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Operator: Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Central Pacific Financial Corp. Third Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded and will be available for replay shortly after its completion on the company's website at www.cpb.bank. I would like to turn the call over to Mr. Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead. Jayrald Rabago: Thank you, Dustin, and thank you all for joining us as we review the financial results of the third quarter of 2025 for Central Pacific Financial Corp. With me this morning are Arnold Martines, Chairman, President and Chief Executive Officer; David Morimoto, Vice Chairman and Chief Operating Officer; Ralph Mesick, Senior Executive Vice President and Chief Risk Officer; Dayna Matsumoto, Executive Vice President and Chief Financial Officer; and Anna Hu, Executive Vice President and Chief Credit Officer. We have prepared a supplemental slide presentation that provides additional details on our earnings release and is available in the Investor Relations section of our website at cpb.bank. During the course of today's call, management may make forward-looking statements. While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected. For a complete discussion of the risks related to our forward-looking statements, please refer to Slide 2 of our presentation. And now I'll turn the call over to our Chairman, President and CEO, Arnold Martines. Arnold? Arnold Martines: Thank you, Jayrald, and aloha to everyone joining us today. I want to begin by expressing our sincere gratitude for your continued interest and support of Central Pacific Financial Corp. We are pleased to report that our bank delivered strong results this quarter. We remain well positioned to pursue our strategic objectives while maintaining flexibility to navigate economic headwinds with a high-quality, well-capitalized balance sheet and strong liquidity. Our foundation is solid, and our focus is on exceptional customer experience, disciplined growth, sustainable profitability and long-term value for our shareholders. While Hawaii's economy is experiencing some softness in tourism due to U.S. trade policies, our market has historically proven resilient. Ongoing construction and military spending continue to provide meaningful support, helping to stabilize the local economy. This quarter, our results were highlighted by deposit and loan growth, margin expansion and the strategic consolidation of our operations center into our main headquarters, which positions us for improved collaboration among employees and future efficiencies. We also announced a strategic partnership with the Kyoto Shinkin Bank, strengthening economic ties between Hawaii and Japan's Kyoto region. This collaboration will create new opportunities for our small and midsized customers, enhancing growth prospects and reinforcing our commitment to supporting business development. At Central Pacific, our vision is to be a bank that people want to invest in, work for and partner with. For our employees, this means fostering a workplace where talent can thrive. For our customers, this means providing exceptional experience with safe, reliable and accessible financial solutions that help them achieve their goals. And for our shareholders, this means delivering consistent attractive returns, distributing income responsibly and building long-term value. Our governing objective is anchored in disciplined capital stewardship. Our strategy is focused on optimizing bottom line returns while maintaining a high level of liquidity and prudent levels of capital. We achieved this through thoughtful capital allocation, measured risk taking and ethical business practices. Operationally, we are building a resilient business model designed for steady returns rather than short-term gains. Our balance sheet strategy is focused on enhancing composition, improving risk-adjusted returns, shortening duration and increasing diversification across products and geographies. In essence, our focus is on 4 priorities: enhancing our products to better serve customers and capture growth opportunities, building the strongest team possible to execute our strategy effectively, strengthening the balance sheet to deliver durable profits and solid returns and growing the business prudently through disciplined programmatic strategies. We are confident that this approach positions Central Pacific for continued long-term success and value creation for our shareholders. With that, I'll turn the call over to David. David? David Morimoto: Thank you, Arnold. Our balance sheet growth strategy continues to focus on deepening customer relationships and increasing market share within our core Hawaii market. As expected, in the third quarter, we reported solid net growth with loans increasing by $77 million and deposits by $33 million. The Hawaii loan portfolio saw growth in commercial, commercial mortgage and construction loan types, which was offset by runoff in residential mortgage and home equity. The Mainland loan portfolio also saw solid growth in commercial mortgage and construction. While this quarter's growth was led by Mainland activity, we anticipate a more balanced contribution between Mainland and Hawaii markets moving forward. We continue to operate within our historical range of Mainland loans, maintaining 15% to 20% of total loans in that segment. Average yields on total loans increased 5 basis points to 5.01% compared with the prior quarter. Our loan pipeline remains healthy, and we continue to expect full year loan growth in the low single-digit percentage range for 2025. Deposit growth of $33 million brought total deposits to $6.6 billion, reflecting both business development wins and deposit stabilization following recent interest rate volatility. While period-end noninterest-bearing DDA deposits experienced normal fluctuations, we are pleased to see continued growth in average noninterest-bearing deposits. The average rate paid on total deposits remained steady at 1.02% as the Fed rate cut occurred late in the quarter. Overall, these results demonstrate the continued strength and resilience of our balance sheet and our commitment to disciplined growth and long-term value creation for shareholders. With that, I'll turn the call over to Dayna. Dayna Matsumoto: Thanks, David. In the third quarter, we reported net income of $18.6 million or $0.69 per diluted share. Excluding $1.5 million in onetime pretax office consolidation costs, adjusted net income was $19.7 million or $0.73 per diluted share. ROA was 1.01% and ROE was 12.89%, underscoring disciplined execution in the current environment. Net interest income rose 2.5% from the prior quarter to $61.3 million, and net interest margin expanded 5 basis points to 3.49%, primarily driven by higher average yields on loans. There was approximately $230 million in loan portfolio runoff in the third quarter. Our weighted average new loan yield this quarter was 6.9% as compared to our portfolio yield of 5.0%. The investment portfolio also has runoff of about $30 million per quarter, which we are currently reallocating to fund loan growth. We are not planning at this time to do any further material investment securities or loan portfolio restructuring as we believe our profitability is strong and will be further enhanced over time through ongoing repricing. For the fourth quarter, we are guiding to $62 million to $63 million in net interest income and a net interest margin increase of 5 to 10 basis points. Total other operating income was $13.5 million, up $0.5 million from last quarter, primarily driven by higher investment services income from the Wealth Management Group. There is some seasonality in the revenue from Wealth with the third quarter usually being strong. Additionally, BOLI income benefited again this quarter from favorable market movements. Our normalized fourth quarter guidance for total other operating income is $12 million to $13 million. Total other operating expenses were $47.0 million, up $3.1 million from the previous quarter. During the quarter, we recorded a net $1.5 million onetime expense related to the consolidation of our operations center, which included a $2 million write-off of fixed assets, partially offset by a lease accounting credit. Going forward, we expect to realize total annual savings from reduced lease operating and maintenance expenses of approximately $1 million. Additionally, salaries and employee benefits increased by $2.1 million due to higher incentive accruals and commissions tied to stronger production. Our guidance for total other operating expense is $45 million to $46 million, which anticipates similar levels of incentive accruals in the fourth quarter. During the third quarter, we repurchased approximately 78,000 shares at a total cost of $2.3 million, and we have $23 million remaining repurchase authorization as of September 30. Additionally, fourth quarter to date through October 27, we have repurchased about 127,000 shares at a cost of $3.7 million. The Board increased the fourth quarter dividend by 3.7% to $0.28 per share. The dividend is payable on December 15 to shareholders of record as of November 28. Finally, on October 1, we notified holders of our subordinated debt notes that we will redeem the full $55 million outstanding at par on the upcoming call date of November 1. The subordinated notes, which were fixed for the first 5 years at 4.75% would have repriced to floating rate at SOFR plus 456 basis points on November 1. Our current target CET1 ratio is in the range of 11% to 12% and our TCE ratio in the range of 7.5% to 8.5%. We plan to deploy our capital first by continuing our quarterly cash dividend with about a 40% payout ratio. Then our priority is to fund accretive loan growth and opportunistically continue share repurchases. Overall, we have a healthy capital position and are optimizing our capital structure to provide sustainable long-term value for our shareholders while continuing to maintain prudent capitalization levels to protect against downside macroeconomic scenarios. I'll now turn the call over to Ralph. Ralph Mesick: Thank you, Dayna. Our risk appetite is informed by our strategic goal of delivering acceptable risk-adjusted returns while maintaining a high level of solvency. We seek accretive growth, balance and diversification. Credit risk is measured and evaluated against expected results and established guidelines and limits. In the third quarter, we continued to maintain strong credit performance and asset quality. Credit costs stayed within an expected range and the level of NPAs, past due loans and criticized assets remained low. Net charge-offs were $2.7 million or 20 basis points annualized on average loans with consumer book losses continuing to trend downward. Nonperforming assets totaled $14.3 million or 19 basis points of total assets, down 1 basis point from the last quarter. Past due loans over 90 days decreased to $1.5 million, representing just 3 basis points of total loans. Criticized loans declined to 177 basis points of total loans, maintaining low levels. Provision expense for the quarter was $4.2 million. including $3.4 million added to the allowance and $0.8 million to the reserve for unfunded commitments. The decrease in provision expense was primarily driven by lower net charge-offs this quarter. We maintain a strong capital position to support the bank through the credit cycle and against additional impacts that could arise from periods of prolonged stress. At quarter end, our total risk-based capital was 15.7%. Looking ahead, we will continue to take a prudent approach to building our loan portfolio, one that considers a range of outcomes and builds margins of safety to protect against adverse conditions. Let me now turn the call back over to Arnold. Arnold Martines: Thank you, Ralph. In closing, our third quarter results reflect disciplined execution, strong profitability and prudent risk management in a dynamic market environment. I'm grateful to our employees for their dedication and innovation, which continue to drive our success. To our customers and