll leave it to you, Chris, to see if we have any questions. Christian Stangeland: Thank you, Steinar and Robert for the presentation. I do have some questions here. First question: Thank you, solid quarter, but can you give some more -- what is happening in Finland? Steinar Sonsteby: Yes. So Finland has been a little bit of a surprise to us this year. We saw some signals to this already in the fall of 2024 that business in Finland was slowing down a little bit. And so we have followed this very closely. It is not Atea that are slowing down. It's Finland that are slowing down. And you can see this looking at a lot of data. And we are, of course, also speaking to all the American partners that we have that have the same development. At the same time, we are winning a lot of contracts. And you've seen that we've publicly talked about some of them, some of the larger ones. And so we expect this to turn around. And our internal forecast say that, that will happen somewhere later this year or beginning of next year. That is difficult to predict. And that's why we are keeping the workforce because we will be ready to go with all the contracts and with a better market soon to happen. Christian Stangeland: Thank you. New question, you seem firm on your guidance with Q4 in Denmark. How can you be so precise? Steinar Sonsteby: First of all, I want to give you two insights. As many of you know, I'm a person that looks at the bright side of life. That gives you a better life in 9 out of 10 chances, and you get surprised negatively once. This is not going to be one of them. And then secondly, we are having a better forecast internally than what we're saying here. But we want to invest as much as possible to grow rapidly in 2026 and 2027 also on EBIT. And so we are balancing -- performing with investments, and that's why we feel pretty confident. But again, predicting the future is not an exact science. Christian Stangeland: Thank you. A new question here. Please, could you help explain how the business has performed outside the public sector, and how are your conversations with your enterprise customers going given the macro backdrop? Steinar Sonsteby: Yes. So the mix between public and private have over many years, grown a little bit in favor of public, especially through corona. But what we see right now is that the investments from enterprises, so private -- larger private companies are super good. Their confidence in what they're doing seems to be high. And I'm now excluding Finland a little bit from that discussion. There are two other factors that are important to weigh in here. First of all, you will see that not all IT companies are growing as fast as Atea. So we are definitely -- our strategy are definitely helping us to take market share. But you also understand that there is nothing a company can do today to improve their business, take market share or develop better products and services than investing in digital services. So we're in the right spot with the right strategy, with the right people. And so we are confident from that part. The discussions are very much centered around finding that edge in investing in technology, security to protect and AI to develop. But you need a broader investment in infrastructure and applications to be able to use those tools. So it's a very cool and interesting time to be in our industry, and we don't see that going away anytime soon. Christian Stangeland: Thank you. The new question, what needs to happen for Atea to achieve a top end of the EBIT range for 2025? Or is that something that's just not in the cards? Steinar Sonsteby: Well, I think we've been pretty precise with what we think will happen. We're still -- we have still given an interval, and it's still possible to have both outcomes. But I think we'll leave it with our guiding. Christian Stangeland: Thank you. A furthermore detailed question on Denmark. What are the plans for ramping up the system engineers in Denmark? And what will be the increased cost? And how much will that happen? Steinar Sonsteby: So first of all, the investment in the 100 new system engineers in Denmark is supposed to give a payout after 1 to 3 months per person. So it takes 1 to 3 months to get people to be profitable. The ramp-up is pretty linear over the 12 months from July to July. And by the way, we are ready to further ramp that up after we've got to the 230-240, which is the target as we've set it right now. But there are two reasons why this is important. So the financial impact of each system engineers by itself is a positive contribution, as I said, after 1 to 3 months. But it's also important in our margins on product, but also how the stickiness between us and the customers will become as we have consultants or system engineers in -- or with the customers. So there is an investment. Of course, the cost per head is what it is, and you can do the average math, and we see a positive contribution pretty rapidly on this. And that is also what we've seen in Q3. Christian Stangeland: Thank you. New question. You've previously stated that reaching the upper end of guidance will require a rebound in Finland and Denmark in H2. Now you say you expect to reach the midpoint despite Finland being weak. Does this mean something else has developed better than you expected? Steinar Sonsteby: Well, that statement is the person putting the question to us. We have not seen any weaker development than what we thought outside Finland. Denmark is exactly where we thought it would be or hoped it would be actually, but we do see a stronger momentum in Norway and Sweden. The Baltics is also performing really, really well, but it's a smaller part of the business. So I would say Finland, surprising a little bit on the negative side. The other countries all in line or a little stronger. Christian Stangeland: Thank you. And the final question. In previous presentations, you've been talking about the four big growth drivers. Can you briefly give us an update on those, please? Steinar Sonsteby: Yes. So very briefly here since we are at the end. AI, starting with that. I think everybody understands that the hype curve was high and very early in the cycle of AI as a technology. We see a lot of interest. We see a lot of people taking advantage of Copilot and some, and not very many, but some who are investing deeper and building solutions based on their set of data. This is a long process. It's going to -- AI is going to be a growth driver for us for years and years and years to come. 5 years from now, we'll look at it and people will say, wow, everybody is using it everywhere. And then we'll start talking about quantum computing or something new, which will accelerate AI even more. Security is right now growing faster than what we thought. We've always thought that customers should invest in security and cyber threats are not going away anytime soon. But it hasn't really happened in the history. People have invested more, but not as much as we thought. Right now, we see an increased interest in investing in security. Defense is strong. And I think it's true to say all over Europe that investments in defense is ramping up. The countries are lacking people, and they have the money. And so we see a very strong demand for investments in defense and NATO going forward. And we will launch some new contracts in the months to come that will prove that. And then Windows 10 end of life. As some of you have seen, there's been a huge push over the last 2 years to go from Windows 10 to Windows 11 operating system. That change by itself is not a huge growth driver, but the fact that you can't run Windows 11 on all the PCs that you were running Windows 10 on at the same time as customers are changing to AI or Copilot plus PCs, so stronger, more expensive PCs, is something that have been driving our revenue on the client side for the last 12 to 18 months. Absolutely a driver that we'll see also into the future, even though Microsoft have prolonged service for some customers for 12 months. There are still about 1 million PCs in the Nordics that need to be upgraded. If they're upgraded because of the operating system or because they're end of life or because you want to run AI central -- locally, sorry, locally, doesn't really matter to us. We're going to sell you the PC anyway. With that, we wrap up the Q3 presentation here from Oslo, and we thank all of you and hope that you have a very, very nice day.
Operator: Welcome to Vitrolife Q3 2025 Earnings Call. [Operator Instructions] Now I will hand the conference over to CEO, Bronwyn Brophy, and Par Ihrskog. Please go ahead. Bronwyn Brophy: Good morning, everyone. I would like to welcome you to the Vitrolife Group Q3 2025 Earnings Report. My name is Bronwyn O'Connor, and I'm joined this morning by our new CFO, Par Ihrskog. So I will now move you on to the first slide with our Q3 2025 highlights. I would like to start by highlighting three key achievements during the quarter. The first highlight is that we delivered 5% organic growth in local currencies, excluding discontinued business, despite the fact that the reproductive health industry as a whole has continued to face substantial macroeconomic and geopolitical challenges during the quarter. The second highlight I would like to bring to your attention is our growth in Americas. Sales increased by 11% in local currencies with strong growth across the entire portfolio and in all markets in the regions. And finally, we delivered strong operating cash flow of SEK 255 million related to positive contributions from our net working capital. I'll now move to the key financial highlights. So starting with the market. Conditions remain challenging in some of the key markets in the IVF industry. However, we did see some small and early signs of recovery in Americas. In EMEA, Western Europe is performing well. However, the market in the Middle East remains impacted by the geopolitical situation. APAC also shows some signs of recovery with the exception of China. Cycle growth in APAC overall remains below the other regions. Sales. So sales in the quarter amounted to SEK 835 million, an increase of 5% in local currencies, excluding discontinued business and minus 4% in SEK, impacted by minus 7% due to currency effects. Gross margin, stable, in fact, slightly positive at 58.9% and EBITDA was SEK 253 million in the quarter, an EBITDA margin of 30.3%. This was also impacted by a negative currency impact. And then strong operating cash flow of SEK 255 million from our net working capital, as I mentioned previously. We will now move on and take a look at our sales and growth per geographic segment. We're very pleased, in fact, with our sales performance in Americas, delivering 11% growth. And even more pleasingly is we saw growth across the entire portfolio and in all markets. So just bear in mind, Americas is the U.S., North America, and also South America. IVF cycle growth is showing early signs of recovery in the U.S. However, share gains drove our growth rates above the market growth rates. Growth in EMEA was 4%, excluding discontinued business. Once again, we delivered strong growth in consumables as a result of share gains in key markets in Western Europe. The geopolitical situation in the Middle East has impacted the region overall, but all other markets in EMEA remained strong for the Vitrolife Group. Sales in APAC increased by 1%, the first positive quarter for the Vitrolife Group year-to-date. We delivered strong growth across all markets in the APAC region with the exception of China, where cycles remain depressed despite improved reimbursement. And then another point that I think is critical to point out is the healthy regional revenue contribution of our company. This has been instrumental in helping us navigate the challenging economic environment. So if you look at our share of total sales, we now have 33% coming from Americas, 37% coming from EMEA, and 30% coming from APAC. Okay. We'll now move into markets region EMEA and take a closer look. So EMEA remains our largest region, delivering sales of SEK 309 million in the quarter and an organic growth of 4% in local currencies. Again, this quarter, sales in consumables were strong, plus 7% in local currencies, excluding discontinued business due to share gains in key focus markets in media and disposable devices. Sales in technologies, plus 6% in local currencies, driven mainly by customer wins for our lab control solutions, which is really nice to see. We are seeing demand steadily increase for our witnessing solution, and customers also really like the integrated EmbryoScope and eWitness solution. Genetics performance was negatively impacted by the Middle East. However, a strong performance by our Genetics business in Western Europe. Okay. We'll now move on to market region Americas. A very strong quarter in our Americas region despite the fact that cycles have not fully recovered in the United States. With an organic growth of 11% and strong growth across the entire portfolio in all markets in the region, we believe we are fully leveraging our relevance to our customers. The strategic investments that we have made in sales and marketing in the U.S. resulted in us delivering our strongest quarter in 11 quarters, with share gains in key parts of the portfolio. Strong growth in technologies driven by increased adoption of EmbryoScope across the region, which is great to see. This has been a key focus area for us, as many of you will know. And we are also starting to build a healthy pipeline of customers seeking to install our witnessing solution. So the combined offering of EmbryoScope and witnessing is also starting to gain traction in North America, as we are experiencing in this quarter in EMEA. Okay. And then our market region, APAC. APAC, the first positive quarter of the year-to-date. So APAC delivered an organic growth of 1%, with strong growth in all markets across APAC, with one exception, that exception being China. We delivered share gains in disposable devices, and our media market position remains very strong across the region. Coming back then to China, despite the increasing reimbursement, we don't yet see an uplift in cycles. Consumer confidence, we expect, is also impacting the timing of patients presenting for IVF. I do want to point out that we are focusing on other key markets in the region where the Vitrolife Group holds strong positions and cycle growth is increasing. I will now hand over to Par, and he will take you through our geographical segments. Par Ihrskog: Thank you, Bronwyn. We are now on Page 9, where I will provide some more details of the geographical segments, America, EMEA, and APAC. On Americas, sales amounted to SEK 276 million, reflecting an 11% organic growth in local currencies and 1% growth in SEK, negatively impacted by currencies. The strong growth can be seen across the portfolio. Gross income amounted to SEK 149 million with a gross margin of 54%. This compares to the last year's gross income of SEK 144 million and a margin of 52.7%, an improvement of 1.3% points compared to previous quarter, mainly driven by product mix. Selling expenses for the quarter rose from SEK 69 million to SEK 77 million, reflecting ongoing investments in sales and marketing in the U.S. as previously announced. The market contribution margin for the quarter was 26.0% compared to 27.5% last year, impacted by the increased investment into sales and marketing capabilities in Americas. Moving to EMEA. Sales declined by 2% in local currencies and by 6% in SEK, totaling to SEK 309 million. The sales were negative, impacted by currency of minus 4%. Sales declined by 2% in local currencies and by 6% in SEK, totaling to SEK 309 million. The sales were negative, impacted by currency of minus 4%. Excluding the discontinued business, sales increased by 7% in local currencies. Gross income was SEK 192 million with a gross margin of 62.0%, compared to SEK 198 million and a margin of 60.4% last year, also here mainly driven by the product mix. The selling expenses decreased from SEK 73 million to SEK 68 million. The market contribution margin for the quarter was 39.9% compared to 38.1%, explained by an improved gross margin and lower selling expenses. In APAC, sales amounted to SEK 250 million, reflecting an increase by 1% organic growth in local currencies, but a 6% decrease in SEK, negatively impacted by currency. Gross income was SEK 151 million with a gross margin of 60.4%, which is lower than previous year's gross income of SEK 167 million and a gross margin of 62.8%, a decline of 2.4 percentage points compared to previous quarter, negatively impacted by currency and negative product and market mix within APAC. Selling expenses decreased from SEK 48 million to SEK 46 million. The market contribution for the quarter was SEK 42.1 million, down from SEK 44.7 million last year. Let's move to the next slide. So then, Q3 financial highlights. As earlier mentioned, the sales amounted to SEK 835 million compared to previous year with a sales of SEK 867 million, corresponding to 3% growth in local currencies and a 4% decrease in SEK and 5% increase in local currency, excluding discontinued business. The gross income amounted to SEK 492 million compared to SEK 508 million previous year, corresponding to a gross margin of 58.9%, margin up from 58.6% previous year. The margin improved from a positive product mix despite the negative impact from the currencies. In the third quarter, the increase in operating expenses was mainly driven by investment in capabilities, especially within IT and digitalization. All-in-all, that gives us an EBITDA of SEK 253 million compared to SEK 289 million previous year, which gives us an EBITDA margin of 30.3% compared to 33.4%. The decrease in margin is mainly impacted by currency fluctuation as well as an increase in investment in capabilities, especially within IT and digitalization. Let's move on to the next slide. Some comments about the operating expenses. In Q3, our operating expenses were SEK 20 million lower than Q2 this year, but compared to Q3 last year, OpEx was SEK 40 million higher, though last year's Q3 was lower than normal levels. Overall, Q3 aligns well with our average OpEx level over the past seven quarters, reflecting a consistent and stable cost trend. On the selling expenses, we had higher selling expenses in the U.S. due to the investment in sales and marketing, but it was offset by lower costs in the other regions, so it stayed stable. On administrative expenses, it was increased by the strategic investment in IT and digitalization. Our R&D expenses slightly decreased year-over-year, mainly due to timing. And then on other operating expenses, this is mainly related to currency fluctuations. Next slide, please. And then finally, I will look -- we will comment upon the year-to-date numbers. Sales for the first 9 months amounted to SEK 2.5 billion, corresponding to 1% growth in local currencies, a 4% decrease in SEK, and a positive 4% growth increase in local currencies, excluding discontinued business. The gross margin decreased from 58.6% to 58.1% mainly due to currency fluctuations. The EBITDA amounted to SEK 253 million compared to SEK 888 million, corresponding to an EBITDA margin of 29.5% versus 33.5% previous year. The decrease in margin is heavily impacted by currency effects driven by a strengthened SEK against other currencies. The margin was also negatively affected by the increased selling expenses of SEK 577 million in the U.S., but also negatively by the product and market mix. Net income amounted to SEK 301 million compared to SEK 375 million previous year, heavily impacted by currency fluctuations, which gives earnings per share of SEK 2.23 compared to SEK 2.76 previous year. Our operating cash flow amounted to SEK 475 million for the first 9 months compared to SEK 640 million previous years, whereof SEK 255 million came from Q3. Changes in working capital had a negative effect of SEK 97 million this year compared to SEK 97 million last year. Our leverage, net debt to EBITDA, improved to 0.7 compared to 0.8 previous year by the end of the quarter. And by that, I will now hand over to you again, Bronwyn. Bronwyn Brophy: Thank you, Par. So you will have seen me present this slide several times. And what I would like to highlight is that we are delivering on our commitments and doing what we say we will do. So this slide I have presented, I think this is my third time to present it. It highlights what the focus areas were for 2025 and beyond: growth, innovation, and operational excellence. So just if we take a look at growth, continue to drive share gain in key markets, leveraging the full breadth of the portfolio. This is exactly what we are doing in Americas, as an example. So we're doing what we say we will do: accelerate the penetration of our combined EmbryoScope and lab control solutions. This is what we're doing in EMEA. You can see it in the quarterly results. When it comes to innovation, if I could highlight strengthen market access capabilities to bring new products to market faster. We have launched Ultra RapidWarm Blast. We received regulatory approval for EmbryoCath in Europe and the United States this quarter. So again, here, we are doing what we say we will do. On the operational piece, automated manufacturing to increase capacity of key growth drivers. We have significantly increased capacity at one of our sites in the United States due to automation. And then the macroeconomic environment. Well, I think we would all agree, it's been a challenging year for the med tech industry as a whole. It's been a particularly challenging year for the reproductive health industry. We continue to assess multiple parameters, not least of which is the impact of the U.S. presidential IVF announcement, the most recent one on the 16th of October 2025. And of course, we continue to monitor the development of the situation in the Middle East and the impact that the recent peace agreement may have on IVF cycles in the region. Before we open up for questions, I would like to thank the exceptional team at the Vitrolife Group for all of your hard work and dedication. I would also like to thank our shareholders for your support and your belief in the Vitrolife Group. Thanks, Micah, thank you very much, and we will now open up for Q&A. Operator: [Operator Instructions] The next question comes from Ulrik Trattner from DNB Carnegie. Ulrik Trattner: I have kind of broad-based questions regarding consumables in the different geographies. So just looking at consumables in Americas, what continues to drive your market share gains? And the same question goes for EMEA. And I guess for EMEA, it's more on the case of one of your competitors at being in a restructuring phase. Just trying to figure out how long this sort of gains could last for? And as for APAC, I hear all what you're saying in terms of demographical challenges, once policy having its effect. But don't you believe that this is more of a consumer confidence kind of issue? I guess sort of the demographic changes in APAC has not really changed since the 2019 or pre-pandemic, while the sort of general economic health of China has. That would be my first question, please. Bronwyn Brophy: Okay. Thank you for your question, Ulrik. Yes. So the performance of the consumables in all our regions, as you -- well, it's positive. It's positive everywhere. I would say that in 2024, we took a lot of media share. We are now leveraging that even stronger media position to take share across the rest of the portfolio. I can't tell you who we're taking share from because we have one competitor who reports externally, but we don't get a breakdown, and the other large competitor, as you know, is privately held. But what we do know is that our growth is significantly up versus the cycle growth that our customers tell us across the various regions that they are experiencing. So I can't say who we're taking share from, but we are firmly of the belief that we're taking share with the growth rates that we experience in the different regions. And what we see from our own numbers is it's across the entire consumables portfolio now, Ulrik. Then your question on APAC, we think it's a combination. So yes, obviously, we have the endemic issues in APAC in terms of desire to have children and low fertility rates. But we do believe that the macroeconomic conditions in China are exacerbating the situation. As we know, reimbursement has improved in the country, but we haven't yet seen an uptick in cycles. So it's likely multifactorial. I think what's interesting to note, and you'll see that in my CEO comments, is we do see growth across the rest of the region. So China is becoming an outlier in APAC in terms of the growth that we can deliver for our company. So hopefully, that helps to answer your questions, Ulrik. Ulrik Trattner: Yes. And a follow-up, like a year ago, a year and a half ago, a lot of talk about the Indian market. So the Indian underlying market growing at a very rapid pace, you tagging along with that market. And it's been quite silent sort of ever sort of in the last few quarters. Can you provide us with some type of update on what's happening in India? Bronwyn Brophy: Yes. So that's intentional. It's intentional because this market has become increasingly competitive, and everybody wants to know where the growth and profitability is. So that's why we don't break down our APAC numbers; so we don't give additional detail. I'm sure we would have some very interested competitors probably listening in this morning, wondering what the India breakdown is. India is a very large market, of course, with a lot of potential. Usually, in medical devices, it's also a low-priced market. So while it may have high growth potential, it doesn't always have high growth that's profitable or at least profitable to the levels that we would need at the Vitrolife Group. But it is clearly a driver. It does form part of our APAC region, but it's not the largest market in APAC for us. So that's probably about as much detail as I would like to give on India for obvious reasons. Operator: The next question comes from Suzanna Queckborner from Handelsbanken. Suzanna Queckbörner: I have a more broad question. I'd like to get your opinion on how or where you see Vitrolife going with future M&A agenda and whether your stance has changed regarding this recently? Bronwyn Brophy: Yes. Great question. Thank you, Suzanna. So I guess, like all companies in the space, we are monitoring potential acquisitions. I think with the consolidation that has happened in more recent times, a lot of the larger-scale acquisitions are off the table now. And for us, I think as we've always said, we have a very clear strategy in terms of building an end-to-end platform. So any of the targets that we are looking at would need to be synergistic with that strategy. They would also need to be able preferably to deliver accretive growth. And then the profitability needs to be broadly in line with our profitability levels, which are typically significantly higher than most of the other players. So I'm not saying there's nothing for us to buy. They clearly are. But of course, those targets need to satisfy our key M&A criteria, and they also need to be available at the right price. Multiples have come down a lot in MedTech. So yes, I guess, from an industry perspective, it's probably a good moment to buy, but still, it has to be the right company at the right price with the right fit for the Vitrolife Group. So that's probably as much as I can say right now, Suzanna. Suzanna Queckbörner: And just to quickly follow up on that. Are there any areas that you're particularly interested in more than others? Bronwyn Brophy: Yes. I would say there are one and two areas which I'm not going to divulge, which would be of more interest. I mean we have a broad portfolio now. We have a lot of differentiation. It's really -- a lot of it is about bolstering the position that we have and staying ahead technologically. But there are a couple of -- yes, I guess, what I would call tuck-ins, potential tuck-ins from a portfolio standpoint. Suzanna Queckbörner: And then as a second question, with regard to your strategy in the U.S., we now see that you have 11% organic growth. You've made some investments in sales and marketing. How should we think about that going forward? Bronwyn Brophy: Yes. So from an expense perspective, I think sales and marketing line for Americas will be stable. We are -- sorry to use an American phrase, but we're kind of fully loaded for now. The investments that we made are -- they're driving the growth that we saw in the quarter. So we probably don't need to do anything additional for now. Obviously, we have to very closely monitor the effect of the announcement on the 16th of October and see what that means as we head into 2026. But for now, I think it's sort of steady as she goes on the sales and marketing investments in North America. Operator: The next question comes from Johan Unnerus from SB1 Markets. Johan Unnerus: Could you provide perhaps a bit further insight into the gross margin? It's pretty impressive or strong given the circumstances, FX headwinds, different product solution mix, and presumably some tariffs as well. Bronwyn Brophy: Yes. So Johan, thank you for the question. Yes, there are multiple factors in there. So it's mix for sure. So product mix and regional mix. I think our team has done a really excellent job in terms of managing the tariff impact. So we did mention during our previous earnings that we did have to increase our prices to help mitigate against that tariff impact. And the team in North America, in particular, did a superb job there. So that largely helped to insulate us from that. And then I guess we're being more strategic in terms of where we're doubling down from a portfolio standpoint. So all of these factors are playing a role there. I don't know, Par, if there's anything that I've missed. Par Ihrskog: No. But on the currency part there, we see on top line negative 7%. It's very much driven by the strength of SEK towards U.S. and euro, but of course, all currencies. And that, of course, flows through the whole income statement down to the bottom line, the impact of the currency. Johan Unnerus: And yes, a follow-up on the U.S. side. It's pretty healthy your performance in the U.S. this quarter. Of course, there are quarterly variations, but also you're putting in effort to go-to-market investment in OpEx. What is the dynamic here? How much is sort of natural variations, your early traction from your early traction from improved go-to-market strategy or something else? Bronwyn Brophy: Yes. So I think it's a couple of things. First of all, thank you for the question. I think it's a couple of things. I think it's the increased investment. I think it's the adjustments that we've made to our go-to-market model. We've ramped up our marketing, which has increased our awareness. We've sharpened our branding. I mean the Vitrolife Group is synonymous with quality and service. And Americans like high quality, and they like best-in-class service, and that is synonymous with our company. So I think it's a combination. I think it's the investments, the go-to-market, the high-quality products, the really good service, all of these things are leading to share gains and wins in key accounts across the United States and Canada, it has to be said as well. And in fact, well, I should also call out -- I mean, Americas, it's Canada, as I said, U.S., and LatAm. We have growth across all of the markets and all of the portfolio. So big brother is U.S., but the other markets are also performing nicely for the company. Johan Unnerus: Excellent. And congratulations, a pretty good quarter given the circumstances. Bronwyn Brophy: Thank you, Johan. We won't get ahead of ourselves, but it's a good quarter, yes. Thank you. Operator: The next question comes from Jakob Lembke from SEB. Jakob Lembke: I also have a question on the U.S. and Americas. And my question is, do you expect that the strong market share gains you're currently seeing that they are sort of on a similar level as recent quarters? Or are they accelerating? And also if you think that this momentum will continue into next year, also considering that you mentioned that you expect to invest less in the U.S. commercially here going forward? Bronwyn Brophy: Yes. So thank you for the question, Jakob. I think they're accelerating because, obviously, we see the breakdown by product. We don't report that externally. So we can see in some of our key product groups, if we look at the rolling 12, that it's actually accelerating. And we think this is a return on the investments that we've made there. How sustainable is that going forward? Well, I mean, if you look at our five-year strategy, our #1 double-down focus market is the United States. If we are going to win and deliver on our mission of becoming the leading global player here, we're going to need to keep this type of momentum up in North America. I'm sure our competitors will have something to say about that, but we're not going to have it all our own way. Nobody does. But we are -- certainly, our ambition is to keep this momentum up. Where can it accelerate, and where are we going to become increasingly challenged? Technologies, EmbryoScope with witnessing, that's a key differentiator for our company. And I think we should be able to gain increasing traction there. On the consumable side, continuing to take this level of share, we're going to have a battle on our hands, but we have to be ready for that, and we have to back ourselves. So I mean, this is the plan. What you're seeing in this quarter is -- what you're starting to see, again, I don't want us to get too ahead of ourselves. It's very important not to be complacent, especially in America. But what you're seeing in this quarter is a return on the investments that we've made, staying focused on our strategy despite the fact that we had to navigate some fairly bumpy quarters as an industry. And then I think the team, the team that we have on the ground there, we've recruited top industry talent and complemented it with a lot of in-house experience that had been built up in the company over many years. So it's a lot of different factors, Jakob. But I think the key thing here is not to be complacent. It's a good quarter. We need to keep up the momentum. We need to stay focused, don't get distracted, and stay the course. That's the plan. Jakob Lembke: Okay. And then just a follow-up also on the U.S. genetics business. I mean it seems to be developing quite nicely. Would you say that you have finally now turned that around and that you're confident that you can also take market share there going into next year and increase profitability? Bronwyn Brophy: Yes. So Genetics had actually had an excellent quarter in North America, Genetic Services. So obviously, in Genetic Services, we have the services business and we have the kits. The services part is doing extremely well. Can we continue this momentum in North America into next year? Yes, we should be able to because we have some large network wins there. So we have some good tailwinds. Yes, what I would say is that the Genetics business has been impacted in the Middle East. So you can see that in our EMEA numbers. We do have -- not very large, but a sizable genetic services business in the Middle East. That has been impacted. But broadly, services -- the genetic services side is -- yes, it's pretty steady and holding up a lot better than it has in previous quarters. I never like to get ahead of myself and say we're going to shoot out the lights, but it's certainly looking a lot more stable than it has certainly in the couple of years that I've been the CEO of the company. So yes, hopefully, that answers your question, Jakob. Operator: The next question comes from Ludvig Lundgren from Nordea. Ludvig Lundgren: So continuing on the U.S. and Americas. So you highlighted that cycle growth like recovered late in Q3 at the second part of the Q3. So then I assume the exit rate was a bit higher than the average or total growth rate in the quarter. So just to set some reasonable expectations here for market development heading into Q4 and '26. Are you able to share how much difference we have seen throughout the quarter in cycle growth? Bronwyn Brophy: Yes. So first of all, thank you for your question. I can't share exact percentages, but we did start to see a pickup. It was really just in the last month of the quarter, to be honest, the first two months of the quarter, we didn't see a pickup, but there is also a seasonal effect there, which can impact that. Despite the fact that we saw a pickup, we still don't believe that cycles have fully recovered in the U.S. So it remains to be seen what the impact of the announcement on the 16th of October will be. But it was more a case of a slow, steady increase in the last month of the quarter. There was no explosion of pent-up demand or anything like that. I mean it wasn't -- we're not talking about a very sizable jump, more slow, steady flow of IVF patients coming back to the clinics. Ludvig Lundgren: Okay. Understood. So, a slight improvement, then I suppose in Q4. But then just a follow-up on the IVF announcement last week. So do you expect this to yield any significant change in either cycles or like IVF insurance coverage maybe into '26 or yes ahead? Bronwyn Brophy: Yes. So I have the White House statement here in front of me. You can actually print it -- you can print it off, anybody can access it. Look, this is good news for the IVF industry. It's not brilliant news, okay? But it is good news. So if you remove a lot of the hype and you get down into the facts, what does this actually mean? What it actually means is a reduction in the price of the drugs, of the fertility drugs for patients. If you look at the White House fact sheet, there's talk of estimates, women, and I quote, women can save up to $2,200 per cycle of fertility drugs. In the United States, nobody pays list price for drugs. So I think that's the maximum amount that a patient would expect to save. Nonetheless, it is a saving. So it's a saving. It's not huge, but it is a saving. So that's a good thing. The insurance piece is more complicated, but it is positive. So essentially, what happens with the way the insurance piece is now designed is you have -- typically in the United States, you have healthcare coverage. And then usually, people will have additional or supplemental things like dental, it can be dental, can be hearing. And now there will be the opportunity to have supplemental fertility coverage. That is also a good thing, but that's going to take time. It will take time for that to come through the system. So what we are expecting, our interpretation, okay, and there can be various interpretations, is, yes, it's positive. Are we going to see an explosion in pent-up demand and suddenly, employers all over the U.S. will grant coverage, fertility coverage to their employees? No. It's more likely to be a slow, steady improvement in terms of fertility coverage for employees. So good news, more likely to lead to slow, steady improvement as opposed to a very significant pickup. I guess my own personal assessment is at least we now have clarity because what we had in quarter two and in -- yes, for most of quarter three was uncertainty. Are we getting an announcement? Are we not getting an announcement? What is it going to entail? What is it not going to entail? The really good thing to come out of all of this from the 16th of October is patients now have clarity and they can decide how they want to time their IVF treatment. So personally, I see this as the biggest advantage of all. So yes, hopefully, that helps to answer your question a little bit. There's a lot to unpeel in that announcement. If you separate the hype from the facts and the 2,320% reduction, this is essentially what it means. Yes. Ludvig Lundgren: And then I just wanted to squeeze in one more for Par on operating expenses, up 4% year-over-year. And I think it's mainly explained by these IT investments in admin. So just if you could give some flavor on these investments, like is it up from Q2? And how should we expect this to develop in Q4 and into '26? Par Ihrskog: Yes. As I explained, it's the investment in IT and digitalization across the company in various functions in manufacturing in admin, and so on. We have invested in the last couple of quarters somewhat more on IT and digitalization, and the increase compared to last quarter -- the quarter last year is not only IT digitalization, but it's a big part of that increase. But compared to Q2 and Q1, it's more or less in line, slightly higher perhaps, but more or less in line. Operator: The next question comes from Ulrik Trattner from DNB Carnegie. Ulrik Trattner: A little bit different angle here, sentiment for genetics and predominantly PGT-A. I note from a lot of focus on STRA and ASRM on workflow protocols, how to manage sort of PGT-A workflows. So where is sort of the customer sentiment, and where are we at in terms of your commercial traction in -- both in EMEA and in the U.S. I know that you're saying that you're having a bit of struggle in the Middle Eastern part, but good traction in the Western Europe and U.S. is obviously doing quite well. So where are we at segment-wise? Bronwyn Brophy: Yes. So thank you for the question, Ulrik. PGT-A, it's accelerating for our company. We're doing very well. And when I say PGT-A, you know this, Ulrik, I mean the PGT-A family of family of test, PGT-A and PGT-M. The growth is more than robust. It's very strong in North America, and it's also strong in EMEA and in Western Europe. I do agree with you on the workflow piece in terms of guidelines and bringing more consistency and standardization to that workflow. But we see that as a positive thing. Standardization is good. Guidelines are good. We welcome that, and it tends to positively impact us as opposed to negatively. So yes, I mean, the PGT-A family of test is a key growth driver. And for us in our key markets, it's very healthy. Ulrik Trattner: And how about the Embrace test and essentially your entire noninvasive family of tests? How are those received, and how is that looking? Bronwyn Brophy: So also very well received, high growth, albeit from a much lower base, very strong growth for Embrace, actually. So yes, it's -- noninvasive is, I suppose, in many ways, the future. But a lot of people like the standard tests as well. But if you look at our portfolio, the noninvasive piece in general, the growth rates from lower base are significantly above the growth rates across the rest of the genetics portfolio. So you're selling on there. Ulrik Trattner: Yes. And would you say that customers have overcome sort of the issues with potential maternal cell contamination of noninvasive PGT-A? Or has that been lesser of an issue in reality versus what was implied technically? Bronwyn Brophy: Yes. I think it's less of an issue because there's much more education around that now. So we -- I mean, initially, clinics would put push back, Ulrik, on the contamination piece because they didn't understand it. Now I think with increased education and understanding, they appreciate the benefits of the contamination factor now. So it isn't -- it's not so much an issue anymore at all, really. Yes. Ulrik Trattner: And an additional follow-up on that because this leads into potentially sort of the million-dollar question on your end. When can we expect a combination of a noninvasive PGT-A test and error test, and time lapse or your EmbryoScope on the U.S. market? Bronwyn Brophy: Well, that's a million-dollar question or a billion-dollar question, which I could never reveal because it's such a source of strategic and competitive advantage to our company. But we have our R&D programs, and we're working on them steadily. And most of them are on track or slightly ahead of schedule. And that's about as much as I would like to say on that topic. Ulrik Trattner: And last question on my end. And since we have Par on board, I need to -- looking at the balance sheet and potentially another direction beyond M&A, I guess you're happy with your current portfolio, could add a few product X, Cryo, Genetics, but I guess platform acquisitions are out of the picture. How about not just exploiting the option of doing buybacks? Par Ihrskog: Yes. Thank you. That's a good question. Yes, we are looking into different alternatives, what to do with the excess cash. And we will, of course, have our view and recommendation to the Board. But ultimately, this is, of course, a Board decision. Ulrik Trattner: But you have suggested Board of Directors. Par Ihrskog: I have not suggested anything yet. I'm only three weeks in here. But we are looking into that. And down the road, we will suggest our proposals to the Board. But ultimately, that is a Board decision. Operator: The next question comes from Suzanna Queckbörner from Handelsbanken. Suzanna Queckbörner: Just one more question relating to the U.S. share gains. So you said that you've been taking share gains across the entire portfolio. I was wondering if, within Genetics, there's been the long-term ambition to sell more high-margin tests versus low-margin tests. Can you maybe talk a bit about this dynamic in terms of the lab testing companies, and yes, whether you've been able to make that transition? Bronwyn Brophy: Yes. Fantastic question. Thank you, Suzanna. So within our PGT-A family of tests, we do have levels of differentiation. So obviously, I mean, you know this very well with your background. We have PGT-A. We have PGT-A+. And some of those tests, I won't reveal which, but some of those tests have a higher margin profile. So what we are doing is obviously focusing our efforts on the more differentiated, higher-margin tests in order to improve the profitability. Essentially, we're doing exactly what you're asking in your question. How do we go about that? It's doubling down on the differentiated areas where we can command a premium price because of the level of differentiation that could be that can be slow, it can be feed, the various different elements in there. Does that answer your question, Suzanna? Suzanna Queckbörner: Yes, I think it does. Operator: The next question comes from Jakob Lembke from SEB. Jakob Lembke: I have two further questions. Firstly, on APAC, I mean, 1% growth here in the quarter, and you say that regions outside of China going well. So I guess we could almost infer them that China is declining. So given this, could you maybe break down your expectations for APAC growth next year, sort of what you see in China and outside of China? Bronwyn Brophy: Yes. Thank you for the question, Jakob. So yes, I mean, China has -- the entire IVF industry in China is impacted, as we know. And obviously, we have a lot of conversations with our colleagues in the drug company. So they're seeing the same dynamic. But what's interesting is the rest of APAC is performing pretty robustly, at least it is for us. So the key question for everyone is, when does China start to improve? When do the improved reimbursement, when or do the improved reimbursement conditions start to kick in? I think to one of the earlier questions, how much of this is linked to macroeconomic sentiment, there is an element of that. So it's complicated, Jakob, to sort of assess when does China turn. I think what's key for us is that we hold our very strong position in China, like we have market leadership positions in certain key categories, very strategic and important ones. So making sure that we continue to hold very firmly there, and we are. And then accelerating our growth across the rest of the region, and we're also doing that. I mean, as I'm speaking to you, I can see our growth rates in the other markets across the region. So it's really a case of holding our position firmly and strongly in China, as hopefully, market conditions improve there and then accelerating our growth across the rest of the region and reducing our reliance on China. And that's how we've been able to turn APAC positive this quarter. Hopefully, that answers your question, Jakob. I need to be rather circumspect in terms of the level of detail I give on APAC. Jakob Lembke: Yes, I understand. That's fine. My second question is sort of a follow-up to the admin costs, which has been surprisingly high this year, both here in Q3, you mentioned IT investments, and they were also quite high in Q2. So just if you can give any thoughts on admin costs for 2026, if they will continue to expand or sort of normalize, or yes, maybe decline. Yes. Par Ihrskog: Yes. No, as I said, the Q3 operating expense aligned well with our average OpEx level over the past seven quarters. So we see it as a consistent and stable cost trend, and we don't have any plans to increase that from this level. Of course, we are exposed to inflation and stuff like that, that we will have to handle, but we don't have any major plans to increase. But of course, our strategic investments in IT and digitalization is important for us, and we will continue to further develop our capabilities in that area. Yes. Bronwyn Brophy: Yes. If I would add, I think the OpEx, to Par's point, has been very stable for seven quarters. What has changed is the mix. So obviously, we've been trying and have very tight cost control measures throughout the year. And so we do see some areas coming down, but other areas where we're strategically investing in a very premeditated way, and IT and digitalization is key there. So yes, hopefully, that helps to answer your question, Jakob. Jakob Lembke: Yes. And maybe if I can take a short final question just on technologies, it was a very strong quarter Q4 last year, and what you see there for Q4 this year. Bronwyn Brophy: Yes, it was. It was a huge quarter. Typically, it is our largest quarter of the year. The comps will be challenging. So there's kind of pros and cons on this one. Challenging comps, that's a headwind. But typically, Q4 is the strongest quarter. So that's a tailwind. We do have a very good pipeline, very robust pipeline. And as I mentioned earlier, the combined EmbryoScope and eWitness is starting to gain traction. So that's a tailwind. But throughout this year, I think across the entire med tech industry, capital purchases have been delayed and postponed. We ourselves see that the selling time of EmbryoScope has lengthened. We do very tight funnel management using Salesforce across all of our regions on EmbryoScope. So we can see the metrics, and we know it takes longer for the deals to come in. But we don't see cancellations of orders, and we don't see needs dropping out of that funnel. So yes, I think there are pros and cons going into quarter four. The team are very focused on driving that. Yes, I guess that's about as much as we can say for now. Operator: The next question comes from Ludvig Lundgren from Nordea. Ludvig Lundgren: So just a very quick question, a follow-up to Jakob's question there. So yes, quite stable OpEx year-over-year, but you also should have some headwinds on the OpEx side from FX. Like looking at OpEx to sales, you're up a bit year-over-year, right? So then I just wondered like, yes, for us modeling, is it possible to share an organic like OpEx increase year-over-year, and how that has developed here in Q3 specifically? Par Ihrskog: Sorry, can you clarify that question again, please? Ludvig Lundgren: Yes. So basically, what I'm requesting is if you have an organic like operating expense increase because we saw a 4% increase reported, but you probably have some tailwind on the cost side from FX. Bronwyn Brophy: Yes. Par Ihrskog: Yes, we have, of course, that as well. So yes, and we have an organic increase partly offset with the currency impact, of course. Ludvig Lundgren: Okay. So is the organic number closer to 10% or like just to get a sense of how much costs are growing here into Q4? Par Ihrskog: Yes. We don't disclose that number exactly, but it's, of course, is higher than 4% and closer to 10%. That's a good estimate. Bronwyn Brophy: But you are correct, Ludvig. There is obviously a currency element in there. There's currency element everywhere. It's flowing through all of the financials, as you can see. Okay. I think we need to finish up there. Thank you all for your time, your attention, your engagement, and your questions.
Danny Younis: Good afternoon, and welcome to the Weebit First Quarter 2026 Investor Update. My name is Danny Younis, and I handle Investor Relations for Weebit. With me today, we have the CEO of Weebit, Coby Hanoch; and for the first time, the VP of Marketing and Business Development, Eran Briman. Before I hand over to Coby, just a reminder, we will be having a Q&A session today. If you have any questions, if you're in the room, just put your hand up or if you're online, just type them into the Q&A box that you see at the bottom of your screen. We're expecting a lot of questions, but we've provided enough time, I think, to go through most of those questions. We've got roughly an hour, but we can run a little bit over if we need to. I would now like to hand the webinar over to Coby. Jacob Hanoch: Hi, everyone. To me, so good to be here, as always. I guess we came here because of the Semiconductor Australia conference that was yesterday. I think it was a very good conference. It was well attended. I don't know if anyone here -- was anyone at the conference? It was really -- I think there were like roughly 300 people or so. This time, we had a booth there. So you see the sign from Semiconductor Australia up here where we're using it kind of and show the demo. I guess we'll be bringing the demo to the AGM, and we'll be showing it there as well. So we'll be back -- I'll be back in a month. And yes, I guess, let me share the screen again with this. So just a few slides, not really much. I think everyone knows, knows Weebit and knows what's going on. So, okay. So we'll just go through the slides like this. So I just thought I'd show you an update. I found this very interesting how just a year ago, the prediction of the size of the semiconductor market was the blue line here and people were saying, yes, it's going to hit USD 1 trillion by 2030 or a little bit later and stuff. And now with AI just going wild in just one year, we see analysts already updating their predictions and the size of semiconductor crossing the $1 trillion mark already in 2028 and so on. So it's -- again, every time I come to Australia, I have this challenge of trying to explain to people how big this market is, how important it is. You guys know, but like yesterday at the conference, even though a lot of people knew what semiconductors are, we still had to emphasize it and of course, with other institutions and other people that we meet here. So I think this really shows you what's going on. It's crazy, the level of investments in this market, I always repeat it because the numbers are just mind-boggling. Every time you see it more investments and more strategic deals, Intel now -- on the one hand, Intel is struggling. On the other hand, they have a new CEO who's really a magician. He's amazing. I know the guy, and he's just capable of doing amazing things. And now he's managing to get investments from the U.S. government, from NVIDIA stuff. India now is starting to invest a lot. They're setting up foundries in India. In terms -- I'm sorry. I need to do this. In terms of the ReRAM market itself, that every once in a while, I refer to the old slides, and it's interesting to see how year after year, the numbers evolve. I think the interesting thing here is to see they are talking about ReRAM being today about 27% of the market. And I think this is already what we've been talking about for a long time. ReRAM is being accepted now as the new standard. And you can see how the ReRAM market share is growing quite a bit, actually more than doubling or just about doubling in just a few years. But also look at the size of the market, it's like 20x. So not only is the market share growing double, but it's 20x the market. So it's actually ReRAM section is 40x in just four years. And that's a huge growth. That's a huge growth. Right now, the companies who are addressing this are basically TSMC and Weebit. The companies that are commercializing the ReRAM that actually have customers that people are buying it, it's TSMC and Weebit. UMC has a ReRAM that's been qualified, but it's been qualified for years, and it's only at 105 degrees, which is really not accepted in the industry as high enough. And to the best of our knowledge, they don't have any customers. Even the owner of the ReRAM actually, Nuvoton is using TSMC. And there's a new entrant. We all knew that GF is looking for ReRAM. We were trying to be the ones who get in there. Their internal R&D has been pushing strongly that they make it happen and the management gave them a chance. So they announced that they have a ReRAM. I think the good news is you can see that people see ReRAM is really needed. They haven't qualified it yet in their announcement, mentioned automotive. I think they still have some way to go. I personally think they made a big mistake because they just don't have the resources to maintain this. At a certain point, it will have to collapse. That's my personal belief. And so I think both UMC and GlobalFoundries are definitely high on my potential customer list still. I still believe TSMC is going to be a challenge even though they are on my customer list, and I believe eventually we can get there. But this is kind of showing you the market. Notice. You can see, by the way, the split between different markets, analog, MCU and ASIC. And you can see that the initial users are the analog guys. I think you guys already know, we started talking more and more about analog. onsemi is basically an analog company. Even with DB HiTek, it's a BCD process, which is mostly for analog companies. And you can see the adoption. It's no surprise that Weebit's first fab customers are analog. But then after that, the MCU market starts going up. And then after that, you have the ASIC and SoC margins going up. So this really shows you, by the way, that it's reflecting also what Weebit is doing. The fact that we signed up with analog companies. I think that's part of the thing that Yole has been looking at and saying, okay, we can see the money coming in. I mean, you already saw the revenue number for the fiscal year, the $4.4 million. And I guess now we're very happy with the recent announcement of the quarterly that -- this quarter, we got $7.3 million from customers. Now I think it's important for me because I know some people were really getting excited and oh my God, it's already cash positive and look at these numbers and everything. It's important for me, and I like to be honest with things. We're getting paid based on achieving milestones. And sometimes some quarters have more milestones, some quarters have less or whatever. And some of the milestones are bigger and bigger payments and some milestones are smaller. So I want people to understand it's great, and we're obviously very proud and very happy of the money that came in. I just don't want people to think, okay, now that's how it's going to keep growing, and we're going to see record quarters every quarter and whatever and extrapolate stuff. So we need to keep it in proportion. It's good. I mean you can obviously see from these numbers that the revenue numbers, I guess, for this year are going to also grow somewhat. And we're not giving any guidance, of course. But that's -- I think this is a good map of what is happening, and you can see how the Yole numbers are changing and growing. And Yole is finally accepting. Yole is close to STMicro, which is which is the only PCM provider actually. And they always -- at least in our mind, they kind of tend to grow the PCM market just because of that influence from STMicro. It's the only supplier of PCM. But anyway, that's kind of -- again, I need to click on this thing. So, recent highlights. You guys know everything here, the AEC-Q100, that's already old news for you guys. Record revenue for the fiscal year, then taped out at onsemi. That was a -- you can see onsemi has a team of I estimate at least 30 people, almost full time working with us. It's a big team. It's a big effort. They are really focused on pushing this forward as fast as possible. It is strategic for them, and it's great -- it's just a great cooperation. It's -- you can see with IDMs, it's really great because they really want to get this out and they want to get their products already moving and they want to. So it's really been a great partnership and this tape-out, and we now have to sit and wait for the wafers, and we'll see how long that goes. We, obviously, we just talked about the record quarterly customer payments. And obviously, that's nice to see there. And by the way, I want to point out, I mean, people are looking also at, oh, this was a positive quarter and stuff. You need to note that there was also the yearly refund payment from the French government that they gave us. So I'd just like to be as transparent and as clear as possible on things. And then you know that we have a target of three fabs and three product companies to sign up this year. I'm very glad that we actually achieved the three product companies already, and that was really nice. We started announcing the first one, and then we have two more now that are -- so there are three products that are already being designed with our ReRAM in them, embedded in them. Obviously, again, the design takes time and they need to manufacture the prototype wafers and test and see and qualify their products. But the clock starts ticking towards revenues eventually. So that's kind of the update. I always like to point to why Weebit is actually managing to make this progress. What is the difference between Weebit and all these other companies that are trying to build ReRAM or work in this nonvolatile domain. And I really think it's this combination of we have the company that is -- I think we're strong. By the way, the cash position is obviously something that is very important. We have $91 million in the bank, and that really enables totally focused on let's improve the technology, let's get the business, let's close these deals. I'm not worrying or spending time on how am I going to raise money now, and that's very important for us. We have money. Again, you start doing extrapolation in fiscal year '25, the spend was about $25 million roughly. So you can see we're feeling good about it for several years now and that we can totally be focused on getting the business, closing deals and in parallel, growing -- improving the technology. The people, you guys know our Board, which I'm extremely proud of each and every one of them. But beyond that, the company now is about 50 people already. We've grown. Obviously, we need to start supporting more projects and these things. We do have roughly 1/3 of the R&D is PhDs in physics and chemistry. I mean we really have a very strong team. You look at the VPs, I think the average experience is over 30 years in this industry, very experienced, very well-known people in the industry worldwide. I'm not talking about just in Israel and even the levels below, I mean, the average age in Weebit is much higher than you see in normal high-tech companies. And it reflects that you need that level of experience. You need that level of know-how of these things. So, really, that's very important. And Leti, of course, is supporting us. So I think it's great to have that. Obviously, we have a very good technology. It's part of it is all of this R&D that is going in with very smart people. We managed to make the technology work and I can tell you, we've hit endless obstacles along the way, but what's important is that you have the team that knows how to overcome them and move forward and fix things. And so really amazing technology, AEC-Q100 and all and so on. And we're providing the solutions now for the customers. And there's actually -- you have onsemi and the analog guys, and we're working a lot with analog guys. There's quite a bit of activity going on now with companies that want edge AI and want to see how we bring in ReRAM there, and there's activity around there and all these other things. And then it's really the customers. We have a very good relationship with the customers. Yes, some of them are just still hesitant. There still is that perceived risk. They still haven't seen this in mass production and so on. So each one at their own pace, but we are pushing forward. We are -- we still have to sign two more agreements. We're working hard on this, trying to get them in this year, and we don't have a lot of time. I remember last year, at this time, I was sitting and people were saying, you don't have time left. You said you're going to have a deal, you don't have time left, and we got it done at the last minute. We're pushing as hard as we can to get this done this year. We are engaged with a lot of companies with a lot of fabs, okay? I mean it's just fabs. I think it's definitely more than 10 that we're engaged right now in discussions, in evaluations in all of this stuff and each one of them with their own story, why and whatever. And -- but there is a very good -- we're in a good place there. And onsemi definitely helped having that deal. And I believe that when we sign another one or two, it's really going to start -- I don't want to say, opening the floodgates, but it's going to get us moving forward. So, and the customers, by the way, the product companies, they -- we have a huge advantage. We have a huge advantage in the design side. People don't realize. We talk about the PhDs and physics and chemistry and stuff. But we have an amazing design team, which is recognized in the industry to the point where sometimes people who try to develop ReRAM ask us, can you guys take our ReRAM bit and do the design around it because we don't know how to do that. And so we have an amazing design team. Customers realize and these product companies, obviously, our goal is to eventually have enough standard modules that people will just come and use them, and we won't need to do manual work there. I mean the goal is to have high margins and then not be doing services. But it's -- the customers know that if they need that support, if they need that design service, we can give it to them. And that's a critical thing. And especially the first customers, they always need some more handholding and stuff. So we have that team. I strongly believe that when you build the brand name that with Weebit, you're going to be successful. That's what really gets the market going. If you look -- if anyone checks my history and the different companies that I was in, almost all my life, I've been competing with companies that gave competing technology for free, literally for free. They were big players. The customers would buy these huge packages from them and then they would tag on, on top of that for free, the competing product. And I had to go and compete with that. And the only way I could do it was just give good service. The customers knew. And I would meet the CEO and I would look him in the eye and I would say with the companies that I was at Verisity or whatever, we're going to -- I'm telling you, no matter what happens, you have a problem, you call me up, I'm bringing in the cavalry. We're coming in, you will be successful with our product. And I was -- we were selling Verisity was selling more than $100 million per year when Synopsys gave its competing technology, which was good for free. And we got more than $100 million a year because people value good service. And that's really what we're doing here. I go and I look at the CEOs in the eye and I tell them, with Weebit, our team will make you successful. We are there. We have a very experienced team, and they are there for you, and we will make sure that your product won't fail because of us. It might fail because of you, but it's not going to fail because of us. And that's a key thing. So that's really just to give you guys where we are, what the status is, if I'll stop sharing, and we can probably go to Q&A side. Danny Younis: Yes. Thank you, Coby. So we will now move to the Q&A part of the session. Once again, for all those online, and there's quite a few of you, if you have any questions, please type it into the Q&A box at the bottom of your screen. I can see they're starting to come through. But I think just to start off with, we might start in the room. Are there any questions from any of the attendees in the room. Unknown Analyst: Question on next year. We obviously -- I mean, you're too early into the commercialization journey to be giving earnings guidance, as you said. This year, I think it was really helpful for the investor community when you issued those targets around the product customers and the fabs. Is it relevant to have a similar target or goal that the investor community can look at and measure against next year, given we don't have that earnings guidance status, if you like, yet? Is that something you've considered? Jacob Hanoch: This guy is on my case saying, what are you going to announce on the AGM? I mean during this trip, how many times have you asked me that question, we're thinking about what we can do. It's very difficult to actually -- I mean, the targets that we set for this year were, a, very aggressive; and b, I mean there's a big risk on achieving these kinds of targets. And it's very hard, especially when you start growing to keep saying how many customers do you expect to have. And I think it's going to be hard for us to talk about number of customers, but we know you guys need some sort of targets or guideline or whatever, and we trying to figure out what would be the most meaningful goal for you and to keep going. So we're discussing this, and I guess we have a month until the AGM, and we'll figure out what we want to present there. By the way, can you mention the names? I'd like to get to -- David, I know. Unknown Analyst: Just regarding these -- the deals that you've made with the product companies, can you give me an indication of the scope what one may entail? Is it just particularly one particular model of chip that they're looking at? And if it is one, how much extra negotiation or whatever that has to go on if they decide to do another one or expand what's existing? Jacob Hanoch: I think we have you here. Eran Briman: Well, I think in the quarterly activity report, we mentioned also the specific markets that these guys are targeting. Battery management was one of those and then some security-related applications and products. These