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Operator: Good day, and welcome to the Ryerson Holding Corporation's Third Quarter 2025 Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Justine Carlson. Please go ahead. Justine Carlson: Good morning. Thank you for joining Ryerson Holding Corporation's Third Quarter 2025 Earnings Call. On our call, we have Eddie Lehner, Ryerson's President and Chief Executive Officer; Jim Claussen, our Chief Financial Officer; and Molly Kannan, our Chief Accounting Officer and Corporate Controller. A recording of this call will be posted on our Investor Relations website at ir.ryerson.com. Please read the forward-looking statement disclosures included in our earnings release issued yesterday and note that it applies to all statements made during this call. In addition, our remarks today refer to several non-GAAP measures. Reconciliations of these adjusted numbers are also included in our earnings release. I'll now turn the call over to Eddie. Edward Lehner: Thank you, Justine. Good morning, and thank you all for joining us to discuss our third quarter 2025 performance and our announced merger agreement with Olympic Steel. I would like to start our call today with an abbreviated version of our prepared financial comments before asking Rick Marabito, Chief Executive Officer of Olympic Steel, to join us to discuss the announced merger agreement, its strategy and the benefits we believe it will yield for our stakeholders. So turning to our performance first. The third quarter market backdrop continued to be difficult as we now find ourselves rounding out a third year of contractionary conditions. The quarter can be summed up as a continuation of industry recessionary conditions characterized by falling industry shipments year-over-year and sequentially with notable carbon steel margin compression with manufacturing activity well below mid-cycle levels. Supply side tariffs and trade policy have placed to some extent floors under bellwether industrial metal commodity prices. However, demand in the aggregate remains stubbornly depressed. We have often said the supply side sets the price. However, our customers set the discount. And through the third quarter, customers continued quoting less and buying less. Within our OEM book of business, especially the contract business, we have actually seen activity come in well below our OEM customer forecast and historical mid-cycle trends. As we are in the late stages of this counter cycle that is in its 13th quarter and has been of longer duration than is typical of historical counter cycles of between 4 and 6 quarters, the OEM side of the commercial portfolio should eventually inflect positively. The offset to that is the very encouraging trend of Ryerson growing its transactional business as recent investments continue to operationalize, stabilize and scale throughout our network. This shows up in our service center fundamentals metrics of shorter lead times, higher service levels and improved on-time delivery. As long as we keep on keeping on with improving the customer experience while optimizing our service center network productively and safely, our performance will continue to improve. As the market navigates the many dynamic factors currently in play around trade policy, investment, interest rates and geopolitical commerce volatility, we continue to drive what we can control, building earnings quality and earnings leverage by being excellent operators of our business with sunrise consistency. We understand that decades of offshoring take time to unwind just as deleveraging, asset modernization and optimization have required long-term vision and commitment. We will persevere through this market environment working safely and passionately throughout and come out stronger on the other side. I can't wait for Rick to join me on the call. But before we get there, I'll turn the call over to Jim Claussen to provide more details on our financial results and our outlook. Jim Claussen: Thanks, Eddie, and good morning, everyone. During the third quarter, we achieved adjusted EBITDA, excluding LIFO, at the low end of our guidance range with revenue and shipments in line with expectations. Looking ahead to the fourth quarter of '25, we expect volumes to soften during the quarter by 5% to 7%. This aligns with typical seasonality patterns as our customers slow production around the holidays, and it also reflects our anticipation that the current demand challenges will persist at least through the close of the year. From a pricing perspective, we anticipate that the current tariff structure will continue to be nominally supportive, leading to what we expect to be flat to 2% higher average selling prices, resulting in revenues in the range of $1.07 billion to $1.11 billion. We expect that gross margins will continue to be under pressure in the fourth quarter, given elevated input prices and the recessed demand environment. In all, we forecast fourth quarter adjusted EBITDA, excluding LIFO, in the range of $33 million to $37 million and net loss per share in the range of $0.28 to $0.22 per diluted share, given projected LIFO expenses and depreciation higher than normalized go-forward CapEx of $50 million to $55 million. We expect LIFO expense to be between $10 million and $14 million in the quarter and net CapEx to finish the year within our target range of $50 million. Turning to the balance sheet and cash flow highlights. We ended the third quarter with $500 million in total debt and $470 million in net debt, which represents a decrease of $10 million and $9 million, respectively, compared to the prior quarter. As a result of incremental improvements in both our net debt and trailing 12-month adjusted EBITDA, excluding LIFO, our third quarter leverage ratio came in at 3.7x, moving us closer to our target range of 0.5 to 2.0x. As we progress through the fourth quarter, we expect cash flow generation to continue moving our leverage ratio back towards our target range. From a global liquidity perspective, the company's profile remained healthy during the third quarter, and we ended the period with $521 million of liquidity compared to $485 million at the end of the second quarter. Third quarter operating cash use of $8.3 million was primarily driven by the net loss generated. We ended the quarter with a cash conversion cycle of 68 days, which compares to 66 for the prior quarter as our higher-value inventory added 2 days of supply, while our payables and receivable cycles remain consistent. I'll now turn the call over to Molly Kannan to discuss our financial performance highlights for the third quarter. Molly Kannan: Thanks, Jim, and good morning, everyone. In the third quarter of 2025, Ryerson reported net sales of $1.16 billion, a decrease of $7.8 million or less than 1% compared to the second quarter with average selling prices up 2.6% and tons shipped down 3.2%. Due to the rising price environment, we recorded LIFO expense of $13.2 million, which was consistent with the prior quarter. Gross margin and gross margin, excluding LIFO, both contracted during the third quarter by 70 basis points to 17.2% and 18.3%, respectively, as we experienced price pressure amidst the soft demand environment. Warehousing, delivery, selling, general and administrative expenses totaled $201 million for the third quarter, a decrease of $3 million compared to the second quarter. Despite decreased expenses and top line metrics within our guidance ranges, gross margin compression contributed to our third quarter net loss of $14.8 million or $0.46 per diluted share. This compares to net income of $1.9 million and diluted earnings per share of $0.06 for the prior quarter. And finally, our adjusted EBITDA, excluding LIFO generation for the third quarter was $40.3 million, which, as Jim mentioned, was within our guidance range and compares to $45 million generated in the prior quarter. And with this, I'll turn the call back to Eddie. Edward Lehner: Thank you, Molly. I would like to conclude our prepared comments by thanking the Ryerson team for their tremendous teamwork and passion for getting better every day. This quarter was another street fight. However, we continue executing our self-help principles and focusing on what we can control while continuing to bring our investment cycle to return and improving our financial performance through the cycle. And with that, I am delighted to invite Rick Marabito to join me as we share an overview of the announced merger of our companies. Richard Marabito: Thank you so much, Eddie. Really appreciate being invited to be part of this call. And maybe before we begin, I just had just an opening comment to make. And just want to say how excited I am, how excited the Olympic team is for this combination of two great companies and really for the opportunity to work together with Eddie and his team at Ryerson. We're looking forward to closing so we can get to work and deliver on the benefits of the merger and really unlock the value that this combination brings to shareholders, our customers, our employees and the communities where we all live and work. And I know I speak for you, Eddie. We're engaged. We're energized and committed to deliver the compelling value proposition in front of us with shared values and a shared vision for success. And so with that, maybe we'll get right into the slide presentation, and let's start with the big picture. I think the combination, as you see, solidifies and enhances the new company's presence as the second largest metal service center in North America. Together, we'll have over $6.5 billion of revenue, and we'll serve our customers from an expansive North American network of over 160 facilities, providing new breadth, new depth of products and processing services as well as a greater ability to offer our customers customized metal solutions and improve speed and efficiency. Together, we expect to realize $120 million of synergies, and that will be phased in over 2 years, which is obviously a compelling contributor to the future margin enhancement and value creation. Eddie is going to provide some more details on the synergies in a moment. So combined, our new company will have a stronger financial profile as the merger is an all-stock transaction. Greater free cash flow and a stronger, more flexible balance sheet only provide more opportunities for future growth than I think we'd be able to accomplish separately. So Eddie, I'll turn it over to you for the next slide. Edward Lehner: Rick, thanks so much. And really, you spoke so beautifully at the outset. And I too want to welcome all of our stakeholders. I want to welcome everybody from Olympic and Ryerson that are on the call this morning. And to really continue why we think this is such a compelling and attractive merger between our two companies with a combined 255 years of experience in the service center business, hard won experience in the service center business. When we look at the transaction and within the next page of our presentation, I want to go right to synergies. And I want to give you two examples of synergies because I think they're powerful examples. And we've renamed this room Synergy Central or prospective Synergy Central. So I want to share just a couple of things with you because I know synergies are really at the root and core of where we can derive multiples of value. So if you look at Ryerson and you look at what's happened since September of 2022, just looking at Ryerson for now, 25% of our mix is in stainless, okay? So when we look at Q2 revenue, about 25% revenue in stainless, 25% revenue in aluminum and 50% revenue in carbon, and what's important to realize is we are underweighted the market in carbon when we look at MSCI numbers. The industry is 67% carbon and it's 33% nonferrous roughly. So when you look at the industry, you look at Ryerson being underweighted carbon, but overweighted stainless and aluminum, just look at stainless. I mean, stainless was a wonderful gift horse in '21 and '22, and I don't want to punch a gift horse in the mouth. But in '23 and '24 and even in '25, think about what happened in the stainless market. MSCI shipments in stainless are off 22%. Nickel prices are down by more than 50%. So we endure that going through a very large investment cycle to modernize our company, improve our company, but we take brutal compression in shipment declines over that 3-year period. And the story in aluminum from a shipments perspective, even though price, there's been a lot of volatility in aluminum price. And even though it's downward gradient has not been as extreme, shipments in the MSCI for aluminum are down more than 20% since September of 2022. But carbon prices have been about on average, even though there's been a lot of modulation in the price, in general, in September of '22, carbon prices were $850 a ton, and that's kind of where they are today in that neighborhood of $850 a ton. But what's even more provocative in this example, the synergy is that carbon shipments in the industry only fell by 5% in that period. So if you were overweighted carbon, in general, you did better in the industry than if you were overweighted nonferrous. So when you think about the combination of Olympic and Ryerson, Olympic has more carbon exposure, more carbon exposure in tube, more carbon exposure in plate. And so that's a natural synergy when we look at being very complementary when we look at our footprint and we look at what we do, certainly on the commodity mix side, that's a really, really strong synergy as we look forward in this transaction. Let me share another one with you. It's no secret that since the pandemic, we've all had to look at things that maybe were not as prolific before the pandemic. And one of the things that's happened is the demographics in our industry, it's no secret that they skew older. When you look at the voluntary rate of attrition in this industry, just folks that just leave on their own and people that retire, in this industry, it's between 5% and 15%. So I want that number to sink in for a second, 5% to 15%. Nothing the company does whatsoever. It's just people that retire or they decide they want to try something new. So if you take the natural rate of attrition in this industry, you can see where we can create a really powerful synergy and efficiency just given the natural rate of voluntary attrition in this industry, you can take the combined employee census, you can take the average comp that we published per the MD&A. And you can do that math and you can model it and you can see how we create a synergy right in line with what we're bringing to our stakeholders and what we're articulating to our stakeholders. So when we look at this, everything on this slide is true, presence, highly complementary match, opportunities for margin expansion, the synergies that I just spoke about, and there's many more, and we'll talk more about some of those other ones as we go through the presentation, accelerated growth, really the combination of talent pools. I mean I've known because we've competed against Olympic for the entire time that I've been here over the last 13 years. And Olympic has incredible talent in their organization. They've got a great brand, a great culture. And I'd like to say that I'm proud of what Ryerson is and what we've been and where we're going over our 183 years. And so when you look at the talent pools that we're combining in this merger, it is very unique, and it's highly accretive and valuable. And then we have an opportunity to deleverage. There's a lot of collateral in this deal, a lot of collateral in this deal that gives us the optionality to deleverage both on a combined basis, but also in terms of the asset quality that we have in working capital, property, plant and equipment. And then we have better access to the capital markets. And we also have better share flow. There's more liquidity in our combined equity than we have now. So with that, I'm going to kick it back over to Rick, and then I'll be back with you in just a minute. Richard Marabito: So thanks, Eddie. We can go to the next slide, please. And really, let's review the details of the transaction. So as we said, the merger is structured as an all-stock deal, and Eddie just talked about that in terms of strengthening the balance sheet and giving us really the strength and power to go forward and grow. Closing of the transaction is targeted for the first quarter of 2026. Olympic shareholders in terms of an exchange ratio will receive 1.7105 Ryerson shares for each Olympic share. And what that equates to is Ryerson shareholders owning 63% of the combined new company and Olympic Steel shareholders owning approximately 37% of the combined company. And as we stated earlier, 2024 combined revenue, $6.5 billion with pro forma adjusted EBITDA margins approaching 6%, and that would include a phase-in of the forecasted synergies. And Eddie just talked about the synergies, $120 million, assuming about 1/3 of those synergies are completed at the end of the first year after closing and then 100% phased in completely at the end of year 2. And we do -- as Eddie said, we do have high conviction in terms of achieving those synergies. I think as you look at all the opportunities, and Eddie just gave you a couple of examples, but there's quite a long list of potential opportunities and synergies. And I'll tell you, that's -- we're going to be quickly engaged on realizing those synergies. In terms of leadership, the Board is going to broaden its talent by expanding to 11 Board members, and the Board will welcome Michael Siegal as Chairman of the Board. I think as most of you know, Michael is currently the Executive Chair of Olympic Steel. And then Olympic will also appoint three other directors to the Board, obviously, mutually satisfactory to the Board. And that will result in four Board members from Olympic and seven from Ryerson to round out the new Board. And then in terms of executive leadership, Eddie will continue to serve as the Chief Executive Officer of the new company, and I'm very excited to serve as President and COO. And the Olympic executive team, I can tell you, is enthusiastically looking forward to continuing with the new combined company. And again, since the merger is all stock in nature, the combined company will really benefit with reduced leverage. As we model that out as synergies take hold, we're looking at leverage of approximately 3x post close. And then the credit profile of the combined company should also be enhanced through scale, diversification, improved margins and profitability and obviously, greater cash flow. So a lot of positives here. So Eddie, why don't you take us through the next slide? Edward Lehner: Thanks, Rick. So when we go to the footprint, when we look at the footprint, and I think a picture really is worth a thousand words or more. But when we go under the hood of what does the prospective combined -- what do the respective combined companies look like. If you look at this graphic, you can see and what always doesn't show up in the financial statements because you really have to drill down and you have to look at the drivers of what create the financial statements for respective companies in our industry. Think about the importance of selection, availability, lead time and on-time delivery. I mean we have great brands. But really, when the customer calls or e-mails us for a quote, if we have it on the floor, it sells. If we can create short lead times, it sells. If we have wider selection, it sells. We can buy out from one another, makes it easier to make that sale. If we can use each other's outside processing network, it makes it easier to create that sale. So when you look at this graphic, you have density and you have points to the customer that are closer to them, relying great -- I mean -- and we can realize greater reliability and consistency in how we make those connections with our customers. When you look -- if you go West, we have an opportunity to take more of the combined company West, and we also have more of an opportunity to go to Mexico together where we already have a presence. And Olympic, I'm sure, has customers that are looking to get to Mexico in a more meaningful way. So when you look at the footprint and the commercial synergies that are attainable in this transaction, I think the picture truly is worth a thousand words. Rick? Richard Marabito: Yes. The next slide, this is something -- I tell you, I get -- this is an area I get really excited about. So if you look at the top there, the two companies combined over the last 3 years have invested a massive amount back into the company, $480 million, and I think the title of this slide is exactly right, Primed. I think we're Primed. So the vast majority of the money on the current investments in CapEx, our portfolio has already been spent, and so what that means is we are both now primed to reap the returns on these investments, and I think the benefit of a merger is we're going to get there faster through a larger combined platform, and then let's not even mention what Eddie talked about earlier, and that's the opportunity for a power boost or a multiplier effect from tailwinds in the metal market. So demand has been off for several years. We get demand back to a normalized demand scenario with $480 million recently invested, and I think that is a very, very strong indication of what we can do together. Briefly, I'll touch on Olympics side of the equation in terms of what some of the investments were, and then I'll have Eddie talk about Ryerson's recent investments. But Olympic, I like to refer to our capital spending over the last 1.5 years to 2 years as the Big 5. So it includes a new cut-to-length line in Minneapolis, and we're targeting their carbon growth, coated carbon growth specifically. A new white metals cut-to-length line in Chicago, a high-speed specialty stainless slitter at Berlin Metals. Berlin is right outside of Gary, Indiana. The biggest of the five is in Chambersburg, Pennsylvania. That's one of our plate processing hubs. And in Chambersburg, we've got a massive automation project, which includes all new lasers and plasma processing equipment and capacity, coupled with material handling automation. So a lot of our movements are going to be touchless. So we're really excited about that one. And then finally, we've expanded down south in Texas, in the stainless area through Action Stainless's expansion in Houston. So all these projects, they're poised for returns on the Olympic side for '26 through '28 time frame. And I'd say that's perfect upside timing for the merger. Eddie, you want to talk about from the Ryerson side, your investment? Edward Lehner: Yes. No, thanks, Rick. When I started with Nucor in 1992, Ken Iverson, legendary CEO of Nucor, stopped by my office and was just talking about the story of Crawfordsville. And he was saying that when they built Crawfordsville in '87, they were losing $1 million a week on the project and they were asking, Ken, how he slept, and he said, he slept just like a baby, he woke up at the night and cried every hour. When you do CapEx and you do greenfields and you do big projects to modernize your company, they all don't go beautifully, and you have to grind through it, but it's worth it, and certainly, as we've gone through this downturn, which has lasted for 3 years, I think Rick said that we're due for some tailwinds, for the last 3 years what we've had is space burn. So when you look at the CapEx investments we've made, we made record CapEx investments to invest in our future. And as we see upside operating leverage and opportunities for the cycle to inflect and certainly, with the combined Olympic and Ryerson, when you look at University Park, 900,000 square feet of modern service center space for long products and tube primarily when you look at Shelbyville, which was a fantastic investment in our nonferrous franchise that's located so close to the bread basket of nonferrous supply in the United States. You look at the release of ryerson.com 3.0 as we go further and further into digital commerce. So that's a synergy between Ryerson and Olympic as we go forward to bring a lot of the digital investments we've made and to actually put those in at scale in a very thoughtful way as we go forward as a combined company, and we have the Atlanta tube laser center. We've made significant investments, and we've gone from nothing in 2016 to more than 10 work centers in Norcross, which has been a wonderful success story, and if you pair that up, for example, with Chicago Tube & Iron, which is in the Midwest, you could see a powerful synergy in that franchise of high value add between tube lasering and sheet lasering. And then, of course, we took a big swing on ERP integration. We've mentioned this before. In our South region and in Texas, we were on legacy systems for 40 years, and we finally had to bite the bullet, we finally had to convert and get on a uniform ERP system. I mean that is a 2- to 3-year trail of tears. But once you come through it, once you come through it, all of a sudden, everybody knows that language and they find possibilities and capabilities they didn't have before within that system to create a better customer experience. So we are on the other side of that. As you see restructuring and rework costs come down and we do the cleanups from a 3-year investment cycle coming through this downturn with the investments we've made. As you look at a combined Olympic and Ryerson, I think you can really start to see the potential of how those investments, they don't just pay off as individual organizations, but when you bring them together, the payoffs are very, very attractive. And that takes us to, again, the compelling synergy opportunity. So I spoke to two very powerful synergies a couple of minutes ago, and I want to put a spotlight now on procurement and supply chain. So you go from 2 million tons to, say, 2.9 million to 3 million tons of combined purchasing spend and you pick up scale, and if you really break this down into math, metal on any given day is between 70% and 95% of our cost depending on the pound that you're quoting and the pound that you sell, 70% to 95%. So if you don't buy well, it's really hard to operate your way out of suboptimal buying, but when you look at the combined scale that we generate now going to that supply chain marketplace, to that procurement marketplace, we're talking about $14 a ton over 2.9 million tons is what we're talking about, and we are highly confident that we know how to get $14 a ton in supply chain synergies, not the least of which follow through to fuller truckloads that we receive from our suppliers. So we pick up savings, not just on the freight, but obviously, the main course is the metal, and now you've got greater optionality of how you purchase that, how you combine that spend and where you direct it through a more dense network to bring down your overall procurement costs. Rick? Richard Marabito: Thanks, Eddie. Next, let's just talk about our profile in terms of pro forma mix on end markets and products here, and Eddie touched on it already, but really excited about, a, the growth markets and customers benefiting from our combined new mix. Obviously, we've got a lot of potential growth happening in the United States in terms of infrastructure reinvestment, reshoring, outsourcing of fabrication and then, of course, the massive data center demand build-out where we're seeing significant growth. I think as you bring the two companies together, you look at the product mix, it's enriched. Eddie talked about the balance of the specialty and the carbon, but you look at really the overall mix now, a great balance across flat and long, stainless and aluminum, carbon, especially coated carbon and then the increased value-add processing and fabricating capabilities I think fantastic, and then combine that with Olympic Steel's recent growing focus on end product manufacturing, wow, these are all margin enhancers. So I think in summary, the combined company is going to be more diverse. We're going to have more high-margin processing capabilities. We're going to have a richer mix of metal products, and that's going to really provide a powerful and expansive one-stop solution for our customers. And when I look at that altogether, I think all this, what it means is it contributes to an improved and less cyclical earnings stream for the combined company going forward. Eddie? Edward Lehner: Thanks, Rick. So when we look at moving up the value chain and what does this industry look like as you start to visualize margin accretion, on the pick, pack and ship side, it's a speed game, right? You quote fast, you quote short lead times, you have the inventory on the floor, you get it to the customer. You need to do that with running water like consistency. But as you move that up and you pick up margin points when you do that, but the key there is consistency and scale. But as you move up through processing and finished parts and kits and assemblies and value add, our value-add franchises combined, I mean, individually, they're significant, but combined, there is another force multiplier when you look at going up that adjacency curve and going to every next step of service capability and value-add capability. And then you get to end products where I'm highly complementary of the work that Olympic has done, forging a path into manufactured products and end products, and Rick is going to speak to that in just about a few seconds here. But you can start to see another very complementary fit as we go up that curve to getting more margin on that consistency for transactional spot build material business, the menu of offerings that you can take to a program account or an OEM and then all the way through to manufactured products. Rick? Richard Marabito: Yes. Thanks, Eddie. And some of you may or may not know about Olympic strategy the past 5 or 6 years to acquire and integrate end product manufacturing into our mix. So for example, we make inside of Olympic, we make industrial hoppers. We make stainless steel bollards. We make metal canopies. We've got many different end products that go into HVAC applications. And as I spoke before, the end product, it carries a higher margin and return profile than traditional service center business. And then the end products are also countercyclical to distribution margins. So for example, when metal pricing declines kind of the depression in the cycle of metals, service center margins tend to come under pressure, while end product margins have the offsetting effect. In those types of declining price environments, end product margins typically expand. So the other beautiful thing about it is end products through our internal purchasing, through fabricating capabilities, which I think about Olympic and now triple that, given the newco size, we're able to provide synergies to the end product manufacturing companies that our competitors at the end market level just don't have. So I think the new combined company is going to really be able to better leverage those synergies across the end product portfolio that we have, and then if you go right into the next slide, we also talk about stronger capital structure, wow, the ability to continue to invest at a faster pace in the areas that expand our margins. So you could see on this slide, really, the summary is, on the left side, when you look at the margin profile, immediately accretive. Synergies give us the boost to earnings that Eddie talked about, improved EBITDA returns, getting to 6%, and then on the right side, you look at the capital structure and the balance sheet and you go, wow, stronger, more flexible balance sheet, synergies drive cash flow generation. So more cash flow, reduced debt, reduced leverage, that's a beautiful thing for being able to fund future growth in the areas that give us higher returns and more profitability. So I think -- and it ties in with the slide we talked about before on having spent a lot of capital, too. So we're entering into this from really a position of strength where we don't have big CapEx needs, so we can really focus on growth, whether it's M&A or whether it's on the internal investment side of the equation. So I just think it's another exciting piece of the way the two companies are coming together at this point in our history as well as the structure of the deal, again, by being an all-stock transaction. Eddie? Edward Lehner: Thanks, Rick. And just to follow up on some of the points that Rick made. When you look at things like and avoidance is maybe not a great word, but we'll stay with it. When we look at CapEx avoidance, when you come through two investment cycles that Ryerson and Olympic have had over the last 3 years, given the quality of the assets, given the magnitude of the assets, now we have the opportunity even to think about how do you move things around, how do you beneficiate assets, how do you repurpose assets. So one of the things you noticed in our earnings release was our depreciation expense is about $19 million in the quarter. If you think about what our normalized CapEx run rate is, depreciation should really be between $13 million and $14 million in the quarter, which is about $0.16 to $0.18 EPS. So one of the ways that we envision EPS accretion is, we don't have to spend as much CapEx as a combined organization, not just gearing down from the CapEx we've had over the last 3 years, but really looking at what is really -- what is the right normalized rate of CapEx going forward as a combined organization and how much depreciation then do you book over time against that CapEx as you add to the balance sheet, but you also optimize the asset footprint that you have. So moving then to the benefits of scale and scope, and I think Katja in her note, I mean, I think she summarized it really well. It's scale and scope within a highly fragmented space. I mean, trivia question for everybody, can anybody remember what the last transaction was of any significance. You'd have to go back to 2013 for the Reliance Metals USA transaction. And then a better trivia question that I won't give you the answer to, even though I know it, is go back and find the three largest transactions of significance before that. But I'll tell you this, over the last 21 years, 4 transactions of any significance in the space. So when you look at the combined company at $6.5 billion in revenue, it speaks to the benefits of densification of the network and creating a better customer experience because that's what I want to bring it around to. Creating a better consistent customer experience is really how you win in this industry. When you get past all the big terms and all the business speak, there's a customer on the other end that just wants a consistently high-level experience from low touch to high touch from pick, pack and ship to finished part, and they want a reliable, dependable, professional and enjoyable experience with that supplier, with that partner. So those are the benefits of increased scale and scope, availability, selection within this proposed merger. Rick? Richard Marabito: Thanks, Eddie. And really, the next two slides, I'm just going to touch on briefly, and it's really for those of you who may not be as familiar with Olympic Steel, and I'll tell you, most of the next 2 slides, we've already covered in our conversation, so I'm not going to go in depth. Just wanted to make a couple of points here. So we talked about at Olympic moving down the values -- up the value stream, higher returns, less cyclicality and all the things that we're trying to do there. So I'll point out a couple of things here. 8% of our revenue mix is now from manufactured products. I'd say roughly 20% of our mix is from multi-process fabricating work. Again, you combine those two, we're pushing 25% to 30% of our mix is of the kind of the highest end of the margin returns that we see for service centers. Touch really quickly our Specialty Metals segment. Specialty metals for us is aluminum and stainless. That's really been a growth engine for us, 10% compound annual growth. Really excited about our aluminum opportunities and the growth there. We've seen enormous growth year-over-year for now 2 years in aluminum. So excited about that and excited about the opportunities when the two companies combine on aluminum. If you look at the bottom of the slide, that's just how we report publicly. We report in three segments. We break it out by product. The carbon is really the traditional Olympic steel, and we've got a high degree of investment going into that in terms of the branded end products and some of the high-margin fabricating equipment. Specialty metals, I talked about already. That's been a growth engine for us, and then, of course, the pipe and tube business, which is highly tilted to tube, and we do a lot of highly intricate value-add work on the tube. So it's really a higher EBITDA segment than the others when you look at it as a percentage of revenue. So -- and then the next page is really just a lot of what we've already talked about. So I'm not going to repeat ourselves. So Eddie, back to you. Edward Lehner: Thanks, Rick. Appreciate it. So as we conclude our run through the presentation, I want to speak to this in summary because I think you've heard a lot of really good things, and really, I think you can really envision now the potential and possibilities of the merged company, and it really goes to the heart again of the spotlight on synergies. And look, we're going to get them all. And I'm going to share with you briefly, again, a couple more because I want to put down these bread crumbs. I want to put down these nuggets. When you look at investments we made over the last 4 years, for example, in nonferrous polishing and buffing and grinding and you look at Olympics franchise in specialty metals, there really is another really excellent synergy between those two capacities. When you look at slitting, for example, Ryerson has a lot of cut-to-length lines. We don't really match that cut-to-length capacity with as much slitting capacity as we need. Olympic has wisely made those investments in slitting both on the carbon and nonferrous side. So that's another really good fit as we look at creating better customer solutions over that horizon, really long, long, long into the future between our combined companies. So with that, we'd like to go ahead and open it up to your questions and look forward to answering them all. Operator: [Operator Instructions] And our first question will come from Samuel McKinney with KeyBanc Capital Markets. Samuel McKinney: Congratulations, guys. Just want to start with one Ryerson-specific question. Fourth quarter, typically a strong cash flow quarter for you guys. Given the earnings guidance and the normal year-end working capital release, fair for us to expect some more solid cash generation again to close the year? Edward Lehner: Yes. I mean, Jim has been silent the entire call. So I'm going to go ahead and let him answer that question. Jim Claussen: Yes, you're correct on the cash generation, and we typically see somewhere between $70 million and $80 million of working capital release in the fourth quarter relative to volumes and natural release. So I expect again in this fourth quarter to get a decent working capital release and cash flow there from operations. Edward Lehner: Yes, Sam, I can't resist to put another breadcrumb out there. So for all you modeling home gamers out there, when you look at traditionally the revenue that it takes, the working -- the net working capital it takes to generate an incremental dollar of revenue, you take the combined net working capital of both companies and look at that on a go-forward basis, post close. You can also see where some of that free cash flow opportunity is really significant around optimizing the working capital of the combined companies, if you work with a ratio that we've been solidly in over my 13 years here, which is usually about $6 to $7 of revenue generated per dollar in net working capital. So I'll let you all go at it and model that, but it's a good result. Samuel McKinney: Okay. And then moving to the merger presentation. You call out driving market share growth, whether it's the recent multiyear CapEx cycle at Ryerson or the high-margin in-product businesses at Olympic, where is it that you see the greatest opportunities to win incremental pro forma market share as a combined company? Edward Lehner: I guess I'll just make some opening comments, and then I'm going to kick it over to Rick. But I really think when you look at cross-selling and upselling opportunities over a shorter distance to the customer, I think that's the key. I mean, if you look at Ryerson's customer count, which we do share with the stakeholder public, it's about 40,000 active accounts. Olympic is about 8,000 to 9,000 active accounts. When you look at the fragmentation of the industry and the ability to go to market from a cross-selling and upselling perspective, again, with greater selection, greater value add, but really getting closer to the customer, day-to-day as those quoting opportunities come in, it really is a function of I have it, I can do it in 1 day or 2 days. I can give you the value-add solution you want or on the contract side, we have a menu of value-added options for you to select from, not just supply chain design, but risk management, scrap management and a whole bunch of other things that we can bring to the table when we're trying to create a better customer solution, Rick? Richard Marabito: Yes, I couldn't agree more. I think, Sam, if you look at that map, I get excited at Olympic. You can see our dots are pretty much in the eastern 2/3 of the country. So while you look out West and the footprint of Ryerson, certainly great opportunities for new geographies for Olympic. I think Eddie said it right, when you overlay all the products and capabilities of the combined companies, I think a much greater ability for one-stop shopping for customers, and it gets back to that cross-selling opportunity that Eddie just talked about. So yes, I think we're not even touching on Mexico where Olympic has a very small presence, and so I see a lot of growth opportunities, at least on the Olympic side of the equation of what we do and where we are. So really excited about it. Samuel McKinney: Okay. And then last one for me. Currently, Ryerson generally reports the whole company, while, Rick, you touched on earlier, you guys provide results for carbon, specialty and pipe and tube. Are you planning for this merger to be a complete roll-up with no segments? Or are you going to provide some segments to the business? Edward Lehner: We don't know. So we're going to figure out though because we're not... Samuel McKinney: Okay. Edward Lehner: Because Sam, that's -- those are all the things you have to do between signing and close. So that goes into that category. But I'm sure Rick and Rich can give you some good color on that, too. Richard Marabito: Yes. I mean I think we'll sit down and map that out and obviously do what we think is best for shareholders and potential shareholders to best understand the company and where we're going. Edward Lehner: Yes, the guiding light experience. Operator: [Operator Instructions] Our next question will come from Alan Weber with Robotti & Company. Edward Lehner: Alan, what took you so long? Alan Weber: So can you talk first about are there cash costs to get the synergies? And I just want to make sure that the synergies that you're talking about are under current market conditions, not based upon improved business cycle, et cetera. Edward Lehner: Yes. Alan, again, I'm going to kick it over to Rick here in just a second. But look, all we've known for the last 3 years of the current conditions, and so we have to really go way back to remember better conditions. So the synergies are really founded and premised on current conditions and how we get them, and when you -- again, to me, I take great comfort. When I look at the combined book value of both companies, there's really a strong underpinning for those synergies if this environment were to unfortunately continue for an unprecedentedly long time. Certainly, any upturn we get, we'll have a chance to really show off that operating leverage as a combined company, but the synergies are really premised on where we live today. Rick? Richard Marabito: Yes, I agree 100% with Eddie, at least how we thought of it on the Olympics side in terms of synergies. Synergies are basically not -- in my opinion, synergies are not, oh, the market is going to improve, so we're going to call that a synergy. The synergies in terms of how we thought about it are real enduring synergies based on our existing model and the model going forward. So I agree 100% with Eddie on that. And then you did ask about some costs that would be incurred to realize those synergies. And yes, obviously, there'll be some costs. I think on one of the slides, we talked about potentially that being up to $40 million. Alan Weber: Okay, and then I guess the last question is, when and if the markets do improve, how do you think about incremental EBITDA margins starting from your pro forma EBITDA? Richard Marabito: Well, I'll start on that. I mean, certainly, again, what we've got in the deck and what we've talked about our pro forma margins using sort of the environment we're in and then looking on a pro forma basis and modeling out what that would be. You know if you go back 2 or 3 years in terms of what the EBITDA margin profiles were for our sector, for Ryerson, for Olympic and for others, it was several points higher. I tend to think of if you can get in that 6% to 8% quartile consistently, on the distribution service center side of the business, that's pretty good. Obviously, given the depressed market we've been in the last couple of years, the current margin profiles for really all of us in terms of service centers is depressed from that. So we've got a 6% pro forma in here, but you get market tailwinds and more of a normalized market, and I can see that going to 6% to 8%. Alan Weber: Okay. Edward Lehner: Alan, when we look at it historically and you go back and look at, again, the last 20 years, and you can certainly spotlight years like 2014, 2018, 2021. And conversely, you can look at years like 2015, '09, 2020 and even the last several years of 2024 and even '25 year-to-date. And you kind of -- you traverse that continuum of years. And here's what I would tell you, we're in the bottom quartile now. And so that feels like a 2% to 5% EBITDA margin. As you get to that second quartile, that feels like a 4% to 6% EBITDA margin. You get to that third quartile when you start to see mid-cycle trends and better, that gets you to 6% to 8%. And then when you get to that top quartile, we start to see 8% to 10% EBITDA margins, which is really a function of being able to sweat the assets to a greater extent, your demand is going up, you get some holding gains in inventory, but you also get more value add because at that point, when the economy is doing better, you also get more outsourcing of manufacturing where some of our customers bring things in-house during times like this. As everybody gets busy, they need to go out to variable resources to go ahead and service that demand and so you get incremental margins on top of that. So really, as we've studied it over the years, it really looks like that 2% to 5%, 5% to 7%, 6% to 8% and 8% to 10%. So I hope that helps. Alan Weber: It does. And I guess my last question is, can you talk about assuming market conditions are flattish next year or similar to this year, kind of working capital for the combined company for next year, whether that will be a source of cash or... Edward Lehner: Yes. Alan, I try to give a little bit of insight into that in terms of what we've seen over time where how much net working capital does it take for us to really finance an incremental dollar of revenue. And I think if you look at that in reverse, if conditions were to stay the same, depending on where price goes, but if conditions were to stay the same in a combined company scenario, there's certainly working capital there to be had and there's working capital release and free cash flow there. More to come as we get through this signing to close period and as we really start to really enumerate that. But again, I want to kick it over to Rick, and I know he's got some thoughts around that as well. Richard Marabito: No, I agree. I think, Eddie, you said it well. I think in a normal market, if we just stayed in the same market conditions, so let's not talk about the price side of the equation. There's big opportunity on working capital turnover, specifically on inventory, inventory sharing, improving inventory turns, absolutely will have a positive cash flow and a working capital release just from being more efficient. Alan Weber: And I guess my last question is, have you gotten any customer comments, good or bad or concerns? Edward Lehner: No. But I mean it's early, but no. Alan Weber: Right. Edward Lehner: Everything -- I have to say, I mean, so far, everything has been overwhelmingly positive, notwithstanding maybe the initial reaction of the market, but it's been overwhelmingly positive. Richard Marabito: Same on our end, Alan. Operator: And that does conclude the question-and-answer session. I'll now turn the conference back over to you. Edward Lehner: Well, I really want to give the last word to Rick, and I'm going to do that. I just really want to thank everybody for tuning in with us today. We couldn't be more excited and more enthusiastic and optimistic about what lies ahead for our combined companies. And I really look forward to being with you on future calls as you start to see the realization of the vision we have for the combined companies. Everyone, have a great holiday season, and I know we're going to see you out there on the road. Rick? Richard Marabito: Yes. Thank you, Eddie. Really appreciate the time and ability to talk to everybody about what I think is an incredible and exciting transformational opportunity for the two companies. And I'm not going to repeat what I said in the beginning. I'll just leave you with this. I truly believe the best is yet to come, and what I will tell you is you've got a combined committed and engaged new combined team that is going to work really hard to make it happen. So thank you all. I appreciate your participation. Edward Lehner: Thank you. Operator: Thank you. That does conclude -- I'm sorry, go ahead. Edward Lehner: No, no, no, nothing, thanks. Operator: Thank you. That does conclude today's conference. We do thank you for your participation, and have an excellent day.
Philip Ludwig: Welcome, everyone, joining us today for the Melexis Third Quarter 2025 Earnings Call. I am Philip Ludwig, Investor Relations Director, and I'm joined by today's speakers, CEO, Marc Biron; and CFO, Karen Van Griensven. We will start with brief remarks on the business and financials before taking your questions, starting with Marc Biron. Marc, the floor is yours. Marc Biron: Thank you, Philip. Hello, everyone, and welcome to this earnings call. In the third quarter of 2025, we delivered sales of EUR 215.3 million, landing just above the top end of our guidance. This confirms another quarter of sequential growth and demonstrate that the recovery, while very gradual, continues. The quarter-to-quarter sales growth was driven mainly by Europe, while Asia Pacific and the Americas were broadly stable. Asia Pacific continues to be our largest region with around 60% of the total sales. Within our product portfolio, the sales of our motor driver were strong during Q3, especially in automotive HVAC application as well as in thermal management for EV powertrains. Our pressure sensors also performed well, particularly for internal combustion engine such as fuel management and after-treatment system to reduce emissions. We launched an additional 3 new products during Q3 for a total of 9 products since the beginning of the year. This included a new magnetic sensor for small motor applications such as automotive seats and windows. We have also launched an upgraded sensor, measuring current voltage and temperature and enabling a more precise measurement in safety critical applications like automotive batteries and DC fast charging. The third launch was a motor driver for smart fans used for server cooling, which is a very demanded application linked to the AI trend. With a busy Q4 ahead, we remain well on track to approach the record number of product launches achieved in 2024. We have recorded new design wins in the third quarter, including the 2 largest design wins so far for this year. One of them was for a motor driver, especially designed for the 48-volt architecture of EV vehicle. This is a unique product, and we expect strong growth for 48-volt architecture, which has many advantages in terms of cost, in terms of electrical power density, not only in EVs, but also in robotics. Overall, we are booking clear progress on our strategy. The number of product launch is on track and will be similar to the record of 2024 with 19 or 20 product launches. We continue to expand our product portfolio with the ambition to address new customer needs in fast-growing applications driven by the electrification, the premiumization and the automotive trends. The opportunities outside of automotive are still very strong. For example, in robotics, we have provided our first tactile sensing solution to our customer. Last but not least, we continue to have strong traction in Asia, both in automotive and outside automotive. We will go in more detail on our strategic progress at our Capital Market Day on November 5. I will now hand it over to our CFO, Karen Van Griensven, to provide a detailed financial overview and outlook. Karen Van Griensven: Thank you, Marc, and hello, everybody. So the sales for the third quarter of 2025 were EUR 215.3 million, a decrease of 13% compared to the same quarter of the previous year and an increase of 2% compared to the previous quarter. The euro-U.S. dollar exchange rate evolution had a negative effect of 2% on sales compared to the same quarter of last year and a negative impact of 1% on sales compared to the previous quarter. The gross result was EUR 83.4 million or 38.8% of sales, a decrease of 23% compared to the same quarter of last year and an increase of 1% compared to the previous quarter. R&D expenses were 12.8% of sales. G&A was at 6.1% of sales and selling was at 2.3% of sales. The operating result was EUR 37.8 million or 17.6% of sales, a decrease of 41% compared to the same quarter of last year and an increase of 6% compared to the previous quarter. The net result was EUR 27.5 million or EUR 0.68 per share, a decrease of 46% compared to EUR 51.2 million or EUR 1.27 per share in the third quarter of 2024 and a decrease of 27% compared to the previous quarter. Moving to the outlook. Melexis expects sales in the fourth quarter of 2025 to be in the range of EUR 215 million to EUR 220 million. And for the full year 2025, Melexis expects sales to be in the range of EUR 840 million to EUR 845 million, with a gross profit margin around 39% and an operating margin around 16%, all taking into account a euro-U.S. dollar exchange rate of EUR 1.17 for the remainder of the year. And for the full year 2025, Melexis now expects CapEx to be around EUR 35 million, previously around EUR 40 million. So this concludes our remarks. We can now take your questions. So operator, please go ahead. Philip Ludwig: Thank you, Marc and Karen. Philip again. To reiterate, please ask one question with one follow-up at a time and if you have more questions, you can rejoin the queue. Operator, can you please give the instructions? Operator: [Operator Instructions] The first question comes from Francois-Xavier Bouvignies from UBS. Francois-Xavier Bouvignies: My first question maybe is on your top line. If I understand correctly, if you look at peers, visibility is still fairly low. So can you provide a bit more like color on what you see as much as you can into the start of '26? I mean, do you see in line with seasonality a good proxy at this stage? Or do you think the recovery can continue and you can have above seasonal trend into early '26? Marc Biron: Yes. Thank you for the question. As we have already mentioned in the previous quarter, and as you mentioned it, indeed, the visibility is quite limited. We have received a lot of short-term orders, even order within the quarter. And for all these reasons, indeed, the visibility is not -- it's less than in the past, I would say. Yes, we are also now in the middle of the annual price negotiation with our customers. And in those annual price negotiations, there is also the forecast discussion. And I think it's really too early. For all these reasons, it's too early to give a helpful view on '26 and even early '26. Francois-Xavier Bouvignies: Got it. And maybe on the gross margin side, I mean, I can see your inventories are -- on your balance sheet are all-time high. So I was wondering, how should we think about the gross margin directionally, I mean, from here? Because it seems that you keep your loading quite high. So you still produce a lot of inventories. So should we expect the gross margin to flatten from here as it recovers? So you have to sell inventories first and the loading not increasing much. I mean it seems that your inventories is quite high. So I was wondering how you want to manage it and what's the impact on the gross margin? Karen Van Griensven: Yes, the gross margin, as we mentioned before, it has quite some effects. That are, I mean, amongst others, the euro-U.S. dollar, which is specific for '25 and which will probably -- I mean, if the dollar is stable, will have limited impact next year. So that could have a positive effect moving forward. The same is true for cost of yield. Cost of yield today also in Q3 was still quite high. But we expect as from Q4 that we will see gradual improvement of the cost of yield also of the gross margin. So expectations are that over the next quarters, we will see a gradual improvement of the gross margin despite that inventories are so high. Does that answer your question? Francois-Xavier Bouvignies: Sorry, Karen. The cost of yield, what do you mean by that? I mean you mean the loading or why your yield would be below -- why yield would be below usual right now? Karen Van Griensven: It's higher than usual now, and it will go back to the more usual amount. So the yield is the way -- it has to do with... Francois-Xavier Bouvignies: I understand that, but why is it more. Karen Van Griensven: Why is it? Francois-Xavier Bouvignies: More than usual. Why... Karen Van Griensven: It has to do with the ramp-up -- that's already for more than a year. So it has to do with ramp-up issues that we had in one of the fabs and because it's a new process, new technology, and it often comes with, yes, ramp-up issues. But these ramp-up issues have been solved. That's why we will now expect better gross margins due to that effect. Francois-Xavier Bouvignies: And how much is it drag? Karen Van Griensven: How much -- yes, it has an impact, a negative impact of at least 2% today. Operator: The next question comes from Ruben Devos from Kepler Cheuvreux. Ruben Devos: I had a question regarding the design win for the motor driver on the 48-volt EV architecture. I was curious what's the step-up in Melexis content versus the 12-volt baseline? And when do you expect sort of sales to be visible here? Marc Biron: The 48-volt architecture is a kind of modern, let's say, new architecture that has been developed by some OEM. Yes, OEM specialized on the EV car. The advantage of this 48-volt architecture is that you can provide power without consuming too much current. And all the goal is to reduce the current consumption of the battery to keep the range high, but having more power in order to move some equipment that need power, then this 48-volt architecture is more and more used by the OEM. As a consequence for the IC manufacturer is that you need to develop specific IC that can, let's say, withstand this 48-volt. Yes, and Melexis, we have started to develop this product some years ago a bit in advance because we are close to the customer. Then it's -- as I mentioned, it's a unique product on the market. And then, yes, we have received our first design win in Q3 for such application directly from an OEM. And to answer your question, yes, what will be the outlook? Yes, it really depends on the speed of the adoption of those 48-volt architecture. But now we have in the making more and more products that are compatible with this architecture. Ruben Devos: Okay. And second question regards the China EV market specifically. So I think you've had a series of quarters where performance was better than in the other regions. I think now also in Q3, it was down, but still better than, for instance, North America. But just wondering around the latest ordering behavior, let's say, the sort of -- is there any change in tone from China, specifically the divergence between Chinese OEMs and what the Western platforms are doing? Marc Biron: Yes. Q3 was a bit lower, but we see already that in Q4, the order from China are back to, let's say, previous level. Then there was indeed a small dip in Q3. Is it linked to inventory correction? I don't know. I'm just assuming -- I don't know exactly what is the root cause. But yes, in Q4, it is back to the regular trend, let's say. Ruben Devos: Okay. And any visibility on early '26 or it's too soon to say anything about that? Marc Biron: Yes, it will be too soon indeed. As I answered before, it's too soon. In general, I would say the funnel of opportunity and the design win are still very strong in China. If we take the top 10 of our design wins in Q3, yes, 6 out of the 10 are coming from China. It's just to show that China is still very strong. Operator: The next question comes from Marc Hesselink from ING. Marc Hesselink: My first question is actually on the testing you're currently doing with the Chinese foundry. I think you intend to start the production there at the beginning of next year. So I just want to know any update that you can see, also maybe related to that yield that if you have some early indications how that's going? Marc Biron: Yes. Small correction, we intend to start the production during summer next year. You mentioned early next year. I would like that it's early next year, but yes, you are a bit too optimistic. It will be summer. Yes, it's for a current sensor that we have developed specifically for this market. We have now the first wafers and the development has been done. The design has been done. We have received the first wafers 2 weeks ago from the fab. Yes, we are now in the process to evaluate the product. It's too early to give any indication. But yes, the chip exists and the chip is working. We are now busy to evaluate the performance. Marc Hesselink: Okay. My second question is on cost, both OpEx and CapEx. Pretty good cost control over the quarter, both lower than expected, also lowering the CapEx guidance for the full year. Can you maybe explain a bit what's behind it? Is -- this is a reaction on maybe a bit longer gross margin pressure? Or is it simply you don't need to do those investments at this stage? Just why it's moving? What did you exactly do to have this good cost control? And what do you expect going forward? Karen Van Griensven: The cost control, given the uncertainties today, we are just putting control on our costs to make sure they don't increase in the current environment. Also over the next quarters, we want to continue that behavior. On the CapEx, yes, it has to do with the product mix. There are many elements that are at play. The product mix has an impact on the CapEx we need. But in general, yes, we see that the pickup is rather slow. It's pretty -- we have an increase quarter-on-quarter, but it is very slow today. So that, for sure, also has an impact on the current CapEx visibility. Marc Biron: And perhaps to complement, Karen, we could say that indeed, we pay attention to the CapEx. But for all the innovation aspect, all the development aspect, we don't reduce at all the CapEx. We are still up to speed on the development. Operator: The next question comes from Janardan Menon from Jefferies. Janardan Menon: I just want to ask a question on the non-automotive side. You seem to be doing quite a lot in terms of drivers for fan coolers, robotics, et cetera, on that side. The proportion between automotive and non-automotive has been roughly flattish at about 88-12 for some time now. When you look at 2026, do you see a possibility where your non-automotive will start growing faster than your automotive? Is that something you can say at this point based on your design wins, et cetera? And in that context, the tactile sensor for the robot, the design win you've got, what kind of -- are you shipping something there? And when can we expect some volume there? Marc Biron: Yes. On the first question on the overall revenue, let's say, from non-automotive for '26, I think we need to be patient. In the funnel of opportunity, in the design win, we really see that the non-automotive is more dynamic. I mean the increase is deeper or steeper in the non-automotive than in automotive. And we really see in the funnel much more dynamic for the non-automotive. Now we need time to convert this in real sales. It means I don't anticipate, I would say, in 2026 that it will become very, very visible even if -- yes, we are working on it. I'll give the example of the funnel of opportunity. I can give also the example of the product launch. We will launch probably 19 products in 2025 (sic) [ 2026 ]. And out of the 19, 9 will be for non-automotive. And we are really -- the machine is running full speed for the non-automotive product. We should be a bit patient for the conversions effects. Coming on your second question about -- sorry, coming on your second question about the Tactaxis. We will explain more in detail during the Capital Market Day next week. But for the Tactaxis, we have decided to not provide only a chip, but we are -- we want really to provide what we call the solution, which is more of a module. We will give more detail during the Capital Market Day. And we have indeed shipped the first module to our customers and now the customers are evaluating not only the chip, but really the module. But it's a big step for us. Janardan Menon: Understood. And just a clarification, if I may. The 2% of gross margin improvement from yield improvement, over what period do you recognize the full 2% or 200 basis points? Karen Van Griensven: It will take a few quarters, but we will probably see already an effect in Q4. It's because we need to go through our inventory before we see the full results. That's why it is gradual. Marc Biron: But we see it already in our test. I mean in our test results, we see that the problem has been solved, let's say. Operator: The next question comes from Craig Mcdowell from JPMorgan. Craig Mcdowell: First one on your auto business. We heard from a large peer that their conversations with OEMs and Tier 1 suppliers suggest that content growth and mix will be far less positive in '26 than in prior years. I understand you're going through sort of planning and budgeting and pricing negotiations, but it would be grateful to hear your perspective on content growth into '26 and what's showing up in your order books. Marc Biron: Again, I think it's too early to give comments on '26. We will give outlook for '26 in early '26. We see that -- yes, there is a bit of 2 different dynamics in Europe and in China. The European customer -- I would say, 1 year ago, the European customers were very cautious, okay? We see also that the Tier 1 and the OEM are reducing the headcount. And we see the consequence that they postpone new platform, they delay the innovation. I think since some months, this trend has been reduced, and we see a new dynamic, let's say, in the -- with our European customer. We speak about new platform, about innovation again, but it's quite moderate. If you compare with China, where in China, there is a lot of traction, let's say, for modern car, modern platform, a lot of premiumization feature in the car. There is a bit of 2 dynamics, I would say. It's why in our decision, in our budget, we want also to make sure we concentrate enough on the China market. Yes, in terms of content, because your question was about the content. Yes, I think long term, I think it's clear that the semiconductor content is increasing in the car. It's also clear that this rate of increase depends on the type of application. I do believe that it will increase more in China than in Europe for the reason I mentioned before. Operator: The next question comes from Robert Sanders from Deutsche Bank. Robert Sanders: Two questions, if I may. Firstly, in terms of the OEMs, they started recommencing R&D on ICE platforms. Is that a good thing for you given the innovation is coming back to sort of your legacy sockets? Or is that a kind of potential risk given that you might lose those sockets? Just interested what that means for your margins and content in ICE powertrains. And the second question would just be in China. Clearly, you've got quite capable competitors like NOVOSENSE in China. Given that the China EV market is kind of suffering from very severe excess inventory at the moment, is that a problem for your pricing discussions next year? I would expect that pricing pressure would intensify. Have you seen that so far in your discussions for next year? Marc Biron: Yes. The first question about the combustion engine. At the end, for Melexis, we have the same number of content in a combustion engine and in an [ electric ] engine. If the end customer selects an EV or a combustion engine car in terms of chip content, it's the same for Melexis. What is important for Melexis is that this -- if we come back on the combustion engine, the combustion engine is put on a modern platform because in those modern platform, there are much more comfort feature, safety feature, what we call premiumization, meaning that ICE or EV is the same for us. What is important if the OEM, let's say, reuse their ICE engine, it's important they put this on the new platform, which is the case because now when you buy a new car, you like to have, let's say, enough premiumization feature. And what we see what the OEMs are doing in Europe, indeed, they refresh their ICE engine, but they put it in a modern platform. Robert Sanders: And on the pricing erosion question? Marc Biron: Yes, sorry. Yes, on the pricing erosion, for sure, we like to go to China because there is a lot of content in the car, but there is also a lot of competition in China. You mentioned NOVOSENSE. Yes, it's a very serious competitor. And yes, 2, 3 years ago, the discussion with the customer were about number of chips, how many chips can you supply? It was the discussion 3 years ago, okay? Now the price or the cost is also part of the discussion. And yes, we have cost discussion with the customer. It's also why we are working on the diversification of our supply chain. It's also why we are working on our internal cost because indeed, we need to improve our cost base in order to be able to have market price with good margin in China. Robert Sanders: But would you say last year, BYD was asking for 10% price cuts from their suppliers. Would you say that's about par for next year? Or do you think it's worse because of the margin pressure they're facing? Marc Biron: I would say the price expectation from our customer last year -- I mean, the price reduction expectation of last year are similar to this year. But of course, they expect a lot and then all the negotiation starts, and we are able to reduce those expectations. It's why a bit as last year, I think, yes, we expect a price reduction, low middle single digit as last year, I would say. It's also important because you mentioned BYD, which is a very big customer. And of course, with this kind of customer, we have price reduction. But it's important to realize that we have a long, long, long tail of small customers. And with those small customers, we don't really discuss price. We have -- yes, I cannot give like that, let's say, the volume or the revenue taken by the top 20 customers. But yes, we have a very long tail of smaller customers when we don't discuss price. I mean that those price discussions at corporate level have a lower impact, let's say. Operator: [Operator Instructions] The next question comes from Michael Roeg from Degroof Petercam. Michael Roeg: I have 2 follow-up questions on inventories. One of the first analysts indeed mentioned that inventories were at record levels. And this is despite the fact that the scrap was above average, low yields, low gross margins. Now if your gross margin recovers because your yields improve, is there a risk that your inventories will grow even more than they already did in the last year? That's the first question. And the second question is, is your entire inventory immediately commercially available? Or is part of it stored in die banks? That's it. And then a follow-up afterwards. Karen Van Griensven: Our inventory is indeed at historical high levels. But we do not expect from here that it will further increase and the yield has limited impact on this, rather the contrary because it will mean that it goes hand-in-hand with better lead times as well, meaning that you need -- the need for inventory reduces. The second question was about die banks, I think. Marc Biron: Yes. I think indeed, the inventory is spread all over the supply chain, then we have part of the inventory is ready to ship because it need to go to be able to react quickly, but we have -- we keep as small as possible, let's say, the inventory ready to ship. And the rest of the inventory is across the supply chain at wafer level before the assembly, after the assembly. So the big part of the inventory is unfinished. Michael Roeg: Okay. But then coming back to those inventories, if you have better yields, then more finished product will end up in your inventories. I also heard that cycle times will be shortening. That means even faster ending up to the inventory. So that means that you must be selling out faster than today to get your inventories down. Marc Biron: No, because we will order new wafers according to the new yield. And indeed, if the yield is 2% higher, as Karen mentioned, we will order 2% wafers in such a way that we can keep inventory under control. Michael Roeg: Okay. Clear. That's clear. Then another quick follow-up question about China. You mentioned you have a very long tail of smaller customers in presumably automotive in China. There have been a lot of news articles about excess capacity among Chinese car manufacturers and the risks associated with that and that the government wants normal price behaviors and stuff like that. What is your -- how you say, counterparty risk with respect to these smaller customers? Do you have a debtor insurance so that -- suppose that one or more would go bankrupt that you still get paid? Yes. What's the situation on that? Karen Van Griensven: Yes, we -- in most cases, we have a distributor in between. So we deal with the distributor. We do not have an insurance, a debt insurance, but we monitor this very, very closely. And in cases where we are not confident in the repayment capacity, we ask for a prepayment as well. So -- and this happens quite a lot in China. That's how we monitor the situation there. Michael Roeg: So would you say that the risk of a smaller end customer lies with your distribution partner? Or has it happened that they try to pass part of it on to you as well in a situation like that? Karen Van Griensven: The risk is with the distributor. But, of course, we need -- I mean, the risk for us is on the financial stability of our distributor, of course. That's why we monitor that very closely. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Marc Biron: Thank you, operator. In summary, after 9 months in 2026, Melexis continue to see sales trends improving. We continue adding innovative new products to our portfolio, and we concentrate resources to our faster-growing market. I would like also to highlight the Capital Markets Day that we will hold on November 5, next week. Thank you for joining our call, and goodbye. Operator: Thank you for joining today's call. You may now disconnect.