shareholders, thank you for your trust and support as we execute our strategy and deliver long-term value. We are now happy to take your questions. Operator: [Operator Instructions] And our first question comes from the line of David Feaster from Raymond James. David Feaster: I wanted to start on the growth side. I appreciate some of your commentary, but I did want to get a sense of what drove the declines in loans in Hawaii? And what gives you confidence that growth on the islands accelerates? And then maybe just touching on -- in that conversation, some of the impacts of the government shutdown in the islands as well as opportunities to capitalize on some of the disruption as well across your footprint, too. Arnold Martines: Yes. Thanks, David. David Morimoto will take that question. David Morimoto: David, yes, again, we did see net growth in the Hawaii market in the areas that we expected. So that would be in construction, C&I and commercial mortgage. The net growth in those sectors were overcome by runoff in the residential, primarily the residential mortgage and the HELOC portfolios, which are 2 portfolios that have been under a little pressure as a result of the interest rate environment. With interest rates hopefully continuing to moderate, we are hopeful that we can see some reduction in the runoff in those 2 portfolios, and that would bode well for future Hawaii loan growth. In addition to that, we do have a healthy Hawaii loan pipeline. There are a number of deals in the pipeline right now. It's just a function of timing. There's a number of loans that are between the fourth -- closing in the fourth quarter and the first quarter. So we'll need to see how that plays out. But we're cautiously optimistic that forward loan growth will be more balanced between the Hawaii and Mainland markets. David Feaster: Okay. That's helpful. And then maybe touching on the expense side. I appreciate the color that you gave in the guidance. It's a bit higher than what we've been expecting. It sounds like there's some cost saves with that op center consolidation. I know a decent amount of its incentive accruals. But just kind of curious, as you think about the expenses, where are you investing today? I mean, are you seeing opportunities for new hires? Are there some other key investments that you guys are making? And just how do you think about your ability to drive positive operating leverage going forward? Arnold Martines: David, this is Arnold. Let me just maybe start, and then I'll turn it over to Dayna. Obviously, as you know, we have been investing in technology, harvesting some of the investments that we've made in the past to be able to drive efficiencies. So that continues to be an area where we focus in on. We have a few systems that we're putting in place today. That's going to create a lot of efficiencies for us and just creates better tools for our employees to be able to support our customers and drive our effectiveness. And then I think just generally speaking, we are very focused in the development of our people and looking at areas where we have gaps and building skill levels in order to execute on our strategies as we move forward. So there will be some investment in people for sure. And I appreciate that you brought that up because that's -- the people is going to help us execute on the strategies. So with that, kind of overall, I'll turn it over to Dayna for additional further comments. Dayna Matsumoto: Sure, sure. David, what I'll add is that managing expenses and our efficiency ratio continues to be a key focus of ours. This quarter, we were impacted by the onetime expense from our office consolidation, and this will create significant efficiencies going forward. Additionally, this quarter, as we had greater revenue, we needed to increase our incentive and commission accruals. This is a good thing. Our objective continues to be driving our efficiency ratio to the high 50% range and mid-50s over time, and we plan to achieve this through consistent revenue growth while we continue process automation and greater use of technology. David Feaster: Okay. That's helpful. And then hoping you could maybe touch on the deposit side of the equation and what you guys are seeing there from a competitive landscape, some of the core deposit growth initiatives that you've got in place? And just how do you think about your ability to -- we just got another Fed cut, right? How do you -- just given the competitive landscape, how do you think about the ability to pass through some of these and reduce deposit costs with Fed cuts? David Morimoto: David, it's David again. Yes, on the deposit growth, again, we're cautiously optimistic. The fourth quarter is going to be a little more challenging of a quarter because we do have some known outflows. So I think we're striving to probably keep deposit growth relatively flat year-over-year. So on a full year basis, whereas we were guiding to low single digit, I think right now, it's probably more flattish as a result of what we know at this point in time on the fourth quarter. Having said that, we are optimistic on 2026. We do think we can drive towards low single-digit deposit growth in 2026. And the strategies there are -- it's the same strategies that we have been deploying probably with just a little more rigor going forward. So it is the blocking and tackling of banking. And we are seeing success in the Hawaii market with those efforts. And then we also are optimistic on Asia. We continue to have initiatives in Japan and Korea, and we're hopeful that those strategies will continue to gain traction in 2026. Operator: Our next question comes from the line of Matthew Clark from Piper Sandler. Matthew Clark: Just on the -- starting on the margin, interest-bearing deposit costs up a couple of bps, but the NIM guide implies -- you're calling for NIM expansion. So my sense is those costs have rolled over. Do you have the spot rate at the end of September on interest-bearing deposits? Dayna Matsumoto: Matthew, it's Dayna. The spot rate on -- I have it on total deposits at 9/30, it was 100 basis points. And if you're also looking for the September month-to-date margin, that was 3.51%. So we continue to feel like it's moving in the right direction. Matthew Clark: Got it. Okay. Great. And then you're going to get a 2-month benefit from redeeming the sub debt. When you strip out the sub debt, it implies the rest of your long-term debt costs are about $623. Can you remind us of the duration of that long-term debt that's left? And I just want to try to forecast the rate. Dayna Matsumoto: Sure. Matthew, we just have one $25 million FHLB advance outstanding, and it matures in February of 2028. Matthew Clark: Okay. Got it. Maybe there's some repos in that number. Okay. And then just on the -- do you happen to have the -- or just on the loan growth this quarter, the Mainland piece, the CRE and construction. Maybe if you could just provide some color on what you originated this quarter. I assume it's all participations and just an update on the size of the SNC portfolio. David Morimoto: Matthew, it's David. I'll start off on the Mainland part of the question, and then I'll turn it to Dayna for -- Dayna or Ralph on the SNC details. But what we saw in the third quarter is growth in the industrial and multifamily sectors. That's for both the multifamily -- I'm sorry, the commercial real estate and the construction portfolios. So they were in the industrial and multifamily sector. And then maybe just to take a step back on the Mainland lending strategy. What I will say is that Hawaii will always be our core banking market. Having said that, CPF has always had some loan exposure on the Mainland, and that's really due to some structural factors with the Hawaii banking market. the Hawaii banking market has always been characterized as having more deposit balances relative to good lending opportunities. And a lot of that has to do with Hawaii being largely a service-based economy without large manufacturing. And due to those structural factors, that's why we always have had a portfolio on the Mainland. Mainland lending provides CPF with geographic diversification, shorter duration assets and attractive risk-adjusted returns. But having said all of that, the third quarter was -- the growth was largely -- net growth was largely driven by the Mainland. What we'll see going forward is very much based on opportunities. It will fluctuate between Hawaii dominant growth versus Mainland dominant growth based on opportunities in that particular quarter. Matthew Clark: Great. And then just maybe on the SNC exposure at the end of the quarter. Ralph Mesick: Yes. This is Ralph. The total SNC exposure for the bank is around $526 million. And how that breaks out is Mainland CRE is about $190 million. And then Mainland corporate lending, which is really sort of the large syndicated -- broadly syndicated loans, that's around $144 million. And that's been coming down over the past year. Matthew Clark: Okay. That's helpful. And then the last one for me, just on the special mention and substandard balances, where those stood at the end of September. Ralph Mesick: Yes. From a balance perspective, let's see. Special mention was $34.3 million. Classified was $62.1 million. So relatively flat from the prior quarter. And in general, I think we had mentioned on the last call, we have a couple of large credits that probably represent about a little over half of that. Both of those loans are secured. They're performing loans. We've done individual sort of assessments. We would expect no loss in the event that they did default, but they are performing and our expectation is that they'll continue to perform. The sponsors have, I think, meaningful equity invested in these projects. And I think they're very committed to working through the situations that they're facing today. Operator: Our next question comes from the line of Kelly Motta from KBW. Kelly Motta: I was hoping to circle back to the expense side to David's question on compensation. You had mentioned some of that increase was related to step-up in bonus accruals. I'm just wondering how much of that, call it, $2 million was related to that. I appreciate the guidance about Q4, but just trying to get a good run rate as we kind of start the year next year. Dayna Matsumoto: Kelly, it's Dayna. Of that $2.1 million, about $1.5 million was related to the incentive accruals. Kelly Motta: Okay. That's super helpful. And then I appreciate the new color on capital targets. It looks like you're currently within the range on TCE and above on CET1. Kind of wondering how you guys are thinking about this level here. Does that imply potentially some more capital return? And given your outlook for balance sheet growth, it would seem that absent maybe more aggressive buybacks that would build. So wondering how you guys are kind of thinking about managing that and kind of the intermediate-term trajectory of capital levels. Dayna Matsumoto: Kelly, let me start off by saying that our target range, it considers a number of factors. First is our debt rating agency expectations. We also further maintain a level to protect against potential downside macroeconomic scenarios. And really, at this point in the cycle, we believe this is prudent. We also regularly perform capital stress tests, and those results are considered in our decisions. So with that said, we are currently slightly above our target range for CET1, and we are taking a more proactive but still prudent approach to capital return. So as I mentioned in the remarks, the priority is first for loan growth, and we are well positioned to support loan growth. We do plan to also continue share repurchases. The level and extent of those share repurchases will be a function of where the loan growth is and where the market is. Kelly Motta: Okay. That's helpful. I guess kind of given this low single-digit outlook, like what would -- as we look to next year, make you more confident with the loan growth stepping up to kind of deploy more of that CET1 into that range? Arnold Martines: Kelly, this is Arnold. I think we -- all of us are expecting that rates