deals, they differ from one another. It's not one deal that fits all of them. In most cases, they get a license to use the technology in a specific product, while others would like to have this in a complete product line. So, entire products. But I think at this stage, we won't be able to give any specific details about these. Jacob Hanoch: I guess what I can say is right now, they're mostly coming with one product. They want to test the waters, right? I mean nobody jumps head first to the deep end without knowing enough. So the deals that we have now, I guess, basically are, again, I can't talk about all of them. But in general, let me talk generality a bit. Most of the companies that we talked to and we're already engaged, obviously, with more product companies. Most of them are basically thinking of one first product. And we have that negotiation. Some of them want some NRE work and stuff, others are actually willing to use the more standard module. Now obviously, once they do one product and they feel comfortable, they'll want to do more. So it's -- we look at it as we're opening the door to that customer, and now we want to go and expand. So now once you sign the first license agreement, normally, you can just add addendums and it becomes much easier. And that's -- again, that as you grow, the overheads start shrinking because a lot of things you did already and now you can. So the customers you already have agreements with, you normally just add an addendum and you specify the new product. And I mean, if it's a different manufacturing node, there are a lot of parameters, by the way, in these license agreements that you define. And the license fee to give everyone a feel for this thing, the license fee varies by 1 million different parameters, by the size of the memory, by the node that they're using, if it's 130 or 65 or if in the future, it will be smaller nodes, it kind of changes. So there are a lot of parameters. It's hard to give a guidance on, okay, this is what it's going to look like. But the key thing is once the company starts working with normally, they will -- they get to know your technology, their designers get to know it. And then they can just start using it more and more and more products in parallel and you start having a lot of addendums to that license. Unknown Analyst: In November last year, you indicated that once you felt once you had two or three customers that FOMO would sit in. And you've also talked about in the past, crossing the chaser. So, on those metrics, where do you consider you are now? Jacob Hanoch: So we were just talking about it this morning. We're right now in that crossing the chasm bowling. We're at the point where DB HiTek helped us drop the pin of onsemi, onsemi definitely now got others moving. I think we're getting closer to that tornado. I think that, I don't know, one, two more agreements, we'll see it going. So it's -- we're sensing it. We're sensing the fact that, I mean, we're talking to all of these foundries, IDMs, et cetera, and people know they need ReRAM. I mean, by now, TSMC has it in mass production. They need to compete. Now that GlobalFoundries announced it, it got more attention. The market is moving. It's moving at semiconductor pace, but it's definitely moving. Unknown Analyst: Yes. Last one for me. I was just interested in understanding the difference between the fab and the IDM. Obviously, with DB HiTek, we know you've got to go through the tape-out, the wafer production, qualification, et cetera, and then start talking maybe some in parallel, but then start talking to customers about their design and then going through that process to get to a customer chip. With the IDM because they are their own customer, is it safe for us to assume that, therefore, the time to a product and market is shorter with the IDM because you don't have that secondary design, test, qualify process? Jacob Hanoch: The answer is yes. The answer is yes because the thing is when you're working with two independent companies, there's that trust level that I mean the product company, the issue is how much they trust the fab or the foundry in this case, that everything will go well and it will be ready and whatever. So they tend to want to wait until qualification. Now sometimes, and you can obviously see companies actually end up signing up before qualification because they can already see the qualification happening and stuff. But it still takes time. I mean there is still -- it's two different companies, and they need that trust level. The thing in an IDM is it's one company. When it decides to sign up to manufacture, it's because it knows that it wants it for its own products, okay? So there's -- you kind of skip that phase of convincing because the only reason why they sign a manufacturing license is because they know they want it for their end products. I mean, otherwise, why would they sign up with you. So, in that sense, that doesn't exist and you can parallelize more. Now where and how and what's happening onsemi has been very strict with us on don't talk about anything. So we can't go into specific what's happening with onsemi. But in general, you're absolutely right. Unknown Analyst: What's your confidence? I'm sorry, my name is [indiscernible] Jacob Hanoch: Okay. I just -- normally I meet you every time, so I need to know. Unknown Analyst: What's your confidence level in achieving or in signing the two remaining IDM fabs and the qualification of the South Korean company, DB HiTek? Jacob Hanoch: So, qualification is actually moving. We had some.... Unknown Analyst: Sorry, if I may just add by 31st December. Jacob Hanoch: 31st of December, yes, of course. That I understood very well. So, with DB HiTek, we had some hiccups on the way. I mean, always expected that you have some issues, but we are continuing. We believe that the qualification will be done by December 31. Right now, whatever big surprise happens. But in general, we're on that path. With the fabs, we are in advanced stages with one, with others. We're also moving forward. We're really trying to get more done by the end of the year. I guess I can say some might slip into 2026. I can't -- the 31st -- the problem is it takes two to tango, right? And these guys sometimes drag things. So we believe we can definitely close -- one of them we can definitely close. The second one, we are really pushing hard. And actually, there's, again, we're engaged with a lot of them. I don't even know who -- sometimes who it will be because we're talking to several. But the goal is really to push as much as we can to have these things done by the end of the year, and we'll see. It's work in progress. Unknown Analyst: The equity incentives of the other directors are hang on. Jacob Hanoch: Well, my equity incentive, believe me, I'm thinking about that a lot. Believe me, I'm thinking about that a lot, mine and his. We all -- our equity is tied to this, and we're really pushing as hard as we can to get it done. You can imagine. Unknown Analyst: Wishing you the best. Danny Younis: Are there any questions still inside the room? We can revert back to you at the end, okay? So if you think of any more. We've got quite a few online questions. I'll also try and pull them where possible, Coby. The first one is actually from an e-mail from Stuart that we got. It's in regard to the pipeline. Would you mind talking a bit more about the pipeline as part of your presentation? Specifically, you have mentioned previously potential signings are being held as no one wants to go first. Is that a comment in relation to fabs, IDMs or product companies? And now that customers are signing, is that helping discussions with others? Jacob Hanoch: So, first of all, human nature is such that we don't like change. And people like to -- what they're comfortable in to stay in their home, in their environment. So whenever change come, people resist it. And that's true for everyone, right, and in any domain. Specifically in this domain, it's true for the fabs, for the product companies. We had a situation where I can tell you with one of the fabs, I thought we were going to sign a long time ago. And then they were already convinced and wanted to go forward and then their product customer told them, hey, we're still not comfortable with this new stuff and whatever, and we want to do flash for another project and stuff. And suddenly, the whole thing comes to us screeching halt and they focus on flash and they come back to us almost a year later. So that's part of the challenge that we have in giving these guidelines and things. You never know how it will work even when the fab is already telling you, we're totally convinced we want to run with ReRAM. Suddenly, their product company tells them, "no, no, no, no. We really prefer flash first. Let's let someone else do that product. We'll do ReRAM the next one, right? So it happens. And -- but I think, again, and this is also true. The more people you see around you starting to use something, the more at ease you are with using it. And that's what's happening. onsemi really helped us. I mean it's -- there's before onsemi and after onsemi. And after onsemi, when people see such an important player in the market, that's signing up with this technology, they say, okay, they're talking. They're talking. Now again, some of them are dragging their feet and saying, oh, until we don't see DB HiTek with a product in mass production, we're just not going to move forward. We want to see it in mass production. And there are several like that. Others are saying, okay, we understand that if onsemi analyzed it and took that risk, we can feel more at ease and they still do evaluations and they still go through all of this stuff, but we're progressing. These negotiations, by the way, are just -- they take so long and their lawyers. I can tell you, let me go back to onsemi. If we go back more than a year ago, I was sure onsemi was going to close before September. It was literally ready for closure. And then suddenly, they tell me, oh, the lawyer is busy now. We're doing an M&A. I think they announced some acquisition in November or something like that. The lawyer just disappeared, and we were so close and the lawyer disappeared. And that's why it ended up closing in December. Now you asked me December 31, it could have been that the lawyer would have been busy two more weeks, and we couldn't have closed onsemi on time. So it's that kind of thing. It's -- we're doing our best on these things to push these forward. Danny Younis: Okay. There's a few questions on DB Hi-Tek. Two or three investors online have asked about an update on the quarter. You've already answered that, so we don't need to answer that again. But Stuart's got another question in terms of DB Hi-Tek. Are there still a lot of fabs, IDMs and/or product companies waiting for DB qualification? That is. Will that be the dam wall bursting when that's completed? Jacob Hanoch: It's going to be definitely an important milestone. There are some companies that are telling us, we just want to see that happen. We just want to see that you actually close that qual. So I don't want to say it will open the wall, but it's going to be another crack in the wall. I think that the big thing will be some more major players signing up and we're pushing on that. I mean that's the big push, but it's definitely going to help us push forward. Danny Younis: All right. There's a few questions onsemi. Can you provide a little bit more detail on the final qualification with onsemi? Jacob Hanoch: I guess onsemi, we can't really talk -- what we can say is we taped out, okay? Now this is now being manufactured, guess where, in onsemi, okay? And you can understand that they consider it a high priority. So now I don't control their priorities in the fab. I mean it takes many months to manufacture. They can give it higher priority. I don't know what other stuff is running through their fab line right now and where they're putting these wafers relative to products that they manufacture for their customers to actually get revenue. So, but they're manufacturing them, and we'll get them back. Once we get them back, as you know, we start doing all the testing and verifying and then seeing that everything is in a good shape. And hopefully, at that point, we can start qualification. The good news is because it's, again, it's the fab that is also the customer and so on, when we want to run more lots, if you remember, we need to do qualification on 3 separate lots that run independently. So, I mean, those kind of things, I imagine. Again, I'm not committing to anything, but I imagine they will probably give priority to get these lots through so that we can do the qualification and they can get their products out. Danny Younis: Some of the investors are pushing a little hard at it, Coby. I know you probably can't answer this, but given onsemi was talked out in early October, is there a chance you could be receiving royalties from onsemi in full year 2026 fiscal year? Jacob Hanoch: I guess Unfortunately, again, they will -- you can assume that they'll want to have this in their products and they'll want to push this forward. But their schedules, we know some of them. By the way, we don't know a lot. They keep it secret from us as well. And even what we do know, they made it very clear that it's under NDA, and we shouldn't be talking to anyone about it. Danny Younis: Maybe to rephrase it as Warren does here, once qualification is finalized, how soon will you have products ready-for-sale potentially? Jacob Hanoch: I really try -- I try to be as transparent as I can with you guys, but onsemi was very clear, don't talk about these things. Eran Briman: Maybe we can just say in general, it takes between 18 months to 24 months for. Jacob Hanoch: Yes. From the day they start doing a design of a product, it's -- the rough schedule in general, again, talking generalities, it's I would say, between 18 and 24 or 30 months. It depends on the product and the complexity and whatever. But that's kind of the time scale to get product out to mass production. Danny Younis: Okay. Maybe a final one on onsemi before we go into other matters. The current tape-out with onsemi, is that the end design final product that's taped out in order to reduce the time? Jacob Hanoch: No, no. No, it's the test chip. You need to remember, this is the first ever tape-out of ReRAM. So it's a test chip that we designed. I think I presented it a while back. It's a complete test chip. It has a processor. It has SRAM on it. It has a bus and everything. I mean it's a complete basically, it's a complete SoC, okay? We did a complete system on a chip, which has our ReRAM in it where you can really load programs in and run them. And so it's a real system that is going out, but it is our design for test purposes at this point. Danny Younis: Okay. We'll move on to other topics. So, from Chris, Coby, firstly, congratulations on a great quarter. How are things progressing with automotive companies? Will this be a slow burn in terms of them putting pen to paper? Jacob Hanoch: You can answer that one also, right? Eran Briman: Well, I want to say automotive is definitely one of the key markets and a lot of interest in that domain. We get -- in modern vehicles today, you get thousands of chips in there and they are more advanced than what you might find in other IoT devices. There's the push over there, we feel it very clearly. I think onsemi is a very good application. onsemi is all about automotive applications. So I feel very confident with these prospects over there. Jacob Hanoch: I would add just the thing about automotive is human lives depend on. And that's something you need to remember, the regulation that you have in different countries related to it, the standards that you need to meet. It's not just AEC-Q100 that you need to meet. There's ASIL and there's ISO 26262, and there's 1 million different qualifications, if you want to call it, that they need to pass and they need to show that people won't die because, right? So it's very, very critical automotive projects normally take much longer than an average SoC. And that's something that people need to understand. They will engage with us now, and they see the potential. And I mean, a lot of these automotives are actually analog. Remember that graph there, a lot like onsemi. So a lot of these automotive guys are analog and they will engage with us now. They can already see the AEC-Q100, they can already see the potential. But how long will it take until it's actually in mass production, automotive projects take longer. Eran Briman: Maybe just to add on that, it's also stickier. Jacob Hanoch: Yes. I mean once they work with you, the cars -- the same model of car, and it's not just the same model of car. The subsystem is used in many future generations of that car. So once you're in, you're in for decades. I mean those are the type of projects that you sign up and you know royalty is now going to come in for a long time, you're going to have that royalty stream. Danny Younis: Okay. The next question from Jason is around the security product. Can we get a sense of what a security product means in terms of the use of a Weebit chip? Eran Briman: Well, secured products mean one of the advantages that ReRAM has is the security. The fact that the NVM is integrated with the main SoC means it's much more difficult to hack the products. You get secured products in payments, secure payment. You get this in your NFC products in your smartphone. Also secured products in automotive, right? It's extremely important to make sure that there's no way to hack into your autonomous vehicle or whatever it is. So these are the types of products that we're seeing over there. And the NVM is a critical part there, right? It's one of those. Jacob Hanoch: The NVM also -- I mean, ReRAM has some unique characteristics about no two ReRAMs are identical. And so people use that, for example, for security keys or things like that. So it's used in many different security applications. But that variability that you have between ReRAMs and the fact that no two ReRAMs are the same is something that a lot of people like and use that in the security. Danny Younis: Okay. The next question is around the architectural agreement. So is the architectural agreement still alive? And if yes, can you comment on what nodes would be part of the architectural agreement? Jacob Hanoch: So is it alive? Yes. One of those fabs that we were talking to is, again, an architectural agreement is also much more complex than a regular agreement, and that's one of the things that's causing it to drag forever. But yes, I never -- if you would have asked me in 2023, do I think I'll be sitting here at the end of '25 and still saying, yes, it's alive, and we haven't signed it yet. I would have said you're crazy. How long will it take? But unfortunately, it's definitely alive. It's definitely alive, and we are working with those guys. But once we announce it -- yes, I mean, once it's done, we'll announce it. I can't talk about it before that. Danny Younis: Maybe on GlobalFoundries, there' a question here. Maybe can you provide an update on if the GF chips were qualified? Jacob Hanoch: The best of our knowledge. I mean, in their announcement, they didn't mention qualification. If it were qualified, I imagine they would want to say that. So they didn't mention it. They also didn't mention the word automotive anywhere in that announcement. So, two things that we didn't see in their announcement. Now they started much later. They are putting a lot of emphasis. I know that they are putting a lot of emphasis to push this fast through. But still, it's a lot of work, and we don't really know beyond that where they stand. But we're relying on their announcement. If I were them and it were qualified, I would say it's qualified. I want the customers. Danny Younis: Christian is pretty keen to know, are you working with any mobile phone product companies? Jacob Hanoch: Also, our... Eran Briman: Among enough. Jacob Hanoch: Among, among, yes, we're talking to so many different product companies, and there's also those. Eran Briman: Yes, smartphones, they have tens of different chips inside from the big SoC that runs the application processor that's usually much more advanced in terms of process node to a lot of power management devices that you have there and smart payments and all these things. So, I'm sure eventually, we'll find ourselves in one of those smartphones, yes. Danny Younis: Okay. Turning to SkyWater. Maybe just an update there on the current relationship status. Jacob Hanoch: I think right now, it's pretty obvious they are totally focused on their R&D services, and we're a customer there. So, I mean, we definitely -- we're a customer right now of SkyWater. The fact that we're qualified there is great because now R&D can actually do a lot of testing there, and they are faster and cheaper than Leti. So a lot of things we're actually running through them to save money and to do things faster. In terms of working with them, to be honest, right now, they've disappointed me so much that even they acquired a new big fab in... Eran Briman: In Texas. Jacob Hanoch: In Texas. I don't know what they're doing there. I don't see I don't want to bash whatever. But right now, there's no real discussion about that. And by the way, we're talking to such bigger fabs right now. To me, they are lower priority. I mean I'd rather close agreements with some of the big guys than with SkyWater anyway, so. Danny Younis: There's a couple of questions around discrete. So the first one is, do we risk our competition beating us to discrete ReRAM while we focus wholly on embedded? Jacob Hanoch: So, first of all, we're not focused wholly on embedded. There is work in the background. It is low priority, admittedly, but there is work going on all the time. I mean just in September, I was at Leti with the R&D team, and we were talking about discrete and how we push this forward and looking at the different options and so on. So it's definitely not dead. It's definitely something that we know is important and we want to push forward. I personally believe we -- I am not aware of any other company that is working on discrete ReRAM right now. So I don't think we're risking someone beating us to it. I haven't seen anything anywhere about a company that's trying to do discrete ReRAM right now. So it's something that people would love to have, but it's a big challenge. I think that's -- again, going back to Weebit's differentiation, it I'm hesitating to say this, but I really can't think of another company in the world right now that has the combination of team, technology, resources, management focus that can actually do discrete ReRAM. I really can't think of that. Eran Briman: We had the Fujitsu that was doing some ReRAM for some time. Jacob Hanoch: Yes, they were trying to do, but that was it. Yes. So there's -- I think we're definitely -- I don't think anyone is going to bypass us. It's true. It's not a high priority right now, but it's still working all the time in the background. Danny Younis: And given it's not high priority, the next question sort of alludes to this. So can you give an indication of the time line to discrete? And have you yet identified a preferred selector architecture? Jacob Hanoch: I can't give any time line. It's still a lot of work. It's really a lot of work to do, and it's going to require R&D and we are exploring all kinds of talking about architectures. We're still at the phase of -- we're trying one and then we're thinking maybe there's another potential. And so there's different options that we're looking at. And yes, so it's still work in progress, and it will take time. Danny Younis: Stephen's got an interesting question here. So are there any restrictions on Chinese companies obtaining or manufacturing ReRAM? Jacob Hanoch: The U.S. has a black list of companies that you can talk to. So those are definitely off of our target list. But beyond that, we don't have a real restriction. I can tell you that I'm just giving preference to anyone who's not Chinese right now because of the risk. I mean you don't know if a company that you're working with might end up on the black list later on or things like that. We've already seen situations where companies that we were considering working with that actually kind of ended up in the black list. So I'm very cautious. We have so much potential right now in the rest of the world. And China is a huge market, and you can't really ignore it. But at the same time, Weebit is just entering this huge vacuum. There's an unbelievable vacuum out there that we can fill. And there's no -- I mean, why take the risk of trying to work with a company where there might be an issue when you have so many others. Danny Younis: There's a couple of questions from Jason and Serena on EMASS. So maybe just to make the generic. Has the EMASS collab progressed? And can you maybe just talk to the talk that they're progressing towards a 16-nanometer form factor, which seems to be beyond Weebit's announced capabilities. Maybe just comment on that. Eran Briman: Yes. Well, we worked with EMASS, it was earlier in the year towards this demonstration that we have. It's a beautiful demonstration. I think recently, we also uploaded a video that shows this demo. I think it's very nice. It has great potential. They were using a 22-nanometer process node, and they have the option to continue and work with us. We're in discussions, but there's nothing much to actually report at this stage. So, let's see how this progresses. Danny Younis: Okay. We'll go to more market general questions. So anything happening on the AI front? Eran Briman: A lot. Jacob Hanoch: This guy and his team are -- I think that's the biggest activity. Eran Briman: There's a lot going on, on AI. AI is divided into multiple steps. We're seeing a lot of interest in integrating our ReRAM into an AI SoC, just to get the memory closer to the processing elements and reduce the amount of data movements. And at the same time, we're seeing increased interest also in what's called in-memory compute -- this is where the computation is done within the memory element themselves. We're seeing a lot of interest from research institutes. I would say that for the past five, six years, maybe five years ago, this in-memory compute was just a concept that people were talking about. Nowadays, this is in real research, but not just within universities and research centers, but also large corporations and companies are investing heavily in this domain. I think it's still not ready for production, but we're getting there. We're getting there every year. It's getting closer and closer. I wouldn't put any time line on this, but it's there and the interest that we get from customers and from such partners is very high. Jacob Hanoch: And I guess I would just add, Edge AI, I talked about it, I think, in the previous period time that I was here in Australia. ReRAM is really a natural fit for Edge AI, and that's a domain that's really growing rapidly and the demand there is growing. The challenge is a lot of these guys want to work at 22 and below. And right now, we actually don't have that to offer them. But some of them are working in larger geometries, and we are relevant. So, but in general, there are a lot of calls even from big name companies who say, hey, we saw you were working with ReRAM. You have ReRAM. We're looking at it for Edge AI and what do you think? So I mean, it's definitely something that a lot of people are looking at ReRAM for Edge AI. Danny Younis: Speaking of Edge AI, I've got a question here from Jason on Edge AI. So can you maybe just clarify, has this been signed as a product company or in negotiations? Jacob Hanoch: So, unfortunately, we gave all the information we could on the product companies in the quarterly. Companies are still trying to be more -- I mean, eventually, they will be announcing their products. And I think these things will become public. Hopefully, they'll let us start talking about it more. I guess, beyond the fact that right now, the three product companies, what we mentioned are U.S.-based, I can't really talk about which application -- I think we -- for the first one, we mentioned they were a security company. The others right now we need to be really careful with them. So that's what we can say. Danny Younis: Maybe touching on Samsung. So what's Samsung's focus these days with regarding NVM? Are they MRAM focused? Jacob Hanoch: So, Samsung, I mean, what they have in mass production right now is MRAM. And what they're offering their customers is MRAM, I guess. Eran Briman: I think it was public that they had some ReRAM. Jacob Hanoch: They had a big ReRAM project, which they ended up shutting down because it just -- they couldn't get it off the -- working. Beyond that, I don't think we can comment. Danny Younis: Michael's got a technical question here. How are you going in terms of reducing the process node to 10 nanometers? Jacob Hanoch: Well, I said we're talking to a lot of fabs. And obviously, that's the direction we want to go, and we want to get fabs that work in the smaller nodes. So, eventually, we'll be there, right? It's a matter of pushing. And you can see -- again, that's part of that "perceived risk thing that in the beginning for the companies, the smaller the geometry, the higher the perceived risk. And so that's why you've seen that we started with 130. Now we're at 65 and then we're trying to push down, and we'll be getting there. Danny Younis: Okay. The next question is around your technology. So once it's in a customer product, will the performance results help sell that Weebit technology to other possible customers? Eran Briman: Definitely. Jacob Hanoch: I mean the ReRAM has big advantages over flash and people will see it and people will see the competitive advantage of the products that have ReRAM in them. I'm sure that, that will help us. Danny Younis: Yes. And when are you looking at reducing the smaller nodes? Jacob Hanoch: Well, as soon as these guys will sign that damn paper. Eran Briman: But we're confident there's no technical barrier to a 1x geometry, knock-knock. Jacob Hanoch: At the 1x, definitely not. Below that, there's more work to be done. But at the 1x, we've already done quite a few -- yes, I mean, I'll even say we have PDKs. We did simulations. We've seen that there's no issue. Danny Younis: Is ReRAM a good fit with the new generations of humanoid robots under development? Jacob Hanoch: Definitely. Definitely. Eran Briman: Definitely. For multiple functions. Jacob Hanoch: Yes, for exactly. I'm thinking for a lot of different functions there. We talked about AI, which is part of it. It's really for many different functions. Eran Briman: AI, it's the motor control that you need to run, which is it's a power management. There's many different functions within this. Danny Younis: Maybe a question on one of your competitors. What are the key differentiators between Weebit's ReRAM and TSMCs? Jacob Hanoch: From what we know, and again, we don't know enough about TSMC from what we know. I would say, first of all, it's the company focus. It's not the actual technology. We -- I don't think we can really comment on speed or performance or power or whatever. We don't know enough, and I don't want to go into that. But I think the real difference is the company focus. Weebit has the design team that is there to help -- and we know because we had customers who actually called us up and said, we talked to TSMC, we wanted to use their ReRAM, but we wanted them to do some modifications for us, and they wouldn't do it. They said, God help, basically. TSMC is a fab. They want to manufacture. They don't want to start dealing with modifying. I mean this whole ReRAM is just an enabler for them to sell wafers. So they have several versions. It's a good ReRAM. First of all, let's make it clear. TSMC is TSMC, and they have a good ReRAM and people are using it. And I'm not going to say it's anything bad about the ReRAM. But Weebit, the advantage is that we have everything around, and we will work with the customers to give them what they need to tailor it to give them a better solution. I believe that the investment that we're making in R&D, and we are working on new concepts in manufacturing ReRAM and on improving the whole manufacturing process. I don't know how much TSMC is continually investing in it. Again, it's not their core competence. It's not something that they plan to make a lot of money off of. I mean it's -- right now, they are making a lot of money off of it because they're the only ones who have ReRAM. So they put this big margin on there. We tell people ReRAM doesn't add more than whatever, 7%, 8% to the cost of a silicon wafer, they say, but TSMC is asking for 40% like, well, because they can, right? So, but in reality, they're not -- this isn't what they're going to make money off of. And at a certain point, there's a limit to how much they'll invest in this R&D. So I believe that over the years, we will continually improve the technology. And at a certain point, and it's not going to be immediate, but at a certain point, I believe we have a good chance of having a better ReRAM that some customers will want and will push TSMC to license the ReRAM from us. Danny Younis: We're on the last four questions online, and then I'll throw back to the room for any final questions. Very general questions. So are we going to see any takeover offers in the near future? Jacob Hanoch: I guess everyone knows what my answer to that. Danny Younis: And on the topic of cap raises, any cap raises in the future? Jacob Hanoch: With $91 million in the bank, I'm focused on getting the deals done. I really don't think I need to think of cap raises. Danny Younis: There's maybe more of a comment here rather than a question in terms of maybe getting other directors like Atiq to join these webinars maybe once a year. It's good having Eran on, maybe introducing other directors as well maybe. Jacob Hanoch: Honestly, I never thought -- I mean, we have Dadi coming every year to the AGM, and he's there. The others are nonexecutives, so I normally don't think about getting them involved, but that's -- let me think about. Danny Younis: A couple of more have come in at the last minute. Outside of the foundry deals and partnerships you've already talked about, is there any other area, potentially a new market or application that you think could quietly become a big growth driver for Weebit over the next few years, something that's not really on the radar at the moment? Jacob Hanoch: We look around. I mean that's this guy's job, right? Business development is his title, right? And we're always looking around at how -- first of all, how ReRAM can be used in different places. And then every once in a while, there are ideas of complementary things. I mean this is the type of thing that I think any company is always looking at, at what's happening in the market happening around. And I mean, when things happen, they happen, right? Eran Briman: I think one interesting market that we're seeing that we get a lot of questions about data centers, AI, but data center side, right? So very focused on Edge AI, and we're doing a lot of stuff there, and I hope soon we'll be able to talk more. But on the data center front, what we're seeing is not necessarily the NVIDIA chips, which run at a much more advanced process node, but the power management, which is a critical issue when it comes to data centers, right? The amount of power and the air conditioning that runs in there and all that. So power management is critical. And one of the markets, for example, for semi is data centers, power management for data centers. So this is definitely an interesting way into those data centers for resistance. Danny Younis: Okay. We've probably only got time for two more questions, maybe one from the room. Eran Briman: All right. Danny Younis: Okay. So the third last question. From your perspective, how should shareholders best interpret the information that you shared? And what are some of those indicators that you can suggest that investors should focus on to understand your future momentum? Jacob Hanoch: I think Yes. I -- honestly, it's hard to talk about yourself and whatever. But I think Weebit is a very conservative company, which is just focused on doing the job. We basically try -- I think you can see -- first of all, I try to be as transparent as I can. Second, you can see the targets and how we progress from year-to-year and slowly. It's -- actually, in semiconductor terms, we're really moving fast. So I know it looks like forever and -- but we are moving, and it's really steady as she goes, right? So I think that more than anything, I hope that shareholders are looking at how things evolved and are seeing that we went -- I remember when I joined the company, we had just the first bit cell and then the array and then we got to the full chip and we qualified and we went to SkyWater and we went to DBH and we got to onsemi. And so I hope you can see that trajectory. Now you can also see the cash. I mean, fiscal year '24 was $1 million revenue, fiscal '25 was $4.4 million. Now just this quarter, you can see already how much cash is coming in. So you can start understanding where it's heading. I really just hope that people see that we're serious. We're doing the work. I don't like to blow things out of proportion. I don't like to go -- when things don't work well, we don't go into, oh my God, everything is falling apart. We're -- it's a very experienced team. We've been through endless hurdles in our lives. And at Weebit, believe me, we've gone through quite a few. And we just -- we hit the hurdle, okay, what do we need to do? We fix it, we move on, and we continue to progress. So I just think people need to look at that and see how every quarter things advance. Danny Younis: And this is a good one to finish off from the online questions at least, 10 years, with your crystal ball, where do you see the company in terms of scale or size versus your peers? Eran Briman: Or the market. Jacob Hanoch: Yes, I'm not giving any guidance because this -- in Hebrew, we say prophecy was given to the falls. I mean that's what's written in the Bible, prophecy was given to the falls. So -- and I don't consider myself such of it. So -- but I mean, obviously, I believe Weebit will be growing. My goal. I can say what my goal is. My goal is to be the leader, the #1 ReRAM company. And I think in 10 years, it's going to be not just ReRAM. We will expand beyond ReRAM. There is a lot more out there. I mean, who knows -- again, people asked about M&A. Things happen when they happen and when you have opportunities. But over 10 years, who knows, you can assume that there might be some opportunities. the whole market, AI, we don't have a clue where it's going to head. ReRAM is a natural solution for AI. So I believe you're going to see a big AI market and you're going to see Weebit as a big player there. That's, again, my belief and my goal, what I would like to do, no guidance or any commitments or whatever. Danny Younis: Do we have a final question in the room? Unknown Analyst: Just regarding the test chip that's been manufactured and in some cases, qualified. Is there any commercial viability to sell that as it is since it's already gone through the full process? Jacob Hanoch: It's a very simple system on a chip. I mean some people might want to actually use it. I don't know. Eran Briman: There is a possibility, I think. For certain applications, some IoT applications, it could be a good fit. But I definitely believe that for a true product, you would need at least to add some kind of interfaces and real-world interfaces into the chip or... Unknown Analyst: I thought that actually was the idea that was made quite generic and versatile for people to test out. Eran Briman: Yes. It's very generic and versatile. I agree. Jacob Hanoch: But for commercial purposes, they'll probably want to tag on some more. And to be honest, I haven't really thought much about it. But if a customer comes and say, "Hey, your test chip is really interesting. I just want to tag on some things. We have no problem to license the full test chip. Unknown Analyst: A quick question about patents. Could you tell me or tell us roughly how many patents you would have covering ReRAM compared to your main competitors like TSMC? Eran Briman: So we're not following up on specific patents from competitors. I think... Unknown Analyst: Just numbers. Eran Briman: Yes. So I think in the last quarter, we announced six new patent applications were made and we were at more than 90 patents for us. With regards to competition, I don't have the answer. Jacob Hanoch: Yes, we actually -- it's -- in the industry, people try to avoid researching the patents of others because you can only get into trouble. So... Unknown Analyst: We took get someone else to do it for you. Jacob Hanoch: I guess it was less interesting for us. As long as we know that to the best of our knowledge, we're not infringing on anything, and that's what we care about. That's what's important. Danny Younis: Unfortunately, we've run out of time. So that concludes the Q&A session. I'll now hand back to Coby for any closing remarks. Jacob Hanoch: Well, I guess, first of all, I'm always glad to meet you guys and the people that are out there. as I said before, Weebit is moving forward, progressing, making good progress. You can see it. We definitely plan to close more deals this year. We -- that's the big focus right now next year to already get into that tornado and really get this thing moving. We have an amazing team, and we have amazing shareholders that stick with us in the ups and downs and all. And yes, I mean, the numbers, again, what happened this quarter, I'm repeating, don't expect every quarter to be like this and going up, but it's good, and we are going to continue to get money from customers and the numbers will grow over time. So, it's good, and we're moving forward. Danny Younis: Okay. Thank you, Coby. Thank you, Eran. Thank you to all the people who attended in person, and thank you to all those online who can now disconnect. Thank you. Eran Briman: Thank you everyone. Jacob Hanoch: Thank you.
David Boshoff: Good morning, everyone, and welcome. I'm David Boshoff, and with me is our CFO, Steve Fewster. We're pleased to be joining you today for the September quarterly update. Before we get underway, I'd like to highlight that today's presentation should be read in conjunction with our September quarterly report. This is now available on our website. As we move through today's session, if you have any questions, please feel free to add it to our live Q&A tab. And then that's on the right-hand side of your screen, and we'll address those questions at the end of the session. It's been another strong quarter for BCI, marking 1 year of operations. Switching on the pumps last year, since then, we have moved more than 185 gigaliters of seawater into our ponds, with continued progress on inundation of ponds 1 to 9, ahead of the 2025-2026 summer season. Our focus remains clear, ensuring a safe and sustainable operational ramp-up as we bring more assets online and close out the final construction packages. What really stands out this quarter is how strongly our people and our partners have lived our values. A great example was our goal to achieve 90% pond inundation by the 1st of August. I was actually on the site of the day that, that happened, and the team achieved it 2 days ahead of target. They really smashed that goal. That's our we do what we say value in action, showing commitment, teamwork and pride as we are producing together. Now I'd like to take you through the highlights for the quarter. In safety, we continue to strengthen key fatality prevention controls by completing 301 critical control verifications. We also performed 640 field leadership interactions and our total recordable frequency -- injury frequency rate reflects an ongoing focus on safe operations with a 12-month rolling average at 3.1. By the end of September, the pond service inundation has reached 93%. We also introduced new technology that's giving us real-time insights into how our operations are performing. This data is helping us to make smarter and faster decisions and plan more effectively for the future. I'll share a little bit more about that later. Construction also continues to progress well. We are both on schedule and within budget, with the overall completion of the construction packages now sitting at 74%. Finally, the commissioning of the pre-KTMS pilot crystallizers, which is an important step of our sulfate of potash progress has also progressed well. We are now in commissioning. I'll now hand over to Steve to walk us through the financial highlights. Thank you, Steve. Steve Fewster: Yes. Thanks, David. With construction on budget, BCI remains in a strong financial position. During the quarter, we drew $110.9 million for our syndicated debt facility, and that brings total cash drawn to date to $347 million. In July, we also received a deferred payment of $34.1 million from the sale of Iron Valley. I'll share more on the cash flow shortly. But first, David will provide a more detailed update on our operations. David Boshoff: Thank you, Steve. I'd like now to start with a quick overview of the salt making process and how it's unfolding at Mardie. Salt production starts with the intake of seawater from the Indian Ocean, which is then transferred through 9 evaporation ponds. Our operations team then carefully monitors the density in each of these ponds to ensure the brine is moved at just the right time. This project is very important because it ensures that the impurities in seawater is precipitated ahead of the crystallizers. This enables the production of salt to our customers' specifications. As the water temperatures rise, the natural evaporation process increases salinity of the seawater and gradually transforming that seawater into brine. Once the brine reaches the target density, which is typically between 1.21 and 1.22 kilograms per liter, it's pumped into the crystallizers where industrial grade salt begins to crystallize. Once enough salt is crystallized, it's harvested. The harvested salt is then processed through our wash plant to remove the layers of impurities before it's being shipped to our customers via our Cape Preston West Port. As you can see on the map, on the left of your screen, the ponds vary in size, all the way from pond 1 to 9. As I mentioned earlier, we've achieved 93% pond surface inundation with most of our ponds at or near capacity. Our focus is now on reaching the target brine density. In particular, we're looking at pond 9 and to make sure that reaches the right density of brine before it's transferred to the crystallizers at the perfect time. To support this process, we have developed a digital twin, which is a digital model, specifically designed for operations, and this allows us to monitor in real time and make data-driven decisions. The digital twin is now fully integrated into BCI's production planning process, combining real-time operational data from the primary seawater intake all the way through to ship loading while incorporating historical weather information. The chart you can see there on the left of your screen has been created utilizing various weather scenarios from the digital twin and it illustrates the range of time of when the brine in pond 9 is forecasted to achieve the density. You can also see on the graph where the actual density of pond 9 is sitting at the end of September. The chart here, you can see, illustrates that range. And then this analysis also shows that target density is likely to be achieved during the period between January and March, and this obviously will depend on the actual weather conditions we experienced in this upcoming summer. Importantly, we continue to work towards our target of having our first production salt on ship in the December 2026 quarter. Other operational activities during the quarter included the commissioning of the Transfer Station at 6/7, also the ongoing fabrication of our salt harvester herein Perth, and the development of the Mardie salt operating system. We continue to make good progress towards our construction milestones, specifically engineering and design of the salt wash plant has reached 60% completion. Earthworks have also commenced along with other orders placed for major long-lead items. These long-lead items include centrifuge, elutriator, dewatering screen, also the screw classifier. The committed cost for the salt wash plant now stands at 30% with the remaining costs to be committed over the coming two quarters. The primary and secondary salt crystallizer were also completed, marking the conclusion of the majority of the bulk earthworks, as well as pond and crystallizing infrastructure required to support full-scale production. In April '25, we commenced commissioning the first crystallizers with seawater to test their permeability and help inform the optimal sealing solution. Sealing the crystallizers is a critical step prior to transferring valuable high-density brine from pond 9, as I described earlier. The results from these trials, the seawater trials confirmed that the use of liners as a superior solution to sealing crystallizers because firstly, it creates a more predictable harvesting environment; and secondly, it eliminates seepage, thereby creating additional ramp-up tonnes in the early years of production. Consequently, BCI is implementing a program, sealing the crystallizers where this cost expected to be fully funded within the $1.443 billion salt-first budget. Sealing of the crystallizer trials will commence in the current quarter with the first crystallizer scheduled to be ready to receive brine from February 2026 onwards. The sealing of the remaining trains is planned to occur as required to meet our production ramp-up schedule. Also now the marine package of the Cape Preston West Port has reached 93% completion, and the environmental approval for the offshore placement of dredge spoil has transitioned into the next phase with both the state -- with the state and the Commonwealth regulators. Steve will take us now through the financial highlights. Steve? Steve Fewster: Thanks, David. Total construction now sits at just over $1 billion, having spent $67 million this quarter. The largest packages of work remaining include the dredging, the crystallizer sealing and the salt wash plant. Other than the long-lead items that have been ordered for the salt wash plant, these packages will be funded from the $386 million we had in uncommitted funds. From the engineering design work on the salt wash plant, and the procurement of materials to date, we are confident the salt wash plant will come in on target and to schedule. With dredging, the tenders closed last week and based on our early analysis of this package, the costs look to be aligned with our budget. And lastly, this will be placed in order for the first package of the crystallized aligners, with the cost of this order being in line with our forecast. The progress being made on these three major construction areas supports our confidence of remaining on budget. Looking forward to the next quarter, as we prepare the site for the arrival of the materials for the salt wash plant and the crystallized aligning, construction activity at Mardie will be lower than recent quarters. Both of these work fronts will be in full swing during the March 2026 quarter, and dredging will follow in April 2026. These activities align with our construction schedule and remain on track to support our FSOS target. As mentioned earlier, we drew $110.9 million from our syndicated debt facility during the quarter. At the end of the quarter, BCI had available liquidity totaling $676 million, with approximately $441 million required to complete construction, we remain fully funded to complete the construction work as well as having sufficient working capital to be able to operate through the ramp-up. As we previously shared, our drawdown process runs on a 45-day cycle. Prior to each drawdown, we are required to undertake a project cost reconciliation and provide this in conjunction with an opinion from the lender's independent technical expert or ITE. The ITE's opinion confirms to lenders that BCI remains fully funded to complete construction, as well as having sufficient working capital. To date, we have successfully completed 6 drawdowns totaling $347 million. I will now provide an overview of what we're seeing in the salt market. You'll see the CFR prices that we quote in the quarter release are based on the price of salt as well as the weighted average cost of freight to get that salt to the customers' ports in Indonesia, Japan, Korea, Taiwan and the Philippines. As such, freight is a key component of the CFR price. The factors affecting the cost of freight include the size of the ship and the distance from the supplier to the customer's port. During the June '25 quarter, Indonesia imported proportionately more volume than other buying countries when compared to the March 2025 quarter. With the lower shipping distance from Australia to Indonesia, this reduced the weighted average freight cost and hence the CFR cost in the June quarter was $5 lower. On an FOB basis or the price that the supplier receives for their salt, the Asian market remains relatively stable. As we've previously shared, the Cape Preston West Port is a strategically valuable asset for BCI and the region. This is a multi-user port that is being designed to export approximately 20 million tonnes per annum of bulk commodities such as salt, SOP and iron ore. At nameplate capacity, Mardie's SOP and salt operational needs are around 5.5 million tonnes per annum. This gives us surplus capacity of around 14.5 million tonnes per annum. So this infrastructure could be part of the solution for some of the components in the West Pilbara region who don't have access to a port. By the end of September, construction reached key milestones marked by the completion of all the heavy lifts. This included putting the ship loading tower in place, installing a small boat landing, as well as subsequent demobilization of the jack-up barge. Works on the electrical and mechanical installation are now well advanced. Pleasingly, BCI continues to receive inquiries from potential third-party users of this facility in the region. David Boshoff: Thanks, Steve. The SOP part of our production stream is a key byproduct of our salt production, and it's a really important revenue stream for BCI in the future. This quarter we visited several potash producers in China and India to gather insights and benchmark their operating practices. The learnings from these visits are now being incorporated into our pilot plant design. We successfully commissioned the Pre-KTMS trial crystallizers as you can see on the screen on the left. And we are now operating these in line with expectations. Operations for the pilot plant construction are also progressing well, and we will commence that work early next quarter. While our focus remains on safety and ramping up our operations safely and completing construction, we continue to prioritize environmental stewardship. During the quarter, we delivered a wide range of environmental monitoring activities in collaboration with specialist consultants and our traditional owners. We also hosted our second implementation committee meeting with the Wirrawandi Aboriginal Corporation and commenced work on an updated Indigenous engagement strategy. On the community front, BCI visited Karratha Senior High School to support the positive behavior support program and the student achievement through the BCI High Value Rewards initiative. We also marked our first presence at the Resources Technology Showcase, and this showcase is Western Australia's premier mining innovation event. As we close this quarter, we do so by consistently applying our values in doing what we said we will do. We are well positioned to respond to forecast salt supply shortfalls in face of rising global demand while creating sustainable multigenerational benefits for our shareholders, local community and also for the broader Australian economy. This brings us to the end of the presentation. If you've got any questions, please add them to the Q&A tab on the left of your screen -- I'm sorry, on the right side of your screen, and we'll go to questions now. Thank you. Tammie Miller: David, can you talk to the remaining packages of construction yet to be committed? Given the salt wash plant design is still not complete, when will you be in a position to award that work and cost to complete known? David Boshoff: Thank you. So yes, the salt wash plant, as I mentioned, is 60% through design. The natural process of design would start with the earthworks design, the footings, the structure itself. And then as you move through the components that you add to that wash plant, and then eventually the electrical and engineering -- sorry, electrical and instrumentation. So the work that's complete is all our structural design, all the design for the selection of our components, as I mentioned earlier, the long-lead items. What is currently underway is piping, electrical and instrumentation, which is naturally to the back end of your process. We have already locked in and ordered a long-lead items, which means that cost is in actual cost. We've also commenced our earthworks and we are about to award the concrete and footing packages at the end of this month, so in November. The next packages will be electrical and instrumentation. And I'm expecting that will still be early in the next year. So probably around February with us then commissioning in salt wash plant in September of next year. Tammie Miller: Thank you. Steve, you mentioned in the quarterly report that the upcoming quarter will be slower in terms of construction progress on site. Does this put FSOS timing at risk? Steve Fewster: Yes. We were actually going to have a slow quarter this quarter. We're coming off the back of almost completing the jetties, the jetties at 93%. The ponds are now constructed, watering the plants, all the bulk earthworks, the crystallizers are complete, this pump stage -- stations that are closing in on completion for the crystallizers. So everything has -- is tracking to schedule. And we were always going to have this natural -- naturally -- natural quieter quarter this quarter. So for many of the reasons that David just spoke about, the schedule is always aligned to have the design work for the salt wash plant now. Dredging was always going to commence in April next year because of the dredge we know in the region. So at this stage there's nothing we see on the construction front. That puts it on a critical path for FSOS, which we're targeting at the back end of next year. Tammie Miller: Thank you. David, your decision to align the crystallizers, can you outline the cost of procuring and installing the liners, what the timing is and what the catalyst was for that decision? David Boshoff: Yes. I think this is important for me to highlight a couple of things. So when I started with BCI, we operate with a -- what I would call a static model. So basically a model that requires manual inputs to be changed. And it took us about a week to 1.5 weeks to run different scenarios. Since then, I mentioned, we've done the digital twin. So the digital twin is a fully modeled replica of our operations, it includes our size of our ponds, the amount of water we can intake, our actual weather data. What that enabled us to do is do one scenario in a couple of hours. So if I went to Steve and I ask him, what if we do this? What's the impact to NPV? What if we change that? How does it impact our cash flow in the future? It was quite hard and arduous process to determine that with a digital twin that happens in a couple of hours. So one of the things that we've looked at very carefully is what is the impact of the planned and forecasted seepage for the crystallizers on our revenue in the future. And is there a better way to do it. And so the digital twin then enabled us to run the scenario with ceiling and without ceiling. And then, of course, we included our forecast cost for the sealing in that model. And the NPV for sealing those crystallizers vastly superior than not doing that. So that then allowed us to say, well, we have to -- that's a better solution for shareholders. And we commenced with exploring exactly how we'll do it from a cost perspective and from a timing perspective. This then led us to the decision to take to the Board and that might then -- I guess, enabled us then to commence that process. So we expect the sealing prices to happen procurement has commenced. So sealing of the first train will happen between now and February. And then February is going to expect, again, the digital twin giving us this clarity. February, we expect the water in pond 9 to be ready to be transferred into the first crystallizer. So we're back -- we've worked back from that date to ensure the first train is ready to receive brine. And then the subsequent trains are then scheduled in line with when that brine volume will come from pond 9. So I see this as a great opportunity. I think the digital twin has improved our insights in how to maximize productivity and that then leads to smarter decisions for the future. I would just probably just add 1 thing -- thanks, Steve. Just 1 quick, I guess, in closure before I hand over to Steve, is the good work the team has done so far has enabled us to have headroom. And Steve will be able to share a little bit more detail on that. Steve Fewster: Yes. Obviously, I was going to emphasize that point. We've got an outstanding projects team and through getting the project to 74%, they're discipline around cost management, cost control, thinking -- digging through really effective solutions has been we've been able to build a buffer in our budget. And so when things -- when we look at opportunities to maximize the return to shareholders, as we have done with aligning of the crystallizers, we've been able to do that within that funding envelope, within that capital budget of $1.443 billion. So I think full credit goes to that project team and that discipline and managing that budget tightly. Tammie Miller: David, can you say a little bit more -- explain a bit more about the water flow from pond 1 to pond 9 is a question around, does the pond get empty 10% and then replenish? David Boshoff: Yes. So the -- I think it's important for me to just step through that. The densities between ponds are managed based on a very specific market density at its transition between ponds. So the ponds are maintained at the exact same level throughout its production cycle. What happens is you continue to transfer, call it fresher water or more -- less saline water from the salt into the pond and monitor the density. And when it gets to the required operating density, some of that water is then transferred into the next pond. At the same time, that water has been transferred is replenished from the pond just before. So imagine a total system where all the ponds are staying roughly at the same height through average operating period, but the density is fluctuating a little bit up, a little bit down based on that transition -- continuous transition over time. What that allows us then is to have a continuous stream of highly saturated brine in pond 9, that then feeds the crystallizers. Where the process is more stage -- where process where they empty and fill is in the crystallizers, so the crystallizers continuously filled until we have enough harvestable product. And then that crystallizer will be drained to make it ready so you can harvest that product, while the other crystallizers are then crystallized, and that goes into a cycle when you rotate that through your different crystallizers in the production process. Tammie Miller: Thank you. Steve, can you comment on what the possible revenue is per year for the port for non-salt products? Steve Fewster: Look, we haven't set a unit price at this stage. We have looked at other ports in the region. So bulk ports do publish their rates. And I think we can look to those rates and probably to the south of us at Ashburton Port is probably best -- is the best comparison to what Cape Preston West Port is as compared to, say, Port Hedland. And what you'll see in the published rates that it's about $9.10 per tonne that Ashburton Port is charging. Now part of the cost of -- or part of how your price will be built up will be based on what's the capital expenditure and what's an appropriate return. That is guided if you want to go and look at the Ashburton Port is, that's probably as good an indication at this stage as anything else. Tammie Miller: Excellent. David, given the seepage in the crystallizers that you've talked about, will you need to live pond 9? Is this why it isn't full? David Boshoff: No. So that -- yes, I'll clarify that. I think important point. So pond 9 is the last one that was finished. You might recall from the previous quarter. We've only just finished the -- we call it the port road or the PPA road, which is the northern boundary of pond 9. And that part is only -- the crystallizer only -- sorry, that pond is, I mean, just being commenced, filled in the last couple of months, and is steadily rising. And you also noticed in the picture that I shared earlier, pond 9 is tiny compared to some of the other ponds. So that pond, I'm expecting in the next 3 months will continue to fill. Obviously, to the seepage question, we've been monitoring the seepage in the ponds. And I'm happy to share with you that the -- any seepage in those ponds, particularly in the ones we filled at the beginning of -- or about 12 months ago, the seepage has completely stabilized in those ponds. So the natural prices of where I mentioned the impurity is dropping out, my expectation is when pond 9 gets to its required density and those natural impurities drop out, then that will continue to, I guess, get that pond into the right production capacity and allow it to operate as it should. And my final point on that would be is that these ponds are based in mudflats. So mudflats, of course, creates a natural boundary to the seepage of those ponds. Tammie Miller: Thank you. Steve, assuming you go ahead with producing SOP, will this be funded by debt or equity? And what would the timing and magnitude of the capital be that's required? Steve Fewster: Yes. So we frequently say the CapEx is probably somewhere between $150 million and $200 million, and the work that the SOP team will help inform the ultimate value of that construction. In terms of the funding, by the time we complete the pilot trials, select a design and they need to fund that construction, we would fully expect that the salt business would be generating free cash flow. Our business that generates free cash flow has a wide range of options to be able to fund that. So I think we'll be -- we'll have very, very flexible options at the time when we need that funding. Tammie Miller: Great. Thank you. David, can you comment on the status of the dredging sea dumping approvals and how they are tracking? David Boshoff: Yes, absolutely. So the -- I mentioned in my -- one of my remarks that we've progressed to the next stage. So last week, we had the EPA Board meeting for the state approval. We're currently in the consultation phase. So we received our draft conditions that included sea dumping among other tweaks in our conditions. The team is expected to respond to that today. Then that is still on track to receive our approval from the state for those conditions well ahead of our April commencement date for dredging that we spoke about earlier. On the federal side, we're also in the conditions consult period. That condition has currently been drafted, and we expect those provisions to be with us somewhere next month. And again, that team is tracking on time ahead of that April due date. So I'm pleased to say that those things are progressing, and we will have to continue to work hard that we deliver on those approvals as we did for the groundwater management plan and the other approvals in the past. Tammie Miller: Thank you, David. So at what level of strength has the pier jetty being constructed to withstand what level of a cyclone? David Boshoff: Yes. Our design specifications for the port has been a one in 500-year rain event. That, of course, is quite superior to many other ports, but is the design requirements that we've set for the construction contractor. So one in 500-year will certainly stand, I guess, the test of time. Also, it can also do a category 5 cyclone. So there are some tie down procedures for the conveyor belt itself, but the structure is designed for voluntarily above that. Tammie Miller: Thank you. That concludes our questions. David Boshoff: Thank you, everyone, and we'll see you next quarter. Steve Fewster: Thank you.