Maggie O'Donnell: Good afternoon, everyone, and thanks for joining Adyen's Q3 2025 Business Update Call. My name is Maggie O'Donnell, and I'm part of the Investor Relations team, and I'm happy to be joined today by Ethan, our CFO. In today's call, we'll discuss Adyen's financial and business updates from the quarter, followed by a Q&A segment. [Operator Instructions] With that, let's get started. Ethan, what were your key takeaways from this quarter? Ethan Tandowsky: Sure. Thanks, Maggie. In the third quarter, we delivered strong revenue growth of 23% year-over-year on a constant currency basis. We're continuing to see diversified growth across pillars as we expand share of wallet with our existing base. This quarter was especially characterized by consistent growth across regions and was also supported by the timing of settlements during the quarter as compared to last year. This quarter, our team grew by 86 FTEs, primarily in commercial roles in North America and in tech roles across our tech hubs. Overall, it was a strong quarter, in line with our expectations. Maggie O'Donnell: Great. Thanks, Ethan. Can you also just give us an update on the performance across pillars? Ethan Tandowsky: Yes, happy to. I'll start with Digital. Digital net revenue was up 10% year-over-year, driven by continued momentum in the content and subscriptions and delivery and mobility verticals. We continue to see a headwind from APAC headquartered merchants focused on online retail, but noted a slight improvement throughout the quarter. As we turn to Unified Commerce, we see that net revenue for the pillar was up 32% year-over-year. This is driven by strength across retail and successful execution of our strategy to expand share of wallet across channels. And finally, platforms. Net revenue was up 50% year-over-year, reflecting continued momentum in the SaaS segment. As we've mentioned before, our relationship with platforms typically starts with embedding payments, and we now have 31 of our platforms processing over EUR 1 billion annually with us. Amongst our platforms, the number of underlying business customers reached 212,000, up from 126,000 this time last year. This growing number of business customers, we see as an important indicator of our momentum towards the next phase of our growth. In short, Q3 was a quarter of solid broad-based growth across each of the 3 pillars. Maggie O'Donnell: Great. Thanks for the summary. Now let's talk about the outlook for the rest of this year. Is there anything in particular you'd want to highlight? Ethan Tandowsky: Yes. So similarly to what we shared in August, we continue to expect full year net revenue growth to be similar to H1 on a constant currency basis. Furthermore, we also continue to expect EBITDA margin expansion for the year. As we get closer to the end of the period covered by our financial objectives, we're also refining our net revenue expectations. We expect annual net revenue growth to be between the low 20s and mid-20s in 2026. Maggie O'Donnell: Great. Thanks. Before we go to Q&A, I'm sure most investors are wondering what we're planning to share at the Investor Day on November 11. Can you give a sense of the agenda for the day and what they can expect? Ethan Tandowsky: Yes, of course. First off, I'd say we're very much looking forward to hosting you all at our upcoming Investor Day, which will take place here in Amsterdam on November 11. Typically, we host these days every couple of years to talk about our long-term strategy and how we plan to execute it to capture the market opportunity in front of us. You can expect us to talk about our core strengths and how we leverage them to set us apart in our space. Ultimately, how we see our long-term opportunity. This includes how we think about our tech infrastructure, innovation and topics such as Agentic commerce. Of course, we'll also connect that back to our business model by giving a sense of how we view the opportunity ahead. We're looking forward to a great event, and I'm personally really excited to see you all. Maggie O'Donnell: Great. Thank you, Ethan. For those interested in attending the Investor Day in person, formal registration has closed, but we do have a few spots left. So please reach out to Isaac and me at ir@adyen.com if you're interested in attending. We also will be live streaming the full event on our website at investors.adyen.com. We'll now transition to the Q&A segment of today's call. We'll get to as many questions as we can with the time remaining. Following the call, the IR team will, of course, be available to respond to any outstanding questions. Maggie O'Donnell: All right. Let's take a look at the questions we've received so far. Our first question comes from Fred Boulan at Bank of America. Frederic Boulan: Hope you can hear me well. Maggie O'Donnell: Yes, we can hear you great. Frederic Boulan: If you can discuss maybe any specific factors that have driven the underlying revenue acceleration we've seen in Q3 versus Q2? Anything in particular you want to call out for the rest of the year beyond the kind of unwind of the settlement days? And then maybe as a follow-up on that, looking at 2026 and the new guide that you've provided, should we assume a base case is now for a bit of an acceleration, if I look at the midpoint of the guide or it's a bit early to talk about that? Ethan Tandowsky: Yes, sure. So first, if I talk through our growth in Q3, I think what is strong here is that our growth was really driven across quite a diversified set of customers, right? You see strength in each of the 3 pillars this quarter. What we've also seen is quite consistent growth across the regions. And so I think we're seeing strength in being able to expand our relationship with our existing customers across a really well-diversified set of our customer base. The other thing, of course, that you touched on is that we had some benefit from settlement days in this quarter. That was about 1% support to our growth in the third quarter, and we expect to have a similar sized headwind in Q4 given the timing of settlement days next quarter. In terms of our guidance for next year, we set that guidance back in November 2023. And we've been quite open in sharing how we look and get insights into our revenues, that's around a 6- to 12-month type of view that we get around our revenue growth. That's because we're in constant conversations with our customers, and that's typically how they think about their own planning, their own road maps, their own priorities. And as we start to get more and more visibility into what next year looks like, we wanted to refine our view and share that information with you all. We don't still have complete and total visibility on those expectations. So we're still working through that over the coming months. And as we get more and more visibility, we'll give that view, but we're confident that we can deliver within the range that we've shared today. Maggie O'Donnell: The next question comes from Hannes Leitner from Jefferies. Hannes Leitner: I have also a question on -- you mentioned that Digital saw some attrition towards Unified Commerce pillar. Maybe you can elaborate on that? And then within Unified Commerce, you talked about luxury segment outgrowing the group performance in H1. Maybe you can talk about that trend, how that continued and how long you think that will continue to grow? Ethan Tandowsky: Yes, sure. So I would much more call it expansion than attrition. I think our strategy is about how do we grow -- land our customers and then expand with them. That can be across regions, that can be across sales channels like in this case, that can even be around expanding to more brands. It really depends on the business. In this case, this is about adding an in-person payment sales channel to existing e-commerce businesses. And that's a move that is -- that we see basically quarter after quarter as it is part of our strategy and part of how we can help our customers to solve for complexity. We called it out this quarter because we saw a more visible move in our Digital volumes to Unified Commerce. But this is just playing out our strategy as we always have. On your second question around Unified Commerce and how luxury is growing. I gave that example back in August because I wanted to share that the growth of our existing customer base is split between growth in share of wallet and their own growth. And at that time, luxury was quite publicly not seeing strong market volume growth, but it was still for us an industry or vertical that was growing faster on our platform than the overall platform was growing, and that was due to share of wallet gains. So we continue to see strength in that vertical. But it wasn't to explain all of our growth in Unified Commerce. I think what we've seen over past years is that we've actually really diversified across many more verticals. We call out entertainment, we call out hospitality. So while we are seeing strength in retail, we're also seeing our customer base get much more diversified. And I think that's the story of how we're growing so far this year. Maggie O'Donnell: The next question comes from Justin Forsythe at UBS. Justin Forsythe: Just one question here. So I wanted to come back on the largest cohort comments for 2025, new merchant cohort that is that you made at the 1H. Maybe you can just confirm whether that's still in play based on the last 3 months progression? And also talk a little bit about where you're having success. I know you just mentioned and why. I assume, again, within that comment as well, you wouldn't be counting then any existing partners like LVMH or Shopify or Toast within that, so therefore, aren't part of the 2025 cohort. And could we potentially be, given how strong this cohort is performing at a high single-digit contribution versus the building block suggested contribution of mid-single digits? And is there anything that's providing incremental opportunity, say, like the Worldpay Global Payments pending merger or any other broader macro shifts in the payments universe? Ethan Tandowsky: Thanks, Justin. So indeed, the comment that we shared is if you look at the 2025 cohort and compared it to the 2024 cohort that this cohort was growing faster than the overall platform was growing. We continue to see that through the third quarter. These are indeed all new customers. So these are customers who we are working with for the first time that are included there. Otherwise, it would indeed be expansion with our existing base. In terms of how it's shifted, I think maybe the only thing that I would call out is that if you look over the past couple of years, we've seen our pipeline move more to platforms than it was previously. So a bigger proportion of the pipeline is now coming from platforms than in previous years. Other than that, it's the same things that are differentiating ourselves -- that have been differentiating ourselves over the past years. It's how do we drive the best payments performance, right? Uplift is a big part of that story, a combination of auth rates and fraud and authentication and payments costs. It's, again, the platforms play. It's connecting sales channels across online and in-store. So it's very much iterations on top of the differentiation that we've been driving over past years. And that's the story of what we're seeing today. I think your question around what to expect for the building blocks going forward, I think it very much has -- it should have a similar impact in the next year. I think still mid-single digits is the right way to think about it. But of course, we see pretty consistent ramping from year 1 to year 2. So if this is a faster-growing cohort, it should have some larger impact in 2026, but the biggest part of our growth next year will come from our existing base still. Maggie O'Donnell: The next question comes from Mohammed Moawalla from Goldman Sachs. Sorry, that's my mistake. The next question comes from Adam Wood at Morgan Stanley. Adam Wood: Maybe first of all, just to come back on the 2026 outlook. I guess if we look at the run rate today, you've got some exceptional headwinds in the business, the large merchant, the Chinese merchants and eBay. And I think you'd probably be a good few points ahead of what you've reported if we were to ex those out. Is that a big part of why you'd still see mid-20s as a realistic outcome for next year? And are there any other things you'd highlight to give us comfort that, that's still a realistic scenario? And then maybe just secondly, as we look at the guide or the implied guidance for the fourth quarter, it does imply some decel. Obviously, the settlement headwind is part of that. Is there a desire to flag that there'll be deceleration in the fourth quarter? Or is it just a feeling that your guidance is specific enough already and there's no kind of clear signaling implied in that? Ethan Tandowsky: So yes, thinking about 2026, first and foremost, I think it is easy to isolate and pick out one customer or another. When we've shared this guidance, it's been a reflection of the broad customer base that we have, right? So when we take our current information about how we expect to grow with all of our customers across the platform, across all of our pillars, across all of our regions, again, a much more diversified base as we go year-by-year. This guidance range is a reflection of how we expect to grow with the width of them. And so of course, you can pick out and isolate specific topics. But for us, it's really about the overall growth of our customer base on the platform. And when we're in discussions with them and when we're trying to understand the opportunity size that we have going into next year, the visibility that we start to get puts us in the range that we shared today. In terms of what we're sharing for Q4, I think the main thing that we are sharing which is different between Q3 and Q4 is the impact of settlement days. Again, that was a 1% support to our growth this quarter, and we think that's a 1% or so headwind to our growth next quarter. We wanted to be sure that, that was understood. On an annual basis, this has very little impact. But given where we are quarter-by-quarter, we wanted to share that. And that's ultimately what we're sharing for our guidance through the rest of the year. Maggie O'Donnell: The next question comes from Adam Frisch at Evercore. Adam Frisch: On the continued execution. I wanted to ask specifically about -- there are aspects to your growth algorithm that are specific to Adyen, obviously, the growth with your existing base and so forth. But I also wanted to ask you to specifically call out anything you're seeing in markets in Europe being particularly weaker, stronger, any view on the consumer? There's been a lot of mixed data points around there and the fact that you guys are growing so well, maybe you have a different view. So if you could just separate the Adyen-specific stuff from what you're seeing in the overall market would be very helpful. Ethan Tandowsky: Yes. Thanks, Adam. I think the challenge is that they are mixed in our view of growth, right? So our growth with our existing customers is that combination of how fast they are growing with how fast we are gaining proportion of their share, what we call share of wallet. We haven't flagged anything specific that we've been seeing related to changes in behavior here. So I don't really have additional insights to share. Maggie O'Donnell: The next question comes from Jason Kupferberg from Wells Fargo. Jason Kupferberg: I just wanted to circle back on one of the prior questions about Q4, make sure we have the numbers right here. So we did 23% in Q3, would have been 22% without the settlement tailwind. And then I think the implied growth for Q4, if the second half is going to be the same as the first half is 19%, which would be 20% if you add back the benefit of settlement. So it does seem if our numbers are right, like there's a little bit of a modest slowdown embedded in there. So I don't know if this is more just rounding, but I just want to make sure we're synced up properly for Q4. Are you putting some cushion in there for macro or tariffs or any other items? Ethan Tandowsky: Yes. So I think what we've tried to share is a view on the year, right? And of course, we're getting now closer to the end of the year. So that time frame gets shorter and shorter, but we've never been trying to guide to every specific quarter. It is our expectation that Q4 will not be at the same growth rate as Q3 given that settlement day impact. Q4 was also a very strong quarter for us last year. So the comparables are strong that we're comparing ourselves to. We still think that we're in a strong position to grow, but these are the factors ultimately in play, which lead us to continue with the expectation we shared back in August, which is that our growth for the full year should be broadly in line with the H1 constant currency growth. Maggie O'Donnell: The next question comes from Darrin Peller at Wolfe. Darrin Peller: Just 2-part question. One is first on Agentic. I know we'll get a lot more at the Investor Day, which we're looking forward to. But maybe any quick preview on some of the initial ideas or plans or partnerships you see already and what your opinion is in terms of momentum on it in the next, let's call it, 2 to 3 quarters from Adyen's perspective? And then the second part would be around hiring. I just -- we keep seeing -- we continue to see the healthy pace of hiring. Ethan, is this the run rate that we should expect sort of normalize for the company going forward in terms of, call it, the annualized rate we're seeing this quarter? How do you want us to think about that? Ethan Tandowsky: Yes, sure. I think first on Agentic commerce, we're really excited about the potential to help customers meet their own customers where they want to engage in commerce. And this is certainly an area that we think over time will develop and be an important piece for our customer base. At the moment, what we're doing is we're working with other industry leaders, think about a Google or an OpenAI or Visa or Mastercard, working together to make sure that we develop standards, which will truly work for merchants that will support them in their growth and their relationship with their own customer base. So we're absolutely engaged and actively working together with others in this space to make sure that we deliver a really unique and differentiated solution for our customer base. Again, here, a lot of the challenges that we're really already strong at, things like authentication, things like managing fraud, things like multiple payment methods. Those are things that we are -- that are core strengths of ours and that we think we can apply in this realm as well. Of course, you mentioned it. We will share more at our Investor Day, but I think that's how I'd summarize our position today. In terms of hiring, yes, we did 86 net new FTEs this quarter. I think the last 2 quarters, we did about 110 each. That type of level is something that we would expect to continue. I have no reason to think that we need to scale that significantly up or significantly down over the next coming while. So as of now, that's our plan. And if that would change, I would, of course, let you know, but that's our expectation going forward. Maggie O'Donnell: The next question comes from Harshita Rawat at Bernstein. Harshita Rawat: I want to ask about Uplift, and I appreciate you're going to discuss it in more detail at the Investor Day. So you've enabled it for all of your customers. What's the uptake been? I know you talked a little bit about it last quarter, the conversion boost you're seeing? And also, how should we think about wallet share gains as it relates to Uplift, especially as we look into next year? Ethan Tandowsky: Yes. So Uplift is a really important way that we package our differentiation to our customers. It continues to be that. So the same updates we gave in H1 hold true through Q3. For instance, when we look at our new customers that we onboard, we still see around 2/3 of them or so using Protect from day 1, so our fraud tooling. But ultimately, this combination of solving for authorization of solving for lowering payments costs, solving for better authentication flows and reduction of fraud, those can be applied no matter the priorities of customers, right? If they want to focus fully on how do they drive revenue Uplift or if they want to manage payments costs more carefully, those are optimizations that they can control and tweaks that they can make. And Uplift really helps make -- helps them quantify the impacts and make it easier for them to ultimately take up these products. And so it's a really important part of our commercial conversations and how we help bring more share of wallet to the platform. It continues to progress well in Q3, similar to what we shared in H1. Maggie O'Donnell: The next question comes from Alex Faure for at Exane BNP Paribas. Alex, can you hear us? Alexandre Faure: Can you hear me now? Maggie O'Donnell: Yes, we can. Alexandre Faure: A couple of questions maybe. As we go into the CMD, I just wanted to sort of look back to what you guided to in November 2023 and sort of this acceleration in the high 20s you're expecting for 2026 and you're now guiding more to, I don't know, low to mid-20s. So I know you called out some tariff impact, obviously, but you also helped us size that impact. So it doesn't quite take us to high 20s. So what do you think didn't go according to plan to get to high 20s in 2026 eventually? So that would be my first question. Second question is going back to the Agent commerce discussion, I heard what you say in sort of engaging with other industry leaders in OpenAI and Google and so on. When you look at all the different protocols and frameworks that have been issued so far this year, and you think of the work it requires on Adyen side to integrate with some of those, does it sound like a significant work? Is it a matter of weeks, a matter of months, a matter of quarters? How should we think about that? Ethan Tandowsky: Yes, sure. So I think if you think back to November 2023, as you mentioned, right, we were giving a 3-year view. Now we wanted to share a wider range at that time, given that we were giving a longer time frame, right? So we were talking about that 3-year view. And a lot of things happen over multiple years to understand what your growth looks like in any given year, right? Even the priorities of your own customers, what is in play in 1 year may look different than what's in play in the next year. And that's just based on their road maps, their own prioritization. We're always looking to help our customers where they have the pain points where they are focused, and that can look different in any given year. So I wouldn't necessarily frame it in the sense of like, hey, what went wrong or what went differently, mostly frame it in, we get closer towards this 2026 year, towards the end of this kind of guidance time frame, and that gives us more visibility and that more visibility is what we are trying to share here by refining the financial objective. To your second question on Agentic commerce, it is not real significant work for us to implement. And I think that's the benefit of building everything on our single platform and taking that end-to-end ownership. We have so many of the building blocks which are going to be required in this new Agentic world, and that positions us really well to be able to move quickly. So I think in large part, we have a lot of the building blocks, which will be at play here. It's much more about figuring out the solution, which truly will help merchants and allow them to give -- have the right experience and the consumers to have the right experience. Of course, there's going to be some work that goes into it, but that's not the biggest piece. I think we largely have the building blocks in play, which is a great position to be in. Maggie O'Donnell: Great. The next question comes from Pavan Daswani from Citi. Pavan Daswani: Can you hear me? Maggie O'Donnell: Yes, we can hear you. Pavan Daswani: So my question would be on the de minimis tariff impact and the previously guided 2 percentage point drag in H2. Could you maybe give us an update of how did that trend in Q3 for the online APAC headquarter merchants? And was there any incremental disruption in late August with the de minimis expansion? Ethan Tandowsky: Yes. For the subset of customers that we talked about in the first half, we saw a slight improvement during the quarter. Also keep in mind that in the first half, this was largely an impact that we saw at the end of that first half. So we did see some slight improvement throughout the quarter, but nothing that really meaningfully changed our results that's worth commenting on. In terms of other impacted merchants also beyond it, we haven't seen material or meaningful movements related to this throughout the course of the third quarter. Maggie O'Donnell: The next question comes from Sven Merkt at Barclays. Sven Merkt: Can you give us maybe a bit more detail on the point of sales volumes growth? It slowed sequentially in both Unified Commerce and Platforms. Can you just comment what is the driver here, especially as you called out that there's been an increased migration from Digital to Unified Commerce? Ethan Tandowsky: Yes, there's nothing specific that I would call out related to this. I think in any given period, right, it is a short-term period. You do see different volumes moving between pillars, but also between the sales channel, also between regions, right? So I wouldn't focus too much on a single quarter results. I think in general, what we've seen is strong growth across each of our pillars, across each of our regions. It is quite a diversified mix, which is driving the growth that we see in the third quarter. And for me, that's the strength of the position that we're in. Maggie O'Donnell: The next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: I have 2 quick questions on your revenue line. I mean you've got some new initiatives like issuing as well as lending, et cetera. Where are we at this point? Has anything changed in the third quarter in terms of progress on these pillars, these next-generation pillars that you are working on? And then secondly, looking into '26, I mean, in the past, Adyen would announce some big new customers and they would have a significant impact on your sales growth in future years. With your TPV now so much bigger than it was in the past, are there any customers that are targeted and can make a big difference to Adyen in '26 or beyond? Or are we now at the point that most of your growth -- more and more of your growth is going to come from existing footprint gains at existing customers. But clearly, this is something that you will probably talk at the Capital Markets Day, but is that way we are going towards as such? Ethan Tandowsky: Yes. So let's start with embedded financial products. Of course, it's a topic we will cover in more detail at Investor Day. But in relation to Q3, I think we still see strong traction in issuing. That's one that we talked about also in H1. And I think in general, the way to think about EFP is that it's a really important piece of the products we deliver, especially to our platform customers. And it's a big reason why we're able to grow the platforms pillar in the way that we have been at the 50% or so level that we saw in Q3 as well. In terms of if there are still big customers to win, which ultimately will drive our growth, I think there's a couple of points I'd make. One is I've said it a few times on the call, but we are getting more and more diversified. So there are more and more customers on the platform, which are helping to drive our growth. I don't look at it necessarily on an individual customer by individual customer basis. If you again compare it or take a look at the 2025 cohort we're seeing on the new sales side. So again, completely new businesses to the Adyen platform, we're seeing that scale up quite nicely. So there still is a lot of potential for us to add new business to the new customers to our platform. And we're very much focused on still driving that because while it has little impact in any given year you add them, it does drive your growth over future years, and it's very much also a signal to our positioning in the market, the strength of the differentiation we have. And so it's, of course, something we spend a lot of time on and that we see strength in today. Maggie O'Donnell: The next question comes from Sanjay Sakhrani from KBW. Sanjay Sakhrani: Kind of I wanted to ask the 2026 question a little bit differently. I guess when we think about that range that you guys have provided, how have you built that range up? And then when we think about some of the variables that could land you within that range, bottom or lower, like what are they? Because as discussed earlier, you've had some puts and takes over the guidance period that you provided before. Ethan Tandowsky: Yes. So the biggest driver of our growth for 2026 is going to be the existing customer base. And the 2 biggest factors are how fast they grow and how much share of wallet we gain in that year. Now we're starting to get some better insight into the specific opportunities that we see with our customer base for 2026 as they go through their own planning process, their own prioritization exercise, and they talk through what types of opportunities they'll be focused on. We also start to get better insights into how they think about their own growth for next year as well. But ultimately, those are going to be the 2 biggest factors that will drive our growth. And while we're not at the point that we have full visibility with them because we're still going through that exercise, we did feel like it was helpful to refine again the range at which we see 2026 playing out. And I think if you look at that range, you see that we'll be in a position to gain significant market share also through the course of next year. We're well positioned to be able to gain much more share of wallet with our customer base. And I think that ultimately is the strength of the differentiation that we have and that we're bringing to market. Maggie O'Donnell: The next question comes from Bryan Bergin at TD Cowen. Bryan Bergin: A bit of a follow-up there on wallet share. So just can you share updated views on your wallet share penetration across certain client cohorts that you've talked about in the past? The runway for further penetration in that wallet share? And does macro volatility enable situations where you can actually pursue and win greater wallet share in certain types of clients? Ethan Tandowsky: Yes. So of course, this is part of what we addressed at the Investor Day a couple of years ago, thinking about where we are per pillar by wallet share. I think the reality is that we're still very much in the same position that we still have most of the wallet share still to win with our existing base. Now that's not true for every customer. There are customers we do 100% or the vast majority of payments for them. But if you look at our platform overall, especially because we've been continuously adding new customers to the platform over past years, we're still in the position where the majority of volumes within our customer base is to win, and that's what we're very much focused on. Maggie O'Donnell: The next question comes from Fahed Kunwar at Redburn. Fahed Kunwar: Just a quick question on Digital, specifically. I thought the acceleration or the inflection in Digital is quite interesting. We've had a couple of quarters where you've disclosed net revenues where it's been decelerating. I appreciate there's been some noise, but it does feel like we had kind of that 7% core number last quarter, probably 9%, 10% ex de minimis and leap year and -- FX, sorry. We probably jumped up to kind of 12%, 13% now. Could I understand -- and that 12%, 13% is with volume boom in Digital to Unified Commerce, so really, really strong performance. Could I understand what's been happening in Digital? Like why has it inflected as much as it has? And going forward, can we expect further acceleration in Digital revenues? Because my understanding is Unified Commerce and Platforms is probably where the juice is coming from, but any color on that would be great. Ethan Tandowsky: Yes. I would just say that we remain really, really focused on winning in Digital. It's the biggest part of our volumes. It's the biggest part of our customer base. A lot of the products that we've been rolling out have a huge impact on Digital customers, right? Think about the Uplift suite, this combination of authorization and payments costs and fraud, that's really, really prevalent in the Digital pillar. And I think our global capabilities, our abilities to work with the largest enterprise and really optimize for their payments needs is the thing that's been really important to differentiating ourselves. Now that's always been the case, but rolling out products like Uplift help us ensure that we continue to stay differentiated that we can continue to help our customer base, and that's ultimately where you see us continuing to gain share. Maggie O'Donnell: Thanks for your question. The last question -- I guess that is the last question. Thank you guys so much for joining us today. We appreciate you taking the time. For any further questions, please don't hesitate to reach out to the IR team. Have a great day. Ethan Tandowsky: Thanks, everyone.
Anssi Tammilehto: Good noon, everybody. Welcome to discuss Neste's Q3 results that were published this morning. My name is Anssi Tammilehto. I'm SVP for Strategy, M&A and Investor Relations at Neste. Here with me, we have our President and CEO, Heikki Malinen; and our CFO, Eeva Sipila. We are referring to the presentation that was launched into our website early this morning. And the key highlights of the presentation include, for example, our Q3 financial performance and the status of our financial targets, including the performance improvement program and leverage, and they are actually progressing well. We are also talking about key regulatory developments and also key opportunities and uncertainties in the market. We are also having time for discussion with you all, and that's, of course, last but not least. And as always, please pay attention to the disclaimer as we will be making forward-looking statements in this call. And with these remarks, I would like to hand over to our President and CEO, Heikki. Heikki Malinen: Thank you very much. And good evening to you folks in Asia, and good morning to you in the U.S. Welcome to Neste's webcast. Nice to see you here again. Q3 in brief, let me state that it's actually now 1 year and -- 1 year and 2 weeks roughly, that I've been working for Neste in this role as CEO. It's been a very busy 1 year. I wanted to just take a few minutes and just reflect on this past year. Obviously, I've had a chance to travel globally widely the company; meet our customers, our suppliers; understand the business; see how our refineries are performing. And I think overall, I really -- the more I -- longer I work here and the more I understand the company, I have come to a conclusion that Neste really is a rough diamond. We have a lot of potential to develop the company further. We have a great group of people here, and as I talked to the Neste folks, I really feel that there's good momentum inside the company and a strong commitment by our staff globally to move this company further. So maybe that sort of more as a context. We will be discussing Q3 results here today. For me, personally, I'm actually pleased with the results. We're obviously not at the level of overall performance we want to be, but the direction of travel into Q3 is good. And if I look at what we have accomplished here, our refineries have been performing well. I'll talk about safety in a moment. Sales has picked up. There's even some positive -- actually good momentum in the market and our performance improvement program is on schedule, maybe even a bit ahead of schedule. So these are also positive things that we're adding them up all together and even our fossil traditional Porvoo Oil products business did well. So it's a good basis to move into the -- into then '26. Well, let's take a look at first safety because safety really is the fundamental of everything that we do. It's a license to operate unless we take good care of safety. We have no right to be making these products. On the left-hand side, you can see the data for our people safety, the total recordable in the incident frequency rate. It is heading gradually down. These numbers, just a reminder, since 2023, they include Mahoney, which is our UCO collection business in the United States, which is a very different type of activity. But in any case, we need to bring that number down much more, and the team here has very clear plans on how to do that. On the right-hand side, you can see our process safety figures for this year. So far, 2025 was actually gone, if I can say quite well. Of course, the trend has really fallen. We've had a number of months where we actually had no major incidences in the company on process side. I think it's too early to say how much of a trend this is. But anyway, the direction of travel is good. And the discussion at least in Neste about process safety is continuous. And we have now, in Q3, launched with a 5-year roadmap journey to further improve our process safety and our ambition is to significantly bring that down even more. But as always, these take time, and it doesn't happen overnight. But anyway, we are systematically moving forward. We have some major initiatives underway. You will hear more from Eeva about the performance improvement program. I just want to say it's on track. You'll see the curves in the moment, maybe we're slightly ahead of schedule. But even having said that, what's interesting and important to understand is the direction of travel towards the EUR 350 million, I think we can confirm that. And then the more we do work around this program, the more evident it becomes that there is -- as I said, there are opportunities within the company to perform even better. And that for me as CEO, is of course, a very important piece of information. We have been driving down our costs, fixed costs, variable costs and the refinery performance is rising. In the middle, you see then the Rotterdam capacity project. It is a significant undertaking. At the moment, having just recently visited the site, and I'm again going in some weeks' time back to Rotterdam. It is very busy. We have approximately 2,300 people from many, many different countries and nationalities working on the site, and the work continues. But it's a big undertaking. And what I want to say separately is that we've also had very good performance on safety with all the folks on the site, it's very critical that we don't have any accidents and the team has done, and I'd say a really good job in working towards that goal every single day. And then on the right-hand side, operational achievements. Actually, I think there are many, but we wanted to just highlight maybe two. One was that on subside, we had record high SAF sales volume. We are clearly -- the market is picking up, even though the mandates are still somewhat were clearly below our hope in Europe, 2% vis-a-vis 6%. And then as you can see, the market has become stronger and Neste has been successfully able to leverage the tailwind. I want to highlight a couple of numbers from the third quarter over 1 million tons of renewable products sales volume of which SAF was about 244 produced tons. So year-to-date, we have produced about 741 tons of SAF. So the journey has clearly started. Our comparable sales margin in RP rose clearly to almost $500 per ton. What was also very positive and helped our result was that the total refining margin for Oil Products exceeded $15 per barrel. And that, of course, then helped the results. EBITDA EUR 531 million, heading in the right direction. Cash, I'll let Eeva talk about cash in a moment. But of course, that's something we monitor very carefully as we do when it comes to the 40% leverage ceiling if I want to use that word. My final slide here before I hand it over to Eeva, and then I'll come back later, it's about the performance improvement program. This is -- for me, this is sort of more than just the performance program. It is very much a journey that will ultimately then move us into what I've called inside the company, a journey of continuous improvement, continuous development. While we're doing this program, we're also building more systematic methods on performance management. We've reviewed all of our KPIs, and we continue to do that because, of course, you get what you measure. We have very systematic cadence on performance reviews. This whole approach, we've really pushed that forward harder, and we will continue to do that, bring it down deeper and deeper into the organization. So I see this is an important part of moving forward with this program. We also track our various activities in this program very carefully. I personally participate in biweekly reviews of all the initiatives that we approved before they even get included in this calculation. So I think I have a good understanding of where the program is going, and I'm happy to say that I really like what I see. I see -- I really like what I'm seeing in the teams. So good work and big thanks to the team Neste on this one. So we are heading well towards EUR 350 million, and so far, EUR 229 million annualized run rate improvement by the end of Q3. And with those words, I give it over to Eeva. So Eeva, please take it from here. Eeva Sipila: Thank you, Heikki, and good afternoon to everyone on my behalf as well. I'll start with the familiar reference margin of renewable diesel. And just as a reminder. So at least do note this is a gross margin. So it deducts only the feedstock cost and is hence different from the sales margin, we'll discuss later on. But indeed, I think this trend line shows very well the strength and recovery we've seen in the European markets in the quarter. Then just to break down by segment are EUR 531 million of comparable EBITDA, so EUR 266 million coming from Renewable Products, EUR 232 million from Oil Products and then EUR 34 million for Marketing & Services. And I'll maybe comment the segments a bit more in detail in that -- very shortly. As Heikki already said, so the performance improvement program is obviously an important part of our EUR 531 million result. We're very pleased with the run rate of EUR 229 million achieved at the end of Q3. And then this gives a year-to-date impact in our figures of EUR 84 million. Now a few points on the EUR 229 million. So if we break it into cost reduction versus more margin volume optimization, it's roughly 80-20 split. And maybe also good to remind you that there is an element of lease costs here, especially on the logistics side, which then are actually not visible in the EBITDA rather in decreased depreciation as we have fewer leases. So roughly a bit more than 10% of the 229 is related to that. Overall, the bigger categories are really around logistics, transportation in all forms and fashion, the optimization there and the lower discretionary spend across everything we do. Moving then to the business segment commentary. So Renewable Products. We're very pleased with the reliability of the operations. We almost reached a similar sales volume, as you see from the left-hand side pillars as we did in Q2, and then the sales margin continued to tick up. If we move to the right-hand side and look at the sort of comparison between our Q3 results versus Q2, you see that the big change really comes from the sales margin area. And naturally, the diesel price has supported as it had a positive impact on our margins to actually both of the two segments and also OP, but important here as well, we continue to see some headwind in the feedstock cost. But then we also had a more one-off positive, which comes from the SAF BTC, so the -- now expired tax credit program in the U.S. which was in place for SAF until September. And we actually booked the full EUR 27 million benefit of those credits in Q3 and that it may be worthwhile noting. On the CFPC side, the continuing tax credit system, we continued on a similar path as in Q2. So looking EUR 27 million in there as well. Then moving into the Oil Products side. So Here, the diesel crack clearly contributed a much better market environment than in Q2, but also, we had a better raw material or crude feed cost level in our Q3 and that supported the $15 per barrel margin as well. Overall, as Heikki already mentioned, so we're pleased with good utilization rate, very stable utilization across the quarters as you see well from the left-hand side. And then really on the right-hand side, maybe in sort of additional point to note is indeed the utilization of 91 and also some fixed cost improvement in the figures. Finally, on Marketing & Services, we had a good season, the Q2 driving season, supporting the results, but the team continues, it's very good and diligent work on the fixed cost side and supporting then the result. Moving then to cash flow and profitability. So the CapEx continues at a very -- under sort of very tight control. We have upgraded now our annual guidance to a level that we expect the CapEx this year to be around EUR 1 billion, so slightly down from the earlier range. And this is really, really thanks to sort of a lot of good discipline across the segments. Now we knew going into Q3 that we'll have a tougher quarter when it comes to cash flow due to the upcoming maintenance or now already started maintenance -- ongoing maintenance, should I say, in Rotterdam and upcoming maintenance in Singapore which meant that we had to build inventories during Q3 to be able to serve our customers during the Q4 period, and that obviously had some headwind on our working capital. But I'm very happy that the total outcome was minus EUR 50 million for the quarter because this is the -- also the year-to-date number, and this obviously gives us confidence that we can deliver positive cash flow for the full year as we work to deliver those built up inventories to our customers in the coming months. So as said, a slight headwind on the cash flow visible also in the leverage, but we're well below our 40% target and we're happy with that performance. So with that, I think Heikki it's back to you. Heikki Malinen: Thank you, Eeva. So a few words about topical matters and then the outlook. So as always, we need to discuss briefly what's happening on regulation. I think overall, our view is that the recent news and decisions are supporting the long-term renewables demand outlook whether you can say it's enough to say there's a long-term secular growth, not completely sure, but at least momentum is building. Here in Europe was, of course, extremely important are the decisions related to implementation of RED III. And the Netherlands, Germany, Italy, France, all moving forward, waiting eagerly to see what happens with Germany. The preliminary information was that they are looking to increase the volumes potentially quite substantially, but still waiting for that decision, hopefully, by the end of the fourth quarter, we will know then which way the direction is in Germany. And then, of course, will the implementation start in '26 or '27. But anyway, it seems to be heading in the right direction, so but still need to be patient here some weeks. On aviation, nothing really major to say other than that, maybe in Asia, South Korea, Singapore, of course, Japan has announced SAF mandates and then Indonesia is also looking at it. So gradually also those countries which have been maybe less advanced in moving forward with these mandates are starting to consider them and discuss them. So that's also a positive when it comes to SAF sales. On the U.S. side, the summer was very busy with the Big Beautiful Bill. A lot of major decisions were made now with the U.S. government in the shutdown, we're waiting to see how the implementation then progresses. But as I said in the -- at the end of Q2, I think if I look at all of these regulatory changes in the U.S. I think for Neste, it's still sort of net positive, some things that are clearly positive, some are negative, but overall, net-net, more on the positive side. And I think that's the main news on regulation and I sit waiting then for Germany and their decisions. The market, let's see. So in terms of opportunities and uncertainties, well, already discussed the German part. On the feedstock side, I think what's worth mentioning is that with the various changes in tariffs, we've now started to see some clear decline in animal prices -- animal fat prices, particularly in Asia, Australia. So that is sort of impacting -- that's a potential a bit of a tailwind for our business. However one needs to always remember that some countries accept animal fats, in their renewable fuels and others don't, so we always need to match the feedstocks with the actual market requirements. But we're very good at that. On the crude oil slate, we, of course, use a lot of crude oil in Porvoo refinery. As part of the performance improvement program, we really started to work systematically and try to see how can we diversify the crude oil slate even further. And we've done in an accelerated fashion, a lot of research here on the various technical limits by crude oil type and have actually been able to identify ways, how can we modify them and also then expand the number of crude oil options we have at our disposal. So I'm very pleased with the results. There are actually quite a number of options we have to expand the crude oil supply. And that, of course, gives us then hopefully, some options to negotiate more favorable arrangements for the company. We already talked about the performance improvement program and the potential even more beyond. On the uncertainties, regulatory matters, of course, still uncertain geopolitics is still around. The whole question about what will happen to Russian refineries, Russian oil, global oil markets. I think the forecast -- the variance between the forecast is very broad. So it's very difficult to make any accurate predictions about that. And maybe the last thing I want to mention briefly is China. China exports. So in the last weeks, we have seen news that China is considering permitting the export of SAF out of their country and remains now then to be seen how much and into what markets that Chinese SAF ultimately goes. So we are keeping a close eye on that as well as we head into 2026. The market outlook pretty much as we have communicated, I would say earlier. And when it comes to the guidance, that guidance is also unchanged. So I wanted to accelerate here to make sure we have plenty of time for Q&A. So maybe with those words, I hand it over to the operator. Thank you very much. Operator: [Operator Instructions] The next question comes from Alejandro Vigil [ Garcia ] from Santander. Alejandro Vigil: Congratulations for the strong results. The first question is about the flow of products export/import in the Renewable Products division because as you mentioned before, now we could see China exporting SAF. And I'm also interested in your thoughts about the different regions, the U.S., Europe and Asia in terms of capacity and balance of export/imports. And the second question is about, what you mentioned about Germany, which is the potential volume upside coming from this RED III implementation in Germany? . Heikki Malinen: Thank you very much. So thank you, Alejandro for the questions. Yes, of course, the thing with these products, once you put them on a vessel, you can ship them in many directions. I think maybe the three things as far as Neste is concerned, so as we already discussed in the spring, so our exports from Singapore to the U.S. have been pretty much constrained. Nothing really has changed there. So as the incentives have gone away, so also our exports have been significantly diminished. That is the case still today. And unless the regulation changes, that will probably be the case also for the near midterm. Then we feel like to --know where is that volume going? Volume has been coming to Europe. The European market has been able to absorb the Singapore refinery volume, and we've had actually reasonably good sales here in this market. Regarding China, it is not easy to get a good sense for what's actually happening there. So of course, we have to also rely on different sources here. But our sense still is that, of course, they have domestic UCO, quite substantial amounts of that. We've seen that UCO prices in that region have not declined as much as one would have expected. So someone is buying that and producing. And now we will then have to wait and see how much tonnage actually comes out of China, and where does it ultimately land? So I think that we will probably be able to report more in the Q4 results once we see that situation evolving. Regarding Germany, yes, this is a very exciting news. I mean the numbers in terms of incremental demand have ranged anywhere from 1 million to 2 million tons. So I mean, whether it's on the low end or on the high end, I mean, it's still positive. And hopefully, the other European countries will then follow up. But Germany, of course, is the biggest market, and that's why it is so critical that, that decision would be positive. Hopefully -- we're hopeful. Operator: The next question comes from Derrick Whitfield from Texas Capital. Derrick Whitfield: Congrats on your results for the quarter. I have two questions for you. First, regarding the short-term market tightness you're referencing on Slide 10. Could you elaborate on this dynamic as we're generally seeing the drivers as being more secular versus short term in nature? And then second, if you could elaborate on the trends you're seeing across the global waste feedstock markets. While you're referencing higher feedstock costs on Slide 13, Tallow and UCO spreads appear to be a bit more favorable for you for the quarter and seemingly have the potential to remain favorable as U.S. regulatory and tariff policy have taken U.S. producers out of the market. Heikki Malinen: Yes, it's a very big question. The short-term demand versus secular demand. I mean, ultimately, the whole matter of having -- moving to clean fuels, especially in SAF, I mean, there's no option. So I mean, logically, you would say that's really the direction of travel for us, of course, at Neste and that's more of a supply issue. It is the fact that we are moving forward with Rotterdam, second-line construction, the more I look at it, the more convinced I am that even though it's a quite formidable task, it is still the right thing to do. And if everything goes well, we should be well positioned as we head into the latter part of this decade. If this RED III implementation goes in a positive way, that, of course, will then give quite a substantial boost in diesel. And don't forget, Neste has the ability to move its capacity fairly flexibly from SAF to RD. So -- and we will take advantage of that flexibility depending on how the market ebbs and flows. Regarding feedstocks, yes, I have to say that it is clear that regulatory decisions on your side of the continent has -- have impacted that some of the buyers seem to have disappeared or at least procuded their procurement from Europe and from Asia. So hopefully, that will ultimately bring some price levels down. But I would say, so far, it's been more of an Asian phenomenon and maybe Australian phenomenon on the animal fat. UCO prices, of course, have, as I said earlier have been holding fairly well. And then I would say in the U.S., we saw this movement up in feedstock prices, but maybe the uncertainty around the implementation of these regulatory decisions is maybe taking a bit the air out. But let's see once the decisions are clear, whether there's another momentum move upward. So Neste is one of the largest buyers of these feedstock, if not the largest buyer, and I think we have a good global setup. We have a good team. We're able to optimize that constantly. We can also trade internally inside the system, but also trade with third-party if we want. So I think we're well positioned for that. I think that's about all the key things I can share with you now. Thank you, Derrick. Operator: The next question comes from Henri Patricot from UBS. Henri Patricot: Two questions, please, both on the Renewable Products margin. The first one, I wanted to check if you can give us some indications as we think about the fourth quarter margins to what extent you're able to capture what seems to be very good spot margins in Europe? Or are you quite constrained because of the maintenance? And then I wanted to also check on the -- on SAF. We've seen quite an increase in SAF prices. Are you able to give us some color on your margins on that side of the business. Have you seen as well an improvement in the SAF margins in the third quarter and in the fourth quarter as demand seems to have picked up? Eeva Sipila: Thanks, Henri. So I would say that we were somewhat constrained in the Q3 as well on taking advantage of really the spot market prices. I think they were relatively high. But obviously, we're very pleased that we were able to utilize even smaller pockets to end up to the $480 that we did. Now going into Q4. So I think the big impact you need to take into consideration is really the maintenance ongoing Rotterdam and coming up in Singapore. And if you look at sort of a year back when we had similar maintenance, be it in Q3, Q4, it is roughly $100 per ton impact. So don't forget that. Otherwise, obviously, we are very much now selling what we have produced to inventory. If all goes well, we will push -- we will hope to be sort of ramping up well and having a bit more still volume to push out really to take into -- take the benefits of the current market, obviously, we are focused on that. But I think we have sort of more limiting factors. And then obviously, please do remember that now in Q3, we had the BTC one-off that will not reappear in Q4 as that sort of legislation. This has now ceased or expired. What comes then to SAF prices. I think the -- indeed, the market turned out to be a bit better than it looked in -- during the summertime when there was a period where one had to consider that whether it makes sense to produce SAF or just focus on renewable diesel, the end outcome was better. I think maybe partly also due to just sort of a bit of lack of product and very, very low exports into the European market, and that helps strengthen the market, and then we obviously took advantage. And like Heikki said, so we are very flexible between the renewable diesel and SAF, and we'll continue to sort of focus on that flexibility really to be to Q4 or '26 for that matter. Operator: The next question comes from Matthew Blair from TPH. Matthew Blair: Could you provide an update on your Martinez refinery? Is this plant EBITDA positive? Or -- are you actually seeing any export opportunities out of California into more attractive markets? And any sort of commentary on the feedstock slate. It looks like veg oils might be a little bit more attractive at certain points during the quarter than some of the low CI feeds. And then on the Oil Products side, could you expand a little bit more on the opportunities on the crude slate. It sounds like you're able to implement a little bit more flexibility. Do you have any examples of crude that you've been switching to and switching away from? Heikki Malinen: Thank you, Matthew. So if I take a stab and then Eeva can continue. So obviously, our Martinez is important. Don't forget, we have a joint venture. Marathon is the operating partner, and we, of course, are actively contributing, but they are the operating partner. So they run the operations day-to-day. I think overall, the refinery is now -- has been running quite well. I would call it from Neste angle that we've come out of the project phase and we're now moving into the more continuous operating phase. And having just some time ago, visited Martinez, so I really feel that they have a really good team on location in California running this. But still, it's early days in this journey of making these renewable fuels even for that team. On the export opportunities, I think the -- I think this is a general comment that with all the different regimes globally, the cost of feedstocks, I don't sort of at least at the moment, I think it's very much focusing on domestic sales. That is kind of where the opportunity aligns at least in the short to medium term. On the feedstock side, I think it's been quite volatile recently, both of the partners supply feedstocks. And then, of course, the refinery can buy whoever they want. So this is -- I don't really -- I can't comment on what the actual substance of the feedstock mixes due to the structure of the joint venture. On the Oil Products side, yes, the crude slate is really interesting because, of course, we buy a lot of it. We have -- our primary sources, the North Sea, has been. And we know we've had a good relationship, getting feedstocks out of there. But -- I'm sorry, a crude out of there. But of course, in the spirit of trying to make more money and improve our performance, we have to look at options. And the only thing I can say is over the last three quarters, our engineers and chemists in Porvoo have really looked at a very, very broad set of options. And out of that, they're now narrowed it down to let's say, a shorter list, but there are some very interesting things, and we're testing them in production level mode to see how they perform. But anyway, the options are evident, and we will continue to work. I think we'll be able to report more as we head into 2026. But I'm very pleased with the work they've done on this crude side. Operator: The next question comes from Peter Low from Rothschild. Peter Low: The first was just on perhaps your term contract negotiations for 2026. I think those usually take place around this time of year. Can you comment at all on how those negotiations are progressing? And whether the current tightness in the spot market confers on your degree of pricing power? And then the second question was on the outstanding BTC, which you recognized as a contingent asset in the first quarter, but I don't think you booked in the underlying results. I think that was EUR 30 million to EUR 40 million, as you said at the time. Can you give us any update on when do you expect you might be able to formally recognize that? Heikki Malinen: So if I -- thanks, Peter. Thanks for your two questions. If I take the first one and then Eeva will take the second. Yes, this is indeed the time of the year when it is a term contract time, so to speak. I think last year, we said that for 2025, I think we said about 2/3 of the volume had been termed -- yes, about 2/3. I think, of course, the market has changed quite a lot. We also have the SAF market is now active with the mandates. What I would like to say here is that we will always term some volume, but I think at the moment, we're a little bit monitoring the situation. We're in no rush to make any decisions here. Let's see how the weeks now move forward. We will term some, but I will then report to you probably in Q4 how these things ended. But at the moment, we're in no rush. Eeva Sipila: And regarding, Peter, the Q1 CFPC credit. So we're working on a deal to monetize all of the '25 credits and targeting to be successful during the fourth quarter, and that would then probably be the trigger for us to recognize the Q1 as well. Operator: The next question comes from Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. First, as it relates to your operated production facilities, utilization rates have been around the 80% mark in recent quarters. How do you see that evolving in the coming quarters? And are there any hurdles there to materially increasing it beyond that 80%? And then secondly, on the opportunity you mentioned from the lower animal fat prices. Can you just provide some color on the current split you have in your operated refineries between UCO and animal fats? And where that could go to take advantage of that opportunity? Heikki Malinen: So the first one, Eeva, on utilization, I think 80% has been sort of a good number for modeling, would you not agree? Eeva Sipila: Yes. Yes. I would say, Adnan, that whilst, of course, it's not necessarily an indication that we're satisfied with the 80%, but just realistically thinking of where we are. I would use that as the right -- as the number also going forward into '26. Now we have identified quite some bottlenecks in our processes, which we are working on to improve the number, but some of them are also tied to maintenance and CapEx, and hence, the sort of progress will not be sort of massive in -- going into '26. So that's a good number for you to use. Heikki Malinen: I would agree. And I think Neste has a -- might if I look at the last decade, Neste actually has quite a good history in debottlenecking these lines, both Singapore Line 1 and Rotterdam Line 1, both have been able to get beyond the nameplate capacity. So we are constantly working -- I mean, under the performance improvement program, we're very systematically turning every corner in those refineries to see how can we get more tonnage. But as Eeva said, a number of these things, they require some investments, not massive, but some money and some of these investments, you can only do when you have a bigger turnaround. So that really creates the delay. But I'm actually very pleased also with the work the engineers are doing. Then on the animal fat, the blending -- I don't want to go into the detail of the blends. It is a bit sensitive. And obviously, UCO plays a big role as does animal fat. What I can say to you, though, is that Neste has invested a lot in pretreatment technology. We have heat treatment. We have pretreatment technologies. We're able to clean up a lot of the bad stuff, if I may use that term from the feed. So it doesn't go into the refinery. And constantly, we're trying to optimize within the technical limits to get as much of the cheap stuff or cheaper stuff in there as we can. But I want to still mention that in some European countries, for example, animal fats are not really allowed. And that does, to some degree, restrict the potential. But I'm pleased anyway with the direction of travel on animal fat prices. That is a good thing. Operator: The next question comes from Artem Beletski from SEB. Artem Beletski: So I would like to ask two relating to European regulation. And the first one is relating to RED III implementation. So you have been discussing about Germany and the impact on the demand for next year. But maybe could you talk about some other markets which are also doing RED III transposition and increasing targets in 2026? What are interesting opportunities you see there? And the second question is relating to some discussions out there when it comes to product certification and some actions or plans to make more strict approach in some markets like Germany or Netherlands. How much is this actually visible when it comes to our customers' behavior? And maybe what comes to preferring U.S. supplier on European market? Heikki Malinen: So thank you very much. So of course, for us, what's very important is what happens here in the Nordics, both Finland and Sweden, very -- Sweden, very critical. Remember, Sweden actually dropped the mandate quite a lot here some years ago. We believe we're going to see gradual movement of the percentages as we head into '27 and '28 and even towards '30. So it's gradual because, of course, people are worried about inflation and so forth. But I think that's all positive. In Central Europe, of course, Germany is just a very big thing. Other markets, we are looking closely at is, Italy is interesting. The Netherlands. And then small markets like Portugal, but volume-wise, Portugal, Spain, are small. I would say, Italy, Germany, Netherlands and then Nordics are critical. And I think overall direction at the moment looks positive. On product certification, this is a really critical thing because -- this is, of course, a trust-based system. The value of the certificates, the biocredits fundamentally related to the fact that the feedstock you procure and use is really the stuff it's supposed to be, and that you have very good tracking. And Neste spends a lot of time and money to make sure that we track with our business partners resources and that we are using the right feedstocks. I can't comment on other industry players. Only to say that I do think that at least the savvy customers are aware of the importance of this, and then they've recognized, that Neste is a reliable partner. I think that's what I would -- that's all I would say. And I think the German legislation, if it goes forward, we'll sort of further heighten the importance that the feedstock needs to be the right kind and from a reliable source or acceptable source if I use that word. So that would be good for us as well. Operator: The next question comes from Nash Cui from Barclays. . Naisheng Cui: Two questions from me, please. The first one is on the Q4 margin impact. I think you provided a very helpful comment earlier talking about $100 per ton impact from similar maintenance previously but we are having two major maintenance this quarter, including Singapore for half of December, I think. So I wonder, could we see more impact over there because there are two plants of in Q4. Then my next question is on inventory. So I wonder if you have built enough inventory to sustain a run rate sale about 1 million to 1.1 million ton in Q4? Eeva Sipila: Sure. Thanks, Nash. So you're right to highlight that there is indeed two breaks. But obviously, the Rotterdam is the sizable because it's full for the quarter, and it's really the start of the Singapore shutdown that impacts this quarter, a bigger bulk actually goes into Q1. So I think the reference is not sort of -- is a pretty good one. Of course, it depends on also how the maintenance breaks go. And a part of this industry is such that when you stop and you open certain things, you sometimes do have surprises. So obviously, the syndication is assuming that we don't have big surprises. And more importantly, that we have very organized and speedy ramp-up in Rotterdam. So it is not meant to be sort of exact guidance, but I just thought it's helpful because it indeed the magnitude is such that if you ignore it, your models will probably lead you to a too high number. Then when it comes to the inventory, I think we are well provided with what we produced into inventory to serve our customers as per our customer promises. It's more than a question of really on our ramp-up time in Rotterdam that the faster we are, we may have some excess to sell in the quarter. And if we then have any issues, we might miss that opportunity to really tap on the spot market. Naisheng Cui: I just wonder if we put margin aside, is there any color you can give on the absolute cost side of this on the two maintenance? Can you say on EBITDA? What is the absolute cost? . Eeva Sipila: Well, we haven't really given such numbers, this per ton is what I think is -- gives you a helpful indication of the impact in the quarter. Operator: The next question comes from Alice Winograd from Morgan Stanley. Alice Bergier Winograd: Two questions from me please. First, looking to 2026, what do you think are the key building blocks of supply growth and demand growth for HVO, for instance, you mentioned Germany, adding some 1 million or 2 million tons in demand. And what else is on your radar that you can maybe quantify from a fundamental perspective? And the second question is on FX. I believe you printed EUR 109 million of FX this quarter? And when do you expect to see the current spot rates to fully show in the P&L because there's quite a gap there? Heikki Malinen: Do you want to take the FX first? Eeva Sipila: Yes, sure. So indeed, the bigger FX move started or the appreciation of the euro started more -- during the quarter, so to say. So the -- as we are hedged, it comes with a delay. We'll start to -- now that levels are obviously kind of, I would say, stabilized at least to some extent to these current levels. So that will start coming through in the Q4. We typically don't have a super long hedging when it comes to FX, but obviously, some going also into next year. Heikki Malinen: Yes, of course, 2026, that goes into the department of forecasting, which has not been easy in this business. I think on a very high level, I think three things. Of course, the macro situation. Europe, as you know, has been overall quite weak here for a number of years on macro. Some minor signs of improvement as we head into next year, but still very early to say. I think the big thing is really regulation because that, of course, will create instant demand. And then when you look at the overall level of how the market is behaving, now looking more at the fossil diesel because that, of course, impacts then the renewables market as well. What is happening with this whole Ukraine-Russia matter? How are these refined products being moved around? That may also have some impact. Inventory levels have been overall quite low here. As we came out of the summer, that's also been supported. So maybe that will a little bit boost as you head into the new year. But for me, really the big thing is what's going to happen in the coming years. And I think it's very much about RED III. Operator: The next question comes from Matt Lofting from JPMorgan. Matthew Lofting: Two, if I could, please. First, Slide 10 in your deck shows the improvement through recent months in the gross renewable diesel margin. It sounds like you're sort of saying at least to this point that feedstock costs have been relatively sort of high or stable. So I just wondered if you could disaggregate roughly sort of how much of the improvement in the gross margin you think is indexed to the strength in fossil fuel diesel market versus being driven by underlying improvement in the renewable fuels market? And then secondly, I noticed that you mentioned listed trade policy, unpredictability in your list of uncertainties. To this point in the year, sort of what have you seen from that perspective in terms of any impact on the business and the market. Just wondering how much of a, let's say, base case versus sort of tail risk you see there? Heikki Malinen: Do you want to do the feedstock,? I'll come to trade. Eeva Sipila: Yes, it was Matt -- your question on the unpredictably really around the feedstock, did I get it right? Matthew Lofting: Yes, yes. Eeva Sipila: Yes. So well, I think considering how volatile the feedstock market has been this year and I think it's prudent to sort of assume that there's some unpredictability into that. Now of course, as the year draws to a close, what we have and now either at the production facilities or close by, obviously, it starts to be more predictable. The -- but it's really these sort of trade barriers that have now been a sort of big area of causing this sort of unpredictability. And I think now the animal fat, where the price has decreased, which is in our favor, is a prime example because it really comes mainly from the fact that we see less U.S. buying and less buyers, hence, around whereas then the UCO has been moving a lot less because actually, the sort of the Chinese buyers have been picking up if there was anything sort of left unpicked from U.S. But as we've all seen, these trade topics change on a daily basis. They're dynamic to say the least. So many things can happen. And then, of course, when it comes to our inventory valuations and those type of things, then the sort of it matters what the prices are at the year-end. And hence, we want to sort of highlight that as a real uncertainty. But I don't think I can really provide any more clarity unfortunately, on the topic. Heikki Malinen: Maybe to your question about trade policy. I mean, of course, there's a lot of stuff, but if I raise two uncertainties. One is regarding the U.S. importation of foreign feedstocks in the RIN 50. Obviously, I think not all industry participants are necessarily of the view that, that is the right thing. So the debate, I think, we didn't have visibility on the debate, how will that ultimately then end? Will it go forward as proposed or will it change? But as I said, my understanding is there are different views on what is the right way forward. So we'll just have to see. And then I think from the European standpoint, Neste, we, of course -- as I referred to the Chinese SAF, the European Commission at the moment is monitoring the SAF situation. And then we'll have to see in '26 or '27, depending on now what happens, what will happen on -- as you know, on renewable diesel, we have antidumping duties. But on SAF at the moment, it's monitoring is what's being done. So that will be some uncertainty. That's worth understanding and noting. Operator: The next question comes from Paul Redmond from BNP Paribas. Paul Redman: My question was just about in preparation for Q4, you have been building inventories. I just wanted to confirm where the focus of that build was. Was it on sustainable aviation fuel or renewable diesel? And then secondly, just a question about CapEx. You reduced your CapEx. If we could just get some insight on what the key drivers are of that? Is it phasing or a true reduction in CapEx? And you were forecasting to a similar spend in 2026. Should we think there's any change there? Eeva Sipila: Yes, I can certainly start with the CapEx. So I would say that Obviously, when the guidance was given, it was very sort of quickly after Heikki started, and we've done a lot of work on reviewing really the amount of CapEx spend that it drives and fulfills our return requirements. And hence, there's been a real reduction of scope in -- but then what comes to the bigger bulk of the CapEx, obviously, related to Rotterdam that has moved, and we expect that to sort of be the bulk of next year as well. So there's really no -- I wouldn't -- we're not expecting a change to the earlier view on next year. But of course, the more you work on, there's always areas of cost efficiency that can be applied and tighter and better procurement, and we're obviously trying to sort of make sure the organization is really alert on all of those topics. But yes -- and then on the Q4 preparation. Well, we obviously know our commitments and have balanced both. So there is an inventory on both RD and SAF. But of course, volume-wise, the RD is much bigger. Heikki Malinen: Maybe if I can just build on that. I remember our conversation after Q1 and after Q4 of last year was very much about, okay, so how will the SAF procurement actually take place in Europe in 2025? And this is the first year when we have the mandate. And coming into this year, we really didn't know exactly, is there going to be seasonality around the summer. Will there be buying later in the year? Or will there be buying equal amounts through the year? So it's been a bit difficult also to plan the inventory when we don't really exactly have any data on the buying behavior and the buying profile. But as we have this year's data and next year's, then we'll probably become also smarter on how do we sort of build our own inventories as the market develops. So just more as a context, remembering those discussions in the spring of this year. Operator: The next question comes from [ Matti Carola ] from OP Corporate Bank. Unknown Analyst: First one regarding the performance improvement program. Could you a little bit elaborate the impact on the variable cost and how much is visible already in the sales margin you have right now? So I mean, the big part is, of course, big part of the headcount reduction, but if you could give a color about this impact on sales margin. Then the second one is about the SAF next year. How do you see SAF market going as the Netherlands opt in this is done and also the U.S. reduction is a little bit killing the exports from Singapore. So do you see potential for RD -- or how do you see the market? Heikki Malinen: You do the first one? Eeva Sipila: Yes, I can comment on the performance improvement. So -- well, the headcount is important, it for regulatory reasons, obviously, it comes a bit in phases that there's still people have certain tenures that we need to respect and hence, not all the savings are in. So actually, I would say that the biggest impact in the P&L is really around the overall procurement, spending less and spending more wisely. And that's by far the biggest. Then the logistics side is important, but part of those savings obviously land into reduced leases and hence in the depreciation role, but still significant also in the P&L. Heikki Malinen: That's your question, I'm trying to recall exactly the wording on the Dutch opt in clause, whether that actually -- I mean, that has, of course, been favorable for SAF, but now if it is going away it could be not exactly sure how much -- yes, I'm not exactly sure how much of a hit that will really mean. On the U.S. side, of course, the fact that you have this equalization from the incentives regarding SAF and RD, of course, that, of course, then reduces in some ways the attractiveness, if I may use our competitiveness coming out of Singapore. So that will be sort of a net negative, I would say. Operator: The next question comes from Christopher Kuplent from BofA. Christopher Kuplent: I've got really only ones remaining on Rotterdam. Could you tell us how much of the project CapEx is still left to be spent? And slightly related to that, what that will do to your depreciation charges running through the RP line? I mean, we're sort of at EUR 140 million, EUR 150 million per quarter right now. Where is that going to pan out once Rotterdam is fully ramped up into '27? Eeva Sipila: Sure. So Christopher, what we are expecting in Rotterdam as CapEx next year is around EUR 700 million. And then now the '27 number on top of my head is obviously a lot lower because there's -- by that time, everything will be built up, but there are some tails 100-ish, if I remember right, in '27. So then that all kind of adds to the depreciation. Obviously, there is a relatively long depreciation time for -- because the asset will be around for decades. So the imminent increases is, of course, visible but based on that, if we can come back to a more exact number, but that would be the number to use on top of what you're seeing today. Christopher Kuplent: Okay. And just to confirm, you're not fully depreciating the asset until it's ramped up, right? So even the CapEx spend to date is not in your quarterly charge yet? Eeva Sipila: Correct. We have the -- what we call sort of comparability in use. So as it is a site in progress, so to say, asset under construction. So yes, that's very true. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Heikki Malinen: Once again, it was a pleasure to spend this hour with you. Summary, I wanted to touch on the four key points. As I've said, I think we're making really good progress on the performance improvement program. You see the numbers. We will continue to report on that, actually see there is more potential. And I think that we will continue to work on this going forward. Regulatory developments very much focused now in Germany. Let's keep our thumbs up, if I can use that word. There is positive momentum in the market. Let's see how much that holds into '26. And then on the balance sheet, which we maybe didn't have to discuss this much this time. So we are below the 40% leverage number. And that, of course, is something we've aspired to do with the help of these initiatives. So with those words, let me thank you, on Eeva's and on my behalf and wish you all well. And to the Americans, Happy Halloween. And we will then see you again in February. Take care.