are going to decline, and we believe that there's pent-up demand, particularly in Hawaii, the Hawaii market. People are on the sidelines waiting for rates to decline. And so we're pretty confident from the standpoint that assuming rates decline, we are going to see more demand for loans. And so therefore, we believe that if that happens, that's going to be where we're going to focus capital on. That's the most accretive for the company, for our shareholders. But we'll adjust as we move forward and we see how the market opens up and what the opportunities are. Kelly Motta: Got it. That's helpful. Last question for me. It looks like you have a new Japanese bank partner. Just if you could remind us about the potential opportunities that you see leveraging now your third relationship that you have with the bank over there. Arnold Martines: Yes. Thanks, Kelly. This is Arnold. Yes, we're really excited about it. It's something that we've been working on for a little bit. We have a couple of other relationships in Japan, but we didn't have any one in the Kansai area, the Kyoto region, but also includes neighboring areas like Osaka and Kobe. And as you know, we have -- given our history and the ties that we have with Japan, starting with Sumitomo Limited, when we first started -- when the bank was first founded, those relationships are important. And we have a lot of business of Japanese corporations that have operations in Hawaii. So we believe the Kyoto region was an area where we didn't have a relationship with, and we're excited that we can now kind of move forward and hopefully facilitate our customers working together to create economic opportunities maybe in Hawaii, but also maybe in the Kyoto region. Operator: There are no further questions. I will now turn the call back over to Jayrald Rabago for closing remarks. Jayrald Rabago: Thank you, Dustin, and thank you all for joining our third quarter 2025 earnings call. We appreciate your continued engagement and look forward to updating you on our progress next quarter. Operator: The meeting has now concluded. Thank you all for joining. You may now disconnect.
Operator: Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group 9 Months 2025 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Simon Hunt, Chief Executive Officer; and Paolo Marchesini, Chief Financial and Operating Officer of Campari. Please go ahead, gentlemen. Simon Hunt: Fantastic. Thank you very much. Good evening, good afternoon to everyone. Thank you for joining us to go through our 2025 9 months results and perspectives for the remainder of the year. Paolo is here with me; our IR team, Chiara and Gulse are happy to connect after the call to further deep dive with all of you in the upcoming days as necessary. Now just before I get going, I think all of you already know, this is going to be Paolo's last call with us before he transitions to his new role as Vice Chairman. I'd like to thank him for all of his support, long-standing contribution to this group and looking forward to continuing to work with him in his new role. And it's pretty rare these days. He, as a CFO that has presided over more than 100 earnings calls, and holds the title being the longest serving CFOO in the Italian Stock Exchange and certainly across our industry by a long, long way. That is an amazing track record and an achievement. And on behalf of everyone in the company, me, my predecessors and all of you here on the call and in our investment community, I'd like to say a big thank you. And for those of you who are joining us on the Strategy Day on the 6th and 7th November, you have a chance to celebrate together with Paolo. Thank you, again, Paolo. Paolo Marchesini: Welcome. Simon Hunt: Now a short summary of our results. As you can see, our performance is on track with what we told you last time. Clearly, the operating environment remains challenging. Despite this, we are continuing to outperform the industry in sellout, and this is exactly our aim. We're keeping our strong focus on commercial execution and continuing to invest behind our brands to ensure we are well positioned for when the market normalizes. In terms of profitability, we're making strong progress, and this is supported by gross margin accretion and visible savings in SG&A more than offsetting the ongoing A&P investments, as I mentioned. And we're maintaining our guidance of moderate organic growth on the top line. While on EBIT-adjusted margin, we continue to expect a flattish organic trend as a percentage of net sales, but now with the tariff impact incorporated. And we'll dive into the details later on. We continue to make solid progress across all of our strategic priorities in line with our expectations. As highlighted in previous updates, our focus remains firmly on the areas we can control, and we are consistently advancing towards our goals. On brand building investments, as already shared, we're not making any compromises. On SG&A, as we already guided, the deceleration trend is evident, and we're also making progress on COGS efficiency. On CapEx, we are on track to complete our extraordinary program for production capacity expansion. In terms of portfolio streamlining, the disposal of our 50% investment in Tannico in Q3 is another step towards simplification following the disposals of Cinzano and the Australian plant in the first half of the year, and we are maintaining our pause on M&A. On the balance sheet, our disciplined approach means that we have now been able to reduce our financial leverage in terms of net debt-to-EBITDA ratio by 0.7x in the last 12 months, down to 2.9x with further improvements to come. Our portfolio approach continues to bear fruit. And while we will discuss this more during our Strategy Day, I can say that we keep growing across geographies where we are continuing to gain share and prioritizing execution and pricing discipline in a challenging backdrop. Now let's look at our top line performance and the drivers. In Q3, we recorded growth across all regions. I'll say that again, we recorded growth across all regions and delivered a very resilient 4.4% organic growth overall. And this means as of 9 months, our organic growth was plus 1.5%, in line with our guidance. And yes, we are still growing even in this tough market. The peak season started possibly in terms of weather, but we did see some variation across geographies in the latter part of the quarter, plus the impact of economic pressures on consumers play a role, especially in the on-premise and in the U.S. But despite this, we recorded solid growth. Regarding some of the technical impacts coming from the first half of the year, you'll remember that of the $11 million U.S. logistics delay impact we flagged in Q1, most of that has now been recovered with a limited impact expected in the fourth quarter. The delisting we flagged in Q2 in Germany continues to impact with EUR 3 million in Q3, leading to a total of $8 million in the 9 months and an expectation to reach $11 million by the end of the year. Net-net, these 2 impacts balance each other out in the quarter. And over the 9 months, the underlying performance broadly matches our reported organic growth. The perimeter impact is plus 1.1% on our top line while the FX impact was negative 2.4%, mainly driven by the U.S. dollar devaluation and Latin American currencies. Overall, our total reported top line growth is 0.2%. Now looking at the sell-out data, which is ultimately the main focus. Our outperformance continued across almost all markets in a challenging backdrop with overall shipments and sellout pretty much to line across the U.S. and EMEA. In the U.S., our outperformance in the strategic on-premise channel and in NABCA is ongoing in Q3 with plus 5% growth year-to-date in the on-premise, indicating a 4 percentage point beat compared to the sector, and a 2 percentage point beat in NABCA. And this is driven by a very resilient growth of plus 12% and plus 9%, respectively, in our tequila and aperitifs portfolio. Note that due to some data policy issues from the provider last night, we're only able to show a 52-week trend in the on-premise data, not the usual quarterly performance, but I'm sure that data will be corrected soon. On the off-premise, while our focus brands continue to show a resilient performance. The rest of our portfolio, which has a higher weight in this channel, impacted our total growth. And by the way, we should highlight that given its universe composition, Nielsen off-premise doesn't sufficiently represent a full picture of Campari America's performance or momentum in the market as we continue to make good progress across the club channel. In EMEA, we also outperformed in each of our main markets with growth of plus 2% versus a market of negative 2% in the region despite the pressurized context. Now let's start and look at our top line growth by region, starting first with the Americas. And Americas grew by plus 1% in the 9 months with an acceleration in Q3 of plus 5%, driven by positive top line across the region. In the U.S., the 9-month performance was impacted by the destocking in Q1, while the last 2 quarters have both been positive with plus 3% and plus 1% growth, respectively, in Q2 and Q3. The main drivers are Espolòn, Courvoisier and Wray&Nephew. And the aperitifs recorded a stable trend with a positive Campari, offsetting inventory reduction post tariff volatility in Aperol in the third quarter. In line with the category trends, we continue to see persisting challenges on SKYY. Jamaica recorded plus 11% growth in the 9 months with a very strong quarter 3 due to the base effect of last year's hurricane but also benefiting from a very positive local market dynamics. And given the news at this stage, I think it's important just to update you with what we know about Jamaica. So at this stage, the team are evaluating the impact of the hurricane from last night. And our primary focus is the safety and well-being of our teams, which we are confirming diligently given the lack of communication available. After that, we have got teams on the ground at each of our sites to assess the impacts and next steps to get us up and running as quickly as we can, recognizing the infrastructure damages anticipated by the Jamaican government. Once we have clarity on the situation, we'll then be able to confirm our support for whatever those recovery plans are and can provide more of an update once we receive it. In terms of the rest of the Americas, which makes up about 11% of our group sales, continued its solid performance with plus 3% growth in the 9 months and quarter 3 was flat, impacted by trade disruption in Canada in connection with the tariffs. But on the positive side, Campari has now become the second largest premium spirits player in Brazil, driven by the strong performance of Campari, and leading Brazilian brands. Now moving on to EMEA. The plus 2% growth was broad-based across almost all countries. In Italy, the environment remains challenging, especially in the on-premise. We saw less willingness by consumers to spend and decreased numbers of visits. Regarding tourism traffic, even though accommodation occupancy rates were relatively solid during the summer, consumers were more selective about spending. There were also a few Italians taking holidays during August pressured by increased prices. In August, we saw all main beverage categories. That's all beverage categories, down 10%, including water a mainstay of Italian consumption in both the on and -- in and out of home, really reflecting the economic pressures that consumers are seeing. And all of this played a role in the performance of Aperol. At the same time, we see our portfolio approach in aperitifs bearing fruit, especially with solid trends in Campari, Crodino, Sarti Rosa as well as the Spirits portfolio. In Germany, the environment has become more challenging over the last few months across all categories and sectors, as I think you know. And consumer propensity to save versus spend has increased significantly. And we are still cycling the impact of the delisting at a retailer to hold our line on pricing. Despite this, we