Operator: Good day, everyone. Welcome to VeriSign's Third Quarter 2025 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. At this time, I'd like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir. David Atchley: Thank you, operator. Welcome to VeriSign's Third Quarter 2025 Earnings Call. Joining me are Jim Bidzos, Executive Chairman, President and CEO; and John Calys, Executive Vice President and CFO. This call and presentation are being webcast from the Investor Relations website, which is available under about VeriSign on verisign.com. There, you will also find our earnings release. At the end of this call, the presentation will be available on that site, and within a few hours, the replay of the call will be posted. Financial results in our earnings release are unaudited, and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-K and 10-Q. VeriSign does not update financial performance or guidance during the quarter unless it is done through a public disclosure. The financial results in today's call and the matters we will be discussing today include GAAP results and 2 non-GAAP measures used by VeriSign, adjusted EBITDA and free cash flow. GAAP to non-GAAP reconciliation information is appended to the slide presentation, which can be found on the Investor Relations section of our website available after this call. Jim and John will now provide prepared remarks. And afterward, we will open the call for your questions. With that, I would like to turn the call over to Jim. D. Bidzos: Thank you, David. Good afternoon to everyone, and thank you for joining us. VeriSign delivered both growth in a domain name base and solid financial performance during the third quarter. We also continued our consistent return of value to shareholders through dividends and share repurchases. At the end of September, the domain name base for .com and .net totaled 171.9 million domain names, up 1.4% year-over-year. We had strengthened the quarter with 10.6 million new registrations. Revenue was up 7.3% year-over-year and EPS is up 9.7% year-over-year. During the quarter, we returned $72 million through dividends and $215 million through share repurchases for a total return to shareholders of $287 million. The positive domain name base trends we saw during the first half of the year continued during the third quarter. Net registrations added during the third quarter were 1.5 million names. This was made possible by the strong volume of new registrations already mentioned and improvement in the year-over-year preliminary renewal rate. The renewal rate for the third quarter of 2025 is expected to be 75.3% compared to 72.2% a year ago. The domain name base grew sequentially in our 3 main regions with the U.S. and EMEA being the strongest. We're seeing solid underlying demand for our domain names and continued registrar engagement with our programs which together have enhanced the pace of growth in new registrations. Given these continued positive domain name base trends, we now expect the growth in the domain name base to be between 2.2% and 2.5% for 2025. Our financial and liquidity position remained stable with $618 million in cash, cash equivalents and marketable securities at the end of the quarter. At the end of the quarter, $1.33 billion remained available under the current share repurchase program, which has no expiration. As announced in today's earnings release, VeriSign's Board of Directors declared a cash dividend of $0.77 per share of VeriSign's outstanding common stock to stockholders of record as of the close of business on November 18, 2025, payable on November 25, 2025. VeriSign intends to continue to pay a cash dividend on a quarterly basis, subject to market conditions and approval by VeriSign's Board of Directors. And now I'd like to turn the call over to John. I'll return when John has completed his financial report with some closing remarks. John Calys: Thank you, Jim, and good afternoon, everyone. For the quarter ended September 30, 2025, the company generated revenue of $419 million, up 7.3% from the same quarter a year ago. Operating expense in Q3 2025 totaled $135 million, which compares to $129 million last quarter and $121 million for the third quarter last year. The areas we saw increases include incentive compensation and legal costs. Net income in the third quarter totaled $213 million compared to $207 million last quarter and $201 million in the third quarter last year. Third quarter diluted earnings per share was $2.27 compared to $2.21 last quarter and $2.07 for the same quarter of 2024. Operating cash flow for the third quarter 2025 was $308 million and free cash flow was $303 million, compared with $253 million and $248 million, respectively, in the quarter a year ago. I will now discuss our updated full year 2025 guidance. Revenue is expected to be between $1.652 billion and $1.657 billion. Operating income is now expected to be between $1.119 billion and $1.124 billion. Interest expense and nonoperating income net, which includes interest income estimates, is still expected to be an expense between $50 million and $60 million. Capital expenditures are still expected to be between $25 million and $35 million and the GAAP effective tax rate is still expected to be between 21% and 24%. In summary, VeriSign continued to demonstrate sound financial discipline during the quarter. Now I will turn the call back to Jim for his closing remarks. D. Bidzos: Thank you, John. The improved domain name base trends that emerged at the end of 2024 continued through the first 3 quarters of 2025. We're seeing strength in demand for our domain names, which we believe are the results of the plans and expectations we laid out last year. Our adjustments to our channel programs, along with anticipated favorable cyclical shifts from ARPU to customer acquisition. Of note is that these improved trends are seen across our main 3 regions with strength in the U.S. picking up during the third quarter. Our 2025 programs have deepened our engagement with our channel and we use their feedback to improve our 2026 programs, which we have rolled out to our registrars. We look forward to finishing out 2025 from a position of strength with these positive domain name base trends. I would note that we also see increases in registration and resolution activity for which we believe increasing use of AI is the -- is a primary driver. Thanks for your attention today. This concludes our prepared remarks, and now we'll open the call for your questions. Operator, we're ready for the first question. Operator: [Operator Instructions] And the first question comes from Rob Oliver with Baird. Robert Oliver: A couple of questions from me. Jim, I guess, first, I appreciate all the color on the domain base trends that you're seeing. I guess, going back to Q1 of last year, when you guys called out the changes you need to make in your marketing programs. We've seen a nice improvement in those domain-based trends from sort of beginning of this year through now. You cited a few reasons, but I was wondering if you can give us a little bit more color perhaps on how much of it is macro, how much of it is stuff that you guys are controlling with your marketing programs? Any other color you can provide in particular geos would be helpful. And then I had a couple of quick follow-ups. D. Bidzos: Okay. Well, I think really, the story is pretty much the one that I talked about in my remarks. It's just basically blocking and tackling in a sense. We improved our programs and made them more adaptable for our channel. We got great engagement from our channel. We've been talking about a cyclical shift that we were hoping for and anticipating and that came around. So that added to the growth. The registrar engagement with our marketing programs is also helping us sharpen our 2026 programs. I guess some more details we can share. John, do you want to? John Calys: Sure. Thanks, Jim. As Jim mentioned, we saw good strength across all of our 3 main regions. EMEA has been the most consistent region over the past few quarters. But what we saw in third quarter was the U.S. improved very nicely and was strong during the quarter. The domain base in Asia Pac, which includes China, did grow again, but it wasn't as strong as the growth we saw during the first half of 2025. Our programs seem to be contributing to the improving trend of domain -- of demand for our domain names. We saw a success with our marketing efforts during 2025. We've already rolled out our programs to registrars for 2026. As Jim mentioned, we continue to incorporate feedback from our registrars and have further refined our approach for 2026. As you would expect, we'll continue to invest in programs that have been working well, and the initial response from our registrars to the 2026 programs has been positive. Just as a reminder, the cost of our marketing programs is included in our updated guidance we provide today, and all of these programs are accretive. In addition to the strong volume in new registrations, the renewal rate has continued to improve as evidenced by the preliminary renewal rate in third quarter of 75.3%, that's up from 72.2% a year ago, both the first time and previously renewed rates have improved year-over-year. And as a reminder, the overall renewal rate is impacted by the mix of first-time renewing names this year versus last. And more specifically, last year, we had fewer new registrations which means fewer first-time renewals this year, which tends to improve the overall renewal rates. The midpoint of our improved DNB guidance for 2025 reflects a continuation of the trends seen in the first 3 quarters of the year, and we plan to provide you with 2026 guidance during our February call after we have a chance to see how domain-based trends finish out '25 and start out 2026. To sum it up, we're pleased with the improvements in both growth and renewal rates and that these better trends are seen across our main regions. Robert Oliver: That's really helpful. Okay, thanks John, appreciate it. Jim, I want to ask specifically about changes that Google has made this year to their AdSense program and what, if any, impact you might be seeing or expect to see within your current domain base from those changes? D. Bidzos: Okay. Well, this -- so Google's AdSense has been around for a long time and the changes that they made are part of a long process that's not new. Through the almost 15 years, they started in 2011, 15 years, Google has been making changes to their algorithm, and they've steadily eroded domain names that exist solely for ad monetization with AdSense. So changes this year to AdSense have continued a multiyear predictable strategy from Google to reduce their reliance of both advertisers and domain name registrants on that particular service. So this isn't a new trend. And after a decade of these changes, we view our exposure as minimal. Don't confuse these domain names with names that have been purchased for resale. Some of these are parked because it doesn't cost anything to do so, but the intent of these domains and the value of these domain names is for resale are not impacted by changes to AdSense. Robert Oliver: Yes. Yes, that helps. Okay. If I have time for one more, I'll just -- I'll ask one more. Just wondering if I can hear from you, Jim, just a broader sense of your view on how you see AI potentially impacting your business, how you see it impacting your business at all today and how you think it might impact your business going forward? I know you guys have said that any technology that makes it easier to create and use domains is good for you guys. I think that's generally true, and we're seeing a lot of activity in that regard. But would love to hear your view on -- from a high-level perspective on AI. D. Bidzos: Thanks -- yes. Thanks for that question. AI is on everybody's mind these days, and it's no surprise, we get a lot of questions about it. So let me answer that in 2 parts. One, what impact we're seeing in our business and separately how we're using ourselves to manage our business. So on the first part, it's early, but with the data we have this year, it's clear to us that AI is having a positive impact on registrations as well as on the utilization of our DNS resolution services. I might mention today, our infrastructure on average, processes over 450 billion DNS transactions per day and growing. Just 2 years ago, that number was $200 billion per day. So AI companies need data, and they're continuously scouring the Internet to get it. Data is not static. And so AIs like search engines are constantly fetching fresh data from websites to augment their existing data. This is enabled by the DNS. There's no doubt in our minds that this trend will continue growing importance and will be additive to the existing drivers of DNS Reliance. So we think this applies even more to the agentic web. Agentic AI can do more for you, you set an objective, and the AI can plan steps and execute required tasks. So for example, the launch of Agentic browsers is making interaction with websites more user-friendly, even more powerful. It lets users summarize information across multiple open tabs, from any websites, applications and Internet services. Again, this is enabled by the DNS. Also, AI can be powerful for domain name suggestions, website provisioning and content generation. So we've used and continue to use AI in our domain name suggestion platforms. For example, AI is enabling more sophisticated multi keyword name suggestions based upon natural language across many languages. And of course, like most businesses, we look for ways AI can provide efficiencies and better protect our services. And one last thing. Looking ahead, we believe domain names will remain critical in providing many important services. They can serve as digital trust anchors, providing trust and authenticity of a destination, critical for Agentic AI. Domain names provide globally unique, stable, human-readable identifiers for verifying digital content and can be especially valuable in combating misinformation and deepfakes hypercritical for AI. As it relates to infrastructure for new protocols because AI agents autonomously crawl the Internet to complete complex tasks, we believe demand for persistent, resolvable identities and endpoints will continue. But the traditional use of domain names isn't going away. Businesses require branding, discoverability and credibility. So domain names and recognized and trusted high assurance TLDs like .com and net hold strong value. Registrars in the DNS ecosystem are well positioned to layer new value-added services on this infrastructure, again, all enabled by the DNS. So from what we see today, the trends are very positive. Operator: And we'll take our last question from Ygal Arounian with Citi. Ygal Arounian: I guess I want to follow up on some of Rob's questions. Maybe first, just on the marketing programs. And there's been a lot of questions on this lately from investors. And maybe if you could help just kind of parse through marketing programs, what's worked in particular. And if there's been a lot of discounting within that? Or is that just the cadence and pace of discounting has changed at all? And just note in your -- in the SG&A line, there was a sort of a notable step up there. I think you called out some legal expenses. But if you strip those out, that sort of more normalized, you step up a little bit in that spending? Maybe just kind of help us think through that a little bit more. John Calys: Yes, Ygal. This is John. We do think our marketing programs have contributed to the growth we've seen in 2025. I would point out that from a cost standpoint, those programs are accounted for as a reduction in revenue. So in the SG&A, there really isn't a significant change in marketing dollars in that line item. So it really is the incentive comp and the legal costs that I mentioned during my prepared remarks. That said, we've seen -- we've tried to shift our programs towards ones that yield higher quality and higher renewing names. And we think those are working at least to date. We've made some adjustments to those programs for 2026. The initial response that we've gotten from registrars as we begin to roll out those new offerings to them has been very positive. And so we're pleased with that. We continuously review our programs, monitor their performance and listen to feedback for registrars, and we will continue to invest in programs that we see are successful. The last thing I would say is don't think of our programs of something that's finite for 2025 or finite for 2026. Think of these programs as an evolution of what we've run for several years. And the main thing we've changed recently as we give more choices to be responsive to the changing market. So you can expect us to continue to learn, adapt and where appropriate, implement changes to our programs going forward. Ygal Arounian: Okay. And so another follow-up on the Google AdSense issue. Just -- I think there's a lot of opaqueness in this industry and maybe things that investors don't understand. Jim, you mentioned a lot of park domains are deferred kind of resale, a lot of the park domains are there for defensive purposes. Like is there any way to sort of break out what you think the split is on advertising monetized or aftermarket monetized defensive? And I think there were a number of players in the -- or a couple of players, key players, public players in the market that saw some impact from this in particular, which might be where some of this fear has been spreading from. So it does feel like it's impacting somewhere. If you could just comment on that and your thoughts on that. D. Bidzos: Sure. When you say it's impacting somewhere, meaning not in our zone, you're not talking about that. I want to make sure I understand the question. Ygal Arounian: I'm talking about like some public players that have seen an impact to add revenue from this change on advertising on park domains. D. Bidzos: Well, if that's your revenue model to make -- to earn revenue from monetizing traffic in parked domains through AdSense, yes, you've been on a downhill slide for 15 years. It was a 2011, I think many of those listening may remember this, Google introduced a change to their search algorithm called Panda, and then they did some more. There was Penguin and I think some others that started with P. And I remember during earnings calls, we'd go through each one and what impact it would have. And that's what I meant when I said that, that particular business has been eroding for 15 years. What I meant about the other side of the business or the other side of those domains is that the domains that are purchased for resale can be easily parked. In fact, I actually found that a registrar had parked a domain that I owned that I wasn't doing anything with, because I guess I didn't check the box that said don't park my domain. So they can pick up a small amount of revenue or at least they could. This happened about 9 years ago. So I think those domains are purchased for resale. They are -- those are -- you can see those for sale. And on registrars, almost every major registrar now has an aftermarket available for premium com domains. Those are different, but you may -- some of those could be part is the point I was making. So I don't have a segment breakout in detail. We do some analysis, but we don't disclose that. John Calys: Okay. And then finally, just shifting to different. Just an update on -- if there is any on .web time line or expectations and maybe in particular, like if sort of loophole on this process continuing open over again, might change? And then maybe with -- at the same time, just if you could talk about any update on how you think about the new -- I guess it's not really an auction model anymore, but with new TLDs and how that might play out later next year and into 2027? D. Bidzos: Okay. So first of all .web, there's nothing substantive that's new since we talked last quarter. The -- but what is true is that what I reported then, which is that the final hearing is still scheduled for mid-November 2025. So I think there's anybody new on the call, just to reiterate, we intend to become the registry operator for .web. We hope to bring it as soon as we can to our customers. We believe Altanovo, who in this legal proceedings believe their use of ICANNs processes to keep that from happening as an abusive process and is being pursued in bad faith to keep web off the market. So we only have weeks now until at least that process begins, and we'll certainly keep you informed when we can about anything that comes out of that. I'm sorry, you had kind of a second part of that? Ygal Arounian: Yes, just on the upcoming domain auctions and -- on that process yes, for later next year and into, I think, 2027? D. Bidzos: ICANN 2026 round of new gTLDs you're referring to. Yes. Yes, that's -- I believe that's on target to open the round in the second quarter, I believe, is ICANNs goal to do that. Unlike the 2013 round, there will not be auctions. There will be a different process that they use, but they haven't started rolling all that out yet. I think like a lot of companies, we are looking at any opportunities there. If there's something that we're interested in, we have our teams studying that, nothing to report yet. But yes, that round, if everything runs on schedule, I'm not sure exactly what the timing for the process is after the opening of the round and the submission of applications and there's a lot of process that goes with these. So I can't tell you exactly when. But yes, I think, 2027, you'll probably -- is probably the earliest that they'll actually be deployed because of the process. But it starts Q2 2026 according to ICANN. Operator: And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. David Atchley. David Atchley: Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation. This concludes our call. Have a good evening. Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
Operator: Good day and thank you for standing by. Welcome to the third quarter 2025 IMAX Corporation earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one-one again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Jennifer Horsley, Head of Investor Relations. Please go ahead. Jennifer Horsley: Good morning and thank you for joining us for IMAX Corporation's third quarter 2025 earnings conference call. On the call today to review the financial results are Richard L. Gelfond, Chief Executive Officer, and Natasha Fernandes, our Chief Financial Officer. Rob Lister, Chief Legal Officer, is also joining us today. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our earnings press release and the slide presentation have been posted on the Investor Relations section of our site. Our historical Excel model is posted to the website as well. I would like to remind you of the following information regarding forward-looking statements. Today's call, as well as the accompanying slide deck, may include statements that are forward-looking and that pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause your actual future results to not occur or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information, future events, or otherwise. During today's call, references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures, as well as the reconciliation to non-GAAP financial measures, are contained in this morning's press release and our earnings materials, which are available on the Investor Relations page of our website at imax.com. With that, let me turn the call over to Mr. Richard L. Gelfond. Rich? Richard L. Gelfond: Thanks, Jennifer, and thanks, everyone, for joining us as we review an exceptional quarter for IMAX. We delivered our highest third-quarter revenue ever with $106.7 million and our best-ever quarterly cash flow with $67.5 million. We drove growth of more than 30% across gross margin, net income, adjusted EBITDA, and earnings per share. Our third-quarter earnings exceeded those of our first and second quarters combined. The third quarter of 2025 was our highest grossing Q3 ever at the global box office with $368 million, up 50% year over year. Signings of new and upgraded IMAX systems surged past our full-year total for 2024 with 142 through September, and we are approaching 100 installations year to date. We now expect to hit the high end of our guidance of between 150 and 160 installations for the full year. You've heard me say that IMAX has been moving into a new position, that we've been steadily building something bigger. Throughout the year, we've delivered operating results that exceed expectations and transcend the broader marketplace. Early on, many thought our full-year guidance of $1.2 billion in global box office would be difficult to achieve. We're now very well positioned to deliver on that guidance. Following our Q2 earnings call, our stock dipped, with many noting that the Q3 Hollywood slate looked soft on paper, and we proceeded to deliver a record quarter. IMAX is, quite simply, a different company than it was just a few years ago. This quarter is the latest and maybe the clearest example yet on how far we've come. We're consistently delivering a diversified, dynamic portfolio across Hollywood blockbusters, local language titles, and alternative content, and we further separated ourselves from exhibition as a result. In Q3, the Mexican box office declined 11% year over year. IMAX was up 29% in North America, and globally, IMAX was up 50%. In prior years, when IMAX posted big results, you could usually point to a single defining title: Avatar, Top Gun, Oppenheimer. Now, our performance is increasingly driven by the full breadth of our content strategy. In the third quarter, we had a big film for IMAX Hollywood hit in F1, for which we dramatically over-indexed. We also had a powerhouse Japanese light language release in Demon Slayer: Infinity Castle. We hosted successful music events from Prince and The Grateful Dead. We flexed our muscles in horror, not historically a genre associated with IMAX, with strong openings for The Conjuring and Weapons. We even leveraged The IMAX Experience to breathe new life into legacy titles, most notably with our successful re-release of Jaws. IMAX is not just a premium format. We're a platform for event content that spans genres and the globe. That diversified portfolio and the marketing prowess of the IMAX brand as a beacon of must-see theatricality make us much more valuable to our studio and exhibition partners than ever, which continues to drive strong installation and sales activity. Audiences in 89 countries and territories around the world know that for awe-inspiring experiences, you must see it in IMAX. The third quarter saw the conclusion of our record run of consecutive Filmed For IMAX blockbusters through the summer, but it also demonstrated our ability to drive success beyond releases shot with our cameras. The halo effect of IMAX extends across a wider collection of films, events, and experiences than ever. F1: The Movie was our highest-grossing Hollywood release of the year, with $97 million worldwide to date, more than 15% of the film's total box office on less than 1% of the screens. Our success with F1 was powered by our deep collaboration with Apple on the film, the latest example of how IMAX has emerged as a premier partner for streaming platforms. We now have four blockbuster openings on the year: Sinners, Mission Impossible, F1, and Tron Aries, for which we've generated at least 20% of the domestic opening on just over 400 North American screens. That's a feat we've achieved less than a dozen times in our entire history, and four of those came in the last six months. It's also been a watershed year for our local language strategy, as evidenced most recently by Demon Slayer. The global anime phenomenon has earned more than $73 million to date in IMAX. It's our biggest Japanese film of all time. It delivered our biggest September opening ever in North America, an astounding feat for a foreign film, and we indexed 19% of its domestic debut. We're optimistic the film will secure a release in China too, where recent Japanese anime titles, including First Slam Dunk and Suzume, have played very well for us. We've now generated more than $356 million in local language box office year to date, shattering our previous record of $243 million set for the full year 2023. International films account for 36% of our global box office year to date, up from less than 20% last year. As we look ahead to the stretch run of the year, the slate is significantly stronger than last year's stripped, depleted offering. November includes two IMAX-friendly releases in Predator: Badlands and The Running Man. We have used our leverage to program another strong Thanksgiving slate, locking in Zootopia 2 and Wicked for Good early. This put us in a position to get tickets on sale before most of the market, with both titles looking strong and tracking. We continue to round out our slate across music, sports, gaming, and exclusive experiences. Building on our success with The Grateful Dead and Prince in August, we have a concert event with Depeche Mode next week. In December, we will host the long-awaited re-release of our seminal Stones at the Max, the beloved 1991 concert film which IMAX made with The Rolling Stones, and the only concert film shot entirely with IMAX Films cameras. In our second year, we will expand our offering of the League of Legends gaming tournament next weekend in China, with up to 219 locations. We partnered with Netflix on a buyout promotional event in support of Guillermo del Toro's Frankenstein. Of course, the year concludes with Avatar: Fire and Ash. Our teams have been working with Disney on the launch for a year to ensure that the brand association between IMAX and Avatar, that has yielded record-breaking success for our companies, continues. With our network continuing to grow and our market shares surging worldwide, we expect to deliver another strong performance with the franchise. With the carryover of Avatar, 2026 looks strong right out of the gate, highlighted by Christopher Nolan's The Odyssey, Greta Gerwig's IMAX exclusive Narnia, and Star Wars: The Mandalorian and Grogu, Super Mario Galaxy Movie, Toy Story 5, and Dune: Part Three, which will have an IMAX 70-millimeter run in select locations. Additionally, a very compelling 2027 slate continues to take shape, including Joe Kaczynski's Miami Vice, which will be Filmed For IMAX, Star Wars: Starfighter, directed by Shawn Levy from Deadpool and Wolverine, Michael B. Jordan's The Thomas Crown Affair, Avengers: Secret Wars, and The Batman 2. Our team was in London last month visiting the filmmakers and sets of many of these upcoming releases, including Narnia and Star Wars, and it's clear these are IMAX-sized productions leaning heavily into our technology and format. Our visibility into our Hollywood slate continues to grow, even as we opportunistically program local language blockbusters and alternative content events and experiences throughout the year. Turning to our networks business, signings to date have already surpassed the number of signings we had for the full year 2024. We're having a lot of success in international markets we prioritize for growth. In Japan, we're pacing towards our single best year for network growth ever, as we expect to end the year with 10 installations, representing a nearly 20% expansion of our footprint. In Australia, we expect to install six new systems for the full year, more than doubling our footprint to 10 locations nationwide. Year to date, we completed 60% of the installations we've targeted for the full year 2025. The level of activity in the sales pipeline is also strong. We just completed an agreement for two new locations in Singapore. We signed multiple agreements this year across two priority markets, France and Germany, and are in conversations for new locations in Italy and Spain. We're in discussions regarding new locations in the Middle East, and we continue to drive opportunity with new and existing partners alike across North America, including our recent agreement with Apple Cinemas and several potential new locations across the underpenetrated Southwest region. Given our continued sales momentum and our backlog of 470 systems worldwide, we have clear runway for strong network growth for years to come. In sum, we delivered excellent financial results in the third quarter. As the year draws to a close, we look forward to hosting an Investor Day in December and sharing our strategy for how we grow our performance over the next several years. We continue to believe the best is yet to come. As we look ahead to a year with no less than four massive tentpoles: The Odyssey, Narnia, Dune: Part Three, and The Mandalorian and Grogu, for which IMAX is at the center of the filmmaking, marketing, and distribution. IMAX has never been better positioned creatively, commercially, or strategically, and we're focused on strengthening our position, executing with financial discipline, continuing to provide the most immersive entertainment experience on the planet, and delivering for our shareholders. Thanks, and now I'll turn it over to Natasha to walk through the financials. Natasha Fernandes: Thanks, Rich, and good morning, everyone. IMAX's third quarter was one of the best in our history, showcasing our global scale, our agility in programming a diverse content portfolio, and in turn, the profit and cash incrementality in our business. Third-quarter IMAX box office of $368 million was 50% higher year over year and exceeded StreetX's estimates by more than 25%. Signing for IMAX systems at the end of September was 142, already eclipsing full year 2024, and system installations are now tracking to the high end of our guidance range of 150 to 160 systems. From a profitability perspective, our operating leverage shined through in Q3 with an adjusted EBITDA margin of 48.6%, up a substantial 630 basis points year over year, and adjusted EPS of $0.47, up $0.12 year over year. Our profit incrementality flowed through, contributing to cash from operations of $67.5 million, which set a new quarterly record and was up more than 90% year over year. As I said on last quarter's call, these are not just numbers; they are a direct result of growing demand by filmmakers, studios, exhibitors, and consumers for the IMAX experience. Our Q3 global market share reflected that, increasing 49% year over year to 4.2%, marking a new IMAX high. Our goal, though, is not to just outperform the market but to expand it, drawing more consumers to theatrical, eventizing content while opening the aperture to bring audiences more of the entertainment they seek, whether Hollywood, local language, or alternative content. This works for us, but it helps our studio partners, it supports our theater customers, and it is responsive to consumer demand for the best possible experience. All of this has resulted in year-to-date performance that positions us to meet or beat every one of our full-year guidance measures. Taking a closer look at our Q3 results, overall, we delivered revenues of $107 million, 17% growth over the prior year third quarter of $91.5 million, and achieved gross margin in Q3 of $67 million, which grew 32% year over year. This resulted in a 63% margin, which is a 740 basis point improvement over the prior year period, reflecting high incremental profit flow-through from the stronger box office performance. Looking at our results at the segment level, content solutions revenues of $45 million increased 49% year over year, driven by the significant growth in IMAX box office, which, as Rich described, was propelled by a diverse mix of content globally. I am especially pleased with the programming agility we demonstrated. We released four fewer Hollywood titles in the quarter than the prior year, yet we were able to grow box office 50% by consistently capturing higher opening weekend market share and leaning more into local language while adeptly filling in with alternative content. Overall, this led to the third quarter global market share of 4.2% on less than 1% of screens, driven by a remarkable 6.1% share of domestic box office. The setup for Q4 looks very positive, with major titles in front of us, including Avatar anchoring the year. Content solutions gross profit of $32 million showed tremendous growth, up 94% or $15.5 million year over year, while gross margin reached a record 71%, up a substantial 1,600 basis points from the 55% gross margin in the prior year, spotlighting the significant incrementality that results from higher levels of box office. Technology products and services revenues of $60 million is up $2.4 million year over year, with gross profit of $35 million, resulting in a 58% margin, up approximately 250 basis points year over year, driven by both growth in our global box office and maintenance revenues that more than offset a lower level of systems installed under sales arrangements. System installations in the quarter of 38 systems compared to 49 in the prior year reflected in part the more balanced timing we're seeing this year with a higher level of first-half installations. As of today, we are at approximately 100 system installations, and as highlighted earlier, we now expect to be at the high end of our system installation guidance for this year. The momentum for signings continues with 19 signings in Q3 and 142 September year to date, already exceeding the 130 for full year 2024. The diversity of signings is especially encouraging. We have achieved near-record signings in Japan of 11 systems. Many of them are in new and exciting locations in underpenetrated areas in the country, and they're performing exceptionally well since opening. We've built momentum in Germany with the successful release of our first-ever German language film in Q3 that resulted in a very strong opening weekend, and we expect we'll have four new German locations open by the end of the year. We are very excited about the growth in Australia as well, where we have had signings with multiple customers and expect to exit the year with 10 open locations compared to two locations a year ago. In the U.S., we expect to expand with new regional partners, including five signings with Apple Cinemas in the quarter, with one in a highly desirable central area of Philadelphia. Operating expenditures defined as research and development and selling, general, and administrative expenses, excluding stock-based compensation, was $30 million in the third quarter, which was consistent with the second quarter. However, it increased year over year as the third quarter of 2024 benefited from adjustments to performance payouts related to our STT business and from the timing of capitalization of film camera costs. We continue to focus on looking for ways to better use technology and scrutinizing work processes to find productivity opportunities across our business. Overall, our strong operational performance led to a third-quarter total consolidated adjusted EBITDA of $52 million, which increased $13 million or 34% year over year, driven by higher revenues, which mostly flowed through to gross margins. This resulted in an impressive adjusted EBITDA margin of 48.6%, up approximately 630 basis points year over year, and giving us a year-to-date adjusted EBITDA margin of approximately 45% relative to our full-year guidance of low 40%. Third-quarter adjusted EPS was $0.47, up $0.12 year over year, driven fully by strong profit growth as our Q3 tax rate of 19% was a headwind of $0.03 year over year. Our September year-to-date tax rate is 24%, which is consistent with a normalized effective tax rate and what we would expect for the full year. Turning to cash flow and the balance sheet, cash flow from operations of $67.5 million set a new quarterly record. This excellent result reflects the very positive incrementality in our model, as well as the timing of collections of the larger first-half box office titles. September year-to-date cash flow from operations was $98 million and has already exceeded by 40% 2024's full-year operating cash flows of $71 million. Year-to-date free cash flow before gross CAPEX is $87 million and equates to an adjusted EBITDA conversion of 68%, a very strong result through nine months. As previously communicated, we expected operating cash flows to show strength and growth this year. Similar to total adjusted EBITDA, the dynamics of cash flows are quite positive as box office expands, leading to incrementality, particularly considering the cash flow characteristics of our joint revenue-sharing contracts, where the capital expenditure is at the beginning of an average 10-year contract term. Turning to investing cash flows, we continue to prioritize the use of our available capital to invest in the business, including $24 million spent on gross CapEx year to date related to partnering with exhibitor customers to grow and upgrade the IMAX network through joint revenue-sharing arrangements. This represents an attractive return on investment opportunity as numerous large partners, including AMC, Wanda, and Regal, are ramping up investment in IMAX as they upgrade their complexes, including bringing IMAX in to replace other premium formats as they look to capture more of the market share gains IMAX is delivering through our Filmed For IMAX program and the exceptional slate ahead of us in 2026, 2027, and beyond. Our capital position remains very strong, with a Q3 ending cash balance of $143 million, an increase of $34 million from the second quarter. In our capital structure is $230 million of debt from our convertible senior notes due in April 2026 that bear an interest rate of 0.5% per annum, with a capped call leading to a $37 per share conversion price. With our strong liquidity position and available facilities, we have the ability to be opportunistic as we assess the timing of when to address these notes and the nature of the instrument, whether that be with our revolving credit facility or through new notes. Debt, excluding deferred financing costs, was $261 million, and our current available liquidity is approximately $544 million. In conclusion, the team continues to execute well. We are successfully capitalizing on our strengthening position in the theatrical ecosystem and the growing contribution we can make to the industry. We are deepening partnerships with studios and filmmakers, programming with agility our global commercial network of over 1,750 locations, connecting with our fan base to bring more of the Hollywood local language and alternative content they're seeking out, and partnering with existing and new exhibitors to bring The IMAX Experience to more moviegoers. The model is working. The operating leverage we have discussed is coming to fruition. We are gaining market share and meeting or exceeding expectations across our guidance measures of IMAX box office, installations, and adjusted EBITDA margin. To be clear, we are not resting on our laurels, and we are focused on delivering results through the end of the year and beyond. As we look past 2025 into 2026, there is good visibility into IMAX's future system installations as well as the film slate. We have a backlog of nearly 500 systems and an addressable market less than 50% penetrated with potential for additional zones. We also have an increasingly clear view into the film lineup for 2026 and beyond, including significant mega-title catalysts on the horizon. We believe IMAX has never been in as strong a position, and we have scheduled on December 4 our first Investor Day since 2017 to share the compelling opportunity we see in front of us, how we will execute to capture it, and in turn deliver strong shareholder returns. We'll dive deeper into what we see as the next era of IMAX, expanding our global content pipeline, accelerating network growth, and advancing the IMAX technology that continues to redefine the cinematic experience. With that, I will turn the call over to the operator for Q&A. Operator: Thank you. At this time, we'll conduct the question-and-answer session. As a reminder, to ask a question, you'll need to press star one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star one-one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Eric Handler of Roth Capital. Your line is now open. Eric Handler: Good morning. Thanks for the questions. I wonder if you could talk a little bit about your margin potential. I mean, 71% for content solutions off of a record box office. I'm curious, and you had 100% incremental margin off of that. At what point does your box office, you know, where does the box office get to where all of a sudden you see just margins start spiking? As far as the costs are concerned, you know, how stable are the costs in the content solutions business, and is that number going to have to grow as you continue expanding, or is that something maybe with AI you can keep flat or maybe even down? Natasha Fernandes: Morning, Eric. Thanks for the question. We're so pleased with the operating margin in the quarter. The 71% is a high for us, and we've talked about this many times about the incrementality in our model. I think Q3 was the perfect opportunity to display exactly what we reference when we talk about over-levels of $250 million in a quarter of box office and how the incrementality flows through at essentially an 85% rate. It could be higher. It just depends on what our, you know, our costs are for that we choose to do for marketing and some of the discretionary costs that we have. There is a lot of opportunity to continue to grow our margins, especially as you hit the even higher levels of box office, which is obviously a record year that we're trending to this year with the $1.2 billion. From a cost basis, when you look at it, we actually don't have a significant increase in costs expected just because the basis of our costs are pretty stable. We remaster and we find efficiencies and leverage operating leverage in that because as you distribute to more countries, it doesn't cost us any more money. We're already doing versioning and marketing in all of those countries. On the SG&A side, we've been able to keep everything relatively flat with small amounts for inflation each year, and I think we've done a really good job on that front as well. Overall, our goal is to continue to show increases in our margins and allow the flow-through to happen all the way down to cash. Eric Handler: Great. Rich has a quick follow-up. Exhibitors can see that your market share is growing quite nicely. I'm just curious, as theaters see more Filmed For IMAX movies coming, you have the halo effect raising the market share for non-FFI movies. How is the volume of requests for proposals just skyrocketing at this point? Maybe you could talk about that dynamic a little bit. Richard L. Gelfond: Yeah. I mean, as you know, we already beat last year in system signings with a quarter to go. We've actually delivered more signings. Yes, there is a lot of activity going on around the world. I think it's not just, you know, looking backwards, Eric, at what FFI was, but it's looking forward to 2026 and also 2027 and 2028. We've never really had a backlog of films going that far forward. I think if you're an exhibitor and you're looking at your return on investment and you look at the number of films that IMAX has coming out in the next few years, I would even add to that, even FFI films, I don't remember the exact number, but I think for 2026, we have double digits of FFI films already ready to come out, and we're doing FFI films in 2027 and 2028. I think, you know, the way you asked the question kind of answers itself. The fact we've done so well at 2026, 2027, and 2028 for filling in in advance have driven a lot of activity in the market. Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Eric Wold of Texas Capital Securities. Your line is now open. Eric Wold: Thanks. Good morning, Rich and Natasha. I guess, kind of following up a little bit on the last question on kind of on the exhibitor kind of demand side, thinking about from the other way, I guess, as you think about the limited amount of real estate for content that you have each year and understanding that, you know, for example, 2026 is mostly spoken for with content, you know, already under contract, I guess, what is the best opportunity to really drive, you know, from your end or work with the exhibitors to drive greater box office revenues on that content? For example, you know, where can you further leverage marketing to drive attendance and drive people into the theaters on that content? I know you can't necessarily push price from your end, but why aren't we seeing more ticket price leverage, you know, for IMAX films from the exhibitors given, you know, the clear demand from moviegoers, especially given, you know, the limited runs that most of your films have, in their theaters? Why aren't they taking price even more so on IMAX films? Richard L. Gelfond: Eric, first of all, just to put it in context, when you said there are a limited number of slots, I just want to remind you that this year we'll have 140 pieces of content. It's not like we can't program more things or multiple things at the same time. In slower times of the year, we could have two or three films sharing screen time, and we've been doing that. There is room to fit more content. In terms of price, as you saw with The Odyssey, we put some film tickets on sale a year in advance, and the ones we put on sale sold out. That's usually a sign that under price elasticity, you can raise the prices. You correctly said that's a decision the exhibitors have to make, but not us. Particularly, in a year that's heavy in film, like 2026 with The Odyssey and Dune and some other things that will be coming out, I wouldn't be surprised to see exhibitors press it a little bit, particularly in the film area. Finally, obviously, the name of the game is capacity utilization, which is related to market share. This year, as our market share has grown so nicely, capacity utilization has gone up. Still, capacity utilization is relatively low as it is in a lot of entertainment businesses. I think there's an opportunity in that area as well. Thanks, Rich. Operator: Thank you. One moment for our next question. Our next question comes from the line of Drew Crum of Vivai Securities. Your line is now open. Drew Crum: Okay. Thanks. Hey, guys. Good morning. I had a couple of questions on 2026. I guess you're likely to address this at your Investor Day, but any preliminary thoughts on 1Q and your ability to grow box office as you lap a tough comp from NAJA too? Separately, I noticed in your press release and your prepared comments, you highlighted four massive tentpoles. Absent from that was The Avengers, which I think historically has enjoyed success on IMAX screens. Just curious if there's anything to read into that omission. Thanks. Richard L. Gelfond: No. Dating though, typically, a year in advance moves around. It's very hard to pinpoint exactly what the movies are going to be and what dates they are. I think we're just trying to be conservative in what the slate is looking like. I think the point we made was that we have four or five movies next year, which include in the first quarter the carryover of Avatar: Fire and Ash. It includes The Mandalorian and Grogu. It includes The Odyssey. It includes Narnia. It includes Dune: Part Three. Actually, the question you asked, we had a board meeting yesterday about the comp of North America next year. I just named you five movies that I think will exceed whatever their comp was this year. As you know, we're a diversified portfolio. You can always, in any year, say, "You had this really good film. How are you going to replace it?" The answer is you look at the whole slate, and you look at how it, how it's going to come together. At our Investor Day, we'll talk about guidance for 2026. Suffice it to say that looking at it very early, we think it'll be stronger than 2025. Got it. Thanks, Rich. Operator: Thank you. One moment for our next question. Our next question comes from the line of Omar Mejias of Wells Fargo. Your line is now open. Omar Mejias: Good morning, and thanks for the question. Maybe just more broadly, you recently announced the first IMAX Investor Day since 2017. I'm just curious, why is now a good time to get together and share what's ahead for IMAX? If you could share what you're most excited about for IMAX in the years to come, that'd be great. Richard L. Gelfond: I mean, Omar, not to be kind of an a-hole about it, but you know, I think we have a lot to talk about in terms of how 2025 performed and how 2026 will perform. It kind of flows off my answer to Eric Handler's question. There's never been a film backlog the way there is now. Like I said to the last question, I think we'll provide a lot of context around some of those movies, of which we've seen a lot of them, and we know a lot about them. I think just putting titles on a slide is different than giving a context. IMAX isn't a one-year or a one-trick pony. We think we have sustained growth going for years ahead. We thought it was really important. We believe we have a new level set for IMAX. As you probably know, films that we used to do 10% of the box office, blockbusters, we're now doing 15% of the box office. A question that was just asked about the activity on the theater side and signings, what's going on. We just think it's the right time to put the story together and put numbers to it. Obviously, our stock has had a nice little run, but from our point of view, we think it's the beginning of the run. We have a lot of data to support that. I'd say one other thing would be since 2017, we have a lot of new talent in management that a lot of investors have never met. I think it's just a good idea. I know Natasha and Jen and I have met a lot of investors, but we have a pretty deep bench, and we think it's a good time to let the investors talk to that bench and get their color on things. Great. Maybe just a quick follow-up on the global opportunity set. You obviously have momentum in the business and a great 4Q slate ahead that ends with Avatar: Fire and Ash. What countries or regions do you think IMAX has the biggest opportunity to drive incremental installations and grow the network? Any color on that would be helpful. Thanks. Richard L. Gelfond: The reason that's a hard one to answer is because of my last answer, which is that there's been kind of this reset in what the box office could look like. When you start to put in numbers in that reset, the ROIs look differently and our ability to invest in JVs and make a better return look differently. I think we're really, you know, assessing how to generate more growth around the world. If you look historically this year, Japan has been very strong. Western Europe has been very strong. Even North America has been very strong. We announced a couple of deals there. I think there's more to come in North America. I don't want to be constrained so much by the past. That's the kind of thing we'll go into more detail on Investor Day because I think the performance and the numbers open up different opportunities. Thank you. Operator: Thank you. One moment for our next question. Due to the time, please limit yourself to one question. Our next question comes from the line of David Joyce of Seaport Research Partners. Your line is now open. David Joyce: Thank you. In thinking about your programming strategy, how do you weigh the pros and cons along with the various economic impacts of running concert films or rerunning a recent release like Formula One or an old one like Jaws, Grands of 50th anniversary, versus showing a new theatrical release like Jurassic World that you were not able to show earlier in the summer? Richard L. Gelfond: Yeah. Just, you know, to get the facts straight, Jurassic World came out the same week as F1 did, and we had committed to F1 already. That's the first rule: when we commit to something, we sign a legal contract, and we can't, you know, change that, although we could try and fill it in from show to show. To the core part of your question, not every week has films that are going to break out. We try and use alternative content or local language films more in the slower periods or bring back, as you asked about. We look at our calendar for this year and next year. For example, we know that on July 17, The Odyssey is coming out. Obviously, we're not going to bring back a film or show a concert film that weekend. At other weekends, there's just no big releases coming. We know that way in advance, and we'll make plans for how to fill in the schedule. One thing, another context to put it in, is we recently hired someone who has experience doing programming on the exhibitor side. They're working with our distribution team to try and maximize the box-by-box programming, with our Chief Content Officer, Jonathan Fischer. If you look at the third quarter, that's a perfect example where we plugged in a lot of things, and we mix and match. Just one example because it comes to my mind is the weekend with Weapons Open. We played Weapons a lot, but not everywhere. It did really well. Formula One still had a lot of gas in the tank, and tea is a bad analogy. That is now close to $100 million. We're able to mix and match a little bit more, particularly in the periods where there's no obvious winner. Q3 was the perfect example of that. That's what really drove the outstanding box office. Is there a margin differential? Is there marketing on some sorts of content that tilts the scale for you one way or the other? Richard L. Gelfond: You know, not really, because, you know, for example, we brought back Jaws, but we timed it for the 50th anniversary of Jaws. We didn't have to put up a lot of the marketing. The studio put it up in connection with the 50th anniversary. This weekend, we're playing on the Springsteen concert, and what we did was, you know, that was timed to the theatrical release of the Springsteen movie. It comes with a lot of marketing. As we try and figure out what slots to put them in, one of our considerations is not having to put up significant incremental costs. Great. Thank you very much. Operator: Thank you. One moment for our next question. Our next question comes from the line of David Karnofsky of JP Morgan. Your line is now open. David Karnofsky: Hey, thank you. Maybe just two quick ones for Natasha. The full-year guidance implies a little bit lighter of margin in Q4. Just wanted to understand the puts and takes there in terms of install mix, box office, or whether there's any kind of marketing consideration for Avatar. Then just similarly for working capital, how should we think about the balance of the year, given those big titles sitting in the final weeks? Thanks. Natasha Fernandes: Sure. David, I'm not sure I heard the first part of your question, but I think the second part was about SG&A and then box office, correct? David Karnofsky: No. The question was basically about margin in Q4, the guide implying that being down a little bit from what you've done year to date. Just wanted to understand puts and takes there, and then the outlook for working capital, given Avatar: Fire and Ash sitting, late in the year. Natasha Fernandes: Yeah. Our guidance for EBITDA margin was updated to low 40% in last quarter. Year to date, we're at just under 45% at 44.9%. The first half was at about 43%. The individual quarters, obviously, we see they drive different margins. We have said this before that Q4's margin, we expect that we'll have incremental dollars for Avatar marketing, which we'll spend in Q4, but the Avatar box office will come in not only in Q4, but then we'll get it in Q1 as well. You'll have lower costs in Q1 with respect to marketing on Avatar. Q4, from a cost perspective, will hold a few more events versus Q3, for instance. We obviously attend several conferences along with our Investor Day that we're planning in Q4. Other than that, there would be nothing that significantly hinders the margin from continuing along its pace towards our guidance of low 40%. Working capital? Natasha Fernandes: On working capital, I mean, from a cash flow perspective, this was a record quarter for us. As I look at cash flow, and we've talked about this before, when you look at cash flow on an annual basis, that's essentially what we're aiming towards, continuing to grow that conversion rate. Hitting at above 50% and continuing to grow that on an annual basis is essentially where we keep moving. I'm sure we will work towards updating and providing more insights and guidance into our cash flows in the future as well at Investor Day. Thanks. Operator: Thank you. One moment for our next question. As a reminder, please limit yourself to one question. Our next question comes from the line of Mike Hickey of The Benchmark Company. Your line is now open. Mike Hickey: Yeah. Hey, Rich, Natasha, Jennifer, congratulations, guys, on a great Q3. First question from us, just looking at your market share here, year to date, slide 11 in your deck, 3.8%, definitely setting a record. Looks like domestic 5.2%, China 5.3%, and the rest of the world 2.4%. I guess the question, Rich, is how you're thinking about rest of the world market share gains relative to your forward growth targets. It seems like rest of the world could be a great unlock opportunity for you, or is there something structural holding you back from achieving sort of the market share that you're seeing in the U.S. and China? I have a follow-up. Richard L. Gelfond: Yeah. The only thing holding us back, Mike, is more theaters. Obviously, in growth markets like Vietnam and Indonesia and places like that, we have much less penetration in India. You have lots of screens, big populations, and not as high a % of IMAX theaters. Obviously, we'll target those, which ties to an earlier question, and try and build up the theaters. There's nothing endemic about those markets, just there's not as many IMAX theaters. By the way, it a little bit goes the other way because as we double down on local language films, like we've had local language in Malaysia, in Indonesia, in Saudi Arabia, as we step up our local language, that will obviously increase our market share in those territories. There's nothing broken. It's just an opportunity that we need to fill in more. Thanks, Rich. Last question. Promise I'm not being a wise guy here, Rich. Just on your installation growth potential for 2026, curious your thoughts there, just given the extreme success you guys have had in 2025, which might be slightly a pull forward or not. Just curious your confidence here on 2026. I know signings have been very strong. Richard L. Gelfond: Let me be clear. There's no pull forward there. It's a result of the reason with the high end is we had a really good signings year, and we have such a good slate and a good slate ahead of us in 2026 that I feel, you know, I'm very good about where we are this year. Obviously, we raised the range of our guidance. For next year, Mike, you know, if you look at the correlation between film slate, Filmed For IMAX, you know, large movies, it should be a positive year. Again, however, we're in the middle of our budgeting process, and I'm hopefully by Investor Day, we'll be able to give you more concrete guidance. Thanks. Thank you, guys. Operator: Thank you. One moment for our next question. Our next question comes from the line of Patrick Sholl of Barrington Research. Your line is now open. Patrick Sholl: Thank you. I just have a question on alternative content. I mean, you laid out your visibility for the broader Hollywood slate. Could you maybe just talk about the visibility that you have into the alternative content to sort of even out those box office periods? Richard L. Gelfond: We have some visibility, but a lot of it arises in the couple of months before it comes out. We're doing, I think it was in my script, I don't recall, but we're doing The League of Legends in China, which came about. It got finalized, I don't know, two weeks ago. We're doing over 220 theaters for the finals, and then we're doing the semis and the quarters. It's both. Some things will be like we have two music projects, one in February and one in May, which we're in the middle of documenting right now. On the other hand, there will be other projects that will come up, more or less minute. Some of the live events where directors speak around their movies tend to come together a little bit later. The sporting things, I think, come a little bit later. The music, especially the music docs, come more in advance because the studios know when they're being released. It's a combination of the type of content. Okay, thank you. Thank you. Operator: Thank you. We have time for one last question. Our last question comes from the line of Stephen Frankel of Rosenblatt. Your line is now open. Stephen Frankel: Thank you. Rich, you guys have pointed out that local language is consistently been over 50% of the box office mix in China over the last couple of years. Do you think that's a permanent change that your penetration into tier three and tier two markets means more local language? Can you do things to kind of accelerate that local language growth in China going forward if you think maybe Hollywood has peaked as part of the mix there? Richard L. Gelfond: Yeah. I mean, I wouldn't get pinned down to an exact %, Steven, but I do think that local language is, you know, permanently going to be a bigger part of the box office than it was before. I think you put your finger on one of the answers, which is, you know, because of tier three and four markets and our increased penetration there. I also think, and this is important, that we've done a better job of penetrating the local markets there. Our CEO there, Daniel Manwaring, is extremely connected in the film industry there. Our team has done a very good job, and the results speak for themselves. With that said, I wouldn't give up on Hollywood box office. For example, Avatar traditionally does very well in China. It's getting in the same day as it got in in the U.S., so I would expect to see strong results there. Zootopia, at Disneyland in Shanghai, there's a separate part of it called Zootopia Land. It's a very big franchise over there. Looking into 2026, the Nolan movies do very well. Obviously, The Odyssey is a very high-profile one. Dune has done well there in the past. Again, that's why I'm not sure about particular numbers and percentages. I do feel like local language will continue to be strong, but don't give up on Hollywood quite yet. You should just be reminded, in that context, that our take rate on local language is higher than our take rate on Hollywood films in China. That's because of the theatrical splits. It's not an IMAX anomaly. It's just Hollywood films get a lower split than local language. Financially, that's a pretty good thing for us to keep in mind. Okay. That's very helpful. Thank you, Rich. Operator: Thank you. This concludes the question and answer session. I'd now like to turn it back to Richard L. Gelfond for closing remarks. Richard L. Gelfond: Thank you very much, operator, and thank you all for joining us today. IMAX pre-pandemic was on a tremendous growth curve. As you know, 2019 was our best year ever at that point. Unfortunately, not just for IMAX, but a lot of the world, the pandemic slowed it down. We have been using the time since the pandemic to build up a lot of different pillars for future growth. They include things like local language content, different ways of looking at marketing, alternative content, not just local language in one country, but across many countries, rationalizing our cost structure. I think in 2025, we saw good years in 2023 and 2024, but all that really came together, and we kind of broke out. If you want to find a quarter that epitomizes that more than anything else, it's the third quarter we just finished. I said this during my remarks, but you can't summarize it any better than to say the North American box office was down 11% in the third quarter, and the IMAX box office globally was up 50% in the third quarter. If that doesn't show how we've separated ourselves from people in different businesses that some people confuse, I think this quarter painted a very clear picture. As you could tell from Natasha and my tone on the call, when you look at the slate and you look at a number of other factors, I think we're very optimistic that we can maintain that momentum going forward. Thank you all very much, and we'll talk to you, hopefully see many of you at Investor Day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and welcome to WesBanco Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to John Iannone, Senior Vice President of Investor Relations. Please go ahead. John H. Iannone: Thank you. Good afternoon, and welcome to Wesbanco Inc.'s Third Quarter 2025 Earnings Conference Call. Leading the call today are Jeff Jackson, President and Chief Executive Officer; and Dan Weiss, Senior Executive Vice President and Chief Financial Officer. Today's call, an archive of which will be available on our website for 1 year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings related materials issued yesterday afternoon as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, wesbanco.com. All statements speak only as of October 23, 2025, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Jeff. Jeff? Jeffrey Jackson: Thanks, John, and good afternoon. On today's call, we will provide an overview on operational efforts and third quarter results as well as provide an update on our outlook for 2025. Key takeaways from the call today are: earnings per share of $0.94 when excluding merger-related charges, which was highlighted by loan growth funded by deposit growth, a net interest margin of [ 3.53 ] and year-over-year fee income growth of 52%. Continued success in our newest markets as demonstrated by growing pipelines and strong customer satisfaction. Commitment to operational excellence in support of profitable long-term growth and enhancing shareholder value. Our third quarter results demonstrate the successful integration of Premier and continued operational discipline. Despite elevated commercial real estate payoffs, we delivered strong loan growth fully funded by deposit growth. while meaningfully expanding our net interest margin and fee income. Combined with our focus on cost control, these efforts drove positive operating leverage and an improved efficiency ratio in the mid-50s. For the quarter ending September 30, 2025, we reported net income excluding merger and restructuring expenses of $90 million and diluting earnings per share of $0.94, an increase of 68% year-over-year. On a similar basis, our third quarter return on average assets and tangible equity improved to 1.3% and 17.5%, respectively. Our efficiency ratio improved 10 percentage points year-over-year to 55% due to expense synergies generated from the Premier acquisition as well as a continued focus on expense management and driving positive operating leverage. Our strong growth in fee revenue was driven by organic growth across our businesses, especially wealth management and our larger post-acquisition customer base. Turning to operational topics. We are pleased to share that customer satisfaction in our newest markets has rebounded even faster than we expected following the Premier acquisition. While a temporary dip is typical during conversions and integrations. Our team anticipated the challenge and proactively put plans in place to support service and quality and customer trust. Today, satisfaction scores in those markets are back to pre-conversion levels. And our overall customer satisfaction across all markets is in the upper 80 percentile level, well above the industry average. This reflects the strength of our integration strategy and the dedication and skill of our teams. That same operational discipline is reflected in our deposit performance. Our annual deposit campaign launched in third quarter is once again delivering strong results. Total deposits grew organically across our footprint by more than $570 million year-over-year and $130 million sequentially, fully funding our organic loan growth. Importantly, this momentum was driven by core deposit categories, not higher cost certificates of deposit, which