Salvador Villasenor Barragan: Good morning, everyone. I'm Salvador Villasenor, Head of Investor Relations at Walmex. And I want to thank you for joining once again to our live Q&A session following our third quarter results, which were published yesterday evening. As always, we will make every effort to answer as many questions as we can in the 45 minutes we have scheduled for this call. [Operator Instructions] I will now hand over to our recently appointed CEO and President of Walmart de Mexico y Centroamerica, Cristian Barrientos, who will present the team and give his initial remarks before going into the first question. Please, Cristian, go ahead. Cristian Barrientos: Thank you, Savor, and good morning, everyone, and thank you for joining us today. We're hosting this live Q&A from Costa Rica right after our Board meeting yesterday. I am here with Paulo Garcia, our CFO; with Javier Andrade, our recently appointed CMO for Mexico; and Cristina Ronski, our CEO for Walmart Central America. Before we begin, I would like to share a few reflections from my first 90 days since rejoining Walmex now as the CEO. Over the past 3 months, I have spent time visiting many of our stores and distribution centers across both Mexico and Central America, and I have seen at firsthand how we are delivering our purpose. It's been energizing to see the evolution of the business since I left the region almost 3 years ago. Even more exciting are the opportunities that I see going forward. I'm convinced that with our renewed focus on the execution of our fundamentals, the strength of our people and the newly appointed leadership team, we are very well positioned to take Walmex to the next level. So now we are open to your questions. Operator: The first question is from Mr. Alejandro Fuchs from Itau BBA. Alejandro Fuchs: My question would be for Cristian, maybe on Bodega, I wanted to discuss a little bit some of the performance of this quarter, looking at same store sales per format, right? It seems that it's falling a little bit behind Sam's and supercenter in the context of kind of easy comps, right? So I wanted to get your thoughts on these first ones that you just discussed in Mexico. Coming back, having had a lot of experience with the brand for so many years. What are some of the strategies that you're thinking for Bodega maybe to grow a little bit faster its semester sales. And maybe you can share a little bit of the early strategy, maybe early findings that you're seeing at Bodega and how do you see it performing for the future? Cristian Barrientos: No, Thank you very much. And as we mentioned, Bodega performed in the quarter, a little bit behind Sam's. But we are seeing a really strong business in the 3 formats. We are seeing in this quarter evolution in terms of the relative performance against different banners, and we are seeing more than 20 weeks gaining share in Bodega. So we're confident that with the value proposition that we had in place are performing well. We have been improving. And as I mentioned in the webcast, we are very focused in things that we can control, means EDLP, availability and the evolution on demand. We see a ton of opportunities in all our business and particularly in Bodega, trying to create access to low-income customers to the -- to the prices that we can deliver for them. So we can accomplish our purpose to save them money and live better. So we're very confident with the future of Bodega and with our 3 banners that we have. I don't know if you have more to add there, Paulo. Paulo Garcia: No, I think it's okay. As you said, Cristian, I think it's -- we talk extensively about that, it's pushing the 3 priorities. Alejandro, it's about the pricing, the new investments. It's about actually availability, making the product available to the customer and accelerating e-commerce. And with that, I think we will continue gaining the trust and the preference from our customers. Operator: Our next question is from Mr. Ben Theurer from Barclays. Benjamin Theurer: I wanted to follow up a little bit on kind of like Alejandro's question, but more broader in terms of like the traffic versus ticket performance. And then at the same time, we've obviously seen a little bit of a weaker opening versus a year ago and particularly in Mexico. And I wanted to understand how you're thinking about the need or the opportunities to open stores if at the existing, you have like traffic pressure to a certain degree. I remember we got the announcement earlier this year during your Capital Markets Day about the commitment to open a lot of new stores over the next coming, I think it was 5 years or until the end of the decade. So as we think about it, the need to open stores, while at the same time, we're seeing at the existing stores traffic decline. With what you've seen over the last 90 days, and it might be early on, but do you think there's a need to potentially revisit what's out there in terms of like openings just to avoid cannibalization? And how should we think about the pace of openings throughout the fourth quarter and ultimately, those stores coming online that might be already under construction? Paulo Garcia: Yes, Ben, a very good question that you're putting on the table. So at the moment, we don't see a need, Ben, to review our ambition in terms of store openings. I think we talked about 1,500 stores in the next 5 years. So we still stick to that. Yes, you already alluded to the fact that we didn't open probably as much as we were expecting in Q3, and there was a little bit of slowdown in that openings, but we have a pipeline, a huge pipeline now for the Q4, a little bit like we tend to do it at the end of the year. But to go directly to your question, at the moment, we don't see necessarily a need to review the store openings in light of potential cannibalization. As to what relates to traffic and ticket, what we are seeing at the moment, maybe I'll hand over to Javier to just give you a little bit more details in terms of how we're seeing traffic and ticket and a little bit the evolution of some of the categories. Javier Andrade: Yes. Basically, Ben, regarding traffic, what we see is a reflection mainly of the customer backdrop that we're seeing in the retail, but we see a positive trend in the last quarters, and we feel very optimistic about Q4 and what's coming for us for seasonal. We've seen a lot of engagement of the consumers regarding seasonalities and everything that's about to come in on Buen Fin and Fin Irresistible. And the other thing, even though we see inflation in some categories. We're also investing in price, we can give access to the consumer even though we see inflation in some categories, we're also investing in price so we can give access to the consumers to better prices and help them save money and live better. So we want to grow even faster instead of just following inflation. And as I said, we're optimistic about what's coming for Q4. Operator: Our next question is from Mr. Froylan Mendez from JPMorgan. Fernando Froylan Mendez Solther: Can you hear me. Well, I guess I'll take the question, but I cannot hear your answer. I don't know why. We had some improvement this quarter, but this is something that you mentioned that there is room to further increase. I would like to know what are the steps being taken? And what was... Paulo Garcia: I think we need to move to the next one. Let's move to the next one. Sorry. Froylan, we are moving to the next one. If you come back and you can hear us, we'll come back to you. Operator: Our next question is from Ms. Irma Sgarz from Goldman Sachs. Irma Sgarz: Welcome to the new appointments on the leadership team. I was excited to see the positions filled and good luck with your new responsibilities. Just 2 quick questions on the gross margin. I understand that the pressure that you posted in the third quarter came specifically also related to the inventory reductions that you are aiming for. So I was wondering if you could just point out if that was concentrated in specific categories or specific formats if that was perhaps more sort of general merchandise related rather than sort of the consumables side and perhaps concentrated in certain formats and how you see that need to adjust your inventories going forward? Or if that's sort of more concentrated and behind you from what your comments on the guidance for the fourth quarter, it sounds like it sounds like it's behind you. And then the second question is just on the private label. I'm curious, just Cristian and Javier, maybe to hear your thoughts about where you feel sort of when you take an assessment of where you're doing well so far and what you still need to be doing on the private label side, especially given that, if I may say, it feels like consumer attitudes are changing towards private label in Mexico and they have been changing over the last couple of years. And where do you feel -- you did call out general merchandise. I think you had in some categories, higher penetration. But on the consumables side, I'm curious like sort of how you're thinking about the strategy there. Paulo Garcia: Thanks, Irma. Thanks for your question. As usual, spot on, by the way, on the first question and what you just said is spot on, on all you said. So as you know, we've been talking about that we wanted to address our inventories. You probably have seen the improvements that we've done in inventories of almost 3.5 days, days on hand, and we still see an opportunity going forward. In terms of what it relates to investments to If you say, expedite some of this more and healthy inventory that we have, I think it's probably most of it behind us. And as you said, it's mostly in general merchandise and because the general merchandise tends to impact a little bit more a banner like Walmart, but at the end of the day, it tends to grow across all the banners. I'll now pass on the second question to Javier on the private brands and Cristian can also build. Javier Andrade: Yes. Okay. So thank you for your question, Irma. As you said, I see a huge opportunity in private label now. Even though we're performing good and we increased 100 basis points this quarter in penetration. I see a big opportunity in terms of surety of supply that we're working with the global sourcing team, and we're also trying to leverage as much we can from other markets. In groceries, consumables and even fresh, we are improving our capacity to bring in products for the customers and give access to them to better qualities and best prices. And for us, private label is going to be important because it's a huge component of the EDLP approach that we have for the future in the company. So you will see more to come in terms of private label. But basically, we're going to make sure that we have the best assortment possible for each of our business formats and making sure that we cover all the needs that every customer has in our different businesses and also in our different channels. So we're focusing on improving as much as we can all our processes, and we will leverage as much we can with global sourcing and other operations in Mexico. We're also working here with suppliers, specifically to drive efficiencies that we can translate those efficiencies into better costs and better price for the customer with local suppliers. So overall, private label is going to be important, and we're going to be speeding to develop our private brand to the maximum potential that we can. Cristian Barrientos: If I may add, Irma, the private label points. As you saw in the webcast, we just hiring [ Prativa ] from international to lead Sam's U.S. -- Sam's Mexico, sorry. And Prativa has a ton of experience before managing private labels in the U.S. So we are seeing a tremendous opportunity to work together between China and the U.S. trying to improve our penetration in Member's Mark in Sam's also. So it's a complement that Javier mentioned before in self-service. So we are taking advantage of the global brand that we are and bringing talent to Mexico to help us or to work together in terms of the business of Sam's some and also with some knowledge about private brands. So we're very confident for the future and the opportunity that we have to improve more our private brands program. Operator: Our next question is from Mr. Ulises Argote from Santander. Ulises Argote Bolio: Congrats, Cristian and the recently appointed leadership team. Actually, we had 2. So the first one for Cristian. Maybe I wanted to get your sense. Obviously, you were a long-term participant here in the Mexico market, then you went to Chile and now coming back. So I wanted to get your thoughts there. What are your kind of recent impressions on the current state of the market. Any relevant change that you're seeing there in competitive dynamics. Any relevant opportunities that might be worth tackling kind of on an initial basis. And then the second one for Paulo. Maybe if we could just get a little bit more details on the one-off that you mentioned yesterday impacting the net income. Any color that you could add there would be really helpful. Cristian Barrientos: Thank you very much for your question. And as you mentioned, I moved in these 7 countries in the last 14 -- 13, 14 years. And my first reaction, if I can compare both countries, it's incredible how similar the situation that we are looking today in Mexico were with the situation that I founded in 2023 when I landed in Chile because both countries were growing 0%. And we saw in Chile and also here in Mexico, the huge opportunity that we have to focus on the fundamentals with the idea when the -- let me say, the economy will recover, we will take advantage of -- we will be better prepared to capitalize all the sales that we're looking for. And that's happened in Chile. We moved from 0% and the retail -- the economy grew to 2% and the business there took advantage of that. So we are looking something similar here in Mexico, focusing on the things that we can control, and that is why we set very clear our priorities to go back, let's say, to these fundamentals as EDLP, availability and of course, the e-com acceleration that we have a huge opportunities, both in Mexico and Central America. So we're very optimistic for the future, and we are focused on these 3 priorities to take advantage in the coming -- in the next year. Paulo Garcia: Just on the second question, Ulises. So I already alluded to the fact that it's a nonrecurring item. So in a business of this size, once in a while, some of these topics pop up. I think I also wanted to give a little bit more reassurance to the market in terms of what we expect going forward. Obviously always the change in laws and regulations that we cannot control the tax effective rate. But actually, we see that hovering more around the 25%. And I think that's probably what is meaningful at this stage for you guys. Operator: Our next question is from Mr. Bob Ford from Bank of America. Cristian Barrientos: Bob, are you there? Operator: Our next question is from Alvaro Garcia from BTG Pactual. Alvaro Garcia: Congrats, Cristian, on the new role. I noticed in the release that used that you mentioned SG&A should sort of gravitate back to high single-digit growth in line with sales, and I found that a slight change relative to sort of the comments at Walmex, which were you should expect SG&A to continue to grow above sales. So I was wondering if maybe you could expand on that comment. Was that specific to this coming fourth quarter or for the full year or medium term? Any color on that would be helpful. Paulo Garcia: Yes. Thanks for the question, Alvaro. So I think what we said is twofold. One is, as we said it in the beginning of the year in terms of the guidance, we do expect to have for this year, high single-digit growth in terms of SG&A, which is much different than what we have said in the past. And for that means we continue to invest behind in the business. We always shed clarity on that token, but also driving efficiencies. And actually, these days also more midterm efficiencies also fueled by AI. I think in terms of also what we said it was that we do expect that SG&A to grow more closer to sales. That's our expectation there, Alvaro. So that's also what we want to see going forward. Alvaro Garcia: Great. And then just one. Maybe for you Paulo, could be for Cristian on gross margin. This Is a business that over the last 10 years has seen a 300 basis point increase in gross margin, which by Walmart standards, I think, is pretty darn high. So in the context of really doubling down on EDLP and really being true to that purpose, how do you feel about gross margin investment over the medium term? Paulo Garcia: Yes. I'll say and then Cristian can immediately jump and chip on that. You clearly see that -- so we have been investing behind pricing behind and we find our customers to help them save money better, as we said it. We do want to continue to invest more. We want always to invest, have the lowest prices in the market. As part of that investment, private brands penetration increase is also a part of that and a more EDLP approach, Javier can allude to the fact that we can do that in a better way than we've done in the past. I think we want to have the right P&L shape, Alvaro. So of course, we want to invest behind our customers. It's also important to know, and you know it very well and a few others as well, the shaping of P&L is also somewhat changing as we have the new contributions from the new businesses. That is helping our gross margin. We have easily around always 20 to 30 basis points in our gross margin as a positive effect that we want to invest behind our customers. And to do that, we need to, of course, continue to work on SG&A efficiencies to get it closer to sales, certainly keep it high single digit. I think if we do that and we sweat more the investments we do in terms of gross margin, we will be putting more money in the pocket of our customers. Cristian Barrientos: And also, if I may add, Paulo, around ecosystem, ecosystem is helping us to improve our profit, where we separate internally gross profit through commercial margin. And we have seen a more stable commercial margin. And also, we are working on managing the approach in our Tier 1, Tier 2, Tier 3 connect with the EDLP approach. And we have seen, as Paulo mentioned, opportunities or better participation on margin in private brands and also managing -- better managing our Tier 3 to improve maybe our mix in the total box, and that is why we are seeing a more stable margin. But we -- as I mentioned before, we strongly believe in the EDLP, and we will be focused on EDLP, trying to maintain as stable as we can our flow of merchandising and connect with our purpose. Operator: Our next question is from Mr. Antonio Hernandez from Actinver. Antonio Hernandez: Congrats on your results and the new appointments. Just wanted to follow up on Ulises' previous question regarding more than the macro environment, are you seeing anything more specifically on how consumer environment or the consumer's mindset has shifted or changed from your previous stage here in Mexico and Central America or more specifically in Mexico. Are you seeing any type of difference from back there to right now. And maybe also on the competitive environment competition. Cristian Barrientos: Well, to be very honest, only 90 days. And my first reaction is I had the privilege to travel in these 3 years that I landed in Chile to Mexico. And I see a more advanced or a more advanced market in terms of the -- how open we are to take, let me say, some technologies and connect with the e-commerce side. And that is why we put the e-com acceleration as a key priority. We are taking advantage of the brand that we are and bringing, as you saw in our webcast, single hallway to provide to our customer a less friction experience, connecting on-demand with 1P, with 3P, and we are seeing a very good adoption for customer. So if I may say something, it's going to be around technology. I've seen in my first 90 days, customer more open to receive these kind of technologies, open to give us, let me say, their cell phones and allow us to build this beneficial program. And with that, we can use data and be more precise in terms of selecting the assortment, in terms of price elasticity. So I'm seeing a more advanced customer, let me say, and very open to receive this kind of new technologies and reduce friction for them? Operator: Our next question is from Mr. Renata Cabral from Citi. Renata Fonseca Cabral Sturani: Congrats Cristian for the new position. My question is about the One Hallway that the company delivered this quarter. So if you can give some color for us on the main milestones that you are seeing now in terms of store coverage or plug in more vendors from the U.S., for instance, in terms of overall opportunities. Of course, we always look at what Walmart U.S. did, but we understand that there are some differences in terms of the market, maybe other opportunities as well. So if you can give us some color of what you see ahead for this One Hallway would be really helpful. Javier Andrade: Yes. Thank you, Renata, for your question. I'm very excited about sharing some ideas and thoughts about One Hallway. Let me start by saying that we are focusing very strongly in on-demand first just to make sure that we are protecting our core with groceries, consumables and fresh. And with One Hallway, we have now the opportunity to simplify the access and the experience for the customer where they will see all the opportunities in items and experiences in just one place in our digital platforms. And as you said, similarities between U.S. and Mexico are bigger than what we expected at the beginning. And basically, when we started the shift to One Hallway, we leverage all the technology from the U.S., the search engine and the technology. And what we're seeing now is interesting because we were expecting kind of a downside of the business during the transition. And with all the learnings that we have from the U.S., we were able to have a better transition in Mexico. We're seeing more loyal customers to our platforms. We're seeing more bigger baskets, if I may say, the customers are now purchasing groceries, consumables and GM, not necessarily just from on-demand, also from extended assortment, and we're working. And we recently shared inside the company that one of the core strategy is going to be cross-border. So marketplace is going to have a huge acceleration in the upcoming weeks and months. So what I can say is that we feel very confident that we're going to be leading the omnichannel experience for the customer, for every customer in Mexico, and we will give them access to the digital economy also through the ecosystem. So we are closing the loop, and we're going to be expecting growth and sustainable growth for the future with One Hallway. Renata Fonseca Cabral Sturani: Super good. Just a quick follow-up. For us, it's clear the potential for top line growth for 2026. In terms of margins, do you think that in 2026, that will be also accretive or that will take some time? Paulo Garcia: I think do you refer to the margins here in e-commerce in the marketplace, Renata? Renata Fonseca Cabral Sturani: Yes. Paulo Garcia: So I've always alluded to the fact you guys know if that if you think about our on-demand business, it's a profitable business already. We always said that our extended assortment business of 1P and 3P in a different stage, it's pretty much a business of critical mass. So critical mass here is important. So we are in that journey. So we actually see a lot of value creation can be created in the future as we go through that journey in improving the volumes that we pass through the 1P and in particular, marketplace. Operator: Our next question is from Mr. Andrew Ruben from Morgan Stanley. Andrew Ruben: Just one quick follow-up on the e-commerce side. For Marketplace, we saw [ celebrace ] grew 30%, but there was a 30% decrease in SKUs. So just trying to understand the strategy and what drove the divergence. And then just a second item, there was a quick mention of tariffs within the release or the conference call. So I just wanted to clarify, is that more of a general statement on macro uncertainty? Or are there specific ways that the tariff backdrop has been impacting business. Paulo Garcia: Yes. If I can just start on the second one. I think it's more just a general statement, Andrew, the way you put it. I think we're just seeing that was a little bit the uncertainty around tariffs, but also a little bit the uncertainty around the TMEC agreement. What it does at the moment is just it's hampering a little bit the investment in Mexico or the big investments. So that ultimately, hampering the investment leads to less job creation that you used to do it in the past. I think that creates a bit of uncertainty and therefore, impacts the consumption. I think that's the statement. I think if you think about tariffs as such and direct impact to our business, we're not seeing necessarily a meaningful impact of tariffs in our business. To the first question. Javier Andrade: Yes. And basically, to your question about SKUs and sellers, it was temporary because of the transition we were doing in technology, but we expect to recover very fast in terms of SKUs and sellers. And we're working closely with the U.S. to expedite this. So we know that it's important for us to have the right value proposition in every category. So it was just temporary. Operator: Our next question is from Mr. Froylan Mendez from JPMorgan. Fernando Froylan Mendez Solther: I want to ask -- I'm sorry, if they already asked, I couldn't hear most of the call, but on working capital, we saw an improvement in this specific quarter. Can you give us some color on what changed? And what are your expectations in the mid and long term on your working capital cycle. I guess, it's for an additional improvement, but more color on how sustainable is this quarterly improvement? If it had more to do with your pricing strategy or just the temporary and the type of SKUs that were sold during the quarter, what are different from the previous ones? More color on that would be highly appreciated. Paulo Garcia: Thank you for the question. So we've alluded in the past quarters that we were actually attacking our working capital. We are not necessarily entirely happy with the performance that we had on inventory days. You have that quarter 2 was already a better performance than the previous quarters. And this quarter, in particular, a reduction -- a significant reduction 3.5 days versus where we were a year ago. I think you can expect us continue to tackle inventory, continue to improve. I think ultimately, if we have less inventory in the store, it leads to more productivity. If it leads to more productivity, leads to money that we have at hand to be able to invest behind prices and therefore, put the spinning wheel to work and for to get more growth, you should expect that to continue to happen consistently in the coming months and not just necessarily a one-off. You do also -- there were concerns also in the past, Froylan, about our DPO and the fact that was increasing. That has to do, of course, we had to reduce purchases in the past to address inventory, now gets to a more stable level. If you remember, I said that in the prior quarter, and I think that's what you can expect going forward. Fernando Froylan Mendez Solther: Excellent. And if I may, just on your comments on what to expect into the fourth quarter, you said that between the second and third quarter, does that mean you are reiterating your top line guidance into the year? And when you say that SG&A should grow in the same level as top line. Should, we not expect then EBITDA margin expansion, but let's say, a stable gross margin for this year? Paulo Garcia: I said 3 things for the quarter, Froylan, and just to allude to the things we said. One, we did said one thing on guidance for the Q4 on growth indeed, and we expect growth to be along the lines of what we saw in Q2 and Q3. And if that's true, then you can do the math versus what we previously had said overall for the full year. I think we are focusing on what we can control and what we have the line of sight. We have line of sight. The good -- as Javier was alluding to for the peak season, and we expect along the lines of what we did in Q2 and Q3. On SG&A, as you've seen in this quarter, we grew only around 5%. As you know, there will be phasing. Sometimes you invest more, sometimes you invest less, so you create more efficiencies, but we stick to our objective to continue delivering the high single-digit growth. And then -- and when you think more in the mid and long term, we definitely want to see SG&A more in line with sales in order to deliver the near-term stabilization of the margins that we promised. That's the second. And the third one that we said for the -- I said it for this particular quarter, Q4, is that we expect a sequential improvement in terms of profit delivery. We always said that Q3 was going to be better than H1, and it was. And we expect a Q4 that will be better than Q3. Operator: Our next question is from Mr. Bob Ford from Bank of America. Robert Ford: Congratulations on the new role, Cristian. Just curious how you're thinking about evolving trends in small box retail in Mexico, maybe historically why Walmex has not really leaned into proximity in the past and how we should think about Express or other proximity formats moving forward? And then also in the footnotes of the results for the last couple of quarters, there's been a note about transfer pricing and tax risk. And I was just hoping you could expand upon that, particularly in the context of this little hiccup on tax expense. Cristian Barrientos: Yes. So first, if you -- on the proximity. Paulo Garcia: Yes. So let me start with the second question, and Cristian can talk a little bit more about how he thinks about proximity risks, and I can build on that. So Bob, so this is what we saw in the quarter. It's just a one-off that we saw it. It doesn't relate with the footnotes that you're alluding to in terms of the transfer price risk or any anything that will be linked to that, Bob. Cristian Barrientos: And in terms of proximity, if I may answer your question, we changed brands in 3 or 4 years ago. And we -- personally, I truly believe that we have a huge opportunity to continue to expand our business in -- Supermarket business. We have a ton of experience here in Central America. We have more than 100 stores here. We have almost 100 stores in Mexico also, but with a different size. So in the middle class that is very big in Mexico, we are seeing a lot of white spaces. That is why we changed the brand. We have a strong -- or, let me say, a better presence in Mexico City, but we have a huge opportunity to grow this supermarket business in regions in Mexico. We recently opened 2 stores with very good performance, and we have planned to continue to open this one because we have seen a lot of white spaces in the region. So we're very confident with these kind of stores or business because of the experience that we have in Walmart. Operator: That was the last question. I will now hand over to Mr. Salvador Villasenor for final comments. Salvador Villasenor Barragan: Thank you very much. We would just like to thank everyone for joining us once again and looking forward for our fourth quarter results and talking to you soon. Operator: Walmex would like to thank you for participating in today's video conference. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to CTO Realty Growth Third Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jenna McKinney, Director of Finance. Please go ahead. Jenna McKinney: Good morning, everyone, and thank you for joining us today for the CTO Realty Growth Third Quarter 2025 Operating Results Conference Call. Participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team that will be available to answer questions during the call. I would like to remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are discussed from time to time in greater detail in the company's Form 10-K, Form 10-Q and other SEC filings. You can find our SEC reports, earnings release, supplemental and most recent investor presentation on our website at ctoreit.com. With that, I will turn the call over to John. John Albright: Thanks, Jenna. We delivered another quarter of strong operating performance driven by the strength of our leasing activity. Year-to-date through September 30, we have completed 482,000 square feet of overall leasing activity, including 424,000 square feet of comparable leasing at a weighted average base rent spread of 21.7%. Contributing to this leasing performance was our third quarter in which we executed 143,000 square feet of new retail leases, renewals and extensions at an average base rent of $23 per square foot. This includes 125,000 square feet of comparable leases, a 10.3% base rent spread. Notably, just after the quarter, we signed a significant lease at the Shops at Legacy, a 243,000 square foot mixed-use lifestyle center located in Dallas, Texas. I will share more details on this lease and the Shops at Legacy shortly. We also continue to make progress on backfilling our 10 anchor spaces. Six of the 10 vacant anchor spaces have been leased, and we remain in active negotiations for the remaining 4. To date, we are encouraged by the rental upside and value creation these 6 leases represent and expect the new tenants to increase foot traffic relative to the former tenants. Furthermore, we remain on target to achieve our goal of positive cash leasing spread of 40% to 60% across these 10 anchor spaces, and we look forward to providing additional updates on our progress. More broadly, as of today, our signed-not-open, or SNO, pipeline stands at $5.5 million, representing approximately 5.3% of annual cash base rents in place as of quarter end. We believe that this pipeline positions us for meaningful earnings growth with approximately 76% of our ABR from the SNO pipeline anticipated to be recognized in 2026 and 100% in 2027. Now I would like to share some exciting updates related to the Shops at Legacy. Just after the quarter end, we signed a 30,000 square foot lease with a co-working operator expected to open by year-end 2026. This lease, along with the 20,000 square foot private members-only social club that we signed in the third quarter of 2024, substantially fills the space formerly leased to WeWork, marking a meaningful inflection point in our re-leasing efforts. In addition to these large leases, over the last 2 years, we have signed smaller shop leases for an aggregate of nearly 60,000 square feet for various restaurants, fitness and retail concepts that we believe will further increase the vibrancy of the center. Today, reflecting all this leasing activity, the lease percentage of Shops at Legacy stands at approximately 85%. Now moving to a recent agreement that we signed to acquire a shopping center in South Florida. This is a property that I mentioned on our last call that we were targeting. We believe this shopping center offers value-add potential that aligns well with our leasing and operating strength and presents an opportunity to both acquire the asset at an attractive initial yield and drive long-term value creation through lease-up of acquired vacancy. We expect to close this transaction before year-end and look forward to providing more details when we close. From a financing perspective, as Phil will discuss in more detail, we recently termed out some debt and refreshed our revolving credit facility, providing enhanced liquidity. This will give us the ability to initially acquire the South Florida property using our line of credit. Ultimately, though, we anticipate funding this acquisition by recycling an asset around year-end. Overall, we are pleased with our leasing progress and the value creation underway as we continue to execute our strategic priorities. And with that, I will hand the call over to Phil. Philip Mays: Thanks, John. On this call, I will discuss our balance sheet, earnings results and updated full year 2025 guidance. Starting with the balance sheet. Just before quarter end, we closed $150 million in term loan financings, including a new 5-year $125 million term loan maturing in September of 2030 and a $25 million upsizing of our existing term loan maturing in September of 2029. Both term loans bear interest at SOFR plus a spread based on our leverage ratio. At closing, we utilized existing SOFR swap agreements, resulting in an initial fixed interest rate of approximately 4.2% for both loans. In March of 2026, when certain of these applied SOFR swap agreements expire and are replaced by other existing forward swap agreements, the interest rate for both loans will adjust to approximately 4.7% based on the company's current leverage ratio. The proceeds from these new term loan financings were used to retire a $65 million term loan scheduled to mature in March of 2026 and to reduce the balance on our revolving credit facility, providing enhanced liquidity. Reflecting this financing, we ended the quarter with approximately $170 million of liquidity, consisting of $161 million available under our revolving credit facility and $9 million in cash available for use. Additionally, we have recently repurchased $9.3 million of common stock at a weighted average purchase price of $16.27 per share. These repurchases consisted of $4.3 million towards the end of the third quarter to close out our previous $5 million repurchase program and $5 million in October under our recently announced $10 million common stock repurchase program. Reflecting this quarter's balance sheet activity, we ended the quarter with net debt to EBITDA of 6.7x, a slight improvement from 6.9x at the end of the second quarter. Further, we anticipate additional deleveraging as we successfully re-lease our vacant anchor boxes and tenants in our signed-not-open pipeline commence paying rent. And notably, with our recent completed term loan financing, we now only have $17.8 million of debt maturing in 2026. Moving to operating results. Core FFO was $15.6 million for the quarter, a $3 million increase compared to $12.6 million in the comparable quarter of the prior year. On a per share basis, core FFO was $0.48 per share compared to $0.50 per share in the comparable quarter of the prior year. The change in core FFO per share reflects a reduction in leverage that took place from late third quarter of 2024 through the end of 2024 when we reduced net debt to EBITDA by approximately a full turn. With regard to same-property NOI, our same-property NOI increased 2.3% during the quarter. This growth was driven by leasing activity across our portfolio, in particular, at Beaver Creek with Onelife Fitness replacing the former theater, along with strong small shop leasing at West Broad Village, Plaza at Rockwall and Ashford Lane. Turning to guidance. We are raising both our core FFO and AFFO outlook for the full year of 2025. Our new core FFO range has increased to $1.84 to $1.87 per diluted share from the previous $1.80 to $1.86 per share. And our new AFFO range has increased to $1.96 to $1.99 per diluted share from the previous $1.93 to $1.98 per diluted share. And with that, operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from Rob Stevenson with Janney Montgomery. Robert Stevenson: Phil, What's the pro forma debt-to-EBITDA look like once you complete the Florida acquisition and sell the existing asset and the near-term signed but not commenced leases start to drive revenue? Philip Mays: Yes. So as John discussed on the call, the Florida asset will be temporarily parked on the line, and we have plenty of liquidity there and capacity to do so, but will ultimately be funded with recycling and should not significantly change debt to EBITDA. The signed-not-open pipeline as it stands today, just coming online, would take off about half a turn as it comes online. Robert Stevenson: Okay. And what is the timing of the bulk of that revenue? Is that -- are you going to see any material amount in the fourth quarter? Is that a first or second quarter '26 event? How should we be thinking of that when we play around with our models in terms of when the bulk of that $5-plus million starts hitting revenue? Philip Mays: It's going to start beginning of next year. The pipeline is $5.5 million of base rent. I think we said 75% of that is going to be recognized next year, so about $4 million. And the way I would ramp that up is about $0.5 million in the first quarter, $1 million in the second and $1 million in the third and then about $1.5 million in the fourth, so kind of growing throughout the year to a total of about $4 million as the pipeline stands today or about 75% of the pipeline with all of it being recognized in '27, everybody should be as currently projected operating in space, paying cash rent by the end of '26. So you get the full $5.5 million in '27. Robert Stevenson: Okay. That's helpful. And then, John, where is your most significant vacancy today that's not either under contract, letter of intent or pretty far down the road where you still have some work to do? Where is the opportunity for you guys, right now? John Albright: Yes. We have a 40,000 square foot vacancy at Carolina Pavilion. We've gone through a couple tenants -- prospective tenants where they were going to take so long that we decided to switch tack. And so we're kind of going down a route of either splitting the box or talking to a couple of different groups about taking the whole box again. So we've had some false starts with some groups that are just going to be really torturous as far as how long they're going to take to get through the process. And then that's really the largest vacancy and then we have a little bit left to go at Legacy, but not too much. So that's where our focus is. Robert Stevenson: All right. And then last one for me. You've got about $45 million of structured investments that are -- have maturity dates in the first part of '26. When you take a look at those today, are those likely to be redeemed around that point in time? Or are those likely to be extended? How are you guys thinking about that as the preferred -- I think it's Watters Creek and Founders Square. John Albright: Yes. Founders Creek will pay off. Watters -- I'm sorry, Founders Square will pay off and Watters Creek may extend, but may just pay off as well. So we're seeing where that plays out, just depending on their -- how they look at capitalizing that property going forward. Operator: And the next question will come from Matthew Erdner with JonesTrading. Matthew Erdner: You guys touched on what I was going to ask a little bit with the Florida acquisition, but I'm just trying to think about how you guys are going about capital allocation moving forward kind of between buybacks and structured investments. Given where the stock is trading, are you guys going to continue to buy back shares down at this level? John Albright: Yes. So I mean, clearly, we're going to do as much as we can, given our credit facility sort of restrictions. So absolutely, given the stock price kind of where we're trading below a 9 multiple and 5-year lows and almost a 10% dividend yield, it's fairly ridiculous. So clearly, the best acquisition investments is our own stock. Matthew Erdner: Got it. And then as a follow-up to that, do you guys have any restrictions on investing more into PINE? And if not, is that something that you guys are considering doing just given that, that stock price is trading at similar multiples? John Albright: Yes. So we do have a little bit more room there without hitting our restrictions on what we can own of PINE. And of course, we're opportunistic. So just depending on what happens with the stock price there. But clearly, right now, feel like CTO is the double discount. Operator: And the next question will come from Craig Kucera with Lucid. Craig Kucera: You've been pretty active on the structured finance side at PINE. Are you seeing any pickup in potential loans that work for CTO? Or are property investments really more compelling right now? John Albright: Yes, not so much at CTO. As you mentioned, we're seeing it more at PINE. Given that the CMBS market has come back very strong for the shopping centers, seeing less need for structured finance there, but we're certainly keeping our eye out there. So yes, that's kind of where the market is right now. Craig Kucera: Got it. Changing gears, you have a decent amount of leases expiring here in the fourth quarter, I think about 3% of ABR, one is an anchor. Can you talk about your expectations there? John Albright: Yes. We're not really seeing any risk as far as nonrenewal. As you know, a lot of these acquisitions had tenants way below market rent and some that we'd like to get back and replace with higher rents. But yes, there's no risk that we're kind of seeing out there on the renewal side. Craig Kucera: Okay. Got it. Congrats on the Shops at Legacy leasing. I think that's been -- there's been some vacancy there for a while. Can you give a sense of how additive that is to the signed-not-open pipeline? John Albright: Yes, I'll let Phil touch on that. But yes, it has been a long time, longer than we would like, of course. And one thing that, that's going to bring to the property that people kind of miss out on a little bit is a lot of vibrancy, a lot of bodies coming in. And it's going to -- even though the restaurants have done really, really well on the leasing without that, just having that component for that property is really going to be an enhancement. But I'll let Phil talk about that. Philip Mays: Yes. Out of the entire signed-not-open pipeline of $5.5 million, Legacy is close to $1 million of that, Craig. In particular, the private members club and then the co-working lease that we just signed in October, those 2 in particular. Craig Kucera: Okay. And just one more for me. Any change to the credit watch negative list? I know we've talked about maybe home goods or some of those things, but any change there? John Albright: Not this quarter. No, same sort of tenants. And if anything, kind of credits have gotten a little better, I think. Operator: And our next question is going to come from Gaurav Mehta with Alliance Global. Gaurav Mehta: I wanted to ask you on the nonrecurring items. I think you reported $0.5 million of nonrecurring this quarter and also raised your G&A guidance a little bit. Just want to get some color on what those items were. Philip Mays: Yes. So on the nonrecurring, those kind of tend to run -- fluctuate between $100,000 and $300,000 a quarter, generally averaged around $250,000. You're correct, it was closer to about $0.5 million, I believe, this quarter. So it was slightly elevated. And we tend to get a quarter like that every 3 or 4 quarters, it kind of tends to pop up to that number. But generally, for like a good run rate, it's typically closer to $250 million. G&A, I think, for the fourth quarter will be similar to this quarter, if you're just looking to model that. Gaurav Mehta: Okay. Second question I have is on tenant improvement allowances. It seems like it was higher this quarter than last few quarters. How should we think about that line item as you sign new leases? Philip Mays: Yes. So it was very light in the first half of the year. That volume and that size kind of tends to fluctuate as anchors get moved in and complete their construction and get open. So this quarter, you had Onelife at Beaver Creek, and they have to support -- provide invoices and stuff. So they can get in and get open. But by the time we reimburse them, it can lag a little. But you had Onelife at Beaver Creek. You had Boot Barn and Barnes at Rockwell. So it was elevated this quarter. Currently, I would expect the fourth quarter to also be elevated and be similar to the third quarter. But again, that's just going to depend on timing on individual anchors and when they get open and when they get their paperwork submitted for their TI reimbursements. But we do have a lot of anchors lined up, and I would expect the fourth quarter to be pretty elevated again. Gaurav Mehta: Okay. And then lastly, on the asset recycling that you talked about to fund the acquisition. Is that expected to happen this year or that's expected to happen next year? John Albright: We think that something will happen this year, but you just never know as far as some things kind of come up and need extensions and so forth, but we're probably at the end of the year. Operator: And the next question comes from John Massocca with B. Riley Securities. John Massocca: As you think about the anchor box re-leasing in the $4 million to $4.5 million of potential new base rent there, how much of that is already set with the 6 leases you've closed? And how much is still contingent on the 4 leases that you're negotiating or trying to close here in the next couple of months? Philip Mays: Yes. So out of the anchors, the 6 that are done, about -- they represent about $2.5 million currently. So with the ones that are left, that would be a remaining $2 million. John Massocca: Okay. And then maybe switching gears a little bit on the investment front. Anything else in the pipeline you're seeing that might close in 2025 beyond the kind of Florida shopping center transaction you talked about earlier? John Albright: Given that we're getting kind of tight on time, I wouldn't expect it, but we're not also kind of -- if one of the things that we're looking at, we are bidding on quite a bit of assets that we like, but not sure how competitive we'll be, but we're certainly saying that we can close by year-end if it's important for a seller. So hopeful, but I wouldn't expect an additional one. John Massocca: Okay. And then in terms of 2026, what's the acquisition environment look like today? And I guess maybe to the extent you would do new investments, how do you think about funding it? And is there additional assets within the portfolio that you think are targets for capital recycling beyond the assets you're going to use to fund the Florida acquisition? John Albright: Yes. I mean that's the easy part. If we find a good acquisition candidate, we do have some stabilized assets given how much leasing we've done over the last couple of years. And so taking advantage of that lower cap rate sale, maybe slower growth asset and recycling into kind of value-add, higher growth asset, higher yielding. So we definitely have a nice pipeline of potential sale opportunities. I just want to match that up with something we feel really good about. John Massocca: You think the Fidelity property or the New Mexico property is a potential candidate for that capital recycling, either for the acquisition we talked about earlier on the call or 2026 investment activity? John Albright: For sure. We just need to get the lease settled up with the state and then it will be in condition to sell. So that's probably early '26. I think maybe previously this year, I mentioned late this year, but it takes a while to settle the lease expansion and so forth. So we're probably looking at early '26 on selling that asset. But yes, that's definitely a candidate. John Massocca: Okay. And then lastly, the Shops at Legacy, the kind of remaining square footage to be leased once you bring in the co-working tenant, what kind of is that? Just big picture, is it all kind of small shop space? Is there any kind of anchor space still left in that property? Just kind of curious what that looks like. John Albright: Yes. It's more small shop space that we've gone through literally 3 different tenants that we just didn't get there, whether we didn't like their financials or too much TI. So we're being a little picky on it. And then we have a little bit of WeWork space left, but we feel like the -- when the private club opens, they express some interest that, that might be an expansion opportunity for them. So everything is very manageable. We're just trying to kind of be picky about who we put in. Operator: This concludes today's Q&A session and today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Centerra Gold Third Quarter 2025 Conference Call. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Lisa Wilkinson, Vice President, Investor Relations and Corporate Communications with Centerra Gold. Please go ahead, ma'am. Lisa Wilkinson: Thank you, operator, and good morning, everyone. Welcome to Centerra Gold's Third Quarter 2025 Results Conference Call. Joining me on the call today are Paul Tomory, President and Chief Executive Officer; David Hendriks, Chief Operating Officer; and Ryan Snyder, Chief Financial Officer. Our news published yesterday outlines our third quarter 2025 results and is complemented by our MD&A and financial statements, which are available on SEDAR, EDGAR and our website. All figures are in U.S. dollars unless otherwise noted. Presentation slides accompanying this webcast are available on Centerra's website. Following the prepared remarks, we will open the call for questions. Before we begin, I would like to remind everyone that today's discussion may include forward-looking statements, which are subject to risks that could cause our actual results to differ from those expressed or implied. For more information, please refer to the cautionary statements in our presentation and the risk factors outlined in our annual information form. We will also be referring to certain non-GAAP measures during today's discussion. For a detailed description of these measures, please see our news release and MD&A issued last night. I will now turn the call over to Paul Tomory. Paul Botond Tomory: Thank you, Lisa, and good morning, everyone. In the third quarter, we sustained robust margins and generated nearly $100 million of free cash flow, driven by strong operational performance at OÖit and elevated metal prices. Gold and copper production in the quarter was almost 82,000 ounces and 13.4 million pounds, respectively. Our cash balance increased to over $560 million in the quarter, demonstrating our ability to fund the Thompson Creek restart project while returning $32 million of capital to shareholders through disciplined share buybacks and our quarterly dividend. We also continue to deploy capital strategically through our equity investment in Liberty Gold, reflecting our balanced approach to growth and value creation. Our self-funded growth strategy continues to advance across multiple fronts. We published the Mount Milligan pre-feasibility study, which I'll come back to, and we also expect to publish a preliminary economic assessment for Kemess in the first quarter of 2026. Together, these assets form a robust pipeline of long-life gold and copper projects in British Columbia. In Nevada, development has advanced at the Goldfield project, which provides Centerra with additional exposure to future gold production. In the quarter, engineering progressed as planned, early mobilization efforts progressed on site, and we are building out a dedicated project execution team. These early actions mark important steps towards project readiness and position Goldfield for disciplined and efficient execution. Each of these growth opportunities as well as the Thompson Creek restart project in Idaho can be funded using our existing liquidity and cash flow from operations, positioning Centerra to deliver sustainable low-risk growth while maintaining our strategic approach to capital allocation. In September, we announced the results of the PFS for Mount Milligan, extending the life of mine by approximately 10 years to 2045. This is supported by an optimized mine plan, delivering average annual production of 150,000 ounces of gold and 69 million pounds of copper from 2026 to 2042, followed by the processing of low-grade stockpiles from 2043 to 2045. The study outlines disciplined nonsustaining capital expenditures of approximately $186 million, most of which are not required until the early to mid-2030s, all fully funded from available liquidity and future cash flow. Key investments include $114 million for a second tailings storage facility to be spent across 2032 and 2033 and providing the potential for future raises, which could add multiple decades of storage capacity beyond the 2045 life of mine. $36 million for ball mill motor upgrades and flotation cells in 2028 to increase process plant throughput by about 10% to 66,000 tonnes per day and increase recovery by approximately 1%. And lastly, $28 million for 5 new haul trucks to support longer haul distances, higher material movement rates and stockpile development. Proven and probable reserves increased significantly to 4.4 million ounces of gold and 1.7 billion pounds of copper, representing a 56% and 52% increase, respectively, from year-end 2024. Recent drilling confirms mineralization remains open to the west of the current resource pit and Centerra continues to advance exploration aimed at expanding the mineral resource and assessing opportunities to extend the mine life beyond the updated plan. The PFS reaffirms Mount Milligan's strong economics with an after-tax NPV of approximately $1.5 billion at $2,600 per ounce gold, which increases to over $2 billion at $3,500 per ounce of gold. Mount Milligan remains a strategic cornerstone asset in Centerra's portfolio with 20 years of mine life, meaningful gold and copper production, strong cash flow and a significant opportunity for future exploration potential in a top-tier mining jurisdiction. Now I'd like to share an update on our sustainability initiatives. As part of our climate change strategy and commitment to sustainability and operational innovation, we're advancing a renewable diesel pilot project at Mount Milligan. This initiative will establish clear reliability metrics, account for seasonal variations and evaluate performance analytics across our fleet. By exploring renewable diesel, we aim to meaningfully reduce greenhouse gas emissions at Mount Milligan and move towards lowering Centerra's overall carbon footprint. At the same time, Mount Milligan's life of mine extension marks a major milestone in advancing Centerra's gold growth strategy and reaffirms our commitment to social responsibility. This includes the launch of the eighth pre-employment training and education readiness program, which supports unemployed and underemployed First Nations members in local communities through skills training, followed by direct employment opportunities. Between 2023 and 2025, we've also achieved double-digit growth in our local spend with First Nations owned and affiliated businesses. That same commitment drives our work at Oksut, where our community initiatives [indiscernible] focus on education, sports, environment and social development. Through these programs, we are proud to have supported more than 13,000 students, helping to build stronger, more resilient communities where we operate. And with that, I'll pass the call over to Dave to walk through our operational performance highlights. David Hendriks: Thanks, Paul. Slide 8 shows operating highlights at Mount Milligan for the third quarter. Mount Milligan produced over 32,500 ounces of gold and 13.4 million pounds of copper in the quarter. In 2025, mining operations encountered zones with more complex mineralization, the impact of which were incorporated in the recently published PFS. Year-to-date and full year gold and copper production remains in line with the PFS. In the third quarter, all-in sustaining costs on a byproduct basis were $1,461 per ounce, 14% higher than last quarter due to an increase in sustaining CapEx and lower ounces sold in the quarter. Full year 2025 costs are expected to be near the low end of the guidance ranges. Slide 9 shows the quarterly operating highlights at Oksut, reflecting another period of strong performance. Third quarter production was 49,000 ounces, better than planned due to higher grades resulting from mine sequencing. As a result, we have reaffirmed our 2025 production guidance at Oksut with production expected near the upper end of the guidance range. In the third quarter, all-in sustaining costs on a byproduct basis were $1,473 per ounce, which is 16% lower compared to last quarter, driven by higher ounces sold and lower sustaining CapEx, partially offset by higher royalty expenses due to elevated gold prices and new royalty rates in [ Turkey. ] Full year 2025 cost guidance is expected to be near the low end of the range, benefiting from expected higher sales and continued strong operational performance. We have initiated a life of mine optimization study at Oksut to evaluate the asset's full potential, including the incremental production potential of residual leaching of the heap and expanding the pit to pursue additional mineralization. The study will explore options to extend gold recovery from existing leach pads through improved solution management, which will enhance residual metal extraction efficiency. The study is expected to be completed by the end of 2026 and will support updates to the mine's long-term reclamation and site management plans, ensuring the operation continues to maximize metal recovery and cash flow in a safe and responsible manner. The restart of Thompson Creek is advancing with approximately 29% of the total capital investment complete. In the third quarter, we invested $31 million in nonsustaining capital expenditures, bringing total investment spend since the September 2024 restart decision to $113 million. We have reaffirmed our 2025 guidance for nonsustaining CapEx at Thompson Creek. The project remains on track and first production is expected in the second half of 2027. I'll now pass it to Ryan to walk through our financial highlights for the quarter. Ryan Snyder: Thanks, David. Slide 11 details our third quarter financial results. Adjusted net earnings in the third quarter were $66 million or $0.33 per share, which benefited from strong production from Öksüt and elevated metal prices. Key adjustments to net earnings include $194 million related to the noncash impairment reversal at Goldfield, $27 million of unrealized gain net of taxes on the financial assets related to the additional agreement with Royal Gold and $16 million of unrealized gain on the remeasurement of the sale of the Greenstone partnership in 2021, among other things. In the third quarter, sales were over 80,000 ounces of gold and 13 million pounds of copper. The average realized price was $3,178 per ounce of gold and $3.73 per pound of copper, which incorporates the existing streaming arrangements at Mount Milligan. At the molybdenum business unit, approximately 3.1 million pounds of molybdenum was sold in the third quarter at the Langeloth facility at an average realized price of $24.42 per pound. Consolidated all-in sustaining costs on a byproduct basis in the third quarter were $1,652 per ounce. We expect consolidated all-in sustaining costs on a byproduct basis to be near the low end of the guidance range for both Mount Milligan and Oksut in 2025. Slide 12 shows our financial highlights for the quarter. In the third quarter, we generated robust cash flow from operations of $162 million and free cash flow of $99 million, driven by strong operational performance at Oksut and elevated metal prices. In the third quarter, Mount Milligan generated $64 million in cash from operations and $45 million in free cash flow. OÖü generated $139 million in cash from operations and $134 million in free cash flow. The molybdenum business unit used $16 million of cash in operations and had a free cash flow deficit of $54 million this quarter, mainly related to spending on the Thompson Creek restart and a working capital increase at [ Langeloth, ] partially due to high molybdenum prices. Returning capital to shareholders remains a key pillar in our disciplined approach to capital allocation. In the third quarter, we repurchased 2.8 million shares for total consideration of $22 million, and we continue to believe that repurchasing our shares is an accretive high-return use of cash. Our Board has increased the approved level of share repurchases through the NCIB in 2025 to $100 million, and we have repurchased $64 million year-to-date. We also declared a quarterly dividend of $0.07 per share. Year-to-date, we have returned over $95 million to shareholders through dividends and share buybacks. As part of our commitment to returning capital to our shareholders, we expect to remain active on the share buybacks subject to market conditions. At the end of the third quarter, our cash balance was $562 million, bringing total liquidity to over $960 million. We also hold an additional $85 million in equity investments. This strong financial position gives us the flexibility to fully fund our organic growth projects at Mount Milligan, Goldfield, Kemess and Thompson Creek while continuing to return capital to shareholders. I'll pass it back to Paul for some closing remarks. Paul Botond Tomory: Thanks, Ryan. We're proud of the continued progress in advancing our internal self-funded growth strategy. The recently published Mount Milligan PFS represents a major step forward in unlocking additional value from this cornerstone asset and provides a clear view of the mine's long-term potential. Alongside this, we continue to advance the Kemess study, which is expected to be completed in the first quarter of 2026. These efforts reflect our disciplined approach to capital allocation and our commitment to enhancing shareholder value through a robust pipeline of self-funded growth opportunities supported by a strong balance sheet. And with that, operator, I'll open the call to questions, please. Operator: [Operator Instructions] And your first question today will come from Luke Bertozzi with CIBC. Luke Bertozzi: On the solid quarter. It's great to see higher commodity prices flowing right into free cash flow. I noticed gold recovery at Mount Milligan was a bit low compared to prior quarters and the recent technical report. Can you provide a bit of color on what drove the lower recovery in Q3 as well as your expectations for Q4? David Hendriks: Thanks very much for the question. This is Dave. On the recovery piece, we had remodeled the entire deposit. And one of the things that we did when we put the PFS out was looking at the ratio of the pyrite to the Kao pyrites. And that ratio has been more pyrite in the last quarter than we had modeled in there, and that has led to the low recoveries. What we have done through the end of the year is we will be able to get through to our ounces for guidance based on moving a little bit more higher material. And so we're able to satisfy ourselves that we understand the piece of the pyrite tocalcopyrite ratio, which is impacting our recovery. Operator: And your next question today will come from Don DeMarco with National Bank. Don DeMarco: Congratulations on the strong quarter. I'll start with Oksut. So I see that during the quarter, you had 1.5 million tonnes stacked at a grade of 1.82 grams per tonne. So considering heap leach residence times and so on, does this suggest that we might see another strong grade quarter in Q1 '26 after the production normalizes in Q4? Paul Botond Tomory: Yes. I think what we'll see going forward there, Don, is that through the end of the year, again, we reaffirmed our guidance number. We're pretty confident that we'll get there. And then we should see some good strong production going into next year as well. 100%, that will impact us going into Q1 of 2026. As Don, this is a bit of a segue into the longer-term study we're launching at Oksut. This mine has reconciled positively since day 1. And we're pretty confident that there's a lot more gold in those heaps than our previous metallurgical models showed. And so what we've kicked off here is looking at how we might be able to exploit those accumulated inventories in that heap. So as we said in our release and in Dave's prepared remarks, we've initiated a study on how to access what we believe are significant accumulated inventories of gold in those heaps. But this asset continues to perform extremely well on reconciliation, and that's what you're seeing in those stacked ounces and in accumulated inventories. Don DeMarco: Okay. And for my next question, U.S.-based assets have been trending favorably under the current administration. So I've got 2 parts to this question. Is there a read-through to improving optics for the MBU? And given that moly is a critical mineral with applications in defense and aerospace and so on, is there a potential for a strategic deal with the U.S. government? Paul Botond Tomory: Okay. So on your first question, there is no doubt that the whole mining and metal space has become a more favorable place over the last year. And particularly for molybdenum, we are a U.S.-based mine feeding a U.S.-based roaster, principally selling refined molybdenum products to domestic U.S. steel mills. And we've seen increased confidence in that sector in the U.S. steelmaking sector. Molybdenum, as you know, goes into high-performance steels that are used in everything from pipelines to nuclear power to defense, aerospace, shipbuilding, all sectors that are seeing an uptick in potential steel demand. So yes, the whole U.S. minerals and mining space, particularly what we have fully permitted in-flight project certainly has become more attractive. In terms of a U.S. government deal, it's something that we monitor. We don't need funding. We were fully funded right through the build. The project is on track, as we said in our prepared remarks. And at this stage, we're going to continue to monitor the situation with the government, but there's nothing to report. And other than to say that it's -- as I said in the previous comment that it's a very favorable environment right now. Operator: And your next question today will come from Frederic Bolton with BMO Capital Markets. Frederic Bolton: Just a couple of questions from me. I just want to follow up on Luke's first question about Mount Milligan. There's mentioned that there was a mention of the grinding circuit being impacted during the quarter. Can you just expand on that and whether that's an issue that's been resolved? And my second question relates to Oxford. If the life of mine optimization study that concludes towards the end of 2026, if that results in an expansion of the pit, would that require additional permitting from the Turkish government? Or would that require a new [indiscernible] Paul Botond Tomory: Okay. So let me take the Oksut question first. So the mine life -- the current reserve life ends in 2029. So that will be -- and we still anticipate at this point that, that will be when the last tonne comes out of the pit. What this optimization study looks at is the accumulated inventories on the heaps because the mine has reconciled positive, we believe, and we're going to be proving this up with Sonic drilling and other means over the next little while, we believe that there's significant accumulated inventories. This can be done in the context of the current footprint. There would have to be permit modifications for residual leaching, but there's broad understanding what that might look like. So the principal focus of the study is how to manage what we believe are accumulated inventories, better solution management with the cyanide solution. And lastly, as part of the study, we will also evaluate whether or not there might be a sulfide inventory below the current oxide -- beyond the current oxide boundary at depth. It's still very early to say what that might look like. And of course, if there were more material that would require permanent modifications, but it's early days, and we're going to be assessing the study as is principally residual leaching, but secondarily, whether or not there are potential extensions to the pit into the sulfides. So that's the Oksut point. On Mount Milligan. So as Dave said, the purpose of this PFS, of course, was to extend mine life, but it was also to reset our understanding on grade recovery and throughput fundamentally, how do we mine a plan that has an optimal blend of the various characteristics so that we're not impacted on recovery. This year, we're still dealing with, in effect, having mined ourselves into a corner on some of this material. As Dave described, we've been impacted by high pyrite and chalcopyrite, which depresses recovery. In the PFS, what we've done is we've created a mine plan that blends down the pyrite so that we can get back up to the recoveries that we intend to be at. And same, by the way, goes for grade. So the PFS, one of its major objectives was to create a mine plan that provides for a more optimal feed source and feed blending into the mill. So we expect to start working our way through that. It's not something you can turn around overnight, but it's something we expect to work our way through certainly starting in the first quarter of next year. Did I answer your question? Frederic Bolton: Yes, thank you. Operator: And your next question today will come from Brian MacArthur with Raymond James. Brian MacArthur: Paul, just so I'm clear on this Oksut, I think you've answered this. But assuming we don't do the sulfides and we just do the residual leach, are we just talking about -- are we removing material again from leach pad to leach pad? Or are we just going to be able to reuse the current leach pads and get more material out? So effectively, my real question goes to this, the capital for this is very, very little, and there's no mining involved, assuming we don't go to the sulfide. Is that right? Paul Botond Tomory: Yes, it would be a very low CapEx spend. Both Dave and I have a lot of experience with this type of stuff in Nevada. Dave, why don't you describe what we're going to be looking at here a scope on the residual work? David Hendriks: Yes, there's a couple of different pieces. One of the studies we'll look at is certainly reshaping the heaps will be a big part of this. So that's just dozer time and everything else. So it takes a little bit of capital to get that done. But that gives us a big opportunity to be able to get in there. And then we'll look at our solution flow and decide, is it best to just go with a straight piece? Do we want to try and up the fig grades by going through the areas a couple of different times and having some -- maybe an additional pond or 2 to do things. And so it's just a piece of what we'll look at is what's the best way to get the gold out in the -- an appropriate time line and leaving us in a good position for closure. So whether that ends up being a little bit more capital, it will only be more capital from the standpoint that we'll be able to get a lot more ounces out. And that's just something that we will plug away at, and it will continue to evolve over the next few years. We'll have a study published at the end of next year that will give us a good level of confidence. And whatever we put in there, I'm sure we'll beat that as well. There's a lot of opportunity taking ounces out of old heaps. We've done it a bunch of times, and we look forward to initiating that work in Turkey. Brian MacArthur: It makes great sense and great return on capital. So just with that, though, as you get this information, is there any opportunity to get better recoveries in the later part of the current mine life? Like obviously, the study is done in 2026. We start to get benefit even in '28 or '29? Or is it -- or do you just have to -- I mean, I haven't been there for a while, just reconfiguring things, how you actually do this. David Hendriks: A lot of it comes down to how much solution that we have and how we're able to put it through the heaps. So are we going to just run it through one at a time? Do we try and build the preg right up by going through a couple of different areas? And that's the study we'll look at. So my expectation is that we would be able to increase the grades going to the plant and get more ounces early, but continue to get ounces late. But that could take 18 months, 2 years to get that up and running because it would require probably some additional pumping. Therefore, we need to do some minor modifications to permitting and everything else. So it's an iterative process and expect that we would be able to do very well with it over the next period of time. And you are 100% correct, very low capital for the return that we would get out of it. Operator: And your next question today will come from Steven Green with TD Securities. Terence Ortslan: I think you answered my questions on Oksut. But just to finish that off, do you have any oxide targets in the project area and or potentially regional opportunities just to take advantage of your position in Turkey at the end of the mine. David Hendriks: Yes. One of the pieces of this optimization study is really a 360 around the site and exploration 360 around the site, bringing in some different people to take a look at what we've been doing there for the last 10 years and give us an opportunity to make sure we're not leaving something behind. And then also working with the deposits in the area. So that is part of the work that we will continue to do, and that will be a part of the life of mine optimization study. Operator: Seeing no further questions, this will conclude our question-and-answer session as well as today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good morning, and welcome to the Stepan Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded on Wednesday, October 29, 2025. It is now my pleasure to turn the call over to Mr. Ruben Velasquez, Vice President and Chief Financial Officer of Stepan Company. Mr. Velasquez, please go ahead. Ruben Velasquez: Thanks, Jecita. Good morning, and thank you for joining Stepan Company Third Quarter 2025 Financial Review. Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to, prospects for our foreign operations, global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings. In addition, this conference call will include discussions of adjusted net income, adjusted EBITDA and free cash flow, which are non-GAAP measures. We provide reconciliations to the comparable GAAP measures in the earnings presentation and press release, which we have made available at www.stepan.com under the Investors section of our website. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation. We make these slides available at approximately the same time as when the earnings release is issued, and we hope that you find the information and perspectives helpful. With that, I would like to turn the call over to Mr. Luis Rojo, our President and Chief Executive Officer. Luis Rojo: Thank you, Ruben. Good morning, and thank you all for joining us today to discuss our third quarter 2025 results. I plan to share highlights of the quarterly performance and we will also share updates on our key strategic priorities, while Ruben will provide additional details on our financial results. We delivered 9% adjusted EBITDA growth through the first 9 months of 2025, bringing year-to-date adjusted EBITDA to $165 million. These results were restrained by the significant increase in oleochemical raw material prices, which continues to impact Surfactant margins and by higher start-up costs related to our new Pasadena, Texas facility. We remain focused on gradually recovering our margins and keeping a healthy balance between volumes and margins. Third quarter adjusted EBITDA was $56 million, up 6% year-on-year. Specialty Products adjusted EBITDA increased significantly, driven by favorable order timing within the pharmaceutical business. Polymers delivered volume growth across rigid polyols and commodity PA, while EBITDA was slightly lower due to unfavorable mix and margin pressures. Surfactant adjusted EBITDA declined versus the prior year, driven by higher Pasadena start-up costs, oleochemical raw material cost inflation and lower demand within our global commodity consumer products end market. Total company sales volumes grew 1%, with Polymers up 8% and our NCT product line up 26%, while Surfactants volume declined 2%. In Surfactants, we continue to experience double-digit volume growth within the crop productivity business and mid-single-digit growth in the oilfield end market. This growth was offset by lower demand within the global commodity consumer products end market. North America Rigid Polyol and commodity PA volumes were both up double digits, while European Rigid Polyol volumes continue to be impacted by macroeconomic uncertainties and low construction activity. Despite a very challenging environment for the chemical sector, we remain encouraged by the volume growth across several of our key strategic end markets. We finished the third quarter of 2025 with $10.9 million of adjusted net income, down 54% versus the prior year, largely reflecting a higher effective tax rate, higher interest net and higher depreciation, none of which had cash impact. Free cash flow was positive at $40 million during the quarter, driven by reduced working capital and disciplined capital spending. During the third quarter of 2025, the company paid $8.7 million in dividends to shareholders. Our Board of Directors declared a quarterly cash dividend on Stepan common stock of $0.395 per share, payable on December 15, 2025. This represents a 2.6% increase in our dividend. Stepan has paid and increased its dividend for 58 consecutive years. Ruben will now share some details about our third quarter results. Ruben Velasquez: Thank you, Luis. My comments will generally follow the slide presentation. Let's start with Slide 4 to recap the quarter. Third quarter 2025 adjusted net income was $10.9 million or $0.48 per diluted share versus $23.7 million or $1.03 per diluted share for the third quarter of last year, a 54% decrease. The decrease was primarily driven by a higher effective tax rate resulting from the recently enacted U.S. tax law, lower capitalized interest income and higher depreciation due to Pasadena plant start-up. These 3 net income unfavorable drivers had no cash impact. Consolidated adjusted EBITDA increased by $3.1 million or 6% compared to prior year. This growth is attributable to strong specialty product results and the non-recurrence of expenses associated with the external criminal social engineering fraud event in 2024. Significantly higher oleochemical raw material costs continued to impact surfactant margins, coupled with softer demand in global commodity consumer product end markets. Earnings growth was also impacted by higher start-up expenses at our new alkoxylation facility in Pasadena, Texas. Cash from operations was $69.8 million for the quarter and free cash flow was positive at $40.2 million, driven by reductions in working capital. We will continue prioritizing free cash flow generation going forward. Slide #5 shows the total company net income bridge for the third quarter of 2025 compared to last year's third quarter and breaks down the decrease in adjusted net income. Because this is net income, the figures noted are on an after-tax basis. We will cover each segment in more detail, but to summarize, we delivered operating income growth in Specialty Products, fully offset by lower operating results in Surfactants and Polymers. The third quarter results were impacted by a higher effective tax rate. The company's effective tax rate was 23.8% in the first 9 months of 2025 versus 18.9% in the first 9 months of 2024. This increase was primarily associated with the recently enacted U.S. tax law. We are forecasting that our returning -- we are forecasting returning to our normal effective tax rate range of 24% to 26%. Slide 6 shows the total company adjusted EBITDA bridge for the third quarter compared to last year's third quarter. Adjusted EBITDA was $56.2 million versus $53.1 million in the prior year, a 6% increase. We delivered adjusted EBITDA growth in Specialty Products, partially offset by lower earnings in Surfactants and Polymers. Adjusted EBITDA results also benefited from lower corporate expenses compared to previous year. Slide 7 focuses on the Surfactant segment results. Surfactants net sales were $422.4 million for the quarter, a 10% increase versus the prior year. Improved product and customer mix and the pass-through of higher raw material costs contributed an 11% to sales growth. Sales volume declined 2% year-over-year due to lower demand within the global commodity consumer product end markets, mainly offset by double-digit growth within the agricultural segment and a strong growth in oilfield. Net sales benefited 1% from foreign currency translation. Surfactants adjusted EBITDA decreased $6.2 million or 14% versus the prior year. This decrease was driven by the 2% contraction in volume, higher Pasadena site start-up expenses and the significant rise in oleochemical raw material prices. This was partially offset by improved product and customer mix. Moving to Slide 8, Polymers net sales were $143.9 million for the quarter, a 4% decrease versus the prior year. Selling prices decreased 14%, primarily due to the pass-through of lower raw material costs and competitive pressures. Sales volume increased 8% in the quarter. North America Rigid Polyol volume grew double digits and our commodity Phthalic Anhydride business continued to deliver strong growth. Global Specialty Polyols volume grew mid-single digits despite the continued challenging overall environment. European and China Rigid Polyols volume was impacted by softer demand across their respective regional end markets. Foreign currency translation had a positive impact of 2% on net sales during the quarter. Polymer adjusted EBITDA decreased $1 million or 4% versus the prior year, primarily due to lower unit margins and unfavorable mix, which was partially offset by the 8% volume growth. Finally, Specialty Product net sales were $24 million for the quarter, a 68% increase versus the prior year, primarily due to higher sales volume. Specialty Products adjusted EBITDA increased $5.9 million or 113%. The increase in adjusted EBITDA was primarily due to order timing fluctuations within the Pharmaceutical business as orders was moved from the second to the third quarter of the year. Next, on Slide 9, free cash flow was positive at $40.2 million for the third quarter, up $44.2 million year-over-year, driven by working capital reductions and disciplined capital spending. We remain optimistic about our ability to deliver positive free cash flow for the full year 2025. During the third quarter, we deployed $29.6 million against capital investments and $8.7 million for dividends. Now on Slide 10 and 11, Luis will update you on our strategic priorities and capital investments. Luis Rojo: Thank you, Ruben. I will focus my comments on our strategic priorities. Our customer will always remain at the center of our strategy and innovation efforts. Our Tier 1 customer base remains a solid foundation of our business. Continuing our new customer acquisition within Tier 2 and Tier 3 customers remains a key priority. This is an important and profitable growth channel within our Surfactant business. For the third quarter of 2025, our volume grew low single digits year-over-year, and we added over 350 new customers. Our end market diversification strategy remains a key focus area. For the third quarter, we continue to see a strong growth in our crop productivity and oilfield businesses. We are pleased to see our North America Rigid Polyol business continue to deliver year-over-year growth. This growth was enhanced by our new product introduction in the growing spray-foam end market. Our supply chain operation and resiliency continue to improve, and we delivered another solid quarter in all our key operational metrics. Thanks, Rob, we continue making investments in our Millville site to improve operational reliability. Moving to Slide 11, we are proud our new Pasadena site is fully operational and is currently ramping up production. We have made 41 different products to date. We expect that the full contribution rate of the plant will be achieved in 2026. Our commercial team continues to develop and deliver new business opportunities and specialty alkoxylation volumes continue to grow double digits in the third quarter. Looking forward, we remain focused on accelerating our business strategies through enhanced operational excellence, improved product and customer mix and accelerated free cash flow generation. We believe our Surfactant business will experience continued growth in our key strategic end markets, and that polymers demand will continue improving as we get more market certainty and we execute our innovation and growth plans. Our Pasadena facility is operational, and this should enable us to deliver volume growth in our alkoxylation product line and supply chain savings going forward. We remain on track to close the sale of our site in the Philippines in the fourth quarter of 2025, and we are analyzing opportunities to optimize our global footprint and asset base. Despite the ongoing current market and tariff uncertainties, which change every day, we remain optimistic that we will deliver full year adjusted EBITDA growth and positive free cash flow in 2025. This concludes our prepared remarks. At this point, we would like to turn the call over for questions. Jecita, please review the instructions for the questions portions of today's call. Operator: [Operator Instructions] Our first question comes from Mike Harrison at Seaport Research Partners. Michael Harrison: I was hoping we could start out with a couple of questions on surfactants. First of all, where are we right now in the process of recovering the oleochemicals cost run-up in surfactants? Do you expect that, that impact could be fully offset by Q4? Or could it take a little bit longer to recover? Luis Rojo: Good question, Mike. So let me start with some background information here. So as you all know, you can track this, it's public information: coconut oil prices. If you think about the first 9 months of 2025, the average is $2,500 per metric ton, that's a 7-0 percent increase versus 2024. So 2024 average was $1,500. We are at $2,500. The peak was $3,000 as we talked last quarter. The prices are coming down. That's the good news. Prices are coming down from the peak of $3,000 per metric ton. So we have recovered a lot of the 70% increase, but we are still catching up. We had another price increase in North America in October 1. And that's the objective. The objective is 2026, we have -- we will recover the margins that we saw on coconut oil prices, which again were significant and the prices are still -- are now coming down, which is the good news. Michael Harrison: Just to follow up on that, if we are seeing some of that raw material costs come lower, I guess, does that make it more challenging for you to get the pricing you need? And does that mean that at some point, we could see you give some pricing back if that trend continues? Luis Rojo: No. Look, one thing that I was very clear on my prepared remarks was that we will continue driving the right balance between volumes and margins. This is an asset-intensive business. We need volume through our reactors. We will not lose share. We will be competitive in the market. We will be competitive in the market and balance volumes and margins to maximize net income to maximize return for the company. And again, that's the balance that the team is delivering. I'm pleased with what they have done in the last few months, and we need to continue that effort in the future months, continue managing that balance between volumes and margins. Michael Harrison: All right. So that kind of leads into my next question, which is just about the overall margin performance of the Surfactants business. Obviously, still a lot of moving pieces with the Pasadena facility starting up, and we're probably not yet seeing the full benefit of bringing some of that alkoxylate production in-house. But do you have longer-term goals for where the Surfactants segment margin could reach over time? Historically, operating margin in that segment got into the double digits, and it was pretty consistently there for a few years. And I'm just wondering if that type of double-digit operating margin could be achievable as we look out 2 or 3 years? Luis Rojo: Great question, Mike, and that's, of course, our belief as well. Look, EBITDA margins are restrained. I mean, call it, close to 10% now because all the investments in Pasadena and still the impact on oleochemicals, but we believe this business as we continue growing in our functional markets, agrochemical, oilfield, construction and industrial solutions, as we continue growing in Tier 2, Tier 3, we believe this is a healthy double-digit EBITDA margin business going forward. And of course, we have made investments. We have made investments and everybody knows that. So on an operating income, with all the depreciation of Pasadena of low 14%, people can see that in the numbers. But on an EBITDA basis, this business will continue performing at a decent margin level, and that's what we are focusing on, growing our high EBITDA margin businesses, as we continue growing those. Michael Harrison: All right. And then over on the Polymers business, just a couple of questions here. First of all, do you believe that there is pent-up demand in the commercial roofing and commercial insulation space? And I'm curious, do you think that lower interest rates could help to stimulate some additional activity there? Luis Rojo: [ Fully aligned ] Mike. There is -- we believe there is a lot of pent-up demand from all the construction that happened in the early 2000. I mean if you look at all the construction that happens in industrial construction, warehousing, plants, flat roofs in early 2000, which was a huge peak a lot of those buildings need renovation in the next 5 years. We're aligned 100% with the belief from some of our customers that all that reroofing needs to happen. It's not going to happen overnight, but it needs to happen and PIR insulation is the preferred choice for all those flat roof projects coming up. And you are 100% right that, I mean, we should see another interest rate reduction today, 98% probabilities now of an interest rate reduction in December Fed meeting. So we believe 2026 will give us some upside on the construction activity if the interest rate continues the way they are and inflation rates continues the way they are, right? I mean we need shelter and rental inflation to keep coming down so we can achieve -- so the Fed can achieve their 2% inflation target. Michael Harrison: All right. And just to follow up on Polymers. From the margin side, I believe you mentioned that unit margins are down, the pricing was down quite a bit. You referred to some competitive dynamics that are challenging. Is your expectation that if we started to see some recovery in demand that we would also see some recovery in unit margins as well? Luis Rojo: Look, I mean, we're happy -- look, we always can improve our margins, right? But if you look at the first 9 months of the Polymers business, we were able to grow EBITDA modestly, very little, but modestly, we were able to grow despite sales down. So EBITDA margins are improving slightly in the Polymers business despite everything that is going on in Europe and especially in Europe, which is a very tough situation. So we believe we want to grow the top line. We want to grow the volumes, and we need to keep inching up the margins as we drive scale. I mean, the benefit of higher volumes and scale should improve our margins, but we are not planning a significant increase. But we're happy with the margins that we have, and we need to continue inching those up as we grow our business. And we had a negative impact on margin as we grow PA and as we grow in some of the other markets because those are typically a mix impact to the overall Polymers business. Michael Harrison: All right. And then my last question is, you mentioned the Philippines asset sale, and it sounds like maybe you're contemplating some other actions to help optimize your footprint. Can you give us any sense of what those actions might involve? Are they other just one-off smaller facilities? Or could there be some larger pieces of business that you might be targeting for divestment over time? Luis Rojo: Great question, Mike. And look, we are committed to deliver a balanced EBITDA and net income growth going forward between productivity and asset rationalization and top line growth, right? The industry needs both. You have seen a lot of announcements from other companies in the past 6 to 12 months. We have made the announcement on the Philippines. We will make more announcements in the future. We need a balanced approach between top line growth, productivity and asset rationalization. We all know the chemical industry is overcapacity, and we need to -- and we all need to make decisions on that overcapacity. And we will make those announcements whenever we are ready to make those. Operator: Our next question comes from Dave Storms at Stonegate. David Storms: I wanted to start, you mentioned on the call, spray foam has really been a nice driver for you in the Poly section. Could we -- I guess my question is, how much more room for growth do you think there is there? And could we maybe see a second wave of growth if the European environment improves? Luis Rojo: Great question, Dave. Look, we have talked about spray foam in the past few quarters. We're serious about this end market. We have developed great technologies and products to serve the high-growth margin, and we started this year. So I'm pleased with what the team has delivered and with the benefits that we are starting to get. This is very early. And it's a good market. It's a good market that has a lot of potential to grow not only in the U.S., eventually in Europe in the future. But we are happy with our participation, and we need to grow more share. We are starting. We are starting from almost 0 share, and we are committed to continue investing and developing this business. And when you think about Europe, of course, we had higher expectations of our European region to start growing more on the construction activity. And when you think about the war in Ukraine and all of those things, the reality is that construction activities are very muted still in the European region. Now as interest rates come down, as they keep focusing on energy conservation, which is a huge issue in Europe and the biggest opportunity is to consume -- is to reduce the consumption of energies in the buildings. So we believe the market trends are there for the future. It's not going to happen in the short term for sure. But we believe this is a good industry for the next 3 and 5 years, and we are committed to continue investing and to continue growing our European Polymers business. David Storms: That's great commentary. Switching to the Surfactants segment. Just would love to ask about maybe the end user there and what you're seeing from a demand perspective. It was noted that you're seeing lower demand in the laundry and cleaning end markets. Is this maybe early indications of a substitution effect? Or maybe is this more onetime in nature? Any commentary there would be great. Luis Rojo: No, great point, Dave. And of course, we continue seeing a lot of changes in the consumer piece in terms of active levels, switching down to lower active products. So this continues to be an evolving situation. But at the end, we believe going forward, again, I mean, you need certain levels for the products to work, right? And at the end, those active levels are getting, I mean, up to the point where you cannot go significantly lower. So we feel good about the cleaning and the laundry business going forward. There is going to be always a mix between high active, low active products, consumer brands versus private label brands. But we believe we are in a decent spot now thinking about 2026 and 2027. David Storms: Understood. And then one more, if I could, Specialty has shown 2 quarters of strong year-over-year improvements. It seems like a lot of this is predicated on volume growth. Would just love to hear your comments about how sustainable you think these potentially new volume levels are. Luis Rojo: Look, we are extremely pleased with the performance of our Specialty Products business. Kudos to Jamil and the Maywood team for everything that they have done over the last few quarters, excellent performance. We still have opportunities to grow. We love our MCT product line. As we said in the remarks, 26% volume growth, and we are extremely happy with this business and with the performance. And it's a high-margin business. So we will continue investing. We will continue investing to make sure that we maximize the return that we can get. It's a small part of the company in terms of revenue, but it's a huge part of the company in terms of operating income and EBITDA, and we're extremely happy with what the team has done, and we'll keep working on ideas for the next 3 years. Operator: This concludes the question-and-answer session. I would now like to turn it back to Mr. Rojo for closing remarks. Luis Rojo: Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day. Operator: Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quantum Minerals Third Quarter 2025 Results Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Bonita To, Director, Investor Relations. You may begin. Bonita To: Thank you, Desiree, and thank you, everyone, for joining us today to discuss our third quarter results. During the call, we will be making forward-looking statements. And as such, I encourage you to read the cautionary notes that accompany this presentation, our MD&A and the related news release. As a reminder, the presentation is available on our website and that all dollar references are in U.S. dollars unless otherwise noted. On today's call are Tristan Pascall, our Chief Executive Officer; Ryan MacWilliam, our Chief Financial Officer; and Rudi Badenhorst, our Chief Operating Officer. And with that, I will turn the call over to Tristan for opening remarks. Tristan Pascall: Thank you, Bonita, and thank you to everybody for joining us today to discuss our third quarter results. During the quarter, we made meaningful progress on our priorities for 2025, and I'm pleased to be able to provide an update on these. Firstly, we continue to proactively strengthen our balance sheet and manage our liquidity. In August, we announced a $1 billion non-debt gold stream agreement with Royal Gold and undertook a series of bond transactions to extend our debt maturities, which Ryan will cover in more detail in his financial overview. Secondly, we remain focused on safe and leading productive operational performance. We were pleased to host analysts and investors to our Zambian operations in September to showcase our cornerstone assets, and we continue to see quarter-over-quarter improvement in production. We remain on track with our guidance for the year, which Rudi will review. Thirdly, at the Kansanshi S3 Expansion, we successfully reached substantial completion on most construction areas during the quarter and produced first concentrate in August, which I will cover in more detail in my closing remarks. On our fourth priority, in Panama, there were several positive developments during the quarter, and we continue to make progress on the preservation and safe management program that the government approved earlier this year. During the quarter, we shipped the remaining concentrated site along with subsequent shipments of supplies and equipment. These all took place safely at our port without incidents. With regards to the power plant, we commenced precommissioning activities and mobilized specialists to site ahead of the restart, which remains on schedule, with the first 150-megawatt unit expected to be fired and synchronized with the grid in November. The power generated will support on-site preservation activities, while surplus energy will be made available for dispatch to support the national grid as required. During the quarter, the government of Panama through MiAmbiente initiated the comprehensive audit of Cobre Panamá and awarded the contract to SGS Global, an independent and internationally recognized audit firm. SGS has commenced the 6-month audit process and is currently working with the various ministries. The company has always sought to conduct its operations with transparency and in full compliance with international environmental standards, including achieving 100% compliance on our environmental commitments in the most recent ESIA audit published earlier this year. Our team at Cobre Panamá is ready to provide all the necessary information to support SGS and the government to complete the audit. Today, the company's work with the government has been centered around the preservation and safe management program for the mine with a priority focused on safety, asset integrity and environmental stewardship. However, we remain prepared for when the government is ready to discuss more broadly a resolution for the future of Cobre Panamá. Understandably, any potential new agreement will need to clarify that the mineral resources belong to the people of Panama. This is well understood by First Quantum and hence, our willingness to find a durable agreement for a fair fiscal structure that reflects this as well as the $10 billion investment that First Quantum has made into the country. I believe both sides will be motivated to reach a fair, equitable and mutually beneficial resolution. Had Cobre Panamá remained in operation since 2023, contribution to the country of Panama could have reached $1 billion to the treasury and USD 2 billion to local Panamanian supplier companies. It is important to First Quantum that the contributions of the mine, such as employment and growth can deliver tangible benefits to the people of Panama. At the same time, a fair and balanced agreement would position Panama as a destination for foreign direct investments and a pivotal step in confirming the country's reputation as a stable and attractive environment for international capital. Our focus remains on reaching a resolution for the mine that serves the best interest of our stakeholders, the government and the people of Panama. Thank you, and I will now pass the call over to Rudi for his operational review. Rudi Badenhorst: Thank you, Tristan. It is pleasing to report that operations continued to improve into the third quarter of this year and operated uninterrupted from power constraints. Total copper production was 105,000 tonnes, a 15% increase over the second quarter as both Sentinel and Kansanshi reported higher production. Copper sales volumes totaled 119,000 tonnes. During the quarter, as Tristan noted, we benefited from additional concentrate shipments at Cobre Panamá. However, sales volumes in Zambia were lower than production due to the replenishment of inventories following the smelter shutdown in quarter 2. Ryan will cover this in more detail in his overview. Year-to-date, we produced 295,000 tonnes of copper and are on track to achieve our 2025 tightened guidance range of 390,000 to 410,000 tonnes. At Kansanshi, the operations reported 47,000 tonnes of copper production in the third quarter, an increase of nearly 7,000 tonnes from the previous quarter. The improvement was mainly driven by higher mill throughput with the commissioning of the S3 expansion. The ramp-up of S3 has surpassed expectations, achieving first production in August and contributed approximately 6,000 tonnes of copper production to the quarter. Looking forward, copper and gold production in the fourth quarter are expected to exceed third quarter levels as stable circuit performance is running ahead of schedule, leading to a better-than-anticipated ramp-up of the S3 concentrator, which Tristan will cover in more detail in his closing remarks. With respect to 2025 production guidance for Kansanshi, we have narrowed copper production to a range of 175,000 to 185,000 tonnes, while gold production guidance has increased to a range of 110,000 to 115,000 ounces. Over to our Trident operations. Sentinel reported copper production of 51,000 tonnes in the third quarter, an improvement of over 8,000 tonnes from quarter 2. Mill throughput averaged over 5 million tonnes per month, representing a 14% increase from the second quarter levels, benefiting from improved ore fragmentation, improved reliability and performance of the primary crushers and excellent management of the crushed ore mill feed stockpile. The relocation of In-Pit Crusher 2 has been completed and will be commissioned in the fourth quarter. The innovative low-energy consumption rail run conveyor, which was showcased on our Zambian tour for analysts, investors and lenders in September, will require some modification as performance testing continues towards final commissioning of the asset. During the quarter, we also continued to advance the maintenance program to address the gold fatigue issues on Ball Mill 2. Work is ongoing with the original equipment manufacturer and specialist engineering consultants to develop a long-term corrective procedure to ensure sustainable performance and an update will be provided once this is established. Any remedial actions will be timed to the best of our ability with planned maintenance downtime in order to mitigate the impact on production. Copper production at Sentinel is expected to continue to improve for the fourth quarter as higher grades will be accessed as mining progresses to the bottom of Stage 1 pit for sump development ahead of this wet season, along with the transition to higher primary sulphide ore volumes reporting from Stage 3. That being said, due to the year-to-date production, we have updated our copper production guidance for Sentinel to a range of 190,000 to 200,000 tonnes. At Enterprise, it is pleasing to report a 44% quarter-over-quarter improvement in nickel production to nearly 6,000 tonnes during the third quarter. While nickel grades continue to be impacted by transitional ore from the Stage 3 area, throughput improved with increased nickel ore supply and plant performance. Production guidance for the year has narrowed to between 18,000 and 23,000 tonnes of contained nickel. The continued focus at Enterprise will be on maximizing ore supply, improving communition efficiency, to increase throughput as well as enhancing plant performance when processing complex nickel ore types. At Cobre Panamá, we continued our preservation and safe management work during the quarter, which included refurbishment of subsystems in the flotation area and the conveyor belts. Inspections of the plant and stockpile feeders have concluded that these areas are in fair condition. Additionally, detailed inspections with original equipment manufacturer specialists are being conducted on the mobile fleet to ensure asset safety and integrity. These inspections and reports are expected to be concluded in the near future. Preservation and safe management costs during the third quarter averaged approximately $16 million per month and included services related to the copper concentrate shipments and commissioning activities for the restart of the power plant. Thank you. And with that, I will hand the call over to Ryan for his financial review. Ryan MacWilliam: Thank you, Rudi. For the third quarter, we reported EBITDA of $435 million and an adjusted loss of $0.02 per share. This financial performance positively benefited from the solid operational results, which Rudi just described. Additionally, the copper price increased 2% from Q2 due to supply disruptions at several large copper mines across the industry. Financial results, however, were negatively impacted by two key items. Our revenue grew by 10% quarter-over-quarter, benefiting from higher copper sales volumes and improved metal prices. This was mainly driven by the 24,000 tonnes of concentrate shipped from Cobre Panamá. However, as Rudi noted, sales volumes from Kansanshi were negatively impacted by the replenishment of anode inventories following the smelter shutdown. This impacted EBITDA by $45 million and third quarter earnings of $0.03 per share. Additionally, royalty costs were $25 million higher at Kansanshi this quarter due to the smelter shut, which resulted in an increased proportion of local sales, which in turn resulted in an earlier crystallization of royalties. With inventories largely replenished, we expect sales volumes and associated royalty costs to normalize, subject to normal timing lags. Moving on to the rest of our financial results. As I noted earlier, during the quarter, we shipped the remaining concentrate at Cobre Panamá. These shipments contributed approximately $160 million to third quarter EBITDA. At the Zambian operations, we had a late shipment of anodes in the quarter. While revenue was booked in the quarter, it also resulted in elevated receivables at the end of September, which is expected to unwind in Q4. During the quarter, we slightly added to our copper hedges while maintaining our gold hedge portfolio. We're not currently adding additional hedges as our long-term strategy remains to be unhedged, thereby retaining full exposure to spot commodity prices. We've engaged in selective hedging as a tool to support our financial resilience and safeguard the balance sheet while S3 ramps up and as we work towards resolution in Panama. Copper C1 costs of $1.95 per pound improved by 3% from Q2, helped by higher production and lower fuel costs, but negatively impacted by reduced gold by-product credits and less capitalized costs. Remaining input prices and Zambian power rates were stable during the quarter. We've narrowed our full year C1 cash cost guidance to $1.95 to $2.10 per pound. While gold prices have been strong, the strengthening Zambian kwacha and higher expected Zambian power costs in Q4 all offset this benefit. Our all-in cost guidance has also been narrowed to $3.10 to $3.25 per pound, reflecting our lower guidance on sustaining and capitalized stripping spend. We have lowered 2025 CapEx guidance by approximately $175 million to a range of $1.15 billion to $1.2 billion. This is due to lower capital spend year-to-date and the expectation that S3 project will come in under the $1.25 billion budget. Some of the reduction in sustaining capital is expected to be carried forward to next year, such as some of our mobile fleet replacements and mobile component change-outs. As Tristan noted, during the quarter, we continued to take proactive steps to further strengthen our balance sheet by executing two milestone transactions. First, we completed a $1 billion gold stream with Royal Gold, which provides long-term unsecured non-debt capital. This transaction allows us to maintain full exposure to copper production at Kansanshi, while leaving most of our gold production exposed to spot pricing over the long term. Proceeds were largely deployed towards debt repayments with net debt ending the quarter at $4.8 billion. Second, we issued $1 billion in senior unsecured notes maturing in 2034. The proceeds were used to retire the remaining 2027 notes and a portion of the higher coupon 2029 secured notes. Following this refinancing, our nearest bond maturity has now been extended to 2029. These combined actions have improved our near-term liquidity by approximately $1.6 billion, resulting in liquidity of $2.3 billion at quarter end. This comprised of $960 million in cash and a fully undrawn revolver of $1.3 billion. After thoroughly evaluating alternatives, the stream agreement was the best strategic and financial outcome for First Quantum. As such, there are no further financings or stake sales planned for Zambia at this time. Thank you. And I will now hand the call back to Tristan for his closing remarks. Tristan Pascall: Thank you, Ryan. During the third quarter, First Quantum achieved 2 milestones that demonstrate our commitment to safety and sustainability in our broader business. At Çayeli in Turkey, our colleagues delivered over 3 years without a lost time injury. I congratulate them on this achievement, a testament to our THINK! Safety Program, which drives engagement and a measurable reduction in incidents. Also at Çayeli yesterday, we published an updated 43-101 Technical Report on the new South Orebody, including a life of mine plan, which extends the mine life of Çayeli to 2036. In Finland, and I call this Pyhäsalmi mine, a 13-megawatt solar photovoltaic generation project was commissioned on the filled tailings pond by the municipal-owned development company, Callio, connecting into the existing electrical infrastructure established by the mine. As part of our commitment to responsible mine closure, we're supporting the transition of legacy assets into renewable energy that benefits local communities. It is pleasing that I can conclude today's call by discussing the substantial completion of the company's latest brownfield expansion project. During the quarter, the Kansanshi S3 expansion project was successfully completed and all but 2 circuits were handed over to operations in October. The full copper circuit was put online in stages with a focus on tuning the circuit and ramping up towards steady state and nameplate capacity. As Rudi noted, to date, the ramp-up has exceeded expectations and the plant is now maintaining 24-hour operations with support from the commissioning team and vendor specialists. Only the gravity gold circuit and some concentrate filter upgrades at S3 remain to be completed and handed over to operations. In addition, the smelter expansion works are complete, while acid plant 5 is currently in the hot commissioning stage. Ongoing project capital works on TSF2 are expected to be completed in the second quarter of next year. I would like to take this opportunity to congratulate the in-house First Quantum teams responsible for the successful delivery of the Kansanshi S3 expansion. And on behalf of the Board and the company, I would like to extend my gratitude to all involved in building and making operational the project for their remarkable work. These are the same in-house teams that successfully built the Sentinel and Cobre Panamá projects, allowing us to learn and improve on each of the six 40-foot SAG mill processing trains across our business. The new processing plant at Kansanshi designed to treat 25 million tonnes of ore annually, incorporates cutting-edge technology and automation, such as the integrated operations center that make the Kansanshi S3 expansion one of the most advanced copper projects in Africa. At the peak of construction, over 2,500 Zambians and 535 local Zambian companies worked on the project alongside our in-house teams, gaining skills and capacity that will serve long after S3 is complete. We see the capital intensity for copper projects is a growing challenge, particularly as the mining industry faces relatively higher cost of capital compared to other market sectors. As a result of declining grades and an increasing infrastructure burden for new projects, the industry average capital intensity to build a project is moving steadily towards $30,000 per tonne of annualized copper production. In contrast, by building our own projects largely in-house, our experience at First Quantum is that we are typically able to exert greater control on quality, productivity and capital intensity. This has allowed us to build a brownfield project at the Kansanshi S3 expansion at $12,000 per tonne of annualized copper production. Our latest greenfield projects at Cobre Panamá, including a Port and power station was built at $18,000 and Sentinel was built at $12,000 per tonne of annualized copper production. As we look forward to applying our experience to future projects within our portfolio at the most responsible and correct time for our balance sheet position, we see our most likely near-term project to be Taca Taca in Argentina. The midterm election results in Argentina over the weekend provides an endorsement by the electrodes of the economic reforms underway in the country and the administration's initiatives to attract greater foreign investment into the country. We continue to work towards a RIGI application with Taca Taca well ahead of the July 2026 time line. In closing then, the Kansanshi S3 expansion is the latest of our projects to deliver on schedule and under budget. This is an important milestone for First Quantum, which will move Kansanshi back to a 200,000-plus per annum copper producing mine, extending its life beyond 2040 and returning the company back to a position of positive free cash flow generation. With that, operator, I'm happy to open the call to questions. Operator: [Operator Instructions] And our first question comes from the line of Ralph Profiti with Stifel. Ralph Profiti: Tristan and Ryan, congratulations on performance of budgeted capital targets at Kansanshi. What's your outlook for copper recovery improvements and targets in that S3 circuit over the coming months and quarters, looking at that 74% in the context of the low-grade stockpiles and as you optimize the circuit? Tristan Pascall: Ralph, thanks for that. Yes, look, it's very pleasing to see S3 performing better than our expectations so far. As I said in my comments, there are some areas that need to be finished off the 2 circuits being the gravity gold and the filter upgrades. So we will continue to remain conservative and stick with our guidance at this stage, and we only provide guidance this year. We will relook at guidance next year in late January. But again, the ramp-up is going well. We continue to see -- to target an 80% of design throughput by the end of the year. More broadly, as we look into next year, we will be commencing on stockpiles, which means the grade is lower. And so that will have an impact on production and costs as well. But then as we get into 2027, the outlook is we'll get into much more fresh grade, which will increase production from the overall circuit with a corresponding impact most likely on cost as well. Ralph Profiti: Okay. I appreciate that. And as a follow-up, what are the critical path items for Kansanshi's TSF2 completion by the second quarter of '26? Is this just maintaining civil earthwork rates? Tristan Pascall: Yes, not complicated, Ralph. We're just putting in a large buttress there and going about the works. We're comfortable around deposition rates. We're comfortable around rates of rise. It's really just steady progress on both moving volumes. I mean as we get into the Southeast dome and have much more confident rock available, that gets easier and easier for us as well. Operator: Our next question comes from the line of Orest Wowkodaw with Scotiabank. Orest Wowkodaw: I'd like to just say congratulations on the deleveraging efforts, both with the stream and the terming out -- the refinancing of your debt that really eases the pressure in the next couple of years. But my question had to do with Cobre Panamá. And I'm just curious, with the environmental audit now underway, do we -- do you think that we have to wait till the conclusion of that audit before formal negotiations could begin with the government on a potential new deal? Or could that begin earlier? And I'm just wondering what milestones we should be looking for here? Tristan Pascall: Thanks for this comment. Yes, look Panama, we recognize the concrete progress in the country, and there has been the evidence in terms of that progress, the approval of preservation and safe management plan, the export of the concentrates that were completed during Q3. We continue to see the power plant coming online and the permits are granted to get that restarted, and we expect to start up in the first train in November and the environmental audits now underway is good solid momentum. In terms of future milestones, we're not really anchoring around those. We remain disposed to the government's table. We will seek -- it will be the President that sets out that timetable and the pathway to those milestones and for progress. From our side, we put aside the arbitration, suspended arbitration, and we're committed to a constructive process. We will work step by step with the government. And again, we'll follow the President's guidance in that timetable and to work things through. In terms of the timetable for the audit and how that relates, we'll take direction from government. The indication from government is sort of 4 to 6 months timetable. And how things go whether in sequence or in parallel, we take guidance from the President and from the government of Panama. Orest Wowkodaw: Okay. And just as a quick follow-up, is there any potential visibility on processing the existing ore stockpiles on site at Cobre Panamá under the preservation plan in terms of turning on a mill? Tristan Pascall: Yes, sure, Orest. Thanks. There hasn't been any discussions on that to date. And again, we wouldn't anchor things around future milestones. We want to be constructive and move towards resolution that deals with the matters at Cobre Panamá in the best interest of all stakeholders, the government of Panama, the people of Panama, but also shareholders. Having said that, the stockpiles, we do think there's some good rationale to move forward. The providing that feed to the cyclone plant at the tailings dam would give an important source of material that we can use to counter erosion from the high rainfall. That is important work that the stockpiles would provide. But we don't have that on the critical path. We remain constructive towards resolution and engaging with governments in that regard. Operator: Next question comes from the line of Marcio Farid with Goldman Sachs. Marcio Farid Filho: And congrats on getting S2 on time and below budget. Yes, my question is on -- maybe to Ryan on the hedging strategy. Ryan, probably it made more sense to be more active on hedging before you take the -- you've done the actions related to refinancing, but also the streaming deal as well. Just wondering how we should think about it going forward as well now that the balance sheet is cleaner. What's the sort of strategy you're going to be taking on the hedging program? Tristan Pascall: Thanks, Marcio. Ryan, can you take that? Ryan MacWilliam: Marcio, yes, absolutely, you've seen 3 big tailwinds for the balance sheet. The first is the stronger copper price. The second is the strong performance at S3 coming in on track at this stage under budget. And then the third is the Royal Gold Stream, which significantly adds to our liquidity. As a result of that, that we haven't recently added additional hedges either on the copper or gold side and we'll continue to monitor that month-to-month. Those hedges roll off as we get into this first half of next year. But absolutely, the liquidity and stronger balance sheet gives us more flexibility in terms of planning for future hedging, noting our overarching goal is to be unhedged over time. Marcio Farid Filho: Great. And as a follow-up on Trident, obviously, it seems like some progress has been made around the issue with the Ball Mill 2. But it seems like you're still doing a lot of long maintenance as well, right? So just wondering what's the path for a final solution around Trident and the Ball Mill 2 , please? Tristan Pascall: Thanks, Marcio. Rudi, will you take that one on the fatigue issue? Rudi Badenhorst: No problem. Marcio, as you would have noticed that -- from the production results, we saw a steady increase of production from the second to the third quarter, which just is a clear indication of how comfortable we are getting with the maintenance strategy around the fatigue on Ball Mill 2, which really equates to something like 20 hours a month now. We are quite comfortable with the way we're handling it. We're working with the OEM to try and get to a final fix. We're almost there. And as we continue into next year, we are happy to continue with our current maintenance strategy, but we will come back to the market and give a clear fulsome update once we have finalized the final approach for this Ball Mill. We certainly don't want to do any intermediate measures because we're quite comfortable with the current maintenance strategy. Operator: [Operator Instructions] Next question comes from the line of Myles Allsop with UBS. Myles Allsop: Maybe just on Cobre Panamá, you're saying you're kind of working towards a fair outcome. How should we think about fair from a First Quantum perspective? Is that something broadly aligned with the previous license agreement? And do you think the government has a similar kind of expectation in terms of how value is shared as we go into these... Tristan Pascall: Myles, thank you. Yes. Look, I think it's too early to get into that. We -- but I think first of all, we understand, for example, the recent comments in Panama, the mineral resources, it's very clear ownership of those belong to the people of Panama. And we're absolutely willing to find a durable arrangement that deals with each of the stakeholders that is the government and the people of Panama, and they need to see reasonable and tangible benefits coming from the mine, but also that it deals with the $10 billion investment that First Quantum has made into the country and there's reasonable recognition on that basis. And we will look at those as the main principles and be constructive around any conversation. Again, the timetable from that, we will take direction from the President and the government of Panama as to when they're ready to commence. Myles Allsop: Yes. And ramp-up, how would you [indiscernible]. I presume there will be quite a big working capital build to get Panama back up to it's full operational level. Tristan Pascall: Yes. Thanks, Myles, you broke up a little bit, but I think you were asking what does the start-up and capital and working capital look like in the event that there is a positive outcome and resolution. And yes, look, as we go through the inspection process, there's been a lot of focus on that through the preservation and safe management plan now approved by the government. And so dealing with corrosion, dealing with the situation on site, we're pleased in that the resolution to those corrosion has been fairly straightforward. It's really around man hours for welding, for painting and to work our way through that. I think the team continues a good job -- to do a good job in making sure that the main assets on -- the mills, the road shovels remain warm and in good condition. But certainly, we will need to repair some of those minor items. And that -- as that comes online, we'll understand timetable more because inspection means that we will be able to open up and see areas. But at this stage, we think that's something like 6 to 9 months as we work through those issues. But again, the timetable for that we might see. So we don't see major capital items in that regard, and it will really be getting people back on site and getting the supplies back on site, that are the sort of the key drivers of that, and that's largely around working capital to pay salaries and also to remobilize supply chains in order to get there. I'm sure as we get closer to our reforecast at late January, we'll provide a clearer picture of what we see there, but also as we understand progress in Panama around resolution of this matter. Operator: Next question comes from the line of Lawson Winder with Bank of America. Lawson Winder: Tristan, Rudi and Ryan, thank you for today's update. I just want to -- If I could ask about Çayeli. I mean I don't think that was something that was on everybody's bingo card. So first of all, well done on extending the life to 2036, I mean I think that's an extraordinary development. But also as you think about longer-term growth and the benefits for jurisdictional diversification, how would you characterize Turkey as a country in which to grow going forward, both in terms of the regulatory environment and the geological prospectivity? Tristan Pascall: Lawson, thanks for the question. Yes. Look, I think the team at Çayeli has done a remarkable job here. The history is that certainly, the mine was looking at end of life and then a lot of work over the last decade on exploration and the discovery of the South Orebody, which is very productive for us. It's improved ground conditions compared to the existing Orebody. We still have more work to finish off in the existing Orebody, and that gives us a very good transition period across to the new South Orebody. And as we spell out in the 43-101, we see life out to 2036. I think beyond that, that's been very well developed both by the local team at Çayeli, but also our exploration group working hand-in-hand. And we do see that Turkey has those opportunities for exploration. I would just frame those a little bit in that what we see is this reasonable grade, but it's really around scale that we see challenges, both permitting and particularly an example like Çayeli, where there's an extremely good relationship with community and so on and an established operation that's been one of the leading training grounds for technical capacity in the country, having run for many decades, it does set up a good basis in the country. But overall, there is opportunity in Turkey. It's just around questions of scale as to whether they really move the needle for a company like First Quantum. Lawson Winder: Okay. Understood. That's helpful perspective. If I could ask a follow-up, I would love to ask about Taca Taca. And the last technical report that you guys studied showed a project with very low capital intensity. And I mean, clearly, there's been CapEx inflation in the industry. But perhaps could you give us a sense of how we could think about that CapEx intensity today? Would that be approaching global averages? Would it still be slightly below global averages? And then when might First Quantum think to update that technical report? Tristan Pascall: Thanks, Lawson. We're working on that at the moment. It's mostly around the engineering studies. We would like to have a technical report of 43-101 out at the end of this year or early next year. We're dotting the Is and crossing Ts on the engineering studies around that. There's been a lot of -- the drilling and the resource definition is well in hand, but also around in terms of the environmental and water permitting process around what the project looks like will define that final picture. We believe that those permits are in good order and they continue to move well in Salta Province, and we look forward to receiving those in the near future. In terms of capital intensity, Taca Taca will remain competitive. Once we have that final picture in the 43-101, we would release that and make it very clear that capital picture. But I think we don't see it evolving to the $30,000 per tonne annualized capital intensity. No, it will remain at a reasonable picture. Obviously, there's been some level of inflation, but we think that the project remains well in hand. Operator: Our next question comes from the line of Anita Soni with CIBC. Anita Soni: Tristan, Ryan and Rudi, most of the questions have been asked and answered, but I just have a couple of follow-ups. So could you just talk about inflationary pressures, if there are any in Zambia that you're seeing and any offsets that you see, obviously, such as the ramp-up at S3. But can you just give us a context of what we should be thinking about going into 2026? Tristan Pascall: Thanks, Anita. Ryan, could you take that question on inflation? Ryan MacWilliam: Yes. Anita, what we've seen in Zambia in terms of pushing costs up, there's principally been two things, slightly higher employee and maintenance costs. And then secondly, we started this year with the kwacha around 28 kwacha to the dollar. More recently, because of the strong fiscal reform that the country has made, that's got closer to 20 kwacha to the dollar. So that's pushed our costs up. Conversely, the strong gold price, the strong gold production from Kansanshi has pushed our costs down. And the net-net of those two has meant that we've narrowed rather than changing cost guidance. And we expect those similar dynamics to play out as we go through next year. You know S3, as we ramp it up, the early phase of S3 is -- has higher costs because we're processing stockpiles. And then as Tristan noted, as you get into 2027 and we start putting Southeast Dome ore through it, that's when you really see the cost position improve and therefore, the positive impact on our cost position as a company. Anita Soni: Okay. And then just on Cobre Panamá. In terms of the time line, thanks for all the color that you provided. And I think Orest asked a little bit about the environmental audit and whether or not something the negotiations can start. Is the time line for a restart, once it's all passed through Congress, still 6 to 9 months? Or has that evolved at this stage? Tristan Pascall: Thanks, Anita. Yes, I think, look -- that's the best estimate that we have at this stage. As we go through inspection and detailed understanding on the preservation stage management plan as we open up areas, it may adjust, but that's the best estimate that we -- that's really to get the three rains operating. It's important to note that optimization would take longer, getting 100 million tonnes is a very large throughput and a lot of work to get there. So we qualify that to say, optimization to the 100 take a level of refinement over a longer period. But at this stage, the 6 to 9 months seems reasonable based on what we know today. Again, we need to go through the process with the government. That's not a straight line. There'll be some ups and downs, but we've seen constructive progress in all of the concrete milestones that have achieved this year. We need to keep working on public perception. And certainly, we'll follow the timetable provided by governments on the overall process. Operator: And our last question comes from the line of Dalton Baretto with Canaccord Genuity. Dalton Baretto: Tristan, I wanted to follow up on a comment you made in your prepared remarks there around Panama, where I think you said that First Quantum recognizes that the resources belong to the people of Panama, but that any agreement would need to recognize the $10 billion investment made. And I'm just wondering, it sounds like there are being markers laid down and negotiating positions ahead of the actual official discussion kicking off. And I'm just wondering, are there background discussions happening around a potential framework and sort of defining what the nonnegotiables are ahead of actual official discussions with the President? Tristan Pascall: Yes. Thanks, Dalton. Look, we're very -- it's been pleasing progress so far this year in terms of the concrete milestones that have been achieved on the preservation and safe management plan and so on. And certainly around those, there is conversation with the government on the preservation and safe management plan around bringing in feedstock for the power plant, the technical issues around these topics. So there are discussions at that level. We welcome the environmental audit now, the comprehensive audit to be done by SGS, and that's commencing now as we understand. And certainly, that will take a lot of work from our side, but we're ready to provide all information and to comply with that audit fully and to go through that with the environmental authorities, with the selected independent expert there in SGS. All of those form a framework around which conversations and feedback is in process. But more broadly, no, there is no formal conversation. We're waiting for that timetable to come from government that once the President and so on provide that timetable, we will be constructive. In terms of those royalties, just to point out and we understand that criteria. Certainly, because we were paying royalties before, those royalty payments do recognize that it is the people of Panama that own the resources, and we understand that, that's important in terms of the profile of the mine and the profile of extraction in Panama. Dalton Baretto: Great. And then just one follow-up for me. If and, let's say, when Cobre Panamá is back up and running again and looking at what you're doing at the rest of your portfolio in terms of partnering in JVs and so on, is it your intention to bring on another partner there in addition to Franco and the Koreans or may be even getting the Koreans to re-up their stake? Or are you happy with the way things are? Tristan Pascall: Yes, Dalton, I think it's -- we need to go step by step with the government of Panama. I think it's too early to get into that. It's not something we're looking at, at this time. We're just working our way through each step as they present. Our focus at the moment is the preservation and safe management plan, the restart of the power plant, the environmental audit that's right on us now. And certainly, we're waiting. We're ready for conversation to happen when -- if the timetable to be chosen by government. It's too early to get into those areas at this stage. Operator: That concludes the question-and-answer session. I would like to turn the call back over to our CEO, Tristan Pascall, for closing remarks. Tristan Pascall: Thanks, operator, and thank you, everybody, for joining the call. Should you have any additional questions, please don't hesitate to contact us. Thank you again. And I would like to wish everybody well for the remainder of the year. Thank you, and goodbye. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Philip Ludwig: Welcome, everyone, joining us today for the Melexis Third Quarter 2025 Earnings Call. I am Philip Ludwig, Investor Relations Director, and I'm joined by today's speakers, CEO, Marc Biron; and CFO, Karen Van Griensven. We will start with brief remarks on the business and financials before taking your questions, starting with Marc Biron. Marc, the floor is yours. Marc Biron: Thank you, Philip. Hello, everyone, and welcome to this earnings call. In the third quarter of 2025, we delivered sales of EUR 215.3 million, landing just above the top end of our guidance. This confirms another quarter of sequential growth and demonstrate that the recovery, while very gradual, continues. The quarter-to-quarter sales growth was driven mainly by Europe, while Asia Pacific and the Americas were broadly stable. Asia Pacific continues to be our largest region with around 60% of the total sales. Within our product portfolio, the sales of our motor driver were strong during Q3, especially in automotive HVAC application as well as in thermal management for EV powertrains. Our pressure sensors also performed well, particularly for internal combustion engine such as fuel management and after-treatment system to reduce emissions. We launched an additional 3 new products during Q3 for a total of 9 products since the beginning of the year. This included a new magnetic sensor for small motor applications such as automotive seats and windows. We have also launched an upgraded sensor, measuring current voltage and temperature and enabling a more precise measurement in safety critical applications like automotive batteries and DC fast charging. The third launch was a motor driver for smart fans used for server cooling, which is a very demanded application linked to the AI trend. With a busy Q4 ahead, we remain well on track to approach the record number of product launches achieved in 2024. We have recorded new design wins in the third quarter, including the 2 largest design wins so far for this year. One of them was for a motor driver, especially designed for the 48-volt architecture of EV vehicle. This is a unique product, and we expect strong growth for 48-volt architecture, which has many advantages in terms of cost, in terms of electrical power density, not only in EVs, but also in robotics. Overall, we are booking clear progress on our strategy. The number of product launch is on track and will be similar to the record of 2024 with 19 or 20 product launches. We continue to expand our product portfolio with the ambition to address new customer needs in fast-growing applications driven by the electrification, the premiumization and the automotive trends. The opportunities outside of automotive are still very strong. For example, in robotics, we have provided our first tactile sensing solution to our customer. Last but not least, we continue to have strong traction in Asia, both in automotive and outside automotive. We will go in more detail on our strategic progress at our Capital Market Day on November 5. I will now hand it over to our CFO, Karen Van Griensven, to provide a detailed financial overview and outlook. Karen Van Griensven: Thank you, Marc, and hello, everybody. So the sales for the third quarter of 2025 were EUR 215.3 million, a decrease of 13% compared to the same quarter of the previous year and an increase of 2% compared to the previous quarter. The euro-U.S. dollar exchange rate evolution had a negative effect of 2% on sales compared to the same quarter of last year and a negative impact of 1% on sales compared to the previous quarter. The gross result was EUR 83.4 million or 38.8% of sales, a decrease of 23% compared to the same quarter of last year and an increase of 1% compared to the previous quarter. R&D expenses were 12.8% of sales. G&A was at 6.1% of sales and selling was at 2.3% of sales. The operating result was EUR 37.8 million or 17.6% of sales, a decrease of 41% compared to the same quarter of last year and an increase of 6% compared to the previous quarter. The net result was EUR 27.5 million or EUR 0.68 per share, a decrease of 46% compared to EUR 51.2 million or EUR 1.27 per share in the third quarter of 2024 and a decrease of 27% compared to the previous quarter. Moving to the outlook. Melexis expects sales in the fourth quarter of 2025 to be in the range of EUR 215 million to EUR 220 million. And for the full year 2025, Melexis expects sales to be in the range of EUR 840 million to EUR 845 million, with a gross profit margin around 39% and an operating margin around 16%, all taking into account a euro-U.S. dollar exchange rate of EUR 1.17 for the remainder of the year. And for the full year 2025, Melexis now expects CapEx to be around EUR 35 million, previously around EUR 40 million. So this concludes our remarks. We can now take your questions. So operator, please go ahead. Philip Ludwig: Thank you, Marc and Karen. Philip again. To reiterate, please ask one question with one follow-up at a time and if you have more questions, you can rejoin the queue. Operator, can you please give the instructions? Operator: [Operator Instructions] The first question comes from Francois-Xavier Bouvignies from UBS. Francois-Xavier Bouvignies: My first question maybe is on your top line. If I understand correctly, if you look at peers, visibility is still fairly low. So can you provide a bit more like color on what you see as much as you can into the start of '26? I mean, do you see in line with seasonality a good proxy at this stage? Or do you think the recovery can continue and you can have above seasonal trend into early '26? Marc Biron: Yes. Thank you for the question. As we have already mentioned in the previous quarter, and as you mentioned it, indeed, the visibility is quite limited. We have received a lot of short-term orders, even order within the quarter. And for all these reasons, indeed, the visibility is not -- it's less than in the past, I would say. Yes, we are also now in the middle of the annual price negotiation with our customers. And in those annual price negotiations, there is also the forecast discussion. And I think it's really too early. For all these reasons, it's too early to give a helpful view on '26 and even early '26. Francois-Xavier Bouvignies: Got it. And maybe on the gross margin side, I mean, I can see your inventories are -- on your balance sheet are all-time high. So I was wondering, how should we think about the gross margin directionally, I mean, from here? Because it seems that you keep your loading quite high. So you still produce a lot of inventories. So should we expect the gross margin to flatten from here as it recovers? So you have to sell inventories first and the loading not increasing much. I mean it seems that your inventories is quite high. So I was wondering how you want to manage it and what's the impact on the gross margin? Karen Van Griensven: Yes, the gross margin, as we mentioned before, it has quite some effects. That are, I mean, amongst others, the euro-U.S. dollar, which is specific for '25 and which will probably -- I mean, if the dollar is stable, will have limited impact next year. So that could have a positive effect moving forward. The same is true for cost of yield. Cost of yield today also in Q3 was still quite high. But we expect as from Q4 that we will see gradual improvement of the cost of yield also of the gross margin. So expectations are that over the next quarters, we will see a gradual improvement of the gross margin despite that inventories are so high. Does that answer your question? Francois-Xavier Bouvignies: Sorry, Karen. The cost of yield, what do you mean by that? I mean you mean the loading or why your yield would be below -- why yield would be below usual right now? Karen Van Griensven: It's higher than usual now, and it will go back to the more usual amount. So the yield is the way -- it has to do with... Francois-Xavier Bouvignies: I understand that, but why is it more. Karen Van Griensven: Why is it? Francois-Xavier Bouvignies: More than usual. Why... Karen Van Griensven: It has to do with the ramp-up -- that's already for more than a year. So it has to do with ramp-up issues that we had in one of the fabs and because it's a new process, new technology, and it often comes with, yes, ramp-up issues. But these ramp-up issues have been solved. That's why we will now expect better gross margins due to that effect. Francois-Xavier Bouvignies: And how much is it drag? Karen Van Griensven: How much -- yes, it has an impact, a negative impact of at least 2% today. Operator: The next question comes from Ruben Devos from Kepler Cheuvreux. Ruben Devos: I had a question regarding the design win for the motor driver on the 48-volt EV architecture. I was curious what's the step-up in Melexis content versus the 12-volt baseline? And when do you expect sort of sales to be visible here? Marc Biron: The 48-volt architecture is a kind of modern, let's say, new architecture that has been developed by some OEM. Yes, OEM specialized on the EV car. The advantage of this 48-volt architecture is that you can provide power without consuming too much current. And all the goal is to reduce the current consumption of the battery to keep the range high, but having more power in order to move some equipment that need power, then this 48-volt architecture is more and more used by the OEM. As a consequence for the IC manufacturer is that you need to develop specific IC that can, let's say, withstand this 48-volt. Yes, and Melexis, we have started to develop this product some years ago a bit in advance because we are close to the customer. Then it's -- as I mentioned, it's a unique product on the market. And then, yes, we have received our first design win in Q3 for such application directly from an OEM. And to answer your question, yes, what will be the outlook? Yes, it really depends on the speed of the adoption of those 48-volt architecture. But now we have in the making more and more products that are compatible with this architecture. Ruben Devos: Okay. And second question regards the China EV market specifically. So I think you've had a series of quarters where performance was better than in the other regions. I think now also in Q3, it was down, but still better than, for instance, North America. But just wondering around the latest ordering behavior, let's say, the sort of -- is there any change in tone from China, specifically the divergence between Chinese OEMs and what the Western platforms are doing? Marc Biron: Yes. Q3 was a bit lower, but we see already that in Q4, the order from China are back to, let's say, previous level. Then there was indeed a small dip in Q3. Is it linked to inventory correction? I don't know. I'm just assuming -- I don't know exactly what is the root cause. But yes, in Q4, it is back to the regular trend, let's say. Ruben Devos: Okay. And any visibility on early '26 or it's too soon to say anything about that? Marc Biron: Yes, it will be too soon indeed. As I answered before, it's too soon. In general, I would say the funnel of opportunity and the design win are still very strong in China. If we take the top 10 of our design wins in Q3, yes, 6 out of the 10 are coming from China. It's just to show that China is still very strong. Operator: The next question comes from Marc Hesselink from ING. Marc Hesselink: My first question is actually on the testing you're currently doing with the Chinese foundry. I think you intend to start the production there at the beginning of next year. So I just want to know any update that you can see, also maybe related to that yield that if you have some early indications how that's going? Marc Biron: Yes. Small correction, we intend to start the production during summer next year. You mentioned early next year. I would like that it's early next year, but yes, you are a bit too optimistic. It will be summer. Yes, it's for a current sensor that we have developed specifically for this market. We have now the first wafers and the development has been done. The design has been done. We have received the first wafers 2 weeks ago from the fab. Yes, we are now in the process to evaluate the product. It's too early to give any indication. But yes, the chip exists and the chip is working. We are now busy to evaluate the performance. Marc Hesselink: Okay. My second question is on cost, both OpEx and CapEx. Pretty good cost control over the quarter, both lower than expected, also lowering the CapEx guidance for the full year. Can you maybe explain a bit what's behind it? Is -- this is a reaction on maybe a bit longer gross margin pressure? Or is it simply you don't need to do those investments at this stage? Just why it's moving? What did you exactly do to have this good cost control? And what do you expect going forward? Karen Van Griensven: The cost control, given the uncertainties today, we are just putting control on our costs to make sure they don't increase in the current environment. Also over the next quarters, we want to continue that behavior. On the CapEx, yes, it has to do with the product mix. There are many elements that are at play. The product mix has an impact on the CapEx we need. But in general, yes, we see that the pickup is rather slow. It's pretty -- we have an increase quarter-on-quarter, but it is very slow today. So that, for sure, also has an impact on the current CapEx visibility. Marc Biron: And perhaps to complement, Karen, we could say that indeed, we pay attention to the CapEx. But for all the innovation aspect, all the development aspect, we don't reduce at all the CapEx. We are still up to speed on the development. Operator: The next question comes from Janardan Menon from Jefferies. Janardan Menon: I just want to ask a question on the non-automotive side. You seem to be doing quite a lot in terms of drivers for fan coolers, robotics, et cetera, on that side. The proportion between automotive and non-automotive has been roughly flattish at about 88-12 for some time now. When you look at 2026, do you see a possibility where your non-automotive will start growing faster than your automotive? Is that something you can say at this point based on your design wins, et cetera? And in that context, the tactile sensor for the robot, the design win you've got, what kind of -- are you shipping something there? And when can we expect some volume there? Marc Biron: Yes. On the first question on the overall revenue, let's say, from non-automotive for '26, I think we need to be patient. In the funnel of opportunity, in the design win, we really see that the non-automotive is more dynamic. I mean the increase is deeper or steeper in the non-automotive than in automotive. And we really see in the funnel much more dynamic for the non-automotive. Now we need time to convert this in real sales. It means I don't anticipate, I would say, in 2026 that it will become very, very visible even if -- yes, we are working on it. I'll give the example of the funnel of opportunity. I can give also the example of the product launch. We will launch probably 19 products in 2025 (sic) [ 2026 ]. And out of the 19, 9 will be for non-automotive. And we are really -- the machine is running full speed for the non-automotive product. We should be a bit patient for the conversions effects. Coming on your second question about -- sorry, coming on your second question about the Tactaxis. We will explain more in detail during the Capital Market Day next week. But for the Tactaxis, we have decided to not provide only a chip, but we are -- we want really to provide what we call the solution, which is more of a module. We will give more detail during the Capital Market Day. And we have indeed shipped the first module to our customers and now the customers are evaluating not only the chip, but really the module. But it's a big step for us. Janardan Menon: Understood. And just a clarification, if I may. The 2% of gross margin improvement from yield improvement, over what period do you recognize the full 2% or 200 basis points? Karen Van Griensven: It will take a few quarters, but we will probably see already an effect in Q4. It's because we need to go through our inventory before we see the full results. That's why it is gradual. Marc Biron: But we see it already in our test. I mean in our test results, we see that the problem has been solved, let's say. Operator: The next question comes from Craig Mcdowell from JPMorgan. Craig Mcdowell: First one on your auto business. We heard from a large peer that their conversations with OEMs and Tier 1 suppliers suggest that content growth and mix will be far less positive in '26 than in prior years. I understand you're going through sort of planning and budgeting and pricing negotiations, but it would be grateful to hear your perspective on content growth into '26 and what's showing up in your order books. Marc Biron: Again, I think it's too early to give comments on '26. We will give outlook for '26 in early '26. We see that -- yes, there is a bit of 2 different dynamics in Europe and in China. The European customer -- I would say, 1 year ago, the European customers were very cautious, okay? We see also that the Tier 1 and the OEM are reducing the headcount. And we see the consequence that they postpone new platform, they delay the innovation. I think since some months, this trend has been reduced, and we see a new dynamic, let's say, in the -- with our European customer. We speak about new platform, about innovation again, but it's quite moderate. If you compare with China, where in China, there is a lot of traction, let's say, for modern car, modern platform, a lot of premiumization feature in the car. There is a bit of 2 dynamics, I would say. It's why in our decision, in our budget, we want also to make sure we concentrate enough on the China market. Yes, in terms of content, because your question was about the content. Yes, I think long term, I think it's clear that the semiconductor content is increasing in the car. It's also clear that this rate of increase depends on the type of application. I do believe that it will increase more in China than in Europe for the reason I mentioned before. Operator: The next question comes from Robert Sanders from Deutsche Bank. Robert Sanders: Two questions, if I may. Firstly, in terms of the OEMs, they started recommencing R&D on ICE platforms. Is that a good thing for you given the innovation is coming back to sort of your legacy sockets? Or is that a kind of potential risk given that you might lose those sockets? Just interested what that means for your margins and content in ICE powertrains. And the second question would just be in China. Clearly, you've got quite capable competitors like NOVOSENSE in China. Given that the China EV market is kind of suffering from very severe excess inventory at the moment, is that a problem for your pricing discussions next year? I would expect that pricing pressure would intensify. Have you seen that so far in your discussions for next year? Marc Biron: Yes. The first question about the combustion engine. At the end, for Melexis, we have the same number of content in a combustion engine and in an [ electric ] engine. If the end customer selects an EV or a combustion engine car in terms of chip content, it's the same for Melexis. What is important for Melexis is that this -- if we come back on the combustion engine, the combustion engine is put on a modern platform because in those modern platform, there are much more comfort feature, safety feature, what we call premiumization, meaning that ICE or EV is the same for us. What is important if the OEM, let's say, reuse their ICE engine, it's important they put this on the new platform, which is the case because now when you buy a new car, you like to have, let's say, enough premiumization feature. And what we see what the OEMs are doing in Europe, indeed, they refresh their ICE engine, but they put it in a modern platform. Robert Sanders: And on the pricing erosion question? Marc Biron: Yes, sorry. Yes, on the pricing erosion, for sure, we like to go to China because there is a lot of content in the car, but there is also a lot of competition in China. You mentioned NOVOSENSE. Yes, it's a very serious competitor. And yes, 2, 3 years ago, the discussion with the customer were about number of chips, how many chips can you supply? It was the discussion 3 years ago, okay? Now the price or the cost is also part of the discussion. And yes, we have cost discussion with the customer. It's also why we are working on the diversification of our supply chain. It's also why we are working on our internal cost because indeed, we need to improve our cost base in order to be able to have market price with good margin in China. Robert Sanders: But would you say last year, BYD was asking for 10% price cuts from their suppliers. Would you say that's about par for next year? Or do you think it's worse because of the margin pressure they're facing? Marc Biron: I would say the price expectation from our customer last year -- I mean, the price reduction expectation of last year are similar to this year. But of course, they expect a lot and then all the negotiation starts, and we are able to reduce those expectations. It's why a bit as last year, I think, yes, we expect a price reduction, low middle single digit as last year, I would say. It's also important because you mentioned BYD, which is a very big customer. And of course, with this kind of customer, we have price reduction. But it's important to realize that we have a long, long, long tail of small customers. And with those small customers, we don't really discuss price. We have -- yes, I cannot give like that, let's say, the volume or the revenue taken by the top 20 customers. But yes, we have a very long tail of smaller customers when we don't discuss price. I mean that those price discussions at corporate level have a lower impact, let's say. Operator: [Operator Instructions] The next question comes from Michael Roeg from Degroof Petercam. Michael Roeg: I have 2 follow-up questions on inventories. One of the first analysts indeed mentioned that inventories were at record levels. And this is despite the fact that the scrap was above average, low yields, low gross margins. Now if your gross margin recovers because your yields improve, is there a risk that your inventories will grow even more than they already did in the last year? That's the first question. And the second question is, is your entire inventory immediately commercially available? Or is part of it stored in die banks? That's it. And then a follow-up afterwards. Karen Van Griensven: Our inventory is indeed at historical high levels. But we do not expect from here that it will further increase and the yield has limited impact on this, rather the contrary because it will mean that it goes hand-in-hand with better lead times as well, meaning that you need -- the need for inventory reduces. The second question was about die banks, I think. Marc Biron: Yes. I think indeed, the inventory is spread all over the supply chain, then we have part of the inventory is ready to ship because it need to go to be able to react quickly, but we have -- we keep as small as possible, let's say, the inventory ready to ship. And the rest of the inventory is across the supply chain at wafer level before the assembly, after the assembly. So the big part of the inventory is unfinished. Michael Roeg: Okay. But then coming back to those inventories, if you have better yields, then more finished product will end up in your inventories. I also heard that cycle times will be shortening. That means even faster ending up to the inventory. So that means that you must be selling out faster than today to get your inventories down. Marc Biron: No, because we will order new wafers according to the new yield. And indeed, if the yield is 2% higher, as Karen mentioned, we will order 2% wafers in such a way that we can keep inventory under control. Michael Roeg: Okay. Clear. That's clear. Then another quick follow-up question about China. You mentioned you have a very long tail of smaller customers in presumably automotive in China. There have been a lot of news articles about excess capacity among Chinese car manufacturers and the risks associated with that and that the government wants normal price behaviors and stuff like that. What is your -- how you say, counterparty risk with respect to these smaller customers? Do you have a debtor insurance so that -- suppose that one or more would go bankrupt that you still get paid? Yes. What's the situation on that? Karen Van Griensven: Yes, we -- in most cases, we have a distributor in between. So we deal with the distributor. We do not have an insurance, a debt insurance, but we monitor this very, very closely. And in cases where we are not confident in the repayment capacity, we ask for a prepayment as well. So -- and this happens quite a lot in China. That's how we monitor the situation there. Michael Roeg: So would you say that the risk of a smaller end customer lies with your distribution partner? Or has it happened that they try to pass part of it on to you as well in a situation like that? Karen Van Griensven: The risk is with the distributor. But, of course, we need -- I mean, the risk for us is on the financial stability of our distributor, of course. That's why we monitor that very closely. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Marc Biron: Thank you, operator. In summary, after 9 months in 2026, Melexis continue to see sales trends improving. We continue adding innovative new products to our portfolio, and we concentrate resources to our faster-growing market. I would like also to highlight the Capital Markets Day that we will hold on November 5, next week. Thank you for joining our call, and goodbye. Operator: Thank you for joining today's call. You may now disconnect.