recorded positive top line growth in Q3, mainly driven by the success of Sarti Rosa, which now accounts for more than 10% of our net sales and has become the second largest brand for Campari Group in Germany after Aperol. Again, here, the benefit of our portfolio approach and Spirits leadership is evident. In France, our solid performance is mainly driven by Aperol with plus 6% growth in Q3, and the U.K. performance remains strong, supported by our excellent execution during the peak season with the added benefit of some good weather, too. The main drivers of the plus 22% growth in Q3 were Aperol and Aperol Spritz as well as Courvoisier benefiting from the ongoing marketing campaign. In the other countries in EMEA, which contributed 16% to our overall sales, we had a positive trend in all countries in the 9 months, especially in GTR, Greece and Belgium. And the bulk of the growth is coming from aperitifs and Courvoisier. Now moving on to APAC. Growth was plus 5% in the 9 months. In Australia, the growth of plus 6% in the 9 months was driven by a 15% growth in Aperol with ongoing focus on accelerating the on-premise activations as well as a plus 12% growth on Espolòn bottle and ready-to-drink, which keeps leading the tequila ready-to-drinks. In quarter 3, which in any case, is an off-season quarter for Australia, performance was impacted by the phasing of shipments in Wild Turkey, leading into the key upselling -- upcoming summer selling period. In the rest of APAC, we saw a positive momentum in Q3 with plus 14% growth, mainly driven by China, India and South Korea. And Wild Turkey/Russell’s Reserve continued to perform well and we've also seen some initial reorders on Courvoisier following a clearing of the trade channels that we undertook following the acquisition. Okay. So let's now move on to look at it different way via the houses, starting first with the House of Aperitifs. Here, we recorded resilient growth of plus 1% in the 9 months, primarily driven by Sarti Rosa and Aperol Spritz. As I mentioned, while talking about the regional performance, Aperol performance was impacted by a variety of factors during the quarter, and I'll deep dive a bit more on the next page. But in Italy, the impact was a result of pressured on-premise, Germany due to the delisting and operating conditions. And in the U.S., we had an alignment of the inventory post tariff volatility in the U.S. market, which impacted shipments. Excluding these 3 countries, all other countries remain on track with plus 4% growth in the 9 months. For Campari, the main impact is coming from Brazil, where we had a very high comparison base from last year, I think, near on 50% due to the rapid growth as well as price increases. And excluding this impact, the performance remains solid with a plus 2% growth in Q3 and a plus 1% in the 9 months, led by the U.S., Italy and the rest of the Americas. The remainder of the aperitifs portfolio is showing positive trends across the regions. Sarti Rosa continues its solid growth in its core German market and has started to benefit from the rollout into other European markets as well. Aperol Spritz is performing nicely, driven by the convenience trends. And Crodino, our nonalcoholic Spritz, is growing double digit across all seeding European markets. As I said, let's have a closer look at Aperol. The geographic expansion is fully on track across all seeding markets. More than 10 countries representing 12% of the brand's total sales are delivering outstanding double-digit growth, reinforcing the strength of our approach and the excitement in these markets. And this really is a testament of the fact that Aperol's desirability and consumer trends continue to support its growth. On sellout, our outperformance is continuing in the strategic on-premise and in NABCA in the U.S. European markets are facing some pressure and it's evident, especially in the on-premise data. In Italy, despite this stock levels remain healthy in the trade. In Germany, given the operating backdrop, Aperol's been impacted, especially in the on-premise. But if you include also Sarti Rosa, in fact, we continue to perform better than the market. In France and the U.K., the performance is very robust, particularly benefiting from favorable weather conditions and excellent execution. This is all to say we are very confident in the trajectory of Aperol. It's a tough market without a doubt and the quarterly performance can get impacted by various factors, but the long-term opportunity remains fully intact. Okay. Looking at the House of Whiskey & Rum. In whiskey, we recorded strong growth in Q3 with Wild Turkey benefiting from the stock availability in its core U.S. market. And you'll see it later in this session, but we also launched a new campaign, which we expect to support more going forward with initial encouraging results. South Korea and China are also supporting off a small base. Jamaican Rum showed a solid growth of plus 16% with Q3, driven by an easy comp from the last -- from the hurricane last year as well as strong underlying trends in the U.S. and in Jamaica. In the House of Agave, Espolòn grew plus 3% in the 9 months. Growth was supported especially by Reposado plus 11% while Blanco remained broadly flat due to our focus on pricing. And Q3 was impacted by the phasing of shipments. Key seeding markets also continue to grow for a small base, in line with our international expansion strategy. Within the House of Cognac & Champagne, Grand Marnier recorded a stabilized performance in Q3, also supported of an easy comp from last year. Courvoisier recorded EUR 99 million of sales in the 9 months and was included into our organic growth as of May. As we already highlighted in our H1 call, we are piloting some brand marketing in the U.S. and U.K., which has shown initial positive results. And above all, I'm very proud to say that Courvoisier took top honor as Best Cognac for its 30-year XO Royal in the 2025 Beverage Testing Institute Awards. In fact, out of the total of 8 categories awarded during the event, Courvoisier was on the podium in 4 of them, with XO Royal winning the top prize with XO, VSOP and the VS expressions. And this clearly reinforces the quality of our liquid in our bottles. For the rest, I won't comment too much, just to note that 21% of our overall portfolio is currently classified as local brands given their geographic concentration. SKYY remains an important part of the portfolio and showed a positive performance in Q3 driven by Argentina, China and Brazil, more than offsetting the ongoing softness in the core U.S., in line with other major players in the category. Okay. I'd also like to share some of the highlights of our activations from last time. And given that we're in our peak season, the key focus for us has been imperative in this period. So let's start with Aperol. Music festivals are and will continue to be at the heart of our activation strategy for Aperol. This summer has been our biggest and boldest yet with over 130 festivals in EMEA alone reaching more than 10 million consumers and selling, yes, selling over 2.5 million Aperol serves. We're also once again in the U.S. Open, where Aperol engaged with more than 90,000 attendees, driving 26 million influencer impressions. For Campari, the main highlights of the quarter were the strong partnerships with the major film festivals. Venice for the 8th, Locarno for the 5th and Toronto for the 2nd year. We're also very active during Negroni week because as you all know, there is no Negroni without Campari. And this linked with our cinema and the Negroni are critical for the positioning of Campari, and we'll continue to strengthen this further in the upcoming period. And moving from aperitifs to tequila, Espolòn is also very active during the summer with its mark days of summer campaign. Media impressions increased by more than 28% compared to last year. Social impressions reached millions leading to additional coverage in Forbes and Vogue and all of this culminated in a widely publicized drone show over New York. And lastly, we're going to have a look at our new Wild Turkey campaign, which was launched at the beginning of September, focused on our legendary master distiller Jimmy Russell. This initiative represents the brand's largest ever investment with a media spend planned up to $12 million through 2026. And this campaign is rolling out across the U.S. and Japan in '25, expanding to Australia, South Korea and other markets in 2026. The and the pre-launch testing ranked the campaign in the top 1% to 5% of benchmarks, showing strong purchase intent, brand saliency across the key markets. So let's have a look at the video. [Presentation] Simon Hunt: Okay. I think back, hopefully, if the technology is working properly. So before I hand over to Paolo for the P&L and balance sheet section, I'd like to give you an update on our key strategic priorities. We're really excited to welcome many of you in-person to our first-ever Strategy Day coming up on the 6th and 7th of November in Milan. The agenda is going to be pretty packed, giving us the opportunity to review our future direction and priorities while not forgetting to have a bit of fun, showcase our brands and our amazing production capabilities. So moving on to cost containment. You can see that in Q3, the declining trend we guided for in SG&A has started and will continue in Q4. Therefore, we are on track to achieve our target of 50 bps benefit on sales in 2025 and 200 bps benefit by the end of '27. On portfolio streamlining, we continue to take the right steps after disposal of Cinzano and our American plant in the first half. We've now divested our 50% stake in Tannico, the Italian online wine and spirits business. Although this has a limited impact on our results, it's another step in the right direction in terms of business simplification, in line with our strategy to focus on fewer, bigger bets. Any additional potential disposal will be based on the optimization of potential proceeds. And I can say that more conversations are ongoing. Okay. With that said, I'm going to hand over to Paolo. Paolo? Paolo Marchesini: Thank you, Simon. First and foremost, I wish to thank Simon for his kind words at the beginning of the presentation of my past contribution to the Campari success. It's been an incredible journey, a privilege to engage with such a thoughtful and committed community of analysts and investors over the years. I look forward to continuing to support the group in my new role as the Vice Chair, and I hope to see you -- many of you again at our Strategy Day in November. For now, let's dive into the results and the outlook for the remainder of the year. Now if you follow me to Slide 17, let's start by looking at our EBIT margin dynamics for the last time together. I am happy to say that we have recorded solid results so far in 2025 with a flat EBITDA adjusted margin supported by gross margin accretion and cost containment benefits, offset by brand building investments as planned. In terms of gross margin, 9 months was up by 90 basis points with an acceleration in Q3 of a positive 180 basis points. This was mainly due to the positive mix and ongoing benefits of input costs, especially Agave as well as contained tariff impact of just EUR 6 million in 9 months. Tariff impact benefited, in fact, from some pre-tariff in-house inventory position we were holding. Accordingly, our full year impact has been revised down to EUR 15 million for 2025. A&P to sales reached 17.3% in 9 months with an acceleration during peak season leading to a positive 9% organic yearly growth and a negative 110 basis point dilution impact on margin. As Simon mentioned before, we continue to invest behind our brands and our full year guidance of 17% to 17.5% is fully confirmed. As you all know, our cost containment efforts are becoming more and more visible. In Q3, we had a declining trend of negative 4% in value, and we are on track to reach a 50 basis point accretion guidance driven by ongoing value reduction in Q4. Accordingly, EBITDA adjusted was realized at EUR 517 million in 9 months. Within this, there was a positive contribution from perimeter