we have strategically allowed to run down. We have continued to see a pickup in commercial real estate payoffs, which totaled $235 million during the third quarter and caused a nearly 1.5% headwind to loan growth. Reflecting this headwind, third quarter organic loan growth was 4.8% year-over-year and 2.2% quarter-over-quarter annualized. Encouragingly, total commercial loan growth continues to be solid as our teams take advantage of our record pipeline. As of both September 30 and mid-October, our commercial loan pipeline stood at approximately $1.5 billion with more than 40% tied to new markets and loan production offices. Notably, our new Knoxville LPO is already contributing meaningfully, accounting for 5% of the total pipeline. Given the current loan pipeline and CRE payoff headwind, we continue to expect mid-single-digit year-over-year loan growth during 2025. This strong pipeline continues to translate into meaningful wins, including in our newest markets. In one of our premier markets, we secured a major deal with a national motorcycle manufacturer looking to acquire additional dealerships on a tight time line. Thanks to strategic collaboration across commercial banking, treasury management and retail, our team delivered a tailored package of solutions ahead of schedule. The result was an 8-figure loan, 7-figure deposits and additional treasury and swap products. This is a terrific example of how we collaborate to deepen banking relationships and deliver exceptional customer experiences. Our mission is to deliver financial solutions that empower our customers for success while maintaining operational efficiency. To that end, we continue to optimize our financial center network in support of evolving customer preferences and long-term growth. This strategy includes streamlining existing locations continuing to enhance our digital banking capabilities and selectively opening new financial centers or refreshing existing ones within our footprint. Following the strong performance of our Chattanooga loan production office, which has grown to over $200 million in loans in just 2 years. We received regulatory approval to open our full first service financial center in Tennessee. This new location will simplify deposit gathering and deepen client relationships. We are also opening a new center in Alliance, Ohio, where we see strong growth potential. Both centers are expected to open in the first quarter of next year. At the same time, we are streamlining our footprint to ensure efficiency and responsiveness. After a thorough review of our customer behavior and banking preferences, market conditions and proximity to existing centers, we made the decision to close 27 financial centers across our legacy markets. none of which are related to the Premier acquisition. More than 75% of these closures are within 10 miles of another location and deposit attrition is expected to be minimal. These closures bring our total since 2020 to 80 closed financial centers and are expected to generate approximately $6 million in net pretax annual savings. By focusing on the right locations, facilities and customer experiences, we are positioning WesBanco for sustainable growth and exceptional service across all markets. I would now like to turn the call over to Dan Weiss, our CFO, for details on our third quarter financial results and our current outlook for the fourth quarter of 2025. Dan? Daniel Weiss: Yes. Thanks, Jeff, and good afternoon. For the quarter ending September 30, 2025. We reported GAAP net income available to common shareholders of $81 million or $0.84 per share. And when excluding restructuring and merger-related expenses, third quarter net income was $90 million or $0.94 per share, representing an increase of nearly 150% from the $36.3 million or $0.56 per share in the prior year period. On a similar basis, and excluding the after-tax day 1 provision for credit losses on acquired loans, we reported $2.55 per diluted share for the 9-month period as compared to $1.61 per diluted share last year. To highlight a few of the third quarter's accomplishments we generated strong year-over-year pretax pre-provision core earnings growth of nearly 130%. We funded loan growth with deposits and on a year-over-year basis, improved the net interest margin by 58 basis points, grew fee income 52% and reduced the efficiency ratio by 10 percentage points. Our balance sheet as of September 30 reflects the benefits of both the premier acquired balance sheet and organic growth. Total assets of $27.5 billion increased 49% year-over-year and included total portfolio loans of $18.9 billion in total securities of $4.4 million. Total portfolio loans increased 52% year-over-year due to the acquired PFC loans of $5.9 billion and organic growth of $594 million, driven by the commercial teams. Commercial real estate payoffs have continued to increase and totaled approximately $235 million during the third quarter of '25 and $490 million on a year-to-date basis, more than 2.5x the prior year-to-date period and currently projecting them to be near $800 million for the year. Despite this headwind, we remain optimistic about future loan growth with our strong pipeline banking teams and markets, combined with more than $1 billion in unfunded land construction and development commitments expected to fit to fund over the next 18 months. And in fact, we've achieved record commercial gross loan production through the first 9 months of the year. Deposits increased 53.8% year-over-year to $21.3 billion due to the acquired PFC deposits of $6.9 billion and organic growth of $573 million, which fully funded loan growth. On a sequential quarter basis, total deposits increased $130 million due to the efforts of our consumer and business teams more than offsetting the intentional runoff of $50 million of higher cost brokered deposits and less reliance on public funds acquired from PSC Credit quality continues to remain stable as key credit quality metrics remain low from a historical perspective. And within a consistent range over the last 5 years, as expected, criticized and classified loans decreased during the third quarter to 3.2% through a combination of credit upgrades and loan payoffs, the allowance for credit losses to total loans at September 30 was 1.15% of total loans or $217.7 million, a decrease of $6.2 million from June 30, 2025, was primarily driven by the runoff of a $5 million qualitative factor that was established in 2023 to capture elevated interest rate risk, which ultimately more than offset increases associated with slightly higher unemployment assumptions and loan growth. The third quarter net interest margin of 3.53% improved 58 basis points on a year-over-year basis through a combination of higher loan and security yields and lower funding costs. As I mentioned last quarter, our net interest margin declined 6 basis points sequentially as the CD book from PFC matured and repriced partially offset by our core margin improvement of 3 basis points. Deposit funding costs of 256 basis points for the third quarter decreased 29 basis points from the prior year period. And when including noninterest-bearing deposits, deposit funding costs for the third quarter were 192 basis points. For the third quarter of 2025, noninterest income of $44.9 million increased 51.5% year-over-year due primarily to the acquisition of Premier. With combined premier fee income, we again set record highs this quarter in several fee income categories, including trustees, service charges on deposits and electronic banking fees, we also saw a nice improvement in gross swap fees, which increased $2.1 million year-over-year to $3.2 million in the third quarter, reflecting both the interest rate environment and traction within our newest markets. Noninterest expense, excluding restructuring and merger-related costs for the 3 months ended September 30, 2025, was $144.8 million an increase of 46% year-over-year due to the addition of Premier's expense base, higher core deposit intangible asset amortization that was created from the acquisition and higher FDIC insurance expense due to the larger asset size. Salaries and wages of $60.6 million and employee benefits of $18 million each increased year-over-year due to higher staffing levels and higher health insurance costs, but were consistent with the second quarter as staffing reductions offset the full quarter impact of annual merit increases. Health care during the third quarter continued to be somewhat elevated by about $1 million over our baseline projections for the quarter due to larger-than-normal claims driven by a few high dollar claimants compared to historical claim experience and general increases in health care costs. We've incurred restructuring and merger-related expenses of $11.4 million during the quarter, which included approximately $7 million of charges from the disposition of assets and lease terminations associated with the planned closure of 27 financial centers with the remaining $4 million associated with the Premier merger. We anticipate incurring additional personnel-related restructuring charges here from the closure during the fourth quarter, while nearly all of the merger-related expenses from PFC have been recognized. Our regulatory capital ratios have remained above the applicable well capitalized standards. On September 10, we raised $230 million of Series B preferred stock which will be used to redeem the $150 million of outstanding Series A preferred stock on November 15 and $50 million of sub debt acquired from PFC later in the fourth quarter with the remaining net proceeds to be used for general corporate purposes. Reflecting the new Series B preferred stock, which is considered Tier 1 capital we realized sequential quarter improvement across all of our capital ratios. And when we use the proceeds to redeem the Series A preferred stock and sub debt, we anticipate our fourth quarter CET1 ratio to continue to build 15 to 20 basis points per quarter, while Tier 1 risk-based capital to decline approximately 50 basis points from the third quarter, reflecting the redemption of the Series A preferred stock. Turning to our current outlook for the fourth quarter. And as a note, we will provide our outlook for 2026, during our January earnings call. We are currently modeling a 25 basis point Fed rate cut in October, However, given our relatively neutral rate sensitive position, we do not expect a meaningful impact on our net interest margin from this or the September cut here in the nearer term. We anticipate our net interest margin to rebound during the fourth quarter to the mid- to high 3.50s, reflecting continued improvement in funding costs, fixed asset repricing and loan growth. And while trust fees and securities brokerage revenue are subject to equity and fixed income market valuations, we anticipate noninterest income and noninterest expense to remain relatively consistent with our third quarter trends -- and we expect the planned closure of the 27 financial centers to occur late January with a pretax annual savings of approximately $6 million to begin thereafter. During the fourth quarter, we anticipate preferred stock dividends to total approximately $13 million, which includes the Series A dividend of $2.5 million the Series A redemption premium of $5.5 million and the new Series B dividend of $4.9 million. And lastly, the provision for credit losses will mostly be dependent upon loan growth economic factors and charge-offs. And of course, our effective tax rate should be in that 19.5% range for the year. So we are excited to see positive momentum from the continued margin improvement, our financial center optimization strategy and continued growth in our new markets as well as the organic growth and expansion opportunities that lie ahead. So with that, operator, we are now ready to take questions. Would you please review the instructions? Operator: [Operator Instructions] Our first question comes from Karl Sheppard with RBC Capital Markets. Karl Shepard: I guess I'll start with you. I think it seems like you're very happy with the production in pipeline for loan growth, but CRE paydowns is still kind of a bit of a headwind. Just help us understand maybe what you're seeing for production a little bit more -- and then what's the path for pay downs maybe? I hate to use the word normalizing, but coming back down a little bit and driving a little stronger overall growth. Jeffrey Jackson: Yes, sure. Very, very pleased with the production. I think if you look at just year-over-year, I can give you a couple of numbers through third quarter. So third quarter last year, we did about $1.7 billion in new production. This year, we've done $2.3 billion. So almost basically $600 million more we've done this year. And so the pipelines are really strong, about $1.5 billion and have remained strong. And so I believe that we should have a really strong fourth quarter. We should hit the mid-single-digit loan growth target that we've set out for this year. As far as pay downs, some of it looks at -- in the third quarter were things we wanted to pay down. If you didn't notice our CNC came down 50 basis points. A lot of that was pay downs that we had requested. So feel very good about that. I think when we look into the fourth quarter, we could see another couple of hundred million in pay downs in the fourth quarter. But looking over a normalized period of time, I would say it's going to be on an annualized basis would be in that $400 million to $600 million, $700 million range on a full year basis. This year, we should be -- we might be touching $800 million to $900 million on an annualized basis. Once again, fourth quarter, we don't know exactly. But I would say our pipelines are very strong. We feel very good about mid-single-digit loan growth for the remainder of this year. And next year, we are still looking at mid- to upper single-digit loan growth. Karl Shepard: Okay. That's very helpful. And then, Dan, 1 for you. On the margin, I think it came in right where you were expecting this quarter, but I just wanted to check to see, are you still thinking 3 to 5 basis points of quarterly expansion in the core -- and is there anything kind of out in '26 that we should think about that might disrupt that trajectory? Daniel Weiss: Yes, Karl, I do feel very good about that 3 to 5 basis points of continued improvement. So I don't -- we're not providing much guidance here on 2026. But outside of what I provided last quarter, which feel good for the next couple of quarters, to see continued margin improvement. And of course, for our purposes today, we're modeling a 25 basis point cut here next week as well as 1 cut in each of the next 3 quarters thereafter. So that's kind of where we see it there. The 1 thing I would note, and this is baked into the 3 to 5 basis points of margin expansion. But you'll notice that our Federal Home Loan Bank borrowings are down $475 million versus the second quarter, which is great. I would point out that the $230 million in capital that we raised $150 million of that $230 million will be used to pay off the Series A preferred. And so that effectively will be borrowing back from the Federal Home Loan Bank of that $150 million. And then, of course, at the very end of the year, we'll have the $50 million of sub debt premier but we'll be paying off and absent normalized deposit growth, we would anticipate to see that Federal Loan Bank borrowing balance to be up probably a couple of hundred million dollars. Operator: Our next question comes from Catherine Mealor with KBW. Catherine Mealor: Just go to ask on expenses. It was nice to see the announcement for the branch closures. I know you're not giving '26 guidance yet, but is there -- can you help us just kind of frame at least as a base how you think about the impact of branch closures kind of offsetting new hires and just kind of what organic loan growth could look like, trying to at least frame up the expense trajectory and potentially more operating leverage and profitability improvement as we get into '26? Jeffrey Jackson: Yes. As far as the loan growth, I'll start out and I'll let Dan talk about the expense base. We feel very good about mid- to upper single digits and loan growth. And a lot of that is obviously driven by our premier markets that are getting ramped up. I would also say our new health care vertical and then our LPOs. Our LPOs are just operating at a tremendous level Tennessee ones of Chattanooga and Knoxville and Nashville, Indianapolis is doing a great job as well. And then Northern Virginia has really taken off. So we feel very good about those prospects on the loan growth piece. I'll let Dan talk more about the expense base. Daniel Weiss: Yes. I would say once again, just to kind of reiterate, we're still in the process of finalizing our budgets and forecasts here for 2026 and we'll provide some more guidance at the end of the year. But I would say, certainly, 0.7 branches, there's going to be a tailwind to expenses heading into heading into '26 as a result. So I think that provides some opportunity potentially for reinvestment in technology, people, process and technology. But we certainly also make sure that we are recognizing that expense benefit to the bottom line as well. So pretty excited about where that -- where we're at there. Jeffrey Jackson: And just to add on it just to add on briefly. As you know, we are always looking to optimize the branch network, and we'll continue to look at that in the future as well. Catherine Mealor: Got it. And so it's fair to assume though, without giving targets that the efficiency ratio should continue to improve as we move through '26. Daniel Weiss: Yes. That would be our model today. Operator: Our next question comes from Dave Bishop with Homsey. David Bishop: You noted the health care team, I think you noted there's some opportunity to grow that portfolio pretty materially. Any way to ringfest how big the opportunity is there from that new team you hire? Jeffrey Jackson: I would say, currently, I believe they've closed about $250 million in loans and brought in about around $80 million in deposits and closed about, I believe, about $2 million in fees. So -- and they've been here approximately 6 months. So if you extrapolate that out, you can kind of look at next year, potentially they could do anywhere from $300 million to $500 million in loans on an annual basis. Very excited about that team. We're looking to grow that team. And it could be larger than that, but that's what I kind of pencil in today. David Bishop: Got it. I noted the increase in average deposit cost on a sequential basis. Was that purely a function of the purchase accounting impact and how aggressive you think you can lead on into these Fed rate cuts? Daniel Weiss: Exactly. It has all to do with what we described last quarter and that being the temporary nature of the CDs that we had acquired 7-month CD specials that were effectively rolling off and don't expect that to see that repeat. That's behind us at this point. Operator: Our next question comes from Russell Gunther with Stephens. Russell Elliott Gunther: I appreciate all the color on the capital actions taken this quarter. It would be helpful to just get a reminder as to where you would plan to kind of manage capital levels to going forward, be it TCE or CET1. And then just any updated thoughts as to how you're thinking about the potential to reverse the CECL double now. Daniel Weiss: Yes, sure. Great question. I'll take that. So from a CET1 standpoint, I would say our internal targets are kind of between that [ 10.5% ] and 11%. And we're growing CET1 about 15 to 20 basis points per quarter, and that's what we're kind of projecting here. over the next several quarters. I would tell you, and as I mentioned in my prepared remarks, that we do have a little extra total risk-based capital with the duplication of the Series A and Series B, the Series A being temporary. It will go back down about 50 basis points. But if you compare it off of the second quarter, we will still be up 70 basis points on total risk-based capital. So excited there as well. As it relates to the CECL double count at this point, we're still evaluating -- but unlikely -- really the FASB has to issue the ASU before we could really make any determination. But I would say the more time that passes, probably the less likely that we would do something there. Russell Elliott Gunther: Got it. Okay. And then last question here would be just use of excess capital going forward and any appetite for buyback around the current level? Daniel Weiss: Yes. So I would say right now, we're still -- we continue to be in a capital build mode -- and as you know, Russell, buyback is typically on the lower end of the spectrum in terms of priorities. So today, I would say certainly less likely in the near term for buyback. Jeffrey Jackson: Yes, I was just going to say really focused on capital build back and then obviously, that would go toward dividends and really loan growth. Russell Elliott Gunther: Excellent. If I could sneak 1 in, in terms of you gave us some incremental color on the health care vertical. It sounds like a good runway there. Anything kind of adjacent or similar vertical add-ons you would contemplate down the road? Jeffrey Jackson: At this point, we're just really focused on health care and then also the LPO strategy. That's really working incredibly well, would potentially look to other cities end markets to continue to expand there. We talk about different verticals, but at this point, nothing really to share right now. Operator: Our next question comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Maybe first on the deposit side. So obviously, you had the impact from the premier CDs repricing. It looked like money market and savings deposit rates were up a bit in the quarter as well. Just curious the type of deposit competition that you're seeing, if you can kind of size it for us from a relative perspective, it's gotten more intense or still somewhat similar to what you saw in the prior quarter. Daniel Weiss: Yes, I would say it's pretty similar to what we've been seeing over the last several quarters, not expecting and not seeing anything intensify. And -- but I would say with CRE paying off in general, I do think that, that could provide some relief on deposit pricing in general. David Bishop: Okay. That's helpful. And then maybe for you, Jeff, you just touched on it a little bit with your comments on the appetite to continue the LPO strategy and perhaps into new markets as well. But just curious if you have any overall thoughts as, I guess, post your capital build when your target that you want to be at where does M&A fit in and relative to the LPO strategy do those 2 things have to be separate? Or can you do both? Jeffrey Jackson: Yes. Right now, I would say we're totally focused on LPOs and verticals and growing our organic business. So that's where we're totally focused at right now. And we feel like we've got a great growth runway just to do this organically. I can't tell you how proud I am of the team and how excited I am about the LPOs and -- what's amazing is we've had a lot of great people that we've been able to hire and that has turned into more people and people hearing about our brands as we expand south and expand West. And so we feel like we've just got a lot of great organic opportunities for us. that we're really going to be focused on in the next year plus. So that's really where our focus is today. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Jackson, CEO, for any closing remarks. Jeffrey Jackson: Thank you. We are continuing to deliver meaningful improvement in our financial metrics and strategic positioning to deliver enhanced shareholder value, highlighted by third quarter earnings per share of $0.94. The strong customer satisfaction scores and continued optimization efforts. We remain focused on driving positive operating leverage through sustainable long-term growth. Thank you for joining us today, and we look forward to speaking with you at one of our upcoming investor events. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome you to the PG&E Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, we have allotted 45 minutes for this conference call. I would now like to turn the call over to Jonathan Arnold, Vice President of Investor Relations. Jonathan, you may begin. Jonathan Arnold: Good morning, everyone, and thank you for joining us for PG&E's Third Quarter 2025 Earnings Call. With us today are Patti Poppe, Chief Executive Officer; and Carolyn Burke, Executive Vice President and Chief Financial Officer. We also have other members of the leadership team here with us in our Oakland headquarters. First, I should remind you that today's discussion will include forward-looking statements about our outlook for future financial results. These statements are based on information currently available to management. Some of the important factors which could affect our actual financial results are described on the second page of today's earnings presentation. The presentation also includes a reconciliation between non-GAAP and GAAP financial measures. The slides along with other relevant information can be found online at investor.pgecorp.com. We'd also encourage you to review our quarterly report on Form 10-Q for the quarter ended September 30, 2025. And with that, it's my pleasure to hand the call over to our CEO, Patti Poppe. Patricia Poppe: Thank you, Jonathan. Good morning, everyone. Our core earnings per share are $0.50 for the third quarter and $1.14 for the first nine months of 2025. Today, we're narrowing our full year guidance range. We've previously shared a range of $1.48 to $1.52. The new range is $1.49 to $1.51 and we're keeping our bias toward the midpoint which is up 10% over 2024. We're also introducing our 2026 EPS guidance range of $1.62 to $1.66. At the midpoint, this is up 9% from our 2025 midpoint. Last month, on our investor update call, we extended our 5-year capital plan through 2030. Highlights included at least 9% EPS growth each year 2026 to 2030, a 5-year capital plan of $73 billion through 2030, which supports average annual rate base growth of 9% and a financing plan, which does not require new equity also through 2030. With the 2025 California legislative session over and the enhanced protections of Senate Bill 254 in place, our team is focused on collaborating with key parties, advisers and state agencies as the Wildfire Fund administrator prepares their April 1 report and recommendations for how best to socialize and mitigate climate-driven wildfire risk in the state. This report is expected to lay out a wide range of policy options that will inform potential legislative action to stabilize the utility sector in the 2026 session. We're feeling the positive momentum of this process with what Governor Newsom on issuing his recent executive order calls a whole of government response to protect Californians from Wildfire. We share the governor's sense of scale and urgency and are committed to supporting the state's efforts to meaningfully adapt California's policy construct to meet the moment. As this work continues, we know that there's no better protection for our customers and our investors than predicting and preventing catastrophic fires in the first place. PG&E's physical layers of protection are delivering. Through October 20, our total year-to-date CPUC reportable ignitions are down over 35% from 2024 levels and are running lower than any year since we started tracking these data in 2015. Despite this year having seen the second largest number of fires greater than 10 acres statewide since 2017, PG&E is on track for a third consecutive year of 0 structures destroyed due to CPUC reportable fires in high-risk areas under high-risk conditions. We are proud of that. In spite of continued elevated climate-related risk, PG&E's layers of protection from ignition prevention to hazard awareness and response are proving effective. Contributing to this performance, we can point to several ongoing and new mitigations. About a month ago, we marked a significant milestone for our customers. PG&E has now constructed and energized 1,000 miles of power lines underground in the highest fire-risk areas. As we've consistently said, undergrounding remains the most affordable and effective way of delivering the safety and resilience our customers deserve. Customers should not have to choose between safety and having reliable electricity. Undergrounding is the only mitigation that delivers both. This year, we cleared vegetation in a 50-foot radius at the base of nearly 4,000 transmission structures after our data showed this approach would have contained the majority of transmission-related ignitions that we have experienced over the last three years. And we're continuing to deploy advanced sensor capabilities. including installing another 8,500 sensor devices this year, which builds on the 10,000 we rolled out last year. These low-cost sensors, coupled with our existing smart meters and our newly deployed AI-enabled machine learning model are enabling secondary system-wide continuous monitoring. This capability allows us to detect potential faults on the system before they occur, including on the customer side of the distribution pool. We will continue to leverage data to drive our mitigations in the field, making the system and our customers safer each and every day. In addition to executing on this important safety work, my coworkers have been leveraging our performance playbook to deliver consistent outcomes across the business for customers and investors. You can see our simple affordable model is working. Our 5-year plan contemplates $73 billion of customer beneficial capital investment through 2030. At the same time, building on lowered electric rates this year and planned even lower rates for bundled electric customers in 2026, we expect customer bills in 2027 to be flat to down to where they are this year. We are doing this by eliminating waste and delivering on our 2% O&M cost reduction goals, enabling rate reducing load growth by partnering with our large load customers and executing on a financial plan built with flexibility conservatism and credit metric targets supportive of investment-grade ratings, which will lead to interest expense savings for customers. We know that performance is power. When we perform we will have the power to influence perceptions and outcomes. By putting customers at the heart of everything we do and by doing what we say, our brand trust is on the rise and has been since our 2027 GRC filing started to change the narrative on affordability. In fact, when compared to our U.S. utility peers, the second quarter 2025 residential customer engagement study by Escalent showed, we had the highest annual increase in Brand Trust. Our data center pipeline remains robust, at over 9.5 gigawatts. We've seen modest net attrition in our application and preliminary engineering phase since June. However, our projects in the final engineering stage continue to grow and advance. Most of the applications in our pipeline are for 100 megawatts or less. This is a function of existing California regulation but also assigned that data centers designed to support AI inference models have strong and compelling reasons to want to locate in PG&E service area, which includes Silicon Valley, the home of the technology sector. Data centers of this size can be located in densely populated areas close to the end user and benefit from Northern California's extensive existing fiber network. This makes our service area a prime location for these customers who require real-time speed to ensure an optimal user experience. We are laser-focused on making this a win-win-win for our cities, our customers and data center developers. For example, we partnered with the City of San Jose to identify more than 150 acres of land adjacent to our existing infrastructure and in the heart of Silicon Valley that will be power ready for the data center selected from the city's competitive RFP issued earlier this year. Our robust pipeline with a diverse set of projects is a great opportunity for customer affordability and California's economic prosperity. Every gigawatt we bring online offers the opportunity to reduce electric bills by 1% to 2%. I'll remind you that this is upside to our plan, both in terms of customer affordability and in terms of capital growth. Given our bias for conservative planning, our capital plan only includes about $300 million a year for this type of capital, much of which falls under our FERC formula rate. With that, I'll hand it over to Carolyn to discuss our financials. Carolyn Burke: Thank you, Patti, and good morning, everyone. Here on Slide 8, we're showing you our earnings walk for the first nine months of 2025. Core earnings per share are $1.14 and we're on track to deliver on our 2025 non-GAAP core EPS guidance narrowed today. As you can see, we've made additional progress towards our O&M cost savings goal contributing $0.05 for the quarter and $0.08 year-to-date. We continue to see unit cost reductions in our inspection processes and savings through vendor contract renegotiations as two examples of our cost savings initiatives. Another key driver is timing and other. This bucket is contributing $0.10 for the quarter and $0.04 year-to-date. Both the third quarter and nine months include benefits from smart tax planning. As a result of a method change, we're able to accelerate the deductibility of certain mark and recognize greater tax savings. We view this tailwind as upside available to redeploy for the benefit of our customers in addition to protecting future years. Turning to Slide 9. There's no change to the extended 5-year capital plan, which we shared with you last month. Our planned customer beneficial investments support average annual rate base growth of approximately 9%, 2026 through 2030. Our rate base growth in turn, supports annual core EPS growth of at least 9% also through 2030. As a reminder, our rate base forecast excludes the $2.9 billion of CapEx to be securitized under SB 254. Incrementally today, we're sharing more detail on our capital investment plan as shown here on Slide 10. This continues to be a no big bets plan. It includes many important projects over the course of the 5 years to improve safety, reliability and resiliency for our customers while enabling economic growth through capacity upgrades and new business connections. To give you some examples, our plan includes a recently approved upgrade of our Helms hydro facility, enabling at least 150-megawatt increase in generating capacity. It also includes a substation upgrade, which more than doubles the electric capacity and improves reliability north of Sacramento. And it includes deployment of about 300,000 grid edge meters by 2030. These meters have distributed intelligence apps and advanced data processing, which support customer electrification as well as wildfire risk reduction. Last month, I shared with you our financing guidepost, shown here again on Slide 11. Importantly, our plan is built not to require a new common equity through 2030, a key consideration given where we currently trade. I also emphasize that we are continuing to prioritize investment grade ratings including maintaining FFO to debt in the mid-teens. Again, IG is one of the most meaningful potential affordability enablers for our customers. I'll remind you that we're targeting a dividend payout ratio of 20% by 2028 and maintaining that level through 2030. This offers financing flexibility over the course of our plan as well as implying near-term compound EPS growth well in excess of 50% over the next 3 years. Our planning also contemplates the possibility that the Wildfire Fund administrator calls for the contingent contributions authorized by SB 254. Regarding capital allocation, I'll remind you what both Patti and I shared on our September update call. Based on progress in the 2025 legislative session and encourage and signals that the state is serious about pursuing further reform in Phase 2, we see the investment plan we have shared with you as best delivering for our customers and investors now and for the long run. That being said, we'll continue to take a disciplined approach when it comes to capital allocation. If we were to reach a point where we aren't seeing clear indications of progress, we would certainly consider reallocating some capital towards more immediate shareholder return. Of course, always being mindful of our credit metrics. A key differentiator of the PG&E story is our performance playbook and focus on waste elimination to deliver better outcomes for our customers. To that end, we've achieved nonfuel O&M savings in excess of our target for 3 years running, and I'm confident that we will meet or exceed our 2% reduction target again this year. We're also on track to make meaningful improvements in our capital to expense ratio this year and beyond. In 2024, we invested $0.90 of capital for every dollar of expense. We forecast that this year, we'll invest $1.20 of capital for every dollar of expense. On the regulatory and policy front, we expect a proposed decision on our cost of capital application in November. And as Patti said, important milestones are coming up as stakeholders weigh into the second phase of SB 254. I'll end here on Slide 14, with a reminder of our value proposition enabled by our differentiated performance. We're executing on our simple affordable model by generating annual cost savings for the benefit of our customers, enabling load growth with our 5-year capital investment plan and improving our balance sheet. I'm pleased Fitch has taken the first move to return our parent company rating to investment grade. This is just the beginning. As we continue to prove out our philosophy that performance is power. And now I'll hand it back to Patti. Patricia Poppe: Thank you, Carolyn. The fundamentals of the PG&E playbook are undeniable. Strong layers of physical risk mitigation improving every day. Ample runway to continue reducing nonfuel O&M, rate reducing load growth serving customers and California's prosperity, improving credit ratings and balance sheet health and our differentiated rate case proposal as a critical proof point all of which provide a path for customer bills to be flat to down in 2027 from today. These performance fundamentals set the stage for constructive legislation but more importantly, a framework that creates prosperity for customers and investors. With that, operator, please open the lines for questions. Operator: [Operator Instructions] Your first question comes from the line of Steve Fleishman with Wolfe Research. Steven Fleishman: So just on the SB 254 process, is there any better sense of in these steps, whether those would be made available that we can see? Or are we going to really more see things towards the end of the process? Patricia Poppe: Yes. Thanks, Steve. On the process front, we do -- we aren't sure what the CEA is going to share publicly. We do know just process-wise, the stakeholder abstracts are due November 3, right around the corner, full submissions by December 12. State agencies will submit final recommendations by January 30 and then that final study from the CEA April 1. We don't know what of those will be public. We're waiting to see that ourselves but we do know those are the milestone dates. Steven Fleishman: Okay. Understood. And then maybe just on the -- just any -- at this point on the cost of capital case, are we just basically waiting for a proposed order the process is done otherwise? Carolyn Burke: Yes. Steve, this is Carolyn. Yes. No, we are. We're -- as we've said in the past, we believe we put a really strong case forward, and the PD is expected in November 2025. Operator: Your next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I guess would you expect the policy reform recommendations next April to be prescreened with like the legislature and kind of have buy in, in advance of then going into the session. Is this something that we should have gave you a little bit more confidence that it's kind of vetted and should have a good chance of making it through? Patricia Poppe: So I guess, as we talk about this, David, let's just back up a little bit and talk about where we are and then we'll talk about where we're going. First and foremost, what we saw from the legislature this year is that they took action. Look, there was concerns certainly about the fund durability and the risk then that was to shareholders in the event that the fund were depleted and the disallowance cap was dissolved. So I do want to just step back and remind everyone that this legislature and our governor took action very quickly, and we're thankful for the actions that they took. And there are some key benefits that I just want to reinforce that have been achieved already. I think there's a lot of, obviously, focus on Phase 2, but let me just remind us what happened in Phase 1. You know that protecting the fund and through the continuation account and our disallowance cap was a very important continuation of AB 1054, but there were several improvements to AB 1054 that I just want to hit really quickly, and I'll get to your process question. Moving the disallowance cap date -- to the date of ignition, I'm going to call that the unsung hero of SB 254. A lot of people haven't talked about that, but moving that disallowance cap date to the date of ignition versus after the entire prudence determination process protects investors in the billions of dollars range of lower exposure through the disallowance cap and any dollars that the IOU would have to pay back to the fund. That reduces that exposure dramatically. That was a big improvement. We also, of course, had no upfront contributions and with a significant portion of the contributions from the IOUs to the fund as a contingent call only in the event of a future large utility cost fire that jeopardizes the liquidity of the fund. That was a much improved source of -- or method of refueling the fund versus how it was done the first time. And of course, all new IOU contributions to the fund act as credits against the future regulatory disallowance that again, was a big improvement. And individual utility funding has been rebalanced, reducing the amount that certainly PG&E is paying into the fund by about 25%. So I say all that, just a reminder to everyone that we have some significant improvements as a result of this Phase 1 process of SB 254. We were very thankful that the governor had leaned in so strongly though on Phase 2. He did not have to issue an executive order. The study bills are issued all the time. He wanted to make it clear. I think that the actions of the CEA and the report and the recommendations and then potential action by the legislature in 2026 was a top priority for him through that executive order. And his comments about a whole of government approach to wildfire is very important, I think, for California, for our citizens, for the -- all of our customers and for everyone who lives here, it's just a very important step to take. Now what we know is that the comprehensive language that he shared that was both in the actual legislation and in his executive order was good to see. I would suggest that just flat out too soon to say what the best answer is going to be. We're going to see this range of proposals. The dates I just reviewed with Steve are the dates that the process will work. Obviously, the governor and the legislative leaders will be having conversation as this process unfolds. And -- but I would expect that the CEA report should be providing some really good recommendations to the legislature on which to act. David Arcaro: Excellent. No I appreciate all that color in the context there for the entire process. And then maybe a bit of a separate question here. From what you can tell, is the undergrounding decision still on track for this year? And how should we think about that? Could that still lead to a future acceleration of your undergrounding activities in the future GRCs? Patricia Poppe: Yes. Procedurally, currently on October 30, here just a couple of days, commission meeting. Currently, the final recommendations on the 10-year undergrounding procedure will be -- it currently is on the agenda. All that to say, we certainly have expressed concern with some of the requirements and some of the methodology associated with determining which miles should be undergrounded. And so we'll be watching closely as the commission provides that direction next week. I will say that -- and I shared this in our prepared remarks, we do believe that undergrounding remains the appropriate mitigation in some of our miles, not all miles. And I think that's important for people to understand. The miles that we've been talking about are in our highest risk areas where today, customers are experiencing 10 or more outages as a result of our safety methods. Our safety methods with enhanced power line safety settings, certainly reduces the risk for customers and keeps customers safe. However, the outages that go with that safety choice are not acceptable. And so in these areas, we need to have a higher risk reduction through undergrounding and a better customer experience through a resilient energy system that can stand up for -- through all sorts of weather conditions. Both fire hazard conditions as well as extreme snow conditions et cetera. So we are -- we continue to be bullish about undergrounding as the most affordable means of both reducing risk and providing resiliency in these highest-risk miles and will continue to advocate for that. We'll be obviously working with the commission on the time depending on their timing on our 10-year filing. And we obviously will need to meet the requirements that the commission outlines. But just to remind everyone, as part of our 2027 GRC, we did include a bridging strategy in the event the 10-year plan were delayed in some way. We did propose a bridging strategy to continue our current level of undergrounding, which is about 300 miles a year. And I'm happy to report, as I mentioned in my prepared remarks, that we did hit a key milestone of 1,000 miles underground, and we've done that at a 25% lower cost than when we started. And so we continue to improve the cost for customers while we improve their safety and resilience. Operator: Your next question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Just wanted to follow-up, actually, if I can push a little bit more on the Phase 2 piece. How do you think about that conversation fitting into a broader, more comprehensive focus in the state on reform of insurance. Just want to understand what your understanding of the scope of the conversation is in the coming year as well as if there is any nuance to break apart as far as inverse condonation. I get that IC perhaps is maybe a bridge too far or at least it seems like a big ask. Are there other ways to dissect this that are relevant that folks should be thinking about? Again, I don't want to preempt the study per se that's coming out, but how do you think about strict liability conversation more broadly here as best you can tell? I get it's early. Patricia Poppe: Yes, Julien, if I had a crystal ball, I would say that it's too soon to say the governor's comments in his executive order and in the actual legislation itself, we're clear that it's a whole of government approach to insurance and utilities. Look, utilities are so important to California's future. We at PG&E power the tech industry. We power the future prosperity of our state. We think there's a big case to be made that our financial health and our customers' well-being our essential ingredients to California's future. So we'll look forward to how the study plays out, and we'll look forward to fruitful discussions with many parties to determine the best way to protect customers, preventing catastrophic wildfire in the first place and then having the right response and a means of compensation for those people who are harmed. So I do look forward to the whole of government approach that the governor has outlined. Julien Dumoulin-Smith: Awesome. Excellent. And then just following up a little bit on the nuance of the data center pipeline. It was down slightly here, but again, if you can speak a little bit to what transpired there with the 500-megawatt reduction. But more broadly, as you think about it's actually coming into fruition, would you anticipate being able to raise capital as you drive more bill headroom from data center realization? Or is that more about having a more of a linear read to bill reductions at large? Patricia Poppe: Yes. So I would suggest -- and this is great news. The most important numbers to look are the ones that are getting closer and closer to construction. So the final engineering numbers went up, and we expect of that 1.6 gigawatts in final engineering, about 95% to be online by the end of 2030. So -- and some of that's on -- will be online as soon as next year. So all that to say that I would suggest that our pipeline is rich. There's a lot of -- that kind of opening of the funnel is a very fluid number. I had a call this week with another customer that's not reflected in those numbers. So trust me when I say those numbers move a lot. And that's -- I think that's good because we're really taking a stand here that any of this new large load that we add here in California is going to be beneficial to customers and investors. Because what that means is we'll be able to invest in the capital to deploy, particularly transmission to build out the -- and some of the distribution system to build out that new large load for those customers. But the new revenue from that large load more than offsets the cost for customers to fund that CapEx, so we can grow our returns and yet reduce bills for customers. It's a really important win for California. And then you layer in the tax benefits, local property and sales tax to local communities. I'm in continual conversation with community leaders, mayors, et cetera, who are very bullish about this as a source of growth and new revenue for our cities to provide new housing options to provide new public safety options. And so there's really a lot of momentum here across the state to make sure that we bring online this new load. Carolyn Burke: Yes. And maybe I'll just add to your second part of your question there, Julien, as we think about additional capital for these additional data centers, we think about it in three distinct possibilities. One could make the plan bigger. We could make the plan bigger. But perhaps that's the least likely given that -- given our current stock valuation. There's also the potential to make the plan better, as you indicated, right? In terms of affordability and driving affordability for our customers by bringing in this beneficial load from data centers. That's a strong possibility. And then we also could just simply make the plan longer in terms of extending our above-average growth runway. So that's the way we're thinking about it. And as I said, it's more likely the second or third and not the first part. Operator: Your next question comes from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Maybe just to start on some of the commentary on the credit side. You obviously highlighted the Fitch upgraded in your prepared remarks. Just curious if anything you can share on conversations with the other agencies and sort of how you're thinking about milestones on the path to potential upgrades there as well? Carolyn Burke: Yes. We continue to have good conversations with both Moody's and S&P. And as you know, Fitch just did the upgrade. I would say they're looking for what you're looking for, which is progress on Phase 2 and that would be a significant trigger for them as they think about our investment grade. They both indicated that our financial credit metrics meet their investment grade criteria to really looking at the regulatory environment. Moody's is on a typical cycle where we see action in the first quarter. But again, that's really up to their internal assessment of the regulatory environment as well. Carly Davenport: Great. And then maybe just on the O&M front. You've executed really well there relative to your targets for a number of years now. I guess just help us frame out what it would take for you to have the confidence to potentially raise that target? Or just curious if that is a potential driver of upside as you think about the 2026 range that you've introduced here? Carolyn Burke: Yes. I'll just say that I just continue to be really odd and proud of my -- of our PG&E coworkers and their use of the lean playbook and driving waste out of the system. As you indicated, 3 years in a row running and we are on target to meet or exceed the 2% this year I have no lack of confidence that, that's going to continue. Just we may -- as we indicated, we're seeing significant progress on our capital expense ratio, but we're still fourth quarter. We still have lots of opportunity to go. So I would say that, that continues to be a driver of our simple affordable model. We are continuing to look at our numbers and where there's opportunity. We're not at the point where we're thinking about raising that -- we're not raising that 2% for this year, but it is definitely a driver for affordability and our earnings. Operator: Your next question comes from the line of Aidan Kelly with JPMorgan. Aidan Kelly: Just wondering how comfortable are you with 2026 EPS guidance before you have a resolution on the cost of capital proceeding, I guess just any detail on what outcome ranges are contemplated in this outlook would be great. Patricia Poppe: Yes, I think you can rest assured that we plan conservatively. We think we filed a good cost of capital proceeding or filing. We think there's no lack of evidence that our actual cost of capital is up. All that to say, though, as we build out our plan, and I think you can start to really see the pattern year after year after year that despite a variety of circumstances, we ride that roller coaster so you don't have to, and we deliver what we say. I think we could all agree it's a choppy year, and there's been a lot of conversation here in California, and yet, we continue to deliver. And that's what I want everyone just to get comfortable with that we will plan conservatively under a variety of scenarios and make sure that we're in a position to deliver for customers and investors very consistently. Aidan Kelly: Got it. That's clear. And then on the storage front, I guess, it looks like some positive momentum here for commerciality with your completion of the CRC energy storage microgrid with Vault -- Energy Vault last month. Just curious to what extent do you see this project as like a blueprint for other high-risk communities as you kind of think about the reliability concerns during like safety shutoffs. Patricia Poppe: Yes. We're really excited about that project. And we definitely have other communities that we're preparing to do similar installations. We have -- every time we do these, we learn. This will be another opportunity for us to learn. Look, our ideal scenario is that, number one, we have less outages through infrastructure built for purpose, aka, undergrounding. And then in cases where public safety power shutoffs are a necessary part of our safety tool kit, which they are minimizing exposure by sectionalizing devices by some of these microgrids to harden -- to protect downtown so that they can have critical services during a public safety power shutoff, we want to make these outages invisible to our customers and keep them safe. So -- the whole suite of operational opportunities that we have, we're going to continue to pursue those. Operator: Your next question comes from the line of Gregg Orrill with UBS. Gregg Orrill: How do you think about the direction of the payout ratio beyond 2028, if that's possible to know at this stage? Carolyn Burke: Well, as we had indicated in our last call that we are growing the dividend to a 20% payout to '28 and then maintaining it through 2030 at 20%. Operator: And that concludes our question-and-answer session. I will now turn the conference back over to Patti Poppe, Chief Executive Officer, for closing comments. Patricia Poppe: Thanks, Christa. Well, thank you, everyone. We appreciate you joining us. As I hope you hear today, we're on full speed here at PG&E. Our entire team is working to deliver for our customers and for you, our investors every day. You can expect nothing less. With that, we look forward to seeing you at EEI. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the West Bancorporation, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] I would like to turn the conference over to Jane Funk, Chief Financial Officer. Please go ahead. Jane Funk: Thank you. Good afternoon. I'm Jane Funk, the CFO of West Bancorporation, Inc. and I'd like to welcome the participants on the call today, and thank you for joining us. With me today are Dave Nelson, our CEO; Harlee Olafson, Chief Risk Officer; Brad Peters, our Minnesota Group President; and Todd Mather, our Chief Credit Officer. During today's conference call, we may make projections or other forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in our 2025 third quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of September 30, 2025, and we undertake no duty to update the information. With that, I'll turn it over to Dave Nelson. David Nelson: Thank you, Jane, and good afternoon, everyone. Thank you for joining us, and thank you for your interest in our company. I have a few general comments, and then we'll turn the call over to others for more details. West Banc had another solid quarter with a 16% earnings increase over the prior quarter and 55% increase over third quarter of last year. Our financial performance metrics continue to improve, primarily driven by an expanding margin. The future Fed rate cuts will also be favorable to our margin as well as loan renewal repricing is also helping our margin, and this will continue into enduring 2026. West Banc credit quality continues to be very strong with essentially no problem loans or any 30-day past due loans. Yesterday, our Board declared a $0.25 per share quarterly dividend to common stockholders payable Wednesday, November 19, 2025, to shareholders of record as of Wednesday, November 5, 2025. Those are my prepared remarks, and I would now turn the call over to Mr. Harlee Olafson, our Chief Risk Officer. Harlee Olafson: Thank you, Dave. My remarks are going to be pretty short because credit quality hasn't changed much here. So credit quality at West Banc for the third quarter of 2025 remains very strong. We have no past dues, no OREO, no nonaccruals, no doubtful accounts and no substandard loans. We have a small watch list that is mainly in the transportation industry. These credits are well secured, but the entities are having cash flow issues. Our commercial real estate portfolio is well diversified and is performing as expected. Having strong customers with liquidity and strong cash flows has served us well. We remain committed to our past underwriting disciplines and expect credit quality to remain pristine. After our prepared remarks, I'm available for questions. I now turn it over to Todd Mather, our Banking Manager and Chief Credit Officer. Todd Mather: Thank you, Harlee. For the quarter ended 9/30/25, our loan outstandings were up slightly at just over $3 billion. We experienced a few larger payoffs from asset sales and refinance activity. The majority of those assets were priced below the current environment. We replaced those assets with quality new assets at better interest rates. Our depositing gather efforts continue to be an emphasis, and we have been successful in attracting new customers and depositors. We remain selective in obtaining new loan opportunities, and those opportunities are less than in prior years. We are confident in our abilities to create and maintain positive relationships with our customers and prospects that we are pursuing in a highly competitive market. I will now turn it over to Brad Peters, our Minnesota Group President. Bradley Peters: Thanks, Todd. Good afternoon, everyone. I'm going to provide a brief update on our Minnesota banks. We continue to see a slowdown with the majority of our manufacturing clients. The economic uncertainty has created a cautious environment in each of our Minnesota regional centers. Our bankers have been diligent in staying close with our clients and have increased calling activities to better manage relationships. We are seeing new business opportunities with the recent M&A activity from competitors in our markets. Our bankers have targeted calling plans and each market has had success bringing new business to West Banc. Our calling is focused on deposit-rich business banking opportunities. We have a disciplined calling approach that has enabled our team to be successful in attracting new business. Our seasoned group of bankers and our business banking focus set us apart from the competition. We are also targeting high-value retail deposits. Our bankers have been successful in winning the retail deposits of our business owners and key executives. We are also attracting new deposits from high-earning individuals in our communities. We do not have specific production goals for our bankers, but rather measure our bankers on doing the right activities that will drive results. This method of performance management is more difficult to manage, but our local leaders are fully engaged with our activity-based expectations, and we have established specific activity expectations, which we coach our bankers on consistently. This method has proven to be successful as we expand our market share in our communities. Our facilities are designed to host client and prospect entertaining. These unique facilities align perfectly with our strategy of building business based on strong relationships. Our team has embraced this and have done an outstanding job of leveraging our buildings to grow our business. Those are the end of my comments. I will now turn it back over to Jane. Jane Funk: Thanks, Brad. I'll make just a few comments on the financial performance for the quarter, and then we'll open it up for questions. So our loan balances increased approximately $43 million in the third quarter, but were relatively flat year-to-date. Core deposit balances decreased approximately $82 million in the third quarter. This decline was primarily due to normal and anticipated cash flow fluctuations in core public fund deposits. Net income was $9.3 million in the third quarter compared to $8 million in the second quarter of 2025 and $6 million in the third quarter of last year. Net income and net interest income continued to improve through improvement in net interest margin, and our margin improved 9 basis points compared to last quarter. The yield on the loan portfolio continues to improve as fixed rate assets reprice into higher yields. In the third quarter, loan yield was 5.66% compared to 5.59% in the second quarter and 5.52% in the first quarter of this year. The cost of deposits declined 2 basis points in the third quarter compared to second quarter. As described earlier, credit quality remains pristine and no provision for credit losses was recorded this quarter. There were no significant onetime items in noninterest income or noninterest expense in the third quarter. And our effective tax rate this quarter was a bit lower than prior quarters this year due to a change in estimate on an energy-related investment tax credit. The effective tax rate was around 19% this quarter compared to 22% to 23% in the first 2 quarters of the year. Those are my final comments on the financials. So now we'll open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Nathan Race from Piper Sandler. Nathan Race: Maybe just to start in terms of where the pipeline stands from a loan growth perspective, nice growth in the quarter, nearly 6% annualized. So just be curious to get an update there. I know Brad indicated there are some opportunities to pull some market share in Minnesota, just given some of the M&A-related disruption there. So I would love to just get an update in terms of where pipelines stand and how you're thinking about growth over the balance of this year and then into 2026 as well, please? Bradley Peters: Thanks, Nate. Yes, I would say in Minnesota, our pipeline is good, but it's not as robust as it has been in the past, and that's probably because we're really being more selective around what we're trying to attract from a credit perspective. But I think we can expect to continue to maintain the pace that we're at today. Nathan Race: Okay. So it sounds like mid-single digits is doable going forward? Bradley Peters: I think so. Nathan Race: Okay. Great. And then, Jane, I think the $50 million municipal deposit that you flagged last quarter, it looked like that came out based on the end-of-period balances. So just curious, is the expectation that you guys can fund that mid-single-digit growth outlook with deposit gathering from here and maybe a little bit as welcome cash flow off the securities portfolio? Jane Funk: Yes, that would be the objective. As we look at the cash flows off the investment portfolio and our opportunities for deposit gathering, that would be our objective. There may be a little bit of wholesale funding or broker deposits that we need to backfill that for a short period of time, but we expect to be able to manage that cash flow. Nathan Race: Okay. Great. And Jane, it seems like you guys have still a decent amount of margin tailwinds at your back in terms of -- I believe you have around $550 million of fixed rate loans repricing over the next 12 months or so. And then if you could just update us on your deposit beta assumptions as we get additional Fed rate cuts going forward? Jane Funk: Yes. On the loan side, yes, we do still see a lot of repricing opportunities. So like in our fixed rate loan portfolio, the average -- weighted average rate of that portfolio is currently like 4.86%. So there's still plenty of room there. And what we look at for maturities and repricing into 2026, we feel there's good opportunity there to continue to improve the yield on the loan portfolio. As far as deposit betas looking forward, I know that a year ago when the Fed did their rate changes, the rate declines, we were able to be pretty aggressive with our betas at that time on deposits. Should the Fed reduce rates another 25, 50 basis points this year and into next year, it's probably still questionable as to whether our betas can be as aggressive as they were a year ago. Just from a competitive standpoint, there's still a lot of pricing pressure on deposits. So I would expect it to maybe be a little bit lower than what we were able to do a year ago. Nathan Race: Okay. And Jane, maybe one last one for you. I appreciate the commentary on the tax rate impacts in the third quarter. Any thoughts on the go-forward tax rate? Jane Funk: I would say the go-forward tax rate is probably similar to what we had the first half of the year. In the third quarter, it's just the anomaly. Nathan Race: Okay. Got you. And then just curious if there's any update in terms of capital management or deployment priorities. You built capital at a pretty nice clip this quarter, and I imagine that should continue to unfold. But just curious if there's any kind of strategic priorities, whether it's additional location build-outs, adding team members to maybe accelerate the pace of organic growth. But I would just love to hear any updated thoughts on just how you're thinking about excess capital management. Jane Funk: We don't have any specific plans necessarily, but I think being able to take advantage of good loan opportunities, organic growth is really what we're looking for. Nathan Race: Okay. Great. Congrats on a great quarter. Jane Funk: Thank you. Operator: [Operator Instructions] Your next question comes from the line of David Welch, private investor. David Welch: This is coming from a guy who grew up in Iowa and then has lived in Minnesota for 20 years. I know you're not a direct ag lender, but soybean prices, corn prices, I'm seeing an incredible amount of press about the distress in the farming community. Is that going to have a knock-off or knock-on effect to West Banc in your opinion? Harlee Olafson: Obviously , the dollars generated off of farm ground is going to be less. Our direct impact will -- it will have some impact on some of our customers, but most of our customers are not specific ag manufacturers. We have some customers that specifically provide pieces and parts to places like John Deere. But overall, we're a little bit insulated from that in our customer base. David Welch: Okay. That's kind of what I figured, but I thought I should ask. And it's been quite a few years now, and it might be a little unfair for me to ask it this way, but what's the medium-term assessment of how the Minnesota growth venture has gone thus far? Bradley Peters: I think it's -- I mean, we never put together a specific projection, but I think I can say with confidence we've exceeded expectations to this point. Each of the markets have contributed to the bottom line, we continue to grow at a reasonable pace. I think at this point, company-wide, it accounts for about 1/3 of our company. So we're pleased. Operator: There are no further questions at this time. I'd like to turn the call back over to Jane Funk for any closing remarks. Jane Funk: All right. We just want to thank everybody for joining us today, and we appreciate your interest in our company, and have a good day. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the West Fraser Third Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 23, 2025. During this conference call, West Fraser's representatives will be making certain statements about West Fraser's future financial and operational performance, business outlook and capital plans. These statements may constitute forward-looking information or forward-looking statements within the meaning of Canadian and United States securities laws. Such statements involve certain risks, uncertainties and assumptions, which may cause the West Fraser's actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risk factors and assumptions is included both in the accompanying webcast presentation and in our 2024 annual MD&A and annual information form as updated in our quarterly MD&A, which can be accessed on West Fraser's website or through SEDAR+ for Canadian investors and EDGAR for United States investors. I would like to turn the conference over to Mr. Sean McLaren. Thank you. Please go ahead. Sean McLaren: Thank you, Inna. Good morning, and thank you for joining our third quarter 2025 Earnings Call. I am Sean McLaren, President and CEO of West Fraser. And joining me on the call today are Chris Virostek, Executive Vice President and Chief Financial Officer; Matt Tobin, Senior Vice President of Sales and Marketing; and other members of our leadership team. On the earnings call this morning, I will begin with a brief overview of West Fraser's Q3 2025 financial results and then pass the call to Chris for additional comments before I share some thoughts on our outlook and offer concluding remarks. West Fraser posted negative $144 million of adjusted EBITDA in the third quarter of 2025 as we continue to operate within an extended cycle trough. Of note, this quarter included a $67 million out-of-period duty expense related to the finalization of Administrative Review 6 or AR6. New home construction remained relatively stable during the period, albeit at uninspiring levels, with annualized U.S. housing starts averaging just 1.31 million units through August on a rolling 3-month seasonally-adjusted basis as mortgage and interest rates continue to present headwinds to U.S. housing demand and affordability. And as we've noted for several quarters, repair and remodeling demand was subdued once again this quarter. Despite the tough Q3, our balance sheet continues to demonstrate strength as we exited the quarter with nearly $1.6 billion of available liquidity and a healthy cash position that remains positive net of debt. A strong balance sheet and liquidity profile, along with our investment-grade rating remain key elements of our defensive capital allocation strategy, which allows us to invest in our business countercyclically and take advantage of investment opportunities if and when they arise. With that brief overview, I'll now turn the call to Chris for additional detail and comments. Christopher Virostek: Thank you, Sean. And a reminder that we report in U.S. dollars and all my references are to U.S. dollar amounts, unless otherwise indicated. The lumber segment posted adjusted EBITDA of negative $123 million in the third quarter, inclusive of the previously mentioned $67 million out-of-period duty expense. This is in comparison to $15 million of adjusted EBITDA reported in the second quarter with the sequential change driven largely by lower pricing and the AR6 duty expense. Of note, operations at our old Henderson site are winding down and the new mill is entering its commissioning phase. Our North America EWP segment posted negative $15 million of adjusted EBITDA in the third quarter, down from $68 million in the second quarter, with the sequential change largely driven by lower OSB pricing. The Pulp and Paper segment posted negative $6 million of adjusted EBITDA in the third quarter compared to negative $1 million in the second quarter, with the sequential change largely attributable to Cariboo Pulp's annual maintenance shut that occurred in the third quarter. Prior to and following the maintenance outage, we are seeing improved operating performance from Cariboo Pulp in terms of daily output. Finally, our Europe business generated $1 million of adjusted EBITDA in the third quarter similar to the $2 million reported in the second quarter. In terms of our overall Q3 results, lower product prices for our lumber and North American OSB products were the largest contributing to tractors as compared to Q2. We were also buffeted by a number of major maintenance activities during the quarter, most significantly the Cariboo maintenance shut. Cash flow from operations was $58 million in the third quarter with our net cash balance at $212 million, down from $310 million in the prior quarter. The relative decrease in our net cash balance reflects lower earnings offset by -- in part by a reduction of working capital plus the impact of $90 million of capital expenditures and approximately $65 million of cash deployed towards share buybacks and dividends. In terms of our 2025 shipments guidance, with the demand softness, we continue to experience across our lumber product portfolio, we are narrowing our outlook by reducing the top end of the guidance range for both SPF and SYP 2025 shipments, while maintaining the North American OSB and EU OSB shipment guides for 2025. We are also confirming our 2025 CapEx guidance range of $400 million to $450 million. All updated views on our 2025 outlook are presented on Slide 8. Regarding softwood lumber duties. Earlier in the third quarter, the U.S. Department of Commerce released final CVD and ADD rates for AR6 which are based on the year 2023. These rates were largely as we had anticipated and at a combined rate of 26.5%. West Fraser has the lowest duty rate in the Canadian industry. More recently, the U.S. administration issued a proclamation that imposed Section 232 tariffs of 10% on imported softwood timber and lumber into the U.S., which came into effect on October 14, 2025. This tariff is in addition to the existing softwood lumber duties. With that financial overview, I'll pass the call back to Sean. Sean McLaren: Thank you, Chris. Looking forward, we continue to monitor macroeconomic conditions complicated by shifting trade policies. Despite such a backdrop, the company remains well positioned to navigate the dynamic and difficult business environment we face today, backstopped by a strong financial position. As a reminder, we acted early in this down cycle, optimizing our portfolio of assets to create a more resilient company. This included permanently removing 170 million board feet of capacity in our Canadian lumber business in 2022 and 650 million board feet of capacity in 2023 and 2024, through the permanent or indefinite closure of 5 of our leased economic lumber mills in the U.S. and Canada. Combined, these capacity removals account for 820 million board feet, representing approximately 12% of the company's lumber capacity prior to the actions taken. Considering our shipment guidance for 2025, our implied Q4 operating rate reflects the curtailment of approximately 20% to 25% of that capacity. Furthermore, we divested 3 pulp mills for $124 million in 2024 and acquired high-quality lumber and OSB assets. In the aggregate all these actions to high-grade the portfolio have made us better at the bottom of the cycle. Going forward, we will continue to take this approach of managing our asset portfolio to do what is both prudent for the long term and necessary in the short term. Also expect us to continue to be flexible in our operating strategy, meeting the needs of our customers and operationalizing the benefits of our strategic capital to drive down costs, all while keeping our focus on a safe working environment for our employees. We are wrapping up a number of capital projects that have been in progress during the current market and expect the start of these projects will continue to lower cost as they are operationalized. We will also continue to pursue a balanced capital allocation strategy that includes investment in value-enhancing projects, pursuit of opportunistic investments in growth, and the return of capital to shareholders as we leverage the competitive advantage of our balance sheet strength and available liquidity. In terms of our more general medium- to longer-term outlook, we will continue to lean on our industry knowledge and experience to make the decisions that we believe will not only keep the company resilient in the trough of the cycle, but will also allow the company to be better prepared for the next industry demand recovery whenever that may be. North American support lumber supply has been trending lower in recent years, with a material proportion of that capacity closed permanently due to factors including high-cost fiber supply, legacy technology, shrinking residual markets and now more recently, increased duties and tariffs. When lumber supply demand dynamics eventually find balance and demand cyclically improves, we expect our ability to add material new supply will face the same significant obstacles, access to economically viable fiber, high capital costs that challenge returns on investment and long-term viable outlets for residual products. Shifting briefly to tariffs. Regardless of what may happen on this front, as we have said before, we continue to monitor the Canada-U.S. trade situation closely and remain agile and ready to respond as needed, and we will continue to work closely with our federal and provincial governments to support discussions when called upon as they relate to softwood lumber. In closing, at West Fraser, we aim to deliver strong financial results through the business cycle. We achieved this leveraging our product and geographic diversity, modern, well-capitalized assets and the dedication of our people and culture rooted in cost discipline and a commitment to operate responsibly and sustainably. We remain steadfast in the strategy. Although we continue to have a challenged near-term outlook, we are optimistic about the longer-term prospects for our industry and for West Fraser, and we look forward to continuing to build one of the world's leading sustainable buildings products companies. Thank you. And with that, we'll turn the call back to the operator for questions. Operator: [Operator Instructions] And your first question comes from the line of Ketan Mamtora from BMO Capital Markets. Ketan Mamtora: Maybe to start with and recognizing that this is a pretty tough backdrop right now. I'm just curious sort of your approach to managing production in both lumber and North America OSB, particularly in this environment, which increasingly looks like that demand is likely to remain soft here in the near term. Can you sort of just give us some part on sort of how do you approach sort of managing production, particularly as we are looking at sort of another year where EBITDA could be kind of negative in lumber? Sean McLaren: Ketan, happy to touch on that. And maybe I'll just start with -- by reinforcing a few things that -- the actions we took early in the cycle, which we're closing permanently or indefinitely a number of our mills adjusting our shift configurations. And we have remained nimble in our lumber portfolio against after those actions. And as sort of -- you have seen in our guidance as the year has unfolded. So we maintain in both of our main -- all of our product lines, but in particular, lumber and OSB, a variable kind of operating strategy that first runs to our economics and our customer demand needs. So that's how we manage that, and we make those decisions all the time within our platform. Ketan Mamtora: Understood. And then on OSB, what was sort of the implied Q4 operating rate looked like based on what you all have discussed. You talked about sort of 25% temporary curtailment in lumber. How does that look like in... Sean McLaren: Yes. I'll let Chris touch on that one. Christopher Virostek: Yes. I think, Ketan, as you'll recall, I think when we've discussed this before, right, Q4 is always very heavy for us on maintenance shuts. We strategically take that maintenance downtime in Q4 because it is a weaker seasonal period. So I think our -- with the shipment guide that is out there, that would imply an operating rate of somewhere around 80% in the fourth quarter. Ketan Mamtora: Understood. And then just last one from me. On the balance sheet side, clearly, the balance sheet is very strong. You've got a net cash position. Curious about sort of how you think about M&A opportunity in this kind of down cycle at the moment? And where do you think you've got the most opportunity for inorganic growth? Christopher Virostek: Yes. Sure. I'll jump in there, and then Sean, you can add if you like. I think we're very consistent the last several years in how we've talked about M&A. And for us, it's quality first, right? And I think clearly, an environment like we're in today necessitates that -- it just shows how important that quality-first approach is around all those things that Sean mentioned that are challenges, whether that's residual supply or asset quality or workforce availability or timber availability. So I think the way that we have the balance sheet we have flexibility to pursue our -- the strategy that we've always had, and growth has always been part -- inorganic growth has always been part of the company's DNA going back decades. So -- but we're going to be guided first and foremost by quality and things that make the company stronger. And I think you can see that certainly in the actions that we've taken over the last several years where we've added to the portfolio, it's been very selective and high quality, and we've also removed things from the portfolio that we don't think make us stronger at the bottom of the cycle. So I think that will be the guide as to what we consider as opportunities is there's got to be -- we got to be satisfied with the quality that's out there. Sean? Mark Wilde: No, that's perfect, Chris, all quality and enhancing our strength at the bottom of the cycle. Those are the priorities as we think about what might be next for West Fraser. Operator: And your next question comes from the line of Ben Isaacson from Scotiabank. Ben Isaacson: Just two questions for me. Sean, I think last conference call, so 3 months ago, the federal government was starting to talk about a possible support and conversations around that when it comes to lumber. So it's been 3 months and things have not really improved in terms of the macro backdrop. Can you talk about what you're willing to share in terms of how those conversations are going and how federal support for lumber is starting to stack up. Sean McLaren: I can't remember, I don't have the exact date in front of me. I believe it was in early August, and it was in British Columbia, which was encouraging at a small business in -- a small lumber business for the premier rolled out some different support measures. I don't have all the details are all in the public domain, but they were providing some level of support for the industry, some level of funding for exploring different markets. But that would all be in the public domain. I think we, as a mandatory responded, we continue to and frankly, with a balance sheet that we -- that remains strong. We continue to support those measures for the industry with the government. And at the same time, are kind of maintaining our own balance sheets, which is reinforcing our operations. So I probably wouldn't add more than that Ben. Ben Isaacson: Okay. That's fair. And then just a second question is perhaps for you or for Matt. With respect to your own customers that you talk to regularly, can you give some kind of sense in terms of how many months or days or weeks of inventory is in the U.S. channel, again, when it comes to your customers only relative to normal conditions for mid-October. Sean McLaren: Go ahead there, Matt. Matt Tobin: Sure. I can answer that. I would say we don't really have visibility into our customer supply chain or their inventory levels. What I can speak to is our inventory levels and they're lean in both SYP and SPF which has been intentional in this uncertain market to run our inventories lean. Ben Isaacson: Okay. So just to be clear, I mean, from the rate of reorder, you don't have a sense as to -- in terms of planning when your customers are going to come back and what their needs will be in the next kind of 2 to 3 months. Matt Tobin: No, I'd say they're buying as their needs come to them, and we're ready to service them in whatever regions they're in. But I would say no fundamental change or visibility to their inventory levels. Sean McLaren: One thing I might add to that, Ben, is our customers are -- products readily available. So they're buying what they need as they need it. And I think our guidance would -- we're maintaining our inventories in a below average position. And so our guidance would -- things are flowing through based on that guidance. Operator: Your next question comes from the line of Sean Steuart from TD Cowen. Sean Steuart: Sean, I want to follow up on the M&A question, and I appreciate your comments around all the assets and building strength at the bottom of the cycle. I guess the follow-on is, we're 3 years into this lumber downturn in North America. Have you seen more opportunities coming to the surface. And if so, would those opportunities include the types of assets you're looking for? I guess I'm trying to gauge what the opportunity set looks like now and how that's changed over the last 3 to 6 months. Sean McLaren: Sean, probably not -- I think we maybe had this question on a prior call. Probably not a lot of change this year. I think there -- what you typically see is early in an upswing as people are thinking about if a quality asset to sell, people would then maybe look to market that. And then I would say in the pipeline, I don't think there's anything any more than normal and for sure, higher quality assets typically are being held to a better time to market them. So all those things saying that we wouldn't be -- there wouldn't be anything that is jumping out today, that is high quality and available that fit. Sean Steuart: And I also wanted to follow up with your comments on North American supply management on the lumber side and appreciating you've done a lot of work on permanent and indefinite closures over the last 3 years. Is a part of the decision making for you at this point in the cycle, we're arguably closer to the end of this downturn than the start at this point, hopefully. Is there reluctance to take more permanent or indefinite shuts at this point when maybe we can see the light at the end of the tunnel as affordability headwinds start to ease. Is that part of the thinking and the thought process when you're gauging sort of rolling downtime versus further definite or permanent closures. Sean McLaren: Yes. No, it's a good question. I think we always look at it against the backdrop of how is that asset holding up during the current down cycle, and do we have a clear path for the next down cycle. And we make kind of decisions against that backdrop, it's really hard to predict. I mean, I agree with your comments that hopefully, we're here closer to the end than in the middle or the beginning, but we really don't know that. So I think we always have to really challenge ourselves, especially in this environment. Is there a a better operating model that lowers our cost here at the -- and makes us more competitive at the bottom of the cycle. And I would look across our SPF business, Southern Yellow Pine, OSB major business lines and volume is coming out of those businesses and costs are lower. So that's really the way we look at all those decisions and -- but they really -- every asset gets pressure tested in this environment. Operator: And your next question comes from the line of Matthew McKellar from RBC Capital Markets. . Matthew McKellar: I appreciate all the details so far. First from me, could you maybe just share with us how conditions in the Canadian markets have evolved in the last few months, is there anything to call out in terms of differences with the band between the U.S. and Canada? And then are you seeing any of your competitors behave any differently in the Canadian market since higher U.S. duties or the tariffs took effect? Matt Tobin: Yes, I can take that. I would say that the Canadian market remains competitive. It's a much smaller market than the U.S. market. So while it's an important market for us and we service those customers, it generally doesn't drive demand. And I would say it remains competitive just with where we are in the cycle and all the other things you've mentioned going on, but I would say nothing unusual, just having to compete every day to service our customers in that market. Matthew McKellar: And then just a couple of cleanups. If we're in an improved, but still, relatively soft wood products market next year, how should we be thinking about CapEx? I appreciate that Henderson will fade year-over-year. How does that evolve into '26 in your view? And second would be just the fire of the Cowie facility, can you help us understand what the state of that facility is today? Christopher Virostek: Sure. Yes. Thanks. So on CapEx, as we look forward, I think as we said in the comments, right, like we've spent a lot of capital. And I think that's one of the advantages of our strong balance sheet is we've been able to be durable with our capital allocation strategy and invest for the future in what have been pretty difficult market in the last couple of years, considering that, as Sean said, we're wrapping up a lot of fairly major projects here, and our focus is shifting to operationalizing those. So I think you can sort of think about what that means relative to 2026. We'll be out in February with our 2026 CapEx guidance. We have had 2 pretty busy years with with big projects going on. With respect to Cowie, I think, flagged in the materials, right, that incident happened about 5 weeks before the end of the quarter. Facility has been repaired back up and running, and I think we're pretty pleased with what we're starting to see in the European segment in terms of maybe some green shoots of things starting to turn around there. Operator: [Operator Instructions] And your next question comes from the line of Hamir Patel from CIBC Capital Markets. Hamir Patel: Sean, we don't have access to the U.S. trade data at the moment during the shutdown. But on the ground, are you seeing any signs of European lumber imports increasing just given that their competitive position has improved relative to Canada with all the duty and tariff changes since August. Sean McLaren: Ask Matt, if there's -- I don't think we have a lot of visibility to that, Hamir, without the data coming in. But Matt, would you add anything to that? Matt Tobin: No, I'd say like you said, not a lot of visibility and no meaningful change that we can see in them. Hamir Patel: Okay. Fair enough. And I just want to ask in Europe, if you have any comments on -- with respect to OSB demand, how things are faring on both the new res and R&R side? Sean McLaren: Yes. And Chris sort of touched on that as unfortunate incident at Cowie, our team did an excellent job of making the repairs and getting the mill back up and running and it kind of shadowed that event really did shadow some progress in Europe, and we are seeing -- hard to say how much is kind of demand driven, some of it still may be supply driven, but kind of sequentially quarter-over-quarter, we are seeing some price improvement in OSB and seeing some demand improvement there. So we're looking more optimistically in Europe over the next few quarters, and we'll see how all that unfolds. Operator: And we have a follow-up question from Mr. Sean Steuart from TD Cowen. Sean Steuart: Chris, you guys have done a good job on working capital management. And yes, I appreciate the seasonality in Q1 you'll update big log deck builds in Canada. Can you speak generally though, to, I guess, the changes you've made in terms of how you're managing working capital, over the mid- to long-term room for more reductions there, ability to pull more cash out of that, just broader perspective on how you're thinking about that item. Christopher Virostek: Yes. Look, I got to give a lot of kudos to the operations teams across the company on this front, right? I think it spans all elements of the working capital, we manage our credit and receivables very tightly, while still maintaining good relationships with our customers. The cycle there is pretty short. I think as Matt indicated in his comments, in many of our businesses were at or below target levels and operating with fairly lean inventories, which, look, presents some challenges from time to time in terms of filling orders. But the teams are doing a remarkable job of managing through that and learning how to operate with lower inventories. And then lots of work, I'll say, going on in terms of on the procurement side as well as vendors and vendor selection and things like that. So say it spans all aspects of this. And I'd say it's not just something that because of the environment that we're in, that it's getting any more focus than it ordinarily does, think the teams work hard on this stuff all the time. They're probably tired of hearing me talk about working capital. But it's really been, I think, a source of strength for us here in the last while, really releasing on, frankly, all aspects of the balance sheet, and it helps run a more efficient and effective business. So what does that translate into going forward? Hard to say on the way out, but I think some great learnings across the business and a deep focus on strong execution. Operator: And there are no further questions at this time. I will now hand the call back to Mr. Sean McLaren for any closing remarks. Mark Wilde: Thank you, Inna. As always, Chris and I are available to respond to further questions as is Robert Winslow, our Director of Investor Relations and Corporate Development. Thank you for participation today. Stay well, and we look forward to reporting on our progress next quarter. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: Thank you for standing by, and welcome to World Kinect Corporation's Third Quarter 2025 Earnings Conference Call. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. I would now like to hand the call over to Braulio Medrano, Senior Director of FP&A and Investor Relations. Please go ahead. Braulio Medrano: Thank you, Latif, and good evening, everyone. Welcome to World Kinect Corporation's third quarter 2025 earnings conference call, which will be presented alongside our live slide presentation. Today's presentation is also available via webcast and on our Investor Relations website. I'm Braulio Medrano, Senior Director of FP&A and Investor Relations. With us on the call today is Michael J. Kasbar, Chairman and Chief Executive Officer; Ira M. Birns, President and Chief Financial Officer; and Mike Dejada, Senior Vice President and Chief Accounting Officer. And now I'd like to review our safe harbor statements. Certain statements made today, including comments about our expectations regarding future plans and performance, are forward-looking statements that are subject to a range of uncertainties and risks that could cause actual results to materially differ. Factors that could cause results to materially differ can be found on our most recent Form 10-K and other reports filed with the Securities and Exchange Commission. We assume no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. This presentation also includes certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures is included in our press release and can be found on our website. We will begin with several minutes of prepared remarks, which will then be followed by a question and answer period. At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael J. Kasbar. Michael J. Kasbar: Thank you, Braulio. Earlier today, we announced a series of important leadership changes. The board has unanimously elected Ira M. Birns to become World Kinect Corporation's next CEO and join the board effective January 1, 2026. This is an important and positive milestone in our company's history for several reasons. The first is confidence in leadership. The board has full confidence in Ira's ability to efficiently allocate resources, accelerate our focus on core businesses, and aggressively drive growth and returns. And the second is the strength of the team. With John Royall's commercial and operational expertise and Mike Dejada's deep commodity, financial, and accounting acumen, we have a talented leadership lineup tested and ready to lead us forward. This transition has been years in the making. Over the past several years, our leadership team has taken on increasing responsibilities and gained invaluable experience. Equally important, this team has the temperament and skill to navigate cycles and events. Pandemics, wars, deglobalization, the disciplined judgment to evaluate risks and uncertainties prudently allocate capital, and maximize long-term value. They are well-seasoned to deliver. Most importantly, we have the right people in the right roles to drive our goals and future growth, demonstrating our commitment to talent development and organizational capabilities that will sustain success for years to come. With improved organizational strength, operational readiness, and a sharper portfolio, we are well-positioned for the future. The entrepreneurial spirit that built this company in fragmented markets is now complemented by the operational and financial discipline required to profitably scale in today's environment. I am incredibly proud of our transformational journey. Simple broker and reseller to a strategically important partner providing mission-critical supply to some of the largest and most important companies around the world. I couldn't be more proud. Turning to the business. Aviation delivered another solid quarter of double-digit earnings growth, driven by improved operating leverage in Europe, and profit growth in both business aviation and government activity. Our recent announcement to acquire Universal Trip Support Services expected to close in Q4 will add momentum and significantly expand our service offering to our core business and general aviation customer base. Marine faced a challenging quarter amid lower bunker prices and low volatility, but we see strong opportunities for greater cash generation when market conditions shift. Land rebounded significantly from Q2 and we are confident that our accelerating portfolio reshaping efforts will improve financial returns and earnings predictability as we move into 2026. We are nearly through our portfolio sharpening, and Ira, John, Mike, and the rest of our team have my full support to deliver on our strategic plan and drive the business forward. I'll now turn the call over to Ira for a financial review and his business comments. Ira M. Birns: Thank you, Michael, and good evening, everyone. And be prepared. I unfortunately have a lot to say today. Mike, I want to begin by expressing my deep gratitude not just for your extraordinary leadership over the years, but for your unwavering commitment to our mission, our people, our customers, our suppliers, and our shareholders. Your vision and passion have shaped this company into what it is today, and I've been truly honored to work alongside you for so many years. I'm incredibly excited about the road ahead and the opportunities that lie before us. This next chapter builds on the strong foundation you've created, and I'm grateful that you'll continue to be part of our journey as executive chairman. Over the past several quarters, we've been sharpening our focus, as Mike just mentioned. Making deliberate decisions to exit non-core and underperforming businesses. While there is certainly still more work to be done, this is already enabling greater strategic clarity and is allowing us to concentrate more of our time, energy, and capital on the areas where we see the greatest opportunities for growth. Across our aviation, marine, and land platforms. As we move forward, executing on this strategy will continue to be a team effort. And I'm especially looking forward to continuing to work closely with John Royall, who will step into the role of president, and Mike Dejada, who will succeed me as CFO. Both bring tremendous expertise, drive, and integrity to their new roles. And I have every confidence in their leadership. With a strong foundation and a world-class team, I believe we're well-positioned to unlock greater value for our shareholders, our customers, and our employees throughout the world. Mike, again, I look forward to your continued support as executive chairman and I am excited about working alongside our exceptional leadership team and our board as we move into this next chapter. As Mike Dejada will be assuming the role of CFO after we file our 10-Q tomorrow, I will now take you through our quarterly financial results for the seventy-fifth and last time. Before we review our financials, please note that our non-GAAP results reflect approximately $5.8 million of non-GAAP adjustments this quarter, or $4.2 million after tax, principally associated with the finance transformation initiative we initiated last quarter where we continue to make progress. In line with our expectations. Reconciliations are as always on our IR website and in today's webcast presentation. So now let's turn to our third quarter non-GAAP results. On a consolidated basis, third quarter volume was 4.3 billion gallons, that's down 4% year over year. And consolidated gross profit declined 7% from last year's third quarter to $250 million. Although our gross profit did fall below guidance for the quarter, we were able to offset most of this impact by effectively reducing variable costs. This brought our operating expenses below expectations and resulted in operating income that was within our guidance range and very close to the midpoint. In the third quarter, our aviation volume was 1.8 billion gallons, down 4% year over year. While volume declined, aviation gross profit of $143 million increased $14 million or 11% year over year. Driven principally from continued strong results at our airport locations in Europe, an increase in government sales, and our business in general aviation activities. Speaking of business aviation, as Mike mentioned, in September, we entered into an agreement to purchase Universal Weather and Aviation's trip support service business. This business provides end-to-end operational support for business aviation flights worldwide covering everything from flight planning and overflight permits to on-the-ground coordination at more than 3,000 locations throughout the world. This transaction is expected to be approximately 7% accretive to adjusted earnings per share in the first twelve months with additional accretion from the realization of approximately $15 million of annual cost synergies within two years following the closing date of the transaction which we now expect to occur within the next two weeks. As we look to the fourth quarter, we anticipate Aviation's gross profit to again increase year over year supported by the expected contribution from the Trip Support acquisition in addition to continued momentum from our airport locations throughout Europe. In the third quarter, land volumes declined 8% year over year, mainly driven by the sale of our Brazilian business in last year's fourth quarter and the sale of our UK land business in the second quarter of this year. Land gross profit was $81 million, that's down 20% year over year. Principally due to continued unfavorable market conditions in part of our liquid fuel business in North America, most notably ongoing transportation inefficiencies tied to our fuel delivery business and the impact of our recent exits from the UK, Brazil, and certain operations in North America. For the fourth quarter, year over year gross profit is expected to decline again, primarily due to the impact of the various business exits over the past year and continued macroeconomic headwinds in parts of the business. While we've already taken significant steps to reshape our portfolio, exiting Brazil and the UK and select activities in North America, as I just mentioned, we are now sharpening our focus even further. Going forward, our priority will be to concentrate resources and capital on our core, most profitable land business activities. Those with the greatest potential for sustainable growth and earnings consistency. In the short term, this means working to quickly further streamline our portfolio while leveraging operational efficiencies across our core land business activities. These initiatives are designed to drive meaningful improvement in our land segment's performance, as we move into 2026 and beyond. Positioning us to deliver stronger overall shareholder returns. In Marine, while volumes increased 3% year over year, primarily driven by a recovery in the dry bulk markets, gross profit decreased 32% year over year. This decline is principally due to lower profit contributions from certain physical locations, as well as lower margins driven by low market volatility and a lower fuel price environment. As we have consistently communicated over the years, the spot nature of our marine business closely aligns performance with pricing environments and market volatility levels. While periods of lower prices and reduced volatility can impact profitability, as they certainly did this quarter, since Marine operates with modest capital requirements we generally generate cash in marine across cycles. We also remain focused on further strengthening the segment's resilience during cyclical troughs. While positioning Marine to best benefit when prices and volatility increase. While we anticipate some sequential improvement in our results for marine, in the fourth quarter, with market volatility and prices expected to remain low through the fourth quarter we expect marine gross profit to decline year over year in Q4. As we look to the fourth quarter, and with the backdrop of the related segment gross profit comments shared a moment ago, we expect consolidated gross profit to be in the range of $237 million to $245 million. Moving on to expenses. Consolidated operating expenses were $181 million, that's down 7% year over year. As mentioned earlier, this is well below guidance primarily driven by lower variable costs during the quarter. As always, we remain focused on disciplined expense management always focusing on additional opportunities to drive efficiencies across the business. As we look to the fourth quarter, we expect operating expenses to be in the range of $181 million to $187 million. This outlook reflects a partial quarter impact from the recently announced Trip Support acquisition again, expected to close within the next couple of weeks. Despite the additional expenses related to the acquisition, we still expect a year over year decline in operating expenses driven by the businesses recently exited and our continued focus on driving greater cost efficiencies throughout our platform. Interest expense was $26 million in the third quarter, up approximately 8% year over year, consistent with the guidance provided last quarter. For the fourth quarter, interest expense should be in the range of $25 million to $27 million. The anticipated increase in interest expense associated with funding the Trip Support acquisition is expected to be generally offset by the impact of declining interest rates. Our third quarter adjusted effective tax rate was 27%, slightly higher year over year but consistent with guidance provided last quarter. Looking at the fourth quarter, we expect our adjusted effective tax rate to be generally in line with the third quarter approximately 26% to 28% which should result in an adjusted full year effective tax rate of 20% to 22%. One highlight of the quarter, our cash flow generation remained strong. With $116 million of operating cash flow and $102 million of free cash flow generated in the third quarter. This increases our year-to-date operating and free cash flow to $259 million and $215 million respectively. In closing, I want to leave you with a few thoughts. Actually, several thoughts. Aviation results this quarter reflect the strength of our service network. Especially our European airport locations and our business and general aviation activities throughout the world. We're truly excited about the addition of the universal trip support business. Trip support services have always complemented our global fuel distribution activities. Now with this acquisition, our trip support business will triple in size. Further enhancing and expanding the value we deliver to our aviation customers alongside our fuel offering. Land results reflect the impact of our recent exits from the UK, Brazil, and certain operations in North America. As stated earlier, we are continuing to sharpen our focus in land with more activity underway which should result in meaningfully better results and returns for land in 2026. Marine performance was principally impacted by lower profit contribution from select physical locations, as well as broader impacts from the continued low price, low volatility environment. And we also continue to focus on driving greater operating efficiency in marine to enhance returns in this business. Operating expenses again came in below our guidance range under flexibility in our variable cost structure and our disciplined approach. To managing expenses. Our ability to generate strong operating cash flow is a testament to our level of excellence in working capital management. This quarter, again, we generated cash flow of $116 million operating cash flow. And free cash flow of $102 million. This lowered our net debt to adjusted EBITDA ratio to under one times enabling us to maintain our strong liquidity profile. We haven't talked about the targets we shared at our Investor Day event, a couple of years back. In a while. So it's a sensible time to provide an update as we approach 2026. Our cash flow generation to date remains in line with the five-year aggregate free cash flow target we had set. While we haven't yet reached our adjusted operating margin target of 30%, we remain focused on achieving this target before the end of next year. Driven in large part by many efficiency initiatives well underway. We have also been meeting or exceeding our targeted free cash flow allocated to buybacks and dividends as we remain focused on enhancing shareholder value through these programs. As a matter of fact, since the beginning of 2024, we have returned $214 million to shareholders through buybacks and dividends, representing more than 50% of free cash flow over that time period. Exceeding our Investor Day target of 40%. Regarding the EBITDA target we shared at our Investor Day event, progress has been affected by several factors. The impact of businesses we have exited, subdued M&A activity due to the persistent high-interest rate environment, which is now changing. And market weaknesses in certain segments. As we've discussed along the way. As a result, reaching this target will take longer than anticipated. Nonetheless, we remain focused on further improving operating efficiencies, generating strong cash flow, and boosting returns. All of which should pave the way for more meaningful EBITDA growth. With our strong financial profile and healthy balance sheet and liquidity profile, combined with declining interest rates, and more reasonable market multiples. We also see increasing opportunities to invest in our core business activities at more attractive returns. Finally, and, yes, finally, I'm almost done. As I prepare to take on my new role, I'm energized by the opportunities ahead and I am fully committed to leading our efforts to drive growth and enhance shareholder returns. I would like to thank all of you for your continued support and I look forward to spending more time with our customers, suppliers, employees, and the investment community in the months ahead. I'll now turn the call back to Latif, our operator, for Q&A. Operator: Thank you. To ask a question, please press 11 on your telephone. To remove yourself from the queue, please press 11 again. Ken Hoexter: Our first question comes from the line of Ken Hoexter of Bank of America. Please go ahead, Ken. Adam Russkowski: Hi. Adam Russkowski on for Ken Hoexter. Michael, Ira, team, thanks for taking our questions. And, congrats on the promotion. Evan. Maybe I'll just you're welcome. Maybe I'll just start with land. I mean, you noted the sharpening focus in this segment, but also some unfavorable market conditions and some transportation inefficiencies. Maybe what is it gonna take on those last two points to maybe turn that around? What are you seeing over the next quarter, year or so? Curious how you view the market. Thanks. Ira M. Birns: Yeah. We'll share a lot more about that next quarter, Adam. But, you know, in the short term, if you look at something like inefficiencies, we're looking at different strategies to manage delivery of product in North America in particular that could be significantly more cost-efficient. There may be some markets that may not make sense for us long term. So we're really digging into every piece of our North American business and even some of the activity in land overseas to figure out whether there are better strategies to drive greater returns or whether there are some parts of the business that may not make sense for us longer term similar to the storyline that we've shared for Brazil and the UK over the last twelve months. So we're working through that. I'm pretty confident that we'll have a lot more details to share as we get into the end of the year on the land business. Obviously, we've been disappointed with performance, but the team is really focusing on a lot of ways that we can make that business dramatically more profitable in a relatively short period of time, and we're spending a lot of time focusing on that. Adam Russkowski: Got it. That's helpful. Thanks. Maybe going back to the latest acquisition, 7% earnings accretion in the first year. Broadly, do you have a thought on the cadence of how that flows in the first year? Does it ramp sort of at the tail end? Any thoughts? Ira M. Birns: We've been conservative. So if we're just looking at the current run rate of business, we're again, we're not assuming any immediate synergies. So as we hopefully close at the very beginning in November, it should be fairly ratable on a monthly basis. There isn't material. There's maybe a little bit of summer seasonality in the private jet industry, but the numbers should be fairly ratable over the first twelve months. And then as we get beyond twelve months, we should start seeing some increase in their bottom line contribution from the achievement of synergies over about a two-year period after we complete the first year. Adam Russkowski: Got it. And Michael noted that you're nearing the I think he said the nearly through the portfolio sharpening, but also noted that interest rates coming down that could spark some M&A opportunities. So maybe how are you balancing kind of further sharpening divestitures from here? And what you know, and potential M&A opportunities from here. Ira M. Birns: Well, great question. So, obviously, we have a lot going on in the short term, which is, as I said, we'll share more in Q4, in terms of fixing restructuring some things, putting land in a much better position, and then also a lot of work to get the Universal acquisition integrated as quickly and as efficiently as we can. So that's a lot of work right there. But at the same time, with interest rates coming down, we're actively looking at opportunities beyond the universal transaction. I don't foresee any of that happening overnight. But, you know, we have a pipeline of opportunities that we're looking at. We have a much sharper focus on what makes sense versus what doesn't than we may have had several years ago. So the door is opening a bit wider. I wouldn't expect anything to happen tomorrow, but I think over the course of 2026, some more opportunities should hopefully materialize in our core where we know we could get synergies, we know we can integrate effectively and drive EPS growth through that mechanism. Adam Russkowski: Got it. And know, got some support this quarter from the variable cost side. You spoke about some of the opportunities in land. Maybe just broadly, any other areas that you expect some runway? And if you could speak to any of those other kind of variable cost efficiencies you can have here. Ira M. Birns: Yeah. So, you know, land is a big piece. So we've talked about a couple of times already. But we're every day, we're looking at every part of the business where there are opportunities to do things more cost-effectively. One of the things we talked about a little bit, had a charge this quarter associated with it is our global finance transformation initiative. Mike Dejada and I are actually heading overseas as part of that next week. And that, you know, that's only kicking off. It takes a while to ramp up one of those programs, but that will start paying dividends for us in '26 and even more so in '27. So, you know, that's one example of something we're doing within one function that'll generate several million dollars of benefit for us over time. And, you know, we're, of course, looking across all of our activities that are ratable, that have synergy opportunities, and then have potentially opportunities to operate under a more efficient cost structure. So the finance piece is one example. We've done a little bit of that in IT similar to the outsourcing initiative in finance. And we'll look at more opportunities of different flavors over time where we could drive efficiencies. And not only save money, but add more value to the business. Right? That's the goal as well. Right? To improve our back-office functions, make them more supportive of the business to help the business accelerate growth, make it easier for them to operate on a day-to-day basis. So there's a lot going on. There's one example, and over time, we'll share additional examples. Adam Russkowski: Alright. I'll hand it off. Thanks so much for the time. Ira M. Birns: Thanks, Adam. Appreciate the support. Operator: Thank you. Once again, to ask a question, please press 11. I would now like to turn the conference back to Michael J. Kasbar for closing remarks. Michael J. Kasbar: Okay. Well, thanks for joining us today. It's a quick call. I want to once again congratulate Ira, John, and Mike in the new roles. We look forward to speaking to you next quarter. So stay well. Stay safe. And, watch this space. Thanks very much. Take care, everybody. And thanks to our global team. As always. It's it is a great pleasure to work every day alongside each and every one of you. Take care. Bye-bye for now. Ira M. Birns: Thanks, everybody. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Kurt Goddard, Vice President of Investor Relations. Sir, please go ahead. Kurt Goddard: Hello, everyone. Welcome to Hexcel Corporation's Third Quarter 2025 Earnings Conference Call. Before beginning, let me cover the formalities. I would like to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings and earnings release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our expressed permission. Your participation on this call constitutes your consent to that request. With me today are Tom Gentile, our CEO and Chairman and President; and Patrick Winterlich, our Executive Vice President and Chief Financial Officer. The purpose of the call is to review our third quarter 2025 results detailed in our news release issued yesterday. Now let me turn the call over to Tom. Tom? Thomas Gentile: Thanks, Kurt. Hello, everyone, and thank you for joining us today for Hexcel's Third Quarter 2025 Earnings Call. Our confidence in the growth outlook in the aerospace and defense markets and Hexcel's unique position within the industry remains strong. With Hexcel's broad portfolio of advanced innovative lightweight materials, we are well positioned to meet the needs of our customers as they increase commercial and military aircraft and rotorcraft production rates. We are also working with customers on developing innovative advanced material solutions for next-generation commercial and military platforms. As we look at the opportunities in front of us, the outlook for Hexcel is compelling. At our September Board meeting, which centered on strategy, we reinforced our strategic focus of advanced material science with an emphasis on the aerospace and defense market. This is our North Star as we navigate a dynamic near-term environment and look to take advantage of the medium- and longer-term opportunities in the aerospace and defense industry. The aerospace recovery from the pandemic has been frustratingly slow with numerous start stops for original equipment suppliers like Hexcel. However, we have growing confidence that we are seeing the beginnings of a more sustained ramp-up in production based on our customer discussions and actions as well as what we see in the aerospace supply chain. The demand for fuel-efficient lightweight aircraft is clear. Air traffic has more than recovered to 2019 levels. The backlog for commercial aircraft has grown from 13,000 units before the pandemic to more than 15,000 today. Even with limited availability of near-term production slots, airlines around the world continue to place orders with Airbus and Boeing. As we look at the macro environment for the commercial aerospace industry, we are clearly seeing growing momentum as past supply chain constraints subside. While we may experience some lingering destocking in the fourth quarter of 2025, we expect to exit 2025 fully aligned with the commercial aircraft build rates of our customers and positioned for growth in 2026 and beyond. Positive news developments in the past few weeks further support the rate ramps for each of our key platforms. Beginning with the A350, our largest program, where we provide the entire lightweight material system, anticipated production rate increases by Airbus will be impactful for Hexcel in terms of driving capacity utilization. Airbus is targeting 12 aircraft per month by 2028 on the A350 program. Rising build rates will drive operating leverage for Hexcel and the EU approval last week that allows for the Spirit AeroSystems merger to move forward is another positive data point as those operations become streamlined into Airbus and Boeing. On the A320, Airbus is targeting 75 planes per month by 2027, with the expectation that build rates will be in the 60s in 2026. GE Aerospace just raised their 2025 LEAP delivery guidance for engines, and Safran just announced a new LEAP-1A engine assembly line in Morocco to support Airbus and the A320 program, and that should be operational by the end of 2027. On the 737 MAX, production has reached 38 airplanes per month and Boeing recently received FAA approval to increase to 42 airplanes per month. On the 787, Boeing is now at 7 a month as they target 10 aircraft per month in 2026. Boeing is currently expanding its 787 production capacity in their Charleston facility, so there may be future upside beyond Rig 10. We visited Charleston recently and saw the construction underway. All of these different signs of improving production system stability in the 4 major programs for both Airbus and Boeing give me and our Board increasing confidence that their production targets are now getting traction. This growing confidence, coupled with actions that we have taken to clean up our portfolio, including the divestiture of our plant in Austria, will help us approach the margin levels we enjoyed in the past as production rates increase and drive operating leverage for Hexcel. We are clearly at the start of a multiyear growth cycle for commercial aerospace original equipment production, which will benefit Hexcel given the strong positions that we have on all the major programs. Turning to our financial results. Hexcel generated $456 million in sales and adjusted diluted EPS of $0.37 in the third quarter of 2025. These results are in line with our expectations for the quarter, which we knew in advance would be challenging due to slower seasonal sales and continued destocking by the commercial OEMs. Hexcel's gross margin for the third quarter was 21.9% compared to 23.3% in the third quarter of 2024. This was partly driven by tariffs and our decision to reduce finished goods inventory in the quarter, which impacted operating leverage and margins. As build rates rise into 2026, that increased sales volume will drive operating leverage and margin expansion. Regarding our markets, Commercial Aerospace sales were $274.2 million for the third quarter. Commercial Aerospace declined 7.3% year-over-year on a constant currency basis, primarily due to destocking on the Airbus 350 program and to a lesser extent, on the Boeing 787 platform. That lower volume was partially offset by a 9.3% increase in other commercial aerospace sales driven by regional jet sales growth. Looking ahead to 2026, Hexcel is already seeing increased order activity for the first half of next year from the commercial OEMs, which supports our growing confidence. We experienced continued strength in our Defense, Space and Other segment with $182 million in sales for the third quarter, an increase of 11.7% on a constant currency basis over the same period last year. This growth was broad across several platforms for domestic and international customers that include fighters, rotorcraft and space. As defense budgets in the U.S. and with allied countries around the globe continue to increase, particularly to support the introduction of new platforms, we see continued strength in the underlying demand for Hexcel's advanced lightweight composite materials. Our innovative solutions enable greater range and payload as well as lower observability for stealth platforms. In August, we were honored to host the U.S. Secretary of Labor, Lori Chavez-DeRemer at Our Salt Lake City facility. This is our largest global facility. We produce both carbon fiber and prepreg at this facility, and the site also hosts our newest research and technology center of excellence. This visit was an opportunity to highlight Hexcel's critical role as the only vertically integrated U.S. domiciled manufacturer of high-strength aerospace-grade composite materials for commercial aircraft and defense platforms. It was also an opportunity to showcase our innovation as we develop and deliver even lighter, stronger and stiffer composite solutions that are designed to support high production volumes by our customers. Our innovation is a mix of evolutionary steps by improving upon existing products, such as enhancing the adhesion characteristics of the carbon fiber surface and revolutionary steps such as new resin systems that cure more quickly and at lower temperature to enable greater throughput by our customers. While we see commercial aerospace production rates starting to rise in the fourth quarter and into 2026, we still expect lingering OEM destocking in Q4. Tariffs also remain a headwind. As we look at how the year may close out, we have narrowed our sales expectation to the bottom of the prior range, and we have reduced EPS guidance due to the impact of lower production from lingering destocking and the incorporation of tariffs into our guidance. We have also continued our cost reduction actions as we streamline operations through site rationalization. At the end of September, we completed the divestiture of our Neumarkt, Austria plant, which supplied wind energy and recreational markets using third-party purchased glass and industrial carbon fibers. This action follows the closure of a high-cost facility in Belgium and the divestiture of an additive manufacturing business that was not strategic for Hexcel earlier this year. These actions are part of our broader strategy to focus our operations and reduce our cost profile as we prepare for the upcoming production rate increases in our major programs. As we have throughout this year, we continue to manage headcount closely. In previous calls, we stated that our headcount at the end of 2025 will be no higher than it was at the end of 2024. Our headcount has continued to decrease this year due to attrition and streamlining our operational footprint as well as lagging production schedules until we see clear evidence of increases. At the end of the third quarter of 2025, our headcount was around the levels of year-end 2023 and well below where we ended 2024. Our inventory acts as a near-term buffer for unexpected demand spikes, and we expect to begin hiring again sometime in early 2026. We are comfortable that we will be able to attract and train the workers we will need. We do not ever intend to be a bottleneck for our customers' production. In addition to our cost reduction actions, we continue to drive productivity. This includes our future factory initiative to drive greater unit cost efficiency with more use of automation, digitalization, robotics and artificial intelligence. Along with cost and productivity gains, we will continue to work to realize price. As we have shared before, about 10% to 15% of our contracts come up for renewal annually. As we negotiate new contracts, we are realizing price gains and expanding escalation and pass-through clauses. Once publicly disclosed peak build rates are reached, our existing sole-source contracts with Airbus and Boeing will generate an incremental $500 million of annual revenue. Defense-based business and regional jets are all additive to that number. So the path to sales growth is very clear. And again, the increasing sales drive operating leverage and margin expansion for Hexcel. As we grow back into existing capacity, capital expenditures will remain subdued for a period of time at less than $100 million per year, likely for the rest of this decade. These factors will all drive strong free cash flow generation. We are forecasting to cumulatively generate more than $1 billion of free cash flow over the next 4-year period of 2025 to 2028. With the forecasted production rates finally firming, our primary focus for the immediate future will be executing on the rate ramp, innovating lightweight materials to earn a position on the next generation of aircraft and organically growing our defense business while returning excess cash to our stockholders. Given that the business is generating cash in excess of reinvestment needs, the Board and the management team spend a lot of time thinking about capital allocation. In the past 18 months during my time as CEO, we have undertaken an extensive review of potential inorganic growth opportunities. We have not found any business that meets our stringent and disciplined strategic criteria for M&A, namely innovative advanced material science with an emphasis on aerospace and defense and a return threshold of 15% ROIC or greater. What we do see in front of us is unprecedented and pent-up demand for modern lightweight aircraft. This represents a tremendous organic growth opportunity for Hexcel. While OEM production schedules have been challenged for the past several years, we are seeing the OEMs increase production as the supply chain stabilizes. The individual catalysts for each major program that I mentioned earlier have helped remove obstacles to production rate increases. Hexcel is uniquely positioned in this market as the largest and most vertically integrated aerospace-grade carbon fiber composite manufacturer. Our industry segment has significant barriers to entry given the large sums that we have invested in our material system and production facilities globally. We have industry-leading technology and intellectual property. And most importantly, we have our people, a highly trained and skilled workforce that we know can deliver on the rising demand in front of us with safety, quality and the on-time delivery our customers expect. Our confidence is growing that the ongoing recovery in build rates is at an inflection point to a sustained ramp to peak rates, providing us greater optimism in our sales outlook and future cash generation. Given all these factors, strong cash generation profile driven by significant organic growth that provides us significant volume leverage, combined with cost control and productivity to improve margins and an unmatched position in the marketplace, we believe now is the right time to repurchase Hexcel stock. Since 2013, we have returned more than $1.5 billion to stockholders through share repurchases. In the past 7 quarters, we have repurchased $350 million of shares and retired almost 6% of our float. Yesterday, Hexcel's Board of Directors authorized an additional $600 million share repurchase program, and we also announced an accelerated share repurchase program, or ASR, of $350 million. We will fund the ASR from our revolver, which we will then repay from future cash generation. Launching this ASR now and making a significant repurchase of our stock underscores our strong belief in commercial aerospace production rate increases and our ability to execute with safety, quality and on-time delivery to our customers. We are seeing resolution of major supply chain problems that have plagued the industry the past several years, and we see all the OEMs making solid progress on increasing their production rates. I also want to be clear that we remain committed to a disciplined financial policy. We target a leverage ratio of 1.5 to 2x debt to EBITDA. We plan to repay the ASR borrowings as soon as possible during 2026 to return Hexcel to this targeted leverage range. Now before I turn the call over to Patrick to provide more details on the numbers, I want to comment on the 8-K we just filed announcing that Patrick has accepted an offer to move over to Howmet, a much larger company than Hexcel. I am thrilled that Patrick has this opportunity to work with a company that plays such an important role in our industry. For 27 years, Patrick has been a transformational leader at Hexcel and has helped position our company to capture the opportunities I have described. He has also been a terrific partner in helping me transition into my role at Hexcel over the last 1.5 years. We all wish him great success in his new role. Patrick has agreed to remain as our CEO during a transition period through the end of November, and we've already launched a process with a leading global executive search firm to recruit a world-class CFO to succeed them. So with that, over to you, Patrick, for your final Hexcel call. Patrick Winterlich: Thank you, Tom. I appreciate your comments. Total third quarter 2025 sales of $456.2 million were unchanged year-over-year as strength in defense and space was offset by Commercial Aerospace destocking. By market, Commercial Aerospace third quarter 2025 sales were $274.2 million, representing approximately 60% of total third quarter sales. Third quarter Commercial Aerospace sales decreased 7.3% compared to the third quarter of 2024. While the third quarter is seasonally slower due to summer holidays taken by our customers, 2025 third quarter sales were also impacted by destocking. The A350 program was most impacted, followed by the 787. Sales for the 737 MAX program continued to lag stated Boeing build rates as we expected, though we did see positive progress in the third quarter. For the A320neo, third quarter 2025 sales increased nominally compared to the prior year period. Sales for Other Commercial Aerospace in the third quarter increased 9.3% year-over-year, led by regional jets. Defense, Space and Other represented approximately 40% of third quarter sales and totaled $182 million, increasing 11.7% on a constant currency basis from the same period in 2024. Demand was strong across a number of fighter, helicopter and space programs, both domestically and overseas. For fighters, sales increased for the F-35, the Rafale and the Eurofighter. For helicopters, European demand was strong, along with the Black Hawk, including replacement helicopter blades. And it was a solid quarter for space sales, including launches, rocket motors and satellites. Gross margin of 21.9% in the third quarter of 2025 decreased from 23.3% in the third quarter of 2024 as sales mix, tariffs and inventory reduction actions negatively impacted operating leverage. The lower third quarter sales from seasonality and destocking magnified the underutilization of carbon fiber assets, pressuring margins. As our customers increase production rates, higher sales levels in 2026 and beyond will drive strong operating leverage and lead to margin expansion. So said another way, higher sales levels are critical for us to return to mid-teens margins. As mentioned above, tariffs are also a headwind. We continue to work on mitigation actions and continue to monitor this dynamic regulatory environment. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 12.1% in the third quarter of 2025 compared to 11.7% in the comparable prior year period. Financial and manufacturing IT system upgrades, which we have mentioned previously, along with the impact of wage inflation contributed to higher operating expenses as a percentage of sales. Other operating expenses totaled $8.8 million in the third quarter of 2025, including charges for the divestment of the Neumarkt Austria industrial business and the closure of the Belgium facility. Adjusted operating income in the third quarter was $44.8 million or 9.8% of sales compared to $52.9 million or 11.6% of sales in the comparable prior year period. Foreign exchange has been a consistent tailwind to margins for an extended period of time as Hexcel benefits when the dollar is strong. We hedge our operating profit over a 10-quarter time horizon, so foreign exchange gains and losses are layered into the financial results over time. This foreign exchange tailwind is now beginning to switch to a headwind as the impact of a weaker dollar begins to work into the business. While our third quarter top line benefited to a modest degree from the dollar weakness, particularly from our European military sales dominated in local currency, the operating margin was negatively impacted by approximately 10 basis points. Now turning to our 2 segments. The Composite Materials segment represented 80% of total third quarter sales and generated an adjusted operating margin of 11.2%. This compares to an adjusted operating margin of 14.5% in the prior year period. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated an adjusted operating margin of 15.5%. This compares to an adjusted operating margin of 11.5% in the prior year period. Net cash provided by operating activities in the first 9 months of 2025 was $105 million compared to net cash provided of $127.3 million in the first 9 months of 2024. Working capital was a cash use of $63.8 million in the first 9 months for 2025 compared to a cash use of $93.1 million in the first 9 months of 2024. Capital expenditures on an accrual basis were $49.9 million in the first 9 months of 2025 compared to $59.6 million in the comparable prior year period. Free cash flow in the first 9 months of 2025 was $49.9 million, which compares to $58.9 million in the first 9 months of 2024. Adjusted EBITDA totaled $249.2 million in the first 9 months of 2025 compared to $291.3 million in 2024. As Tom explained, we are executing a $350 million accelerated share repurchase program or ASR. We will fund this repurchase using our revolver. This action will result in leverage temporarily being over our targeted range of 1.5 to 2x. We will utilize subsequent cash generation to repay the revolver and return to our targeted leverage range over the coming quarters. Following the Board stock repurchase authorization of $600 million and after this ASR is concluded, the remaining authorization under the share repurchase program will be approximately $384 million. Hexcel did not repurchase any stock during the third quarter of 2025. I want to reiterate, we remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5 to 2x as soon as possible during 2026. The Board of Directors declared a $0.17 quarterly dividend yesterday. The dividend is payable to stockholders of record as of November 3 with a payment date of November 10. We have revised our 2025 guidance, as Tom explained. To share some additional color, operating leverage within the business is strong on rising sales, but conversely is a headwind on softer sales, which we are now forecasting for the fourth quarter of 2025. Our reduced EPS guidance reflects the impact of lower production as we work through some lingering destocking in the fourth quarter and our continued focus on inventory levels. Further, we have now incorporated tariffs into our guidance. And finally, the revised earnings guidance includes the impact of higher interest expense in the fourth quarter from revolver borrowings to execute the ASR. We continue to assume an underlying effective tax rate of 21% for the fourth quarter of 2025. Given some discrete adjustments in the first 9 months of 2025, we expect the average adjusted ETR for the full year 2025 to be lower than 21%. We continue to forecast a tariff impact of $3 million to $4 million per quarter, however, the tariff situation remains uncertain. Our regional sourcing helps to insulate us from the direct impact of tariffs and over time, we will continue to work on mitigation and pass-throughs. I would also like to highlight that the divested Neumarkt, Austria industrial business generated just under $10 million of sales per quarter in the first 3 quarters of 2025. The divestment occurred on September 30, so there will not be any sales from the Austrian business in the fourth quarter of 2025 or going forward. The niche value-add industrial market that we will continue to serve will be supported by existing Hexcel Aerospace facilities using existing aerospace assets. When we first issued guidance in January 2025, we had forecasted 2025 sales for the Commercial Aerospace market to be flat and for sales for the Defense, Space and Other market to be flat. As the year has progressed, Commercial Aerospace has been weaker than initially forecasted due to anticipated destocking, particularly on the A350. Conversely, Defense and Space has been stronger. As a result, we are revisiting these percentages. 2025 Commercial Aerospace sales are now forecasted to be down mid- to upper single digits and Defense, Space and other sales are now forecasted to be higher by mid- to upper single digits on a percentage basis. Consistent with past practice, we provide annual guidance during our fourth quarter and full year earnings call. To reemphasize what Tom already covered, we expect to exit 2025 strongly positioned for growth as we anticipate being generally aligned with our commercial aerospace customer build rate. Sales growth will drive operating leverage and margin expansion in 2026 and beyond, supported by continuing price realization, productivity gains and cost control. Lastly, as I close out my 33rd and final earnings call for Hexcel, I would like to take a couple of moments to express my sincere gratitude to this great company. Companies, as we all know, are ultimately a collection of people aligning to achieve a common goal. And I have been honored to work with so many wonderful people over my 27 years. I cannot thank them enough. I now look forward to joining Howmet and starting what I believe will be an incredible new journey. However, I know for certain, I will never forget my amazing colleagues at Hexcel. With that, let me turn the call back to Tom. Thomas Gentile: Thanks, Patrick. To close, while the third quarter reflected near-term headwinds, the strong-term fundamentals for Hexcel remain exceptionally strong. The Commercial Aerospace backlog is at historic levels. Defense spending continues to rise globally and the Aerospace and Defense supply chain is finally ramping to support build rate increases. Hexcel is uniquely positioned to capitalize on this momentum. Our unmatched portfolio, deep customer relationships and global manufacturing footprint give us confidence in our ability to deliver accelerating growth over the coming years. We expect to generate over $1 billion in cumulative free cash flow over the next 4 years. That cash flow will support continued investment in innovation, and we will continue to evaluate returning cash to stockholders as demonstrated by the new share repurchase authorization of $600 million and the $350 million ASR that we just announced. We believe the recovery in build rates is real and sustainable. Hexcel is ready to meet that demand and deliver long-term value for our stakeholders. Tiffany, we're now ready to take questions. Operator: [Operator Instructions] Your first question comes from the line of Myles Walton with Wolfe Research. Myles Walton: Congratulations, Patrick, on the move and good luck in the search, Tom. In the context of the $500 million growth that you're looking for at manufacturer production rates, Tom, can you talk about -- I think that implies maybe $1 billion of Airbus revenue out in that time frame. How much of that should it be -- or how much higher should that be if you actually had contracts that allowed for inflationary pricing to have escalated during the last decade? Thomas Gentile: Well, the good thing about the Airbus contract that we signed in 2008 for the A350 is that it was a long-term contract, and it gave us the confidence and foundation to make massive capital investments to industrialize for the A350. And we extended that contract in 2016 to go all the way out to 2030. Now as you know, the production rates ramp very quickly up through 2018, 2019, they peaked. We delivered 112 A350s in 2019. And our overall revenue that year was $2.355 billion and the margins were 18%. Now since that time, the pandemic hit, volume dropped quite a bit, and we also experienced a lot of inflation. Now where we are today, we're not getting volume leverage across the board. And we've absorbed a lot of that inflation on some of our long-term contracts, particularly with Airbus. When we get back to the $2.35 billion of revenue, probably sometime in the next couple of years, our margins are going to be a little bit curtailed. They'll be at about 16%. So about 200 basis points of headwind from the inflation is really what the impact is. Now when we get the full impact of the $500 million from all of the targets across the major programs, we think that will get us back to 18%. But obviously, we would like to do more than that, and that's why we're driving our productivity projects. So to summarize, the impact of the inflation that we've absorbed over the past couple of years is about 200 basis points, and we're working to offset that. Myles Walton: Okay. And Patrick, one financial one for you. The debt or interest costs we should plan on for '26 in light of the ASR, is it close to $50 million or so? Patrick Winterlich: 50, Did you say 5-0? I mean, it should be a lot less than that. And the debt will decrease quite rapidly after the first quarter. The first quarter will probably be a cash usage, it's normal but then we should see the debt coming down quickly as we generate free cash flow next year. So you can assume the revolver about 5.5% interest rate as that balance reduces through next year. Operator: Your next question comes from the line of Michael Ciarmoli with Truist Securities. Michael Ciarmoli: Maybe just to stay on both of those topics. Tom, I think you said getting back to that 18%. I mean, so is it reasonable to think that incremental margins can be in that, I guess, implied 40% plus range to get back to that 18%? I mean, is there going to be any disruption with labor add-backs? Or do you think you have more confidence in pricing along the way with -- I think you said 10% to 15% of these contracts renew and then you probably have that bigger renewal out in 2030 with Airbus. But is that the right way to think about incrementals? Thomas Gentile: Yes, yes. I mean the way I would say it summarize is that as the volumes increase and as our revenue goes up, we're going to get a lot of operating leverage. And we're not going to have to make a lot of capital investment to get there. you always have to offset various things, inflation and productivity and potentially other costs like utilities or logistics. But that's what your productivity programs have to offset. But the biggest driver for Hexcel is that as production rates increase and our revenues go up, that drives an incredible amount of operating leverage, which will create the enhanced margins and the recovery back to the 16% first and then 18% as we get the full impact of all the target rate reductions across the major programs. Michael Ciarmoli: Okay. Okay. And then just on the ASR, I mean, maybe a little bit of dilution out of the gate but it sounds like that should be paid down if you're carrying a portion of that interest expense here in 4Q, maybe a full $5 million in 1Q and 2Q but then you're obviously going to have the cash generation. So that should kind of eliminate some of that interest headwind and shouldn't really be dilutive on a full year basis for '26? Patrick Winterlich: It should be positive on a full year basis. So we'll take out 80% of the share count basically on Monday or tomorrow or Monday when those 80% of our shares are surrendered. So you'll have 2/3, 2 months out of 3 this quarter will benefit from that reduced stock count of what, 4 million, 4.5 million shares, I would guess. And then you'll have that benefit offset by the interest charge next year. But I would assume there would be a net benefit to 2026 overall as the debt gets paid down quickly. Operator: Your next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: I guess just following up on the margin question. In 2026, if Commercial Aero revenue is higher than it was in 2024, can margins also be higher? Thomas Gentile: They can, yes. We have work to do to offset some of the natural inflation that we see normally but that's certainly the goal. Gavin Parsons: Okay. And then, Tom, I guess, as you plan for 2026, obviously, the supply chain has been pretty lumpy. A350 increases have been set back. How do you think about possible contingencies if destocking does continue longer than you expect? So maybe it's not as operationally disruptive to Hexcel as it was this year? Thomas Gentile: Well, what we've been doing is lagging a little bit more in terms of the demand, waiting to see it materialize before we go ahead and hire the heads. And we'll continue to do that. We have a lot of inventory, so we can cushion any potential unexpected increase in the short term. But that's really the primary way we've been managing it and cushing it is one is set realistic expectations, lag the growth in terms of when we actually hire and use our inventory to make sure we have a proper cushion for any unexpected demand. Operator: Your next question comes from the line of Scott Mikus with Melius Research. Scott Mikus: Patrick, congrats. Patrick Winterlich: Thanks, Scott. Scott Mikus: Tom, you referenced the LTA negotiations and historically, your LTAs have included language where some of the productivity benefits are shared between Hexcel and its customer. So as those agreements come up for renegotiation, are you making sure that you get to keep a larger share of the productivity benefits going forward? Thomas Gentile: Well, we always want to keep as much as we can. That's for sure. But at the same time, you've got to make sure any negotiation ends up being a win-win. And a lot of the productivity projects that we drive do require engineering resources from our customers. And so you want to make sure you can obtain those resources. So yes, the goal is always to make sure we get a fair return on the investments that we make and the value that we deliver but also recognizing that we want to make it -- we want to facilitate the fact that we need some help and engineering from our customers. Scott Mikus: Okay. And then we've seen some airlines complain that the A321 XLRs range is a little bit shorter than advertised and they produce their orders. But just given that your material reduces the weight of the aircraft, is there an opportunity for Hexcel to potentially increase its content on the A321 XLR if Airbus were looking to extend its range? Thomas Gentile: Well, lightweight materials always help, and there's always an effort to look at material substitution and to change out higher weight materials for lower weight materials. Those efforts are ongoing. A lot of the ones, I'd say the low-hanging fruit has already been captured. So there's probably limited opportunities to, frankly, to change it on the existing aircraft but a lot of opportunity on the next generation. The A321, all the versions, the 19, the 20, the 21 LR, XLR, et cetera, are only 15% carbon fiber composite. The A350 is 50%. so the next-generation narrow-body will for certainly be much higher ratio of carbon fiber composite lightweight going forward. But the current aircraft, probably most of the material substitution has already been captured. Operator: Your next question comes from Ken Herbert with RBC Capital Markets. Kenneth Herbert: And Patrick, let me extend my congratulations as well, and thanks for the help over the years. Maybe -- yes, first question, Tom, last quarter, you were pretty explicit in terms of expected delivery schedules on some major programs. It looks like the guidance maybe implies about 5-ish A350 units were pushed out of the fourth quarter. Can you just talk about if we're thinking about that appropriately? And specifically, maybe you sound very confident in the exit rate on that program this year, sort of where you expect to be exiting this year as you think about that program? Thomas Gentile: Yes. I think that's about right, Ken. What we're seeing is that Q4 is a little bit lighter than we thought. We only had about 5 aircraft per month full in Q3. And Airbus has gone to 7 aircraft per month now. That change has been made, but it's not necessarily flowing all the way down yet. And so as a result, the orders for Q4 were a little bit lighter than we expected. Now that said, the orders going into 2026 are stronger than we expected. And so that, again, gives us confidence in this rate ramp really taking traction. Airbus is at 7 now. They're supposed to go to 8 sometime in the middle of the year and maybe even get to 9 aircraft per month by the end of the year is the current schedule. But yes, it was a little softer in Q4, but the orders going into 2026 are actually higher than we expected. So that's very promising. Kenneth Herbert: That's great. And with the tariff impact, is there any opportunity to recapture to call back some of those incremental costs at some point in the future? Thomas Gentile: Yes, there are. There's a couple of different provisions if the goods are for export or if the goods are for military use. There's lots of different areas that we can push and pull to try to recover, and we're doing that. It's just -- those are a little bit more longer term and the impact, the dollars that we pay out are right now, and that's been about $3 million or $4 million a quarter. But we do hope to recover some of that as we go forward and frankly, to shift some of our foreign supply to domestic sources to avoid the tariffs. Operator: Your next question comes from John McNulty with BMO Capital Markets. John McNulty: Patrick, again, congratulations on the move. So I guess I was hoping you might be able to quantify or give us a little bit of an idea of how big do you feel like that inventory cushion that you have actually is? Is it a couple of months? Is it a couple of quarters? Yes, I guess as you're thinking about the ramp going into 2026, I'm just trying to get a better understanding of that cushion. Thomas Gentile: Yes. Well, we've been running pretty high on inventory the last couple of quarters, over 100 days, north of $400 million total amount. And that's down to about 90. Back in the 2018, 2019 time period, it was more like 70 days. So we've got a 90-day cushion on inventory but it should more in kind of static terms and steady state, be more like 70%. So that's the goal. So that's where we are. We do have that inventory. We've been burning it down, and you saw some evidence of that in this quarter. By burning down some inventory, we had some absorption impact, and that impacted our margins a little bit. John McNulty: Got it. Okay. Fair enough. And then I guess when you're thinking at least as of now about the ramp for your customers next year, I guess, how much in terms of labor will you have to be adding? Because it does sound like you've drawn it down a decent amount this year. And it almost feels like you're trying to thread a pretty small needle here with letting labor come down and only to basically rehire or hire next year. So I guess, can you help us to think about that? Thomas Gentile: Right. Well, we're really right now starting some of the hiring in Europe in Q4 because we see this very high strong demand that has come in for 2026. And we'll be hiring in the early part of '26 and really throughout the years -- throughout the year in order to align to production rates. So we know how much labor we need for the production that's on the books, and we'll be hiring that. As I said, some of that hiring has actually started in Europe in Q4, and it will continue into the first part of 2026. Operator: Your next question comes from the line of Pete Skibitski with Alembic Global. Peter Skibitski: Congrats, Patrick. I guess maybe, Tom, you could talk more about Space and Defense, just the growth you've seen over the last 2 or 3 quarters. Does it feel like this is the start of kind of this European secular defense spending trend? Or are we not there yet? And I was wondering, should we expect a pretty big ramp on the CH-53K as well now that Lockheed got the full rate production contract? Thomas Gentile: Yes. Well, on Europe, I mean, honestly, we saw growth in Europe at European Defense at about 18% for the quarter. So that was very strong. And I think it is an indication that we're really seeing defense spending in Europe increase. Obviously, they had 1% of their GDP historically, and they've committed now to 5% going forward. So there's going to be a massive ramp, and we've seen that with a lot of the companies in Europe. And an example of a program is the Rafale program. It's been around a long time, but France has said that they are going to be increasing production of the Rafale in the coming years to meet the demand for European defense. And we have a very big position on the Rafale. So that's going to bode well for Hexcel. So the answer to that is yes. European defense is growing, and we expect it to continue growing, and we're going to be doubling down on that. Now with regard to the CH-53K, this was probably a bit of a softer quarter, Q3 on the CH-53K but you read that Lockheed signed a $10 billion deal with the Navy and the Marines to deliver 99 units that will take it out to 2032. So that is a great sign of confidence in the CH-53K program. And so we have a very large position on it, $2.5 million to $3.5 million per ship set. And so we're very excited about that program, very excited about this multiyear deal that Lockheed and Sikorsky were able to sign with the Navy and the Marine. Peter Skibitski: Tom, just one more program, the F-35, just because Lockheed got the Lot 18 and 19 contracts definitized. Is that pretty steady state for you guys? I know it's a big program for you as well. Is that pretty steady state for you guys for a while? Thomas Gentile: It is. They've been producing at about 156 aircraft per year. I think this year, they might do 170 to catch up a little bit. But in general, at 156 is a good steady state amount, and that will go for years and years to come. So that's what we will see is a little bit of an uptick on sustainment. Some of the materials that we make for the F-35 are consumable based on usage and flight legs. And as the fleet grows and they fly more, that will drive a little bit more of that material sales for us. Operator: Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Patrick, congratulations and Tom, good luck. And maybe, Tom, if I could ask you on the first question Myles asked going back to that. Just the $1 billion of free cash flow over the next 4 years on an additional $500 million of revenue, assuming that 35% incremental historically holds, it still assumes some working capital lift. Can you maybe talk about how we should think about inventory unwind from here? Thomas Gentile: Well, the goal is to continue to drive it down. We've been running heavy on inventory because sales have been lower, and we produced, and we're managing that now a lot more tightly. And so the goal is we're, call it, 90, 95 days of receivables on hand and the goal is to drive that down into 70. That's more of a steady state for us. And if we can do better, we will but that's the target right now on inventory. So we will be winding inventory down in the coming quarters. Sheila Kahyaoglu: Got it. And then if I could just ask on the margin commentary for '25. How do we -- I know you didn't have a direct margin guidance but as we think about the implied margins, it seemed like they're down 100 basis points versus the prior guide and the tariffs were about 60. So what could you attribute the remainder of that to? Thomas Gentile: A little bit of it was this inventory drawdown, which is absorption for us. So as we don't produce and take out of inventory, that creates some pressure on our operating -- and so that was part of it. We also, as we've mentioned in previous calls, have been investing in a new ERP system, Microsoft D365. And the implementation of that is a little bit of a hang. And then just the lower volume in general because of the destocking and some mix changes and kind of the combination of all that is what weighed on the margins this quarter. Operator: Your next question comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna: Congrats, Patrick. Patrick Winterlich: Thanks, Gautam. Gautam Khanna: Guys, I may have missed it, but can you update us on what the A350 equivalent shipments are expected to be this year? Previously, I think you were saying low 60s. And I just want to make sure I understood what happened in Q3 and... Thomas Gentile: That's not -- 60 is the right number. We started off much higher. Our original plan was 84, and that dropped after the first quarter to 68. We're staying about 60 right now. Gautam Khanna: And your best guess, given what you know now about 2026 equivalents would be? Thomas Gentile: I'd say in the 80 range. Gautam Khanna: Okay. And to your point, you already have kind of capacity, labor, et cetera, to meet that rate. So in theory, the incrementals next year could even be -- I know you answered the question on 40% but could they even be higher given the absorption? Thomas Gentile: You always have other factors that you have to offset. But there's no doubt that as those production rates, particularly on the 350 go up, we get better operating leverage and that drives higher margins. Gautam Khanna: And last question just on tariffs. Previously, I think you said $3 million to $4 million a quarter, and I just wanted to know what is in the 2025 guide aggregate tariff headwind? Thomas Gentile: That's what we've incorporated into the updated guidance is that amount. Gautam Khanna: And is that's for 3 quarters or for 2? Thomas Gentile: Yes. Yes, right. And then I mean, if you look at it, basically, it's about $0.10 of EPS. So we dropped our midpoint on EPS from $1.95 to [ $1.75 from $1.95 to $1.75. ] And so $0.10 of that was based on the tariffs. Operator: Your next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: Patrick, let me add my thanks for all your help over the years. Patrick Winterlich: Thanks, Noah. Noah Poponak: If I look at consensus right now, it has total company revenue up 12% full year 2026 versus 2025. Is that kind of growth directionally achievable? Or does the aerospace new build destock last long enough into '26 to make that look steep? Thomas Gentile: It probably looks a little bit steep. I don't think -- we're confident that we've reached the inflection point and it's going up but I don't think we want to overcall it. I think we want to be conservative in terms of what that outlook is. So it's definitely going up, and it will be a healthy increase but 12% is a little aggressive, and we'll see where we end up. But I think we'll also be conservative in our outlook of what we plan for and build and wait and see the increases happen before we get too far out in front of it. Noah Poponak: Okay. That makes sense. And Tom, at a high level, if I look across the aerospace supply chain and I take the 2025 operating margin versus the pre-pandemic, the 2019 -- there aren't that many suppliers that are down, a lot are similar and a lot are up considerably, and Hexcel is down. What do you attribute that to? And I know you have some pretty significant contract renegotiations over the next few years. Are there things you're looking to change in your contract terms with your customers to improve the profitability protection in the case of downturns and industry disruptions? Thomas Gentile: Yes. Well, first of all, let me answer the first question. The reason our margins are down and maybe others in the industry aren't down is we are mostly original equipment and others have more aftermarket. If you look at the industry, air traffic dropped 96% in April of 2020. and it recovered fully within 4 years. But production peaked in 2018 at 1,734 units. Last year, we were only at 1,230 units, only 75%. So while air traffic increased, production didn't. And probably 3,600 aircraft that should have been built in that period weren't built. And that meant that the fleets were older and people had to spend a lot more on aftermarket. So anybody who's had aftermarket exposure has done extremely well. For better or worse, Hexcel makes material that goes into structures that don't wear and don't have a lot of aftermarket. And so the fact that we are so heavily tilted toward original equipment for commercial aerospace and that production is only 75% recovered. And by the way, only 50% recovered on widebodies, that explains why our margins are still down and others are higher because they have this great aftermarket exposure. But as the production rates increase, we will get huge amounts of operating leverage. And that's why the next 4 or 5 years for Hexcel are going to be absolutely great because we're going to benefit from the $500 million of incremental annual revenue and the increased cash flow that, that will generate. So that's what I would say. And then in terms of the contracts, yes, the contracts as we go forward, first of all, they won't be longer. The 22-year contract is not what we're going to be looking for. And we'll also have more tiered to volume. So as volume goes up and volume goes down, the price will change. We'll probably also look at more pass-throughs on costs that we can't necessarily control some of our resins or chemicals and products like that. So the contracts will be more sophisticated to reflect a more dynamic environment that we face today that we didn't face back in 2008. Operator: Your final question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Tom, just to clarify your response to Ken's question, do you expect to enter 2026 at 7 a month on the A350? Thomas Gentile: Yes, we do. They're there. A little bit of destocking in the fourth quarter, but they'll have a couple of months under their belt at 7, and we expect to enter '26 at 7 going to 8 and possibly 9 by the end of the year. Scott Deuschle: Okay. And then, Patrick, can you offer any quantification as to what the FX headwind that you flagged in your prepared remarks could look like going forward? I'd imagine it's fairly immaterial, but I just want to check on that. Patrick Winterlich: Well, it was very immaterial really in the fourth quarter, just 10 basis points, as I called out, the hedging mechanism that we have in place and have had in place for many years smooths the peaks and the troughs. We are at this cusp of a turning point from a strong dollar to a weaker dollar, so into a slight headwind now into 2026. But again, I wouldn't overstate the 10, 20, 30 basis points maybe in 2026 but it all depends on where the dollar now moves. Scott Deuschle: Okay. And one last question, if I could. I mean, Tom, if you see value in the stock today, just trying to understand why you didn't buy back any in the third quarter when the stock price was 20% lower than it is right now. It would have been. Thomas Gentile: A $350 ASR. I think that's my response. Operator: We have time for one more question from Richard Safran with Seaport Research Partners. Richard Safran: Patrick, wish you all the best. It's been a pleasure. Listen, Tom, I know you're coming off of facilities in Austria, Hartford and Belgium. I was just wondering if you're contemplating any further changes in the portfolio. Thomas Gentile: Well, we're always looking at the portfolio to figure out how to streamline and optimize it. And so there could be a few more things that we do. These were the big ones, but that's an ongoing part of our normal operating cadence. And so we're going to continue to look at that and figure out how do we optimize so that we get the best cost and make sure we're focused on the strategic priorities. And the #1 priority for us in the next few years is making sure we can ramp up to meet the production rate increases for our customers, the safety, quality and delivery. That's our #1 priority, and we'll continue to optimize the portfolio to help achieve that. Richard Safran: Okay. And on the -- just quickly on the buyback. I was just accelerated buyback. I just wondered what drove the change in capital deployment strategy? It seems a bit out of character. And should we take that in the future, you're going to do more of these with the $1 billion you're anticipating over the next 4 years? Thomas Gentile: Well, the answer to that is yes, we'll continue to look at that, and it will be a top priority. I think what changed is a couple of things. One is we're looking at the market and the market clearly is at an inflection point and the rates are going up. So we now have great confidence in that. Secondly, as I mentioned, our capital deployment strategy has always been fund productivity, fund R&D to get on the next generation of products, fund organic growth and then look at inorganic growth. Well, we look hard. We did a very comprehensive search. We didn't see anything out there that met our strategic priorities or our return threshold. And so we said we've got all this excess cash that's coming. The best investment in aerospace right now is Hexcel, that's where we put our money. And that's why we did the ASR, and that's why we made the reauthorization as big as it is so that we could do more in the future once we pay this one down and get back to our target leverage ratio. Operator: Ladies and gentlemen, this concludes the Hexcel Third Quarter Earnings Call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to Molina Healthcare's Third Quarter 2025 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Geyer, Vice President, Investor Relations at Molina Healthcare. Please go ahead. Jeffrey Geyer: Good morning, and welcome to the Molina Healthcare's Third Quarter 2025 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our third quarter 2025 earnings was distributed after the market close yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, October 23, 2025, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in the third quarter 2025 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2025 guidance, our preliminary 2026 outlook, the medical cost trend and our projected MCRs, Medicaid rate adjustments and updates, our 2026 marketplace pricing and rate filings, our RFP awards, including our contract wins in Georgia and Texas as well as our M&A pipeline and activity, revenue growth related to RFP wins and M&A activity. The recently enacted Big Beautiful Bill and expected Medicaid, Medicare and Marketplace program changes, our expected future growth in both our existing footprint and in the new products and markets and the estimated amount of our embedded earnings power. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe? Joseph Zubretsky: Thank you, Jeff, and good morning. Today, we will provide you with updates on our reported financial results for the third quarter, an update on our full year 2025 guidance, our outlook for 2026 and our growth initiatives. Let me start with our third quarter performance. Last night, we reported adjusted earnings per share of $1.84 on $10.8 billion of premium revenue, below our expectations. Our 92.6% consolidated MCR reflects the continuation of a very challenging medical cost environment in the third quarter. We produced an adjusted pretax margin of 1%. The headline for the quarter is that approximately half of our underperformance is driven by the Marketplace business and that Medicaid while experiencing some pressure, is still producing strong margins. Year-to-date, our consolidated MCR is 90.8%, and our adjusted pretax margin is 2.7%. Some color on the quarter. In Medicaid, our flagship business, representing 75% of our total premium revenue, we reported an MCR of 92% and an adjusted pretax margin of 2.6%. Medical cost trend was higher than expected and driven by utilization of behavioral health, pharmacy, LTSS and inpatient care, largely consistent with what we observed throughout the year. A few positive rate updates were not enough to offset the elevated trend, and our risk corridor protection is now very limited. While our Medicaid performance did not meet our expectations for the quarter, many would characterize these results as best-in-class in this environment. In Medicare, we reported a third quarter MCR of 93.6%. We continue to experience higher utilization in this high acuity population, particularly related to LTSS and high-cost drugs. In Marketplace, the third quarter MCR at 95.6% was significantly higher than expected. We continue to experience much higher utilization relative to risk adjustment revenue. Our third quarter adjusted G&A ratio of 6.3% was very strong, reflecting our continued operating discipline. Turning now to our 2025 guidance. Our full year premium revenue increases to approximately $42.5 billion. Our full year 2025 adjusted earnings per share guidance is now expected to be approximately $14 per share which is $5 below our prior guidance of $19 per share. This revised guidance reflects a consolidated MCR of 91.3% and a pretax margin of 2.1%. As we recount our original EPS guidance of $24.50 and a $10.50 revision to $14, we note that half of this revision emerges from the unprecedented utilization trend in Marketplace, which represents nearly 10% of our business. Only 1/3 emerges from the rate and trend imbalance in Medicaid, which is 75% of our business and the remainder for Medicare. Now some color on the segments related to our revised guidance. In Medicaid, our guidance assumes a full year MCR of 91.5%, which produces a pretax margin of 3.2%. This Medicaid MCR result is above the high end of our long-term target range, but we evaluate it in the context of this challenging trend environment. Average rates achieved are now expected to be 5.5% but medical cost trend for the year is now expected to be 7%, which is 100 basis points higher than previous guidance. Our early 2025 rate increases were sufficient at the beginning of the year. But as medical cost trend increase beyond those rates, our MCR increased each quarter. The rate updates we received later in the year and risk corridors did not provide an adequate buffer. In Medicare, our full year guidance includes an MCR of 91.3% and pretax margin is at breakeven. We continue to effectively manage elevated utilization through our cost control protocols. In Marketplace, the full year guidance MCR of 89.7% produces a negative pretax margin. We expect higher utilization to persist as in past quarters with little to no risk adjustment revenue offset. Our Marketplace business has significantly underperformed our expectations, but its performance appears consistent with industry-wide trends. As noted a moment ago, approximately half the earnings per share reduction from initial guidance and prior guidance is attributable to this business. which represents just 10% of our consolidated revenue. Marketplace was initially projected to produce over $3 of earnings per share, but is now expected to produce a loss of $2 per share, a swing of over $5 of the $10.50 reduction from our initial 2025 guidance. Our updated full year guidance at $14 per share, implies earnings per share of approximately $0.35 in the fourth quarter. Within this fourth quarter EPS guidance, Medicaid is projected to earn $3 per share with a 92.5% MCR and a pretax margin of approximately 2.5%. Medicare and Marketplace are expected to offset the Medicaid performance with a combined $2.65 loss per share. The fourth quarter and second half projected Medicaid performance provides a strong jump-off point for our 2026 outlook. Now some commentary on our outlook for 2026. While it is far too early to provide formal guidance, we believe a discussion of the 2026 building blocks for both revenue and earnings per share will be helpful. I will lay out the components and Mark will provide further details. Our 2026 premium revenue outlook anticipates growth in our current footprint, consistent with historical levels, significant new Medicaid contracts in Georgia and Texas, and Medicare duals growth in 5 states through our recent RFP wins and MMP conversions. These items alone would put us on track to meet our target of $46 billion of revenue in 2026. However, our 2026 pricing strategy for Marketplace with the intention and expectation of reducing our exposure will likely be a revenue headwind, although earnings accretive. With respect to our outlook for 2026 earnings per share, there are several items to consider, particularly related to the Medicaid earnings baseline. First, our Medicaid performance in the second half of 2025 is expected to produce a 92.3% MCR and a 2.5% pretax margin. This equates to $6.50 per share in the second half, the annualization of which is an appropriate jumping off point for 2026. Second, we note that there is normal rate-related seasonality pressure in Medicaid in the second half of the year. Third, with some early views of our January rate cycle, which comprises 60% of our full year revenue, we project rates will be modestly in excess of trend. And Medicare and Marketplace are projected to at least break even, although we are driving to achieve our target margins. This early view of the 2026 earnings per share baseline should provide for an outlook for 2026, which likely approximates this year's updated full year guidance. However, we further note the following areas of potential upside to this baseline view. Medicaid rates as every 100 basis points of improvement produces an additional $4.50 per share, performing better than breakeven in Medicare and Marketplace as we continue to target low to mid-single-digit pretax margins and harvesting a portion of our $8.65 of embedded earnings. That at a high level is our outlook for 2026. Mark will take you through more detail on this in a moment. Finally, turning to our growth initiatives. Despite the short-term margin challenges, we continue to fuel our growth engines and see a clear path to surpass the $50 billion premium revenue mark in the next few years. During the third quarter, we continued our successful track record of winning RFPs with the renewal of our Wisconsin My Choice contract in Regions 2 and 7. We are engaged in active RFPs in several states and have an active pipeline of $54 billion of new opportunities over the next few years. On the M&A side, our acquisition pipeline contains a growing number of actionable opportunities. This current challenging operating environment has been a catalyst for many smaller and less diverse health plans to consider their strategic options. We remain opportunistic in deploying capital to accretive acquisitions. In this temporary period of rate and trend in balance, we are going to work to acquire as much Medicaid revenue as possible and as we have done in the past, work it up to target margins. At our last Investor Day, we characterized this environment as inclement weather rather than climate change, metaphorically, meaning temporary rather than permanent. We continue to believe this to be true. Medicaid is expected to produce a 3.2% pretax margin and contribute approximately $16 per share this year. Rates will come back into balance with medical cost trend and the business will recalibrate to target margins. Medicare is experiencing a rejuvenation aimed at serving the very attractive dual eligible segment, which we believe is poised for significant profitable growth. And Marketplace is undergoing a rationalization, addition by subtraction as we reduce our exposure, while the risk pool stabilizes. In short, these businesses are well positioned for the long term and sustainable profitable growth. With that, I will turn the call over to Mark for some additional color on the financials. Mark? Mark Keim: Thanks, Joe, and good morning, everyone. Today, I'll discuss some additional details on our third quarter performance, the balance sheet, our 2025 guidance and the building blocks of our 2026 outlook. Beginning with our third quarter results. For the quarter, we reported approximately $11 billion in total revenue and $10.8 billion of premium revenue with adjusted EPS of $1.84. Our third quarter consolidated MCR was 92.6%, reflecting a continued challenging medical trend environment for each of our segments, but was moderated by our consistently effective medical cost management. Half the miss versus our expectations this quarter was due to the significant underperformance in Marketplace. In Medicaid, our third quarter MCR was 92%, higher than our expectations. We continue to experience medical cost pressure across many cost categories, particularly for behavioral, pharmacy and LTSS. The combination of these trends exceeded rate updates received throughout the year. In Medicare, our third quarter MCR was 93.6%, also higher than our expectations. We experienced higher utilization among our high-acuity duals populations, particularly for LTSS and high-cost pharmacy drugs. In Marketplace, our third quarter reported MCR was 95.6%. Utilization in our membership was significantly elevated compared to our prior guidance. In past years, higher trends have often been offset by risk adjustment benefits. However, since Marketplace risk adjustment is relative to the market, not absolute like Medicare, the higher trend this year across the entire national population mitigates the risk adjustment offset we would have expected to realize. Our adjusted G&A ratio for the quarter was 6.3%, reflecting our normal operating discipline. I will note that our effective tax rate in the third quarter dropped significantly, reflecting benefits related to acquired federal tax credits and the impact of lower nondeductible expenses. Turning to the balance sheet. Our capital foundation remains strong. While margins are lower than our targets, I point out that positive earnings continued to add to our capital base and drive cash flow via dividends to the parent. In the quarter, we harvested approximately $278 million of subsidiary dividends and our parent company cash balance was approximately $108 million at the end of the quarter. RBC ratios, which test the level of capital at the subsidiary level compared to regulatory requirements, are 340% in aggregate and unchanged since the end of 2024. Total subsidiary capital is 70% above state minimums. Our operating cash flow for the first 9 months of 2025 was an outflow of $237 million due to the settlement of Medicaid risk corridors and Marketplace risk transfer payments as well as the timing of tax payments and government receivables that offset the normal positive items. In the quarter, we have repurchased approximately 2.8 million shares at a cost of $500 million. We see real value in our shares at current market prices, which we believe at this low point in the rate cycle underappreciate the longer-term margin targets of our business. Debt balances at the end of the quarter increased temporarily to fund the share repurchase. Current ratios are 2.5x trailing 12-month EBITDA and our debt-to-cap ratio is about 48. We continue to have ample cash and access to capital to fuel our growth initiatives and execute on our capital allocation priorities. Turning to reserves. Days in claims payable at the end of the quarter was 46. We remain confident in the strength and consistency of our actuarial process and our reserve position even in this period of sustaining high trend. Next, a few comments on our 2025 guidance. Our full year premium revenue guidance is slightly higher at $42.5 billion. Our adjusted earnings are now expected to be approximately $14 per share. Within our guidance, the full year consolidated MCR increases to 91.3% up 110 basis points from our prior guidance. Updated EPS guidance is $5 below our prior guidance of $19 per share, reflecting our higher full year MCR outlook. The medical margin decline of $6.25 in our guidance is partially offset by $1.25 of favorable G&A and the modest impact of lower average share count. I will note that Marketplace, which comprises just 10% of our total revenue, contributes half of that medical margin-driven EPS shortfall. In Medicaid, we expect fourth quarter MCR of 92.5% and full year now at 91.5%. This full year outlook is up 60 basis points from our prior guidance, reflecting the third quarter experience and our expectations for higher trend in the fourth quarter. Within those numbers, our full year Medicaid trend rises from 6% to 7%. Updates in several states increased our full year rate outlook from 5% to 5.5%. We continue to see a willingness from states to discuss off-cycle and retro rate adjustments as data develops, but we do not include speculative updates in our guidance. Even in this challenging operating environment, our Medicaid segment's full year pretax guidance margin is 3.2 and implied second half margin is 2.5, demonstrating the underlying strength and execution of our main business. In Medicare, we expect fourth quarter MCR of 93.6%, in line with the third quarter. Our guidance for the full year of Medicare MCR rises to 91.3%, a 130 basis point increase from our prior guidance, mainly driven by expectation for full year trend rising from about 4 to 5. The Medicare segment full year pretax guidance margin is breakeven. In Marketplace, we expect fourth quarter MCR of 96.2% and full year at 89.7%. Within our marketplace guidance, full year trend rises from about 11 to 15. We expect the full year G&A ratio to be approximately 6.5%. Due to third quarter share repurchases, our fourth quarter share count falls to 50.9 million and full year is 53 million. Finally, I'll expand on Joe's comments on our initial outlook for 2026. While we're unable to give guidance at this early stage, I would like to further detail our initial views on the premium and EPS building blocks for 2026, which may help shape your perspectives and modeling. A number of known items put us on track to meet our target of $46 billion of revenue in 2026. They include normal growth in our current footprint, the new Medicaid contract wins in Georgia and Texas, and the Medicare duals growth in 5 states as our MMPs transition to FIDEs and HIDEs. However, we anticipate 2 revenue headwinds in 2026, which we are unable to size at this early stage. First, given the lapse of enhanced tax credits or subsidies in Marketplace and the significant uncertainty will cause in the risk pool, we are repricing the Marketplace book of business to reduce exposure and restore margins. Our 2026 rate increases averaged 30%, ranging from 15% to 45%, and we have exited difficult geographies. I will note that for the next year, we have reduced our county footprint by 20% and our #1 and #2 price position goes from 50% of our footprint in 2025 to an estimated 10% of our footprint in 2026. Separately, we may see a small impact to Medicaid membership due to the recently passed budget bill, but continue to expect most of that impact will manifest in 2027 and 2028. I'll now run through a similar set of building blocks on the EPS side. As a baseline for 2026, our Medicaid performance in the second half of 2025 is expected to produce a 92.3% MCR, a 2.5% pretax margin and contributes $6.50 per share to earnings. We annualized that to $13 per share for full year Medicaid baseline for 2026. Next, we adjust that baseline upward to reflect normal seasonality pressure in the second half of the year. Remember, second half MLR is typically 50 basis points higher for seasonal items in our rate cycle, which implies a 25 basis point increase to next year's annualized outlook from the second half of 2025. Then early views of draft rates in our January rate cycle, which comprises 60% of our full year revenue, now suggest next year's full year rates could be better than an initial proxy for trend by 50 basis points. While still short of the significant catch-up needed in rates more generally, our early data points suggest states are moving in the right direction. Next, we anticipate increased G&A expense next year as a return to normal compensation expense levels are only slightly offset by the end of the unusual implementation expenses we recognized in 2025. Lastly, we expect the benefit of lower share count next year to be largely offset by the impact of declining interest rate environment on our interest income. These building blocks will enable a fair outlook for 2026 that likely approximate for this year's updated full year guidance. I will note that this approach inherently assumes that both Medicare and Marketplace are earnings neutral next year. As we build our plan for next year, we see additional potential upsides in 3 areas. Most significantly, we remain optimistic on the margin improvement potential as state set rates for 2026. Many state programs are underfunded as we are now in the sixth consecutive quarter of abnormally high medical cost trend. Published reports and our own internal analysis suggests that the market needs 300 to 500 basis points of rate in excess of trend to breakeven. States are listing, becoming more responsive and weighing more heavily on recent medical claims data in the rate setting process. We have very strong rate advocacy efforts working with our state partners to restore rates to appropriate levels. Rate increases beyond our initial assumptions create significant earnings upside as each 100 basis points of MLR yields $4.50 of earnings per share. Separately, as noted, this 2026 outlook also conservatively assumes Medicare and Marketplace will break even. In Medicare, we remain strategically focused on our dual eligible population and improving pretax margins. Each 100 basis points of MLR yields $0.80 of earnings per share. In Marketplace, any positive margins are also upside to our building blocks even on declining revenues. A final source of upside is our embedded earnings which accounts for the estimated accretion from new contract wins and recent acquisitions. We will harvest some portion of the $8.65 per share in 2026. This concludes our prepared remarks. Operator, we are now ready to take questions. Operator: [Operator Instructions] The first question comes from Andrew Mok with Barclays. Andrew Mok: Can you elaborate on the drivers of ACA MLR pressure in the quarter? It sounds like there was a negative surprise in the September Wakely data can you confirm and quantify that for us? And given the timing of the ACA pressure, how confident are you that this most recent utilization and morbidity experience was captured in your 2026 pricing? Joseph Zubretsky: I'll frame the answer and then hand it to Mark for more detail. The pressure in the quarter was strictly related to increased medical cost trend literally across all categories. We have a higher percentage of special enrollment membership, which usually runs hot initially. It's all medical cost trends. The risk adjustment was not a factor in our trajectory of earnings per share. Now for next year, as Mark mentioned in his comments, we don't like to allocate capital to a product in an unstable risk pool. That's why we kept this small, silver and stable at 10% of revenue. So next year, our rate increases state-by-state range from 15% to 45%. They average 30%. We reduced our footprint by 20%, and more importantly than the raw price increase that went into the market is where does your product price sit compared to the other market participants. We were #1 or #2 silver in 50% of our markets last year. And this year, an early read, we don't have all the information, suggests that we're only going to be priced #1 or #2 in 10% of our core markets. Mark, anything to add? Mark Keim: Joe, I think that's well summarized. Just to hit that in the third quarter, a number of drivers because certainly, our MLR is up a lot Q3 over Q2 to your question. In general, it's the same trend pressure that every one of our segments are seeing. Joe mentioned SEP volumes keep coming. Program integrity, the different forms of membership attrition that come out certainly put a little pressure on it. What you'll also see, and I expect you to ask about this, is in our IBNR roll forward, you'll see some development that went back to last year on some large dollar items and some provider claim settlements. So you put those items all together, it certainly is the driver of a lot of pressure here in the third quarter on marketplace. Joe hit the key theme for next year exactly. We'll reduce our exposure significantly next year. We're not as competitive in most markets. We're pretty far down the rankings on most prices, which means I think we have enough price in there to jump over any unforeseens in the third and fourth quarters and more importantly, minimize exposure next year. Joseph Zubretsky: That initial 2026 outlook only assumed on a reduced revenue base that would get Marketplace back to breakeven. But in our pricing, we certainly targeted mid-single-digit pretax margins. Operator: The next question comes from Stephen Baxter with Wells Fargo. Stephen Baxter: Just a couple of clarifications on how you're thinking about Medicaid going into next year. In terms of the rates that you're discussing, are you then expecting rates to be in the excess of this 7% cost trend that you're seeing right now. And then when you speak to enrollment trends, on one hand, it sounded like you talked to some level of normal enrollment growth, but then also talking about some expected pressure on enrollment. I guess could you just clarify whether you're expecting on a same contract basis in Medicaid for next year, whether enrollment is going to be up, down or stable? Joseph Zubretsky: I'll answer the second question first. In each of the last 3 quarters, we saw a 1% membership decline in Medicaid, and that's just due to more rigorous and disciplined enrollment activities in each of our states. Now as you know, stayers versus leavers, that usually adds a little bit of acuity shift, which is probably part of the issue of why medical cost trend is increasing. But your first question about rates, there are 4 reasons why we're optimistic that rates will at least keep pace with the trend and probably be slightly in excess of trend. One is in the past, over the past year, states have been very responsive, on-cycle, off-cycle, retroactive, prospective and responding to the increased trend. Two, this cost inflection started in mid-'24 through mid-'25. We have a full year baseline that includes significant cost increases that can be rated for. So the updated baseline gives us optimism if that's included in the rate projections, then it captures a lot of the cost increase. Third, 3 of the cost categories that are increasing pressure on our results, LTSS, pharmacy and behavioral are discrete rating cells in the rating process, very visible, very prominent, gives you great visibility into those cost components, and they can be rated for adequately. And lastly, an early glimpse, very early glimpse at the 1/1 cycle where 60% of our revenue renews gives us some optimism that rates will be slightly ahead of trend and including rate updates for the full year in 2026, be slightly in excess of trend. Mark, did I miss anything? Mark Keim: No, Joe, I think it's well summarized. Stephen, it's indisputable that managed Medicaid rates are 300 to 400 basis points underfunded and our state partners are recognizing that. We understand there's budget pressures out there. But with the development of data, as Joe mentioned, that's indisputable. And our early outlook for next year is that rates will be at least somewhat better than expected trend. But as you can imagine, we're feeling our way through both of those right now, and we'll have more as guidance develops. Operator: The next question comes from A.J. Rice with UBS. Albert Rice: I appreciate the early comments about next year. Thinking about what you're assuming on the public exchanges, there are a lot of different scenarios on the table now with respect to subsidies, enhanced subsidies, et cetera. How does that affect -- what have you assumed embedded in the comment about breakeven? And how much of a variability might there be depending on the various ways this could play out? Joseph Zubretsky: Well, we gave you the rate increases ranging from 15% to 45% averaging 30%. And I won't go through the discrete components. I'll describe them qualitatively. You were underwater this year. We're going to have a 3% negative margin so you put in a catch-up to get you back to target margins. You put in an estimate of trend, which we believe is very conservative. And then, of course, you have to estimate the impact of the acuity shift as the membership growth reduce due to the enhanced subsidy expiration. We believe we conservatively priced for all those 3 elements. But again, the more important point is where does the product sit on the shelf compared to your competitors. And the fact that it's not 1 or 2 in most of our markets gives us a view that volume will be reduced next year. I can't tell you how much right now, but it will be reduced. And our assumption is that on that reduced volume, we can at least get this back to breakeven. But those conservative pricing assumptions did target mid-single-digit margins. Anything to add, Mark? Mark Keim: The only thing to add, A.J., is right now, we're priced for the expiration of subsidies, which is the base case on the table. I think inherent in your question might be, well, what if the rules on subsidies change? If the rules on subsidies change, then pricing changes as well. Our objective, as Joe said, would be the same, which is to break even or be better. But if the outlook and the regulation on subsidies changes, then the rates need to change as well. Operator: The next question comes from Josh Raskin with Nephron Research. Joshua Raskin: When you look at that early view of 2026 being similar to the $14 this year, would you characterize that as a new baseline from which you grow and realize your embedded earnings going forward? Or do you view that as abnormally depressed still and we should expect above-average growth for a couple of years as margins get back to targets in all 3 segments? Joseph Zubretsky: Whether we're taking the full year of 2025 in Medicaid at $16 or an annualization of the second half at $13, with the items of upside we mentioned, we certainly believe that rates will come back into balance with medical cost trend over time. Now the question everybody ask is, well, how much time will that take? We don't know, and we're not forecasting that. But next year, we are assuming that rates are in excess of trend, modestly in excess of trend, and that's a good jumping off point. But we do believe we have not changed our long-term outlook on the margins for this business. In the first half of the year, we had a 3.8% pretax margin. And even that was below our long-term target of about 4.5% for the business. We believe, over time, these things come back to target margins. The market in Medicaid needs 300 to 500 basis points to break even, just to break even. We've consistently operated 200 to 300 basis points better than the competitors in all of our markets. We only need a fraction of what the market needs in order to get back to target margins. Mark? Mark Keim: And Josh, just to build on that, I noticed overnight, some of you did the math on our initial outlook, the building blocks to $14 and a few of you got pretty close. It sort of implies next year that the whole company would run about a 2% pretax margin and maybe a 2.5% on Medicaid, which, in both cases, is significantly below our longer outlook of 4% to 5% pretax for the whole company or 4.5% at the midpoint. So it certainly implies that next year, margins are reduced with a lot of growth potential as this rate cycle normalizes. Operator: The next question comes from Justin Lake with Wolfe Research. Justin Lake: I was hoping I could get you to share where you think exchange revenue would be for next year, given all those moving parts you talked about versus kind of the $4.5 billion run rate this year. And then maybe you talked about SG&A be a little pressured year-over-year given bonuses returning. Can you -- anything you could share with us in terms of where you think that SG&A ratio will shake out year-over-year? Joseph Zubretsky: I'll answer the exchange revenue question first and kick it to Mark for the G&A color. We have various scenarios. And of course, what you're doing is you're looking at your price position versus the price positions of other players and looking at your competitive position and trying to forecast how much volume will you keep and how much volume will you get. We don't believe we'll get a lot of new membership, but we believe we'll hold on to some renewal membership. We have scenarios that indicate that revenue could come down from $4 billion to $2 billion or even slightly less than that at $1.5 billion. In either case, we are 100% comfortable of at least breaking even in that line of business next year. But our pricing models, even at that reduced volume, were priced to produce mid-single-digit target margins. Mark, do you want to take the G&A question? Mark Keim: Yes, Joe, just to build on the marketplace one, a lot of the consensus views out there are that Marketplace could shrink nationally 30% to 50% next year. I think what Joe is suggesting is it wouldn't be out of line to think we would as well with some of the numbers Joe mentioned. On the G&A ratio, we'll probably come in at a 6.5% this year within our guidance. That is low for the reasons you mentioned, compensation and a few other items, probably targeting roughly about a 6.8-ish is the right way to go for next year, at least to start your modeling. Joseph Zubretsky: On the -- another point on the G&A question is really important because when we talk about target margins in Medicaid, one of the facts that is usually missed is that we operate just north of 5% of a G&A ratio in that line of business, which we believe is best-in-class. So if we get 200 to 300 basis -- 100 basis points of rates, which is equal to $4.50 a share and continue to operate just north of 5% on the G&A line in Medicaid, then we're well on our way back to target margins. Operator: The next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Great. I guess I appreciate with the guidance that you basically are only signaling potential areas of upside. It really seems like the market is much more focused on potential areas of downside. You have some peers who are thinking that margins trough next year rather than are slightly better in Medicaid. Obviously, the exchanges are unknown. So I would just love to hear your view on where you think the downside risk to the numbers are. You said that this year, trends matched -- rates matched trend, but then trend got worse as the year went on. It's not clear to me why you have confidence that today, when you say rates look like they're going to be slightly above, why you'd have confidence that by the end of the year, that would still be the case. And then with your embedded earnings comment with, I guess, the business underperforming, how do we think about the embedded earnings? I guess, in the past, you've kind of talked about the trajectory of realizing them. Is that all pushed out a year? Like how should we be thinking about that part of the equation? Joseph Zubretsky: Well, on the margin question or the MCR question in Medicaid, when you produce a 91% MCR in the first half of the year, 92% in the second, averaging 91.5% and your pretax margins at 3.2%. It depends what you mean at trough from. I mean these are the lowest point of our margins because we started at 4.5% to 5%. So I think we have to -- when comparing our results to others, you have to look at the starting point. We started at 4.5% to 5%. It was just a year ago, we were 200 basis points into the corridors. One of the reasons why the cost inflection that began in mid-2024 didn't hit us as much is we were 200 basis points into the corridors late in '24, which buffered a lot of that medical cost pressure. So we're operating the way we want to operate. We believe we'll get back to target margins and even back into the corridors. And we're -- I articulated the early view of rates to our items, past state rate updates, the '24/'25 baseline already including a lot of the cost inflection, 3 rating components that are very discrete and highly prominent and an early glimpse at 1/1/26. So we think the Medicaid business, which is the earnings back to the company, 75% of our revenue, producing a 3.2% pretax margin at $16 a share this year is going to continue to perform. Is there downside? Any business has downside on medical cost trends. And there's no question that in all of our businesses with a 7% cost trend in Medicaid, a 5% cost trend in Medicare and a 15% cost trend in Marketplace, it's all about cost trend and where that settles in, in 2026. But our view is the appointment logs are filled in doctors' offices, the beds are filled in the hospitals. And at some point in time, capacity has to level out and trend levels out on this highly increased cost base. If trend just levels, costs are still up 15%, 20% of where they were 2 years ago. Mark Keim: Yes, Kevin, the second part of your question was on embedded earnings. As we said in our prepared remarks, we've got $8.65 now. And remember what that is, that's earnings on top of what we're currently guiding to in the current year, things that will emerge in future years. We're at $8.65. We had previously signaled we thought about 1/3 would come out into earnings in 2026. We're not ready to give a more specific number. Joe and I certainly will when we give guidance after the fourth quarter. But what you can think about is within that $8.65, remember, we were carrying $1 of implementation costs, which depressed our earnings in 2025. That just goes away. That was the preparation for the FIDEs and HIDEs. We'll kick those into gear January 1. So that kind of headwind goes away for next year. The other small component was we were expecting a little bit of a loss on -- from the Virginia contract going away. That was a $0.40 item. So that falls out. So you get the dollar next year. You have to recognize the $0.40 headwind from Virginia, but net, you're up at least $0.60 just on things that are money in the bank. The rest we'll update as Joe and I have a better view on trend in rates next year, but you'll get some portion of that $8.65. Joseph Zubretsky: The only thing I would add is embedded earnings is what we call an ultimate concept, meaning that you get to your ultimate target margins over a period of time. Now given where margins have settled recently, could that then take longer to get to ultimate? Sure. But we have not changed our view of the ultimate target margins in those businesses, but the timing of emergence is certainly something we'll update you on when we give 2026 guidance in February. Operator: [Operator Instructions] The next question comes from Scott Fidel and Goldman Sachs. Please go ahead. Scott Fidel: Maybe switching over -- let's switch back over to Medicare a little bit. And interested maybe if you can sort of break down for us around the performance for this year, sort of breaking it down between, let's say, the traditional MOH sort of D-SNP focused book of business. And then the acquisition of the bright assets in California and how each of those sort of have built into the performance this year. And that then looking out to next year as well how each of those 2 categories influence your view on Medicare into that, I think, sort of breakeven margin view that you have for next year? Joseph Zubretsky: Well, I'll tee it up, and I'll hand it to Mark. The Medicare business, as I said in my prepared remarks, is sort of going through a rejuvenation, and that is because it is -- it was always aimed at the dual eligible segment. But now with the MMPs, the $2 billion, 44,000 members, $2 billion of revenue converting to FIDEs and HIDEs, we're really well positioned, particularly with the swipe of Illinois, Ohio and Michigan and the D-SNP RFP process. So as we look year-over-year, this year versus next, the Bright acquisition will be what, the third full year of ownership, and that was coming from a very low margin position, we're building it up. That will provide some improvement. But as we convert these 44,000 members and by the way, add 20,000 due to the service area expansion and the MMP conversions, we're being a little cautious. They're the same members. They're in the same geographies, but it is a different product chassis. So we're being a little cautious with the margins in that product. So breakeven to breakeven, Bright does better in the third year of ownership, and we're a little bit cautious on the profitability of the MMP conversions until we