Operator: Good day, and welcome to the Blackstone Mortgage Trust Third Quarter 2025 Investor Call. Today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead. Timothy Hayes: Good morning, and welcome, everyone, to Blackstone Mortgage Trust's Third Quarter 2025 Earnings Conference Call. I'm joined today by Katie Keenan, Chief Executive Officer; Tim Johnson, Chair of BXMT's Board and Global Head of Breads; Tony Marone, Chief Financial Officer; Austin Pena, Executive Vice President of Investments; and Marcin Urbaszek, Deputy Chief Financial Officer. This morning, we filed our 10-Q and issued a press release with a presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements, which are subject to risks, uncertainties and other factors outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and 10-Q. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the third quarter, we reported GAAP net income of $0.37 per share and distributable earnings of $0.24 per share. Distributable earnings prior to charge-offs were $0.48 per share. A few weeks ago, we paid a dividend of $0.47 per share with respect to the third quarter. Please let me know if you have any questions following today's call. With that, I'll now turn it over to Katie. Katharine Keenan: Thanks, Tim. BXMT's strong third quarter results underscore the continued forward momentum across all aspects of our business, including earnings power, credit, investment activity and balance sheet optimization. We reported distributable earnings prior to charge-offs of $0.48 per share, covering the $0.47 dividend and continuing this year's positive trajectory. Book value was essentially flat, reflecting a stable credit backdrop with no new impaired loans. We continued our robust investment activity, looking across channels, originations, portfolio acquisitions and net lease and across geographies to find compelling relative value. And we continue to drive a more attractive cost of capital to enhance our competitiveness, improving terms on both corporate and asset level financing to reflect the strong positioning and track record of our business through this period. BXMT's 3Q performance also reflects our ability to capitalize on the continuing recovery in market conditions. Real estate fundamentals remain strong with demand stable or improving and new supply constrained. Liquidity and transaction activity are increasing with SASB CMBS on track for a record issuance year. This dynamic continues to generate robust repayment levels in our pre-rate hike portfolio, $1.6 billion this quarter and affords us a strong investment pipeline with $1.7 billion of total originations closed or in closing post quarter end, building on the $1 billion of investment activity in 3Q. While spreads have normalized as liquidity has returned to the market, the diversity and reach of our platform's vast sourcing engine are crucial differentiating factors. And with a market-leading capital markets team, we've continued to drive down our cost of borrowing. These advantages on both sides of our business allow BXMT to produce compelling returns on both an absolute and relative basis. I'll turn it over to Austin to speak in more detail about our investments, portfolio and balance sheet. Before I do, I'd like to spend a minute on BXMT's opportune positioning today. Our portfolio is turning over, unlocking earnings from more challenged legacy deals and steadily increasing the proportion of our capital invested in high-quality current vintage assets. Our balance sheet is in fantastic shape, and we remain at the forefront of both structural and cost of capital innovation. And all of this has translated to healthy earnings generation supporting our dividend. The forward trajectory of our business is embedded in this quarter's results, though BXMT's stock price has yet to catch up. Notwithstanding the tremendous progress we have made in the last several years, our stock today trades within 10% of the lows through this period and continues to provide a highly attractive 10.4% dividend yield. This disconnect has created the opportunity for us to repurchase over $100 million of stock so far this year at a meaningful discount to book value. As my tenure as CEO comes to a close, I could not be more excited about the momentum of this business and our highly capable leadership team. I'd also like to express my deep gratitude to the analyst and investor community for your support and attention to BXMT over the years. Congratulations to Tim and Austin on their new roles. And Austin, over to you. Austin Pena: Thanks, Katie. BXMT's strong third quarter investment activity demonstrates the distinct advantages of our platform's differentiated scale and sourcing capabilities as we closed $1 billion of total investments across loan originations, net lease assets and a performing bank loan portfolio that we acquired at a discount. Our loan originations remain concentrated in our highest conviction sectors with 75% in multifamily and diversified industrial portfolios and over 60% in international markets, where we are capturing excess spread relative to comparable deals in the U.S. We continue to achieve attractive net interest margins, setting up investments to achieve a levered spread of more than 9% over base rates or low teens all-in returns. And importantly, credit characteristics remain very attractive with strong cash flow profiles, light value-add business plans and an average LTV of 67%. Investments this quarter include a 90% leased diversified U.K. industrial portfolio and a well-amenitized stabilized multifamily property near Miami. We also steadily grew our net lease portfolio, investing another $90 million across 60 properties in the third quarter, bringing the total portfolio to $222 million at BXMT's share. Importantly, we've maintained a rigorous approach to credit, acquiring assets within durable industries and generating strong EBITDAR coverage, nearly 3x on average and at significant discounts to replacement cost. With another $100 million in our closing pipeline, we continue to expand our presence in the net lease sector. To that end, this quarter, BXMT acquired a 50% interest in a $600 million portfolio of granular loans secured by fully occupied net lease retail assets with a low weighted average origination LTV of 52% and an in-place debt yield over 12%. We were uniquely positioned to evaluate this portfolio, leveraging our experienced net lease and loan portfolio acquisition teams to underwrite and execute this transaction. Acquiring high-quality performing loans at discounts from banks remains one of our top investment themes across our platform. These transactions have a high barrier to entry, requiring bespoke sourcing capabilities, the capacity to underwrite granular portfolios quickly and accurately and the operational wherewithal to onboard and manage hundreds of loans seamlessly. But here at Blackstone, we have invested in building market-leading capabilities to execute, leveraging the scale of our team and our data. And the prize is quite compelling, high credit quality loans with convexity and duration in thematic sectors and with outsized risk-adjusted returns. And with bank M&A accelerating, we see more opportunities like this on the horizon. In total, we expect to close over $7 billion of new investments this year across originations, loan acquisitions and our net lease strategy, diversifying our portfolio and enhancing credit composition through deliberate rotation into the sectors and markets best positioned in the current environment. Turning to the portfolio. Market tailwinds are driving increasing investor demand for assets, large and small and supporting positive credit outcomes. We collected $1.6 billion of total repayments in the third quarter, including 4 loans greater than $200 million, 2 secured by Texas multifamily assets and 2 abroad, a European hotel portfolio and a London office building. We had no new impaired loans this quarter. We resolved 2 previously impaired loans at a premium to aggregate carrying values, and we upgraded 8 loans, including 6 office loans, removing 2 from our watch list. Our loan portfolio is now 96% performing, and our impaired loan balance continues to decline, now at 71% below last year's peak. We expect to complete additional resolutions next quarter with 1 impaired office asset sold last week and others in advanced stages. The real estate recovery, while uneven, is extending to some of the most acutely impacted markets and sectors. In San Francisco, fundamentals are improving, driven by the growth of AI. Multifamily rents are up 10%, office demand is growing and convention hotel bookings are up 60%. Investors are taking note with acquisition volumes picking up across sectors. Altogether, 25% of our REO portfolio today is in the Bay Area, including our largest asset, a fully renovated hotel held at nearly 60% below the prior owner's basis and more than 70% below replacement cost. San Francisco has long been amongst the most cyclical markets in the country. And today, we are positioned to capitalize on the upswing. Amid a strong capital markets backdrop, BXMT has taken advantage, refinancing and extending over $2 billion of corporate debt in the last 12 months. Debt markets have been resilient through recent market volatility with spreads still sitting within 20 basis points of all-time tights. And we continue to see strong demand from our bank lenders, providing opportunities to introduce new facilities, further optimize our financing structures and reduce our marginal secured funding costs. We borrowed over 15 basis points tighter in the third quarter compared to the prior quarter, improving our cost of capital and advancing our overarching goal to generate an attractive, stable stream of current income for our investors. And with that, I will pass it over to Tony to unpack our financial results. Tony Marone: Thank you, Austin, and good morning, everyone. In the third quarter, BXMT reported GAAP net income of $0.37 per share and distributable earnings or DE of $0.24 per share. DE prior to charge-offs, which excludes realized losses related to 2 loan resolutions, was $0.48 per share, an increase of $0.03 from the prior quarter and $0.01 above our $0.47 quarterly dividend. DE benefited from BXMT's continued execution on key initiatives with investment activity, loan resolutions and accretive capital markets executions all contributing to this quarter's strong results. We also recognized $0.02 of default interest from a multifamily loan that repaid in full. Looking forward, we expect our earnings will continue to benefit from capital redeployment and resolutions of impaired loans, including the 2 that closed on the last day of the quarter as we unlock the earnings potential of that capital. For reference, we collected $0.06 of interest from impaired loans this quarter, which were excluded from earnings under cost recovery accounting. We ended the quarter with book value of $20.99 per share, which was largely stable quarter-over-quarter, reflecting strong credit performance, loan resolutions executed above carrying values and accretive share repurchases. When considering the $0.47 dividend, BXMT provided an 8% annualized economic return to stockholders this quarter. BXMT repurchased $16 million of common stock in Q3 at an average share price of $18.69, a significant discount to book value. And so far in Q4, we've accelerated buybacks through recent market volatility, repurchasing another $61 million of stock at even lower levels. In total, we have repurchased nearly $140 million of shares since establishing our program in 2024. And just last week, received Board approval to replenish our $150 million buyback capacity. Our book value at 9/30 includes $712 million, $0.14 -- excuse me, $4.16 per share of CECL reserves, which declined from $755 million, $4.39 per share in the prior quarter as we crystallized $42 million of specific CECL reserves in connection with 2 impaired loan resolutions. As Katie mentioned earlier, these resolutions were executed at a premium to aggregate carrying values, contributing to an $11 million net reversal in our specific CECL reserve and offsetting the modest $10 million increase in our general reserve. Turning to our balance sheet. BXMT remains well positioned to address today's attractive investment environment with debt to equity down to 3.5x, strong liquidity of $1.3 billion and over $7 billion of available financing capacity as of quarter end. And in October, we closed a new $250 million non-mark-to-market credit facility with an international bank who recently established their CRE loan warehousing business targeted Blackstone as one of their first and largest relationships. Another example of our strong position in the market and ability to drive differentiated results for stockholders. We continue to take advantage of the supportive capital markets backdrop to further optimize our cost of capital as we repriced $400 million of corporate term loan during the quarter, reducing spread by 100 basis points and upsizing the deal by $50 million, reflecting strong demand from institutional investors. And just last week, we collapsed BXMT's 2020 FL-3 CLO, which we replaced with balance sheet financing at a lower spread. CLO market remains robust with new issuance nearly tripling last year's total and tracking its strongest year since 2022. We have been a consistent issuer in this market, completing our fifth transaction earlier this year, and we are well positioned to take advantage of the supportive market backdrop. Before opening the call to Q&A, I will turn it over to BXMT's Chairman and incoming CEO, Tim Johnson, for a few closing remarks. Timothy Johnson: Thanks, Tony. First and foremost, I'd like to thank Katie for her dedicated service to BXMT, the Board and our shareholders. Katie leaves BXMT in a tremendous spot with a global portfolio that's delivering for our investors and a team that's poised to capture this exciting investment environment. I've had the pleasure of working alongside Katie throughout her Blackstone tenure, and I'm extremely grateful for all of the hard work, strategic insight and strong execution she's brought with her each and every day. She's been an inspiring partner and leader and will leave a lasting impression on our business. While we'll no doubt miss Katie, we wish her well in her next chapter and are confident the team will step up in her place. Personally, I'm excited to have been appointed CEO of BXMT and to work closely with Austin to continue to build on the momentum our business has today. Austin and I are fortunate to have the strength of the Blackstone franchise behind us, our dedicated team of over 160 real estate credit professionals and the critically important connectivity with our global real estate team. This has always been the backbone of BXMT's investment process. I'm looking forward to working more with all of you along the way. And with that, I'll now ask the operator to open the call to questions. Operator: [Operator Instructions] We'll take our first question from Catherwood with BTIG. William Catherwood: Katie, just first off, congratulations and best of luck in your new role. It's been an absolute pleasure having you in this position. And then second, just wanted to follow up, Katie, on your prepared remarks, where you mentioned a recovery in transaction activity and return of liquidity to the CRE markets. Kind of 2 items around that. First off, can you provide a little bit more color on exactly where you're seeing that? Is that U.S. and Europe? Or is it just pockets that you're seeing that recovery? And then second, if that recovery in transactions is more here in the U.S., which is what it seems like to us, could we see a larger portion of your origination activity pivot back to U.S. loans instead of more Europe loans, which you've been doing so far this year? Timothy Johnson: Thanks, Tom. This is Tim. I'll take that. I'd say liquidity certainly has returned to markets, I would say, both in the U.S. and in Europe. As you pointed out, a bit stronger on a relative basis in the U.S. and mainly driven by a more established CMBS market here in the United States, as Katie referenced, tracking toward an all-time high in terms of liquidity. So I would say it's a little bit further ahead, as you'd expect in the U.S. versus Europe, but both places are continuing to see capital markets open up and be pretty strong. In terms of the U.S. versus Europe on an ongoing basis, what we love is being able to have a platform that can look across all of the regions and establish a view on relative value at any moment in time. So that does shift over time. And I think that the U.S. continues to be the biggest market for us, just a larger transaction market overall. So I think you'll continue to see this be the largest share of our investment activity over a long period of time. But we certainly look at both and play relative value across both. William Catherwood: Appreciate that, Tim. And the second one for me, maybe Austin, in terms of the REO portfolio, can -- first off, can you remind us of the potential earnings uplift as that capital comes back over time? And second, do you need to set aside incremental capital for the New York City hotel that you took on balance sheet during the quarter? Or is that one in pretty good shape already? Austin Pena: Yes. Thanks for the question. I would say, generally, we haven't given specific numbers in terms of the potential earnings uplift. But obviously, the REO assets are not generating our target returns, and we certainly see the opportunity to, as we turn over the portfolio, exit these REO assets over time to drive additional earnings power as we do that. Specifically with regards to sort of CapEx and conditions, I would say, firstly, we have a tremendous amount of insight into kind of the needs across these assets. And we really don't feel that there's a significant component of CapEx needed. To the extent it is needed, we certainly have the capability to do that with over $1.3 billion of liquidity. But I'd say the condition of these assets across the board is pretty good, and we feel comfortable with our position today. Operator: We'll take our next question from Harsh Hemnani with Green Street. Harsh Hemnani: Maybe one on how you're thinking about originating new loans versus buying back into the capital structure. Is there a particular premium or discount to book at which you're thinking that buybacks are perhaps more accretive than new originations? And it sounds like 4Q is stepping up on the origination front, but also on the buyback front. So I'm just trying to understand the relative value math there. Timothy Johnson: Yes. I'd say we continue to look at both in terms of every day, just like we do across loans in the U.S. and Europe, we look at opportunities of where to invest capital, including share buybacks, which, of course, we've been quite active in. So that's -- I'd say that's a pretty dynamic analysis. But we've captured the -- we've taken advantage of the opportunity to buy back when the stock has traded at levels that we think are quite attractive and provide a very high return on investment. So I think that's how we look at it. We continue to look at it dynamically over time. Harsh Hemnani: Got it. And then maybe one on the makeup of the investment portfolio this quarter. It seems like roughly 2/3 of originations this quarter were in sort of the traditional floating rate loan portfolio and roughly 1/3 is in net lease and bank loan portfolio acquisitions. Should we be thinking about these fixed rate loans as sort of being a lever for you to be able to reduce your floating rate exposure ahead of what most are expecting to -- they're expecting to see lower floating rates in the future? Austin Pena: Yes, Harsh, this is Austin. I can take that. I think you're correct in that we really are looking across different channels to deploy our capital right now. One of the things we like about net lease in these bank portfolios is that they do add some duration and create a natural hedge to our sort of traditional floating rate business. The bank portfolios, in particular, as we noted earlier, we're buying those at a discount to par. And that provides some upside convexity to the extent those loans repay more quickly than we underwrite. And we like that as well from a risk-adjusted return basis. And so I think you'll continue to see us look across different types of investments across these channels to really think about the best relative value and really sort of diversify the composition of our earnings. Operator: We will take our next question from Jade Rahmani with KBW. Jade Rahmani: Each earnings season brings its own unique developments, and it seems to me that this earnings season so far has been characterized by AI dominance, but also some pockets of weakness in the economy, whether it be in the consumer and jobs or discrete credit items in the financial space and the C&I lending and also a couple of CRE items. So the commercial mortgage REIT sector also seems to have been caught in this downdraft. And my main question is whether you've seen any spillover effects into the CRE market as yet? And if you're doing anything differently, perhaps more defensively to prepare for any weakness that may unfold. Timothy Johnson: Thanks, Jade. I'd say we're not seeing it in real estate credit. We are in an environment with real estate credit where we've gone through a pretty significant downturn, and now we're quite clearly in recovery mode in terms of coming out of that downturn. So I would say the real estate credit market has been somewhat uniquely tested already and has experienced its challenges, not to say that there might not be other challenges around the corner, but it definitely is more battle tested, I'd say, overall. And so that translates through to what we see on the new origination side of things in terms of credit quality. Generically, you're going to have a more tighter lending market coming out of a cycle like we've been through where credit standards are higher. And so we're not seeing that type of deterioration that's been referenced elsewhere. We're seeing much like what you're seeing in the BXMT portfolio itself, improved credit overall. Jade Rahmani: And in terms of the pace of 3Q investments and originations, notwithstanding the bank loan JV, which I believe would have higher ROEs than the traditional business. Was there anything that drove a more muted pace of originations perhaps it was on the liability management side, putting in place the new repo line, the tighter spreads on the term loan as well as calling the CLO? Was that in preparation of stronger originations and maybe weighed on volume in the quarter? Austin Pena: Yes, Jade, this is Austin. We obviously made $1 billion of total investments this quarter, which we think is a good amount. I would say that we have $1.7 billion in closing as well. So our pipeline of opportunities remains really robust. So I'd say we're actively investing in the environment. I would say there might have been a modest impact seasonally with some of the volatility we saw sort of in the spring around some of the tariffs, which may have impacted certain timings of transactions overall. But over -- but really across our channels, we really see a lot of interesting opportunities both in Europe and the United States. So we feel good about the level of the transaction activity going forward. Operator: We'll take our next question from Doug Harter with UBS. Douglas Harter: Sort of touching on that last point, how do you see the pace of kind of net deployment in the portfolio in the coming quarters? And how do you think about what is the right level of leverage that you guys are targeting? Austin Pena: I'd say I'll take the first. In terms of deployment, I think it's a pretty good indication of what you saw this past quarter where we're having a healthy amount of repayment activity and then turning that directly into new investment activity. So I think we're at a place where we feel pretty good about being kind of at a run rate in terms of repayments and deployment overall. So I think that would remain consistent. Douglas Harter: And on the leverage side, like how are you thinking about what is the right level of leverage to run this business at this part of the cycle? Timothy Johnson: Yes, Doug, on leverage, obviously, we're at 3.5x today, which is right in the middle of the range that we target. And so I think we've always been sort of in that mid-3s over the last quite period. So we certainly have liquidity and capacity to sort of go up a little bit from there. And again, we're seeing good opportunities. So we feel very comfortable with the balance sheet today and where we are from that perspective. Operator: We'll take our next question from Rick Shane with JPMorgan. Richard Shane: I apologize, like everybody, we're bouncing around between calls. So if this has been covered, I apologize. Look, when we look at the implied dividend yield as a function of book, it's about 9%. You guys aren't clear yet. When you think about the path to covering that dividend, which is obviously not only your goal, but your indication by maintaining that dividend, can you walk us through sort of what the different levers in terms of higher yields, reducing nonaccruals, reducing REO, what you think are sort of rank those opportunities, please, and perhaps give us some sense of what the contribution of each is? Timothy Johnson: Yes. Thanks, Rick. I'd say, obviously, it was good to cover the dividend this quarter in terms of distributable earnings ex charge-offs at $0.48 relative to $0.47 dividend. As Tony noted, a couple of onetime small items in there, but pretty close to the dividend ex those. And as you said and as we've said for a while, we set the dividend with a long-term view in mind. And where we really still have earnings left to unlock is in the REO and the impaired loan portfolio, where we can turn those assets into higher returning investments. We're not particularly focused on quarter-to-quarter results as there's always a little bit of variability in terms of the ins and outs of fundings and things like that. But we continue to have confidence that we've set the dividend level at a long-term sustainable position. Richard Shane: Got it. Okay. And is there -- when you think about, for example, funding cost rate outlook, obviously, you're modestly asset sensitive, but there's so much opportunity in terms of recycling capital. I'm assuming that you guys are even in a sharply lower short-term rate environment, confident that you can continue to achieve those hurdle rates given the scale. Timothy Johnson: Yes. I would say that's right. I think the opportunity to redeploy the capital within the REO portfolio and the impaired loan portfolio is a really strong offset to a lower rate environment. Austin Pena: I would also add we only lose [ about 150 basis points ] of rate move. So it's not as drastic as you might be thinking. Operator: We will take our last question from Don Fandetti with Wells Fargo. Donald Fandetti: Can you talk a bit more about what you're seeing in office market fundamentals? I mean I think you had 6 upgrades. And I guess at this point, is it possible that you'll end up being a bit over reserved in your office book? Austin Pena: Yes. Thanks, Don. This is Austin. I definitely would say we are seeing stability and improvement across office. I think you see that, as you noted, in the movements in terms of our upgrades this quarter, 6 office loans upgraded, 2 of them were removed from our watch list. That's really driven by leasing that we're seeing at these assets. And so I definitely think we're starting to see more broad-based green shoots, liquidity coming back into the market. As I noted earlier, we sold one of our impaired office assets post quarter end. So continue to see more transaction activity, more capital coming off the sidelines for the sector. I'd say in terms of reserves, we obviously go through those every quarter. We feel like our reserve levels are appropriate. We feel good about where we set those. It's obviously a detailed asset-by-asset analysis that we do. And so we feel good about where those are. Donald Fandetti: Okay. And then on a follow-up, I mean, you've had another quarter here where there was fairly steady credit migration. How are you thinking about like movement to 4 from 3 in the near term? Do you feel like you're in a steady state? Timothy Johnson: I'd say the direction of travel for credit is clearly positive in the portfolio with the no new impairments. So I'd say we -- the direction is quite clear. Obviously, we're continuing to work through things. But in terms of credit migration, we feel like we've basically resolving 70% of our impaired loans at this point and a good line of sight to a significant amount more. We feel really good about the overall path here in terms of credit performance. Operator: That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Tim Hayes for any additional or closing remarks. Timothy Hayes: Thank you, Katie, and to everyone joining today's call. Please reach out with any questions.
Operator: Good morning, and welcome to the Blue Foundry Bancorp's Third Quarter 2025 Earnings Call. Comments made during today's call may include forward-looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Blue Foundry encourages all participants to refer to the full disclaimer contained in this morning's earnings release, which has been posted to the Investor Relations page on bluefoundrybank.com. During the call, management will refer to non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. As a reminder, this event is being recorded. [Operator Instructions] After the speaker's remarks, there will be a question-and-answer session. I will now hand over to President and CEO, Jim Nesci to begin. James Nesci: Thank you, operator. Good morning, and welcome to our third quarter earnings call. I'm joined today by our Chief Financial Officer, Kelly Pecoraro. She will provide a detailed financial review after I share updates on our strategy and recent progress. Earlier this morning, we reported a quarterly net loss of $1.9 million and a quarterly pre-provision net loss of $1.3 million. Both metrics have improved compared to the prior quarter. During the third quarter, we advanced our core objectives of growing core deposits, diversifying our loan portfolio to enhance risk-adjusted returns, and expanding our net interest margin. The progress against these strategic initiatives better positions us for continued growth and long-term value creation. Deposits increased by $77.1 million. Loans grew by $41.9 million and net interest margin expanded by 6 basis points. Capital remains strong, and we were able to increase tangible book value per share. Our loan growth was driven by continued expansion in our commercial real estate and consumer loan portfolios. Our commercial portfolio grew by $7.2 million, reflecting strong origination activity of $81.3 million, including approximately $40 million in owner-occupied CRE and C&I offset by $66.8 million in payoffs. Our consumer loan portfolio increased by $38 million in the third quarter, supported by purchases of unsecured consumer loans with credit reserves. This growth allows us to improve yields while maintaining prudent credit risk. Our loan pipeline remains healthy with over $41 million in executed letters of intent, primarily in commercial lending, with anticipated weighted average rates about 7%. Year-to-date, our relationship-driven approach has enabled us to grow core deposits by over 10% and commercial deposits by over 17%. Our net interest margin expanded by 6 basis points to 2.34%, supported by a 9 basis point increase in asset yields and a 4 basis point reduction in the cost of liability. Net interest income was $12.2 million, up $551,000 from the prior quarter. We remain focused on disciplined capital management and enhancing shareholder value. Tangible book value per share increased to $15.14 per share. During the quarter, we repurchased over 837,000 shares at a weighted average price of $9.09 per share, well below our tangible book value. Since instituting share repurchases, we have repurchased 8.65 million shares. Liquidity and capital remained strong. At the end of the third quarter, we had $423 million in borrowing capacity and an additional $178 million in unencumbered securities. Tangible equity to tangible assets stood at 14.58%, and we remain well capitalized with capital ratios among the highest in the industry. With robust capital, ample liquidity and a focus on deepening commercial relationships, we believe Blue Foundry is positioned for continued growth. We expect downward rate movements, which will benefit our funding costs and anticipated repricing in our loan portfolio to have a favorable impact on our net interest margin over time. With that, I'll turn the call over to Kelly for a deeper look at our financials. Kelly? Kelly Pecoraro: Thank you, Jim, and good morning, everyone. As Jim mentioned, we reported a net loss of $1.9 million for the third quarter or $0.10 per diluted share. This compares favorably to the $2 million loss in the prior quarter. This improvement was driven by an increase in net interest income partially offset by an increase in provision for credit losses and an increase in operating expenses. Net interest income increased by $551,000 versus prior quarter to $12.2 million, driven by $693,000 of additional interest income representing an 11.8% annualized increase. The yield on average interest earning assets grew to 4.67%, while the cost of average interest-bearing liabilities declined to 2.72%. These improvements contributed to a 6 basis point expansion in our net interest margin. Non-interest expense increased by $347,000 primarily due to higher compensation and benefit expense and higher professional services expenses. The increase in compensation and benefits is due to day count and the prior quarter having higher forfeitures of equity grants. We recorded a provision for credit loss of $589,000 primarily driven by deterioration in economic forecasts. Our allowance methodology continues to place greater weight on baseline and adverse economic scenarios. The allowance for credit loss was 0.81% of gross loans, up 1 basis point from the prior quarter, primarily reflecting changes in economic forecast. While charge-offs remain minimal at $25,000. Credit quality remained sound overall, and we continue to manage risk with discipline. During the quarter, a $5.3 million multifamily loan was added to nonperforming loans. Currently, we do not believe that there is a risk of loss of principles associated with this credit. Total nonperforming loans was $11.4 million or 66 basis points of total loans on September 30, up from $6.3 million or 38 basis points at the prior quarter end, reflecting the increase in nonperforming loans. Moving on to the balance sheet. We saw total loan growth of $41.9 million for the quarter. We continue to focus on optimizing our portfolio composition and we are encouraged by the growth in owner-occupied commercial real estate and commercial and industrial loans this quarter. Our available for sale securities portfolio with a modified duration of approximately 3.9 years decreased by $10.3 million, primarily due to calls and maturities, partially offset by an improvement in the unrealized loss position. Deposits grew by $77.1 million with core deposits increasing by $18.6 million. Broker deposits increased $50 million, helping us manage funding costs and support loan growth. Borrowings decreased by $42 million as we allow them to roll off and replace them with broker deposits. With that, Jim and I, are happy to take your questions. Operator: [Operator Instructions] Our first question comes from Justin Crowley from Piper Sandler. Justin Crowley: I wanted to start off on the margin here. I saw continued progress with the lag from cuts we got last year. With the cuts that we got late this quarter, very likely another one today and more to follow. Can you talk a little bit about how you've already maybe responded on the deposit side? And just what your expectations are for matching the Fed as rates continue to come down? Kelly Pecoraro: Yes, Justin. So as we look at where the market has been and the rate cuts, we did take advantage during the quarter of putting on another broker deposit. And while we're trying to manage funding costs with that, we were able to swap that and get that into at a lower rate. As we look at customer deposits, as we move forward, a lot in our market is dependent upon competition. We've actively worked with our customers on core deposit growth, deemphasizing CDs from a customer perspective. And we continue to look at lowering those costs that we are paying on deposits, but again, being responsive to market and looking to see where our customers are and what's going on. James Nesci: And to reinforce it a little -- you'll see more shift from the CD to the money market product at Blue Foundry. Justin Crowley: Okay. Got it. And so I guess with the deemphasis of new CDs in terms of the back book and what kind of benefit you could get as stuff comes up for repricing. And I'm sure the book is relatively short. Can you quantify what that might look like over the coming quarters in terms of magnitude and yield pickup? Kelly Pecoraro: As we're looking from a perspective of the customer deposits for the CDs, we do have durations out there of 5 months, some of our specials has been 5-month CD to shorten that life of the CD. So we don't necessarily anticipate a tremendous pickup in Q4 with any rate movement as those will be rolling off a little bit later, probably in January, February, we see more of the roll-off of those. So we see benefit in 2026 from that. Again, we'll be booking from managing the core deposit component of that and lowering those rates as we move forward through the quarter. James Nesci: Justin part of the cycle we've seen is as you get to year-end, the cost of deposit seems to tick up. So we try to position ourselves not to end at 12/31. Obviously, we prefer to have some of that duration go out to January, February to reposition as opposed to just kind of stop at year-end. Justin Crowley: Okay. And then so what would sort of be your near or medium-term expectations just for the margin? I think you've talked before about how multifamily repricing, how that really starts to become more of a tailwind next year. Can you remind us what that looks like in terms of magnitude, yield pickup? And then just anything else on the asset side, and how that could inform benefiting the margin in lieu of maybe deposit costs not coming down as quickly? Kelly Pecoraro: Yes. I think as we look forward from a forecast perspective, we anticipate fourth quarter to be relatively flat given where we are and that we do see that repricing activity pick up, specifically first half of '26. We have probably around $45 million coming in, that's sub-4% from a repricing perspective, maturity and repricing. And then in the latter half, we have about another $35 million, $40 million. That's really [sub-3.75]. That will be repricing. So we really are looking for the 2026 pickup in net interest margin. Justin Crowley: I know it's hard to say, but could that pick up in net interest margin next year, could it look like on a quarterly basis, what you got this quarter? Would your bias be towards greater expansion? How do you see that? Kelly Pecoraro: Yes. I think it's going to be a combination, Justin right? So while we have repricing, we also have new products or new production that we're looking to put on. So depending upon what the market does and how we're able to execute will really drive that. So it's hard to say exactly where as we're going through our strategic planning now and looking at our initiatives. Justin Crowley: Okay. And then on the commercial loan growth, I know it's just 1 quarter, but saw a net growth in multifamily for the first time in a little while and then some solid growth in CRE, including the owner occupied, you mentioned, Jim. Can you talk a little on opportunities you're seeing there, how the pipeline looks, which I might have missed that. And just how you expect that could trend as rates continue to come down? James Nesci: Yes. So obviously, we've tried to deemphasize the multifamily. When we do multifamily, while we're adding multifamily assets, they're usually pretty strategic working with borrowers that we've worked with before. Coupons are attractive to us. So again, I think you'll see us back off of the multifamily a little bit unless there's a strategic reason. The C&I is where we try to focus pulling in the full relationship. So we get the deposit along with the asset. But that's where the team is focused right now. It's really on that business banking side or commercial assets that are really driving that business loan to go through. Kelly Pecoraro: And just to reemphasize... Justin Crowley: Okay... Kelly Pecoraro: Sorry, Justin, just to reemphasize, the pipeline, as we discussed, we have over 41 million letters of intent out there with rates above 7%. In that bucket, there is less than $6 million of multifamily. So really deemphasizing that asset class. And as Jim said, it's really got to be relationship driven for us to be engaged in asset class. Justin Crowley: Okay. And then just one last one quickly for me. On expenses, I'm not sure if I missed it. I'm not sure if you gave a guide for the fourth quarter or not. But between that and just as we look out to next year, and I guess, you'll see the normal merit increases, et cetera, again, between the fourth quarter, but '26 as well. What do you think is a reasonable level of expense growth to expect for the company? Kelly Pecoraro: So I think at this point for fourth quarter, as we look, we're going to be in that high 13% low 14% range. Again, as you noted, expenses were a little bit elevated some on the compensation front. And then also as we look at the professional services, there's all these initiatives that we're doing here. So those don't come in smooth over a time period. It all depends on what we're doing at the institution. And we are not really prepared at this time to give guidance on '26 as we're working through our initiatives and our strategic planning process. Operator: Our next question comes from David Konrad from KBW. David Konrad: Just a couple of quick questions. One on the follow-up, just on the loan growth outlook. You did have some really good loan growth in the kind of the structured consumer loan book. I think you're around 7% of loans. Is 7% to 8% kind of the -- still the range that you're thinking about for that portfolio? Kelly Pecoraro: Yes, David. David Konrad: Okay. And then capital remains really strong. You're trading below tangible book. So real good buyback activity. Is this a pretty good run rate for us to think of going forward? Or how do you think about the buyback now? James Nesci: We had a transaction that we called out in the quarter. So I don't think that's a usable run rate. I don't think you're going to see us put up another number at that level. But, Kelly... Kelly Pecoraro: Yes. And I think as you look at we definitely believe the buybacks have been a very good use of capital as we're looking at our structure here. We did, at the end of the quarter, still have another 730,000 shares under our current plan to repurchase. Operator: We currently have no further questions. So I'd like to hand back to Jim for some closing remarks. James Nesci: Thank you. And thank you for the question, David. Appreciate it. I want to thank all of our shareholders, our employees for dialing in today and all of the communities that listen into our call. We appreciate it, and we look forward to speaking to you again soon in the next quarter. Thank you. Operator: This concludes today's call. We thank everyone for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the TPG Real Estate Finance Trust Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Bob Foley. Thank you. You may begin. Robert Foley: Good morning, and welcome to the TPG RE Finance Trust Earnings Call for the Third Quarter of 2025. Today's speakers are Doug Bouquard, Chief Executive Officer; Brandon Fox, Interim Chief Financial Officer; and Ryan Roberto, Head of Capital Markets and Asset Management. Doug and Brandon will provide commentary regarding the company, its performance and the general economy in which TRTX operates. Doug, Brandon and Ryan will answer questions from call participants. Yesterday evening, we filed our Form 10-Q, issued a press release and shared an earnings supplemental, all of which are available on the company's website in the Investor Relations section. This morning's call and webcast is being recorded. Information regarding the replay of this call is available in our earnings release and on the TRTX website. Recordings are the property of TRTX and any unauthorized broadcast or reproduction in any form is strictly prohibited. This morning's call will include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a comprehensive discussion of risks that could affect results, please see the Risk Factors section of the company's latest Form 10-K. The company does not undertake any duty to update our forward-looking statements or projections unless required by law. We will refer during today's call to certain non-GAAP financial measures, which are reconciled to GAAP amounts in our earnings release and our earnings supplemental, both of which are available in the Investor Relations section of our website. Today's earnings call is my last. After more than 12 years with TPG and 10 years as CFO of TRTX, my wife and I decided, I will retire at year-end to become a senior adviser to TPG Real Estate, which was announced via press release 6 weeks ago. As a senior adviser, I will remain a member of the investment review committees of TRTX and our other real estate vehicles. Brandon Fox has assumed the role of Interim CFO, and Ryan Roberto has assumed all duties regarding capital markets and portfolio management. The succession plan was in place prior to my decision to retire, and Brandon and Ryan have been growing into their new roles for several years. The final stages of this transition will be complete by the holiday season. I've worked with Brandon and Ryan for 7 and 10 years, respectively, and I have every confidence in their well-developed abilities and judgment. Brandon and Ryan have been strong teammates to Doug as he continues to drive TRTX's success. It's been a privilege to work with my TPG colleagues since 2015 to transform TRTX from a $25-billion loan portfolio purchased from a bank into a market-leading commercial mortgage REIT. Important memories for me include $17.9 billion of loan investments, TRTX's 2017 initial public offering, early entry into the CRE CLO market and establishment of a strong brand as issuer and collateral manager. I'm also very proud of TRTX's deeply ingrained culture of disciplined credit investing, portfolio management and liability management and the firm's transparent communication with its shareholders, lenders, bond investors and borrowers. Like most of you on this call, I'm a shareholder, and I look forward to TRTX's continued growth and success. I have the utmost confidence in the TRTX team and its ability to execute its business plan under Doug's thoughtful and energetic leadership. I've known many of you on today's call for decades, during which the real estate credit market has developed impressive depth, breadth and liquidity. I am appreciative of the confidence and support you have extended to TRTX, to my colleagues and to me. And I am deeply grateful for the many professional relationships and personal friendships developed over the years. I will miss you. Doug? Doug Bouquard: First, I want to take a moment to thank you, Bob, for your dedicated service to our firm over the past 12 years. Your incredible work ethic and strategic vision have served TRTX shareholders incredibly well. Like many in our industry, you have served a variety of important roles in my life, a thoughtful client, a close mentor, a dedicated colleague and a great friend. We are excited to have you remain as a senior adviser to the TPG real estate platform and congratulate you and your family on a well-earned retirement. Additionally, I look forward to continuing a close working relationship alongside Brandon as Interim CFO and Ryan as Head of Capital Markets and Asset Management. Over the past quarter, the equity market again hit multiple all-time highs, while the 10-year treasury rallied nearly 40 bps to hover near 4%. Meanwhile, the real estate equity market continues to heal, albeit not at the ferocious pace of the broader asset market. As a result, the backdrop for real estate credit continues to remain attractive on an absolute and relative value basis. This market dynamic continues to be driven by a combination of reset valuations, reduced lending appetite from the banking sector and elevated risk premium driven by the uneven recovery across real estate property types and geographies. In the third quarter, TRTX's investment activity accelerated. We closed $279 million of new investments during the quarter, another $197 million subsequent to quarter end. And beyond that, we currently have over $670 million of loans expected to close in the fourth quarter. To dimension our investment momentum this year, when you combine our closed loans year-to-date of $1.1 billion and the loans we expect to close in Q4, this totals over $1.8 billion of new investments during 2025. This steady growth in activity will drive TRTX earnings growth and demonstrates the offensive posture of our investment platform. We continue to lend primarily on multifamily and industrial assets, which represent approximately 91% of the $1.1 billion of our closed and in-process investments. For loans closed in the third quarter, we averaged 65% loan-to-value ratio and a credit spread of 3.22%, which speaks to the attractive credit risk profile we can source in the current investment environment. Our investment activity would not be possible without TRTX's stable credit profile and substantial liquidity, coupled with the investment insights of TPG's integrated debt and equity investment platform. While we were very active on the investment side, we continue to enhance our liability structure as evidenced by last week's pricing of our latest series CLO, FL7. This $11-billion transaction represents our latest match term nonrecourse non-mark-to-market financing with 30 months of reinvestment capacity. Since both FL6 and FL7 were issued in 2025 and have 30-month reinvestment periods. These 2 vehicles will provide for the next 30 months, approximately $1.9 billion of financing capacity at a blended cost of funds of SOFR plus 1.75. These stable, cost-effective, flexible financings will accelerate earnings growth and provide substantial ballast for years to come. This quarter's operating results and investment activity demonstrate TRTX's continued ability to deliver on its strategic goals. Year-over-year, our loan portfolio has grown by $1.2 billion or 12% net. We intend to continue our growth in a prudent manner. TRTX shares currently trade at a 20% discount to book value, which we believe offers substantial value. This value continues to be realized as we pull the many levers for growth, including deploying excess liquidity and prudently increasing our debt-to-equity ratio to meet our full investment objectives. Combining these growth levers with the differentiated sourcing and investment capabilities of TPG's integrated real estate platform fuels our ability to create value for TRTX shareholders. With that, I'll turn the call over to Brandon to discuss our results. Brandon Fox: Thank you, Doug, and good morning. Before I review our third quarter operating results, I also want to recognize Bob and his impact on TRTX, TPG and my professional career. Through his tenacity and commitment, Bob's reach and influence is felt across TRTX and TPG. His mentorship over our 7 years together has been invaluable to me, and I wish him all the best. Thank you, Bob. For the third quarter of 2025, TRTX reported GAAP net income of $18.4 million or $0.23 per common share and distributable earnings of $19.9 million or $0.25 per common share, covering our quarterly dividend of $0.24 per common share. Book value per common share increased quarter-over-quarter to $11.25 from $11.20 due to our share repurchase program and another solid quarter of operating results. Our operating results reflect the continued execution of our investment strategy, which is supported by our nimble capital allocation approach and durable liability structure. During the third quarter, we originated 4 loans with total commitments of $279.2 million at a weighted average credit spread of 3.22%. We received loan repayments of $415.8 million, including 6 full loan repayments of $405.8 million across our loan portfolio. These repayments were primarily multifamily and hotel loans originated in 2021 and 2022. These par loan repayments continue to demonstrate the ability of our borrowers to execute their business plans and validate the credit performance of our loan portfolio. We repurchased 1.1 million common shares for total consideration of $9.3 million or $8.29 per common share, generating $0.04 per common share of book value accretion. In total, the company repurchased 3.2 million shares of common stock at a weighted average price of $7.89 per share, resulting in $0.13 per share of book value accretion in the current year. We remain a market leader in optimizing our capital structure. On Monday, we announced the pricing of TRTX 2025 FL7, a $1.1 billion managed CRE CLO, which will settle on or about November 17. The company marketed to institutional investors approximately $957 million of investment-grade securities that will provide TRTX non-mark-to-market, nonrecourse term financing. FL7 includes a 30-month reinvestment period, an advance rate of 87% and a weighted average interest rate at issuance of term SOFR plus 1.67% before transaction costs. Simultaneously, with the issuance of FL7, we expect to redeem TRTX 2021 FL4. The FL7 issuance and FL4 redemption are expected to produce roughly $100 million of liquidity to fund new loan investments. We ended the quarter with near-term liquidity of $216.4 million, consisting of $77.2 million of cash-on-hand available for investment, net of $16.4 million held to satisfy liquidity covenants under the company's secured financing agreements; undrawn capacity under secured financing arrangements of $78.6 million and collateralized loan obligation reinvestment proceeds of $44.2 million. Our net earning assets have grown year-over-year by $377.3 million or 12%, driven by $1.2 billion of loan originations. At quarter end, our loan portfolio was again 100% performing with no negative credit migration. Our weighted average risk rating for the loan portfolio is 3.0, consistent with the prior 7 quarters. Our CECL reserve decreased by $2.6 million quarter-over-quarter, primarily due to loan repayments, while the reserve rate of 176 basis points is flat from June 30. The company's liability structure is 87% non-mark-to-market, reflecting our long-held preference for liabilities that are stable, long-dated and low cost. Total leverage was flat quarter-over-quarter at 2.6x. At quarter end, we had $1.6 billion of financing capacity available to support loan investment activity, and we're in compliance with all financial covenants. Our third quarter operating results again demonstrate that the company's disciplined approach to capital allocation, asset management and capital markets execution will continue to deliver quality earnings growth and enhanced shareholder value. We remain focused on sustaining our momentum to further narrow the current share price to book value discount. With that, we welcome your questions. Operator? Operator: [Operator Instructions] First question comes from Steve Delaney with Citizens JMP. Steven Delaney: First, Bob, congratulations to you on a wonderful career and all the best in what I would call your semi retirement, given that you're going to remain an adviser, a trusted adviser. So, this is a special call for just that reason. Brandon, I'm just curious, when you look at the portfolio, which is performing exceptionally well, but at $3.7 billion, when you look at that and you look at your 2.6 debt-to-equity, do you feel that the company has some amount of organic portfolio growth available to it with the current capital base? Brandon Fox: Thank you for your question. And I do believe that, that is the case. We have previously discussed the potential growth of the balance sheet as it's currently constructed. In June, we put out materials that show as you lever the company's balance sheet to 2.5, 3, 3.5x that there's incremental DE growth on a per share basis of $0.04 to $0.06 depending on the ROEs of the loans originated and timing of when that occurs during the quarter. Steven Delaney: This afternoon, we'll hopefully get a cut from the Fed. As you -- and your partners there, as you talk to borrowers, do you feel that there are -- there is CRE equity money for transitional properties that is sort of waiting for a more attractive rate environment? And would you expect not just this one 25 basis point cuts, but if we get 3 to 4 over the next year, like a lot of people are expecting, do you see a significant increase in demand for your primary bridge loan product? Doug Bouquard: Yes. It's an important question. This is Doug, by the way. I think that from an investment activity perspective, we're already starting to see some of that acceleration. I mentioned that when you combine the loans that we closed this past quarter, what we have closed thus far in Q4 and what we have signed up, that totals about $1.1 billion just in Q1 and -- sorry, just in Q3 and Q4 of this year. So we're kind of starting to see some of that. As I look forward to the next year, I think there's sort of a few things that I expect will increase the demand for our product. I think, one, SOFR actually going lower, I think, will be a big driver. That will probably on the margin push some of those acquisition dollars for transitional assets into our sector, one. And then two, simply put is there's more -- as there's a reduction in interest rate volatility is when you tend to see more appetite for real estate transactions, generally speaking. So I think when you think about our current pipeline and portfolio, I think as I've shared in prior quarters, it's been, I'd say, predominantly refinance focused, typically, give or take, about 80%. And what we're expecting, at least for next year is to have perhaps a little bit more balance between acquisition activity and refinance activity, driven again by part of what the Fed's actions will be. But also, there's just kind of to my earlier comments about broader asset classes, there is -- there's been a pretty dramatic rally across all asset classes globally. I would say that real estate has not fully participated in that rally. And I think it does put our asset class at a particularly attractive spot in terms of risk appetite. Operator: Next question, John Nickodemus with BTIG. John Nickodemus: And before I start, I just want to congratulate you, Bob, on a fantastic career at TPG and elsewhere. Always was a pleasure working with you since we started picking up coverage. First off, similar question to what Steve led off with. Obviously, saw leverage stay flat quarter-over-quarter. Brandon, you just noted the sort of pickup in earnings power from raising that leverage. So I was curious, both headed into the end of this year as well as next year, given the new CLO, given what appears to be a ramp in origination volumes, sort of how you see the cadence of that leverage as we assume going up both at the end of 2025 and into 2026, just how you're thinking about the timing there? Doug Bouquard: Sure. Yes. I think what Brandon alluded to back to that kind of path to growth chart, does map out, again, a bit of as we lever up and frankly, how that can flow into DE. I think that what you're seeing within, let's call it, this quarter, and I think thus far, what we've seen so far in Q4 is the -- you're not really seeing that kind of full earn-in of our new investment activity because even in Q4, exactly what we're seeing is that the repayments for Q4 have largely happened within the sort of first half of the quarter. And the bulk of the new investments, we expect will close towards the end of the quarter. So as we're -- I think one of those players in the market who is pretty meaningfully growing our balance sheet. We will have that lag that can be 45 to 60 days in between when loans pay off and when we make new investments. And we continue to want to kind of keep that day count as short as possible. But that's a little bit of what you're seeing, I'd say, Q3 earnings, and I think that will be a dynamic over the kind of coming quarter or 2 as we continue to kind of scale and grow our balance sheet. John Nickodemus: Great. That's really helpful for us. And then my other question, a little more minute here, but noticed that your largest new loan of the quarter was actually on the Nashville hotel. This has been in recent quarters, an area that you've been reducing exposure. Obviously, you have been more focused on multifamily and industrial. So just curious what went into this loan, if it was just sort of a unique opportunity, just kind of something that caught our eye when we were looking through the new loans for the quarter. Ryan Roberto: Sure. This is Ryan. As you know, as you said, we have been reducing some exposure to hospitality over time as we've seen repayments accelerate in that sector for us. And this was just an unique opportunity to lend on a very high-quality asset to a high-quality borrower where the business plan has largely been completed at that point in time. So a good ROE for the company and an interesting investment per se. Operator: [Operator Instructions] Next question comes from Rick Shane with JPMorgan. Richard Shane: Bob, I'm sure we'll catch up afterwards. But I think we've followed your companies for approaching 20 years, and it has truly been a pleasure. Really appreciate all of the wisdom and consideration over the years in terms of thoughtfulness, so thank you. As we think about the levers that are available, you've had questions today about whether or not you can take operating leverage up. You've done a great job managing down nonaccruals. So the portfolio is accruing. Is the opportunity at this point to enhance ROE a function of taking down that REO portfolio, having more leverageable capital there and obviously having a portfolio that no longer drags earnings. Is that the next leg as we move forward in terms of enhancing ROE? Doug Bouquard: Yes. No, I think that's really not the path specifically. I think that it really is just net balance sheet growth is the single most important driver. I think unlike many of our competitors, our REO portfolio is really not a material drag in terms of our DE. I think more of what really will frankly drive our growth is just the growth in our net balance sheet over time. Our liquidity position continues to get further buttressed even by this recent series CLO. So I think for us, the next kind of coming quarters will be focusing on just frankly growing our balance sheet and really moving our debt-to-equity ratio up from -- we've kind of been in the mid-2s recently. And I think getting closer to 3, 3.5 over time is really -- that's the important driver, frankly, less so in terms of REO dispositions. Richard Shane: Got it. Okay. And that's helpful. I appreciate the specificity. I wasn't -- perhaps I misunderstood the earlier answers, but I wasn't as confident about increasing that leverage until the specificity of answers. That seems to me to be where the opportunity is. And is part of this a function of the CLO market is going to, given the efficiency there, give you incremental leverage based on sort of recent transactions? Doug Bouquard: Yes. No, that definitely does give us more leverage, one, and also that it both gives us more leverage, but also it lowers the cost of capital of the company. And the deal has priced but has not closed yet. So these are all things that you'll start to see flowing through in coming quarters. Richard Shane: And Bob, like I said, we'll catch up later, but thank you for everything over the years. Robert Foley: Thank you. Operator: I would like to turn the floor over to management for closing remarks. Doug Bouquard: Thank you, everyone, for taking the time this morning, and we look forward to updating you on further progress in the future. Thank you very much. Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gates Industrial Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Rich Kwas, Vice President of Investor Relations. Rich, the floor is yours. Richard Kwas: Greetings, and thank you for joining us on our third quarter 2025 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO. Before the market opened today, we published our third quarter 2025 results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast and is accompanied by a slide presentation. On this call, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website. Please refer now to Slide 2 of the presentation, which provides a reminder that our remarks will include forward-looking statements within the meaning of Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we've described in our most recent annual report on Form 10-K and in other filings we make with the SEC, including our Q2 quarterly report on Form 10-Q that was filed in July of 2025. We disclaim any obligation to update these forward-looking statements. This quarter, we will be attending the Baird Global Industrial Conference, the UBS Global Industrials and Transportation Conference and the Goldman Sachs Industrials and Materials Conference and look forward to meeting many of you. Before we start, please note all comparisons are against the prior year period unless stated otherwise. And now I'll turn the call over to Ivo. Ivo Jurek: Thank you, Rich. Good morning, everyone, and thank you for joining our call today. Let's begin on Slide 3 of the presentation. Gates posted solid third quarter results with positive core revenue growth of almost 2% on the macro industrial demand conditions that remain subdued. Our replacement channel grew low single digits, supported by mid-single-digit growth in automotive replacement. Our OEM sales were relatively flat. At the end market level, industrial was mixed. Globally, Off-Highway realized positive growth with stabilizing demand in construction, offsetting incremental weakness in North American and European agriculture. Commercial On-Highway declined mid-single digits, impacted by decreasing production rates in North America. Personal Mobility generated another strong quarter of growth, exceeding 20% year-on-year. Our adjusted EBITDA margin increased nicely year-over-year to 22.9%. We generated record adjusted EBITDA dollars and margin for a third quarter. Our net leverage ratio declined to 2.0x, a 0.4x reduction compared to last year's third quarter. With that, we are on pace to reduce our net leverage to under 2x by year-end. We have updated our 2025 guidance, raising our adjusted EPS midpoint to $1.50 per share. We have maintained our full year 2025 adjusted EBITDA midpoint of $780 million, while slightly lowering our core sales growth outlook at the midpoint. Brooks will provide more color and comments about our updated guidance assumptions later in the presentation. Additionally, our Board recently approved a new $300 million share repurchase authorization that will expire at the end of 2026. The new authorization replaces the prior authorization, which had over $100 million remaining. On Slide 4, we have heard from a number of you on the call that you would like to see an update on what is occurring in the end markets. So we have laid out an updated view of our underlying end markets and how they have progressed during 2025. Coming into the year, we did not anticipate a broad macro recovery, but we have continued to see uneven end market performance since we set our initial expectations for the year in February. We did, however, enter the year with some expectations that the PMIs could begin to recover in the second half of 2025. That has not emerged to date. Industrial Off-Highway demand trends have continued to languish and softened a bit relative to our expectation during the third quarter in certain geographies on reduced build rates and dealer inventory destock. Additionally, in the On-Highway end market, the North American commercial truck production levels deteriorated as the third quarter evolved. Despite some of these near-term headwinds, we are still outperforming our underlying markets and believe that many of our challenged end markets are troughing or are close to troughing. Our Automotive Replacement and Personal Mobility business continues to grow nicely, while our data center opportunity set continues to expand. As such, we are optimistic that demand in the majority of our end markets will be more stable to improving at some point in 2026. Please turn to Slide 5. Third quarter total sales were $856 million, which translated to core growth of 1.7%. Total revenues grew 3% and benefited from favorable foreign currency. As I have highlighted earlier, the end market performance was mixed in the quarter. Personal Mobility continued to trend nicely higher with its year-over-year growth rate accelerating compared to the second quarter. Off-Highway grew mid-single digits with growth in construction and agriculture globally. However, ag declined incrementally in both North America and Europe. Diversified Industrial and Energy were both down slightly and On-Highway demand was soft. Automotive grew low single digits with solid growth in auto replacement more than offset a slight decline in auto OEM. Our key growth verticals, Personal Mobility and Auto Replacement contributed to the performance. Our revenues from data center also continues to increase, although from a small base. And we see the liquid cooling opportunity in early stages of more broad-based adoption. Adjusted EBITDA was $196 million with adjusted EBITDA margin coming in at 22.9%, an increase of 90 basis points and represented a record third quarter margin rate for the company. Our adjusted earnings per share was $0.39, an increase of approximately 18% year-over-year. Operating performance contributed $0.02, while a lower tax rate and consolidated mix of other items each contributed $0.02. We believe we are effectively managing the enterprise across all aspects. On Slide 6, we will review our segment highlights. In the Power Transmission segment, we generated revenues of $533 million in the quarter and core growth of 2.3%. Most industrial end markets realized growth. Personal Mobility continues to be a strong contributor with growth exceeding 20% in the quarter. At a channel level, replacement grew with automotive and industrial channel core growth each growing low single digits. OEM sales also grew low single digits with industrial sales growth more than offsetting a decrease in automotive. We continue to invest in our strategic sales initiatives and innovation to help drive potential outgrowth in the future. Our mobility opportunity pipeline is staying robust. In the Fluid Power segment, our sales were $322 million, representing core growth of just under 1%. Many of our key end markets in Fluid Power continued to experience various levels of demand pressure, but our teams have held its own. Commercial On-Highway sales decreased mid-teens as industry inventories are elevated. Off-Highway grew with positive construction trends offsetting a low single-digit decline in ag. The agriculture performance year-over-year was worse, impacted by incremental OEM production cuts to better align our customers' inventory levels heading into the year-end. We believe the underlying ag market is troughing and should be better positioned for recovery sometimes in 2026. Replacement demand was strong, driven by double-digit growth in Automotive Replacement globally with broad-based growth across regions. Industrial OEM sales declined mid-single digits on a core basis, driven by soft demand trends in agriculture and commercial truck. Our data center opportunity pipeline exceeds $150 million and design-in activities remain robust. With respect to profitability, both segments expanded adjusted EBITDA margins at a similar rate. I will now pass the call over to Brooks for further comments on our results. L. Mallard: Thank you, Ivo. I'll begin on Slide 7 and review our core sales performance by region. The majority of our geographic regions generated core growth in the quarter, highlighted by EMEA's return to growth. In North America, core sales were about flat. The incremental demand weakness experienced in Agriculture and Commercial On-Highway during the quarter was primarily concentrated within the North American region and led to a low double-digit decline in industrial OEM sales. Industrial Replacement sales were also down slightly. Industrial was offset by growth in automotive as Automotive Replacement sales increased high single digits, supported by year-over-year growth contribution from our new channel partner. Automotive OEM sales grew low single digits. In EMEA, core sales grew 2.6%. Industrial end markets were mixed. Construction returned to growth and more than offset weak demand in agriculture. On-Highway grew while energy and diversified industrial saw declines. Personal Mobility was very strong, growing almost 75%. At the channel level, OEM sales grew high single digits, supported by Construction, On-Highway and Mobility, partially offset by lower automotive OEM. Sales into replacement channels increased slightly. East Asia and India posted approximately 5% core growth. Most industrial end markets grew. Automotive OEM sales decreased slightly, which was more than offset by high teens growth in Automotive Replacement. China core sales expanded 6% year-over-year with growth across all channels and most end markets. South America core sales declined low to mid-single digits. On Slide 8, we show the key components of our year-over-year change in adjusted earnings per share. Operating performance contributed approximately $0.02 per share, driven by core growth and higher adjusted EBITDA margin. A lower tax rate contributed $0.02 per share. Other items, including lower interest expense, lower share count and other income together generated about $0.02 per share. Slide 9 provides a summary of our cash flow performance and balance sheet metrics. Our free cash flow was $73 million and represented 73% conversion to adjusted net income. Our restructuring cash outflows have increased, which impacted our free cash flow conversion. Our net leverage ratio declined to 2.0x at the end of the third quarter, which was an improvement on a year-over-year and sequential basis. During the quarter, we paid down $100 million of gross debt. We expect our net leverage to be under 2x at calendar year-end 2025. Our trailing 12-month return on invested capital was 21.6%, an improvement sequentially as improved operating performance helped offset the impact from internal investments in high-return projects. On Slide 10, we provide our updated 2025 guidance. We have trimmed our core revenue growth midpoint to 1% and narrowed the range from 0.5% to 1.5% to reflect current macro conditions for the balance of the year. In addition, we have maintained our $780 million adjusted EBITDA midpoint and narrowed the range to $770 million to $790 million. We have raised our adjusted earnings per share guidance to the range of $1.48 per share to $1.52 per share, the upper half of our previous range. The $1.50 per share midpoint reflects a $0.02 per share increase relative to our prior guidance. Our guidance for capital expenditures is unchanged. We have lowered our free cash flow conversion outlook to a range of 80% to 90% from 90% plus as a result of increased restructuring cash outlays as part of our footprint optimization and restructuring initiatives. Turning to Slide 11. We want to provide an update of our ongoing restructuring plans as well as the strategic system conversion that we have been working on and that we expect to be complete by the middle of 2026. Beginning late in Q4 2025 and finishing by the end of Q2 2026, we expect to close multiple factories, complete a labor realignment and go live with an ERP conversion for most of our European footprint. As we complete these activities, we will be focused on providing continuity and service for our customers and our affected team members. We expect to incur additional costs and other onetime operational impacts from these projects in the first half of 2026. From a financial perspective, we anticipate an unfavorable year-over-year impact of 100 to 200 basis points to our adjusted EBITDA margin in the first quarter and a more modest unfavorable effect in the second quarter, ranging from 25 basis points to 75 basis points year-over-year. In the second half of 2026, as we look towards completion of these various projects, we expect operations to normalize and realized favorable impact to our adjusted EBITDA margin from our restructuring activities of 75 to 125 basis points year-over-year. Excluding volume considerations, we expect our footprint optimization, restructuring and material cost-out activities to generate 0 to 25 bps overall adjusted EBITDA margin improvement year-over-year for the full year 2026. We anticipate being at a 23.5% adjusted EBITDA run rate in the second half of 2026 in a volume-neutral environment. As I said, we have not taken volume impacts into this analysis and plan to update those assumptions as well as provide further insight into our restructuring activities when we initiate our formal 2026 guidance in conjunction with our Q4 earnings call in February. I will now turn the call back over to Ivo. Ivo Jurek: Thank you, Brooks. Moving to Slide 12. This is our illustrative update on our walk towards the midterm stated adjusted EBITDA margin target of 24.5%. In 2025, we have experienced a highly fluid business environment and continuation of prolonged negative PMI prints, resulting in constrained volume performance. With that as a backdrop, we now anticipate to complete our initial phase of the committed footprint optimization projects by mid-2026 and still expect that those projects will achieve 100 basis points of savings from the footprint optimization program exiting 2026. Coupled with our ongoing focus on material cost savings and 80/20, we estimate that our adjusted EBITDA margin will be nearing 24% on a run rate basis exiting next year. Most importantly, this does not assume any margin benefit from a potential broad volume recovery in our industrial end markets. While the end market volatility has not been supportive, we are very pleased with our execution and performance to date. We believe the prospects for incremental improvement over the midterm are positive, especially as the end market conditions begin to potentially inflect. With that, let me summarize our views on Slide 13. We believe we have executed well, delivering solid results given the lackluster demand environment we have encountered throughout this year. We generated record third quarter adjusted EBITDA margin rate and achieved our highest quarterly core growth rate since Q2 2023. For the year, we are on target to deliver adjusted EBITDA margin expansion and earnings growth in a muted demand backdrop. We continue to make progress with our Personal Mobility and data center strategic initiatives and believe we will encounter a better industrial demand landscape in 2026. We continue to adjust our structural cost base, and we expect our savings to begin to compound during the second half of '26 and anticipate our adjusted EBITDA margin rate to be approaching near 24% exiting next year. With that as a baseline level, we would expect any volume improvement to be additive to our margin performance. Lastly, we believe we now possess a strong balance sheet that can be utilized to support various potentially value-creating capital deployment options. Our Board recently approved a new $300 million share repurchase authorization. Separately, debt reduction continues to be an option. We just repaid $100 million of debt during the third quarter. And of course, at this juncture, our ability to execute bolt-on M&A transactions is increasing as we move towards our midterm financial leverage target. Before taking your questions, I want to thank the approximately 14,000 global Gates associates for their diligence and commitment supporting our customer needs. With that, I will now turn the call back over to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: I just wanted to maybe clear up some questions around Slide 12. So it's very clear that the 24% for 2027 is -- should be viewed as more of a floor here, right? I mean if we continue to just bump along the bottom here, 24% is where you see margins and then volume gives us some upside. I just want to make sure that, that's the case. And then maybe just kind of dig into some of these kind of costs you're flagging for the first half of the year? And what sort of benefits you see from this ERP implementation? Ivo Jurek: Yes. Thanks, Nigel. Let me take the first part of your question, and then I'll pass it off to Brooks on the ERP side and some of the other attributes of the cost question that you've had. But thinking about Slide 12, right? So that margin walk was created, if you think about it, more to provide you with an opportunity to model the impacts of the transitory costs to be incurred as a part of our restructuring program restart. And that program is intended to significantly improve our cost structure, all else equal, right? So not representative of growth forecast for our top line in '26. So to your point, this is kind of a foundational floor. We do expect growth in '26. The margin impact for the full year in our presentation deck, however, excludes any benefit from revenue growth. Frankly, because we are not providing you an updated guidance for '26 yet, as you know, we will do that at the conclusion of our Q4 fiscal year, we'll do that in January, right? So we -- look, we certainly believe that many of our end markets are at trough or close to troughing, as I said in my prepared remarks, and we believe that they will turn positive in '26. In addition, we are excited, and I said it on a number of these calls over the last couple of quarters, we are quite excited about the strategic revenue generation initiatives for next year, and we certainly expect them to contribute nicely to our growth trajectory in 2026. With that, Brooks, if you want to take the second part of the question, please? L. Mallard: So there's several things that we expect from a onetime cost perspective. Relative to the restructuring and the headcount alignment as we do the restructuring, there'll be -- we expect some additional freight costs, expediting costs, redundant labor costs and productivity costs as we move through some of these relocations, and that's normal course of business. We do expect, to Ivo's point, I want to remind everyone, a lot of the backdrop for the reason we're doing a lot of these footprint optimization activities is to support our future growth. And so yes, we're going to get a cost benefit. But even moreover, we're going to have additional capacity, both from a machinery and equipment perspective, but more importantly, more capacity from a labor perspective to ramp through the cycle. From an ERP perspective, we're replacing a fairly antiquated system with a new system that's going to provide us much more capability in terms of warehouse management, in terms of managing the front end of the business to the back end of the business. But we really haven't built any of those benefits into our outlook. We've been very neutral on building those benefits in, but we definitely expect to improve our efficiencies and capabilities and again, support the strategic initiatives of the company with the ERP. But it does take -- we do think it will take us the first half of the year to get that all lined out, which is why we wanted to be transparent and provide you an update of the cost and the impact associated with those activities. Nigel Coe: Yes, we definitely appreciate that. Just wanted to double-click on growth. You mentioned growth about 4x or 5x there. What kind of tailwinds or visibility do you have right now on some of the structural growth vectors like data center, Personal Mobility. I'm guessing you're going to have some price carryforward for next year. But more importantly, when you talk about the bottoming in some of these Off-Highway, On-Highway markets, how much visibility do you have on production schedules for your OEM partners? And do you have any visibility on maybe kind of a turn in production for those end markets? Ivo Jurek: Yes, sure. So look, great question, Nigel. Thank you for asking that. Very, very optimistic, as you probably noticed over the last couple of earnings calls about some of the growth vectors such as Personal Mobility and liquid cooling and data centers. The Personal Mobility, I think on the last call, we suggested that we anticipate kind of over the next 3 years. And again, while that's not going to be every quarter, I want to kind of remind everybody that things are not always linear, right? But if you kind of take next 3 years, Personal Mobility, we anticipate Personal Mobility to grow kind of 30% year-on-year compound annually between kind of '25 and '28, right? And there will be time that it's going to grow 22% to 25%. There will be time that it's going to grow 35%. But on aggregate, we believe that, that's going to grow about 30% compound annually. And we have that confidence because of the design wins that we've been talking to you about over the last couple of years. The destock post-COVID has occurred. And obviously, we are delivering a real nice acceleration to the growth trajectory, and that will continue into the next couple of -- 2 to 3 years. So we are quite positive about that. We've talked about the accelerated adoption of liquid cooling. And while I'm not ready to give you a forward-looking revenue forecast for '26 today, and I'll do more of that on our next call, we are seeing tremendous amount of activities out there. And there are some real positive attributes because what we are realizing is there's more cooling that's required, not less in the projects that we are involved with. And we are seeing pretty substantial growth across the various customer base in the design-in activity. And that's a really good precursor into what will be occurring over the next 12, 24, 36 months. So think about it kind of in a similar vein as when we were discussing Personal Mobility. So we believe that over the next 1 to 2 quarters, we're going to be giving you some more tangible attributes associated with the dollars and cents about what that's going to represent in '26 and '27. But so far, quite optimistic about what we see there. Our Automotive Replacement market, while we don't necessarily talk about it as necessarily a growth torque, we have been growing that market quite substantially and quite nicely over the last couple of years, provided a great deal of stability for our revenue generation, and we believe that, that's going to continue as we move into '26, '27 and '28. There's still plenty of opportunity, plenty of firepower left to be able to continue to grow that market in that kind of 2% to 3% range, which is rather nice for kind of more mature type level of applications. So put that aside from kind of the incremental over and above, if you would, growth trajectory to kind of your standard base. Then when I take a look at some of our more traditional end markets, look, we certainly believe that the auto OE business, while it does not represent a significant size of our business, that's stabilizing, and we believe that we will start seeing more additive growth rates in North America and ultimately in 2026 in Europe. So we believe that those markets are stabilizing post Liberation Day announcements as these companies are starting to -- different countries are developing different agreements with our administration, and I think things are starting to stabilize there. I think people are becoming a little more optimistic about that end market. We see some positive, I would say, formation of green shoots in certainly in commercial construction end market, and we are starting to hear more positive news about what our customers expect there. Ag is still challenged, and I talked about ag actually got incrementally worse for us in Q3, while we have delivered maybe a positive core growth overall in ag, it got a little bit worse than what we've anticipated, but we do believe that, that's troughing. And that while it's not going to go off to the races in '26, it's going to be significantly less bad than it has been over the last 8 quarters. And so we are somewhat positive about that. And then ultimately, the diversified industrial market, we've talked about it being kind of more kind of bottoming out over the last couple of quarters, and we certainly believe that that's bottomed out and that should start being more accretive in 2026. So I don't want to give anybody an idea that we have come out and we have given a forecast that we will not anticipate to have an organic growth rate in 2026. We're actually quite optimistic about it, but we just wanted to give you a visibility on modeling of certain structural cost removals that are going to be going in and out over the first half of the year and resetting our cost structure, becoming more competitive and giving ourselves the opportunity to actually support the growth rate, which we are very optimistic about. Operator: Your next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: I wanted to circle back on Slide 12 again. I know you've given this as a margin walk. But -- and I don't know if you provided this previously, but can you give us some dimensions of the restructuring? Like how many plants, where are they? What kind of headcount reduction, the dollar amount being invested and the dollar kind of payback cadence? I know you're providing it as a margin, but it would be helpful if you provide that dimension to it as well. Maybe you're restricted. I know if it's outside the U.S., you've got some works council, but maybe if you could start there, that would be helpful. L. Mallard: Yes. So look, Deane, it's fairly complicated because it's a combination of -- if you remember when we said we were doing the restructuring, it was mostly around North America and EMEA, right? So we'll kind of leave it at that we're closing multiple factories, and there'll be hundreds of affected employees. I would say the payback generally ranges from 1 to 2 years, depending on the amount of severance, the amount of move, the amount of investment that we need to make. When we talk about the headwinds, just to kind of size it, we talked about the 100 to 200 bps and 25 to 75 bps that's kind of a $30 million to $35 million onetime expectation for the first half of 2026. And that also includes the system conversion and all the costs associated with that. And so from a -- I would say the other part, if you think about our increased capital spend over the past couple of years, that's part of the investment as well, right? And so if you look at what we spent over the past couple of years, you could say maybe $20 million last year, $20 million this year. So that's part of the investment as well. So when you calculate all that up, that kind of gives you that 1- to 2-year payback, again, depending on the timing of when the projects get implemented and when the savings come through. And as I said, we feel as we exit the second half of '26, that the first part of all that restructuring will be complete, and you'll see the flow-through in the second half. But let me also say that we're still working on additional projects. And there's still money that we're spending right now that's kind of part of that group that investment I talked about that we haven't put into our run rate yet that we haven't disclosed yet, right? Because we -- when you think about the back half of the year, there's probably $5 million per quarter, so $10 million in the back half of the year of savings, which will also roll over into the first half of '27. So that's kind of $20 million or half of the $40 million. So we're still working on the other half. And those projects will be implemented, and we'll disclose those here over the next year or so. Hopefully, that kind of gives you enough color in terms of how all those things are working. Deane Dray: Yes, it really did. I appreciate that additional color. And then as a follow-up, I was hoping you could take us through kind of the tariff impact, pricing? And do you see any -- and it sounds like there could be some volume falloff because of some demand destruction, but just kind of where does tariff stand on a net basis? L. Mallard: So let me take the cost piece, and I'll let Ivo talk about the volume piece. So from a cost basis, we're okay in terms of the total EBITDA impact. What I would say, though, as you look at some of the gross margin dilution in the back half of 2025, and that will fall through to EBITDA dilution. We're probably seeing 30 to 40 bps of dilution because we're not getting anything in terms of bottom line add from the tariffs, right? We're just kind of holding our own and making sure that we don't cost ourselves money. So the impact from a profitability perspective is kind of 30 to 40 bps, $0 from a total EBITDA dollars perspective. And then I'll pass it over to Ivo to talk about the volume piece. Ivo Jurek: Yes, Deane, I think that that's -- I'm not sure whether I would call it volume destruction or what have you, but I think I would probably call it more of a short-term transitory growing pains. I believe that there's probably some impact to ag in particular. Certainly, the trade environment has gotten more challenging, particularly for farmers. And that's kind of what we have seen in terms of probably delayed recovery in ag overall. And as I said on the call, ag in Q3 got slightly worse than what we've anticipated at the beginning of Q3 around the edges, but we do believe that, that market will also start normalizing as we enter '26 and sometimes during '26, it should start getting a little less negative. So around that, I think that you're starting to see more stabilization around the auto businesses. Overall, I think you start seeing forecast maybe getting a little more positive in terms of production output by the carmakers. So I think that some of those transitory headwinds are probably abating. And as we enter '26, I think the environment should be more stable. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe just the first question, trying to drill into perhaps a little bit the sort of exit rate from 2025. Just looking at the fourth quarter, for example, you mentioned Ivo was sort of firming of the industrial environment in the prepared material. But I think the revenue guide seems to embed sort of fairly normal seasonality for the fourth quarter. Just wondered if you could clarify that? And then similarly on kind of the EBITDA rate in the fourth quarter, often down sequentially. I think this time, it's sort of flat to up. Just wondered if there was anything to call out there in terms of enterprise initiative benefits or mix or something. Ivo Jurek: Yes. So look, Julian, I think that you said it correctly. I mean we -- if you think about our Q4 revenue, it really is kind of taking exit rate Q3 environment, applying normalized seasonality. So there really isn't anything peculiar. I wouldn't say that we have baked in any further recoveries. We're obviously very cautious around ag but we're taking that present environment, and we say you're probably not going to really see any tangible change in Q4 and taking into account that many of these end markets, many of our customers have had somewhat challenging years. I don't see anybody trying to preposition themselves for 2026. And that, in a way, I would say, is positive that folks are not prepositioning themselves. I think that people are now focusing more on '26. And we are seeing -- or we are hearing certainly more kind of an optimistic outlook about '26 in certain segments of our business. So that being said on the on the demand. And I'll let Brooks chime in on the EBITDA for Q4. L. Mallard: Yes. So from a Q4 perspective, we're still seeing some -- we're seeing some of our initiatives roll through around material costs. That's sort of -- that's offset by some of the tariff dilution and kind of normal seasonality in terms of Q4. We're pretty -- I think we're pretty happy with where our inventories are in terms of service and then building -- being ready for some of these activities in Q1. So we're not building significant inventories as we head into the end of the year. So all in, nothing -- some puts and takes, right, in terms of things working in our favor, other things that we're taking on and making sure that we're able to deliver EBITDA growth year-over-year, but nothing structurally different as we end the year. Ivo Jurek: But Julian, we are also executing rather well, right? I mean we had 18% EPS growth in Q3, record level of margins in a reasonably muted end market environment. So I think that the organization is doing a good job in managing during some of these challenging times and frankly, delivering differentiated operating results. Julian Mitchell: Great. And then just one quick follow-up on the sort of cash conversion. I think you walked down the guide a bit there. There's some higher cash restructuring. Should we expect much improvement in conversion next year? Or no, because of the EMEA and North America restructuring charges will sort of weigh on next year? L. Mallard: Yes. We'll have to take a look at that. I mean I would think that the bigger part of what's affecting us in 2025 is the restructuring charges that get -- that are an add-back to adjusted EBITDA and adjusted net income, but flow through the free cash flow and then the higher CapEx as well. I would say that we're going to continue to spend CapEx, although I would imagine it starts to dial down just a tad in 2026. And we'll probably see some small headwinds related to the restructuring cash out versus how it shows up in adjusted net income, but probably not as much as we do this year. And again, we called out the headwinds. Those are going to show up in the numbers and show up in the cash. And so that won't really affect the overall cash conversion number because those will be in both places. So we'll update that, and we'll make sure that we call that out specifically when we update our guidance for 2026. But again, that's really just a kind of -- it's in one number. It's not in the other number. And so it's a little bit out of balance. We need to make sure we call that out in our cash conversion. Operator: Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Appreciate all the color. So just to kind of put a bow on this noise around margins and the margin bridge because I think that the message is getting confused that next year is a transition year and maybe your long-term target is getting pushed out. It seems like to me, you had said to get to your margin target, you needed 100 to 150 basis points from volume, and that hasn't played out. And it seems like you've maybe outperformed on internal execution, material savings and the volume has been the whole, but maybe just level set me on that. Ivo Jurek: I think, Jeff, you said it perfectly. We've actually -- we're actually delivering on our midterm targets without getting any help from the underlying macro. And we feel really good about that, right, because it's really tough to execute in such negative PMI environment. And so I think that there was the point of delineation where we wanted to ensure that we communicate to the market that the company is executing well. We certainly believe that the volume is going to inflect. We all certainly know that we -- none of us are very good at being able to call the inflections in the macroeconomics, taking into account that there are so many different moving pieces associated with trade policies and industrial policies and kind of the global behavior of these end markets itself. But I think all of us would anticipate that after 36 months of negative PMI, we would be on a verge at some point in time to see some inversion. And when that occurs, obviously, that's incremental to what we have described in our presentation. Jeffrey Hammond: Okay. Great. And then just on capital allocation, I sense a little bit of a tone change where you've kind of been saying before, hey, we're just going to buy back our stock. The market doesn't appreciate what we're doing here and the multiple hasn't expanded relative to our peers. But now it seems like you're maybe talking a little more about bolt-ons. And so am I reading that right? Or do we lean in on a day where our stock is down 6% and the market is confused? Ivo Jurek: Yes. Look, I mean, our stock is -- I think our stock is inexpensive. It's trading at a valuation that is not akin to the performance that the company is delivering. So we'll certainly lean into buybacks. The Board authorized $300 million of buybacks. So we'll certainly be utilizing what we can. But the company as well is generating tremendous amount of free cash flow. So I think that we can do all of the things that have been outlined as plausible outcomes for capital deployment. We've bought back -- I mean, we've paid down some more debt. We will be strategic about buying back our stock, but we also believe that as our balance sheet is trending towards below the 2x leverage that we have kind of put in a place as a demarcation point for us. And so hopefully, I won't have to be talking about leverage in the future. We believe that we can use all 3 levers for capital deployment, and we will be leaning more aggressively towards bolt-on M&A. Operator: Your next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: You've been talking about accelerating footprint optimization and doing 80/20 since your Investor Day 1.5 years ago. But obviously, your growth since then has been somewhat slow. So I'm just trying to figure out if you're accelerating or enhancing any of your restructuring plans versus when you updated us at that Investor Day. And then maybe can you update us on how 80/20 is impacting Gates as you go into '26 and beyond? If you do organically grow, can you do core incrementals over 40%? Ivo Jurek: Yes. Look, I think that we've -- I want to kind of be fully transparent, right? So as Liberation Day came forward in April, we kind of took a little pause to try to understand what will the new mercantile regime look like? And how do we think about our overall operating structure as a company. And obviously, we have been in region for region for a long time. So we just wanted to reassess and get a better sense of what is happening in the world. I think that as we got more comfortable with what we are seeing and how we are organized, we've come to a conclusion that our original plan was the right plan. As Brooks indicated, we need to be capable of having an access to labor that will give us an ability to flex up and down as these cycles occur. We believe that we are on the verge of an up cycle. So we've got to be positioned well to support the growth that we anticipate over the next upcoming up cycle. And so we are really just executing on our original plan, Andy. Nothing really has dramatically changed around what we have anticipated vis-a-vis our footprint optimization and restructuring. So we are -- I think we are in a very, very good shape, and it also validated that our plan was the right plan. We just needed to hit a pause for a couple of quarters. So that's kind of beyond us, and we are moving forward. As to 80/20, look, 80/20 material cost reductions and driving a better operational focus has been really the attributes that have given us the opportunity to outperform what we've anticipated during our Capital Markets Day in 2023 and still deliver on our midterm targets without the growth. So it's a very powerful tool. We again believe that we are very early innings. We take a look at somebody like ITW that has been doing it for over a decade plus, and they continue to deliver good margin expansion. We believe that we not only have the opportunity for a very certainly intermediate future to continue to support 80/20 as the key attributes of our enterprise initiatives to add to our profitability, but also grow our franchise through our strategic growth verticals. So we think that we can do both, and we think that 80/20 is going to be very additive to us. And if you exclude the benefits from restructuring, and again, I want to be very specific. If you exclude the benefits that we have described on Slide 12, we still believe that in a normalized growth environment that we anticipate kind of in '26 and beyond, we should be generating 30% to 35% incremental over and above the benefits that I described on that page. Andrew Kaplowitz: Ivo, that's helpful. And then just in terms of growth by region, I think you explained what's going on in North America well. But you also mentioned EMEA returned to growth, which is interesting, and China continues to put up durable growth for you guys. So maybe you could sort of click on or give us a little more color about what you're seeing. Ivo Jurek: Yes. Look, I mean, I think that North America has been probably most challenged from kind of agriculture end market exposure that got slightly worse. And remember, we -- it wasn't a ton of dollars that we -- that it got around the edges less supportive than what we've anticipated. So it's just around the edges, less supportive there. The other end markets, look, I mean, automotive overall grew nicely. Automotive Replacement grew really well for us in North America. Our Industrial Replacement market is growing. So the things are not -- they're not bad in any form of imagination. They're kind of around what we've anticipated with maybe slightly worse behavior in the ag environment. South America has been tough last quarter, but it's been predominantly tough after extraordinary several quarters or maybe 6 quarters of significant growth. So it's kind of a more normalization. And we again anticipate that South America is going to start moving into the growth phase as we kind of exit '26 -- I mean, '25 into '26. Yes, I mean, Europe has been a little bit surprising to us, right? I mean it's behaved a little bit better than what we've kind of envisaged with positive core growth. I would say that the auto markets are quite negative in Europe. I don't think I'm telling you anything that has not been already communicated, but our AR business is performing well. Our industrial first-fit, particularly around the commercial construction segment and mobility has been performing quite well. And IR has been stabilizing and starting to perk up a little bit in Q3. So maybe around the edges, more green shoots than less. And China has been okay. Automotive has been doing quite all right for us in China. Industrial Replacement has been doing quite all right for us. So China has been behaving more or less as we have seen over the last several quarters. And then East Asia and India is growing. I mean we are growing nicely. Our Automotive Replacement business in India. The industrial first-fit business is doing well. I mean I think that India is poised to continue to be on a trajectory of nice growth with the overall economy evolving nicely and becoming a real alternative to China over the midterm. So we are quite optimistic about what we can see out of India in particular. So overall, we're actually reasonably tending to be more optimistic than less. And we believe that '26 should be more positive than perhaps might have been taken out of our release today. Operator: Your next question comes from the line of Tomo Sano with JPMorgan. Tomohiko Sano: I'd like to ask about the data centers. And of the $322 million in Fluid Power revenue this quarter, how much was related to data center sales? And what is your expectations for 2025 data center revenue and the conversions of your $150 million plus pipeline in 2026, please? Ivo Jurek: Yes. We are not going to be addressing exactly the revenue flows because it's still reasonably a small size of revenue that is growing rather nicely for us, but from a very, very small base. So I don't think it's worth to -- at this point in time to spend time yet on the sizing of this. It's in the millions, not in the tens of millions yet. Our design-in activities remains very, very robust. I mean, we see a significant number of new customers that are coming to us, and we are working with on new design-in opportunities. And we will be providing you with some additional color in January or early February on our Q4 earnings call. But we do continue to be quite optimistic that the data center growth as a vertical is going to ramp up rather nicely. And we still feel that, that $80 million to $200 million, $100 million to $200 million by 2028 is certainly -- doable for us as an intermediate target for us over the next 2 to 3 years. We also incidentally are going to be at the show Supercompute next, I think, 2 weeks from now in St. Louis. So we would invite anybody to still buy and have a conversation with us about some of the new products, innovation, and we can provide additional color on what we are working on from a technology perspective there as well. Tomohiko Sano: And a follow-up on pricing perspective. Could you talk about how effective you have been in passing through cost inflation in Q3? And what is your pricing strategy for 2026, please? L. Mallard: Yes. Well, look, I mean, we've -- going back, I mean, we've always been, I would say, as effective as anybody in terms of passing pricing through from an inflation perspective. We -- when the tariff -- all the new tariffs came out, for the most part, we're able to cover that with pricing. I mean there are certain regions that are a little bit more pricing challenged, particularly in Asia, where we're able to offset it more operationally than through pricing. We've always been very transparent in terms of we're going to cover material utility inflation on a yearly basis with pricing. And then the 80/20, when we implemented 80/20, we added a value pricing lever to our pricing kind of tactical approach. We make hundreds of thousands of SKUs, right? And so some of these SKUs, you want to be more competitive on. Some of them, you're the only ones that make it and you can price those based on the value you bring because you may be the only one that makes that particular part. And so we continue to use our 80/20 playbook to optimize pricing. And in the aggregate, we're always going to make sure that we use pricing to cover our material and utility inflation. Operator: That concludes our question-and-answer session. I will now turn the conference back over to Rich for closing comments. Richard Kwas: All right. Thanks, everyone, for joining. If you have any further questions, feel free to reach out. Otherwise, have a great rest of the week. Take care. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Everyone, thank you for standing by, and welcome to the TE Connectivity Fourth Quarter and Final Results Earnings Call for fiscal year 2025. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead. Sujal Shah: Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full year results and outlook for our first quarter of fiscal 2026. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. Now please note that we are making a change in our non-GAAP reporting with the start of our fiscal 2026 year. The fourth quarter and full year fiscal 2025 financial results that we will discuss in today's call do not reflect this change. However, beginning in fiscal 2026, we will exclude amortization expense on intangible assets from certain of our non-GAAP financial measures, and this change is reflected in our Q1 guidance. We have recast the financial information of the quarters of 2025 and 2024 to ensure an apples-to-apples comparison of our results going forward, and this is provided in the slide appendix and in an 8-K that was filed this morning. Also, as a reminder, we will hold our Investor Day event on November 20 in Philadelphia with a product showcase the evening before. We're excited to convey opportunities for growth and further value creation for our owners and are looking forward to seeing many of you at the event. Note that we will also have a live webcast for those who are unable to attend in person. And finally, during the Q&A portion of today's call, due to the number of participants, we're asking everyone to limit themselves to one question, and you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments. Terrence Curtin: Thanks, Sujal, and thank you, everyone, for joining us today. Before I get into the details on the slides, I do want to reinforce a few key takeaways upfront. First off is that our strong momentum is continuing with quarterly and full year records for sales, earnings and free cash flow in what continues to be an uneven macro environment. We also continue to demonstrate the strategic positioning of our portfolio, benefiting from the secular growth trends in a number of our businesses, and we'll talk about these as we go through the discussion of our results today. We also continue to demonstrate operational resilience with our global manufacturing strategy where we've invested heavily to ensure in-region support of our customers, and we are set up for this strong performance to continue into fiscal 2026. We expect to continue executing on our long-term value creation model, and we'll click down and provide more details at our Investor Day next month. So with that as a backdrop, I would like to get into the presentation, starting with Slide 3, and I'll discuss fiscal 2025 results and our guidance for the first quarter of fiscal 2026. Our fourth quarter sales were above our guidance at $4.75 billion, growing 17% on a reported basis and 11% organically year-over-year. Both segments contributed to our sales being above guidance. We also saw orders increase in both segments to $4.7 billion, and this was an increase of 22% year-over-year, and it was up 5% sequentially. We delivered adjusted earnings per share of $2.44 that was above our guidance due to the strong execution by our teams and increased 25% versus the prior year. Adjusted operating margins were 20%, increasing 130 basis points year-over-year. And lastly, in the quarter, free cash flow performance continued the strong momentum that we've seen throughout the year and was $1.2 billion in the fourth quarter. So let me transition to full year results. Full year sales were a record at $17.3 billion, growing 9% on a reported basis and 6% on an organic basis. In our Industrial segment, we saw 24% reported growth, benefiting from bolt-on acquisitions that we made this year. On an organic basis, segment growth was 18% and capitalized on the strong demand for artificial intelligence and energy infrastructure applications. In Transportation, we continue to demonstrate our strong global position with strength in Asia that drove content growth from increased data connectivity and growth of the electrified powertrain in that region. We achieved record earnings in fiscal 2025. Adjusted operating margins were essentially 20%, expanding 80 basis points year-over-year and adjusted earnings per share was $8.76, increasing 16% versus the prior year, driven entirely by the strong sales and margin performance. We continue to demonstrate the strength of our cash generation model. We delivered free cash flow of over $3 billion with conversion levels of well over 100%. This strong cash generation gave us the flexibility for record capital deployment with over $2 billion returned to shareholders and $2.6 billion used for bolt-on acquisitions during the year. As we look forward, order levels support our outlook for double-digit growth in the first quarter. We are expecting our first quarter sales to be $4.5 billion, reflecting sequential seasonality that we typically see and increasing 17% year-over-year on a reported basis and up 11% organically. We expect adjusted earnings per share to be around $2.53 in the first quarter, and this will represent growth of 23% year-over-year. Now if you could turn to Slide 4, let me get into order details. In the quarter, we saw orders of $4.7 billion with growth year-over-year and sequentially in both segments. On a year-over-year basis, we saw organic order growth across all regions. And on a sequential basis, growth was driven by automotive, digital data networks and energy. Touching on the segment. Transportation orders increased 9% versus the prior year, driven by auto growth in all regions. In the Industrial segment, orders increased 39% year-over-year, reflecting ongoing momentum in DDN as well as our energy and AD&M businesses. Also one thing to highlight in our orders, we did see order rates improve in the general industrial end markets, and we believe this indicates stability. Now let me get into the segment quarterly results. And if you could turn to Slide 5, I'll start with Transportation. Our auto sales grew 2% organically in the fourth quarter, with growth in Asia of 11% being offset by declines in Western regions of 4%. Our growth over market reflects the ongoing regional dynamics that we've seen all year and have impacted our growth over market. As we look forward, we expect global auto production to be 87 million to 88 million units in fiscal 2026, with content growth being driven by key wins for our leading-edge products and technology around data connectivity and electrification of the powertrain. We continue to benefit from our strong global position and localization strategy, which enables us to serve our global customer base. Turning to Commercial Transportation. We reported 5% organic growth, and this was driven entirely by growth in Europe and in Asia, which was offset by ongoing weakness that we see in North America. And in our Sensors business, we saw weakness in end markets in Western regions that were partially offset by growth in Asia. For the Transportation segment, the team delivered 20% adjusted operating margins for the full year as we expected, and the team did a good job of navigating an uneven global production environment. So if you could, let me turn to Industrial Solutions segment, which is on Slide 6. And the segment grew 34% in the quarter overall as well as 24% organically. Digital Data Networks had another outstanding quarter where the business grew 80% year-over-year. We continue to benefit from increasing ramps from hyperscaler platforms. And for the full year, we generated over $900 million in AI revenue, tripling our AI sales versus the prior year, and this reflects our increased momentum. In our Automation and Connected Living business, sales grew 11% organically year-over-year with 3% sequential improvement that we believe reflects stability in general industrial markets. In our Energy business, sales grew 83% and included the Richards acquisition, which enables us to capitalize on strong growth opportunities in the North American utility market. On an organic basis, our sales increased a strong 24%, driven by continued increased investments by our customers in grid hardening as well as renewable applications. In our Aerospace, Defense and Marine business, sales grew 7% organically, driven by growth across commercial aerospace as well as defense applications. And in these markets, we continue to see favorable demand trends, coupled with ongoing supply chain improvement. And in our medical business, sales were roughly flat sequentially as we expected. Turning to margins for the Industrial segment. Our adjusted operating margins expanded by nearly 300 basis points to over 20%, driven by the strong operational performance and benefits of higher volume. I am pleased with the progress our team has made this year, supporting the strong growth that we have in this segment. Now let me turn it over to Heath to get into more details on the financials and our expectations going forward. Heath Mitts: Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, adjusted operating income was $943 million with an adjusted operating margin of approximately 20%. GAAP operating income was $916 million and included $10 million of acquisition-related charges and $17 million of restructuring and other charges. For the full year 2025, fiscal -- I'm sorry, for the fiscal '25, restructuring charges were $113 million, and I expect restructuring charges in fiscal '26 to be roughly at the $100 million level. Adjusted EPS was $2.44 and GAAP EPS was $2.23 for the quarter and included a tax charge of $0.10 related primarily to the increase in the valuation allowance for deferred tax assets. Additionally, we had restructuring, acquisition and other charges of $0.11. The adjusted effective tax rate was 21.4% in our fourth quarter and approximately 23% for the full year 2025. Moving to fiscal '26, we expect our adjusted effective tax rate in the first quarter to be approximately 22%, with the full year being similar to last year at approximately 23%. And importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR. Now if you can turn to Slide 8 for fiscal '25 performance. We set records in sales, adjusted operating margins, adjusted earnings per share and free cash flow. Relative to our business model, we are delivering on our targets for sales growth, margin performance, EPS growth and cash generation. Sales of $17.3 billion were up 9% on a reported basis and 6% on an organic basis year-over-year with both organic and inorganic growth, driven by our Industrial segment. Adjusted operating margins were essentially 20% for fiscal '25 with margin expansion of 80 basis points year-over-year, driven by strong operational performance. Both of our segments are running at the 20% level for adjusted operating margins, and we would expect further margin expansion as volumes continue to grow. Adjusted earnings per share were $8.76, up 16% year-over-year, driven by sales growth and margin expansion. Now turning to cash. We increased our free cash flow to $3.2 billion in fiscal '25, which was up 14% or $400 million year-over-year. Our free cash flow reflects over 100% conversion to adjusted net income, and we remain committed to this going forward. And keep in mind that our strong cash flow generation and cash conversion in fiscal '25 also included us investing a couple of hundred million of increased capital investments to support the growth in our Industrial segment. So a very good story there. In fiscal '25, we returned roughly $2.2 billion to shareholders through share buybacks and dividends, and we deployed approximately $2.6 billion, aligned with our bolt-on acquisition strategy. Our cash generation and healthy balance sheet gives us continued optionality with uses of capital to support investments for future growth, both organically and through M&A. Now as Sujal mentioned earlier, we are making a change to our non-GAAP reporting. And going forward and beginning with the first quarter of fiscal '26, we will exclude intangible amortization expense from our non-GAAP financial measures, and this change is reflected in our Q1 guidance. You will see the historical impact of the recast materials that we have provided for fiscal '25 and fiscal '24 in the appendix of our materials. And you can assume that amortization impact will be roughly $0.15 per quarter for fiscal '26. Now before I turn it over to questions, let me reinforce that we continue to execute well in both segments to deliver the record results you see for fiscal '25. We have positioned the company to deliver strong performance and value for our owners, and we expect our momentum to continue into fiscal '26 and beyond. We look forward to sharing more about our growth opportunities and our value creation model at our upcoming Investor Day on November 20. Now let's open it up for questions. Sujal Shah: Thank you, Heath. Kate, could you please give the instructions for the Q&A session? Operator: [Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research. Scott Davis: Congrats on a great year. I got to lead in on the AI stuff because it's just a giant tailwind for you, and you're doing a -- seem to be doing a great job of capturing those revenues. But last quarter, I think you were talking about $800 million. You did $900 million. I think last quarter, you said you thought maybe '26 was $1 billion. Can we mark-to-market that forecast? And just as importantly, where are you on kind of the scale impact there where you can get to or above kind of company average margins? Terrence Curtin: Yes. So no, great question, Scott. And you're right on with where we've seen the momentum all year. And in many cases, our customers, on the programs that we win, continue to want more and they want it faster, which is a key element of how you win in this market. And so you are right, we generated over $900 million of AI sales in '25. And remember, in '24, that was $300 million. And this is really the products that we do that go into AI with the GPUs and so forth. So we tripled our revenue in this product set, which I actually think shows the job the team has done to ramp to your question. As we look into '26, the estimates out there is for hyperscale CapEx to grow about 20%. And let's face it, we have strong orders. We have the momentum and we have the design win traction. So we grew $600 million this year alone in AI in dollars. I think that's probably the baseline you have going into next year from a level of dollar growth that you should be thinking about right now. The other thing I want to highlight is while we talk about AI, we also have a lot of growth that's happening outside of AI in our DDN business. And there is business we have that is cloud business that is not AI. That business is running about $500 million right now this year. That doubled versus last year. And then we also -- that's also a real momentum. And then outside of that, where we play in enterprise and telecom over the past 6 months, I would tell you, we have seen increased momentum there where those applications are growing double digit for us. So I know we spent a lot of time on AI and a lot of -- early thing was all the cloud CapEx went to AI. We've seen a broadening out of it. Certainly nice growth in the cloud side as well that is not AI, but also seeing nice growth rates. And all of that comes together to be that nice 80% growth we had this quarter, and we can see that growth momentum continuing. Operator: Your next question comes from the line of Joe Spak with UBS. Joseph Spak: Maybe just to follow on, I mean, you talked about some of the high-speed interconnect and data center. I was wondering if there's also a power element related to AI that's going to help you in '26. And then just for CapEx in '26, like you've been close to mid-5 sales this year to help build out that support. Should we expect similar levels next year to help support that continued growth? Or has most of that investment already been made? Terrence Curtin: No. Thanks, Joe. So first off, let me get into the product sets a little bit that when we talk about our DDN business. Clearly, the bigger driver is what you get around high speed. But we have -- our growth has also been happening around what happens on the power interconnects, certainly, what we do in helping that power be more efficient from liquid busbars and things like that, that we do with our customers. And then also where we do cable connectivity that goes between racks and so forth. So the numbers I quoted to Scott include all of that in those categories, Joe. And we have momentum across all of them because all of them are key building blocks of how this architecture comes together, where you need lower power, no latency, higher speeds, all happening at once. So all of those products are there. I don't think one inflects at a higher point than the other as we continue. I think you're just going to continue to get that good momentum that we've had this year with the ramps that we have going and the program wins that we have. Heath, why don't you take the capital side of it. Heath Mitts: Sure. And Joe, just as a point of reference, and you have the material there. Our capital was up a couple of hundred million from FY '24 to FY '25, and that growth was entirely for some of these AI and cloud programs that we've won both in the past as we're expanding and/or, in some cases, adding new capacity altogether for very program-specific reasons. There will be some pressure to increase that a little bit as we move from '25 into fiscal '26. We don't guide that number specifically, but I would expect it to be kind of in line, maybe just a little bit less than the dollar increase we saw in the prior year. So I still think with the revenue growth and the growth that comes out of these programs, we'd still be at the TE average still in the -- a little over 5% range. And it kind of depends because sometimes with these programs, the revenue that comes out of these programs can lag a fiscal year or lag when you make those investments. So I know where some of the things the team is contemplating for this year is even investments that we'll make in '27 to support programs that we've won for -- I'm sorry, investments in late '26 for programs that will kick into revenue for '27. So there's a lot of great momentum there. The key is for us to get up, get operationalized things, so we're not the ones holding our customers back. Operator: Your next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: I was hoping you can help us better understand trends by end market beyond DDN, including how demand trends have changed over the last 90 days? And any early views you can share for fiscal '26? Terrence Curtin: No. Thanks, Mark. And like we've done already in the script, there's going to be some of this we're going to say, please come to Investor Day, but I'll tell you what we've seen and changed over the past 90 days. Let's build on the orders that we talked about, and you can see the slide. I think one of the things that is a positive is you saw the order growth both year-over-year and sequentially in both segments. So I do think the environment does feel better than 90 days ago. But let me click down a little bit by the segments. First of all, just taking Transportation, orders were up both year-over-year and sequentially in auto. And it is one of the things all in 2025, we dealt with a world where Asia production grew, Western production declined. We do actually think what we're seeing is some stability that they're probably going to be more even between regions, even though auto production is going to stay in that 87 million to 88 million unit range, which is flattish. We also think we're going to continue to deliver content growth over market of 4% to 6% because when you think about what's happening with data needed in the car, what's happening with further comfort things that we all want that drives more electronification in the car as well as just the nonending growth of electrified powertrains in Asia, all of that continue to give us confidence on the 4% to 6%. When you look at industrial transportation versus 90 days ago, Mark, honestly, there hasn't been much change, unfortunately. We continue to see Europe and Asia have growth and North America still having declines in the truck and bus and the agricultural area. So I would say that's one that continues to be uneven that we're actually really looking for signs when can we get a little bit of a North America pickup, but we are not seeing any trends that see that right now. So that's one, unfortunately, probably still feels muddled. And then in the Industrial segment, I will jump over DDN like you asked. But you look across our end markets there, we're seeing consistent growth across them. In Energy, we have -- you saw the organic growth this quarter of 20% with where we position ourselves in North America and what's happening in grid investment in the T&D side by utilities, the hardening, getting it up to current trends and everything, that continues to be very good order momentum there, and we're also benefiting from utility scale renewables like solar. AD&M just continues, I would say, the market continues to move along. You've seen airframers talk about where they're getting their build rates to, and it feels the supply chain continuing to show improvement, which is good signs. And then the one that I know we've been pretty hesitant on in our ACL business, which has general industrial, has a little bit of things that touch the consumer. What I could tell you, the factory automation side, which is the bigger piece of it, we are seeing growth in orders across all regions. The business grew sequentially. The areas where we see weakness is where we have things that go into HVAC, things that go into appliances, that's where we see some weakness there. So it does feel the industrial piece of that, the business side has improved. Certainly, the residential or consumer side has gotten a little weaker. But we did have nice growth. You saw that, and we think the momentum on the more of the industrial side continues to get more traction. So that's a little bit of going around the horn as we think about entering '26. Certainly, you see that in our guide with 17% overall growth and 11% organic growth here in the first quarter. The Industrial segment is still in very good momentum, and it feels like we're getting some stability across the Transportation segment and a couple of markets with questions. Operator: Your next question comes from the line of Wamsi Mohan with Bank of America. Wamsi Mohan: I was wondering if you could talk a little bit about margins in 2 ways. One is when you look at gross margins, just a few years ago, you were in the low 30s, you're squarely in the mid-30s now. How should we think about the potential for gross margins for you and for this industry to actually expand further from here? And if you could comment just on the new basis of accounting, how should we think about the adjusted operating margins for both your segments? And sorry, if I could, does this change in accounting imply any increased appetite around rate and pace of M&A as well? Heath Mitts: Okay. I will tackle -- I think you got 3 questions in one there, Wamsi. Terrence Curtin: Wamsi, you're ignoring Sujal's instructions. Heath Mitts: Yes. But no, I appreciate -- I do appreciate your questions and your interest. So let's talk about margins first. Margins for the year, this is a bit of a journey that we've been on. I think we were very specific with our comments around Transportation going back several years, getting them closer to their margin target of about 20%. Largely, they're there. You're going to have noise in a given quarter that's going to swing you on both sides of that. But for the year, they're at 20%, and we expect good things margin-wise as we go into FY '26. The Industrial business has been more of a story around more rooftop consolidations and so forth and taking advantage where we have scale opportunities, particularly when we have strong programs like we have going on in the DDN business. And we're very pleased with their performance and their jump forward in FY '25. Again, as we go into '26, we're going to be balanced with our investments. We think both of those segments will flow through on revenue growth at 30% or maybe a tad better depending upon the mix. So I think as you do your modeling, depending on what you want to put in there for the growth side, I think 30% is a good flow-through math on that piece of it for the organic growth. In terms of gross margin, a lot of that flow-through math does come to gross margins, and we do get some leverage on our OpEx expense as well. So we're running this past year at about 35% gross margins. The amortization change largely affects the gross margin line. So when we think about it at the TE level, it's about 100 basis points of margin improvement that flows through at the gross margin line. So at 35% in '25 would be kind of a recasted 36%. And that's where some of that flow-through is going to occur. If you think about the split by segments, which is another part of your question, it's in the schedule that we have in there for you that recast it, and it shows the segments recasted by quarter going back to prior 8 quarters. So you can see that relative to what our actual results were. But it's heavier weighted towards the Industrial segment because, obviously, the amortization expense load comes from the acquisitions, and we've simply been more acquisitive on the acquisition front in the Industrial segment over the past few years, inclusive of the Richards deal that we completed earlier this year. In terms of your third or fourth question on M&A, listen, I think we've been trying to be -- we're going to talk more about it in our Investor Day here in about 3 weeks in terms of just overall capital deployment. So I don't want to -- but I'd say it's fair to say that we're excited about our bolt-on opportunities in front of us. Bolt-ons don't always mean small. They come in all shapes and sizes, just as we completed in FY '25. We completed the Harger deal that was a little bit smaller, but then with the Richards deal, which was much larger. And our appetite ranges depending upon the business and the opportunity to create value there. Certainly, the optionality that I commented on earlier about free cash flow and the optionality that, that provides gives us some confidence that in some ways, we can be a little bit more aggressive, but we're going to be smart with the investments that we make. So stay tuned, and I look forward to seeing you in a few weeks. Operator: Your next question comes from the line of Amit Daryanani with Evercore ISI. Amit Daryanani: I just had a couple of questions just on the DDN segment broadly. Terrence, on the AI side, it sounds like $1.5 billion revenue run rate is sort of what you're comfortable with. I'd love to understand, do you see this growth coming more from end demand end units? Or is there a share gain narrative as well as some of these programs are starting to mature, perhaps the share is getting more in your favor? I'd love to just kind of understand the levers behind the growth you see. And then on DDN ex AI, your growth over there actually has been really impressive, north of 40%, I think, in fiscal '25, which is much better than what the end markets are there. So what's driving this growth on DDN ex AI as well? Terrence Curtin: Yes. So twofold one, Amit, sorry. The one time, I guess, you're adding the AI and the cloud piece together. So I just want to make sure where that comes from. And honestly, that's program ramp wins. Like we've always told you, we have a nice position with the hyperscalers. We have to play everywhere there, and these are ramps there. And I think our share has been pretty stable, but really benefiting from the technology and where we're co-designing with our hyperscale customers that, in some cases, have their own GPUs. Outside of AI and cloud, what I would tell you, what we saw and just if you take this past quarter, in enterprise and cloud, we grew about 15%. And on things around the edge and IoT, it was a similar number in the double digits. And what you see is I do think it's the bump down effect that's happening in CapEx. Our product set is very broad. When you deal with high-speed things, they do cascade down over time. So I do think you sort of have -- lines do blur between AI and non-AI. And the key thing, this cloud CapEx that the key element is that's a number we keep an eye on, which is growing 20%, I think is taking that bump effect that cascades down. And if you remember, like a year ago, we all just thought all the cloud CapEx was only going to AI. We're seeing that broaden out. And clearly, as you added some of my numbers together, you have those lines blurring, but it's really created that really strong growth that we've had that not only in the quarter, we grew 80%, but basically, we grew that for the year organically. And it was in the AI, the cloud that's non-AI as well as we're starting to see pick up here in the past couple of quarters on the enterprise, the telco as well as IoT and edge. Operator: Your next question comes from the line of Luke Junk with Baird. Luke Junk: Terrence, I wanted to circle back to Transportation and the orders in particular. You had mentioned that you had seen order growth in all regions this quarter. I'm just wondering relative to auto outgrowth, especially that has been more weighted to Asia and China recently, would you say this might portend to more balanced outgrowth algorithm? And I think you spoke to production being more balanced in the West, but what about some TE-specific dynamics as well? Terrence Curtin: No. Thanks, Luke. And first off, you are right in my comments. We've had this outbalance of production this year, and that has created a little bit of headwind because our mix -- I mean, our content per vehicle is higher in the West. You all know that. So that has created a little bit of pressure where you've seen our content outperformance be a little bit lighter than our 4% to 6%. But as we look forward, as we work through these Western declines and they become more flattish, I do view you're going to see content per growth in every region that contributes above that to get to the 4% to 6%. Certainly, there's different opportunities in different regions. The electrified powertrain is driven out of Asia. Data connectivity is in every region. Certainly, feature sets are different that drive electronics in the vehicle are different by region. But the key thing you have to realize, in every region, all of them are increasing. It's just the rate of increase. So net-net, we do think you'll see content growth over market be more even this year. But certainly, there'll be a little anomalies just due to the trends are very different in region. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Unknown Analyst: This is [indiscernible] on for Samik Chatterjee. So I just wanted to ask on implied margin guidance for F 1Q. So based on my calculation, even after adjusting for the change in non-GAAP calculations, the implied margins are close to 21%, which is a robust expansion relative to F 4Q. Can you please highlight the drivers which are driving that margin expansion there? Terrence Curtin: Yes. Samik, I'm going to have Heath answer that question on where sequential margin goes sequentially Q4 to Q1. Heath Mitts: Samik, first of all, as you know, we don't guide a specific margin target. However, I think it's fair to say with the breadcrumbs that we've given you on various things with tax rate and implied what our EPS guide is and our revenue guide, you can assume that we're going to see an increase in margins modestly sequentially, probably more driven by Transportation, which tends to have the highest auto production number in our calendar -- in our fiscal first quarter each year and neutral or maybe flattish in Industrial. But I don't want to get into guiding margin rates, but I think that would be a fair assumption. Operator: Your next question comes from the line of Guy Hardwick with Barclays. Guy Drummond Hardwick: Terrence, I know you kind of answered the question about the growth in DDN ex AI. But I think I heard you say the cloud business doubled to $500 million. Can you tell me what's driving that? I assume it's cloud companies pushing their on-premise customers to the cloud, and they seem to be growing at 20%. So just wondering how much visibility you have in this business because it potentially could be a multiyear runway. What sort of kind of growth assumption should we assume sort of medium term? Terrence Curtin: Yes. So first off, Guy, you are right. The comments I made in -- to Scott's question really had to do with our cloud revenue, which is in non-AI applications was about $250 million in last year, and it was up to $500 million this year. And I do think it's about the infrastructure being upgraded. And not everything has a GPU, but you do have cloud data center, there's other things going in it that are being upgraded, and we're benefiting from that. So clearly, you have very high-end compute that's happening on the high-end side, but you're going to have cascade down that we're benefiting from our broad product set. And I do think we're going to continue to benefit from that growth trend going forward. It may not have as much content as we have on AI, but it's going to have a nice growth rate to it because certainly connecting GPU to GPU like we do today, and that's more of the AI element, you don't have that product in there, but certainly, you have the high speeds needed in these next-gen servers that the cloud needs. Operator: Your next question comes from the line of Colin Langan with Wells Fargo. Colin Langan: Just a follow-up on the outlook in auto to grow 4% to 6% over market. I mean any way to frame the challenge from EV adoption slowing down in developed markets? Is that sort of going to keep you at the lower end of that range or even below that range given some of the pushbacks in some of those products? Or is that kind of offset by other factors? Terrence Curtin: No. When you look at it, I think, clearly, when you have EV adoption, the biggest driver of it is Asia, and that's full steam ahead. You have less adoption elsewhere in the world. Where you have, you're not going to full EVs. You might be going to a hybrid, which gives us a content increase, but not the total content increase you have in the full electric. The element that you have to remember is I need you to think about what's happened to the content, not only in EV, but outside. Think about the Ethernet connectivity that you need in a car for autonomy, for the sensor suite, for everything else that needs to happen in the car, for software updates over the top. All of that's being put in, and we benefited from that, had really nice growth this year on it, and that's going to be a key driver, almost just as important as what we've gotten out of EV. And then the other thing that come into, the safety features, the comfort features, everything else that's getting added to the vehicle also adds content. So we actually view it's going to be more balanced. And when we're at Investor Day here just next month, we'll spend more time on this to make sure everybody has a clear picture of how we see the content growth going forward. Sujal Shah: Your next question comes from the line of Asiya Merchant with Citi Group. Asiya Merchant: Can you just talk a little bit about the book-to-bill, specifically, I think, in Industrial, given the strong momentum you have, DDN as well as some of the other segments that you talked about, is book-to-bill below 1 here? I think I calculated it to be 0.96. Is that a metric that investors should focus on? And how we should think about that relative to your guide? Terrence Curtin: Thanks for the question. I would say you have to look at order levels and the one element you get always this time of year is we do have sequential seasonality that's very normal. And especially in our Industrial segment, you have factories that shut down around holidays in the western part of the world. So in many ways, and if you look back over time, you will always see we have a step down quarter 4 to quarter 1 due to this factor. It's almost like we have 1 less week of business due to how people leverage their production planning. And the element is $4.7 billion of orders in the fourth quarter against a $4.5 billion guide for the first quarter is very healthy. So I know the book-to-bill takes current quarter, but what's really nice is the trend you see going into a sequentially slower quarter just due to seasonality is really how you should look at it. Operator: Your next question comes from the line of William Stein with Truist Securities. William Stein: I want to first recognize very good results on revenue and earnings and the outlook in the same regard. So the question I'm going to ask is maybe is not quite as optimistic, but I do want to recognize the great results and outlook. On the margins, however, I have this lingering question. You're, again, beating on revenue. You're beating in this new -- partly from this new category of AI, which I would expect carries better margins. The conversion margins are not bad, but I think they were a little bit below consensus. And if you look to the out quarter, if you don't make that amort adjustment, I think it's the same story. Revenue beat and earnings beat, but margins are a little bit disappointing from a [indiscernible] perspective. Is there something dragging on profitability today that you could clarify for us? Heath Mitts: Yes. Will, I'm not -- we've kind of been holding this roughly 30% flow-through here for a while. And so I think when you look at our -- and there are some bridges, I think, in the back, when you look at our operational performance and you look at the fourth quarter or the full year '25, our guide for '26 year-over-year or at least our first quarter guide, I think you would come back into a number that has a 3 in front of it. So certainly, amortization change was not done for any reason other than to better represent kind of our cash profitability of the business. And so you're always going to have a little bit of noise between segments and within a segment, maybe even some mix within a segment, but that noise goes both directions. And so I don't get too hung up on that quarter-to-quarter. But no, from a fundamental perspective, there's nothing that drags on us. I would say in certain pieces of the business that are passing on a little bit more tariff pricing, that tariff pricing and the revenue that comes from that does not include any margin behind it. So when we do see a spike in some of that tariff pricing, some of those businesses struggle a little bit because you might add revenue with no margin, but that's just more of a recovery mechanism. So that can create noise. But I'd say if you look at the schedules that we provided for the quarter, for the full year and certainly for our guide, you'd see a 30% or so in there. Operator: Your next question comes from the line of Shreyas Patil with Wolfe Research. Shreyas Patil: On the AI piece, you're growing very rapidly, run rating at about $1.2 billion. You've talked in the past about this being a 3-player market. One of your competitors appears to be quite a bit ahead on revenue, maybe 3x the revenues that you're doing at the moment. So I guess, as we think ahead, how do you think about the market share dynamics in this space? Do you see an -- should we be thinking over the long run that this will eventually become a more balanced market share across the 3 big players? Or do you see TEL as sort of a firm #2 over time? Terrence Curtin: I think what you have here, and you said it well that when you look at the players, it is a concentrated player because what occurs is who can provide this technology. And when you look at how you have to co-design, ramp to the levels that you've seen us do, it doesn't mean it's going to be a concentrated market. I think we have to continue to look for technology inflections, and they are typically going to be the areas where you see opportunities to gain share. But we got to compete on technology, we got to compete on ramp with the customers and we have to compete plan on the ecosystem. And I think what's really good is that we provide the technology that shows we can provide it, and we're going to compete every day to try to increase share. Operator: Your next question comes from the line of Joseph Giordano with TD Cowen. Michael Elias: This is Michael on for Joe. So previously, you mentioned strong content in busbars and cabling and also previously other quarters, backplane content in particular. Are there any recent order wins you'd like to highlight there specifically? And then what types of customers are you seeing the most order activity with right now between GPUs, custom ASICs, hyperscaleers, stuff of that nature? Terrence Curtin: So first off being the wins that we have are across the product set. And in some cases, we're stronger with certain customers on one product set versus the other. You shouldn't assume you get one product set or all product sets with one customer. We compete individually on each one of those product sets that you sort of talked about. And that's just reality as we work the architecture real time. The bulk of our wins that when you see the revenue traction we have in the ramp are mainly with the hyperscalers. We had wins across the hyperscaler group as well as the semi players. But the element is the bigger driver of growth for us is the hyperscalers that have their custom TPUs and GPUs. Sujal Shah: Okay. Thank you, Mike. It looks like there's no further questions. So we appreciate all of you joining us this morning for the call. And if you have further questions, please contact Investor Relations at TE. Thanks, everyone, and have a nice day. Terrence Curtin: Thank you, everybody. Operator: Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today, October 29, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to the Expand Energy 2025 Third Quarter Earnings Teleconference. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Colby Arnold, Manager, Investor Relations. Please go ahead. Colby Arnold: Thank you, Jonathan. Good morning, everyone, and thank you for joining our call today to discuss Expand Energy's 2025 Third Quarter Financial and Operating Results. Hopefully, you've had a chance to review our press release and the updated investor presentation that we posted to our website yesterday. During this morning's call, we will be making forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including factors identified and discussed in our press release yesterday and in other SEC filings. Please recognize that, except as required by applicable law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. We may also refer to some non-GAAP financial measures, which help facilitate comparisons across peers -- periods with peers. For any non-GAAP measure, we use a reconciliation to the nearest corresponding GAAP measure, and it can be found on our website. With me on the call today are Nick Dell'Osso, Josh Viets, Dan Turco and Brittany Raiford, Nick will give a brief overview of our results, and then we will open up the teleconference to Q&A. So with that, thank you again, and I will now turn the teleconference over to Nick. Domenic Dell'Osso: Good morning, and thank you for joining our call. The third quarter marked the first year of Expand Energy. I'm extremely proud of the way our team has come together to collectively drive long-term value through safely reducing costs and efficiently developing our advantaged geographically diverse portfolio. As we demonstrated this quarter, our business continues to deliver and outperform every expectation pegged at merger onset. While there are many ways to measure synergies and their impact, we are clearly spending less for more production, which is the ultimate definition of efficiency. Nowhere is this more evident than in our Haynesville position, which has seen a meaningful step change in both efficiency and performance, enhancing the value of our 20-year-plus years of inventory. Today, we can deliver with 7 rigs, the same production it took 13 rigs to deliver in 2023. Since then, we have reduced well costs by greater than 25%, and year-to-date, our costs are 30% lower than peers based on third-party well proposals. Importantly, our optimized development and completion design continues to lead to improved productivity. Since 2022, our average well productivity was approximately 40% greater than the basin average, a trend we expect to continue. These efficiency gains are sustainable and deliver significant improvement to our breakevens, which today average less than $2.75 across the basin. We have also used our low-cost advantage to attractively -- to add attractively priced acreage to our portfolio, giving us an option to develop volumes in East Texas and reach additional markets. Through the innovative efforts of our team, we are seeing success stories like this across our business, resulting in us delivering 50% more synergies than our original target. These meaningful efficiency gains and savings have greatly strengthened our underlying business and resulting cash flows. Since close, we've eliminated $1.2 billion in gross debt and returned nearly $850 million to shareholders. We now expect to spend $150 million less to deliver 50 million cubic feet per day more of production in 2025 compared to our beginning of the year guidance. These efficiencies will carry forward to 2026, where should market conditions warrant, we are prepared to deliver 7.5 Bcf per day of production for approximately the same CapEx spent in 2025. Looking ahead, we see significant opportunity to expand the value of natural gas by connecting our global scale to growing markets. Consumers need affordable, reliable, lower carbon energy and natural gas will play the largest and most crucial role in answering that call. By the end of the decade, natural gas demand is expected to grow 20%, driven by LNG, power and industrial growth. Expand sits in an advantaged position today, our diverse asset portfolio across 2 premier gas basins with 20 years of inventory, proven operational performance, unique market connectivity and investment-grade balance sheet are clear differentiators as we look to serve customers eager to secure reliable and flexible supply. This is especially true along the Gulf Coast, where there is increasing competition for supply and lower carbon molecules. With NG3 now online, we can track our production from the wellhead to the end user and offer a responsibly sourced, differentiated lower carbon gas, something our counterparties value greatly as was the case with Lake Charles Methanol supply agreement we announced yesterday at a premium to NYMEX. Expand will serve as the sole supplier to this new build industrial facility, which is expected to commence operations in 2030 with global investment-grade offtake already secured. Importantly, we believe this agreement demonstrates our differentiated path to strategically connect our molecules to the highest growth markets at a premium price. This announcement is also a great example of the evolution of our marketing strategy from value protection to value creation. We are intentionally enhancing our marketing and commercial organization to capitalize on our unique position as North America's largest natural gas producer. We see this organization as more than a few commercial transactions, but an opportunity to drive long-term value from our integrated well-connected portfolio. As consumer demand grows, we will be positioned to provide reliable and flexible supply to meet that demand. We have the assets, scale and capital structure to be patient. Our experienced team will continue to ensure we are achieving the best long-term risk-adjusted returns possible in any agreement we enter. We are ready to answer the call of growing demand we see ahead, and we look forward to updating you on our progress. We'll now turn the call over to Q&A. Operator: And our first question for today comes from the line of Matt Portillo from TPH. Matthew Portillo: I wanted to start out on a question that may be focused a bit more on the medium term with the outlook on Page 9. Just curious if you might be able to speak to the evolution of gas demand you're seeing regionally around Texas, Louisiana and Arizona, and if your downstream counterparties are starting to realize the value producers like yourself, might be bringing to the table for contracts that require 10 to 15 years of coverage. I guess to us, it seems like there might be an interesting supply-demand imbalance emerging on the Gulf Coast with the lack of material long-haul pipeline capacity from the Northeast and dwindling inventory from smaller privates in basins like the Haynesville but curious on your thoughts around the regional dynamics. Domenic Dell'Osso: Yes. Great question, Matt. I'll start, and I'm sure Dan will have more to add here. Slide 9 is a new slide, our team created this quarter, and we really like it. It shows the current demand and then the expected growth in demand in each of the interesting growing submarkets of the U.S. And so what we've created here is a way to think about where demand is growing along the Gulf Coast, including onshore Louisiana as well as LNG in Appalachia and then in other key markets like the Southeast and Florida. And I think you're right to point out that as demand for gas is growing and growing in a really tangible way, we have more insight into how gas demand is growing right now than we've had in a very long time. These projects are multiyear projects. They require billions of dollars of capital, and you can see it coming. And so we can plan for this, and we can be ready to help work with our customers to deliver the solutions that they need. I think this is a great -- the Lake Charles Methanol transaction we announced here, is a great case study for how this works. And is evidence of exactly what you just described. This is a project that Lake Charles Methanol is going to be a new demand facility built along with the offtake customers supporting the facility, so requesting the methanol product, it's in need around the world. That offtake has been fully subscribed. They need to lock down the economics of the project to go out and get the project FID-ed. The supply of gas is a really important element of that. They look to us with our depth of supply and inventory to drill, our ability to bring large volumes to South Louisiana, and then for those volumes to have a low carbon intensity. And they were wanting to lock that up for 15 years. And so we were in a position to accommodate that. I think this idea that gas demand, especially new gas demand growth needs to have clarity as to where the supply will come from. The depth of that supply, the characteristics of it, the credit quality of the counterparty providing it, all of those things need to come together in a bundled solution that we're uniquely positioned to do in this transaction, and we believe we'll be in a unique position to do across many transactions in the future. So it's a good example of what we think is plenty to come. Daniel Turco: Matt, you hit on an interesting dynamic at the start of your question that I'll just add to you is that demand is growing in South Louisiana and our portfolio sets up well, especially where our asset base is, as Nick talked about, and our capacity to get there. And you said, where is the supply coming from and the challenge from associated basins? And we agree that there's going to be a lot of supply that comes out of associated basin, especially the Permian. But as you see pipelines being developed, the terminus of those pipelines end up in Texas. And so getting across that border from Texas, Louisiana is a bit of a challenge. It will happen, but it takes a longer time, obviously, with interstate pipelines, it's a longer build to get across that border. And so we set up quite nice to where our demand ends at the end of our NG3 and LEAP pipeline into Gillis. And where customers are looking for that security of supply, as Nick touched about. So it is an interesting dynamic about where demand is growing and how it's actually going to get supplied from the different regions across the basins. Matthew Portillo: Great. And then just as a quick follow-up. Nick, curious if you might be willing to comment on your views around the evolution of mid-cycle gas prices. I guess specifically, as we kind of look at the Haynesville or regionally in Louisiana, you're projecting about 11 Bcf a day of demand growth regionally. And I think most forecasts even with really robust gas prices, I expect maybe the Haynesville can grow 6 to 8 Bcf before starting to face some pretty significant inventory challenges. So you all are kind of in a unique position given the depth of your inventory. I guess, bringing this back to Slide 7, you highlight kind of maximizing free cash flow at a kind of 8.25 Bcf a day production level would require kind of a $4.50 gas price over the medium term. But I think if you go all keep pace with the Haynesville growth moving forward, your corporate production would be in excess of that. So Nick, maybe just specifically curious as you get more comfort around this regional demand growth trend and the Haynesville being part of the production engine that meets that demand, how do you think about the mid-cycle gas price? And is that right-hand side of the chart kind of closer to that $4.50 level, a good place to be thinking about? Or are there other factors that are involved? Domenic Dell'Osso: Yes, it's a great question, Matt. At this point, we're still focused actually on the columns of the chart that we've highlighted there, $3.50 to $4, centering on $3.75. There's so many unknowns to how this will all evolve and we think taking a measured approach to how we set up our supply in the context of the broader U.S. market that is now increasingly connected to the global market is the right answer. I do believe that over time that our view of mid-cycle prices can go higher. I don't think we're quite there yet. I think there's a lot to still happen with the timing of how this demand will grow. You'll see some of the numbers that are on this Slide 9 that we put out today are a bit more conservative than many other forecasters in the market. We're pretty -- I would say, I guess, conservative is the right word around how we think about the pace at which this demand will grow. I think it's important to note, though, that when we talk about all of this stuff, this slide is framing between now and 2030. 