of EUR 1.1 million driven by Courvoisier until April, net of agency brands and co-packing. Foreign exchange impact was realized at a positive EUR 9.8 million, driven by devaluation of the Mexican pesos offsetting the negative impact of U.S. dollar devaluation. Let's move on to look at our group pre-tax profit with a few comments. So far this year, operating adjustments totaled EUR 41.9 million and that includes the impact of plant disposal in Q1 and severance payment. Financial expenses came in at EUR 80 million in 9 months. This is on track with our expectations of EUR 105 million to EUR 110 million for the full year. The increase versus 9 months of 2024 was driven by higher average net debt, actually EUR 2.365 billion this year versus EUR 2.071 billion last year, mainly due to the base effect of Courvoisier closing on cash and debt. Average cost of net debt is now at 4.3% versus 3.7% in 9 months 2024. As in previous quarters, we need to remember that last year's figure was artificially low, given cash at hand ahead of Courvoisier closing coming from acquisition funding. Adjusted 9 months 2024 figure would have been 3.8%. Overall, group pre-tax profit adjusted amounted to EUR 440.4 million in the 9 months, indicating a negative 2.6%. And group pre-tax profit came in at EUR 398.8 million with a negative 5.7% decline. Moving on to look at the net debt, Slide 19. Net financial debt was EUR 2.241 billion in 9 months, improving by EUR 136 million compared to 2024, thanks to positive cash generation. This is before the further benefit expected from the proceeds of Cinzano disposal after the closing, which is expected to occur before the end of the year and will further contribute. Cash and cash equivalents were at EUR 509 million, up versus first half due to cash generation. Compared to the end of 2024, it is down by EUR 157 million due to EUR 78 million of dividend payment, CapEx initiatives, loan repayments and employee termination payments. Lastly, in line with our strategic priority of balance sheet discipline, our leverage ratio improved to 2.9x in 9 months, down from 3.6x in 9 months of 2024, following the acquisition of Courvoisier, 3.2x at the end of 2024. So in 12 months, as we said before, we have a deleverage that is accounting for 0.7x. Pro-forma including Cinzano disposal, the ratio is slightly better at 2.85x. This is a testament to our capability of actively manage our balance sheet following acquisitions and bringing leverage ratio down with further improvement expected going forward. Let me hand back to Simon to comment on our outlook. Simon Hunt: Great. Thanks very much, Paolo. So I started this year by saying it was going to be a transition year. And in these 9 months, we've showed a resilient performance despite the ongoing challenging backdrop you all know. The environment is still one of the most complex any of us has gone through, but we continue to outperform in key markets. At the same time, we keep our focus on what we can control in order to manage our balance sheet and P&L effectively and the results as clear as you just heard from Paolo. For the full year, we continue to expect moderate organic top line growth, assuming no worsening of consumer confidence in Europe or in the U.S. and especially in the on-trade. So far in the 9 months, we recorded plus 1.5% organic growth which confirms our targeted progression. On EBIT-adjusted margin, we're maintaining our flattish organic guidance. Have this in guidance now includes the tariff impact and the drivers behind this provision are as follows: first, lower than previously guided negative impact from tariffs of EUR 15 million as Paolo mentioned before, due to the benefit of our pre-tariff in-house inventory position. Of course, this is assuming the current tariff rates remain the same, which we hope they do. But now anyway, given the stability we've established. But just to consider, we will not have the same benefit next year. Second, the benefit of efficiency gains in COGS and SG&A, where we continue to make good progress. This is more than offsetting the reinvestments in A&P which are critical for our brand building, and we believe investing now while many others are cutting their budgets, helps to deliver strong long-term brand benefits. In terms of FX and perimeter, we expect limited overall impact in value terms. And regarding the medium long-term outlook, we confirm our previous guidance, and we are confident for the future. As I mentioned before, we'll come to the market with more details of how we're going to get there next week during our Campari Strategy Day. So to summarize, we keep our focus as planned in the key areas that we've mentioned before. We continued relative outperformance in sellout, which we are doing; financial deleverage trend, which we are achieving; deceleration in SG&A growth driving operating leverage, which we are delivering; continued focus on commercial execution and pricing discipline, which we are controlling; and portfolio streamlining, which we are delivering. So let's close here, and let's open up the floor for your questions. Thank you. Operator: [Operator Instructions] The first question comes from Andrea Pistacchi of Bank of America. Andrea Pistacchi: So first of all, Paolo, I haven't been on all the 100-plus calls you've done, but many of them. So I really want to say a big thank you for the help, detailed answers, insights that you've consistently provided. And also, of course, congratulations for your appointment to Vice Chairman of the Board. And all your best -- all the best in your new chapter, and I look forward to seeing you in Milan next week. So I have 2 questions, please. First, I'll start with Paolo, on gross margin. Gross margin being one of the key highlights, I think, of these results. Now there are a lot of moving parts here from the tariff impact, the input cost benefit, Agave, mainly mix effects, maybe other things. So it would be helpful, please, if we could go through these drivers in a little more detail if that is okay? For example, how much of a benefit are you getting from input cost and Agave, and is there more to go as we go into next year? And also, if you could say, what is driving the mix benefit? Because I think your aperitifs was a bit more subdued this quarter growing below group average. Yes. So putting all this together also on the margins, how you're thinking about how these moving parts play out in Q4 and maybe going into next year? And then for Simon, please. I wanted to dig a little deeper on EMEA, which I think was very solid overall. Some markets are strong. Others not, however, various companies are calling out how affordability is weighing on consumer demand. Now given that the affordability headwind probably won't go away in the short-term, what are you doing to deal with this to adapt with this? What does it mean for pricing in EMEA in the next 12, 18 months? And in Italy, stock levels, given that there's been a bit of a softer performance that you're calling out in the on-trade in the summer, how are wholesaler stock levels there? Paolo Marchesini: Thank you, Andrea. On -- I'll start with the gross margin question. So vis-a-vis key drivers on the COGS, we have originally highlighted EUR 20 million benefit from input costs, most of it coming from Agave. But also, I have to say that many other commodities are -- the prices are coming down. The only exception to that still remain logistic costs, where we have seen negative variances vis-a-vis a year ago. In terms of -- if you look at the upcoming quarter and more directionally into 2026 for the upcoming quarter, we think we will still benefit from positive contribution at the gross margin level, as we've seen in the third quarter of the year. We will keep on benefiting from a reduction in value of SG&A due to the restructuring initiative that is having an impact in the second half as we have originally guided, more to come with a further 90 basis points in 2026 due to the full year effect of the initiatives that have been implemented in year 2025. Vis-a-vis the mix, the very good news is that on Espolòn, originally the objective was to achieve parity vis-a-vis group average gross margin by Q4 of this year. Instead, we managed to put it forward to Q3. So Espolòn in Q3 was no longer a bleeder and that contributed to a positive mix. Clearly, if we look at the composition of the margin gain in the third quarter, giving the pricing pressure that we had, most of the -- if not most of the gain is coming from cost benefits more than mix and so the very same dynamic we are expecting to see in Q4 with promo pressure negatively impacting the company's ability to take net price gains. COGS, will keep on being positive and mix as we hope will positively contribute. So this is a little bit how we see the first quarter and next year. In terms of clearly, perspective in the past years, our ability to drive gross margin expansion based on sales mix improvement is linked to the performance of primarily aperitifs but now also tequila, Espolòn will be no longer a bleeder. So we remain extremely positive vis-a-vis the possibility of expanding gross margin via sales mix. Commodities remain a tailwind in 2026, whilst at this stage, we believe pricing, the opportunity is minute and less evident given the current market conditions. Simon Hunt: Andrea, looking forward to seeing you next week. Look, your question on EMEA, look, EMEA, overall, it's tough, as you rightly said. But I'm really pleased with the performance that the team has delivered. And I think the call out on affordability, you're seeing consistently across categories and this whole cyclical structural debate. I think one example of cyclical EMEA is a great one where you're seeing it across every category. It's not just within our category, put it that way. I think, look, in terms of what we need to do on this, we are very good, I think, at positioning the brand as aspirational, yet affordable. So the space we play in, we've got to really create that value in the consumers' eyes. And so the best way to do that is execute brilliantly. And that's in the markets where we're carving out, we're getting -- gaining share or outperforming, it's where we're really doing that, and the consumers are seeing the value in what we offer. So I think that's the first thing in terms we need to do. The second thing is then leveraging our portfolio. We have a collection of brands that allow us to compete very effectively in these markets. And you see that whether it be there may be a tougher performance on Aperol in Germany, but the growth in Sarti or the growth in Crodino and other markets. So leveraging our portfolio is key. I mean, more tactically, there are some opportunities, I think we've got to focus on around revenue management, which you'll hear more about next week. And just generally, in terms of our overall strategy, I'm not going to take away from what you're going to hear next week. So maybe by the end of Friday, you can let me know whether I've answered your question probably. Operator: The next question is from Sanjeet Aujla of UBS. Sanjeet Aujla: Hi Simon. Paolo, I'd also like to echo massive congratulations on your new role and many thanks for all of the help of the years [indiscernible]. So also 2 questions from me. Simon, I just want to come back to the consumer demand environment in the U.S. and Europe. Would you highlight there's been a deterioration between Q3 and Q2? And in particular, how are you seeing the evolution of the competitive and pricing environment? Would you say that's further intensified over the summer months? And that's my first question. And then just coming back to stock levels. I think Andrea asked the question, but can you just give us a flavor for where stock levels are, particularly in the U.S. and Italy and anywhere else that might be noteworthy? Simon Hunt: Sure. Absolutely. So I think in terms of the performance in Q3 and Q2, it is really mixed. And as you know, looking at this data from a national point of view, it kind of blurs what's going on. Yes, if you look at the Nielsen data, and it seems very kind of doom and gloom across the industry