have 1 year of experience. Mark, do you want to add anything? Mark Keim: Joe, that's well summarized. Within our $6 billion of Medicare, it's about 1/3 MAPD, about 1/3 MNP and about 1/3 D-SNP. As we look to next year, those MMPs will translate to FIDEs and HIDEs given all of the RFPs that we won so I think you'll see slight margin erosion as you go from MMPs into FIDEs and HIDEs, and that's one, just us being cautious about a new product; and two, recognizing that the second half of the year was hotter than we thought this year. That slight margin erosion though, I think, is offset as on the MAPD side, Bright ConnectiCare come back up to closer to where they should be on target margin. You put that all together, we're starting off at least margin neutral for next year. Operator: The next question comes from John Stansel with JPMorgan. John Stansel: On the M&A pipeline, since Investor Day last year, you spent a fair amount of time talking about the opportunities you see with smaller and regional players. And I think we've heard a fair amount of commentary across the space about potentially negative margins in Medicaid. And to contrast that with the significant share repurchase done in the quarter, can you just talk through how you're thinking about capital allocation priorities from here, capacity and how developed that pipeline is in the coming quarters? Joseph Zubretsky: Sure. Our capital priorities have not changed. The order priority, organic growth, inorganic growth and returning capital to shareholders through share repurchase, that haven't changed, and we have ample capital, as Mark said, we're still producing earnings. You throw leverage on top of earnings. We're producing $1.5 billion of capital capacity a year even at these compressed margins. On the M&A pipeline, if you look at our history of purchasing, what, $11 billion of revenue over 7 or 8 deals and only acting capital equal to 22% of purchase revenue, half of which is regulatory capital, hard capital we barely paid any goodwill value for the acquisitions. In this period of cyclically low margins, we're going to be very disciplined about prices paid for revenue streams. If you can buy a revenue stream, from a struggling local health plan at or about book value, it's just as good as winning a new contract, no goodwill capital. All the capital was hard capital and regulatory capital. So the number of local not-for-profit health plans in Medicaid that have experienced prolonged operating difficulties and therefore, profitability and capital problems has been a catalyst for the pipeline being replenished in very full, very full of actionable opportunities. And if you can action them at or around book value is as good or even better than winning a new contract. Mark, anything on capital allocation? Mark Keim: On capital allocation, Joe mentioned the prioritization, we always prefer to grow organically. But these M&A situations, when you buy them so close to book, almost feel organic. If the industry is 300 to 400 basis points underfunded, you can imagine some of these smaller players are starting to really struggle, which is why we feel good about the opportunities to do some M&A here and drive additional value from that perspective. On the capital side, we remain in a really good spot with our financial ratios. And again, with the earnings power of the business, even at these lower levels, we just continue to build book value and therefore, debt capacity. So we feel pretty good about one, the opportunities, and two, our capital position. Operator: The next question comes from Ryan Langston with TD. Cowen. Ryan Langston: Great. I appreciate all the details for 2026. It sounds like you see states moving in the right direction in terms of rates. But I'm wondering, is there any other type of relief that states are offering just above and beyond. Joe, I think in the second quarter call you said utilization management was constrained in certain states and more sort of allowable services. Are you seeing any signaling from states this could change over time? Joseph Zubretsky: With, I think what you're describing is the construction of the program. Look, states are pressured on budgets. They have a variety of things they can do. They can change the program, reduce benefits, reduce eligibility. And we've heard other companies talk about this. We've seen this at the margin. Have there been utilization pauses called by various states? Yes, isolated, mostly on behavioral. And what do you think happens when you pause utilization on any component of cost that goes up. Most states are going back to full utilization protocols at this point, but it's not a major phenomenon. Benefit changes, meaning reduction in the size of the program to the benefit changes. We've seen those on the margin in various places, but not significant. So going into next year, program changes, program construction is really not a major phenomenon to consider as we -- in our outlook for 2026. It's here, it's there, it's isolated, but it's not a major driver. Now the other component that we are seeing, as I mentioned before, and it shouldn't be ignored, is states even before work requirements are taking enrollment processes more seriously, and we've lost about 1% of membership per quarter for each of the last 3. Leavers usually have a lower MCR than stayers. So they're putting a little bit of pressure due to an acuity shift, but most of the pressure in Medicaid is higher utilization by the stayers, not the acuity shift by the leavers, but continued program integrity is another phenomenon that were experienced state by state. Operator: The next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: Just a bigger picture question on the exchange business in light of just the uncertainties, whether it's subsidies or otherwise the lack of visibility sometimes across that business, and you're taking a conservative approach, but I guess, can you talk about your overall commitment to that business, how you think about that? And at what point would your thinking change on that front in terms of your priorities and the overall mix of your business. Joseph Zubretsky: As I mentioned previously, thanks for the question. We will allocate capital to the business as long as we are convinced that the risk pool will continue to be stable. And I look over the past 5 years, insurtechs coming in with unreasonable pricing, expanding the eligibility for special enrollment, enhanced subsidies in enhanced subsidies out. I mean you can go back and look at duration of membership, fast-churn membership, you need risk adjustment, you have a member for 18 months, you don't get risk adjustment. So when you look at the inherent what I call inherent volatility of the book, we have no choice in my -- in our capital philosophy of allocating as little capital to an unstable risk pool as we can. However, we did not pull the product. The product is available. It's available in over 300 counties. It's on the shelf. And if we come to the conclusion that the risk pool stabilizes for a period of time, we can allocate more capital, leverage our broker relationships. And while other market participants might consider this product a necessity, we consider it an option. We believe that option is out of the money next year. But when it goes back closer to the money or in the money, we'll exercise it. Operator: The next question comes from Lance Wilkes with Bernstein. Lance Wilkes: Great. Just a couple of clarifications on Medicaid and Marketplace. For the '26 assumptions on trend and rate, are you kind of presuming that rates, given visibility you've got thus far are going to improve up to that trend level? Or do you think that trend level is going to be normalizing down? Could you also talk a little bit about the variability you see contract-to-contract or state to state in your margin performance? And does that present any opportunities for exiting any particular contracts? Or are they all doing kind of comparably well? And then the last question is just on Marketplace. If you're seeing any sort of pull forward in activity kind of the uncertainty in the membership there, if they're going to have the program going into next year for some of them. And if you could quantify that? Joseph Zubretsky: Mark, do you want to take the Medicaid rate question, the 2026 rate question, the state by state question. Mark Keim: Absolutely. Lance, on the Medicaid rates versus trend, again, the industry is 300 to 400 basis points underfunded right now. And while states might have budget pressures and be reluctant to completely address that, it's inevitable they need to. And so our view into early next year and what we're seeing from our state partners, is that the trend in rate imbalance can't perpetuate. We're far enough into at least 6 quarters into it, that the trailing data is catching up with it. And our assumption is that extremely high trends as we've seen don't continue that they moderate somewhat. But more importantly, that states are recognizing with the trailing data that they need to catch up. It may take them many quarters to catch up, but they are starting to recognize that and catch up. And remember, if the industry is 300 to 400 basis points underfunded, the stat filings show that Molina is still performs 200 to 250 basis points better than the industry. So we need half of what the broader industry needs to get to our target margins and the probability of us getting that half sooner than later is probably better than the whole market coming back to stasis. So we feel that some catch-up is appropriate and warranted, and we're expecting, again, a small catch up in our initial outlook here. Joseph Zubretsky: With the question state-by-state, Mark and I spent a lot of time managing what we call the portfolio. and we do not tolerate performance SKUs, everybody's got to deliver. Now things go through cycles and sometimes the state rate will get weaker and then sometimes it gets stronger. But every property in the portfolio is performing at least in excess of its cost of capital. There's a supposition out there that some of the smaller plans can't be doing well because they can't be scaled properly. We have $5 billion health plans, and we have $500 million health plans. The margins are not correlated to the size of the plan. They're just not. We can make money in a $500 million to $1 billion health plan, all the shared services, claims, grievances and appeals all those shared services call centers are completely leveraged at an enterprise level. So right now, sure, states go through -- our state properties, go through various cycles of profitability, ebbing and flowing. But no, there is no contemplation of reducing the size of the portfolio. We still have an active pipeline targeting $54 billion of opportunities over the next number of years. We have 2 active RFPs, 2 of our bigger states in flight right now. So now we're building the portfolio. And right now, there is no discussion over any underperformance or any state where we're not happy to do business. Operator: The next question comes from George Hill with Deutsche Bank. George Hill: I had a Medicare question. And I guess, Mark, when I think of your portfolio in Medicare, I think you talked about like the LTSS and the duals penetration, I think if you guys as having high duals in a relatively sick book of business, which is why I was surprised at the magnitude of the MLR miss in the quarter. I guess, can you talk about the variable consumption that you guys saw in the Medicare business? And what's driving that because, again, I think the really sick members is constant utilizers of care. So I kind of really like to hear about the marginal -- like what's driving the marginal cost of care in Medicare. Mark Keim: I think you have a variety of things going on. We typically talk about LTSS as being a bigger driver in a high acuity population, and it's certainly a built-in big part of each of these high acuity and duals products. And then on the high-cost drug side, that continues to be a factor across all of our businesses, but with certain cancer treatments with certain other of the therapies that are out there, high-cost drugs continued to be a very big driver of it. Joseph Zubretsky: And you make an interesting point. That in highly chronic populations, by definition, ABD and Medicaid and Duals, you wouldn't expect to see a cost inflection because they're using services from day 1 to day 365. And but we have seen it. And those are the 2 cost components in Medicare, LTSS hours and SNF admits and high-cost drugs, which are our Rx trends as a company are about of 16% and 36% in the top 10 therapeutic categories. So they're being used across all our populations, and that is what's putting the cost pressure in Medicare. Even though they're already high acuity chronic populations, utilization is up. Operator: The next question comes from Michael Ha with Baird. Hua Ha: With regard to Medicaid margins and state rate increases, I understand you're strongly advocating for better rate alignment. So I'm wondering how many of your states are actually reflecting recent '25 trends into the reference look back period for the upcoming January rates. Curious because in our conversations with state actuaries, it seems like actuaries at best can only consider a look-back period of 12 to 24 months, just given how difficult it is to shorten it, just given they need a few months ahead of time to submit to CMS for approval, need roughly half a year to run the process and then clean 12-month look back that reflects about 3 months of claims runoff. So I'm curious, are you seeing states who actually reflecting '25 trends? And also on the Medicaid member attrition this year. I was wondering if you could quickly elaborate on the nature of that disenrollment. How many of these lives are rolling off because of procedural or administrative reasons? Just trying to better understand if this might be emblematic at the higher level of outsized procedural disenrollment that we've been seeing? Joseph Zubretsky: On the Medicaid rates, and Mark and I, particularly Mark spent a lot of time in this process. The data through June of 2025 is virtually complete. Yes, actuaries like to see data very well seasoned. And this cost inflection did start in mid-'24. So whether they use '24 but include early '25 as a trend factor or use mid-'24, '25 as the baseline and late '25 as a trend factor. As long as they capture the medical cost inflection either in the baseline or trend, we believe we'll be in good shape. So I'm not going to go state by state. The industry's advocacy efforts to fully consider the latest experience are very strong, and we believe are working. Whether the actual baseline period is 12 months older and then they include a generous trend on top of it or more recent period and less generous trend, it mathematically doesn't matter. But we are confident that the latest cost information either in the baseline or in a trend assumption is being contemplated in rates. Mark? Mark Keim: And Joe, that's a big point that isn't always well understood. If the look-back period is 6 months or 12 months ago, sure, that makes a difference from one perspective, but that's not the rate you get. The rate you get is that look back starting point plus a fair trend on top of it. Now actuaries can argue over what that fair trend is on top of it. But if that fare trend comes out at an appropriate place, the specific data, the look-back period is less relevant. Joseph Zubretsky: On your membership question, yes, states have just gotten more disciplined on eligibility requirements, and there's no one state or one area, about 1% per quarter for the last 3. And I believe in the membership decline in Virginia must be in there as of June 30. So the loss of Virginia, I don't have the number in front of me. Mark might have it. That also accounted for some of the membership loss. That contract rolled off a few months ago. Mark Keim: Right? And in the third quarter, 120,000 of our Medicaid members fell off due to the termination of Virginia. Joseph Zubretsky: Right. Operator: Our last question comes from Jason Cassorla with Guggenheim. Jason Cassorla: Great. Maybe just piggybacking off of the benefits questions from Medicaid. You noted program construction isn't like a phenomenon for 2026. But as opposed to multiple years of elevated rates, discussion around being 300 to 400 basis points underfunded in Medicaid. What do you believe needs to happen for states to take a deeper look at benefit structures and find areas that they'd be willing to pare back? And what would be like the mechanism or timing around when that could possibly happen? Or do you see a greater honors for states to do that and look at benefit structures? Joseph Zubretsky: Well, they do from time to time, carving out pharmacy, putting pharmacy back in. And the real issue there is while we don't like to see swings in revenue, revenue, we like to see revenue coming in. We certainly don't like to see it leave. The real issue there is if they take out benefits, how much rate do they take out? Do they take out the right amount of rate for the reduced benefit. So it should be margin neutral that and over time, it usually is. But there are value-added benefits in many states. I mean there's the core essential benefits that you'd always provide, but there were benefits around the edges that are always provided where they could actually cut back. States tended to have a tendency to carve out pharmacy. Some states have done that and found that it increased costs substantially. So we don't see that as a new emerging phenomena, there's 4 or 5 states that already do it. We don't see any more that are inclined to do it. So I think around the edges, they will look at that in order to save money. It will reduce revenue, but as long as the right amount of rate is taken out of the capitated rate, then volume goes down a little -- premium volume goes down a little bit, but margins should be neutral and should not be affected. Operator: This concludes our question-and-answer session and Molina Healthcare's Third Quarter 2025 Earnings Call. Thank you for participating and attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the third quarter conference call for Graco Inc. If you wish to access the replay for this call, you may do so by visiting the company website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. At the request of the company, we will open the conference up for questions and answers after the opening remarks from management. During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute forward-looking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of the company's 2024 annual report on Form 10-K and in Item 1A of the company's most recent quarterly report on Form 10-Q. These reports are available on the company's website at www.graco.com and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. I will now turn the conference over to Chris Knutson, Vice President, Controller and Chief Accounting Officer. Christopher Knutson: Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for more commentary. Yesterday, Graco reported third quarter sales of $543 million, an increase of 5% from the same quarter last year. Excluding acquisitions, which contributed 6% growth and currency translation, which contributed another 1% growth, organic sales declined 2% in the quarter. Reported net earnings increased 13% to $138 million or $0.82 per diluted share. During the quarter, we recognized a $14 million noncash gain from a reduction in the fair value of contingent consideration related to last year's acquisition of Corob. This gain is an unallocated corporate operating expense. Excluding the impact of excess tax benefits from stock option exercises and this contingent consideration fair value gain, adjusted non-GAAP net earnings was $0.73 per diluted share, an increase of 3%. The gross margin rate was flat compared to the same quarter last year. The effects of our targeted interim pricing actions started to be realized during the quarter, offsetting higher product costs resulting from lower factory volume, unfavorable effects of lower margin rates from acquired operations and incremental tariffs. Tariffs affected product costs by $5 million in the quarter, resulting in a 100 basis point decline in the gross margin rate. Operating expenses decreased $6 million or 5% in the quarter. The decline was driven primarily by the recognition of the noncash gain related to the fair value contingent consideration reduction. Excluding this gain, total operating expenses increased $8 million or 6%, driven by incremental expenses from acquisitions of $10 million. Excluding expenses of acquired operations, operating expenses declined $2 million. Adjusted operating earnings increased $5 million or 3% during the quarter. Operating earnings as a percent of sales was 28% for the quarter and consistent with the same period last year. The adjusted effective tax rate was 20%, which is consistent with our expected full year tax rate of 19.5% to 20.5% on an as-adjusted basis. Cash provided by operations totaled $487 million for the year, an increase of $51 million or 12%. Improved inventory management from consolidating operations under One Graco and lower sales and earnings-based incentive payments drove the increase. Cash provided by operations as a percentage of adjusted net earnings was 146% for the quarter and 132% for the year-to-date. Significant year-to-date uses of cash include share repurchases of 4.4 million shares totaling $361 million, dividends of $138 million and capital expenditures of $34 million. These cash uses were offset by share issuances of $32 million. A few comments as we look forward to the rest of the year. Based on current exchange rates, assuming the same volumes, mix of products and mix of business by currency as in 2024, movement in foreign currencies would have a 1% favorable impact on net sales and net earnings for the full year. Finally, projected unallocated corporate expenses and capital expenditures are $35 million to $38 million and $50 million to $60 million for the full year, respectively. I will now turn the call over to Mark for further segment and regional commentary. Mark Sheahan: Thank you, Chris. Good morning, everyone. I'm pleased to report that sales were up 5% this quarter with acquisitions contributing a strong 6% growth. This more than offset a modest 2% decline in organic revenue. Our Contractor segment continues to face headwinds from subdued construction activity and cautious consumer sentiment in North America. The Industrial segment delivered a 1% sales increase, supported by acquisitions and favorable exchange rates. While growth occurred in many product categories, overall sales were set back by the timing of powder finishing system sales compared to last year. Expansion markets performed well, led by momentum in the semiconductor space. Third quarter order activity increased mid-single digits across all segments, driven by strategic pricing and steady demand. Last year's third quarter had a nearly $25 million backlog reduction. Excluding this reduction, organic sales grew 4%, aligning with third quarter order rates. Backlog levels are stable and no significant challenges are expected for the rest of the year. Details on backlog reduction by segment are included in the conference call slide deck. We announced targeted price increases during the third quarter, and those efforts are gaining traction. These actions are helping to offset the impact of tariffs, which added $5 million in costs this quarter and $9 million year-to-date. While pricing has not fully covered these costs yet, we expect this by the end of the year. Turning to segment performance. The Contractor segment sales increased 8% for the quarter, with acquisitions contributing 11%, more than offsetting a 3% decline in organic sales. Affordability concerns have continued to affect the North American construction market with declines in both the Pro Paint and the Home Center channels. Channel partners are managing inventory tightly in response to current conditions. On a positive note, Protective coatings equipment sales had their best performance of the year and pavement products saw increased demand supported by infrastructure investments. Incoming orders grew low single digits in the quarter, giving us confidence heading into the fourth quarter. Industrial segment sales increased 1% in the quarter with acquisitions and currency offsetting a 2% organic revenue decline. The Americas grew 3% organically, led by good demand in vehicle service and automotive OEM projects, particularly in liquid finishing systems and sealants and adhesives. In EMEA, gains in process manufacturing were not enough to offset a drop in vertical powder coating systems due to project timing. In Asia Pacific, there was solid demand in mining, which was not enough to offset lower solar and EV investments. Despite lower organic sales overall, profitability was extremely strong with incremental margins of 220% year-to-date. Expansion market sales were up 3% with good activity in semiconductor products, partially offset by declines in the environmental business. While semiconductor has grown this year, we are still below peak revenue and continue to face some challenges in China. Margins have been strong throughout the year, though they may be volatile quarter-to-quarter due to fluctuating volumes. Moving on to our outlook. Year-to-date sales are up 5%, supported by the 6% increase from acquisitions, which have more than offset a slight organic revenue decline of 1%. Heading into the fourth quarter, order rates are satisfactory and year-over-year comparisons in the Contractor segment are becoming easier. As a result, we're keeping our full year revenue guidance of low single-digit growth on an organic constant currency basis. That concludes our prepared remarks. Operator, we're ready for questions. Operator: [Operator Instructions] Our first question comes from Deane Dray of RBC. Deane Dray: Maybe we can start with since macro overlay and expectations is so important. Kind of can you zip through the end markets and regions, just the performance of what stands out versus expectations up or down? And then any kind of the forward look, the leading indicators, day rates, what you saw in the first -- the last 6 weeks of orders, too, please? Mark Sheahan: Yes. So I think it's a continuation of really a lot of the themes that we've been talking about all year. I think that in terms of like the industrial end markets, I wouldn't characterize the demand is robust, but I would also say that people are still ordering products, and there's targeted opportunities in some of the areas that we talked about like vehicle service and our process pump segment, which have been pretty good. And also our liquid finishing segment as a lot of customers are looking at converting from air operated to electric, that's created some opportunities for us as well. So it's kind of hit and miss depending upon the customer type, the end market that we're in. The North America market has probably been the one where we've unfortunately seen more caution from customers just because of the changing landscape with respect to the tariff situation. I think it has created some caution in some of the end markets and some of the customers. We're hopeful that, that kind of cleans up. But if I were to put my hat on from the end of last year when we were putting our plans together, I think we're more hopeful that we would have a more stable environment in North America than what we've experienced. Our teams are still working really hard. They're still executing. There's still opportunities out there. But again, the environment is not what I would characterize as robust. China has really actually held up pretty well for us this year, which after a couple of years of declines there has been nice to see. And again, it really depends on the end markets that you're in. The mining industry, in particular, in Asia Pacific and maybe to a lesser extent, China has held up pretty well. And the -- some of the traditional industrial markets, including adhesives, sealants and liquid finishing and the powder business have actually held up pretty well in China. So I would say that China has been a positive surprise maybe for us after a couple of years of tough business over there. And probably the other big surprise is just the uncertainty in some of the end markets with our industrial business. Contractor, I mean, I know we'll get into it on this call, but the issue there, again, is just affordability, home affordability issues primarily in North America, nothing too surprising. We're hopeful that we get a little bit of a break on that with rates coming down. The environment has been tough. Last year, as you know, we had the lowest level of housing sales in this country since 1995, and this year is even lower than that. So turnover is good for us. Houses need to sell. When houses sell, they hire contractors to paint and they fix up and they remodel, and it's just good for the overall health of our contractor business. It will get better. We're very well positioned once things firm up on the demand side and we get some volume growth. The P&L is in great shape. Profitability is super high. Incremental margins look good. Cash flow is extremely strong. So it's really just making sure that we're all set up for what will be better volume days ahead in Contractor. Deane Dray: And the leading indicator looks, stay rates, October, et cetera? Christopher Knutson: When we look at the rates and what we see coming out from some of those indicators, the pretty flat, I would say, on -- in terms of housing starts, with a 30-year interest rate is now at 6.1%, which is lower than it's been in quite some time. So we're hoping that as those rates start to trend downwards, that we'll see some improvement come with housing movement, as Mark had previously talked about. Mark Sheahan: Yes, it's still a pretty sluggish environment, Deane. And we're hopeful it's going to get better, but I don't think our results are really all that bad when you look at how hard this housing and construction industry has been hit. I never -- I don't like the fact that we're down a little bit organically in Contractor. But given the pain that's going on in that market for a while here, it's been the challenge that the team has dealt with in an admirable way. David Lowe: Yes. I would just add that a fairly significant portion of that market, as Mark touched on, with resale being so slow is remodeling activity. Now that's one of the areas that affects both our Pro Paint side and our Home Center side of our business. That -- actually, this was the first year that the group that does forecasting around that, Harvard University, projected that category to grow -- that activity to grow this year. That really hasn't happened. So I think that, that holds us back, and we hear some of our channel partners talk about the same things, both on the Home Center side and as well as on the paint materials side of the business. Deane Dray: And then just a follow-up. I know it's a rare event for you to do a second price increase in September. But just kind of give us some color about how it was introduced? Are they all sticking and you expect this to fully offset the tariffs? What's the time frame there? Mark Sheahan: Yes. Good question. We did announce price increases in the early third quarter. We like to give our channel partners enough time to digest those before we actually implement them. So we didn't actually start to really have those take effect until late in the third quarter. But I would say sort of low to mid-single-digit kinds of increases across all the business units in all of the regions with the exception of the Pro Paint channel in North America and the Home Center channel in North America, and those are queued up to go in January. Operator: Our next question comes from Mike Halloran with Baird. Michael Halloran: Can you unpack what you're implying for the fourth quarter here? If I -- is this mainly through the pricing that hasn't come in fully being more ramped in the fourth quarter? Comps, is it something you're fundamentally seeing in the demand outlook that gives you a little bit more confidence in the fourth quarter because the inflection of growth is above normal seasonality. And so I just want to make sure I understand what those puts and takes are to get you to that positive fourth quarter number that's implied with the guide? Mark Sheahan: Yes. I think we're -- we kept the guide. I think that, obviously, you'll do the math, and you guys can figure out that it looks like we're going to be on the low end of the guide when we get there. We're not likely to get all the way up to the high end of the low single-digit guidance. But despite where we're at year-to-date, we're down about 1%. We think with our incremental pricing actions that we put in, the order rates have been stable, that somewhat better in the third quarter than what we had seen earlier in the year. Obviously, there's some areas of business that are doing better than others. And then we also have a fairly easy comparison in Q4 with the Contractor business. So you sort of put all that together and our team, our forecasts are rolling up to hitting in somewhere in that low single-digit range. Michael Halloran: So to be clear, it's not like you're assuming there's something fundamentally getting better in the fourth quarter. It's more steady and then you put the other factors in play and then that's how you get to that guide. Mark Sheahan: Exactly. Yes. I think that's fair. Michael Halloran: And if you think about kind of to the second part of -- the second question Deane asked there, when does price cost turn positive for you guys? So when does that drag? Is it with those price increases that you said were coming in the first quarter? Or when you hit the fourth quarter here, does that dynamic normalize out? Mark Sheahan: Yes, I think we'll definitely see it here in Q4. Actually, if you look at Q3 gross margin, if you were to back out the impact of the Corob acquisition, our margins were actually up in Q3. So we are doing okay on the price cost. We'll see that roll through here in Q4 as well. Operator: Our next question comes from the line of Saree Boroditsky of Jefferies. Saree Boroditsky: You alluded to this just a second ago on the price, but it looks like Contractor was the only segment to have a large headwind from product cost. I think you mentioned putting in price increases in North America in January. So just maybe talk through your ability to push through price in that segment versus the others. Mark Sheahan: Yes, it's good, but we are respectful of the fact that we deal with large channel partners, and it's -- conversations happen around this time of the year. They start at that level. We intentionally did not try to push price midyear with them, which I think is appreciated because some of our competitors did. And so, we fully expect that we'll be able to realize some pricing starting at the beginning of the year with our larger channel partners. We did raise prices in Contractor in the spray foam category and the high-performance coatings category and in our line striping and texture businesses. So it's not like we didn't raise prices at all in Contractor. We did hit those categories with the other industrial categories in the September time frame. David Lowe: And you will see in Q4 in our international locations, the product lines, especially we're talking about the Pro Paint line, which, of course, is largely sold through some of these big channel partners here in North America. Price adjustments will be processed there now, and we'll see some benefit even before the end of the quarter in that category, too. Saree Boroditsky: Appreciate the color. It looks like you turned a little less negative on APAC and expansion. Just maybe some -- an update on what you're seeing there and the key driver of that decision to update that -- the pie chart. Mark Sheahan: Yes. I think that the Asia Pacific region, as I said earlier, I think overall, the China business has actually held up better than maybe what we thought. The comments that I made during the opening remarks were targeted at the semiconductor space where despite decent levels of demand, there's still some challenges in getting licenses and getting products into China, which we are hopeful will get cleaned up at some point. That's really, I think, part of the reason why we moved a little bit to a less optimistic view in that region overall. I wouldn't call it a dramatic change, but just kind of a fine-tuning of where we see things at here as we make our way through the year. Operator: Our next question comes from Bryan Blair of Oppenheimer. Bryan Blair: So you're a few quarters in now with the new organizational structure. And obviously, you've been navigating a pretty choppy sluggish backdrop. To date, how has the more market and customer-centric framework helped your team to navigate this volatility and better position for recovery? And then on the side of M&A strategy, has there been a noticeable difference in funnel development? Just curious what "proof points" you could call out? Mark Sheahan: Yes. Thanks for asking. On the One Graco side of the house, I think that it's still fairly early days. But for sure, we're seeing a lot of margin improvement from some of the cost initiatives that we took last year, just look at the industrial incremental margins is probably a good benchmark for you in terms of what we've done there. And we're on track with the targeted number that we had given to you last year. Those things are moving forward quite well. Commercially, the teams are really starting to gel with respect to having distributors be able to carry multiple product lines that they weren't in the past. So we're seeing like upticks in some of the MRO business because those are broad-ranging distributors that carry multiple products, and they're very interested in being able to get access to some things like our lubrication products, for example. We're also getting, I would say, better penetration in some of the international markets like down in Mexico, where historically, maybe we're a little bit more protective in terms of who would get access to products like our Quantum pumps, which are going into a lot of different applications on the process and sanitary side. Well, now we've opened that up a bit, and we're seeing some traction there as well. The teams are working well, but it is still early days. I mean there's growing pains that happen whenever you put multiple business units together and then you also put the regions together. But I'm very happy with what I'm seeing and what I'm hearing from the teams. When I meet with customers, distributors, they're really happy because they view this as us taking down a lot of the walls that maybe prevented them from being able to sell different product categories that they walk by applications every day and they weren't able to have access to, let's say, for example, lubrication products. Well, now they have that. So it's really a matter of getting them trained, making sure that they've got the opportunities. And then if they do and they're trained, we're going to open up those channels for them. So I'm very happy. On the M&A front, it's kind of a continuation. I like the pipeline. We got a lot of companies in there. We're talking with them regularly. We're on top of any of the targets that we're interested in. We've had some success this year. Obviously, with the Color Service acquisition that we announced during the quarter. There's other things in the pipeline that we're also excited about. But -- it is a -- for sure, it is a secondary to our organic growth strategy. We want to execute on M&A. We like these businesses where they're technology-based, where we think we can add some value, where they're growing, where we like the management team where we can add value. And we're continuing to push those types of opportunities pretty aggressively here at Graco. So hopefully, some stuff pops here over the next 6 to 12 months, but I think we're in a good spot. Bryan Blair: All very encouraging. I appreciate the color. It looks like top line contribution from your acquisitions pretty solid, at least in combination. Maybe offer a quick update on Corob and Color Service integration. I know the latter is still quite early stage. Just how they're performing relative to the deal model to date. Mark Sheahan: Yes. I think that for sure, Corob is coming in right where we thought it would be, which was our expectation was that we want to make sure that we retain what we had seen from them previously in the earlier year in terms of their revenue. So we feel really good about where that one is at. No surprises, great business, great management team. Super excited on how we can help them collaborate here better in North America, particularly with some of the larger channel partners like the Home Centers and the Pro Paint side, where their penetration isn't as good as some of their competition. So very good there. Color Service, yes, brand new. It is part of the Gema Powder business. It's being managed by a leadership team that is actually in charge of running our SAT vertical lines business. They're both in Italy. They're closely located to one another. Those teams are -- it's really early days, but they've got ideas as well on how to integrate and how to implement some of the best practices that the Gema organization has shown over the years into the Color Service business model. So we're excited about that one, too. It's a nice technology business. They're solving customers' problems. They're moving materials that people care about. It fits really well with what we're trying to do. David Lowe: Yes. And I would just add on the Color Service side. They take us into some large markets that historically we haven't had a lot of exposure to like the textile market, tire market. And those could be good learnings in addition to, as Mark referred to, their powder technology expertise that our powder equipment business is quite excited about. Operator: Our next question comes from the line of Andrew Buscaglia of BNP Paribas. Andrew Buscaglia: I just want to dig in on one comment you've been making in the last several quarters on vehicle service. First off, how big is that? And then it just seems to be an interesting market that's bucking a lot of trends you're seeing across, I guess, general automotive. And what are the dynamics there driving such good growth for you guys? Mark Sheahan: Yes. We don't break out the revenue on that, but it is a nice business for us. Actually, it was the business that Graco started with back in 1926. So we've been in it for quite a long time. I think that the teams would tell you that probably the biggest driver of the demand here more recently has been our focus on creating fluid management systems that really track the information by vehicle in terms of the amounts of fluids that are being dispensed. So going back to these are materials that people care about. They're expensive, they matter, making sure that every single vehicle gets lubricated appropriately and that they're tracking the inventory of fluids that they need to be able to make sure that, that service is done correctly and having that tie into the back-office systems where they can do demand planning, order planning, schedule when the guy needs to come to take out the used oil, all those things. We bring a really nice package together for a lot of the larger fleets and auto dealerships and large users of this type of equipment, and that's really been a nice recurring theme for that group. But it started with the product and the technology. David Lowe: And I would just add that motivating these dealers that Mark mentioned is the fact that along with their used car activity, this is -- service is a very profitable area for them. And anything they can do to expand the share of wallet of either the customers or the manufacturers during the early years of a new car service period is very interesting to them. Andrew Buscaglia: Interesting. Okay. And your free cash flow, it's been delivering really strong conversion lately. It's -- you guys probably should do over 100% free cash flow conversion this year. I think that's the second year in a row now, and you're typically historically more of like a 80% to 90% converter. Is this kind of the new normal going forward? And what is behind that? And how sustainable is that going forward? Mark Sheahan: Yes. I don't know that I would -- I don't know that I have a view on whether it's a new normal or not, but I would tell you that it is something that we're focused on. Cash matters, we know that. We are challenging our teams to make sure that we're not overutilizing the balance sheet when it comes to things like inventory and accounts receivable. I will say that the One Graco initiative helped clean some of that stuff up, where in the past, you've had multiple factories. Every division had their own factory. Every division had their own warehouse and operations around that. So being able to put that all under one organization has really driven a lot of improvements. It's early days for us in terms of what we think we have available to us and improvements, but it is getting a lot of attention and focus on our end because we all know that it is a very important metric, and it is a value creator for the company. And that's not something that we take lightly, and it's not something that we have lost sight of. And I feel like we're in a really good spot to continue to drive improvements going forward. David, I don't know if you have anything. David Lowe: No, I think that even on the -- I think an important point is the One Graco point is that we didn't take the steps as a strategy to drive operations. But as we talk to our operating team, sort of quarter-by-quarter, they're finding opportunities where they can eliminate duplication activities, have these centers of excellence that we've talked about before. And not only can it improve quality, improve service levels, there's really money to be saved on the factory floor by eliminating those. Mark Sheahan: Yes. The only other thing I might add, too, just as I was thinking about it is over the last 5 years, we've added a lot of production capability here at Graco. We've expanded multiple facilities. We've broke ground on a bunch of new ones. We're in really good shape brick-and-mortar-wise. We did announce earlier in the year that we're going to be consolidating operations out of our Minneapolis factory into currently existing Graco facilities, both here in Minnesota as well as in South Dakota and down in Ohio. So being able to do that, those types of things, again, kind of lines up with One Graco. It might have been harder to do that under the old regime, but now being able to really close a factory here and move all the production into these new state-of-the-art facilities is pretty exciting, plus all the overhead cost, infrastructure, things of keeping a factory up and running will go away. Operator: Our next question comes from Joe Ritchie of Goldman Sachs. Joseph Ritchie: Just -- I was curious around the additional disclosure you guys gave this quarter on backlog because I historically have just never thought of you guys as a backlog company. And so I just wanted to get a better understanding as to what you were trying to, I don't know, signal, not signal by providing that information. Mark Sheahan: Yes. We thought it would be helpful, and that's why we put it in there. You're right. We don't normally talk about it. But when you just look at the third quarter in and of itself, last year, we did have a significant amount of backlog that flowed through the top line to the tune of about $25 million, $30 million, something like that. Some of that was in our industrial business on the Gema Powder side, on some of the sealants and adhesive systems that were being sold during that time period. And then part of it, too, was on the contractor side as well, where they had some new products that were a little bit late on the launch cycle last year. So they had built up some orders and got those shipped out in Q3. What I'll say is that right now, our backlog is about where it was at the beginning of the year, and we feel like that is a really good place to be in. We don't have any more headwinds. Our backlog is in the neighborhood of $225 million, $230 million. I'm looking at Chris. He's nodding his head. At one time, our backlog was $500 million at Graco. And that was obviously when the supply chain crisis happened and all those orders come flying in and inflation is hitting and everyone is putting their orders in ahead of time. So we've really unwound that now over the last 2.5, 3 years, and we're at a point now where it's really back to a more or less a book and ship business with the exception of maybe the Gema Powder business, which is more project-based. Joseph Ritchie: Got it. That's super helpful. And do appreciate that context. And I know, look, I know that you guys don't give guidance outside of your expectations for growth for the entire year. But as you kind of think about maybe kind of like an early framework for 2026, what's interesting to me is that you look across your different businesses and look, outside of expansion, of late, you really hadn't seen a lot of growth across Contract or Industrial, but your margin expansion in Industrial, particularly has been notable. I'm just trying to get a sense for how to think about maybe segment margins going forward into 2026. And so any kind of qualitative or quantitative comment would be helpful. David Lowe: Well, I think the key to margins in our business model is going to be the volumes. I think that we believe one of our sort of bedrock ways we think about our business is in all of our businesses, we have opportunities to improve margins. And I've demonstrated I'm not much of a forecaster in terms of when the business is going to turn. But I do believe with some volume growth, moderate volume growth in Industrial and in Contractor, when that happens, it can carry these margins that aren't bad today, I think, is your point, to an even higher level. Mark Sheahan: Yes. I would just say it, too, that we're really good operators at Graco. We -- I think we do a great job in terms of getting our teams oriented around making sure that we're not spending resources that we don't need to spend. And as we head into next year, I think that, that's going to be the go-in mantra that we're really going to keep a close eye on our expenses, manage that well. We get some tailwind, hopefully, on some of the pricing actions that we've done. And if we get a little bit of help on the -- half of our business is tied in with commercial construction, housing, those end markets, contractor-type markets. If we get any help on that, as David said, the volumes will really, really help the equation. Operator: Our next question comes from Jeff Hammond of KeyBanc Capital Markets. Mitchell Moore: This is Mitch Moore on for Jeff. Maybe first, I know there's a lot of moving pieces with the macro right now, but how should we be thinking about the magnitude of the price increases for early 2026 in Contractor? And then more broadly for the segments, does the fact that this recent pricing -- you did this recent pricing action change your view on doing another price increase here in a couple of months? Mark Sheahan: Yes. So we're not going to comment on the level of the pricing with the Home Centers and the Pro channel just because those negotiations are happening and our teams are working. I don't want to say anything that is -- put them in a bad spot. So I would expect that we're going to get what we are proposing, which will be reasonable. It will be fact-based. It will be based on what we're seeing for input costs. We're very transparent. We share all that information with them, and also based on what we view pricing in the market to look like. So we're expecting that those will kick in, in the January time frame. As of -- the rest of it, I think in terms of what else we might do in other business units, I'm going to leave that up to them. Obviously, to the extent that we think that we have the ability to raise prices again in 2026, we'll do that. But I think we are also cognizant of the fact that over the last 3 to 5 years, there's been a lot of pricing that's going on in our end markets. So it's really competitive based and there will likely be some targeted price increases, but we -- we're aware of the fact that is a market where because of all the activity on the pricing front, including the stuff that we just did, my preference would be to not push quite as hard as what we have. Mitchell Moore: Okay. That's helpful. And then just maybe sticking with pricing and competition and tariffs. I was just wondering, particularly with the DIY and Pro Paint channels, just wondering if there's been any evidence of share shift towards Graco versus some of your foreign competition? Mark Sheahan: I don't think that that's something that we can quantify because it's really difficult. But I will tell you that in the Home Center channel in North America, which is like really the primary channel for those types of products, their business is down pretty significantly. So are we down more than our competition? Are we down less? It's really hard to know. I just know that it's down. And their foot traffic is down, their level of business activity is down. It ties back in with this whole turnover, affordability, remodeling. Those markets have just been pretty flat to down, and I think we're seeing that in that channel. So it's hard to know whether we're doing -- we're not as bad as our competitors, but I don't like the fact that we're down. David Lowe: Yes. The premise is, of course, that everybody has a different -- somewhat different manufacturing footprint. And sometimes they go for price and sometimes they have to lump it. And I think that, that applies really across most of our niche businesses is that we could be talking about liquid finishing too, and each of the major manufacturers have very different global footprint. So there's frequently a story behind the story. But Mark's underlying point is absolutely right on. In the short term, there's switching costs, which tend to make our relationship sticky. But big picture, long term, products have to be priced as to what the market will bear. Operator: Our next question comes from the line of Matt Summerville of D.A. Davidson. Matt Summerville: Just a couple of quick ones. Do you have an early read on what the Contractor kind of new product pipeline looks for 2026 as you think about maybe trying to use innovation to reinvigorate demand if we're going to be in this, I'll just call it, general housing malaise for longer things maybe to help stimulate a replacement cycle? Or is that something maybe you've already done in the recent past? Mark Sheahan: I would say the pipeline looks pretty similar to what we've experienced over the last few years. I'd call it more of a normal year, some additions in the paint category, some in the line striping category and some in the texture category. But it's a good pipeline. It should help drive some demand. Yes. So I'd kind of a normal year next year in terms of what we're seeing. Matt Summerville: And then you mentioned in Contractor, I think it was in your prepared remarks that you're seeing both Home Center and Pro Paint customers tightly manage inventory. Do you expect inventories to further decline into calendar year-end? Or are they running about as lean as you would expect them to run given the environment we're in? Mark Sheahan: Yes. I think they're pretty smart. I think that they're -- I don't sense that they've got a lot of inventory that they got to get rid of or deal with here. I think that they're just managing it to the levels of the business that they're seeing. Operator: Our next question comes from Walter Liptak of Seaport Research. Walter Liptak: I wanted to ask kind of similar to what Matt was just asking on 2026. I know you don't get a whole lot of visibility, but I wonder if you could comment a little bit about maybe in Industrial, some of those capital projects, is there a lot of quotes out there? Could they get released? And then when you think about 2026 and the One Graco and kind of the new go-to-market strategies, all things being equal, could you get another percent or so of organic growth just from your own kind of strategic changes? Mark Sheahan: Yes. I think that I'll take the second one. That's what we're driving for is you don't go through all the work to do this without really expecting that your channel partners are going to get access to more products and sell more and have it easier to do business with. I think it translates into growth for us vis-a-vis what we would have had under the old regime. I haven't put a number to it. I don't know if it's a percentage thing, but that is definitely the reason why we did it. David Lowe: I'll take a shot on the investment side, your first question. When we look around -- when we sell to so many different markets, it's always hard to generalize. And so we can always find 3 or 4 positive stories, a couple of disappointments. What I would say in terms of quotation activity and discussions around projects, which is, while we're short cycle, we sometimes have an indication that a major customer is working on, say, a new paint line or a new sealant line or something like that. We have good quotation activity in traditional Graco markets like farm and construction equipment. Even throughout the, call it, the turbulent times of the last couple of years, automotive, as a business, both in the legacy and the EV has been consistent in making investments. And when I talk about other -- some of the other niche markets that we serve, they get pretty small, so we can have a couple of orders, say, from the commercial aerospace market. There aren't that many manufacturers around the world, but we have heard of investment possibilities that are at least intriguing going into the coming year. But of course, there's markets that have been soft, as we've talked about late, both on the construction and on the industrial side, especially those markets that serve the construction industry like window and door, furniture, some of the white goods people that could swap over into a couple of -- 2 or 3 of our different business units. On the construction side, I would say our premise that you've heard us talk about, Walt, over the last 5 years hasn't changed. We're still underbuilt. We have a generation of people that if we can see some improvement in affordability, and that does start with mortgage rates. That's why we track them probably as closely as you people do. We really believe that when we have a little bit better dynamics there, there's a lot of housing to be constructed. And as we've already touched on, a lot of remodel and repaint work that will help us. Walter Liptak: Okay. Okay. Great. I appreciate the kind of thoughts on that macro. Maybe another one that's on 2026. When you think about the One Graco and there's a profit component of it a margin component that you talked about as well as the organic growth component, which one is easier, which one could you see the most benefits from in 2026? Is it more top line? Or is it more on the profit improvement? Mark Sheahan: Yes. I think for sure, if we can get volume on the top line, it's going to really be nice for us. So I'd say that one. Operator: [Operator Instructions] Our next question comes from Brad Hewitt of Wolfe Research. Bradley Hewitt: So as we think about contractor margins, it looks like you've done about 28% margins year-to-date, excluding Corob. I guess how do you think about incremental margins for Contractor going forward? And how much volume recovery do you think is necessary to get back to kind of the 29% to 30% zone ex-Corob? Mark Sheahan: Yes. I don't think a lot of volume is needed. Obviously, the pricing is going to help us offset some of the tariff costs. Volume starts coming back, then you can -- you realize a lot of efficiencies in the factory that we're just not seeing when volumes are flat or even slightly down. So I have no concerns whatsoever in terms of them getting back up to those kinds of margin rates even with a very small amount of volume increase. Bradley Hewitt: Okay. Great. And then curious if you could provide a little more color on what you're seeing in the white knight business from a growth perspective this year. And then from a medium-term perspective, is there potentially any change to your thoughts on the growth algorithm for that business as a result of the proposed sectoral tariffs on semiconductors? Mark Sheahan: Yes. I don't know that we are going to be able to give you like specifics on revenue for the white knight business, but it has come back. Obviously, everyone knows that there was about a 2-year period there where a lot of those investments were not happening, but it's a cyclical business, and we recognize that and things have picked up there, and they are getting orders, and we're happy about that. But I think as I said in the earlier comments, they're not back to the levels that they were at a couple of years ago. The macro still look pretty favorable. There's still a lot of investment going on. I'm sure that we'll be able to get our fair share of that. Operator: As there are no further questions, I will now turn the conference over to Mark Sheahan. Mark Sheahan: Okay. Well, I want to thank everyone for participating today, and I look forward to chatting with you down the road. Operator: This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