2030 being the end of the decade is a point in time that the market has become focused on we don't believe demand growth stops in 2030 by any stretch. And so our view relative to some of the other more aggressive views of demand growth is really a difference in timing more than it is anything. There's a lot of bottlenecks to create all of this demand growth. And so we think while it is big, it is very meaningful and there will be supply constraints to deliver to certain of these markets at certain times, there's going to be a lot of volatility around it. And we're ready for that volatility. I think our business is uniquely positioned with the geographic diversity we have with our approach to being willing and proven to modulate supply up and down. We're, again, really ready to take on the challenge of this volatility and help our customers have the surety of supply that they need with the characteristics of supply they expect. Operator: And our next question comes from the line of Doug Leggate from Wolfe Research. Douglas George Blyth Leggate: Nick, I wonder if I could hit two things. First of all, there's been a lot of moving parts, obviously, in the cash flow capacity of the portfolio. So I'm really focused on where you think your breakeven is trending with the continued synergy delivery. More importantly, you've dropped your sustaining capital by, it looks like $150 million, which that alone is pretty meaningful in your stock. So where do you see your breakeven today? Where do you see it trending? And I guess my follow-up, forgive me for this, I kind of asked it fairly regularly, but you've given a lot of insight into the role or the impact that Dan and his team are having. Where would you see the -- what kind of innings are you in, if you like, in terms of the marketing uplift? And if you can quantify how do you see your realization has been impacted by that, that would be great. So those are my two, please. Domenic Dell'Osso: Okay. Great. I love talking about this, obviously, Doug. So the capital efficiency that our business is showcasing right now is tremendous. And we're beating our own expectations, beating the synergy goals we laid out at the onset of the merger and then, again, making faster progress towards reducing costs and increasing productivity across our entire portfolio. That's driving our breakevens lower. Importantly, we're talking about this morning the fact that our 2026 setup looks even better. We had said at the beginning of this year that we wanted to set up our productive capacity for 2026 to be 7.5 Bcf a day. That is what we are positioned to deliver. We can hold that level of production through 2026 and going forward with a very similar CapEx profile to what we have this year. So $2.8 billion to $2.9 billion in CapEx is the right way to think about what we're setting up for in 2026. Now lots of things could change between now and when we actually go through '26. So what we determine is the right level of activity and the right level of production based on market conditions will undoubtedly change, and that's the flexibility that we've been excited to build into our business and embrace. But that capital efficiency is what we want to highlight by showing that we can deliver that level of production with about the same amount of CapEx that we had this year. So what that means is that these improvements in our cost structure alongside the productivity are sustaining, and we're going to hold those going forward. We're pretty excited about all of that. As to your question about what inning we're in with how we're seeing the uplift of marketing. I guess I would say we're still in pre-game warm-ups to keep the analogy going with baseball here. This is a very newly emerging part of our business that we are putting resources behind and giving a mandate to this team that is a highly effective team that we can let go out and create more value than historically they've been positioned to do inside of a company that was of lower scale and not investment grade. So with the tools that this company has now around what is a talented organization, we can go out and do so much more. And this Lake Charles Methanol transaction is the first example. Douglas George Blyth Leggate: Nick, can I pin you down just on one specific, are you under $3 now in your breakeven? Josh Viets: Yes, Doug, we are. We've made a ton of progress on our breakeven. Of course, the merger was really a key catalyst for that. But we think if we were to go back kind of premerger in 2024 to where we are, as we see the setup for 2026, we're over $0.15 improvement in a breakeven and sitting well below $3. Operator: And our next question comes from the line of Betty Jiang from Barclays. Wei Jiang: I really appreciate all the color that you're laying out, Slide 9 and 10 on just growing the gas marketing opportunity. If I can just ask about what it specifically means for your gas realization over time. The methanol deal is obviously helping in the 2030s and beyond. But the opportunities that you see, do you see your gas realization and this just narrowing over time as you start capturing all these opportunities? Domenic Dell'Osso: Yes, Betty, it's a great question. We do expect to add a lot of margin through our marketing business. There's so many elements of this, and Dan will add to my answer here, but we'll optimize the delivery of every molecule that we sell today across our extensive firm transportation portfolio in all the markets we reach. We'll aggregate supply and create value off that aggregation. And we'll continue to connect to customers that need surety of supply and work with them around the reliability and flexibility that they require. I think you get paid for the combination of all of those things that we bring to the table. Daniel Turco: Betty, thanks for that question. I'd just add to that, the two elements we're really focused on right now is that optimization that Nick talked about. The team has already done a great job this year of being able to optimize our portfolio. We start from a great position with our asset base and our transportation portfolio. And our team is being able to optimize across different markets, across geography and across different time with storage and different assets we have to be able to create realizations that are meaningful. We've already taken tens of millions of dollars -- low tens of million dollars and added that to our realizations and just expect to do more over time. And then that LCM example is a great example of how we can be differentiated, offer customer solutions. You pointed to Slide 10, that gives some of our guiding principles of how we think about these deals and what we're looking to accomplish and different elements of these -- of value chain creation. In LCM, for example, we hit a majority of these elements. And we have a tons of inbounds right now and plenty of conversations going on where we can do a lot more of these deals and create a lot more value for the corporation. Wei Jiang: That's great. Very exciting developments there. And then my follow-up is just on the M&A side, the resource expansion that you highlighted, both the Appalachia and the Western Haynesville. Maybe bigger picture, what are you looking to achieve with these type of bolt-on/small deals? Do you see more resource opportunities and similar type of deal to acquire locations at a low cost? Josh Viets: Yes. Betty, this is Josh. I would maybe characterize the two acquisitions of organic leasehold in two different ways. The acquisition in the Southwest App was purely opportunistic. That's clearly highly synergistic with our existing acreage position. It allows us to extend lateral lengths, almost more than double lateral lengths, which gives us an opportunity to pull forward inventory and simply improve the overall return profile there. And in the Western Haynesville, that's -- we think about that a little bit differently. That's something we've been studying for a number of years now, and have been very thoughtful about what an entry might look like. We wanted to get in at a low cost. We want to ensure there was limited near-term obligations. And we are also looking for a part of the play that we would see as being lower from a geologic complexity standpoint. And we think we've done that with the 75,000-acre position that we've created. And as we think about that going forward, we simply see that as a great option for the company to be able to develop a resource with a tremendous upside in an area where we see growing demand. And so we'll continue to be mindful of these opportunities as they appear. But of course, we're always going to be sticking to our M&A nonnegotiables with any transaction that we evaluate. Operator: And our next question comes from the line of Kevin MacCurdy from Pickering Energy Partners. Kevin MacCurdy: Kind of sticking with the Western Haynesville. I mean, it sounds like you've already drilled a vertical well there, and you did some leasing maybe before this last acquisition. Can you kind of expand on what you saw in that vertical well and what was attractive about this particular area of the Western Haynesville? Josh Viets: Yes. Thanks, Kevin. Happy to address that. We've been, again, studying this for some time. And so we have a pretty extensive data set across the entire region, just given our 1.5 decades of experience here. And so we've been very thoughtful about integrating new production data as that came available from some of the developments further to the west, incorporating that in and calibrating our models. And then with the vertical well, that was, of course, pretty important for us to serve as a good final validation of the resource potential that we saw. And what we found is a thick, very dense shale reservoir that we think presents tremendous upside. It has a lot of characteristics that we're accustomed to developing in areas like the NFZ and our southern portion of the Louisiana play. And that really kind of met all the requirements that we would think about to support future development. But I would just note, though, for the company specifically, this is something that we still see is carrying some level of uncertainty with it. And I think that really goes for the entire Western Haynesville area. Long-term decline is something that we definitely need to monitor. And I think the advantage that we have in the play is that with 20 years of inventory in Louisiana, we can definitely be measured in our approach. We'll drill our first horizontal production well here later in the fourth quarter. But really, we'll need time as we head into 2026 to further assess that. But again, the resource potential is quite high. We like the option that it creates. And again, given the depth of the inventory, we're going to be very measured in our approach to how we develop it going forward. Kevin MacCurdy: Great. I appreciate the detail on that. And as a follow-up, kind of moving back to the core Haynesville, and it looks like a lot of the CapEx savings and even outperformance on the production side has come from the Haynesville. What are the most notable differences between your expectations coming into the year on the drilling and completing of the wells? And you kind of mentioned in your earlier remarks that you think you're doing wells significantly cheaper than peers, without giving away your secrets, do you know what you're doing different that is causing that well cost saving? Josh Viets: Well, one of the things that has helped us, of course, is just putting two teams together, where we've been able to leverage the experience of two companies. And I think the drilling improvements that we've experienced over the last year I think, have just exceeded all of our expectations and really a credit to our employees and to our contractors that help support that. And so we continue to make strides. And I would say the most material cost improvements that we've made and where we see differentiated performance is on the drilling side. But also, I think I would like to talk about completions just for a little bit there because there's really two components to it. Of course, we made an investment in our own sand mine, which I think is a unique opportunity for us because of the scale of program that we run, where we're going to be pretty consistent in running anywhere from 2 to 4 frac crews. And so we can go make that investment. It pays out in just over a year's time and has a material impact on our well cost. And then when you combine that lower source of sand or lower completion cost, that also now presents an opportunity to where we can be a little bit more thoughtful about our proppant intensity on the wells that we're completing. And so through the merger integration, we knew that the two companies had different approaches to completion design in terms of both fluid and proppant intensity. And so through the integration, we landed on what we would consider kind of our Gen 1 as expand completion design, and we quickly put that into place at merger close. And I would say, even through that Gen 1 design, we've seen improvements in productivity in some of our fourth quarter and first quarter of 2025 TILs. So that's helped contribute. We've quickly continued to progress that to a Gen 2 design that we implemented in the earlier parts of the year with those wells coming online in the second and third quarter. Those two have been outperforming our expectations. And we're already now moving on to the Gen 3, where we continue to see kind of outsized performance from these wells. So you've seen the productivity trends. We think there's still more upside to be had within that, and we're very excited to be able to talk more about that in the coming quarters. Operator: And our next question comes from the line of Neil Mehta from Goldman Sachs. Neil Mehta: Yes. And Nick, it's great to see the capital efficiency improvement. And that kind of sets up my question for -- as you think about '26, is it fair to say that the CapEx, all else equal, should be relatively flat '26 versus '25? And what are some moving pieces as you think about the soft guide for next year? Domenic Dell'Osso: Yes. I think that's exactly the right message, Neil, is that you should think about the same CapEx profile for next year, same dollar amount. The moving pieces, of course, are just going to be the market conditions. So again, one of the things we're really pleased within our business is our willingness and ability to be flexible in how we allocate capital and how we view production within a given year. So we're ready for anything the year throws at us. And obviously, gas markets have been pretty volatile through the summer being pretty soft even through the third quarter. Production has been pretty high. The '26 setup is different. It looks like we have some pretty significant structural demand growth that should outpace supply for most of the year. But by the end of the year, you've got some Permian pipes coming on in size, and that will again change the dynamic. So we're ready for that volatility and we're ready to be flexible. Neil Mehta: Yes. Nick, and then the follow-up is just the update on hedge the wedge. The curve looks really good here for 2026 and even into '27. And so how are you thinking about continuing to execute that program? And it backwardates pretty decently as you get it from '28 to 2030, and I know there's less liquidity. So I'm guessing 8 quarters rolling forward is still the right framework, but just your latest thoughts there. Brittany Raiford: Yes, Neil, this is Brittany. And you're right, we're going to maintain that disciplined approach to commodity risk management that includes layering on those hedge positions over a rolling 8-quarter period. And really, that strategy is focused on adding that downside protection, while also affording significant upside participation. And I think this year is a really great example of the effectiveness of that strategy. If you think about the second and third quarters, we had around $165 million of cash inflows from our hedges. So that's really great to see that downside protection in action. And as we look to '26, we're about 47% hedged. Collars are about 75% of that book. And in '27, we've already initiated our position just under 15% hedged. So even with a bullish outlook, we believe it's prudent to continue to layer on downside protection and the benefit that we have is with our fundamentals team. We have great market insight to proactively manage that book once those positions are layered on. So we're going to lean in when we see opportunities in the market and consistently add to that position. Operator: And our next question comes from the line of Zach Parham from JPMorgan. Zachary Parham: First, just wanted to follow up on Kevin's question. You took your D&C costs down in the Haynesville and expect those to move even lower in 2026. Can you just talk about the factors pushing those costs lower? Is that mostly efficiency gains that you factored in, in 2026? Or is there some level of OFS deflation built into those numbers? Josh Viets: Zach, really, this is going to be driven by efficiency improvements. As we assess the OFS market and just think about where activity trends are potentially heading in 2026. We would expect the OFS markets to be relatively stable year-over-year from '25 to '26. And so we're really just thinking about how do we continue to strengthen our business improve our operational performance and continue to build upon all the success that we had in 2025. Zachary Parham: And then my follow-up, just on your macro views in general. You've mentioned flexibility and you've got this productive capacity sitting here. As we sit here today, would you expect to be back at 7.5 Bcfe a day in January? And maybe just talk about the flexibility you have on when you bring those volumes to market and kind of how you think about that? Josh Viets: Yes. So right now, as we look at the setup, as we exit the year, we do have the ability to be at 7.5 Bcf a day, pretty early in 2026. But like we've demonstrated in the past, we're always going to be responsive to market conditions. Our goal is to always be thoughtful about how we shape our production, and that should be in alignment with how we see demand rolling out as well. And so we expect to average 7.5 Bcf a day across 2026, but that doesn't necessarily mean that we're going to simply just be flat. As demand pushes higher or if we happen to see market weakness, we're always going to be in a position to exercise flexibility and push volumes higher or be lower. But again, the target for next year across the year will be 7.5 Bcf a day. Operator: And our next question comes from the line of Charles Meade from Johnson Rice. Charles Meade: I want to ask a question on breakevens and go back to some of the -- I think, your prepared comments. I believe I heard you say in your prepared comments that your -- I think it was your company-wide breakeven is now $2.75. And I'm wondering if you could tell me if I heard that correctly. And also maybe remind us what the other important assumptions in that number are? And I'm thinking just two, off the top of my head, whether that includes location costs and if there's some minimum threshold return that's baked in that number also. Josh Viets: Charles, this is Josh. So the $2.75 that you referenced is, shows up on Slide 12. I mean Nick did reference this in his prepared comments, but the $2.75 refers specifically to Haynesville. And so think about that as just simply an annual free cash flow breakeven for -- specifically for that asset. So obviously, it would include any corporate items such as the corporate dividend. But what I'd like to maybe just comment there, I mean, obviously, with improved productivity, reducing costs, that's a great combination that's going to pull down breakevens. Just as a point of reference, if we were to go back to where we initially guided on the company and specifically Haynesville back in February, we would have been sitting probably closer to $3. So we've seen that much improvements in the business to kind of be able to back out almost a quarter out of our breakeven just across the calendar year of 2025. Charles Meade: Got it. That's great context. And then maybe this is a follow-up for you perhaps. The Western Haynesville horizontal that you're going to drill in 4Q, can you give us some framework for what success would look like there? What would get you more enthusiastic about the play? And perhaps as a follow-on to that bracket, what we should be thinking about for your activity there in '26? Josh Viets: Yes. I mean, first of all, we need to get this first well on the ground and assess the results before we start thinking about what might else occur in 2026. But to your first question, we've confirmed the geologic model. We have a good understanding of what the subsurface looks like. And so with the well, it's really first about kind of fine-tuning our operations of drilling in this part of the state. And then, of course, primarily, this is really centered around productivity and getting some early time data to kind of assess the overall reservoir performance. But obviously, we'll be monitoring this very closely to help better understand longer-term flow characteristics from the reservoir. Operator: And our next question comes from the line of David Deckelbaum from TD Cowen. David Deckelbaum: I wanted to just follow up a bit on some of the color and planning around '26. I'm just curious if you could talk to the appraisal program for the Western Haynesville in '26. And really, I guess, how impactful you could see this asset becoming to your overall program in what time frame? Josh Viets: Yes, David. So for next year, the soft guide that we've provided of $2.85 billion to deliver the 7.5 Bcf a day is inclusive of the appraisal CapEx that we have planned. So we're not, at this point, getting into the specific details of what all is included in that. But I think it's just important to reiterate that all the appraisal CapEx that we think we need is included in that $2.85 billion. And that really just speaks to the overall improvements that we've seen in capital efficiency through the course of the year. And I think at this point in time, it's just way too early to be speculating on what might this do to capital going forward. We're really just in the first inning there. David Deckelbaum: I appreciate that. And then maybe we could revisit just the LCM deal. I know without going into pricing terms, I'm curious just what merits of this deal sort of propelled you or motivated you to sign this one, why this agreement sort of makes sense versus perhaps some others like LNG or power-related contracts. I surmise you're trying to achieve a premium relative to what your forecast might be on 2030, but what was the general thought process or guidelines that you're using right now to sort of engage in some of these offtake agreements? Daniel Turco: Yes. Thanks, David. I think Slide 10 is a great slide to lay out how we're thinking about these deals. And for Lake Charles Methanol specifically, hit -- majority of the elements you see on our guiding principles laid across this page. It was a deal that facilitated new demand and has committed offtake. So a huge win for us. It provides the customer their needs. It provides them reliability and flexibility. The genesis of this relationship is -- goes back to the heritage companies, heritage Chesapeake and heritage Southwestern, where they have a long-standing relationship with the principles of this project, ex-Cheniere guys. And so they understand the reliability and the reputation that we bring. And so they were looking for long-term security of supply. They were looking for a differentiated product. We can deliver the lower carbon intensity score product, and give them that flexibility. We have a baseload sale into them, but we also give them a bit of operational flexibility. So we can really manage their supply. So that leads us to achieving that premium price on that deal. As this deal opposed to other deals, we're taking a huge portfolio approach to this. We're looking at LNG deals. We're looking at power deals. We're looking at more industrial deals. But we're really taking it back to these guiding principles and how do they meet and create value for us as a corporation. So at the moment, we have -- because of our position, because of our portfolio, we have a lot of conversations going on right now. We have something like 20, 25 different conversations going on across the LNG spectrum, across the power spectrum, across industry. And again, it comes back to that value creation and then risk reward of any deal we're looking at. Operator: And our next question comes from the line of John Annis from Texas Capital. John Annis: For my first one, with over 2 Bcf of power and industrial demand growth expected along the Gulf Coast that you highlight on Slide 11. How should we think about the pace of leaning further into supply agreements like the one with LCM and the inbound interest you've noted. Just given you're one of the few with meaningful inventory depth in the Haynesville and with egress from Texas to Louisiana potentially constrained are you contemplating potentially being more patient with entering into future deals to let the gas on gas demand further materialize and accrue to your benefit? Domenic Dell'Osso: Well, we're happy to be patient. And I think we're going to go back to the principles Dan just described in how we think about which deals we want to pursue, which customers we want to align with to provide long-term supply agreements. We're looking for those characteristics, again, that help to deliver a better business for our bottom line, higher revenue, we want lower volatility for our business. We're trying to set up customer relationships where we can help provide a service in addition to the commodity that we're providing in that it's uniquely reliable, flexible, and we can get paid a premium for that. When we think about the overall scope here of long-term agreements, this one is attractive to us because it doesn't require any balance sheet commitments and the price is floating. So if you're thinking about doing transactions, where there are balance sheet commitments associated with the transaction or you're changing your price characteristics, whether it be a fixed price or a collar price, you would think about the impacts those have on your portfolio. Those could be very attractive to you as well. And again, it will be a portfolio approach as to how we think about the balances here. But to put in place a structure like this where you're getting a premium to NYMEX, which, of course, NYMEX being the most liquid natural gas market in the world, we can hedge around that and manage that exposure proactively, we thought was a really good opportunity here. So we could do more of these. And again, we'll continue to look for transactions that have all the right characteristics, but they won't all look the same. In fact, intentionally, we will have a portfolio approach to this. John Annis: Terrific. I appreciate that color. For my follow-up, with your position in the Nacogdoches fault zone, I wanted to get a sense of how similar your position in the Western Haynesville is to the NFZ just in terms of depth and temperature. And do you believe your experience operating in the highest geopressured area of the legacy Haynesville positions you to potentially come down the learning curve more quickly. Josh Viets: Yes, John. So there's definitely some similarities. Of course, as we get into the Western Haynesville, the depths will be a little bit deeper from a total vertical depth standpoint. But as far as will there be learnings, absolutely. Currently, when we think about how we're developing the NFZ area of our play, just as a point of example, we're drilling completing wells there, $1,500 to $1,600 per foot. And today, if you're thinking about wells in the Western Haynesville at around $3,000, I have every bit of expectation that it doesn't take us 2x the well cost to go develop that part of the asset. So we will absolutely carry forward those operational learnings. I think there's a lot of things that we can carry forward into this part of the play, which again is why we simply believe that we're the right type of operator to be operating in a very complex part of the basin. Operator: And our next question comes from the line of Scott Hanold from RBC Capital Markets. Scott Hanold: Just touching base again on the Western Haynesville. Just a couple of questions, just a clarification. Number one, first on -- you spoke about like geological complexities and stuff out there. Do you -- what other kind of facets are important for us to focus on? And then trying to figure out, like is there a greater position for you to build out there? Or do you think you've got a pocket that you like right now? Josh Viets: Yes, Scott, we feel really good about the position that we've built. I mean with 75,000 net acres, of course, the gross acre position is going to be a little bit larger than that. And so we think there's some opportunities to maybe kind of buildup in and around that position, but nothing material. Again, given our overall inventory depth in the basin, we think this is about the right size for us going forward. And then to your comments on the geologic complexity, one of the things that we've observed through our data sets is there is quite a bit of structural complexity as you move across the play, especially as you move further west, you'll get some very steeply deeping beds there that create some complexities in terms of how you drill wells, especially in the lateral section. And so we are very thoughtful about where we want it to be. We like the area that we've got, that it has much less structural complexity within it, which puts us in a position to simply executing at lower cost while delivering outsized production results. Scott Hanold: And my follow-up question is on the Haynesville productivity improvements and the view of seeing it improve yet into 2026. It sounds like some of that is your Gen 1 through potentially Gen 3 design. Could you give us a little bit of color on exactly what you're tweaking within that? And also, is there any facet of the expectation of productivity improvements related to where you're targeting within the Haynesville? Or is it more based on these new generations of completions? Josh Viets: Yes. I mean, first of all, both the Bossier and the Haynesville are very prospective within our acreage position in Louisiana. So we continue to develop both. And especially in the southern portion in and around the NFZ, both zones are highly prolific. And so yes, we continue to optimize exactly where we land the wells within those zones. But really, what we find to be one of the biggest drivers is just simply how we complete the wells. And so exactly that recipe, obviously, we're not going to get into that. But I think the biggest factor is we have a very low-cost sand source that we're able to rely on going forward. That also allows us to control the deliverability of it in terms of ensuring that we have the right sand at the right time. Historically in the basin, especially as we've gotten more and more efficient with our completions, third parties, their ability to keep up with their needs has definitely been lagging. So we can now control our own destiny. We have a lower supply sand source. We can increase our proppant loading and do so more economically than what others can do in the basin. Operator: And our final question for today comes from the line of John Freeman from Raymond James. John Freeman: When I was looking at the full year CapEx reduction by another $75 million, the two biggest drivers of that are the $25 million less allocated to the productive capacity build, which you've been pretty clear kind of highlighting the efficiency gains in the Haynesville that drove that. But the other amount was Northeast App that dropped about $25 million, and I know there's some curtailments. And I'm just trying to get an understanding if that's sort of timing curtailment related? Are there efficiency gains? I didn't see anything in the deck on kind of what drove the meaningful Northeast App drop in the budget. Josh Viets: Yes. So I mean, if you just think about kind of seasonality across the United States, I mean, the majority of the seasonal demand weakness will show up in the Appalachia region. And so when we think about curtailments, we will tend to prioritize curtailments in the Northeast first. And so that's really what's impacted the Q3 number. As you kind of project forward into the fourth quarter, we're obviously carrying forward curtailments into the fourth quarter with those being predominantly in the Northeast. So that's, by and large, what's driving that, John. John Freeman: Okay. And then on the follow-up question, you've obviously made significant progress on debt reduction this year. When I'm looking at next year relative to your capital returns framework that you all have on Slide 14, how should we think about kind of further debt reduction relative to other returns such as buybacks? I guess said differently, in other words, like would you anticipate a similar amount gets allocated to debt reduction next year in that sort of capital returns framework? Domenic Dell'Osso: Yes. John, it's Nick. So last quarter, we said we were going to prioritize debt pay down for a period of time as we recognize that post-merger, our balance sheet is very strong, but we would like to have less debt for the long term. So we're going to continue to do that going into next year. We think we have a lot of momentum to pay down some debt next year, and looking forward to delivering on that. I would just note that this year, we did, both retire $1.2 billion of debt and returned $850 million to shareholders. So we are willing and able to do both. We have the financial flexibility to allocate capital towards shareholder returns in size when we choose to do it. And we'll be ready to do that when the right time hits. So I would say stay tuned. We'll be giving more specific answers as we get into next year and see market conditions set up. But we're totally flexible, capable and willing on all fronts. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Nick Dell'Osso for any further remarks. Domenic Dell'Osso: Thank you, guys, for joining the call this morning. We're obviously really pleased with our third quarter results. This puts a great end to the first 12 months of Expand Energy, and we think is such a great setup for where we head next as an organization. The momentum we have around capital efficiency as well as building out our marketing business is very exciting to us. And we think there's an opportunity to create a tremendous amount of value for shareholders going forward and look forward to speaking with you all at each step along the way. Thank you for your time. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good day, and welcome to the Orion Group Holdings Third Quarter 2025 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Margaret Boyce of Investor Relations. Please go ahead. Margaret Boyce: Thank you, operator, and thank you all for joining us today to discuss Orion Group Holdings Third Quarter 2025 Financial Results. We issued our earnings release after market last night. It's available in the Investor Relations section of our website at oriongroupholdingsinc.com. I'm here today with Travis Boone, Chief Executive Officer of Orion; and Alison Vazquez, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we'll open up the call for your questions. Before we begin, I'd like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts are forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-Q and 10-K. With that, I'll turn it over to Travis. Travis, please go ahead. Travis Boone: Thank you, Margaret, and thank you all for joining us today. I'll cover our financial highlights and market update, and then I'll turn it over to Alison to discuss our detailed financials. Before I start, I'd like to highlight that Orion was recently recognized by E&R Magazine as #2 in the top contractors in transportation in the marine and port facilities category and #15 in the top 20 concrete contractors in the U.S. This recognition reflects the strength of our team, the quality of our work and the growing reputation we built in both the marine and concrete markets. Now onto the quarter. I'm excited to announce that we delivered another strong third quarter marked by top and bottom line results, robust cash generation, good bookings and market-leading safety metrics. We have also continued to advance strategic priorities, including expanding our bonding capacity by another $400 million, continuing to strengthen our Board with the appointment of Robert Ledford, being shortlisted on strategic INDOPACOM MAX and closing the sale of the East West Jones property in October. With a strong balance sheet, disciplined capital deployment strategy and focus on long-term strategic execution, our team is laying the foundation for Orion's next phase of growth. As we enter the fourth quarter, Orion is well positioned to take advantage of multiple growing tailwinds that span robust AI investment, increasing domestic focus on reshoring manufacturing, commercial and public investment in marine infrastructure and defense expansion across the Pacific. Our talented team is poised to build on our momentum and capture the exciting opportunities on our doorstep. Following another strong quarter of performance and with a favorable outlook, we are pleased to raise our FY 2025 annual guidance for revenue, adjusted EBITDA and adjusted EPS that Alison will cover in detail in her remarks. Moving on to our opportunity pipeline, bookings and outlook. Our aggregate pipeline is a healthy $18 billion with over $1 billion of opportunities that we have submitted and are awaiting award. During the third quarter, we booked over $160 million in new contracts and change orders that were balanced across our Marine and Concrete segments with each of our operating regions contributing wins. Starting with our Marine segment. Recent awards included installation of a crane trestle for a major transportation project and maintenance dredging for the Army Corps. Across our marine markets, activity remains strong with multiple opportunities advancing across all regions. In the Pacific, we are pleased that NAVFAC recently selected teams on which Orion is a key marine construction contractor on strategic multiple award or MAC contracts. As most of you know, these selections shortlist a group of prequalified contractors who can compete on future task orders, limiting the competitive landscape. Having been shortlisted based on our team's proven technical expertise, performance and safety record, we are now eligible to pursue work in the Pacific that leverages our core marine capabilities. Most recently, in September, our team was shortlisted on the $15 billion Pacific Deterrence Initiative contract or PDI MAC. This MAC streamlines the acquisition process for major infrastructure projects throughout the Pacific, enabling faster execution of essential projects across the INDOPACOM region. Larger opportunities under this MAC are expected to be procured in mid- to late 2026. In June, our team was shortlisted on the $8 billion Hawaii Wake Island MAC. These bidding vehicles are important milestones in our long-term growth strategy, and we expect that much of the Navy's specific infrastructure investment over the coming years will flow through these contract vehicles, along with several other MACs that we are also pursuing. Our Atlantic business continues to be hot in both project delivery and opportunity outlook. Constant focus on operational excellence, commercial discipline and pursuit prioritization combined to deliver strong profitability and a durable growth outlook ahead. The Gulf business is equally exciting with expanding backlog and an opportunity pipeline that gives us confidence in our growth outlook. We continue to see a healthy mix of negotiated private marine construction and dredging work supporting energy, chemical and bulk material clients, along with robust public sector federal, state and port authority opportunities. In summary, our Marine business is well positioned in growing markets that value our proven track record of executing safely with predictable excellence. Moving on to Concrete. Our concrete business continues to benefit from a strong growing near-term opportunity pipeline that spans data centers, multistory buildings, medical, warehouse and industrial manufacturing projects. Concrete awards in the quarter were led by multiple data center projects, a large cold storage facility and a handful of manufacturing and health care projects. Demand for data centers shows no sign of slowing and our deep partnerships and track record with major hyperscalers and general contractors in this space position us well from a competitive standpoint to continue to win work and capture that growth. Having delivered 39 data center projects, we've earned a strong reputation for reliability and performance, which we're now using to fuel expansion into Florida, Arizona and other high-growth data center markets. And finally, I'm very pleased to share that we closed on the sale of our East West Jones property in October for a purchase price of $23.5 million, something our team has been advancing for quite some time as many of you are keenly aware. We intend to use the proceeds to reduce debt and for general corporate purposes. In connection with the sale of this property, we also entered into an exclusive dredge spoils agreement with a buyer that gives Orion the right to deliver dredge spoils to the property for 10 years, giving our team a competitive advantage in the Houston Ship Channel. In summary, as we look ahead, I'm confident in our positioning and optimistic about the future. The AI boom, combined with lower interest rates and lucrative incentives for our clients to invest domestically are catalyzing our Concrete segment. On the marine side, increased federal investment in military infrastructure as well as port expansions and dredging that are required to keep pace with maritime transportation and logistics are clear catalysts to growth. I couldn't be more pleased with our talented team, and I'm excited about Orion's positioning to build on our momentum and capture the significant opportunities ahead. I'll now turn it over to Alison to review our financial results. Alison? Alison Vasquez: Okay. Excellent. Really good stuff, Travis. Thank you. Let's dive into the numbers. So first, the consolidated results for the quarter. We're pleased to report revenue of $225 million, operating income of $5 million, adjusted EBITDA of $13 million and adjusted EPS of $0.09 per share in the quarter, which results were generally in line with management's estimates and in line with our updated full year guidance, which I'll cover shortly. From a sequential perspective, these results represent 10% growth in revenue, 20% growth in adjusted EBITDA and 27% growth in adjusted EPS. The sequential top and bottom line growth were driven by increased volume, strong execution, favorable utilization, primarily in our Marine segment and reduced borrowing costs. As compared to the third quarter of 2024, our 2025 results were comparable for revenue, lower for operating income, adjusted EBITDA and adjusted EPS. This reduction was caused primarily by favorable project closeouts in 2024 that did not reoccur this quarter, an increase in SG&A to support and invest in business growth, a decrease in gain on sale of disposals as compared to 2024 and partially offset by reduced borrowing costs in 2025. I'm pleased to report that we generated $23 million in operating cash flow in the quarter and $14 million year-to-date. We wrapped up the quarter with $21 million of net debt or just under 0.5 turn of leverage on a TTM EBITDA basis, which is a very healthy place for Orion. As [ Boyce ] covered earlier, in October, we were very happy to close on the sale of the East West Jones property. The transaction resulted in a significant cash upside of over $22 million, net of commissions and taxes and a nominal book charge, which will be reflected in our fourth quarter results. We expect to use the proceeds to pay down debt and for general corporate purposes. From a backlog perspective, we added approximately $160 million in new awards and change orders in the quarter. And at quarter end, backlog stood at $679 million. Moving on to segment results. From a segment perspective, Marine revenues increased just about 2% over the third quarter of 2024 and 6% sequentially to $143 million in the quarter. And Marine adjusted EBITDA grew over 50% to $18 million in the quarter, which represents a 12% margin this period compared to 7% in the same quarter of 2024. Strong marine margins are attributable to a greater mix of higher-margin revenue, excellent execution and project closeouts and favorable equipment utilization. Concrete revenues decreased 5% over prior year and were up 17% sequentially to $82 million in the quarter, and Concrete incurred a $4 million loss in adjusted EBITDA for the quarter compared to a $4 million profit in the third quarter of 2024. The reported adjusted EBITDA reduction is primarily attributable to favorable project closeout benefits in 2024 that did not reoccur in 2025. Some weather issues in the quarter also impacted chargeability in our concrete business this quarter. For reference, Concrete's contribution EBITDA margin in the quarter was right at 2%. I'll wrap up with our guidance update. We're very pleased to update our full year 2025 guidance as follows: increasing our revenue guide to $825 million to $860 million; increasing our adjusted EBITDA guide to $44 million to $46 million, increasing our adjusted EPS guide to $0.18 to $0.22 and reiterating our CapEx guide of $25 million to $35 million. I'll now pass it back to Travis to wrap it up. Travis Boone: Thanks, Alison. We have all the pieces in place to finish the year strong, and I'm even more excited about what lies ahead in 2026 and beyond. I want to thank our shareholders for their continued confidence in us and our people for the exceptional work they do every day in the field to deliver safely for our customers. Operator, we're ready to take questions. Operator: [Operator Instructions] And our first question today will come from Aaron Spychalla with Craig-Hallum. Aaron Spychalla: First for me, I noticed a slide in the deck on the pipeline detail on award dates and opportunity size. Can you just maybe talk a little bit about that? Has that split by opportunity size been pretty consistent? And just any thoughts on expected traction with some of those larger opportunities? Travis Boone: Sure. Yes, we can hit on that slide. So it's -- we have been talking about our pipeline for a while and the increase in size of our pipeline. So we have been working to kind of provide some more information on the pipeline based on a lot of questions about it. And so we just tried to find a way to break it up so people could have a little better feel for what's in there, when it's coming and the size of the opportunity. So -- but generally speaking, I would say it's fairly consistent. Our pipeline for next year is very strong. We still got some good opportunities this year that we're working on bringing in the door and good, very, very strong opportunities for 2026. So anything to add to that? Alison Vasquez: Just to reiterate the comment from the call on the over $1 billion of award or projects and opportunities that we have that are in the queue awaiting award decisions. The number has stayed pretty consistent around that $1.2 billion, so over $1 billion, which is a really healthy place for us to be. That number has actually grown through the year if we look back through the earlier part of the year just because of some of the delays that we're seeing and some of -- with some of our clients and some of the pauses that our clients have put on. So it's nice to see that bids submitted and awaiting award number continue to be a very robust $1.2 billion. Aaron Spychalla: Understood. And then does that include the opportunity in Washington with the Estuary? Or maybe just can you give an update there on how that's progressing? Travis Boone: Good question. So that's the Deschutes Estuary project that we won almost a year ago, one, I believe, in late 2024, early 2025 time frame. It's not included in the pipeline. It's kind of in a weird spot where it's an awarded not booked project because we've won it, but it's not -- so it doesn't show up in backlog nor does it show up in our pipeline. It's in kind of a weird limbo spot until we actually get under contract to do the work, which is -- it's probably going to be about a year or so out before we actually start that work. So good question. Aaron Spychalla: Got it. And then can you just give a little bit more detail on the data center opportunity? Just how much of the concrete business does that represent today and maybe the pipeline there? Are you seeing quoting pick up? An average deal size pickup and just how you're thinking about opportunity there as we head into 2026? Travis Boone: Definitely, it's remained very steady on the data center opportunity side of things. We've been bidding quite a large number of projects on data centers. To your question specifically, it's about 27% of our pipeline is data centers and about 27% of our current revenue in the quarter, I should say. For concrete -- was 27% of concrete's revenue for Q3 was data centers and lots of continuing activity there with bid opportunities. Operator: The next question is from Liam Burke with B. Riley Securities. Liam Burke: Travis, you had -- or Alison touched on the negative operating profit for concrete. We're looking at sequential backlog step-up. Could we anticipate a more profitable mix in the backlog as we move into the fourth quarter? Travis Boone: Yes, definitely. We're expecting concrete to continue to be in a good place. As she mentioned, it's -- when you compare it over last year, it doesn't look super favorable based on some big pickups around this time last year. But as far as the concrete business, we remain confident in the profitability and the good business that it is. Liam Burke: Great. And have you seen any either good or bad movement on major projects due to policy changes with the administration? Travis Boone: None that affect us, no. We haven't seen any movement related to policy changes. The -- some of the movement that's happened has been related to -- there's been movement in the private sector over the last couple of quarters with awarding projects based on kind of uncertainty around tariffs and things like that. There's been some movement in other -- whether it's the Navy opportunities in the Pacific that I talked about last quarter, some of that slid out a year based on funding from Congress and some other things and -- but no policy-related shifts or changes. Alison Vasquez: Yes. I would just add that from a regulatory perspective, I mean, the deregulation that we're seeing happening is a benefit to our clients and some of the tax benefits that are coming in on deductibility of interest and deductibility of fixed assets, the acceleration of those things, those things should continue to the outlook for our commercial clients, especially. Operator: The next question will come from Brent Thielman with D.A. Davidson. Brent Thielman: I guess, Travis or Alison, maybe the first question just back to Marine. I'm trying to think through these really strong results here, the contribution from your two big projects to those margins. And then I guess, when we get into the point of what we think is kind of a sustainable margin threshold going forward for the segment, especially considering some of the somewhat slower bookings here in the last couple of quarters. Alison Vasquez: Sure. I'll start on that. From a margin perspective, we were really pleased with the Marine's performance in the quarter. And I would say that there were some -- we saw some benefits that came through some upsides, but I would also add that they were not unusual in terms of the amounts or the magnitude we had -- or the magnitude. We had really great performance across the business. We had great performance across the Atlantic in the Gulf. And we have really strong performance in dredging, which you'll see just the uptick in those when we publish the Q later today. But the dredging was very strong in the quarter, which ultimately benefits us top line and bottom line because of the very favorable equipment utilization that we get out of that. So while there were a handful of upsides that we recognized in the quarter, I wouldn't say they were meaningful. I would say that the more meaningful driver of performance was really the operational performance really led this quarter by dredging. So hats off to that team. Brent Thielman: Okay. And then the elevated SG&A, Alison, as you mentioned, is sort of a factor for the lower year-on-year EBIT performance. I guess your thoughts on where that goes going forward? What is that predominantly focused toward sort of how do you harvest that investment you're making in the business as we think about that going forward? Alison Vasquez: Sure. I would say that a couple of million of that SG&A uptick from a year-over-year perspective is related to investments in the business, like just directly advancement of or the expansion into the Atlantic or region for concrete into Phoenix, some of those offices that we're investing in that we're setting up so that they will fuel some of the organic growth that we are expecting going forward. And then I would say that probably the other big driver is there is some lumpiness associated with how certain employee costs were recorded last year as compared to this year that created a quarter-over-quarter increase, but from a sequential perspective, pretty consistent and in line. Brent Thielman: Okay. And then last one, just in consideration of the balance sheet here. You've obviously got the property sale, which comes in at the end of the year. Maybe just your expectations for cash flow in the fourth quarter, I guess, especially some of these larger projects wind down, presumably receivables come in. Should we -- or could we see a sort of a big windfall in cash flow into year-end? Alison Vasquez: The East West Jones, for sure, results in just a $23 million of cash that drops to the bottom line. Now that will go through investing. So that will be an investing activity, not an operating activity, but cash in our treasury, which is nice. And that cash, we have already received that cash. So it's nice to have that in our pocket now. From the rest of the business perspective, I don't see really a downturn in the cash collection cadence. The team is really focused on very keenly identifying, targeting and going after and reducing our past due balance sheet and really optimizing the working capital on the balance sheet. And I think that you can see that while we only report from a quarter-to-quarter perspective, you can see that really in the interest expense and the significant step down that we had this quarter on -- from an interest expense perspective. And that step down is related to just a significant amount of work that the team has put into optimizing the balance sheet so that we could minimize borrowings under the revolver. So do I think that from a fourth quarter perspective, we could see good cash? We will see good cash from East West Jones. We've not seen a slowdown in cash collection activity in the rest of the business. We have a couple of months to go, so we'll see. But so far through October, it's been good. Operator: The next question will come from Alex Rygiel with Texas Capital. Alexander Rygiel: Congratulations on the sale of East West. That's great news. Travis Boone: Alex. You've been hearing us talk about that for a lot of years. Alexander Rygiel: Good to see you got the sale done. Quick question for you on that. Is there a way for us to think about what the present value of the dredge spoil sort of 10-year agreement is at that site? Travis Boone: Yes. For -- probably we're going to keep the details on that just for competitive advantage purposes to ourselves. But it's -- we -- part of the reason we were okay taking a lower purchase price on that is because we were able to find a way to kind of use the property again through being able to use it for dredge spoils going forward. Alexander Rygiel: That's good news. And then as it relates to your expanded bonding capacity, can you talk about the value of bonds you have outstanding right now? And I guess what I'm trying to get to here is just what is the kind of remaining opportunity balance that you have with that new bonding capacity? Travis Boone: I'll say it this way. We had a fair amount of available capacity under our -- before we got this increase. What this does is just allow us to continue to bid larger projects and -- to facilitate the growth that we see coming here in the next few years. So we'll obviously -- we're going to keep working on adding additional bonding capacity to the mix to continue to kind of stay in front of our ability to grow and bid bigger projects. Alexander Rygiel: And then lastly, as it relates to the data centers, have you seen a notable increase in the size of the project opportunity for these data centers? And how does that compared to, say, two or three years ago? Travis Boone: Compared to two or three years ago, I would say definitely, there's some bigger ones in the mix now. We did do a large one a couple of years ago in North Texas. And -- but there's -- it seems -- and that was kind of a one-off, but it seems like now there are more of those larger type or larger data centers that we're -- that we have visibility to and are bidding on. We've talked about the one we're working on in Iowa. It's a large data center, a very large data center. Operator: [Operator Instructions] Our next question will come from Jason Ursaner with Bumbershoot Holdings. Jason Ursaner: Congrats on finally closing the East West Jones sale and a great quarter. It was about a year ago that I was asking you during the World Series about this Field of Dreams vision, and there was kind of clear daylight for significant growth in demand for the marine services coming over the next couple of years and just not a lot of contention, it felt like that you've kind of built the right platform to capitalize it. And so the question I have then was kind of really around execution and margin profile. And so it feels like kind of this year, some of those big pursuits with the Navy slid out a little bit, kind of started to talk about the transformational growth in 2026 and beyond. And so not a lot of change in the vision, but just kind of maybe this delayed onset. So just kind of to update on the overall long-term vision that you're building it and that it's coming. on the demand side, everything from your prepared script, the bonding, the preapproved MAC team kind of sounds like there's still a lot of clear catalysts that all the growth is coming and answered it a little bit in the Q&A, but maybe just reiterate anything that could cause shocks to that investment in the Pacific and just sort of this whole vision of demand materializing. And then to the extent that it does kind of come the way you're envisioning, whether you still think it's likely to translate to some of those long-term profitability targets that you previously laid out? Travis Boone: Sure. Yes. Thanks, Jason. I think you kind of answered your question for me, I think, a little bit, but it definitely -- we -- the way we saw it a year ago, we still see the same -- we still see everything the same, if not even more confident now because we've delivered on getting some things accomplished over the last year that we were working toward. And so as far as the vision, if you will, is still the same. The only thing that's changed a little bit is some of those delays in some of the bigger contract opportunities in the Pacific that slid out a year. So that's really the only thing that's changed from a year ago. And so we're continuing to invest and work toward the growth that we -- growth opportunity that we see in front of us. Everything is going as planned. Everything that's in our control is going better than planned, I would say. And there's a couple of -- the biggest thing out of our control is those opportunities sliding to the right. But we feel like we've executed well on our plan, and we've delivered, and we're going to continue to do that. And when those opportunities do show up, we're going to knock them down and keep going. Alison Vasquez: Yes. And I would just add to that, Jason, that -- I mean, the beautiful part about this business is it's not singularly threaded. Like this is a multifaceted business. And so the opportunities in the Pacific are exciting, and they afford us some pretty interesting growth catalysts in the future. But today, we're starting on a large project -- starting on a large project in Texas on a large bridge project over water. We have a big port project that's going on in South Carolina. So there are a number of other opportunities that we pursue and that we win and that we are executing that are outside of the Pacific. The Pacific is exciting, but it's not the only story here. Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Travis Boone for any closing remarks. Please go ahead. Travis Boone: Thank you all for joining our call today. We're super excited about where we are as a company and looking forward to coming back to you with our year-end results here in a few months. And I also want to thank our team, all of you guys working hard every day to make this business work. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to OppFi's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] I am pleased to introduce your host, Mike Gallentine, Head of Investor Relations. You may begin. Mike Gallentine: Thank you, operator. Good morning, and welcome to OppFi's Third Quarter 2025 Earnings Call. Today, our Executive Chairman and CEO, Todd Schwartz; and CFO, Pam Johnson will present our financial results, followed by a question-and-answer session. You can access the earnings presentation on our website at investors.oppfi.com. During this call, OppFi may discuss certain forward-looking information. The company's filings with the SEC described essential factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements. Please refer to Slide 2 of the earnings presentation and press release for our disclaimer statements covering forward-looking statements and references to information about non-GAAP financial measures which will be discussed throughout today's call. Reconciliations of those measures to GAAP measures can be found in the appendix to our earnings presentation and press release. With that, I'd like to turn the call over to Todd. Todd Schwartz: Thanks, Mike, and good morning, everyone. Thank you for joining us today. OppFi achieved another record quarter of revenue, profitability, originations and ending receivables. In addition, we are happy to report that we have renewed our credit agreement with Castlelake, improving operating leverage, pricing and capacity. Given our continued outperformance in Q3, we are raising earnings guidance for the third time this year. I will discuss growth, credit our Loan Origination Lending Application, LOLA migration and Bitty, our SMB investment on the call. In the quarter, we achieved a 12.5% growth in net originations and a 13.5% increase in revenue year-over-year, with almost 50% of originations coming from new customers. Auto approval rates increased to 79% year-over-year, and customers continue to be approved at higher rate than in prior quarters with no human interaction. We continue to see increased scale in our partnerships and direct response programs. We started testing Connected TV in Q4 and believe that this could contribute to growth in 2026 and beyond. This strong top line growth, combined with prudent expense management, led OppFi to generate a record $41 million of adjusted net income for the quarter, representing 41% year-over-year growth. Regarding credit, Model 6 continues to perform well and better segment customers across risk segments. Throughout the quarter, we saw higher charge-offs in new loan vintages. However, by tightening higher risk segments and applying our risk-based pricing approach, we maintain strong unit economics while sustaining growth. The team leveraged AI tools, customer attributes and repayment data to refit Model 6 into what we believe is the most reliable model to date, Model 6.1. This Model 6.1 refit is designed to identify riskier borrower populations better while incrementally improving volume. The model is also designed to enhance risk pricing across segments accounting for behavioral and seasonal volatility. In conjunction with our lending partners, we plan to roll out Model 6.1 refit in Q4 and fully implemented in Q1 2026. With LOLA, OppFi is building the origination system of the future. This will give us a clean architecture that is designed to take advantage of rapidly developing AI tools in originations, servicing and corporate operations. The product and tech teams have been working hard and have officially begun the testing phase of our migration. We plan to continue testing LOLA throughout the fourth quarter and migrate in Q1 2026. Early indicators give us confidence that LOLA will help continue to improve funnel metrics, increased automated approvals enhance efficiency in servicing and recoveries, better integrate major systems and deliver reduced cycle times and greater throughput for our product, tech and risk teams. Our investment in Bitty continues to perform well. In the third quarter of 2025, Bitty generated $1.4 million in equity income for OppFi. Bitty is a great partner that we have enjoyed working with and learning from in the SMB space. The company shares OppFi's business principles and corporate values and consistently uses technology to enhance operations and the customer experience. Bitty has identified significant additional growth opportunities and continues to capitalize on the ongoing supply-demand imbalance in the small business revenue-based finance space. Overall, OppFi delivered another strong quarter, both financially and operationally, outperforming expectations and allowing us to raise guidance for the third time this year. Looking ahead, we anticipate continued double-digit revenue and adjusted net income growth throughout the remainder of 2025 and into 2026. We believe OppFi is well on its way to executing its vision of becoming the leading tech-enabled digital finance platform that partners with banks to offer essential financial products and services to everyday Americans. With that, I'll turn the call over to Pam. Pamela Johnson: Thanks, Todd, and good morning, everyone. As Todd noted, we achieved another record quarter, generating revenues of $155 million, an impressive 14% increase over third quarter 2024. Model 6 has been a significant contributor to this growth, empowering OppFi to expand its reach and grow its business effectively. It's enhanced predictive power has enabled us to better manage our loan economics through risk-based pricing and allow our bank partners to underwrite larger loan amounts for creditworthy individuals, helping fuel robust growth in originations and receivables balances. As Todd noted, in the third quarter of 2025, we observed an increase in net charge-offs as a percentage of revenue at 35%, up from 34% in third quarter '24. It's important to note that we believe this risk is appropriately priced into these loans. This strategy also contributed to our net revenue growth, reaching a quarterly record of $105 million, a 15% increase over third quarter '24, though the yield decreased slightly to 133% from 134% in third quarter '24. Our scale and focus on cost discipline also played a pivotal role in our strong performance. Continued operational improvements contributed to notably lower total expenses before interest expense, which declined significantly to 30% of revenue in the third quarter, a substantial improvement compared to 33% in the same quarter last year. As we noted previously, earlier this year, we proactively paid down our corporate debt and successfully upsized one of our main credit facilities at more attractive interest rates. These strategic moves helped reduce interest expense to 6% of total revenue, down from 8% in the prior year. Additionally, in early October, we announced the signing of another $150 million credit facility with lower interest rates than the previous one, positioning us to realize even lower interest expenses as a percentage of revenue in the future. As a direct result of increased revenue and strategic reductions in expenses, adjusted net income surged 41% to a quarterly record of $41 million, marking a significant increase from $29 million last year. Concurrently, adjusted earnings per share grew to $0.46 from $0.33 last year. On a GAAP basis, net income increased by 137% to $76 million, reflecting our higher revenues lower expenses and a $32 million noncash gain related to the change in the fair value of our outstanding warrants. Because our Class A common stock price decreased during the quarter, the estimated value of the warrants issued when we went public decreased, driving this noncash income. However, as we have consistently stated, this is a noncash item and does not impact the underlying profitability of the company. Looking at the balance sheet. We continue to maintain a robust financial position, ending the quarter with $75 million in cash, cash equivalents and restricted cash, alongside $321 million in total debt and $277 million in total stockholders' equity. Our total funding capacity stood at a strong $600 million at quarter's end, including $204 million in unused debt capacity. During the third quarter, OppFi strategically repurchased 710,000 shares of Class A common stock for $7.4 million. Additionally, since the third quarter, OppFi has repurchased 317,000 shares of Class A common stock for $3.2 million as management continues to believe the share price does not reflect our underlying cash generation or our return on capital opportunity. Given our strong operating performance, driven by growth in net originations, revenues and adjusted net income, we are pleased to provide the following updated full year guidance. We are once again increasing our guidance. For total revenues, we are raising the bottom of the range to $590 million while leaving the top of the range of $605 million, up from the prior guidance of $578 million to $605 million. Adjusted net income is expected to be $137 million to $142 million up from our prior guidance of $125 million to $130 million. Based on an anticipated diluted weighted average share count of 89 million shares, adjusted earnings per share are expected to be $1.54 to $1.60, up from our prior guidance of $1.39 to $1.44 per share. With that, I would now like to turn the call over to the operator for Q&A. Operator? Operator: [Operator Instructions] We'll take our first question from David Scharf with Citizens Capital Markets. David Scharf: Maybe I'll start off with credit since it's been so topical this reporting season. Just curious, obviously, you spoke to a strong performance. Just curious, are there any early indicators or metrics such as, first, any defaults or the like? I mean anything that gives you a sense that households that you're catering to are becoming a little more stressed than three months ago? Or is it pretty much the loss rates you reported speak for themselves? Todd Schwartz: Yes. David, good question. Thank you. We constantly are surveying -- looking at different data points, not only from the data that we received from customers, bank accounts and the macroeconomic data. I mean the backdrop from a macroeconomic standpoint still remains largely unchanged. We are hearing about different products like auto loan delinquencies and all this, but we really focus on how it affects our customers. In our bank data, we're not seeing anything that would cause alarm. However, we did see some higher early payment stats in the quarter that caused us to tighten slightly. I will remind you, though, that back in '22 without risk-based pricing, not being able to price risk properly in these environments is something that we were not able to do. Also our recovery lines. We feel really good about keeping unit economics strong with pricing and strong recoveries in this environment and feel like we can operate in any environment with Model 6, and it's kind of a dynamic modeling environment. It's not set it, forget it anymore. We're really of the mindset that we're going to meet the customer where they are and we're going to price it properly and have a product for them. So yes, we may incur some higher charge-offs coming through in the fourth. But let's not lose sight of as a percentage of revenue, year-over-year, we expect our charge-offs as a percentage of revenue to go down year-over-year. So that's just kind of how the environment is now. You've got to -- you can't set it forget it, you have to be constantly watching it and constantly updating your pricing per segments and your pricing for risk. David Scharf: Got it. No, that's helpful. You kind of delved into maybe my follow-up, which was maybe to get a little better context for risk-based pricing that Model 6 is going to enable more of. I guess at a high level, should we think about more risk-based pricing as you're currently leading yields on the table? Or is it you're leaving volume on the table that there are maybe consumers that are applying, not accepting the loan? Maybe give us a little context. Todd Schwartz: It's both. I think in times of volatility and economic environment, it allows us to properly price risk so that gives us that lever. But it also allows us to target with potentially lower prices for our lowest risk customers. It allows us to better target them and so we use it for both. We use it for credit and losses. We also are using it for targeting and growth. And it's a switch that you can toggle depending on the environment. And that's kind of why I spoke a little bit before about the dynamic nature of it. It's something that we're reading in real time on a weekly basis and kind of assessing especially in an environment like this where there's a lot of news and a lot going on. We do -- the Fed's meeting soon. We're waiting and seeing on that from a unit economic standpoint, if we do get some relief on interest rate. But right now, we're just in an environment like that where we're just going to continue to watch credit, but we still think we can grow in this environment with strong unit economics. David Scharf: Got it. Great. I apologize. Maybe just one quick follow-up on credit because obviously, you had mentioned auto, it's been sort of dominating the headlines of a lot of company-specific events out there. But at auto subprime delinquencies have gone up. I'm curious, since you're capturing bank data, are you -- do you monitor what percentage of household budgets are being attributed to auto payments since affordability is still sort of plaguing the auto sector for both new and used? Todd Schwartz: Yes. I mean something -- we're very -- ability to repay is very prevalent in our modeling, not specifically necessarily auto but it is factored into the equation of ability to repay. The customers have to have the discretionary income to make the monthly payments. And so it's something that is top of mind in our model. We have not seen in our bank data, significant reductions in income or balances or anything that would cause alarm here and so that's why we've tightened where it made a lot of sense and then also use the model to better target lower risk customers in this environment. But we're watching it just like everybody else right now. I'm not going to not say that credit isn't worse. It is worse than it was last year in the new segments, especially the new, but something that we can operate in now with our current pricing structure and how we operate. Operator: Our next question comes from Mike Grondahl with Northland Securities. Mike Grondahl: On the origination side, could you talk a little bit about direct mail and then some of your thoughts on Connected TV that you mentioned? Todd Schwartz: Yes. Thanks, Mike. Listen, I think direct mail is a highly scalable lever for us that we're just starting. We're just in the early innings of it. It was 4.2% of our originations, that can easily be in the double digits if we wanted. We're going slow and being pretty methodical and strategic. We're making sure we have the creative right and making sure that the modeling is right. It's something that -- it's a powerful funnel -- top of funnel, if you can get a lot of assets consistent it's something that we're prioritizing and focusing on. Mike Grondahl: And then Connected TV? I think you... Todd Schwartz: And the Connected TV. Yes, so we're really early innings of that, but it's something that we think it's controllable, scalable and it's also reaching a lot of our customers in a targeted fashion. So we're excited about it. It also allows us to get our brand out there and are creative. So our marketing team has been working hard on that, and we're going to be testing that throughout the quarter. But we'll have more to report on that in our Q4 earnings. But we think it's promising, and it's something that can help us scale and continue to grow next year. Mike Grondahl: Got it. And then you've been really disciplined on OpEx. I would call OpEx sort of basically flattish to up a tad, how much can you grow originations in the book without having a step function lift in OpEx? Like you've kind of done this now for 2-plus years, if not longer, bolted on more revenue and more loans on your existing platform and then really efficient, the throughput has been great. But how long can you continue to do that? Todd Schwartz: Yes. Good question. We feel really confident in our ability to scale. I mean this is where things get highly incremental at this scale as far as originations and growth go. We don't anticipate -- I mean, LOLA is that. That's why I keep talking kind of about LOLA on these calls and introduced it last quarter. We made significant R&D and software development initiatives in the company over the last year to allow us to continue to scale and then also allow us to essentially, as I said, building the lending origination system in the future, but it really allows us to install and integrate some of these new AI tools that are coming. Some of them are more developed than others, and some of them are more ready to use today versus a year from now. But it was all about having a clean architecture on your tech stack and not have a lot of technical debt built up so that we can take advantage of some of these tools and also to better integrate our corporate systems. So we really don't anticipate having to add much fixed overhead. It's more going to just be variable cost of the growth and think that this can continue and definitely into next year. Mike Grondahl: Got it. And then one last question. I think in your prepared remarks, you said double-digit revenue and adjusted net income growth for the rest of 2025, obviously, implied by your guidance. But I think you also said and into 2026, is there anything you want to say about 2026? Are you sort of striving for double-digit top line? Anything there would be helpful. Todd Schwartz: Yes. I mean listen, it's something that it is credit dependent. I'll caveat that. But I will say that we have the levers, and I'm pretty confident within our wells, we have the levers to grow in double digits and feel confident we can do that. The only thing that would prevent us from doing that is we're not going to chase growth if credit is not there, it's just not something we're going to do. You know us now, we're very disciplined. So we won't chase growth to take on higher losses, but we do have the levers if that's what you're asking for next year for double-digit growth, absolutely. Operator: We'll take our next question from Kyle Joseph with Stephens. Kyle Joseph: Just given everything going on with the portfolio in terms of new customer mix, the risk-based pricing. Just wanted to get your -- kind of your thoughts in terms of yield trends we should expect going forward? Todd Schwartz: Yes. We feel good that our yield's stable. It came down a little bit in Q3. It's due to -- that is typical this time of year, Q3, you're going to see some of your lower yields as you start to see some losses kind of come into the past dues when they drop out of accrual. We do hope that we'll see a nice rebound in Q4, and it's also been stable throughout the year, but we anticipate stability and an elevated yield coming through the book. And that is part of the risk-based pricing, right? We're better pricing risk across the segments. So we feel good about where we are with that. Kyle Joseph: Got it. Helpful. And then moving to the balance sheet and capital. Obviously, you guys have done a lot of work on the balance sheet year-to-date, and it's in a really good place, and then you guys are still generating strong cash flows despite portfolio growth, but just give us a sense for kind of your capital allocation priorities now that you have the balance sheet in a really good position. Todd Schwartz: Yes. Well, Pam, I think Pam talked about it, we've been buying back stock in open windows and with predetermined programs. We'll continue to defend our share price, and we think it's undervalued. It's something that we were -- we feel like we're not trading. Hopefully, the third time is the arm here, Kyle, with us raising guidance again. But listen, it's -- that's top of mind right now is obviously defending our share price and making sure that we're properly valued in the marketplace. We're continually actively looking at M&A opportunities, looking at -- we're using it as a way for growth. The menu of options is open. So we're actively looking at those different scenarios and best and highest use of our cash. Kyle Joseph: Got it. And just one last one for me. Apologies if I missed it, but just in terms of the marketing spend, we saw a return to growth this year. I think you mentioned that was maybe TV in direct mail. But yes, if you can walk us through what you're seeing in terms of customer acquisition costs and how you expect marketing expenses to go going forward and how that -- versus portfolio growth. Obviously, they go hand in hand. Todd Schwartz: Yes. I think I stated back in Q2, you should expect the acquisition cost to kind of creep up here as we go into growth mode here in the second half. And that's -- it's consistent with what's happened. We're probably up $20 to $30 per -- we feel very comfortable there. And I think there's even probably some more room, especially for lower risk segment customers to be able to pay the CPS and feel really strong about the unit economics and the incremental growth it provides. Operator: Our last question comes from Robert Lynch with Stonegate Capital Partners. Robert Lynch: Just have a few here. With net charge-offs as a percentage of revenue saw a slight increase in Q3, is this typical seasonality or mix? And could you get this back up to the 45% in Q4 that we saw last year? Seasonality and early indications for the holiday season coming up. Todd Schwartz: Yes. I mean there is seasonality to the business. And you're going to see your lowest charge-offs as a percentage of revenue kind of in Q2 and Q3 and then it elevates. Year-over-year, it is slightly elevated. We do anticipate, though for annualized -- a reduction as a percentage of revenue overall. We didn't tighten -- we were very conservative in '24, even tightening probably a little too conservative maybe in Q2, which caused really strong revenue as a percentage charge-off numbers. I mean we didn't -- we don't need to be -- we're at a level now where we feel really comfortable that the unit economics are strong. So it's going to flatten out here. And incrementally, every quarter, it could be a little bit less, it could be a little bit more, but we feel really good at these numbers where we're at and think that we can generate really strong returns within this band. Robert Lynch: Okay. Great. Really appreciate the color there. I've got maybe two more here, but you highlighted stronger recoveries from operational changes. Is the second half recovery run rate now above plan? And how confident are you that this level is sustainable into 2026? Todd Schwartz: I mean we've now achieved a strong -- as a percentage of gross charge-offs, a really strong recovery right now for two years. We think it's very sustainable, it's performing at or above plan every quarter. We have a great process team and strategy behind it. So we feel is sustainable. And in the first year when we were achieving those results, it was something that was hard to bake into the unit economics because we weren't sure if the stability of it was going to last, but it has. And we feel really good that we're going to continue to achieve that percentage of recovery on charge-off. And obviously our unit economic model and how we price and how we target on the front end. And so it's been a great story for us. Robert Lynch: Awesome. And I've got just one more kind of unique question here. But on the recent shutdown, what impact did it have on any of the data you see coming in as well as your models with customer behavior, more for them and yourself as well? And how are you monitoring the situation and mitigating any of the effects going forward in real time? Todd Schwartz: Yes. I thought we were prepared for this question because I thought I was going to get it sooner, but no, it's something that we're activating. We have a very, very fair hardship program for customers that have been impacted by the federal government shutdown. We do have some exposure. It's something we're currently watching. It's pretty de minimis at this point on the number of hardships this time of year because of weather events, it is our largest hardship program offering for this quarter in terms of the Q3 and the weather events that happen usually typically in this time of year. But incrementally, there are some more coming from the federal government shut down, nothing that we've caused alarm or causes to really change how we operate at this point or credit -- from a credit perspective, but definitely something we're watching very closely as it unfolds, and we'll continue to. Operator: It appears we have no further questions at this time. This does conclude today's program. Thank you for your participation, and you may disconnect at any time.