in many cases, but we have pockets of growth really coming through quite nicely. I mean a good example is not picked up is, in our 11 cities that we're really focusing on building Aperol, we have 10 of them in double-digit growth. So when you talk about the deceleration, it really depends where and on what. And I think that's where we've got to be a bit careful that we [indiscernible] too many conclusions simply because of the negativity in the off-premise. We are still growing. We're growing in the on-premise. We're growing in NABCA and we're growing really successfully on the brands that we're focusing on that we're prioritizing. So I think for me, it's -- it's more about what we're doing and where we're doing it than actually what's happening in the marketplace. As I've said before, we have the benefit of being a smaller operator in the U.S. and therefore, we've got to go after opportunities and maybe some of the other companies don't have. Having your second point on the pricing environment, I think you're saying you see the same data we see, which is from a mix point of view, again, it depends on which category. I think you're starting to see a bit more price competition coming through in Blanco as we've seen within the tequila sector. Repo is dipping down a bit. But if you look at the overall price mix, actually, the tier that most of it is coming from is the tier above where we play with Espolòn. It's up at the super premium price point, where you've got a mix, from memory, at 2.6% negative as consumers are now trying to -- our brands are trying to capture that consumer affordability in that end. And that's actually creating a good opportunity for us, some people on the down trade. So, we're going to have to carry on [ sale. ] I think it's going to be a pretty aggressive festive period. I think everyone is going to be up trying to close out the calendar year strongly. So we'll have to wait and see, but I'm very confident in terms of the plans that the team has got. I mean in terms of the stock levels just quickly in the U.S., I'm very happy, as I said before, with the levels of stock we've got we can -- we've managed to take down some of the pre-tariff stock that we put in, which on the flip side of that allowed us to not get hit by the tariffs quite as much as we originally forecasting. So that's impacted some of the shipment numbers that you see in Q3. In Europe, again, very happy. We see the stock levels we've seen in Italy and perfectly normal with what we're seeing in terms of sell-out. I'm not concerned about excess stock anywhere. There was -- I'm not concerned about heavy pushing through to land Q3. I feel pretty confident. And without getting into the performance in Q4, but I'm not seeing any hangovers running from Q3, put it that way. Operator: The next question is from Simon Hales of Citi. Simon Hales: Can I echo the congratulations to you, Paolo, and look forward to celebrating properly with you when we see you next week at the Strategy Day. So just a couple of quick ones for me as well, please. I want to start, can I just go back to the U.S. sort of briefly. And I wonder if you could just talk about whether you -- obviously, we're seeing a deteriorating underlying trend in the industry through Q3. I appreciate you're outperforming that and some of your comments earlier in terms of you're still winning where you're investing. I wonder what you're seeing as we're coming to the early parts of Q4, obviously, an important festive season to come. Has that deterioration in trends fed through to just sort of do you think weaker ordering by wholesalers in the U.S.? I mean, any comments and color there would be interested. And then secondly, just coming back to Jamaica. I appreciate it's very early days, given the hurricane only hit last night and your focus is rightly on the safety of your people. But you're obviously confirming at this stage, your full year '25 guidance for group moderate organic sales growth. I think consensus is looking for around about 2% to be moderate for the year. I just wonder, is that deliverable that moderate sales growth even if the disruption in Jamaica ends up being pretty significant given the hurricane? Simon Hunt: Yes, Simon, good questions. I mean I think, look, in terms of the underlying Q3 and heading into Q4, we're certainly living in a dynamic environment at the moment is the way I describe it. So I think ultimately, we're not seeing any real pressure from, certainly from our relationships. We came through on the wholesaler side, but that's also probably because we're actually in a reasonably healthy stock position already, healthier than not too high is what I mean by that and appropriate for what we need going forward. So I think -- as I've said on previous calls, the cost of capital, both in on-premise retailers and wholesalers is clearly ask -- people are now asking about what -- are people destocking further. For us, we feel pretty confident in terms of the flow. We're very confident in terms of the stock levels at each level. So we don't really see too much of that coming through. I think what will be interesting is whether or not retailers are willing to take in the holiday stock that they normally take in. And I think that's something we don't know yet. We've had no indication they're not going to. But again, things are changing quite quickly in the marketplace, and we'll see. Maybe they're taking half as much through to a holiday to wait and see what the consumer does. So that may impact. Again, for us, it comes back to a big chunk of our business is in the on-premise as well. So we've got to make sure we're executing really well in the on-premise, which the team is doing a good job on, but also making sure that we can respond to those changes if they come through in the purchase patterns. So I think on the first question, again, it's difficult to kind of predict what's going to happen, as you know, but we feel pretty confident with the plans that we've got. On your second question on Jamaica, you're absolutely right. Look, it's all about the team and making sure everyone is safe at the moment. I've got calls later tonight with the team to find out where we are. In terms of this year, I want to be clear that we've already shipped a vast majority of the stuff that we need to close out the year out of Jamaica. And we're sitting on healthy inventory positions to meet the demand. So I don't see that being an impact into this fiscal or impacting our ambitions to close out the year strongly. I think until I see or until I hear really what the team has found, once I've established everyone is okay, then I'll be in a better position to give maybe a bit more of an update next week in terms of what we found out. But at this stage, it's very hard to get the communication. I think you know electricity is out, phones are out, a lot of the roads are blocked. We're getting kind of piecemeal information. We've got a call later tonight, and I'll know a bit more, but I probably won't have the full picture tonight either. But in terms of full year impact, I don't think there's -- it's a significant impact. Operator: The next question is from Mitch Collett of Deutsche Bank. Mitchell Collett: And I'd also like to say thank you very much, Paolo for all your help and patience over the years and good luck with the future. Two questions for me, please. So the first one is a little bit similar to what we've had before, but you've obviously reiterated this year's guidance, but you've added this line about assuming no further worsening of consumer confidence in Europe, especially impacting the on-trade and in the U.S. I appreciate the importance of OND, but maybe just a bit of color on why you felt that additional line was necessary given how far we are into 2025? And then I wouldn't want to take anything away from next week. But clearly, you've confirmed your medium-term outlook. And I appreciate visibility is low. It's still early to ask for a read on 2026. But the question I want to ask is, do you think that next year, you'll be in that mid- to high single-digit organic growth range? And I guess, if not, what do you need to see to get there? Simon Hunt: Okay. Mitch, yes, in terms of the guidance, the reason we put that in is, as I said on -- literally on the first call, I think I came on with it, we're controlling what we can control. And so the team is working through that. And so yes, we've only got a couple of months to go to close out the year. But this has probably been a year with high volatility than I've seen in 31 years. We've had tariffs, we had economic pressures, geopolitical changes. And as a result, we're seeing consumer behavior really change quite quickly and certainly a lot quicker in terms of purchase behavior. And that was the only reason we put it in. We want to be prudent. We want to make sure that we land the year in line with what we've told you, each one of these calls of what we're going to do. So I think we're just kind of being a bit prudent there. I'm confident we can get where we need to get to. But I think it's also recognizing there are some things outside of our control. And therefore, we want to make sure that we've kind of covered that off in terms of our guidance. I think in terms of your question on '26, yes, you're right. I'm not going to give you an answer yet in terms of where we are, but I think -- the reason we set our medium-term outlook, and we'll talk more about this next Thursday and Friday is really about our confidence in that longer-term outlook and medium-term outlook. What we anticipate '26 will be, will be a step on that journey. Exactly what step? We need to confirm we want to close out this year, and we'll be able to give more guidance once we see how we finish out the year. But it would be, I think, a positive step in that direction. Again, the only caveat on that is there's a bunch of stuff outside of our control and volatility at levels we haven't seen before. So again, what I want to be able to do is be prudent, make sure we can deliver what we tell you we're going to deliver. Operator: Next question is from Laurence Whyatt of Barclays. Laurence Whyatt: Simon and Paolo, and can I echo all the comments to Paolo, and thank you for all your hard work and help over the years and look forward to seeing you next week at the Capital Markets Day. A couple of questions for me there, please. Just on the tariff impact. You mentioned you've managed to get around some of the tariffs by using some of your stock. Presumably, that means that some of the impact will be felt next year. I was wondering if you could quantify what sort of tariff impact you would expect next year once you no longer have that -- the benefit of the stock and whether you think you have taken any price in order to overcome some of those tariffs and if so, sort of on what brands do you think that will be taken on? And then secondly, with regard to Espolòn, of course, the expectations of tequila over the past few years have been, I guess, pretty heroic. The growth has been enormous. And of course, that's slowed down somewhat in recent months and quarters. Just wondering on your sort of contracted Agave supply, whether you've had to adjust how much Agave you're buying in from Mexico and whether that's giving you some of the benefit on the margin on Espolòn recently? Paolo Marchesini: Yes. On the tariff, the -- we confirm -- although this year, we're benefiting from already existing in-house stocks for next year, unfortunately. If nothing changes, the EUR 37 million guidance that we've highlighted before stays. So it's completely unchanged. You alluded to opportunity of taking price. Of course, there's always the opportunity to partially mitigate the impact. But we also have to recognize the fact that the U.S. environment is particularly competitive at the moment. Therefore, I wouldn't bank on it at this stage. Whilst on the second question vis-a-vis the Espolòn brand, we've managed to tweak down the prices and the commitments. And so this is why we're benefiting from the decline of the Agave price. For next year, there will be still a tail end opportunity sitting in the