Operator: Good day, and welcome to Selective Insurance Group Third Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Brad Wilson, Senior Vice President, Investor Relations and Treasurer. Please go ahead. Brad Wilson: Good morning. Thank you for joining Selective's Third Quarter 2025 Earnings Conference Call. Yesterday, we posted our earnings press release, financial supplement and investor presentation on selective.com's Investors section. A replay of the webcast will be available there shortly after this call. John Marchioni, our Chairman of the Board, President and Chief Executive Officer; and Patrick Brennan, Executive Vice President and Chief Financial Officer, will discuss third quarter results and take your questions. We will reference non-GAAP measures that insurance and investment professionals use to evaluate operational and financial performance. These non-GAAP measures include operating income, operating return on common equity and adjusted book value per common share. The financial supplements on our website include GAAP reconciliations to any referenced non-GAAP financial measures. We will also make statements and projections about our future performance. These are forward-looking statements under the Private Securities Litigation Reform Act of 1995, not guarantees of future performance. These statements are subject to risks and uncertainties that we disclose in our annual, quarterly and current reports filed with the SEC. We undertake no obligation to update or revise any forward-looking statements. Now I'll turn the call over to John. John J. Marchioni: Thanks, Brad, and good morning. This quarter, we delivered an operating return on equity of 13.2%, driven by strong investment income, which increased 18% year-over-year. We are on track to deliver full year operating ROE in the 14% range. However, our combined ratio guidance of 97% to 98% exceeds our 95% long-term target. To address this, we are prioritizing profit improvement and moderating premium growth. Risk selection, granular and accurate risk pricing and prompt fair claims adjudication are foundational capabilities we have built over many decades. We have a solid foundation but are continuing to strengthen these core competencies to compete effectively in this dynamic environment. Across the company, we are sharpening our focus on a set of key priorities. First, relentlessly improving on the fundamentals across risk selection, individual policy pricing and claim outcomes; second, diversifying revenue and income within and across our 3 insurance segments; and third, further leveraging our use of data, analytics and technology, including artificial intelligence to drive operational efficiency and improved underwriting and claim outcomes. Turning to results. We recorded unfavorable prior year casualty reserve development of $40 million or 3.3 points in the quarter. $35 million relates to commercial auto and $5 million to personal auto. Unfavorable prior year development in both lines is attributed to the 2024 accident year and is primarily driven by the state of New Jersey. With recent prior accident year reserve strengthening in each of the last 2 quarters, we refined our view of the current accident year for commercial auto. This adjustment added just under 5 points to the current year casualty loss cost for the lines year-to-date combined ratio. For the quarter, the pressure in casualty lines was offset by light property catastrophe activity and favorable non-catastrophe property results. In total, our combined ratio for the quarter was 98.6%. As you know, we book our best estimate each quarter, incorporating new and emerging information as it becomes available. Consistent with our long-standing practice, we continue to engage an independent party to conduct semiannual reserve reviews and sign our actuarial statement of opinions. Over the past 15 months, we have supplemented these external reviews by engaging other independent third parties to evaluate our reserving, planning and claims processes. Through their reviews, the outside firms have provided us with additional industry perspective on current loss trends and best practices. Their reviews confirm that our actuarial processes are reasonable and consistent with best practices for methodology, data and approach. Most recently, we had an independent review of our overall casualty reserve adequacy completed. It indicated that our booked reserves were in a reasonable range and importantly, above the third-party central estimate. The third-party review confirmed that our approach was somewhat more responsive to recent elevated trends they are seeing industry-wide. Consequently, we have greater confidence in our overall reserves, and we maintained our actuarial approach and management processes to determine our best estimate for the quarter. The claims reviews include evaluations of samples from both open and closed claim files. The findings on open claims indicate that our claims management and reserving practices are consistent with internal guidelines, aligned with industry best practices and that valuations have been reasonable. The review of closed claims is ongoing. We will continue to incorporate enhancement recommendations from these reviews, augmenting our other ongoing claims handling and litigation management process and system improvements. Last quarter, we took reserving action in commercial auto liability responding to increasing paid severities. This quarter, these trends escalated in specific jurisdictions, most notably New Jersey. Otherwise, auto liability loss ratios have been in line with our expectations with improving accident year loss ratios driven by consistent rate increases. While rate increases continue to be an important lever, rate alone will not be sufficient to drive and maintain long-term profitability in this line, particularly in certain jurisdictions. The legislative, regulatory and judicial environments in these jurisdictions present specific challenges, and we intend to take significant targeted underwriting actions. Specifically for commercial auto, several actions are underway. In early September, we deployed an updated rating plan and predictive modeling to provide more granular pricing segmentation for the auto line, incorporating several enhanced variables, including additional vehicle and driver-specific criteria. We've implemented tighter underwriting guidelines on fleet exposures, supported by state-level tactics and analytics to better identify and target risks. We are targeting certain segments and states for higher penetration of Compass, our telematics solution. And in further support of our risk management specialist engagement on fleet safety with our insurers, we are actively promoting increased use of commercial auto self-assessments in our risk management center, which provides customers online risk management guidance and expertise. We continue to invest in processes and tools to further elevate our underwriting, pricing and claims sophistication. While this is not a new initiative, there are opportunities to sharpen fundamental disciplines, including risk selection, individual risk pricing and claims adjudication. Maintaining our focus and sense of urgency is critical to improving underwriting margins and supporting long-term profitable growth. We continue to diversify our portfolio by expanding our Standard Commercial Lines footprint. Since 2017, we have strategically added 14 states with 2 more planned in 2026. Geographic expansion has significantly increased our addressable market, and we have advanced our stated goal of operating our Standard Commercial Lines business with a near national footprint. Going forward, we will continue to pursue opportunities to further diversify our business within and across our 3 insurance segments. Before I turn the call over to Patrick, I want to reinforce 3 foundational points shaping our performance and long-term strategy. First, we firmly believe that insurance requires a long-term perspective, particularly with long-tail casualty lines. To that end, we will trade short-term impacts for long-term sustainable success. By reacting quickly to current claim trends, we are better positioned to ensure our pricing indications are appropriately positioned to achieve our long-term underwriting margin targets. Second, we believe that prudent decisions made now with the best information available are the surest way to deliver value over time. Analyzing new information requires us to constantly refine our views of the market and take appropriate and sometimes difficult actions. This ongoing process reinforces the importance of maintaining a long-term perspective. Third, we continue to invest to deliver long-term profitable growth even as the market is increasingly competitive. Growth levers include achieving greater market share and segment diversification in Standard Commercial Lines, potential geographic expansion in Personal Lines and increasing our product and distribution capabilities in E&S and other specialty lines. We also prioritize returning approximately 20% to 25% of earnings through our shareholder dividend. In addition, guided by our capital strength and the valuation of our stock, we will opportunistically repurchase shares as we did this quarter. The $36 million of repurchases in the quarter, the new $200 million purchase -- repurchase authorization and a 13% dividend increase reflect our confidence in the path forward and the value we perceive in our stock. Our full year guidance implies an underlying combined ratio of 91% to 92%, up 1 point from our expectation at the beginning of the year, driven by our actions to strengthen the current accident year. We remain committed to taking a longer-term perspective, making tough decisions when necessary and investing in profitable growth to deliver long-term value to shareholders. Now I will turn it over to Patrick, who will provide more details about our financial results. Patrick Brennan: Thanks, John, and good morning, everyone. For the quarter, fully diluted EPS was $1.85, up 26% from a year ago. Non-GAAP operating EPS was $1.75, up 25%. Our return on equity was 14% and our operating return on equity was 13.2%, with continued strong performance from the investment portfolio. The GAAP combined ratio was 98.6%, elevated primarily due to 3.3 points of unfavorable prior year casualty reserve development and 6.2 points of higher current year casualty loss costs. Catastrophe losses were 2.1 points, significantly better than anticipated and 11.3 points better than the prior year period. Our full year guidance now includes a 4-point catastrophe load, reflecting lower-than-expected catastrophe losses through the first 9 months. The overall underlying combined ratio for the quarter was 93.2%, up from 86.1% in the third quarter of 2024, reflecting higher current year casualty loss costs. Non-catastrophe property losses, although better than expected, were 0.9 points higher than last year. Year-to-date, the underlying combined ratio was 91.6%, 2.6 points higher than the first 9 months of 2024. Non-catastrophe property losses were 14.7 points year-to-date. This was an 80 basis point improvement year-over-year and reflected the continued benefits from property lines earned rate and the tightening of terms and conditions over the past few years. Year-to-date, these benefits were eclipsed by a 3.1 point increase in current year casualty loss costs. The expense ratio increased by 40 basis points, primarily driven by higher expected employee compensation compared to last year's lower profit-based payouts. We remain disciplined in managing expenses but continue to invest across our business to support scale, enhance decision-making and improve operational efficiency. In Standard Commercial Lines, we reported a 101.1% combined ratio this quarter, which included 3.7 points of unfavorable prior year casualty development and 6.6 points of higher current year casualty loss costs. As John described, the current environment demands strong underwriting and pricing discipline. Consequently, premium growth in the quarter slowed to 4% .Renewal pure price increased 8.9% or 10%, excluding workers' compensation. The biggest increases were in general liability at 11.4% and commercial auto at 10%. Renewal premium change for property was 15.5%, including 5.1 points of exposure increase. Retention for the quarter was 82%, down 4 points from a year ago and 1 point from last quarter. The decrease reflects our pricing and underwriting actions as well as an increasingly competitive environment. Excess and surplus lines grew 14% in the quarter, driven by average renewal pure price increases of 8.3%. The combined ratio was 76.2%. We see continued growth opportunities in this segment despite an increasingly competitive market. Our deliberate E&S strategies include introducing new products, expanding our brokerage business and investing in operational efficiency and piloting expanded distribution by giving retail agents access to our E&S offerings. We are excited about this segment's forward growth prospects. The Personal Lines combined ratio was 110.1% this quarter, 12 points better than a year ago. However, our New Jersey personal auto reserving actions added 4.9 points of unfavorable prior year casualty development from the 2024 accident year. It also drove the 7.2 point increase in current year casualty loss cost this quarter. Personal Lines net premiums written declined 6%. However, target business grew 12% in the quarter, with nearly all new business being in our target mass affluent market. Renewal pure price for the quarter was 16.9%. Third quarter after-tax net investment income was $110 million, up 18% from a year ago. This income generated 13.6 points of return on equity, up 50 basis points from the third quarter of 2024. Our investment portfolio continues to be positioned conservatively, and we have not significantly changed our investment strategy with an average credit quality of A+ and duration of 4.1 years. We delivered strong operating cash flow in the quarter, supporting continued portfolio growth. The average new purchase yield was an attractive 5.8% pretax, exceeding the quarter end average pretax book yield of 5.1%. We expect this embedded book yield to provide a durable source of future investment income even if interest rates decline. Turning to capital management. As John mentioned, we continue to prioritize profitable growth within our insurance business and aim to return 20% to 25% of our earnings through dividends. We also opportunistically repurchased shares. These actions reflect our commitment to delivering long-term value to shareholders. We are pleased to announce a 13% increase in our quarterly dividend, our 12th consecutive annual increase. We also repurchased $36 million of common stock during the quarter with year-to-date repurchases through September totaling $56 million. Given the increased level of share repurchases in 2025, our Board of Directors authorized a new $200 million share repurchase program. This replaces the previous authorization, and we expect to deploy it opportunistically. We ended the quarter with $3.5 billion of GAAP equity and $3.4 billion of statutory surplus. Book value per share increased 13% in the first 9 months of the year, driven by our profitability to the $2.77 per share reduction in after-tax net unrealized losses. Debt to total capital declined modestly to 20.5%, below our internal threshold of 25%. In light of results through the first 9 months of the year, we have revised our 2025 guidance as follows. First, we expect our 2025 GAAP combined ratio to be between 97% and 98%, in line with our prior guidance. Our guidance now includes 4 points of catastrophe losses, lower than our previous 6-point estimate, reflecting favorable results through the first 9 months of the year. Guidance also includes the impact of prior year casualty reserve development reported through the third quarter, which equals approximately 2 points on the full year combined ratio. It also assumes no additional prior year casualty reserve development and no further change in loss cost estimates. We do not make assumptions about future reserve development as we book our best estimate each quarter. Second, we also expect after-tax net investment income of $420 million, up from prior guidance of $415 million. We also expect an overall effective tax rate of 21.5% and an estimated 61.1 million fully diluted weighted average shares, reflecting repurchases in the first 9 months of the year, and we assume no additional repurchases under our share repurchase authorization. With that, I'll now turn it over to Q&A. Operator, please start our question-and-answer session. Operator: [Operator Instructions] The first question comes from Michael Phillips with Oppenheimer. Michael Phillips: John, I appreciate the comments in the opening about the commercial auto, and it seems like this quarter was isolated to one accident year in one state, predominantly New Jersey. But I guess if we go back to last year when you were taking some GL charges, I -- just correct me if I'm wrong here on my perception of kind of the comments, GL charges last year, you got some questions about could this spill over into commercial auto? And it seemed pretty confident that it wouldn't. The last 2 quarters, granted $60 million total in 2 quarters isn't a big number, but it's continued 2 quarters in a row. So is my perception right? And if so, kind of what's changed? Maybe just New Jersey, but sort of it seems like commercial auto now is the problem child. And if so, if that wasn't the case before, sort of what's different? John J. Marchioni: Yes, Mike, thanks for the question. So first thing, just going back to the prior comments relative to commercial auto, and you've heard me reference it as probably the earlier evidence of higher severity trends and the evidence of social inflation. I think that comment continues to hold weight. And what I mean by that is if you look back to our public disclosures, we have been carrying a higher assumed loss trend in commercial auto than GL dating back to 2021. And in fact, we increased our GL -- I'm sorry, our commercial auto liability trend assumption to 8.5% in '22 and carried it there. I think what we've seen in the last 2 quarters is a reacceleration of severity trend, particularly in the state of New Jersey. And remember, New Jersey is a bigger state for us in the commercial auto line. It represents about 15% of our countrywide commercial auto premium, and we've seen higher severity emerge there. And I'm happy to talk through some of what we think might be driving that. New Jersey has always been a higher severity state across all casualty lines of business, but we've seen that really impact the last couple of quarters. We didn't point it out last quarter, but it was also the primary driver of our commercial auto emergence that we saw last quarter as well. So I would say that's the change that we've seen and recognized. I think the positive is from non-New Jersey perspective in commercial auto liability, not that there hasn't been some pressure there, but our actual emergence in those other states has held up reasonably well relative to our expectations. Michael Phillips: Okay. Yes, maybe we can get into the details of New Jersey and another venue or here if I think anybody else wants to I appreciate that. I guess second then for me would be, you talked about the added third parties that kind of looked at reserves for you guys, the external reserves reviews. And I'm not sure I heard you correctly. It sounded like -- I mean, one of my takeaways was it sounded like as they look at your reserves and compared to what they see as industry trends, I sort of heard maybe a warning sign that industry looks like there could be some deficiencies and you guys are staying ahead of it. But it sounded like some warning signs for some pockets of deficiency for the industry that just hasn't been recognized yet. And did I hear that right? Is that what you're seeing? John J. Marchioni: Yes. I guess I'll stop short of suggesting what you're saying there with regard to whether or not there's going to be industry challenges going forward. What I will say and reinforce though is the validation from more than one external actuarial expert that has a broader view of the industry that the elevated trends that we're responding to in the more recent accident years are evident across the industry. And that is clearly a statement that we've gotten from them. It's something that we've heard repeatedly from our reinsurance partners, the majority of whom we just met with earlier this month out of the CIAB meeting. And I think that's -- while it doesn't change the results that we're delivering, I think it does suggest that, in fact, this is something that's more widespread. And again, I would encourage you to look over a longer time horizon at both commercial auto liability and general liability and just look over the last 10 years up to and including the -- our current view of the more recent years. And what you see is our performance over the long term continues to hold up really well for commercial auto liability and general liability against the industry. It doesn't change the fact that these lines are under pressure and they're under continued pressure from elevated social inflationary trends, but we're reacting and we're reacting in a way that we think is timely and appropriate. And I'm highly confident that when we look back at these more recent accident years post pandemic as they age for us and everybody else, that our track record and our reputation of being a strong underwriting company history will show that that's continued to be the case. I understand it might not feel that way right now, but that's how we manage our business, and that's how we'll continue to manage our business. Operator: And our next question will come from Michael Zaremski with BMO Capital Markets. Michael Zaremski: Maybe you could explain more of the thought process behind continuing to buy back shares if this reserve review has been leading to the loss ratio profit margin pressure. And you said there's still an ongoing review of closed claims that will or could impact ongoing claims and ultimately reserves. So I guess why not wait until the coast is clear? John J. Marchioni: Well, just to clarify a point, the open -- the open and closed claim reviews were designed to evaluate whether or not there was something happening in the claims organization that might be driving some of this. There's no evidence of that. And based on the early indications we've had because the closed claim review is actually 2/3 complete, there's nothing there that would suggest any issues. With regard to reserving, we book our best estimates, and we continue to book our best estimates, and we have high conviction in those estimates, and that conviction has only been reinforced by the external reviews. I think the challenge right now is our results on an absolute basis are not the issue. It's our results on a relative to industry basis that is causing the pressure. And with a 6% top line growth rate and as we said, an expectation for the full year of a 14% ROE, we are building book value per share. We're building capital and surplus. And as a result of that, that is the Board's way of expressing confidence in our forward earnings... Michael Zaremski: Got it. Okay. As a follow-up, on commercial auto, you took up the pick, I think, 5-ish points. How much of that was influenced by the study that you commissioned versus just things you're seeing? Or is it all commingled? John J. Marchioni: Yes. That's a result of our internal analysis. Again, the point we made about the outcome of the third-party review of adequacy was that we are above their central estimate in total. And the reaction as continues to be the case is based on our internal evaluation. And again, with regard to commercial auto, that continues to be predominantly driven by the state of New Jersey. And based on what we see because we have good insight into other company filings and other companies' indications, frequency and severity trends in New Jersey over the last couple of years have accelerated. And that's what we're reacting to, and we're seeing that in actual claim emergence on the paid and incurred side in the state of New Jersey. Michael Zaremski: Got it. And my last follow-up, thought I believe you said 8.5% is your trend assumption of commercial auto. Is that correct? John J. Marchioni: Yes. So it's been sitting in that range dating back to 2022. And again, those were our assumed loss trends that we incorporated into our expected loss ratios. Michael Zaremski: Yes. And so if we look at the 8.5%, is it a correct statement for me to say that if we look at your historical loss ratio development for commercial auto specifically in vintages that are more seasoned, so let's say, '18, '19, I'm going to exclude '20 because of the pandemic year in '21. So if I look at those vintages that are more seasoned and see how the loss ratio has trended, is it correct to say that loss inflation on those vintages has been higher than 8.5%? John J. Marchioni: No, no, we're talking about the post-pandemic accident years. I mean, for commercial auto liability, those pre-pandemic years are quite mature at this point. And the pressure we've seen of late has not been driven at all by those pre-pandemic accident years. So I would actually say those are -- there's no change with regard to those. It's more of these recent accident years we're responding to. And again, I think it's important to note that our average commercial auto BI rate over the last 4 to 5 years is a little over 10%. So while trends have been elevated, the earned rate level has been largely offsetting that impact when you look at loss ratios and on level and trend them and look at the pre-pandemic block of years to where the current years are, and that's how you want to think about that... Operator: And the next question will come from Meyer Shields with KBW. Unknown Analyst: This is [ Dan ] on for Meyer. My first question is on the general liability reserves. I know you reported no reserve development. Just curious, is there any shift among individual accident years? John J. Marchioni: No, there's nothing notable with regard to any accident year movement within GL. Those are stable overall. Unknown Analyst: Got it. My second question is on your expansion to the new state. You mentioned entering -- enters this quarter, entering Montana, [ Wyoming ] next year. Just curious what you're seeing in these markets, what the initial agent receptivity on that? And what feedback do you have? John J. Marchioni: Yes. I would say -- and this -- our expansion has been ongoing since 2017 and results and agency reaction has been favorable. Performance has been in line with our expectations, and I think that continues to be the case. And again, as I pointed out in my prepared remarks, one of our organizational priorities is to continue to diversify our business. And part of that diversification is geographic, part of it is line of business and product and part of it is across the 3 primary business segments of commercial, personal and E&S. And that geo expansion is a big part of that diversification in standard commercial lines and part of it is we're talking a lot about New Jersey so far this morning. It's a state that we have performed well across all lines over the long term, but there is a concentration that we were trying to manage. And over the last decade, our New Jersey share has gone from north of 20% to about 16%. And we think that will continue to happen going forward with our expansion. And I think that's just part of how we think about the business longer term is to drive greater diversification in both revenue and income. Unknown Analyst: Got it. Just a follow-up on that. Are there any lines or customer segments you're seeing especially strong interest fund distribution component? John J. Marchioni: I would say our performance in our expansion states over the last 8 years, the mix of business is generally reflective of the mix we see in our existing footprint on a line and a segment basis. Operator: And the next question will come from Paul Newsome with Piper Sandler. Jon Paul Newsome: So I guess the first question would be any thoughts you could give us on how we should think about premium growth? I mean I think we could figure out the size of your commercial auto business in New Jersey. But I guess the follow-on question would be if that business tends to shrink as you become more conservative, does that affect the package business? I think of you folks as being a package provider more than anything else. Any thoughts that kind of might give -- push us in the right direction would be great. John J. Marchioni: Yes, sure. So I mean I'll give you some sort of higher-level thoughts around this. First and foremost, and I'll say this has always been the case. We think about growth as more of an outcome as opposed to a target. And for us, it's always about striving to achieve your target margins and then growth will be determined in part by market dynamics and whether the market is reacting in a similar fashion and has a similar view of indicated rate or adequate rate levels on a state and line of business basis. And there's no question, and you hear the commentary and you see the industry pricing surveys that would suggest that our pricing -- our actual pricing being achieved in GL and commercial auto liability are above where industry surveys are currently showing market pricing mix. That has and will continue, we expect to put some pressure on conversion rates. And as we've said on multiple occasions, that's a trade-off that we're willing to make. And I think what you saw in the quarter is reflective of that. New Jersey, as I mentioned earlier, is about 15% of our auto premium across the country in commercial auto premium. And if you look at New Jersey in total, it's a similar percentage of our footprint. So we are going to -- when we have underperforming pockets of business like we're talking about with regard to New Jersey commercial auto, we will take aggressive action to address that. And that will impact growth without question, and that's a trade-off we're willing to make. Jon Paul Newsome: That sounds good. Another question would be any additional help on thinking about the level of the forward accident year, maybe excluding catastrophe losses. Obviously, you bumped up in this quarter because of the commercial auto issues in New Jersey and other places. But I don't know if that's a good run rate for the future or if we should think about maybe the run rate on your day results is a better run rate. Any thoughts you have there in terms of what might be a higher accident year loss ratio prospectively? And I realize some of this has to do with pricing and perhaps even the lag between getting the pricing and actually bringing in over time. John J. Marchioni: Yes. So I guess, Paul, the best place to really focus, if you look at the 9 months and then look at the full year guidance. The full year guidance of a 97% to 98% with our 4-point assumption relative to cats gets you to an underlying combined ratio on an accident year basis of 91% to 92%. And because you've got 2 points of PYD -- roughly 2 points of PYD in the current year, and you've got the adjustments to the current year casualty loss cost that are adding about 2 points. And then you've got non-cat and expense favorable. So you put all those pieces together. And I think as you're thinking about the run rate, I would focus more on that 91% to 92% that underlies our guidance for the full year of 97% to 98%. And I'm happy to go through those pieces, yes, I know there's moving pieces there, but you have to incorporate the current year loss cost changes that we've been making but you've got to also adjust for the PYD impact. Operator: And the next question will come from Bob Huang with Morgan Stanley. Jian Huang: Yes. So first question is on the 2025 developments. I think last quarter, you talked about 2025 was still favorable to expectations. Can you remind us -- so can you remind us if that is still the case comparing the 2025 picks to the 2024 and the prior picks? John J. Marchioni: Yes. Just I'll clarify one point. So what we've said and we'll continue to say is that claim frequencies in the current year have been running in line with or better than expected, and we pointed particularly to workers' comp as the line that was driving the better-than-expected claim counts. In casualty lines, you never want to react that quickly to favorable claim counts, but those claim counts have continued to come in better than expected. That's what we said last quarter, and that's what I'll repeat again. And that's different from the decision that we made in the quarter to book additional loss ratio impact in the commercial auto line of business specifically and specifically driven or largely driven by the state of New Jersey. Jian Huang: Okay. No, that's helpful. Second question, and apologies, this is a little hypothetical. Does it make sense to kind of find or somehow explore ways to have a bigger -- much, much bigger balance sheet either through like a variety of other ways of thinking about the business going forward? Like wouldn't that kind of reduce the reserve volatility? And would that also maybe better absorb reserve volatility? Is there a way to think about -- does it make sense for Selective to find a way to somehow explore opportunities to have a much bigger balance sheet one way or another? John J. Marchioni: In our view, this business is still about getting the fundamentals right and achieving your target loss ratios. I think -- and again, I realize there's recency bias, and there's been some challenges in an uncertain loss trend environment. And we are a little bit overweight to commercial auto liability and general liability, which has created some near-term challenges. But I think when you look at it over the long term and the way we've optimized the balance sheet and maximize shareholder returns and delivers consistent strong performance from an underwriting perspective. We like the strategy. We like the operating model, and that's going to continue to be our focus. Operator: And the next question comes from Michael Zaremski with BMO Capital Markets. Michael Zaremski: I appreciate you letting me in after follow-ups. One thing that caught my attention was you talked about RPC for property that sounds like accelerating into the [ 15s ]. I think we've been seeing the decel industry wide. What's causing that? John J. Marchioni: I would say that we've seen a little bit of deceleration in property. But in our mind, property is a line that while the results have improved and continue to improve and rate remains strong, it's a line that on a risk-adjusted basis, you have to think about the longer-term variability and volatility in both non-cat and cat property. So our risk-adjusted combined ratio of target for that line is lower. So we're going to continue to try to improve margins there. So -- and the exposure change has been fairly consistent in that renewal premium change that you're referencing and the rate is just under 10%. So that's held in strong, but it's drifted down a little bit. And we would expect based on market dynamics for property -- commercial property pricing to drift down a little bit further, but remain strong against a relatively low exposure trend in that line of business -- or loss trends, sorry, in that line of business. Michael Zaremski: Got it. And lastly, just stepping back, thinking about kind of these corrective actions you're taking to improve profitability. I think when we think of Selective, you all target to have well into the double-digit share of -- I guess, I think you call it share of wallet with your agency partners. And so does that -- and you also talked about the market becoming a bit more competitive overall. So is there -- does it -- in your view, these corrective actions, do they need to be kind of dealt over many, many quarters in order to not let retentions continue falling maybe into the 70s? Is that kind of -- are you walking that line? John J. Marchioni: Yes. It's a great question. First thing I'll say is I think the benefit of depth of relationship that we have and size of relationship we have agency by agency is beneficial because the renewal negotiation ensures that we have good communication back and forth. What I will say is, and I mentioned this, and this was sort of underlies our discussion about improving the fundamentals. It's important that in an environment like this, you execute your pricing and underwriting strategies in as granular a fashion as possible by account, by class, by state, by line of business. And our ability to continue to do that and do that effectively should mitigate some of the downward impact on retention overall. Now again, we are willing to make that trade that push comes to show. But the granularity of our execution will ultimately determine how agents respond to that and how the overall retention rate responds to that. And I'll put that in the category, one of the areas that we'll continue to focus on from a continuous improvement perspective is the granularity of execution. I think we have the tools to do that. We want to make sure we're effectively executing with those tools. Operator: And the next question will come from Michael Phillips with Oppenheimer. Michael Phillips: I have 2 follow-ups also. John, I think you said Jersey frequency severity kind of rising over the last couple of years. If I heard that correctly, does that mean that we should be worried in the future about accident year '23? John J. Marchioni: No, I would suggest that we continue to book our best estimate across all accident years. So our response this quarter -- what we saw this quarter was driven by the '24 accident year, but the actions last quarter were the '22 through '24 accident year. So I would say that we're talking about the commercial auto reserve position across the recent accident years and are acting accordingly across all of those... Michael Phillips: Given the third parties have kind of confirmed and give you some confidence in what you're booking, have you ruled out or have you considered maybe an LPT for your reserves on the casualty side to help give some confidence in what you're booking? John J. Marchioni: Yes. I would say that reinsurance opportunities, including some sort of a cover like that are things that we routinely evaluate but at the same time, these are very recent accident years. We're confident in how we're booking those accident years and the economics on that would not be favorable from our perspective because that -- these are immature years. And anybody who's going to come in on the reinsurance side is going to command a lot of the economics, and that's just not something we think is all that attractive, but we'll continue to evaluate it. We just don't think it makes sense for us at this point. Operator: I am showing no further questions at this time in the queue. I would now like to turn the call back over to John for closing remarks. John J. Marchioni: Well, thank you for joining us. We appreciate the questions and the interest. And as always, please feel free to follow up with Brad with any additional questions you might have. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Gerardo Lapati: Good morning, everyone, and welcome to Alsea's Third Quarter 2025 Earnings Media Conference. My name is Gerardo Lozoya, Head of Investor Relations and Corporate Affairs. Today, you will hear from our Chief Executive Officer, Christian Gurría; and Federico Rodríguez, our Chief Financial Officer. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business, and that future results may differ materially from these statements. Today's call should be considered in conjunction with disclaimers in our earnings release and our most recent Bolsa Mexicana de Valores report. The company is not obliged to update or revise any such forward-looking statements. Please note that unless specified otherwise, the earnings numbers referred to are based on the pre-IFRS 16 standards. I will now hand it over to Christian for his initial remarks. Please go ahead, Chris. Christian Dubernard: Thank you, Gerardo. Good morning, everyone, and thank you for being with us today. Thank you. Today, I'll provide an overview of our third quarter results, covering our financial earnings, regional highlights and key brand developments. I will also highlight our progress on digital transformation, ESG initiatives and expansion strategy. Federico, our CFO, will follow me with an analysis of our results, including revisions to our 2025 guidance. Before we turn to the quarterly results, I want to remind everyone of the continued focus on our strategic priorities that will guide us moving forward. As we mentioned last quarter, our first priority is to continue driving disciplined organic growth. We remain focused on expansion and innovation to drive same-store sales growth, prioritizing traffic over price increases. We will also improve our customer experience and advance our digital capabilities. In addition, we will continue rolling out successful commercial campaigns such as Menu Del Dia from Vips in Mexico and Spain, Tres para mi or three for me in Chili's in Mexico, Paradiso Italiano with Italiannis in Mexico and Gourmet Burgers from Foster's Hollywood, among others, other initiatives, which have consistently improved our product offering and reflect our commitment on innovation. Our second priority is to optimize our brand portfolio. We will prioritize return on investment by ensuring that each brand and store format is aligned with the needs of each regional market. Also, scalability and growth across all brands remain a core focus to unlock their full potential. We are also addressing and analyzing potential divestments on non-core assets to concentrate on the business with the greatest strategic and financial value. Our third priority is to enhance profitability. More value is being generated in our existing stores portfolio through consistent operational improvements by leveraging the strength of what we call high-impact operational talent. Organic growth is supported by strategic new store openings and the remodeling of key locations. As mentioned, 2 stores are being remodeled for every opening as refreshing the existing base delivers faster and more efficient returns on capital. Finally, our fourth priority consists on discipline and strategic capital allocation. We will prioritize growth and productivity initiatives with clear return thresholds. Also, vertical integration and long-term sustainability continue to be central to our strategy. Our CapEx plan is being optimized, adjusting long-term investments to become even more efficient and ensuring every peso invested aligns with our capital allocation priorities as well as different G&A efficiencies that we have been consolidating and working through the year. Now I'll provide an overview of our quarterly performance, including our financial results, regional highlights and key brand developments, along with updates on our digital advancement ESG initiatives and expansion strategy. In the third quarter, we reported a 5.7% year-over-year increase in total sales, reaching MXN 21 billion or a 6.7% increase, excluding foreign exchange effects, same-store sales grew by 4.1%. EBITDA increased 1.8% in the third quarter, reaching MXN 2.9 billion with a margin of 13.7%, decreasing by 50 basis points year-over-year. Regarding brand performance during the third quarter, Starbucks Alsea same-store sales increased by 3.9%. For Starbucks Mexico, same-store sales grew by 3.3%, demonstrating solid in-store performance backed by our loyal customer base. For Starbucks Europe, same-store sales increased by 1.6%, reflecting a challenging environment in France, offset by continued strong momentum in Spain, driven by effective commercial initiatives. Given the strong results in Spain and the importance of the brand in the country, we are very excited about the latest opening of our flagship store in the Santiago Bernabeu Stadium, Starbucks Bernabeu. Finally, in South America, same-store sales rose 9.6%, driven primarily by Argentina. Excluding Argentina, same-store sales declined 1.3%. Nonetheless, there is a sequential improvement in Chile despite lower traffic. Domino's Pizza Alsea posted 2.6% increase in same-store sales. In Mexico, Domino's same-store sales increased 1.6%, driven by our continued efforts in product innovation. In Spain, same-store sales increased by 2.9%, reflecting the ongoing effective promotional efforts and positive customer response to product innovation. In Colombia, Domino's delivered strong results. Same-store sales increased by 9.1%, supported by successful marketing initiatives. Burger King's Alsea same-store sales, excluding Argentina, decreased 1.4%. In Mexico, Burger King reported a decrease in same-store sales of 1.7%. This was driven by a shift of mix towards low price and discount items, combined with a decrease in premium innovation and digital coupon. The full-service restaurant segment delivered a 4% same-store sales growth. This segment remains strong and resilient, supported by marketing campaigns that enhance our product offering and demonstrates our commitment to innovation. Full-service restaurants in Mexico increased by 5.3%, with most brands growing at mid-single-digit pace with Chili's and Italiannis, while Chili's and Italiannis stood out by achieving high single-digit growth. The performance was driven by the strength of our value product menu offering, product innovation and launches. Same-store sales for full-service restaurants in Spain grew 2.4% with Foster Hollywood and Gino's delivering solid growth of 5.5% and 4%, respectively. We are focusing on introducing new and premium products to attract new guests, capitalize on existing traffic and strengthening our customer loyalty. Our global expansion strategy remains focused on prioritizing quality over quantity, targeting the most profitable opportunities across our key markets. We remain committed to delivering strong value to our customers, maintaining our pricing strategy and customer loyalty through our resilient brand offering. In the third quarter, we opened 46 new stores, 35 corporate units and 11 franchises with an emphasis on high traffic and high potential locations. We expect the pace of openings to pick up on the fourth quarter to meet our full year goal for net stores. This approach reflects our commitment to long-term brand positioning and disciplined strategic growth through flagship developments and selective market expansion. Given the profitability and payback of store remodeling, such as increased customer satisfaction and higher sales, we will continue prioritizing a refresh and modernized look across all our locations. Our digital platforms continue to be key drivers of growth. By the end of the quarter, loyalty sales increased 7.9%, reaching MXN 5.1 billion, representing 24.6 million orders and contributing 26.1% of total sales. We also surpassed 8 million active users across our loyalty programs, confirming the strength of our digital engagement. Additionally, we served nearly 33.6 million digital orders in the quarter, totaling MXN 7.3 billion, which represents 37.4% of our total sales. This quarter, we continue to strengthen our sustainability model by aligning our purpose with every aspect of our operations. As part of this effort, we made significant strides towards reducing CO2 emissions, installing over 215 solar panels in Europe and installing 159 kilowatt per hour of power in Europe in Spain. In Mexico, Starbucks served over 1 million beverage in reusable cups and granted 3.9 million -- 3.2 disposable cups as part of our efforts to reduce waste. We also continue to strengthen our social impact through Fundación Alsea and Movimento Va por mi Cuenta, supporting vulnerable communities and driving positive change. As we launch new fundraising campaign, we expect to surpass previous year's results, reinforcing our long-term commitment to responsible, purpose-driven growth. Let me now turn it over to Federico, our CFO, who will provide further insight and financial performance. Thank you. Federico Rodriguez: Thank you, Christian. Good morning, everyone. During the quarter, the sales increased by 5.7%, supported by the brand resilience and a strong performance in Mexico, Spain and Colombia. Excluding foreign exchange effects, sales increased 6.7%. In the third quarter, sales in Mexico were up 7.5% to MXN 11.5 billion. In Europe, sales increased by 8.2% to MXN 6.5 billion, while in euro terms, sales increased by 3.8%. Finally, South America sales fell 4.7% to MXN 3.1 billion. The EBITDA increased by 1.8% with a margin contraction of 50 basis points, mainly due to a loss of operating leverage given the lower consumer environment in the month of September. These impacts were partially offset by the resilience of the brands across most regions, disciplined revenue management and improved SG&A efficiency. In this context, we chose to limit price increases to protect traffic and sustain brand competitiveness with consumer demand slowdown. In Mexico, adjusted EBITDA remained flat as there was lower operating leverage given the softer consumer environment in the month of September. In Europe, adjusted EBITDA increased by 6.2% year-over-year, primarily due to an increase in same-store sales of 2.3%, driven by new products and campaign launches that led to improvements in all brands, offsetting higher labor costs. In South America, adjusted EBITDA decreased by 14.2%, reflecting a lower consumption environment in the region, except for Colombia. A slowdown in consumer activity weighted on operating leverage and contributed to the slow recovery in the region. The net income for the quarter increased 559% year-over-year, reaching MXN 512 million, reflecting a positive noncash effect, which reduced the cost of our U.S.-denominated debt in Mexican pesos terms. The next slide, please. The CapEx for the first 9 months of the year totaled MXN 3.8 billion. Of this total, 77% was allocated to store development initiatives, including the opening of 35 new corporate units, the renovation and remodeling of existing locations and equipment replacement across the brands. The remaining 23% was directed at the strategic projects such as the distribution center in Guadalajara, technological upgrades, process improvements and software licenses, all reinforcing the long-term competitiveness and operational efficiency. At the end of the third quarter, the pre-IFRS 16 [Foreign Language] thank you. The pre-IFRS 16 gross debt decreased by MXN 1.8 billion year-over-year, reaching MXN 51.8 billion. The company's net debt, not counting the impact of IFRS 16 was MXN 34.5 billion, which is MXN 2.5 billion more than it was at the same time last year. This increase reflects the bank loans used to settle the minority stake in the European operations, short-term debt for working capital and CapEx needs. Consolidated net debt reached MXN 47.1 billion, including lease liabilities. At the end of the quarter, 74% of the debt was long term with 67% denominated in Mexican pesos and 33% in euros. We remain focused on maintaining a healthy capital structure supported by prudent financial management. At the end of the quarter, the cash position stood at MXN 4.7 billion. Turning to financial ratios. The total debt to post-IFRS 16 EBITDA ratio closed the quarter at 2.9x, while the net debt-to-EBITDA ratio stood at 2.6x. While we are still committed, we have adjusted the 2025 guidance given the negative impact generated by a lower-than-expected consumption dynamics during the month of September and the ongoing impact of the appreciation of the Mexican peso affecting the top line. Now we expect a high single-digit top line growth and a low single-digit EBITDA growth for the year. I will now pass you over to the operator for the Q&A session. Thank you very much. Operator: [Operator Instructions] The first question is from Mr. Ben Theurer from Barclays. Benjamin Theurer: So 2 ones real quick, just following up on some of the commentary you had about the softness towards the end of the quarter in September and obviously, the guidance adjustment as you look now for slightly lower top line. If you think about the weakness, how has that potentially carried into the fourth quarter in October? And are you seeing any difference between the formats? So thinking coffee versus pizza versus burger versus food service across the board? Are there certain areas that are a little more affected versus others? So just a little more granularity as to the weakness in September, maybe over the last couple of weeks to understand what's driving the guidance revision. Christian Dubernard: Thank you for your question. No, the reality is that, as we mentioned, the third quarter was -- we saw July and August pretty balanced. And then we have an important drop in September. And this was across, in general, brands and geographies. It's not specific to a particular brand. Obviously, as we mentioned in the report, some of the South American countries, we have a slower -- a higher impact in those countries due to the deceleration of consumption. But in general, was across all geographies and markets. And as you asked going into Q4, it's too early. It's been 2 weeks in October. We see a similar trend in October. Nevertheless, we have very strong commercial initiatives in all of our brands and across all of our geographies for Q4, focusing on mainly 3 particular aspects. One is product and customer experience innovation. The second one, value. We can share some examples of some of the initiatives that have been paying off across the year regarding value like Tres para mi in Chili's in Mexico, Paradiso Italiano with Italiannis in Mexico, not just Magic Magicas or Magical Nights in Ginos in Spain and Gourmet Burgers in Fosters and many of the day in some of our brands. which have been continued driving traffic and that. Nevertheless, for Q4, we have very, very strong and powerful innovative and customer experience-driven campaigns that we are confident that will help us drive the traffic during this quarter. But something very important to highlight is always protecting this gross margin while we preserve traffic. We know that during these times of lower consumption or slowdown, the brands that remain loyal to their customers are recognized when traffic comes back. So that's what we are focusing on. Benjamin Theurer: Perfect. And then my second question is you mentioned potential asset disposal. Could you just elaborate, is that more like regions you think of not being worth maintaining? Or is it brands in particular? I mean we've seen, for example, the Burger King transaction in Spain. So is that something maybe in other regions to follow? How should we think about this? Federico Rodriguez: We have been very vocal, Ben, regarding divesting processes that we are setting in different noncore units. I would say that is one of the main priorities, not only for this year, but for the future. And we're still dealing with more than -- for potential buyers for different business units. It is not going to be relevant in terms of the contribution to the top line or to the EBITDA -- but obviously, what we want to address us to all the investors community is the focus that we want to deliver to the main brands such as Starbucks, Domino's Pizza, et cetera. We are still moving forward. Sorry, we cannot elaborate on rumors. But once we have said and we have completed this M&A activity, we'll give you more news. Operator: Our next question is from Mr. Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I'd like to understand a little bit more the add up of the revised guidance, right? And this is on top of one very particular moving part that is FX. You cut revenue and EBITDA similarly, which could suggest as your broad expectations for margins are virtually unchanged. Obviously, we know that the stronger currency, the translation from Europe is a headwind, but gross margin could actually benefit from that going forward, right? So this is just to see if you could elaborate a little bit more on how you're seeing FX translation versus transaction FX, how your hedging positions are, how you're thinking about pricing and cost and more importantly, what is your underlying assumptions for margins going forward? Federico Rodriguez: Thank you, Thiago. I will answer the first part of the question regarding the cutoff of the guidance in top line and in EBITDA growth. Obviously, we are losing operating leverage and even what we have -- and we are having some help in terms of EBITDA margin from Europe because of the appreciation of the peso in comparison with the euro. We are losing some kind of operating leverage in Mexico, too. We had a really weird quarter. We have a good July and a strange August with one strongest week and a terrible September. So that's the reason that we are cutting up all the guidance for the rest of the year. And I would say it is only operating leverage. We are having tailwinds from the FX. You know that we delivered a guidance with a forecast of MXN 20.8 per dollar, we're having a good gross margin. And in fact, you will see a lower-than-expected loss of margin EBITDA. But having said this, obviously, we have to bring you the reality of what we saw in the quarter. And as Christian have just mentioned, with 3 quarters out of the 13 weeks of the last quarter, it is pretty early to say what is going to happen. That's the reason of the [indiscernible] of the guidance. So if you want to complement? Christian Dubernard: Yes. And also regarding gross margin, we have seen positive tailwinds regarding COGS. As you know, there was a lot of pressure on cost of goods, particularly with some commodities based on the FX -- now we are seeing that both the internal initiatives that we shared some of them last quarter are starting to pay off. There's normally 3 to 5 months of time when you start seeing the different initiatives to pay off. We are seeing that. And also, on the other hand, the initiatives that we had implemented and consolidated around productivity and labor, we have seen them to start to pay off. So in these terms, we are seeing a steady -- slow but steady margin recovery in our brands through these initiatives and still have had some increments on beef, but we are -- again, it's part of our business, we are managing every year as they come and through different platforms. Thiago Bortoluci: This is helpful. And if I may, a quick follow-up. We have been discussing on our opening remarks and now the drag in September, right? Anything you could share to help us calibrate the magnitude of the pressure that you saw particularly in that month? Federico Rodriguez: We do not disclose the transactions by brand, but obviously, there are some brands where we had a contraction of around 100 basis points in terms of the same-store sales in comparison with the previous 2 months. And that's the reason. As I said before, Thiago, it was only 1 month. Unfortunately, when we take a look at the guidance, we prefer to be really honest of what we're looking for the remaining part of the year. You know the seasonality of this business in November and December, maybe we'll have a positive news. But as of today, I cannot say that. Sorry. Operator: Our next question is from Mr. Alejandro Fuchs from Itau BBA. Our next question is from Antonio Hernandez from Actinver. Antonio Hernandez: Just I mean, very good color that you provided regarding the different performance in the 3 months. Just wanted to see if you could provide more color on September. If there were -- how much of that underperformance was because of external factors, maybe competition or anything specifically that you could provide on that, that will be very helpful. Federico Rodriguez: I would say it's really macroeconomical factors, Antonio. I cannot say that we are dealing with something different from a cost of food point of view or something internal. I would say that we are delivering the same campaigns. Obviously, most of the value coming from traffic. We have been telling you these guys. We are not doing a 100% pass-through coming from ticket. We have positive tailwinds regarding FX. Obviously, we have 30% of the food basket dollar index. And I would say that everything is not from competitors. We know that the competitors are slowing down the pace of openings, especially in coffee and pizza. But having said this, we are not dealing with something different from a commercial point of view. Do you want to add. Christian Dubernard: To avoid being repetitive, it's more -- we have seen, in general, a deceleration on consumption, particularly after the end of the summer, which had the highest peak in September. We know that normally every September slows down. Nevertheless, this was a little bit more -- the peak or the value was higher. So again, this has to do more to a macroeconomic environment. And in general, we see less thrust on the consumers in certain geographies as Europe, certain economy slowdown in South America and likewise in Mexico. But we are expecting to have, as you know, most of our -- almost 30% of our revenue EBITDA comes on the last of the quarter. So we are, as I mentioned, with strong campaigns and strong value-driven and innovation campaigns for Q4 in all of our brands and geographies. Antonio Hernandez: And just to clarify that terrible September or bad performance in September is all over the place. I mean, not only in one specific geography? Federico Rodriguez: Yes, it was in the 3 regions. Operator: Our next question is from Ms. Renata Cabral from Citi. Gerardo Lapati: You opened your camera? Renata Fonseca Cabral Sturani: Yes, I did. Christian Dubernard: No worry. Go forward with your question, Renata. Renata Fonseca Cabral Sturani: Sorry for the problem with the connection. My question is regarding Europe and the improvement that we are seeing there. 2024, we know that it was a challenging year in terms of same-store sales, and we are seeing now a stabilization in the region contributing to the company's results. So my question is, what were the main changes that you have implemented to reach to the current results and still the opportunities that you see to further improve the results on Europe. Christian Dubernard: Thank you for your question. Let me take this one. I believe what we have seen in terms of the recovery that you mentioned, particularly driven by Spain. We've seen very -- the customer reacting to the different campaigns in terms of innovation and value-driven campaigns as well as improved portfolios in terms of core offering like our brands in Starbucks, value-driven initiatives in Vips and Ginos, new very innovative campaigns around chicken and burgers in terms of -- in the case of Foster's Hollywood and particularly Domino's also the first half of the year, they were very much driven in having more, let's say, less traffic-driven and promotional activity which brought us good margins. And now we -- second half for Domino's will be more driven on achieving traffic, obviously, protecting the margin. So I would say to make the answer short, is the consolidation and the understanding and reading of the environment and looking forward of how the customer is behaving that we were able to adjust and adapt our different initiatives to respond to the customer needs. For Q4 and looking forward, as I mentioned before, innovation is going to be one of our main drivers. And likewise, as protecting value and margin for the customer -- value driven -- to protect value for the customer to drive traffic, but at the same time, in a smart way to protect our margins. So I believe understanding what is the behavior and what the customer is looking for is what's been paying off particularly driven by Spain. Federico Rodriguez: Additionally, Renata, in the bottom part of the P&L, we are implementing a lot of different strategies. In the stores, for example, we are increasing the productivity, trying to measure what are the peak hours of the day to have a better deployment of the workforce, and we are having terrific results. Additionally, in all the headquarter offices, obviously, we are stopping with doing non-core activities. We have been growing really -- we had a relevant growth during the last 10 years in Alsea. So we are going back to basis to consolidate synergies, moving different areas to where we are performing the best tasks. So we are having a lot of efficiencies in the bottom. But obviously, when we are losing the leverage as we have seen in September, it is impossible to offset only with these efficiencies, the loss of sales. Christian Dubernard: And to complement this last that you mentioned, Renata, also, we have seen this, let's say, approach where we consolidate the brands and when we are capturing opportunities like in the FSR segment where we are creating and generating a lot of synergies, it's paying off. So in a way, the strategy that we started at the beginning of the year in these terms is maturing, and we are already seeing part of the benefits of this strategy. Operator: Our next question is from Mr. Ulises Argote from Santander. Ulises Argote Bolio: I just wanted to understand a little bit better here on the pace of remodeling. Is this something we can expect going forward for the next couple of years? Or what's more or less the time line that you guys have in mind for this? And also to understand if this is focused on any specific format or region or if it's more across the board. Then a follow-up to that is if you guys have any color that you can share maybe on the sales lift that you're seeing on these remodeled stores. Christian Dubernard: Yes, I will take that one. Yes, as I mentioned in our first call, one of our main priorities is how do we make our existing portfolio more profitable. through driving same-store sales and basically driven by traffic. And remodeling is clearly a very strategic lever that allows us to drive this additional traffic, both one way through having better-looking stores, but also more efficient stores. When you have a remodel a store that has been operating for 5, 7, 10 years, you already know how the store behaves, what type of customers you get in those stores. So when we do these types of renovations or remodelings, we are just adapt to the reality of each one of the stores and the needs of each one of the stores. So as we mentioned in the first -- in our last call, we are in an average of 2: 1, 2 remodelings or renovations for each opening. That shifts between different brands, some brands or some geographies, we are 3:1. In some cases, we are 1:1. But clearly, the renovation of our existing portfolio is one of the key drivers of traffic together with having the best operational talent in each one of our stores, which is also one of our key strategies where we are focusing. Regarding payoff, where we have seen the highest impact in terms of payoff is in the FSR or casual dining segment and in Starbucks because obviously, different from Domino's or the customer doesn't necessarily stay in the store for a long period of time. In the case of Starbucks and our food service restaurant segment in both geographies, we clearly see that the customer really appreciates these types of renovation. So we've seen between mid- to high single-digit growth in some of the segments and to double -- I would say double. Low teens in the case of FSR. So it's a core -- it's part of now a clear strategy for us and a clear priority. Operator: Our next question is from Ms. Isabella Lamas from UBS. Isabella Pinheiro F. Lamas: I have 2 here. So firstly, could you discuss a little bit more about the input costs, particularly in the scenario of the peso appreciation. We were kind of wanted to get a sense of how you're thinking about your cost inflation going forward and how that compares to what you have experienced for this year? And how should we think about the margin setup for next year? And my second one is a quick one, is regarding leverage ratio. You've just reiterated your guidance for this year. So we were wondering if you have any views you could share for next year, any kind of range or what should be aiming for? That's it. Federico Rodriguez: Okay. Thank you, Isabella. Regarding the input costs, we are not having -- I'm talking only regarding Mexico and South America. We are not having more headwinds regarding FX. I would say that at this point of the year is totally comparable and in some cases, better than in 2024. That's from one side. As you know, we have 30% of the inputs dollar index in Mexico and the rest of South America brands. And additionally, for the next year, we are forecasting mid low single-digit input cost for 2026. And regarding the guidance, we changed the guidance for 2025 from a low teens in top line to high single digit and regarding EBITDA growth from a mid-single digit to a low single digit. Regarding 2026, it is too early. We are building our budget with the different variables. So we'll tell you something in the next conference in the month of February. Operator: Our next question is from Ms. Julia Rizzo from Morgan Stanley. Julia Rizzo: I have 3 actually. One, could you -- I noticed a sharp increase in the leasing expense on the cash flow from MXN 4.6 billion from MXN 3.6 billion, 26% increase actually, which is quite high compared to your sales and also to the store base. Is there anything here was a renegotiation in some regions, specific some brand? Is there something that is not perhaps recurring or it is related with some stores that you're already opening under construction and paying but not open. Can you give me a little bit of sense of how we should interpret this, especially looking forward, right? Because it increases from 6.3% of sales to 7.4% of sales in 1 year. Federico Rodriguez: Okay, Julia. Yes, Julia. We have been very vocal from December on regarding the lease change that we do from a post-IFRS 16 perspective. As you know, we manage the business on pre-IFRS 16 figures and -- but the change was because we standardized the criteria of all the leasing contracts across the geographies to have a single one company-wide. For example, we had a different policy in Europe from a bps perspective, that bps here in Mexico, while it's the same business, et cetera. So it is more an accounting perspective than a real change on the lease payment that we do on a monthly basis. This does not imply -- and just to be repetitive, an increase in the rental expense, but in the way that we account these leases. This is an effect we'll have until the last quarter of 2025. And from the first quarter of 2026, it is not going to be a relevant change. I don't know if you had another question, Julia. Julia Rizzo: Yes. Just as a follow-up. I'm not talking about the depreciation and amortization. I'm talking about the cash flow payment on the free cash flow generation. Federico Rodriguez: No changes. From a free cash flow payment, it is pretty much the same. We have around 35% of the lease contracts on a variable base totally linked to the gross revenues and the remaining 65%, 70%, depending on the region is totally fixed and increased with half of the inflation of each one of the countries. So we do not have a relevant change from a cash flow perspective into the lease part. Julia Rizzo: Okay. So we follow up later. And also on the interest expenses, also when we annualize the rate of how much you paid, again, on a cash basis, the MXN 2.9 billion was MXN 3 billion compared to the average net debt of the period. We have kind of a rate around 14% roughly, which is well above the base rate. Is there anything here that is nonrecurring? Again, looking forward, how we should expect the cost of that or interest expenses to be? Federico Rodriguez: Well, unfortunately, it was like that because even while we had -- well, we have the $500 million bonds at 7.750%, it is swap. So we pay a rate above 13% from the dollar bonds. And that's the reason, and I want to link to what are we doing with the LT with the liabilities management for 2026. We are moving forward accordingly to the plan. We are almost ending with the refinancing of the 100% of the liabilities, the financial liabilities in the balance sheet, and we'll have savings above $20 million for 2026. We're still dealing with it. That's the reason I do not want to give you more details, but we will change from bonds in dollars and in euros to bank debt, which is cheaper and that will improve the average duration that we have into the balance sheet. But you will see savings on the 2026. Julia Rizzo: Fantastic. Last one would be on the remodeling, the focus -- the increased focus of the company on the remodeling. Can you -- is there any specific brand or region that are you going to allocate resources more or less? And can you give me a rough sense of how much it costs a remodeling Starbucks versus one opening? Just we can make some calculations here of how that would be. Federico Rodriguez: Regarding the cost, it's around 1/3 of the cost of a new opening and regarding the regions and the. Christian Dubernard: Yes. Regarding the regions and the brands, as I was sharing before, Julia, we are -- the brands where we see that are -- that react most -- the best when we do a remodeling are Starbucks and all the FSR segment. So we also do remodelings in some of the other brands, but we are focusing mainly on the brands where we have the best reaction from our customers in terms of traffic, which are the casual dining segment and Starbucks. Regarding the geographies, it's a strategic approach. It depends on the aging of the portfolio in some cases, depends on the -- if there is a particular region, area, city where we see that we have an opportunity to drive additional traffic. And I can tell you that -- or in the case where we see some additional competition coming in. So there is a different -- a very strategic approach to this. And as I mentioned before, we are privileging remodeling our openings with a much more focused and disciplined growth. Julia Rizzo: So it's mostly Starbucks and casual dining. Region, you don't have a specific targeted. Christian Dubernard: It's in general, obviously, where we have a higher number of store or a bigger portfolio like we do in Mexico with more than 900 Starbucks stores, you will see a bigger number of renovations, likewise, with the FSR or casual dining segment in Mexico and Spain, where we have also an important portfolio there. So that depends more on the size of your existing portfolio. But this is a very -- it's a high priority for us and with a good ROI every time we do, as Federico was saying, it's 1/3 of what we do in a new store and the ROI is very, very good. Operator: Our next question is from Mr. Bruno Ramirez from JPMorgan. Bruno Gabriel Ramírez Fernández: So question would be regarding full-service restaurants. How sustainable is to keep seeing this performance as it has been in the past quarters? And second question would be about the run rate for CapEx levels. Federico Rodriguez: I will go with the second one regarding the CapEx. This year, we will be spending around MXN 6 billion, MXN 6.1 billion for CapEx. We are turning things into the company. So only we have non-[indiscernible] projects. As you know, we have recently opened the facility of the distribution center in Guadalajara. It was on Tuesday, and we'll have a lot of profitability and diversification to all the different routes. So for 2026, I think that the guidance, as I said before, it is too early, but should be in the range of MXN 5.5 billion, at least for 2026. And the openings should be a similar figure to what we have seen during 2025 of around 200 openings, taking into consideration not only corporate stores, but franchisees and sub franchisees too. Christian Dubernard: Yes, I'm taking this one. As you have seen in the past, I would say, 24 months, we have seen a very steady growth in the performance of our FSR segment, both in Spain and Mexico. We continue delivering with a lot of innovation and very disciplined and focused growth on each one of the brands, both our own brands like we do in Europe and with our franchisors from the other brands in our portfolio, where we are working -- we have seen clearly brands like Chili's doing an extraordinary -- with an extraordinary performance in the U.S. So we learn a lot from that. We continue holding hands with our franchisors and seeing how this is really being executed and transferred with some value-driven initiatives in Mexico, likewise with the Cheesecake Factory. So I believe the preference of the consumer of our brands. And I would say the consistency that we have been able to deliver in the last years is clearly paying us and showing us that the customer wants to be in our stores and the quality of our products has continues to be a big differentiator. We have not fallen into this attractive or sexy approach into trying to reduce costs through -- by reducing portions or things like that. We are clearly going the other way. We are very disciplined in maintaining our value-driven initiatives that have been there for more than 3 years now, and we keep refreshing them with innovation and new products. So again, this is a segment that we are very happy with the performance. At the same time, we are very -- obviously, the investment in these types of stores or restaurants is an important investment. So we are always very cautious and careful on going for the no-brainer and locations that we know we're going to do well. And as I said before, Bruno we still have an important number of stores to renovate, and we know that this is going to drive and continue driving additional traffic. And also in some cases, growing through our franchisees is a very important part of our strategy. Our franchisees are very happy and confident with the performance of this brand. So we continue getting demands on trying to continue developing the brand through franchisees, particularly in Europe and in some of our brands in Mexico. Bruno Gabriel Ramírez Fernández: And just a follow-up question in the -- regarding CapEx. So beyond 2026, what percentage of sales should we expect? Is 2026 levels a good proxy between 2026? Federico Rodriguez: I would say it should be around 1.5% as a perpetuity rate, the CapEx. But it is better to have the guidance, and I will deliver both answers what to model in 2026 and what is happening in the next 10 years. Operator: Our next question is from Mr. Nicolas Riva from Bank of America. Our next question is from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I don't know, but I think I'm double counted here. No further questions on my end. Operator: That was the last question. I will now hand over to Mr. Christian Gurría for final comments. Christian Dubernard: First of all, I want to thank everyone for being here today and the interest and for your questions. Thank you very much. Before we conclude, we would like to thank you for your participation and interest in our quarterly conference call. If you have any additional questions or require further information, our Investor Relations team is always available to assist you. We wish you an excellent day and look forward to having you join us for our next quarterly update and the best holidays and the best holiday season and best wishes for you for this last quarter. Thank you, everyone. Thank you. Operator: Alsea would like to thank you for participating in today's video conference. You may now disconnect.