Operator: Good morning, and welcome to the MGP Ingredients Third Quarter of 2025 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Amit Sharma, Vice President of Investor Relations. Please go ahead. Amit Sharma: Thank you. Good morning, and welcome to MGP's Third Quarter Earnings Conference Call. I'm Amit Sharma, Vice President of Investor Relations. And this morning, I'm joined on the call by Julie Francis, our Chief Executive Officer; and Brandon Gall, our Chief Financial Officer. We will begin the call with management's prepared remarks and then open to your questions. Before we begin, this call may involve certain forward-looking statements. The company's actual results could differ materially from any forward-looking statements due to a number of factors, including the risk factors described in the company's annual report filed with the SEC. The company assumes no obligation to update any forward-looking statements made during the call, except as required by law. Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most comparable GAAP measures is included in today's earnings release, which was issued this morning before the markets opened and is available on our website, www.mgpingredients.com. At this time, I would like to turn the call over to Julie for her opening remarks. Julie Francis: Thank you, Amit. Good morning, everyone. As we review our third quarter results, I want to begin by sharing reflections from my time in the business and how it's shaping our priorities and actions. I will then provide an update of our 5 key initiatives before handing it over to Brandon for a deeper review of our third quarter results and updated guidance. These first few months truly have been a whirlwind as I've traveled around the country to visit our distilleries, bottling facilities, manufacturing plants, as well as to meet with our distribution partners and retailers in the market. Most importantly, I've had honest and candid conversations with a broad cross-section of our organization, hosting more than 60 one-on-ones and several town hall meetings. I'm also appreciative of the feedback and conversations I've had with investors and analysts as well. MGP is a company with a proud heritage, strong brands and amazing people who are passionate about our business. What I've seen is inspiring and the opportunity now is to harness that passion with greater focus, performance and accountability to drive meaningful progress. While we fully recognize the challenges facing our industry and our company, we are committed to improving our strategic clarity, taking decisive actions, controlling the controllables and emerging stronger. This will not be an overnight fix. Some initiatives will bear fruit quickly, while others will take a bit longer, but the work is already underway. While it's too early to get into specifics, let me share a few highlights. First, we are conducting an exhaustive strategic review of our business and using a thorough approach that takes the time to ask these hard questions. What capabilities will differentiate us in the future? How do we allocate resources that ensure both growth and discipline? Where can we create the most value? This is not just a planning exercise. It's about execution and a data-driven approach to ensure that we are making the right choices, establishing clear priorities and setting ambitious targets and ensuring accountability for results. Another key component of the strategic work is a more active portfolio management of our spirits brands. While having a branded portfolio spanning across all price points and categories is an undeniable strength, we believe that the opportunity ahead lies in being more precise and focused, prioritizing the brands with the greatest potential, distinctive positioning and scalable growth while trimming persistent underperformers. The goal is clear: a streamlined, more balanced portfolio that drives sustainable growth and delivers higher margins. As part of these plans this morning, we announced the appointment of Matias Bentel as our Chief Marketing Officer; and Chris Wiseman as Senior Vice President of Operations. I am confident that Matias' strong expertise and deep experiences in building and growing brands at Brown-Forman and other leading alcoholic beverage companies will be instrumental in accelerating our branded growth agenda. Strengthening operational execution is another key component of our strategic agenda. Chris' appointment to lead our operations underscores our commitment to and deliberate focus on strengthening operational reliability, agility and efficiency across the enterprise. To fuel growth, we are focusing on unlocking additional cost savings. MGP has always been an efficient operator and our current initiatives are delivering excellent results. As we look ahead, we are developing scalable and repeatable processes that promote a continuous improvement mindset, foster cross-functional collaboration and build a robust pipeline of projects designed to unlock additional productivity and savings. I am encouraged and energized by the enthusiasm and alignment I see across the organization and look forward to sharing the strategic road map for the next phase of our growth with you early next year. Now turning to our third quarter results. We delivered another strong quarter and are seeing early signs of progress across many parts of our business. The environment remains challenging, but our results continue to reflect the strength of our brands, the resilience of our businesses and the focus of our team. We are leveraging MGP's unique capabilities to navigate the near-term while positioning the company for better results ahead. There's more work to be done, but the foundation we are building is solid and gives us confidence in MGP's long-term potential. For the third quarter, consolidated sales declined 19% as the continued growth in our premium plus portfolio and higher specialty ingredient sales were offset by the expected declines in brown goods and mid- to value brands. Adjusted EBITDA declined to $32 million, while adjusted basic earnings per share reached $0.85, both above our expectations, reflecting favorable mix improvements, pricing discipline and productivity initiatives. Our solid cash flows continue to be a key highlight with year-to-date operating cash flows up 26% for the same period last year to $93 million. With another quarter of solid delivery, we are confident in finishing the year ahead of our previous expectations. Brandon will provide greater detail on our updated guidance shortly, but we are raising our full year 2025 adjusted EBITDA and adjusted earnings per share guidance to the range of $110 million to $115 million and $2.60 to $2.75 of EPS, respectively, while tightening our sales guidance to a range of $525 million to $535 million. This has been a period of transition for our company, our customers and the broader alcoholic industry. Despite these challenges, our team continue to advance our 5 key initiatives for 2025, which are: sharpen our commercial focus; strengthen key customer relationships; improve operation execution; fortify our balance sheet; and drive greater productivity. Let me provide brief highlights of our progress on each of these initiatives. Beginning with our focus initiative, Branded Spirits, which we believe is the main engine of growth and value creation for MGP. Our decision to focus our A&P investments behind the most attractive growth opportunities continues to deliver results as our premium plus portfolio once again outperformed the overall category. The most tangible example of this focused approach is Penelope Bourbon as it continues to exceed expectations. According to Nielsen dollar sales data for the past 52 weeks, Penelope now ranks among the top 30 premium plus American whiskey brands in the country. Even more impressively, it has been the second fastest-growing brand in this group over the last 52 weeks and the fastest-growing over the past 13 to 26 weeks. Our team's relentless focus has fueled Penelope's remarkable growth since acquisition. We are applying that same discipline to elevate other brands in our portfolio, new tools, including brand health dashboards and advanced analytics are enabling smarter A&P decisions, sharper insights and stronger brand equity across the portfolio. Innovation is central to our growth agenda as it enables us to meet consumers where they are in terms of quality, price points, occasions and convenience. Our exciting new product launches in the fast-growing ready-to-pour cocktail segment demonstrates how we are applying our deeper understanding of consumer insights and category trends. The Penelope Black Walnut Old Fashioned launched during the third quarter is off to a strong start, building on the success of Penelope Peach Old Fashioned that launched earlier this year. We also introduced 3 new cocktails under the Yellowstone brand to further expand our presence in this fast-growing segment. With their beautiful presentation, approachable price point and desirable alcohol proof, these new products are directly addressing consumer need for high-quality, affordable and convenient crafted cocktails, making them an especially attractive entry point for females and new to whiskey drinkers. The year-to-date results in our distilling business show that our second initiative to strengthen partnership with key customers is working. Though sales and profits declined during the quarter, they came in ahead of our expectations, reflecting disciplined pricing, operational efficiencies and better aged whiskey sales. Throughout the year, we have maintained a close engagement with our key distilling customers to align on their production needs. While some customers have paused their near-term whiskey purchases as they rebalance their inventories, most have expressed their commitment to a continued long-term strategic partnership with MGP. Our commercial teams are working closely with them to develop innovative solutions that leverage our unrivaled scale and aged whiskey inventories as well as our high-quality and flexible production capabilities to offer premium gin, white spirits, specialty grain distillates in addition to brown goods. Importantly, our customers recognize our differentiated value proposition. And last month, Diageo North America named MGP as one of its distinguished suppliers, a meaningful acknowledgment of our strong partnership and contribution to the success of their brands. I'm also pleased to see that the broader domestic whiskey industry continues to recalibrate to the current environment. According to TTB data through June of 2025, total U.S. whiskey production is down 19% over the prior 12 months, down 28% over the prior 6 months and down 32% over the prior 3 months. While inventories remain high, this trend is encouraging signal that the market is working through its imbalance. We believe this rational behavior by the broader industry, combined with our strong partnership with strategic customers, will position MGP to emerge stronger once brown goods supply and demand dynamics normalize. Turning to our Ingredient Solutions segment. We are pleased with the ongoing top line momentum in this business. However, operational execution fell short of our expectations and pressured segment margins. This resulted from an unanticipated equipment outage and lower operational reliability, elevated waste starch disposal costs and higher start-up costs in our textured protein business. This critical equipment outage pressured our third quarter performance and is expected to remain a headwind in the fourth quarter, which is reflected in our revised full year outlook. We are taking decisive actions to strengthen operational reliability. We've increased plant staffing, raised maintenance capital and engaged an external engineering firm to partner with our operations team for a comprehensive review of plant performance. Together, we are addressing critical process dependency, restructuring key workflows and implementing predictive analytics and enhanced preventative maintenance protocols to identify and resolve potential issues before they impact production. I am confident that the addition of Chris Wiseman to lead our operations team will further strengthen and accelerate these initiatives, enabling us to return to our targeted level of performance in the coming quarters. While the newly operational biofuel plant is expected to mitigate our waste starch disposal costs, these costs were higher than expected during the quarter due to operational challenges during start-up. Learnings from that start-up are already helping us refine our processes. And as production ramps up, we expect the biofuel plant to provide greater relief on waste starch disposal costs over time. And lastly, our extrusion protein business is gaining traction as we expand our portfolio beyond wheat to soybean and pea-based proteins to compete more effectively across the full extrusion segment. During the quarter, we secured a large new customer, underscoring the potential of this expanded platform. While start-up costs associated with this commercialization effort temporarily pressured margins, we expect these costs to moderate as volumes ramp up and the businesses scale. Even as we make steady progress on these operational challenges in the Ingredient Solutions segment, commercially, we continue to have a clear right to win in this segment. Consumer demand for high fiber and high-protein foods continues to accelerate, and we are well positioned to capture this growth. The specialty starch and protein categories are expected to post mid- to high single-digit growth over the next 5 years according to industry reports. Our flagship Fibersym and Arise brands are already category leaders, and our R&D teams are partnering with a growing number of leading food manufacturers to incorporate our specialty ingredients into their new existing products. We also continue to collaborate with leading university and research institutions to expand the functionality and application of these ingredients. With these commercial strengths and ongoing progress towards restoring operational excellence, we believe that we're well positioned to deliver solid top line and margin growth in our Ingredient Solutions business over the next several years. Our last 2 initiatives to fortify our balance sheet and drive productivity savings remain firmly on track. Brandon will provide additional details on these 2 key initiatives, but I'm pleased with our financial strength and our team's efforts to drive efficiencies throughout the enterprise. Let me close by saying that we are doing what we said we will do, controlling the controllables and being transparent about what's working and what's not working. This balance between accountability and opportunity guides how we view our businesses and how we communicate about them. While the path ahead is unlikely to be linear, it's increasingly becoming well defined. As we look ahead, we are continuing to build on the strength of our differentiated customer value propositions across each of our businesses. I see greater alignment, stronger commercial execution, a clear view of where we can win and a growing sense of confidence and optimism across the organization. With that, let me hand it over to Brandon for a review of our quarter and updated guidance. Brandon Gall: Thank you, Julie. For the third quarter of 2025, consolidated sales decreased 19% to $131 million compared to the year-ago period. Within our segments, third quarter sales for the Branded Spirits segment decreased by 3%. Our premium plus sales posted a third consecutive quarter of positive growth, driven by the continued momentum of the Penelope Bourbon brand. However, premium plus performance was more than offset by the expected softness in the rest of this segment, including a 7% collective decline in the mid and value brands. Distilling Solutions segment sales declined by 43% compared to the prior year period. Although our brown goods sales decreased by 50%, our year-to-date sales and margin are trending above our initial outlook, reflecting higher aged whiskey sales and the success of our proactive partnership approach with key customers. Given that, we now expect 2025 Distilling Solutions sales and gross profit to be down 46% and 55%, respectively, from prior year relative to our previous outlook of down 50% and 65%. Ingredient Solutions sales increased by 9% compared to the prior year quarter, primarily due to higher specialty and commodity wheat protein sales. Third quarter gross profit, however, declined by 36% due to equipment outage and other operational reliability issues that Julie mentioned earlier. While we have a good line of sight to resolving these issues, they'll remain a headwind in the fourth quarter. As a result, we now expect Ingredient Solutions segment sales and gross profit to be down mid- to high single digits and approximately 40% for the full year, respectively. Consolidated gross profit decreased 25% to $49 million, primarily due to lower gross profits in the Distilling Solutions and Ingredient Solutions operating segments. Gross margin declined by 300 basis points to 37.8%. Third quarter SG&A expenses increased by 10%. But on an adjusted basis, this increase was reduced to 4%. It's important to note also that when removing the impact from the reinstatement of the incentive accrual in 2025, adjusted SG&A was down 9% due primarily to our productivity initiatives. Advertising and promotion expenses declined 31% as we continue to realign our spending behind our most attractive growth opportunities. For the full year, we continue to expect Branded Spirits A&P to be approximately 12% of Branded Spirits segment sales, largely in line with the year-to-date trends. Adjusted EBITDA decreased 29% to $32 million, primarily due to lower gross profit. Net income declined to $15 million, primarily due to lower operating results. On an adjusted basis, net income decreased 36% to $18 million. Basic earnings per common share decreased to $0.71 per share, while adjusted basic earnings per share decreased 34% to $0.85 per share. Year-to-date cash flows from operations increased 26% to $93 million as we continue to prioritize strong cash generation by managing our working capital, including barrel inventory putaway. Our year-to-date barrel putaway reduced to $16 million, and we continue to expect the full year net putaway to be in the $16 million to $20 million range relative to $33 million in 2024. Capital expenditures were $7 million during the quarter and $25 million year-to-date. We continue to expect full year 2025 CapEx of $32.5 million, a reduction of more than 50% from last year as we continue to streamline capital expenditures in the current environment. Our balance sheet remains healthy. We remain well capitalized to support the Penelope contingent consideration payment, and we'll be prudent in our support of ongoing operations, long-term growth investments and future capital structure considerations. We ended the quarter with total debt of $269 million and net debt leverage ratio of 1.8x. Given the encouraging year-to-date results, we are raising our full year adjusted EBITDA and adjusted EPS guidance while tightening the guidance range for sales. We now expect 2025 sales to be in the $525 million to $535 million range, adjusted EBITDA to be in the $110 million to $115 million range and adjusted basic earnings per share to be in the $2.60 to $2.75 range. For the full year, we continue to expect average shares outstanding of approximately 21.4 million and an effective tax rate of approximately 25%. For the final quarter of the year, our focus remains on staying close to our customers, keeping tight control of costs, maintaining financial discipline and allocating capital carefully to the areas that we believe create the greatest value. I'm proud of how our teams are navigating this period and confident that the foundation we are building today under Julie's leadership will support durable, profitable growth in the years ahead. With that, let me now hand it over to Julie before opening for your questions. Julie Francis: Thank you, Brandon. As we look ahead, our focus remains on delivering results with the confidence and credibility. We're working to create a more resilient business model, one that can weather industry cycles and still deliver sustained growth. That means making the tough decisions, prioritizing the highest return opportunities, driving operational excellence and supporting our businesses with the right level of investment. There is still work ahead. But what encourages me most is how aligned our team has become around the company's direction and purpose. That alignment, combined with our strong balance sheet, differentiated capabilities and growing brand momentum gives me confidence that MGP is on a stronger, steadier path towards creating lasting value for our shareholders, customers and organization. Thank you. Brandon and I will now take your questions. Operator: [Operator Instructions] And our first question for today will come from Sean McGowan with ROTH Capital. Sean McGowan: First question is, I guess, a broad one on industry trends. You talked about the reduction in production, but what are you seeing? What are you hearing from your customers regarding channel inventory and how much further work needs to be done? Brandon Gall: Yes. Thanks for the question, Sean. What we're hearing from our customers is really the need and the willingness to stay close. There's a lot of changes going on in the industry. There's still elevated inventory. There's obviously reduced production, as you mentioned. There's also distilleries that are closing their doors or furloughing employees. And the general response that we're seeing from our customers is increasingly wanting to communicate and have open dialogue. But what we're also seeing, Sean, is a lot of our historically indirect customers that usually purchase from third parties, our product want to deal directly with MGP. They want to have that relationship. They want to be close to us because they know that we're committed to the space and going to be there over the long term. Sean McGowan: Okay. Maybe that ties into a follow-up. A lot of the numbers in the quarter were a little better than I had thought. So congrats on that. But the gross margin in distilling was especially strong. Is that kind of related to what you just mentioned of staying close to the customer? Or can you talk generally about how you were able to hold up those margins? Brandon Gall: Yes. The margins definitely came in even better than our expectations in the quarter. And there's really 2 reasons for that. A larger volume of aged sales than we had anticipated. Again, it's the customers working very closely with the team. And we're seeing orders from customers who predominantly historically have only purchased new distillate. But like everyone else in the space, they're looking for ways to innovate and to differentiate further on the shelf. And we're getting calls from customers like those that want to buy aged for the first time. They want to put out a new limited time-only product on the shelf, maybe at a different price point from their core portfolio. And we're really well set up for that, as you know, due to the breadth and scale of our aged offerings and our ability to help them innovate, whether that's through blending, through picking out the right match fill or the right age profile. So it's things like these that are really improving our aged performance over our initial expectations. The second thing, Sean, is the team operationally is doing a tremendous job in managing the cost structure of the facility. That's a top 4, 5 volume-producing bourbon facility in the United States. So while ramping up is difficult, like we've had to do in previous years, ramping down is even more complex. And the team has done a really nice job from a productivity initiative point of view in executing the cost side. Operator: And our next question will come from Robert Moskow with TD Cowen. Seamus Cassidy: This is Seamus Cassidy on for Rob Moskow. Julie, you mentioned in your prepared remarks sort of more active portfolio management around the Branded Spirits portfolio. Since the Luxco acquisition, MGPI has focused its ad spend and acquisitions on more premium brands. And you've said you're comfortable letting mid and value decline as a result of this. So I guess my question is, could you walk us through some of the pros and cons between sort of trimming some of these lower-performing brands? Because while they may be slower growing, I imagine they still add scale to your portfolio and provide positive cash flow. Julie Francis: Yes. Thanks for that question. I appreciate it. Listen, Branded Spirits certainly is our true north on our strategic growth platform. We're certainly pleased with the premium plus performance, focusing on those core 3 Penelope, El Mayor and Rebel certainly have been paying off. We're up 4% on the premium plus versus a category that's not showing the same results. And then Penelope is certainly growing very fast. But I think your point is interesting because the mid- to value, certainly, we are heavily weighted still in that area. So I would tell you, and I think as I've talked to analysts throughout the first few months that I do think there's an opportunity for us to be -- take some of the core focus that we've had in the premium plus and be precise in the mid- to value because there are some brands, as you know, that have some pretty good density, and there are some regional and channel opportunities that we certainly could bed out a little bit more with some flavor innovations with some regional brands that may make sense. So I'd tell you that we are reevaluating that because I do see some strong brands in there that we could certainly provide a little bit of ignition to and to help us offset some of that mid- to value decline. But again, if you look at it, we're certainly focused on mid first, and I think you're seeing some progress there and value we should start looking at very shortly into 2026. Operator: Our next question will come from Marc Torrente with Wells Fargo. Marc Torrente: I guess first on billings, with the larger customers that have paused their purchases you've referenced this call in the past, have there been any incremental pauses or maybe even restarts out of those customers? And then how is planning progressing with those customers? Any, I guess, additional commentary on your visibility into 2026? Julie Francis: Marc, it's Julie. Thanks for the question. A couple of things. I think we've said in the past, and we still feel this way that our large multinationals certainly have communicated with us that they're paused. We do expect to hear more about 2026 near spring of next year. But we're staying close. And I think you saw -- you heard in the prepared comments that we were acknowledged by Diageo as they -- one of their more distinguished suppliers. So I think you're seeing our customers and our team's ability to engage and stay close. We've been really accommodating to the crafts. They're certainly going from kind of like just-in-case to just-in-time buying, where cash really is and availability of cash really is playing in a role into how they're purchasing and when they're purchasing. But we've also seen, as Brandon said, it's been interesting to see some craft customers that have only been in new distillate come to us for aged whiskey because that certainly is where the demand is. And we're known for our unique mash builds, our variety, our master distillery. So that certainly has been an area that we were pleasantly surprised with. And it goes back to the approach the team took probably 6 months ago where we went to really engaging with our customers, being accommodating, showing agility and most importantly, the larger folks certainly know we're here to stay. The Distilling segment is extraordinarily part -- important part of our business. You probably recall that Penelope started in that area, right? They're a customer of our Ross & Squibb distillery. We noticed that they were putting out some good juice, choosing some good juice and they're very innovative and coming together and acquiring Penelope in 2023, certainly, we're very pleased with those results. But we do expect the headwinds into the first half of 2026 with hopefully some moderation in the back half. Marc Torrente: Okay. Great. Appreciate that. And then on the ingredients side, it sounds like there's a combination of headwinds in the quarter, sales perhaps a bit lighter versus expectations, but then also some execution issues. Maybe just some more color on the recovery timing here. It sounds like would be ongoing impact into Q4. Will this all be contained in 2025? And you also started to report some biofuel sales. Maybe any other detail on the expected ramp there and cost offsets? Julie Francis: Yes. Thanks, Marc. First, obviously, we're not satisfied with the results we saw in Ingredient Solutions, both from a year-to-date and then in particular, in Q3. I tell you, first, it's important to note that it's not a commercial demand issue. These are platforms that are in high demand, and we've ramped up our R&D department, which really is paying off dividends. We've got some large customers that have come on board that are expanding their products. So the demand is there. And where we fell short, we're in a few different areas. One, there was an equipment outage, and I'll take full responsibility for that. As I've got in the business, Marc, it became clear that one of our more important dryers had had significant operational reliability issues, downtime, yield, waste. And in my experience, it was best for us to take that equipment offline, rebuild it. It did come offline a couple of months ago, and it will be online by the end of this month and we will see better performance. So that is a discrete event, but I did want to make sure that people understood that our expectation is for it to have headwinds into Q4. But after that, we certainly will be on a better path to full productivity coming out of that dryer. But we have had continuous operational reliability across the plant as we closed down that Atchison distillery. And we've taken a few discrete decisive actions. One, I did bring in a project engineering team, boots in the plant, I'd like to say. They're well-known for working alongside management and leadership to bring a plant back to performance. We've invested 15% more in adding staffing. We're increasing maintenance CapEx. And also, we're bringing back predictive analytics and some of the enhanced preventive maintenance that we are known for. And then certainly bringing in a leader that has extensive operational turnaround experience that's led manufacturing, production, engineering and also some of the other key safety and quality metrics, bringing Chris on board is an important part. So we do believe and expect to see continuous improvement heading into next year. And the teams are working really hard. So I'm going to turn it over to Brandon on biofuel. But I do want to say one area we're pleased to see is our ProTerra line in extrusion. We did get online our larger customer that we've been talking about. A little bit higher start-up costs, which could be expected with all the different R&D and test runs that you do. But that is starting up mid-November with salable product. And so, we're pleased to get that online. And now I'll turn it over to Brandon for biofuel. Brandon Gall: Yes. Before I get into biofuel, all these actions, Marc, that Julie just listed, and there's a lot of very positive actions that she and the team are taking. We do not expect it to be fully contained. Maybe the dryer will be that specific discrete issue. But when you're hiring new people, when you're investing capital, when you're building in new processes, that does take a bit of time. So we do expect to return to our historical high level of performance, but probably not until the first part of next year or the first half of next year. So more to come on that, Marc. But yes, to your question around biofuel. So that project was commissioned in the quarter. Proud to say that the team shipped out their first tanker biofuel in September. You saw some of that in the numbers. But these things do take time. And so, whether it's getting it efficiently started up, whether it's hitting customer spec, rebuilding the customer network for this type of facility and a couple of other things, they do take time. But over time, we do expect this to offset a large part of the disposal costs we're currently incurring in addition to some of the other initiatives we have going to dispose of some of the other byproduct. So while Julie said very well, we're not pleased with the performance to date. We do believe that we're doing the right things to correct that going forward. Operator: And our next question will come from Ben Klieve with Lake Street Capital Markets. Benjamin Klieve: First, I want to see if you guys can double down a bit on the success of Penelope of late. I mean, it seems quite impressive that, that growth is accelerating even as that business has really, I think, developed some scale. I'm wondering if you can kind of isolate any of the variables behind this growth. I mean, is it -- are you guys seeing any accelerated growth from greater velocity, increased household penetration, distribution gains? Anything to specifically call out behind the growth numbers over the last 6 months or so? Julie Francis: Ben, it's Julie. I appreciate the call. Yes, Penelope certainly is performing quite nicely. We're pleased to say we're the second fastest-growing brand out there in the last 52 weeks. So we're pleased on that. But I would tell you this, if you think about Penelope and the positioning, it's kind of like an [ unbourbon bourbon ]. So it's attracting a broader range of folks across the spectrum. It's a brand that's built on innovation. So we're very purposeful on sending out innovation. It's also very tight on the releases. I was out in the market the last couple of weeks and talking to retailers and how the excitement that they generally have around Penelope, and they definitely said that our approach to limiting the number of cases with each launch. One guy was saying that he's got 60 people on his bourbon list and a lot of the releases are sold out and don't even come on to shelf. So we think that's a key part of it. And then knowing our consumers. We just launched the Penelope Old Fashioned line. We started with Peach, which was highly successful. We're just out with Black Walnut. And some of the brand insights that we saw there was that we had an opportunity to engage with females. Females who were curious about bourbon and entering into this category, and they were looking for a lower proof, attractive price point. And also, they're about image and visual appeal. So if you've ever seen that bottle, it's a beautiful bottle. So we think that that hit on bringing in new consumers. And then certainly, from a distribution standpoint, our independents certainly are doing a great job of launching Penelope and having a significant number of average items. Our opportunity still does lie with a national footprint across on-premise and national accounts. So we do feel bullish that there's some upside on getting more distribution across the nation, in particular, in some of those national accounts. Benjamin Klieve: Great. That's all very helpful. And then for my follow-up, I'm curious, Julie, about one of the comments you made about the dynamic where your Distilling Solutions customers are shifting from just-in-case to just-in-time. In that context, how are you guys -- how was that context contemplated within your updated full year guidance? I mean, are you banking on some just-in-time orders still here to come in, in the next month or 2 that you have real visibility of? Or is this something that you're kind of looking for given historic conversations with customers that don't really have locked in yet? Julie Francis: No. I would just say in Q4, you've heard us talk about our guidance. And so, we certainly are confident on what we reaffirmed and where we took some of the levels. And listen, the biggest thing we did was in the past 8 months is go out there and truly engage the customers, right? And we're only a phone call away, and we're very accommodating. And so, as they have money availability, we're willing to take any order that they're willing to give us. So I think that's important. But our -- we've been pretty tight to hitting our forecast the past few quarters. So we believe that the planning and the forecast that we have out there represents the demand. And certainly, if there's these intermittent customers coming to us, that's just a slight net positive upside. But understand these are craft customers where the number of barrels that they're taking are on the lower end. Brandon Gall: Yes. And what I'd add to that, Ben, is this is -- we're now approaching 1,000 customers that have bought whiskey from us over the years. And the just-in-time versus just-in-case, what that means is, they're not willing to necessarily contract out. So it does limit visibility to a specific customer necessarily. But because of the breadth and size of our book of customers, what we do see, especially at the craft level is the market effect, which is, we can see the overall trend that they're moving toward -- more toward this. And we are seeing greater demand for aged, which is obviously a positive. So while it's hard to really visibly measure when a certain craft is going to purchase, the breadth and size of the number that we serve gives us that added confidence that as a collective, these trends are taking place, and we expect to continue. Benjamin Klieve: Very good. I appreciate that from both of you. Congratulations on a good quarter here and a healthy outlook for the rest of the year. Operator: And our next question will come from Mitch Pinheiro with Sturdivant. Mitchell Pinheiro: So when you look at the data, both for Branded Spirits and even the TTB data, we see inventory, both barrels and also in the retail side and the distributor level kind of full, still full. But pricing data is still much better than I would have expected, holding up. You might expect to see more discounting and pricing actions, but we're not. And I'm just curious as your view on this. Is it saying something larger about the category? Is it saying anything about consumer preferences and/or consumer value? Julie Francis: Mitch, Julie, thanks for the question. First and foremost, we certainly believe strongly as most folks, American whiskey and tequila, our really strong long-term outlook is really healthy. And as we talk about the pricing environment, yes, it's largely remained rational across all core categories. And certainly, there are pockets, regional pockets of greater competitive intensity. And we're certainly seeing in the nonpremium end some investment and some pricing in the value brands in particular, but nothing that causes us concern. And as you called out, it's been pretty rational. So I think that to me, it shows that people are bullish on the strength of the categories and the health of the categories for long-term value, and they don't want to do anything rash to destroy any of the value that they can capture. Mitchell Pinheiro: And I guess then just sort of a follow-up. So you've always talked about your revenue in the Distillery Solutions business being 1/3, the multinationals, 1/3, your larger regionals or nationals and then 1/3 craft. Is that still there? Or with the sort of decline, it seems like there's a greater decline in craft. Is that now a smaller portion of your business? And yes, let's leave it at that. Amit Sharma: And Mitch, you were breaking up in the middle. Can you repeat that, please? Mitchell Pinheiro: I was just curious about your Distillery Solutions sort of revenue breakdown. It was typically 1/3, 1/3, 1/3, multinational, but your larger regionals or nationals and then your craft. And I'm curious if that's changed. Brandon Gall: Yes. I'd say, Mitch, I'll start on that one. We are seeing, generally speaking, a larger proportion of aged sales relative to new distillate than we had expected coming into the year. And so, broadly speaking, like you said, it's typically 1/3, 1/3, 1/3. Age customers tend to skew much more towards the craft. So -- and that is where we're seeing the incremental demand, and that is where we're seeing the improved performance as the year has gone on. So a lot of those larger national, multinational customers that typically buy new distillate, a lot of them still are, but some of them have paused, and we've talked about that. And so, because of that pause the proportionality of our sales mix has moved in that direction. Operator: And our next question is a follow-up from Sean McGowan with ROTH Capital Partners. Sean McGowan: A quick question first. What is your expectation for the margin profile on the biofuel? And then more broadly, again, I'm a little surprised with this deep into the call and the word tariff hasn't come up. So could you give us your latest thoughts on that? Brandon Gall: Yes. I'll start on the biofuel. Margin -- gross margin profile, we're going to maybe get a little further along until we share our expectations there. But generally speaking, we believe that the biofuel facility, once it's fully ramped up, once it's efficient and selling at the prices that we think it will hit and get all the tax accreditations that are going to come with it over time. We expect that to offset a large part of the disposal costs we're currently incurring. And -- but let us get a little bit further in, let us see what the market pricing is, where the expectations are for next year, and we'd be happy to share more. And on the tariff front, yes, we are seeing some tariff pressure, not to the extent of probably some of our peers. That's the benefit of being mostly domestic. So a lot of the tariffs we're seeing are mostly on dry goods, some of the product and other materials that we're bringing in. But what's harder to quantify, Sean, is the impact it's having on some of our customers that do have more of an international business. We can see the export data. It's been very volatile this year, especially in terms of American whiskey specifically going out of the country. And so, we do think that it is causing some near-in volatility in patterns as it relates to that. Amit Sharma: And it's included in our guidance. Brandon Gall: Yes. Great point. And the incremental tariff exposure that we are experiencing is contemplated in our full year guide. Operator: And with that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Julie Francis for any closing remarks. Julie Francis: Thank you, Joe. I'd like to thank everyone for joining us today on our quarterly earnings call. I look forward to engaging with all of you in the very near future and playing a much more active role in the next earnings call. So good luck, everyone, and we'll talk soon. Cheers. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Hello, and welcome to Amrize Q3 2025 Earnings Conference Call. [Operator Instructions] Also, as a reminder, this conference is being recorded today. [Operator Instructions] I will now turn the call over to Scott Einberger, Investor Relations Officer for Amrize. Scott Einberger: Thank you, and good morning. Welcome to Amrize's Third Quarter 2025 Earnings Conference Call. We released our third quarter financial results yesterday after the market closed. You can find both our earnings release and presentation for today's call in the Investor Relations section of our website at investors.amrize.com. On the call with me today are Jan Jenisch, our Chairman and CEO; and Ian Johnston, our CFO. Jan will open today's call with highlights from our third quarter results and the growth investments we are making in our business. Ian will then review our financial performance for the quarter and provide an update on our Project ASPIRE synergy program before turning the call back to Jan to discuss our outlook for the remainder of the year. We will then take your questions. Before we begin, during the call and in our slide presentation, we reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures to GAAP in our earnings release and slide presentation. As a reminder, today's call is being webcast live and recorded. A transcript and recording of this conference call will be posted to our website. Any statements made about future results and performance, plans, expectations and objectives are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those presented during the call due to various factors, including, but not limited to, those discussed in our Form 10 filings and in other reports filed with the SEC. The company disclaims any undertaking to publicly update or revise any forward-looking statements. With that, I will now turn the call over to Jan. Jan Jenisch: Thank you, Scott, and thank you all for joining us today for our third quarter earnings call. It is our first full quarter operating as Amrize and we made progress across our businesses, and I'd like to thank our 19,000 teammates who are serving our customers across all of our markets. Together, we delivered strong revenue growth of 6.6%, driven by continued infrastructure demand and an improving commercial market. Our Building Materials business had strong volumes and positive -- and we achieved very positive aggregates pricing, while a temporary equipment outage in our cement network resulted in higher costs for the quarter. Our Building Envelope business delivered substantial margin expansion driven by operational efficiencies and lower raw material costs. We generated strong free cash flow of $674 million, up $221 million from prior year. Building on our progress in the third quarter, we are raising our revenue guidance for 2025, and we are confirming our EBITDA and net leverage ratio guidance. Let's turn to the financials. We had strong revenue performance driven by volume growth across the business from cement, aggregates and ready-mix concrete to commercial roofing. Several positive developments contributed to our margins, including operational efficiencies in Building Envelope and strong aggregates and residential roofing pricing. Within Building Materials, the temporary equipment outage in our cement network affected our margins. During this time, we leveraged the strength of our footprint and network to continue serving our customers without disruption, which resulted in higher costs. We've now completed the equipment repair and all of our plants are operating as normal. We also had a material asset sale in the third quarter of last year, which impacted the year-over-year adjusted EBITDA comparison. Looking to the market environment. Our commercial customers have shown early signs of improvement. It's led by strong demand for data centers and energy projects. This is also reflected in the latest Dodge construction starts report, which shows new commercial construction starts are up 6.8% over the last 12 months. In infrastructure, demand continues to be steady with federal, state and local authorities prioritizing modernization projects. Within residential, new construction remains soft and a milestone season affected repair and refurbishment demand negatively. Looking to the future, we see strong long-term demand ahead of Amrize. As interest rates decline, we expect pent-up demand to unwind and construction activity to accelerate in both the commercial and the residential sectors. Megatrends, including infrastructure, modernization, onshoring of manufacturing, data center expansion and the need to bridge the housing gap will drive our long-term growth. We are uniquely positioned across infrastructure, commercial and residential construction with around and even split between new build and repair and refurbishment. Let's look at our investments. We continue to invest and execute on our key organic growth projects. In the fourth quarter, we will complete the expansion of our flagship Ste. Gen plant adding production capacity and improving efficiency at North America's largest and market leader cement plant. We are on track with our new state-of-the-art Malarkey Shingles factory, in Indiana, and we are progressing with the expansion of our St. Constant cement plant in Quebec. In the third quarter, we kicked off several additional projects in key markets. In the Great Lakes region, we are expanding our aggregates production to meet customer demand. And we are increasing production and improving efficiencies at our cement plant in Midlothian, Texas, to serve the Dallas-Forth Worth market. In Exshaw, Canada, we are expanding to serve the Calgary and Western Canada market. We will continue accelerating our organic growth investments to build on our market-leading positions and best serve our customers. I'd like to share some project highlights from the third quarter. In Louisiana, we won another data center project to supply 100,000 tons of cement. This is just one of 25 data center projects we have underway in 2025 as the AI boom continues to fuel construction growth. In Ontario, we are delivering ready-mix concrete and aggregates to help build a new battery plant, one of many examples of our advanced manufacturing and onshoring trends are driving construction growth. Our roofing team completed a large project for a new school outside of Houston, and we have many similar projects across Building Envelope, helping to build strong communities. To support a massive new LNG plant in Louisiana, we are providing over 75,000 tons of cement and over 1 million tons of aggregates as energy projects continue to drive demand. All these strong commercial projects reflect the megatrends underpinning long-term growth in the North American construction market. Our growth -- the growth of Amrize is directly connected to these trends. We have a few big pipeline of projects and new ones are kicking off each quarter. The actions we are taking from investing in our business to driving synergies are positioning Amrize to capitalize on the significant long-term demand in our $200 billion addressable market. I'd like now to turn the call over to Ian to discuss our third quarter financials in more detail. Ian Johnston: Thank you, Jan. I'll begin on Slide 11 with our results by segment, starting with Building Materials. Building Materials' third quarter revenue was approximately $2.8 billion, an increase of 8.7%. During the quarter, we saw strong volume growth in both our cement and aggregates businesses with cement volumes increasing 6% and aggregates volumes increasing 3.3%. We continue to see new infrastructure projects breaking ground, along with spending on data centers and energy-related projects. While there is still some uncertainty in the market, conversations with our customers are encouraging and our pipeline continues to grow. Cement pricing for the quarter was down 0.6%, while year-to-date, it remains up 0.6%. Over the last several years, we've seen consecutive cement gains, which are stabilizing this year with softer demand. We expect pricing to be flat on a full year basis and anticipate pricing to improve in 2026 as demand increases. Total aggregates pricing, including distribution revenue increased 10.1%. We continue to see healthy pricing growth in our aggregates business supported by strong market fundamentals and ongoing infrastructure demand. Adjusted EBITDA for the quarter was $902 million, and our adjusted EBITDA margin was 32.5%. The strong volume and aggregates pricing growth that I just spoke about were positive contributors to adjusted EBITDA in the quarter. These were offset by a temporary equipment outage in our cement network that lasted for several weeks during the quarter. With demand high, we leveraged the strength of our footprint and logistics network to move products from other plants to serve our customers. This resulted in approximately $50 million of higher manufacturing and distribution costs in the quarter, including the impact that lower production volumes had on fixed cost absorption. Through the combined efforts of our team, we were able to continue serving our customers without disruption. We have now completed the necessary repairs and our plants are operating as normal. In the fourth quarter, we expect to recover some of this lost production. Additionally, during the third quarter of 2025, we recorded $4 million of asset gains as compared to $43 million in the third quarter of 2024. Prior year included a $31 million gain on an asset sale specifically related to 1 transaction in Canada. While asset sales are a routine part of our business, the specific transaction from last year was large and we do not have a similar sized transaction this year. Moving to our Building Envelope segment. Third quarter revenue was $901 million, an increase of 0.7% compared to the prior year. Commercial roofing revenue increased in the quarter, supported by repair and refurbishment activity and system sales. Residential volumes were down in the quarter due to soft new construction activity and a milder storm season. Based on recent industry data from SPRI, we outperformed the market in commercial roofing in the quarter. Our Elevate business is performing well, and our system offering continues to resonate with customers. Last November, we closed the OX Engineered Products acquisition, which contributed $26 million to revenue in the quarter. As a reminder, we will begin lapping the benefits of this acquisition in the fourth quarter. Adjusted EBITDA was $217 million, and our adjusted EBITDA margin was 24.1% representing a margin increase of 190 basis points from the prior year. The increase in adjusted EBITDA was driven by several factors, including operational efficiencies, lower raw material costs, and higher residential shingles pricing. In the quarter, we saw improved operating performance in our Elevate business as the team executed well, driving efficiencies at the plant [indiscernible]. Price over cost in the quarter was down slightly versus prior year, but improved sequentially versus the second quarter. That's favorable raw material costs and higher residential shingles pricing, partially offset lower pricing in our commercial roofing business. Our team continues to drive synergies and effectively managed our cost base, resulting in an improved performance compared to the prior year. Moving to cash flow in the quarter. We generated $674 million of free cash flow, an increase of $221 million versus the third quarter of 2024. The increase was primarily driven by a net benefit in working capital. Taking a closer look at working capital, September was a strong revenue month, resulting in an increase in our accounts receivable and a modest use of cash, we expect to turn these into cash in the fourth quarter. In addition, as part of our project ASPIRE, we are working on vendor payment terms and to the benefit of the cash in the quarter. We also reduced inventory levels as a result of higher demand and lower production volumes. Finally, the timing of cash tax payments was a small benefit to cash in the quarter. As a reminder, we typically generate the majority of cash flow in the second half of the year, with the fourth quarter being our highest cash flow quarter of the year. Fourth quarter of 2024 was an above-average cash flow quarter. And while we also expect strong cash flow in the fourth quarter this year, cash flow for full year '25 is expected to be below 2024. This is primarily a result of lower net income on a full year basis and higher CapEx spend as we continue to invest in organic growth opportunities across our network. Turning to Slide 14. During the third quarter, we successfully reduced our net debt and strengthen our balance sheet. Net debt at the end of the third quarter was approximately $5 billion, down $612 million from the end of the second quarter and our net leverage ratio declined to under 1.7x, both benefiting from the strong cash flow we generated in the quarter. Our healthy balance sheet and investment-grade credit rating allows us to operate from a position of strength with the flexibility to pursue value-accretive acquisitions and allocate capital to growth projects. Lastly, I would like to provide a brief update on our ASPIRE program where we are leveraging our scale across 1,000 sites and 2 business segments to accelerate synergies. We made excellent progress in the third quarter. We have onboarded over 300 new logistics and service providers to optimize third-party spend, and we launched more than 100 projects to drive synergies across raw materials, services, logistics and equipment. This continues to be a top priority for all our teams, and we expect to begin realizing savings from our ASPIRE program in the fourth quarter. We are on pace to deliver the full 50 basis points of margin expansion beginning in 2026. I'll now turn the call back over to Jan to discuss our 2025 guidance. Jan Jenisch: Yes. Thank you, Ian. When we look at our guidance, I think I'm very satisfied with the good demand we saw with our customers in Q3, our first full quarter as Amrize and we see markets now have begun to stabilize, and we see significant pent-up demand backed by long-term megatrends. There are some uncertainties remaining with our customers. However, we are cautiously optimistic about our demand momentum to continue from now on. Building on our third quarter revenue, we are raising our 2025 revenue guidance, and we are confirming our EBITDA and net leverage ratio guidance. So for the full year, we now expect revenues to be in the range of $11.7 billion to $12 billion, adjusted EBITDA to be in the range of $2.9 billion to $3.1 billion and we expect to finish the year with a net leverage ratio below 1.5x. With this, I think we will now begin the Q&A process, and I turn over to Scott. Scott Einberger: Thank you, operator. We're ready to begin a Q&A process. Can you please explain the instructions? Operator: [Operator Instructions] Our first question is from Keith Hughes from Truist. Keith Hughes: The midpoint of the guidance implies flattish year-over-year EBITDA, I believe. Could you talk about some of the puts and takes that could be coming in the fourth quarter? It does sound like cement is going to have some positive carryover, but there must be some other things going against you. Jan Jenisch: We have a difficult time to understand the question. Would you mind to repeat the question? Keith Hughes: Your guidance seems to imply for the fourth quarter around flattish at the midpoint EBITDA year-over-year. Could you talk about what will be the positives and what will be the negatives you expect in the fourth quarter? Jan Jenisch: Yes. Thank you, Keith, for the question. Look, I think we -- again, we are very satisfied with the demand from our customers and the increasing number of projects we deliver and very happy to have the 6.6% sales growth in Q3. Now going forward, it's a bit tricky for Q4 to give guidance as we still have some uncertainties among our customers regarding tariff politics and also regarding future interest rates. So as you know, we do about half of our business is in the commercial market segment. So we have no project cancellations, but we have still a couple of -- or a significant number of projects sidelined, and they will be kicked off in our view as soon as the market environment is stabilizing. So it's not easy for us to forecast Q4. We are obviously very optimistic for the long term, but Q4 is not easy. So that's why we gave this guidance, which is, I would say, maybe a bit cautious overall to make sure we deliver what we promise. Keith Hughes: Okay. Just one final thing. It does appear from your previous comments that the production issues you had in cement, those are fixed and will not play a role in -- not play a negative role in the fourth quarter. Is that correct? Jan Jenisch: Yes. We are happy with our operational performance. It's basically for 2 items. We have this land sale in Q3 last year, and then we have this production outage, which is resolved. So we're looking forward to have solid margins in Q4 and in the coming quarters. Operator: Our next question is from [Anthony Pettinari] from Cementir Holding. Unknown Analyst: Good morning. I'm wondering if you could talk about cement market dynamics in a little bit more detail. And specifically, in terms of the confidence and potential price improvement in 2026, are you seeing specific things in your backlogs or the market or import dynamics that would give you kind of confidence in pricing momentum in '26? And as a follow-up, I'm just wondering if you could talk a little bit more about Ste. Genevieve in terms of the ramp-up and what -- how that's going? Jan Jenisch: And yes, we previously reported -- we come from challenging maybe past 2 years where we had lower demand for cement, which made it difficult or more challenging for us on the pricing. We are -- nevertheless, I think we are under the circumstances, we have almost stable cement prices for the year. I think that's not a bad achievement. And now we believe that this will change for next year. And we will -- especially with the volume growth we saw now in cement, which we believe will continue into next year, we will be -- it will be healthy pricing dynamics, especially in our inland markets, and we believe we are well positioned now to execute this. We are also here. We made very, I would say, focused investments here. So in Ste. Gen, the fifth mill to further increase our production, but also to further increase our efficiencies is on track, and we are planning to have the first production, which we are selling in November, so next month. Operator: Our next question is from Timna Tanners from Wells Fargo. Please go ahead. Timna Tanners: Okay. Great. Just wanted to follow up on the cement question and ask about pricing and if you're seeing any impact on -- from imports. So we've been hearing that there may be some price hikes announced and if you're seeing the impact from the tariffs reducing competitiveness of some of those overseas tons. Jan Jenisch: So in principle, we -- our customers largely recognize the value of a local producer like Amrize providing consistent high-quality products, local service and full reliability of supply chain and the logistics. In addition, our inland footprint in the hard end markets will make us very strong going forward. I think there's a lot of information at the moment in the market about price increases, about increasing import costs from tariffs and so on. I prefer not to comment on this. We're going to focus on ourselves, and we believe we have the right action plan in place to improve pricing for next year. Operator: Our next question is from Pujarini Ghosh from Bernstein. Pujarini Ghosh: So on the building products side, could you provide some color on the volume and pricing that you saw in Q3 and specifically commenting around the market share gains that you were referring to on the commercial side? Also, could you give some color around the 190 basis points of margin expansion we saw seems to be in sharp contrast with what some of your peers have been saying. So how are you getting this margin expansion? Jan Jenisch: Yes. Thank you for the question. So first of all, we're very happy we had a good commercial roofing business in Q3, with increasing volumes, but also with market share gains. So very happy to report that, that we have been very successful here with our customers to provide our systems with all the different membranes we are offering. In contrast to this, the shingle market is difficult. I think we shared the information with you. We have a very soft new construction market in residential. And also we have -- I think we see a softer storm season or something. So residential is a bit challenged. But overall, I think we are -- we have flat sales, which I think is quite a success in this market. And I'm especially pleased with the market share gains for commercial roofing. We have on the operational efficiencies, very happy that our teams put all the plans in excellent conditions. You always sometimes have hiccups. We have around 40 manufacturing facilities in Building Envelope, and we had a few we were walking on the last 12 months or so, and this all comes now to a very positive results basically with lowered cost and leading to then a significant increase in this EBITDA margin of 190 basis points. Operator: Our next question is from Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I just wanted to ask a question on the commercial landscape as it relates to your Building Envelope and roofing business. We've obviously seen quite a lot of change on the distributor channel. We've had a lot of assets change hands, SRAs going to Home Depot and obviously a new entrant in QXO acquiring Beacon. I'd like to hear how you are seeing this play out for your business because there does seem to be at least some commentary from the distribution players that there might be a desire to be a little bit more aggressive on pricing with their OEM suppliers. Are you seeing that in the market at all? How would you respond to one of your distributors looking to sort of negotiate price and then linked question, can you comment on some of the new entrants actually on the sort of manufacturing side of things, if you have a perspective on, for example, Kingspan looking to add capacity? Jan Jenisch: All right. Cedar, thank you for the questions. I mean, look, we are -- first of all, we are not in competition with any distributor, we are partnering with distributors to make our products efficiently available for all the roofing jobs. You can see in our Q3 results that obviously, we don't see any impact from any consolidation in the distribution space. And it's important, I think, to note that all our efforts in building envelope and in roofing systems is to provide the best, most innovative systems for our customers, which are the building owners, which are the specifiers and are the roofing contractors. And we are focusing to make the best possible roofs and the most easy and efficiently installing roofs. This is all our focus. We do this with our innovation. We do this with our workforce for specification of roofing, inspecting roofs and then providing warranty for the roofs. This is our focus, and this is all underpinned by our strong branding of our strong brands. So -- and then we go direct, I think, in our roofing sales at the moment, we do about 30% direct and 70% goes through distribution. And these are just partners for us. We don't see any negative impact. And just important to understand that we focus on the end customer, and we have no real opinion on the distributors. However, if you want me to comment on the distributors, I think we have very good and very efficient distributors in roofing from the companies you have mentioned. So we're very happy to partner with them. They provide a great service. And again, we are not able to deliver every roof on overnight on time for the roofing jobs. This is why we have these very competent roofing distributors in the North American market. The question on new entrants in the roofing market is really -- we didn't have that in the last 30 years. The market is actually consolidating. And we believe it's very challenging to come in and start with a greenfield roofing business in the U.S. We haven't seen that in many, many years. And so we cannot comment. We have -- we are focusing on some of our other peers as we compete for this full nationwide distribution we are having, and that's our real focus. So we see any impact from greenfield, new entrants, very, very limited. We rather see roofing going for more consolidation. Operator: Our next question is from Adrian Huerta from JPMorgan. Adrian Huerta: Jan, if you can share with us how do you see the M&A environment over the next 12 months and potential opportunities within the different segments that you're in. Do you think there will be opportunities for Amrize to expand through M&A over the next 12 months? Jan Jenisch: Adrian, yes, look, we made it clear that part of our strategy is, of course, organic growth. We believe we will invest more into the business compared to recent years. But then in addition, we are very open of M&A. I mean, story of Amrize has been very much also driven by M&A. And we have a -- I think I would say we have a healthy pipeline here of targets and projects. And hopefully, we have some news for you in the months to come. Operator: Our next question is from Yassine Touahri from On Field Research. Yassine Touahri: Just a short follow-up on the volume in the fourth quarter. Do you have any view on what's happening in the cement business in October? And maybe a question on strategy. When you look at your Building Envelope business, it's mostly roofing, but you call that Building Envelope. And I think in your Form 10, you were mentioning wall solution. How do you think about the business in the next 5 to 10 years? Do you see any opportunity in the next 12 to 24 months to do a big platform deal? And if you see an attractive platform deal to complete this business line, what kind of maximum leverage you would be happy to go to in terms of net debt to EBITDA? Jan Jenisch: Good question. Look, first of all, to your pricing and volume question, first of all, I think the cement and aggregates pricing is set for the remainder of 2025, and we now shifted our focus for the pricing for next year. So for the fourth quarter, we expect the cement pricing to continue as we have seen it in Q3, but also then our strong aggregates pricing up 10%. We also expect this to continue into the fourth quarter. So demand is good in Q3. We have to just make the comment that our customers are still with certain uncertainties regarding tariffs regarding interest rates. But besides that, we believe there's a strong underlying demand makes it a bit more difficult to really guide the Q4, but we are very optimistic for next year. And also with that, we're going to have, we believe, healthy volumes and healthy pricing in 2026. So on Building Envelope -- I have to ask the other question. So on Building Envelope, I think you point out that we call the segment building Envelope and not roofing systems. And I think this is -- just gives us more opportunities into the future as we could expand in complementary applications and technologies. However, I asked my teams to focus on our core businesses as it is today, as we have this $200 billion addressable market in front of us. So that means we don't need to necessarily enter new segments to grow Amrize. We believe we have plenty of to grow. And then the Envelope gives us a little bit of extra vision and strategy for the years to come. Yassine Touahri: In terms of leverage, the maximum leverage that you would be happy to go to if you see interesting platform deal? Jan Jenisch: Look, I think, first of all, we are happy to have the balance sheet we are having. You see we're making progress now in Q3, further progress. Very happy to close the year where in the balance sheet, how we guided it. If we have attractive M&A transactions, and you remember, we have an excellent track record of value-accretive deals, we can go well above this. I think it's just important always you have a clear plan to further -- to go down again in the leverage. But we are not afraid to go up in the leverage for the right transaction. Operator: Our next question is from Tom Zhang from Barclays. Tom Zhang: Just housekeeping ones for me at this stage. Could you maybe just give a little bit of color around litigation, the $40 million that is not in the adjusted EBITDA. Could you just give us a bit of color on what that is about and which division it was booked in? And then also just on the guided corporate costs, I see it's come in quite a bit below the $75 million to $80 million number that you spoke about at the Q2 prints. Any color on why that's better? And is $75 million to $80 million the right number into Q4? Is there a bit of catch-up? Just a bit of help there for the modeling. Ian Johnston: Sure. Tom, thanks for the question. I think just to begin with the litigation, we're quite happy with the outcome during the quarter we were able to reach final settlement on several long-standing commercial litigation items. As you would expect, we cannot provide details related to specific litigation items, but we're quite happy with the conclusion on those particular matters. Regarding the corporate costs, we did guide at a little bit higher range. We do think we're making good progress. This was our first quarter as a fully independent Amrize. So we're quite pleased with our numbers being a little bit below what we expected. Our previous estimate was at the high end of what we'd expect. It's going to continue to evolve. We do think that the result in the third quarter was quite positive. We had some delays in terms of our assumptions on staffing and so forth. So it was a good outcome, and we think that we'll continue to refine that as we go forward. Tom Zhang: Okay. Maybe just to confirm, sorry, on the litigation that it wasn't sort of one major case. There was a few different outcomes. And so it's sort of spread across different segments. It's not like all in Building Envelope or in Building Materials. Ian Johnston: 5 That's correct. There were some long-standing items that we were able to resolve in the quarter as conclusive and it was a quite a good outcome from our perspective. Operator: Our next question is from Martin Hüsler from ZKB. Please go ahead, Martin. Martin Huesler: Yes. I hope you can hear me. I have a question. Can you give us a bit more background on the nature of this outage you were mentioning, if this was kind of maintenance driven or just about when and where this happened? Ian Johnston: Thanks, Martin, for the question. Yes, it happened in our Mountain region. It was a temporary equipment outage. We were down for approximately 6 weeks to repair the equipment, which resulted in reduced production. We also had increased distribution costs. The challenge here is that it was a very temporary in nature. However, given our extensive footprint and our network, we're able to leverage other opportunities to be able to supply and keep our customers satisfied. We were able to move product into the market and be able to meet the demand that was there. The equipment at the plant was repaired. Plant is now operating normal, and we expect that we'll be able to recover some of this production in the fourth quarter. Martin Huesler: That's helpful. And then maybe on volumes, because you had such a stellar growth in cement. However, pricing were down. I just want to double check if you think that's kind of are you chasing volumes and maybe give some price rebates? Or is this a different functions there? Jan Jenisch: Martin, no, we didn't really do this. I think we just had our customers starting more projects as reported, especially in this most important market segment of commercial projects. So very happy to see that. So the demand was not driven by us making any concessions on pricing. You will probably see in the market that we probably had the best pricing or we're going to be among the best pricing this year or something. And this is something also we couldn't change within the Q3 time span. So what makes us, I think, confident for the future. Operator: Our next question is from Juilan Radlinger from UBS. Juilan Radlinger: Two for me, please. So first of all, in building envelope, can you talk to what drove the positive pricing in resi shingles when volumes were negative? And was that both a year-on-year and a sequential comment on pricing, i.e., is pricing holding up? Or is it declining in line with the resi and reroofing weakness? That's number one. And then number two, in Building Materials, obviously, your volumes were very strong in Q3 and now based on your guidance for Q4, you're guiding to lower sales growth in Q4 than what we saw in Q3 implied. And I remember that Q3 last year was a very wet quarter for the industry in some states. So is it fair to say that easy comps played some role in the strength in cement and aggregates volumes in Q3 and Q4 will be a bit tougher just on a comps basis? Or is that something we shouldn't be thinking about? Jan Jenisch: No, I think to your last question, I don't think we should speculate about this at this point. As we talked about before, it's just difficult to guide now. We are happy with the project starts of our customers in Q3, and we believe this will be continuing from here. However, there are still uncertainties in the market, which makes it difficult to predict. So just have to take our guidance as a cautious guidance now for Q4. On the pricing side, I think we did a good step on the pricing on the shingles. So this is something we do early in the year, and this has continued successfully despite the decline in volumes in the market. Operator: Our next question is from Will James from Redburn. William Jones: Please could I just explore a little bit more on the confidence around pricing for next year in Building Materials. I guess on the cement side, just wondering your view on the extent to which it would rely on volumes being up next year? Or do you think price could make some progress even if volumes were flat? And then in aggregates, would you be willing to offer a view on what you might achieve potentially next year? Could it be another kind of mid- to high single-digit year on price? Jan Jenisch: I think it's the wrong time now to talk specifics about next year guidance or something. I think you should -- that we provide already a lot of comments on market dynamics and on our action plan to position ourselves well for next year, and this is what we are working on at the moment. But I don't want to give any more guidance regarding volume or pricing. I think we talked already quite extensively around it. William Jones: Okay. I might just ask a different one then please, which is just around your kind of demand views and whether there's any difference between how you see Canada and the U.S. in the mix? Jan Jenisch: No. We're seeing -- when you look at our results, we made good progress in Q3 in Canada and also in the U.S. Operator: Our next question is from Glynis Johnson from Jefferies. Glynis Johnson: Just a follow-up on the ASPIRE program because obviously you saw margin improvements coming through on the Envelope side, you have reported lower nonallocated costs as well. So I'm wondering how much of that actually is part of the ASPIRE program? Or is the everything for ASPIRE going to come from sort of the Q4 onwards? Ian Johnston: Yes. Thanks for the question. We do reference a little bit in the presentation deck. For instance, we had over 300 suppliers added to our portfolio. We have over 100 projects that have been kicked off. And we do expect to have some positive impact in our fourth quarter, but really all of this will begin to materialize into the 2026 season. We're on pace for our 50 points of margin expansion beginning in 2026. We had a number of actions within the quarter. We're quite happy with the way things are progressing, and we think that, that will continue into the fourth quarter. Glynis Johnson: Okay. But there was nothing in the Q3 in terms of the margin expansion or the lower corporate costs that you would say a part of ASPIRE? Ian Johnston: No. Very limited. Q3, we began this project in late April, early May. That's continuing. We have our teams mobilized. There's several hundred projects underway, but very limited in Q3. Operator: Our next question is from Arnaud Lehmann from Bank of America. Arnaud Lehmann: Just to confirm one thing on capital allocation. Can you confirm that you've not done any buybacks so far? And is it -- is share buyback something that could be possible in 2026? And maybe just in terms of just the idea of the model, you guide for D&A depreciation, $850 million, but the run rate is probably a bit closer to $900 million for the full year. Is there any reason why depreciation will be smaller in Q4? Ian Johnston: Arnaud, with regards to the buyback and dividends, that's a policy -- those are policy questions that we still have to work through the Board, and that would come up in early 2026. We haven't provided a framework for that yet, but that will be coming in due course once we have alignment with the Board and then going to shareholders. Regarding the D&A, thank you, the question. We do expect a little bit of reduction in the fourth quarter where we would have traditional equipment that would phase off in terms of their depreciation expense. So that should help us into the fourth quarter. Operator: Our last question is from Pujarini Ghosh. Pujarini Ghosh: One follow-up on the Building Materials margins. So on the face of it, we saw a sharp decline in the margin on the Building Material side. But even if we take off and adjust for the one-off outage this year and the higher land sales proceeds last year, we still see around 100 basis points of decrease in the margin. So what is causing this decrease? And do you expect to kind of recover this maybe next year? Ian Johnston: Obviously, we outlined in the presentation, the biggest factor being the plant outage that we had. We had basically 6 weeks to repair that equipment. That cost us $50 million. We had the significant variance in asset sales year-over-year. The other impact that's affecting us is lower pricing in cement. There's another decline of 0.6% in the quarter. And then there's some cost inflation that went along with that. But those would be the main items. We do expect to be able to recover some of that production volume going into the fourth quarter. That should help lift margins a little bit in the fourth quarter. But right now, all of that temporary nature of those shutdown issues are behind us. Pujarini Ghosh: So in terms of price cost, so you would say there's like probably more negative than the 0.6% pricing decrease in cement? Ian Johnston: Price cost in cement was negative. That's correct, because of those temporary cost increases in the -- in our Mountain region. Operator: Thank you. We have no more -- we have no further questions at this time. I will turn the call back over to Scott Einberger, Investor Relations Officer, for closing remarks. Scott Einberger: Thank you all for joining us today for our third quarter earnings call. We look forward to speaking with you in February for our fourth quarter call. Have a nice day.