current trend. We have directionally highlighted in the past EUR 5 million, which is, I think, makes sense is confirmed for next year. So we have a little bit of tailwind also on that -- on input costs for next year. We're in a good spot on Agave suppliers. Operator: Next question is from Trevor Stirling of Bernstein. Trevor Stirling: Simon and Polo, let me add to the que Paolo and look forward to really having a proper drink and celebrating next week. Simon, probably one question for you. If we look at the Espolòn shipment data, it looked kind of weak around minus 1%. And so the sellout data we see in NABCA is much stronger than that. I think you alluded to shipment phasing. Maybe could you just give us some sense of where you think Espolòn is on an underlying basis? Simon Hunt: Trevor, you're right. I mean in terms of shipments down 1% and then you see the performance on the sellout, we basically -- there are 2 drivers of this. One was actually just destocking the stock that we brought in ahead of the tariff, we're still unsure as to what was going to happen there. And so we've just been working that through, which is whether ultimately the shipments will catch up with the sell-out performance, is the first thing. The second thing on that is just there's some mix around the different states is about where we're shipping stuff as well. So in terms of whether Repo, whether it's Blanco, again, there's just some different phasing in terms of that. So I don't think either of them are big drivers. It's more just about -- I think you'll see some catch-up on that as we close out the year and head into Q1. Trevor Stirling: And then maybe just one follow-up. The strength of both Jamaica and the Jamaican Rum portfolio, it seems really strong. I mean, I think Jamaica and Jamaican Rum is down about 19%, 20% this time last year, and you're up 45%, 50% which would imply you got underlying growth as you're probably in some of the region of 20% at least. Does that sound about right? Operator: [indiscernible] you have your phone on mute? Simon Hunt: Sorry about that. I thought -- Trevor, I thought I hit it. The -- in terms of the Jamaican Rum performance, really a couple of drivers on that. One is the performance in Jamaica. So we're cycling the disruption of the hurricane last year, which now it looks like we might be doing the same this year. So that's one of the drivers. But the brand is incredibly powerful on the island, and the team has done an excellent job of continuing to drive the execution. So that's been one area. The second area has been the fact that we were out of stock in the U.S. And so now that we've got stock back in, that's allowed us to give us a very positive performance there as well. So put those 2 things together, that's really why. Operator: The next question is from Chris Pitcher of Rothschild & Company. Chris Pitcher: Another round of thanks for Paolo from me for [indiscernible] over the years. And also congratulations on the, The Glen Grant sale, which you highlight in the Annex, which has gone to raise some good money for charity. So good work there. One question on Courvoisier again. Are we through the last really disrupted period for Courvoisier? Because if my numbers are right, you've probably done EUR 13 million, EUR 14 million of organic sales through on Courvoisier. And should that be normalizing into the fourth quarter? Or should we still expect to see continued strong momentum as that brand comes back? Because certainly, the EUR 99 million was a bit ahead of what I was forecasting for the 9 months. Paolo Marchesini: I think as we progress further into the upcoming quarters, the shipment performance of Courvoisier will basically mirror the depletion and the sell-out trend. So it's clearly at the beginning, we benefited from the first time consolidation of Courvoisier. So I think most of that is behind us. Chris Pitcher: The destocking phase? So it's on a more normal comp in the fourth quarter. And are you still expecting to release -- continue to release cash from the inventories given the levels they were at? Paolo Marchesini: On the inventory side, we -- as we said that, we have a lot of aging liquid. Over time, we will more than selling liquid, contain the intake of new aging [indiscernible]. So yes, it's directionally positive. It will take time to absorb the stock we've taken on board as we bought the brand. It was more than EUR 440 million. Operator: The next question is from Alessandro Tortora of Mediobanca. Alessandro Tortora: I have 2 questions. Okay. The first one, if you can comment a little bit on the debt-EBITDA trajectory, considering the leverage ratio you already got in the 9 months, if we can assume, let's say, that you're going to stay below the 3x by year-end or if we need to think about any seasonality or any, let's say, factor that should bring this ratio, let's say, again above the 3x. This is the first question. The second one is just a follow-up on Cognac. If you can comment a little bit, let's say, the recent change on the duty-free side and if you expect also on Courvoisier side, a significant, let's say, impact on the reorder on the duty-free. Paolo Marchesini: On the leverage ratio target, we're not giving any guidance. We have also to take into consideration the fact that in Q4, we still have a significant tail of extraordinary CapEx. The total amount of CapEx is EUR 200 million. And in the first 9 months, we've already spent EUR 120 million. So there is EUR 80 million cash outlay coming from extraordinary CapEx in Q4. Yes. But directionally, you're right in saying that the company generates a lot of free cash flow, one of the highest free cash flow to EBITDA conversion in the sector. Average for the last 5 years at about 60%. So we -- you can easily calculate the deleverage potential in coming years. Simon Hunt: Okay. And Alessandro, sorry, I couldn't quite hear the question. [indiscernible] We got the recent change in duty-free on Courvoisier and others, but we aren't sure what the question was? Alessandro Tortora: Yes, it was related to China. I know it's, let's say, is not so big for you. But if we look at, let's say, the GTR and the restock that is now possible according to the recent tariff agreement. If you see, let's say, any restock for Courvoisier in the coming months? Simon Hunt: Right. So yes, so I couldn't hear you. Look, for us, as you know, look, China is very small for Courvoisier and so is the Asian duty-free at this stage. So it's not a big driver for us. I think China represents less than 2% of Courvoisier sales. So the key thing we want to look at in GTR as part of our relaunch plan of Courvoisier across the region is the strategic role that GTR plays as a shop window for the consumer. So I think that's more where we'll see it with part of the new strategy. But there's no -- we're not looking at a restock and it would be negligible in our case anyway. Operator: [Operator Instructions] There are no more questions registered. Would you like to make any closing remarks? Simon Hunt: Yes, I would just very quickly, thanks very much, and look forward to seeing many of you next week. Just to reiterate, all of your thanks to Paolo again. A remarkable run and a remarkable set of earnings reports, and [indiscernible] to him next week. So thank you again, Paolo. And we'll see you next week. Thanks for your time. Paolo Marchesini: Bye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Ladies and gentlemen, welcome to the Q3 2025 Earnings Conference Call. I am Mattilde, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Drager, CEO. Please go ahead. Stefan Dräger: Yes. Good afternoon, and thank you for joining our conference call on our financial results for the first 9 months of 2025. I have with me today Gert-Hartwig, CFO; as well as Tom Fischler and Nikolaus Hammerschmidt, both Investor Relations. I would like to take you through the results of the presentation that we made available on our web page this morning. Following the presentation, we will open the floor to your questions. Let's get started on Page 5 with the business highlights. With a significant increase in orders, noticeable growth in sales and very good earnings, we delivered a strong business performance in the first 9 months of 2025. Despite difficult economic conditions, demand for our Technology for Life rose to around EUR 2.6 billion. The last time we had such a high order intake after 3 quarters was in our record year 2020. Growth was driven by both divisions and all. The same is true for net sales, which increased to around EUR 2.3 billion. Earnings before interest and taxes almost reached the prior year level at around EUR 77 million despite the positive one-off effects mentioned above in the prior year. As a reminder, last year, we had divested a non-core business in the Netherlands and unused property in the United States and a building in Spain, totaling around EUR 30 million in one-off effects. Similar effects are missing this year. In addition, this year, we need to compensate for some quite strong headwinds, currencies and tariffs had a substantial negative impact on our earnings. So without these headwinds, our EBIT would have been significantly above the prior year level. Our business in the third quarter made a substantial contribution to the strong overall performance in the first 9 months. Net sales were significantly above the prior year level in Q3, while EBIT more than doubled. In addition to our top line, we were able to improve our operating cash flow in the first 9 months with a considerable increase by more than EUR 35 million to around EUR 93 million. This development has also been recognized by investors. Until the publication of our preliminary figures, our preferred shares had already increased by around 44% year-to-date. On the day after the publication, they rose by 12%, resulting in an increase of around 63% in the current year. Our common shares have shown strong performance as well with an increase of around 41% year-to-date. Ladies and gentlemen, as communicated 2 weeks ago, we now expect the net sales growth and the EBIT margin in the upper half of our forecast range. I'll come back to our outlook at the end of our presentation. With that, I turn over to Gert-Hartwig for a review of the financials. Gert-Hartwig, please. Gert-Hartwing Lescow: Thank you, Stefan, and welcome, everyone. Please turn to Page 7 for a group overview. As usual, all growth rates are quoted on a currency-adjusted basis. As Stefan Drager said, we continue to see strong demand for our Technology for Life in both divisions in all regions. Order intake rose by 9% to around EUR 2.6 billion in the first 9 months of '25. The Americas led the growth with an increase of around 19%, followed by EMEA and APAC. In Germany, the order volume was slightly above the prior year level. In the third quarter, orders grew by roughly 7% as the slight decline in Germany and APAC was more than offset by an increase in the other regions. Our net sales development has further accelerated in Q2. We are well on track to compensate for the slow start in the year caused by some supply chain disruptions. Net sales rose by more than 10% in the third quarter. In the first 9 months, they increased by roughly 4% to around EUR 2.3 billion. All divisions and regions contributed to growth in the respective reporting periods. The positive development in the third quarter was driven in particular by a significant increase in the EMEA and Americas regions. I'll comment on that when we get to the divisions. Our gross profit margin increased by 0.7 percentage points in the first 9 months to 45.1% despite currency headwinds and higher tariffs. The margin improvement was strong in the Medical division than in the Safety division. Operating costs rose only moderately, reflecting disciplined expense management. Our functional expenses increased around 6% in the first 9 months, but mainly driven by the absence of last year's EUR 30 million one-off income. Excluding the positive one-off effects mentioned above, the cost increase amounted to 2.4% in the first 9 months and to 1.5% in the third quarter. In nominal terms, however, functional expenses were on a slight decline in Q3. Due to the only moderate increased costs and the significant growth in net sales, we more than doubled our EBIT to around EUR 57 million in Q3, coming from around EUR 24 million in the prior year quarter, which had been still supported by the positive one-time effects amounting to EUR 10 million in the quarter. Our EBIT margin rose from 3.6% at 3.1% to 6.8%, strong earnings performance in the quarter. Over the first 9 months, EBIT came in at around 3% margin, slightly below last year's EUR 80 million and a 3.5% margin. Again, the positive one-off effects from the prior year are now missing. In addition, headwinds from currencies and tariffs strained our EBIT as the euro appreciated sharply against key trading currencies. Carefully monitor the development of foreign currencies and manage risks proactively through hedging and price adjustments. Having said that, FX still had a negative impact of roughly EUR 22 million on EBIT. Our operating performance improved year-on-year, and that improvement nearly but not fully offset the absence of one-offs and the FX and tariff drag; thus, our EBIT declined slightly. Finally, our rolling 12-month EBITDA improved significantly from roughly EUR 30 million to around EUR 49 million. Let us now take a closer look at on Page 8. We grew order intake by almost 12% to around EUR 1.5 billion in the first 9 months of 2025, driven by high demand for ventilators, anesthesia machines, services, and consumables. In the second quarter, mid-double-digit million euro order for hospital infrastructure from hospital further powered our growth in the Americas. But even without this large order, demand in the Medical division rose year-on-year. In the third quarter, order intake in the Medical division increased by more than 5%. The decline in APAC was compensated for by the significant growth in EMEA and by the positive development in the other regions. Thanks to EMEA and the Americas, in particular, net sales rose significantly by more than 10% in the third quarter after a slight decline in the prior year period. Looking at the first 9 months, net sales increased by around 5% to EUR 1.3 billion, driven by all regions. In APAC, growth was driven mainly by EMEA and China, with business development somewhat uneven in China. After solid growth in the first 6 months, demand has cooled considerably in the third quarter. Although the resolution of our Q1 supply chain problems had a positive impact in Q3 as expected, these effects were offset by the overall weak business in China, resulting in a decline in net sales compared to the prior year quarter. Our gross margin expanded by nearly 3 percentage points in Q3 and by 1.1 percentage points in the first 9 months, thanks to a favorable product and country mix and lower quality expenses from field actions. Functional expenses rose by 6% in the first 9 months of 2025 and by roughly 8% in the third quarter. Excluding the proportionate positive one-off effects from the sale of real estate in the prior year, the increase amounted to roughly 4% in the first 9 months and also in the third quarter. Earnings in Medical returned to positive territory in Q3 as we are making progress in improving the profitability in the division. Our EBIT grew considerably from minus EUR 4 million to plus EUR 11 million, lifting the EBIT margin from minus 0.9% to 0.3%. For the first 9 months, EBIT amounted to around minus EUR 23 million after around minus EUR 28 million in the prior year period. As mentioned before, one-off effects in the prior year's period played a role. Our rolling 12-month EBITDA improved significantly by around EUR 22 million to around minus EUR 45 million. I will now turn to our Safety division on Page 9. In the first 9 months, order intake rose by roughly 6%, driven by gas detection, respiratory and personal protection products, and Engineered Solutions. Orders for occupational health and safety normalized after last year's large order for NBC Protective filters, leading to a lower demand in Germany. EMEA and the Americas delivered strong double-digit order growth, while APAC remained almost stable. After a somewhat slower development in the second quarter, order intake accelerated in Q3 with orders rising by roughly 9%. In addition to the significant increase in EMEA and the Americas, growth in APAC also contributed to this development. Q3 net sales rose significantly by roughly 10%, driven by EMEA and the Americas in particular. The first 9 months, net sales increased by more than 2%, thanks to growth in all regions. That said, our safety business is back on track after slight weakness in Q2. Our gross margin expanded by 1 percentage point in Q3 and was stable in the first 9 months, thanks to a favorable product mix. Functional expenses rose about 5% in the first 9 months. This was mainly due to other operating income in the prior year period from the sale of our fire alarm systems business in the Netherlands and the sale of real estate. Higher marketing expenses also had a negative impact on function costs. Excluding the other operating income of the prior year period, functional expenses decreased slightly by 0.3% in the first 9 months of the year and by 2.4% in the third quarter. So good expense management and safety. Q3 EBIT improved significantly to roughly EUR 46 million after EUR 28 million in the prior year quarter. The EBIT margin increased to 12.6%. After the first 9 months, the EBIT came to just under EUR 100 million, down from EUR 108 million. The EBIT margin was just below 10%. Rolling 12-month EBITDA decreased slightly by roughly EUR 3 million to around EUR 94 million, coming from EUR 97 million in the prior year. That concludes the Safety division revenue. Let's move on to the development of our cash flow and other key figures on to Slide 10. In the first 9 months, we significantly improved operating cash flow by around EUR 35 million to roughly EUR 93 million. This was mainly due to effective working capital management, especially better development of trade receivables, trade payables and other liabilities. Outflows from investing activities more than tripled from EUR 2 million to about EUR 76 million, resulting in a free cash flow of around EUR 17 million after around EUR 35 million. Among other things, the significant increase in outflow was due to a base effect in the prior year, the sale of our fire alarm systems business in the Netherlands and the sale of the property in the U.S. led to a considerable inflow, which is now missing. On the other hand, Drager added an investment to one of its holdings in the first quarter of 2025, which has contributed to a higher outflow year-to-date. Looking at our net financial debt, we had modest reduction, keeping our leverage at a healthy 0.7 net financial debt to EBITDA. Our 12-month return on capital employed rose from 10.9% to 12%. This was due to the significant increase in our rolling 12-month EBIT, which was much stronger than the increase in capital employed. The considerable growth of our rolling 12-month EBIT resulted from the good performance in the fourth quarter of '24, which had delivered much higher earnings compared to Q4 '23. Net working capital was around 3% higher than in the prior year at around EUR 21 million. Our equity ratio as of September 30 stood at nearly 50%, remaining at the year-end level of 2024. Now I hand back to Stefan Dr ger for our outlook on Page 12. Stefan Dräger: Ladies and gentlemen, Q3 was a strong quarter for Drager. Our excellent order development and the increasing sales momentum make us optimistic about the further growth of the business for this year. Therefore, we now expect the upper half of our previous guidance. We now expect net sales growth of 3.0% to 5.0% net of currency effects and an EBIT margin of 4.5% to 6.5%. EBIT is now expected to be in the range of EUR 10 million to EUR 18 million so far, business development during the year has given us a good basis to reach our targets. We start in the most important quarter of this year with our typical seasonality. In the next coming weeks, we will remain focused on execution to deliver on our promises. With this, I would like to end the presentation and hand over to the operator to open the line for your questions, please. Operator: [Operator Instructions] The first question comes from the line of Oliver Reinberg from Kepler Cheuvreux. Oliver Reinberg: I would have 3 and probably take them one by one, if possible. The first one would be on the ventilation market, if you just can discuss the dynamics there. I mean I assume the whole industry has benefited from the exit of Bayer, GE and Medtronic. There have been some kind of voices who claim that Tania and Hamilton have gained most from these kind of changes and Dr gerwerk somewhat less. I mean I assume everyone has seen significant growth. I was just trying to get a kind of feeling, do you feel that's fair? Or do you believe you have captured your kind of fair share in this kind of market development? And also to what extent if we move into next year, is that kind of challenging base effect? Or will this kind of market consolidation support further growth next year? That would be question number one, please. Stefan Dräger: Yes. This is Stefan answering your question, Mr. So, I believe all the market participants that are still there, they get a fair share, including ourselves of the opportunities that come from the withdrawal of the 3 players. And so, for me, I couldn't understand why they made this withdrawal these 3 players and I see that for the times to come, very beneficial to be in the market. As you know, we have the longest tradition and experience and the greatest production capacity for all players as we invented the ventilator in 1907, my great, great grandfather this. And I still see it for the future as very beneficial to be in there. And I see that both Mr. Hammerschmidt and myself, we address our customers personally the video message to let them know that we will be there at their side in the future. So, it's not a secret. For Hamilton, it's a challenge because although it's a U.S.-owned company, operations are based in [Biel/Bienne] in Switzerland, the tariffs for the U.S. are 39%. So that led to some extra effort to cope with that, that we don't have. So, it's beneficial for other European ventilator manufacturers, including the one in Sweden. Oliver Reinberg: That makes sense. And do you believe you can still grow from this kind of base next year? Or is that a kind of demanding base, of which we would expect to kind of decline? Stefan Dräger: No, I would not expect a decline. I think the overall market has still opportunities and room for growth, as the medical technology and environment, the general positive trends they are still there and continue. So, despite maybe some single countries drop out, the global trend is still there. Oliver Reinberg: Super. That's helpful. The second question is just on supply chain. I mean, there's obviously the kind of discussion on Nexperia, the kind of Dutch company where the conflict with China, I think, largely people focus on the automotive industry, but I think they're also a major supplier for chips for the Medtech industry. I'm just wondering, is there any kind of risk factor that you face here in particular as we move into the kind of Q4 now? Stefan Dräger: Not a big effect. We do use some of these chips, but only to a small extent. And we have larger inventory that we keep on stock as the automotive people do. And from what we can see, luckily, these are used for applications that are not so regulatory dependent. So it's easier to replace and there are alternative suppliers. So we may see some smaller effect, but not in Q4, maybe in the next year. Oliver Reinberg: That's super. That's reassuring. And then the last question, obviously, it's a bit too early for next year. But just to get any kind of flavor, we are making nice margin progress in 2025. At the midpoint, we would probably run 50 basis points ahead of the kind of normalized run rates toward a 10% EBIT margin in 2030. I'm just wondering, looking at the pulls and pushes for next year, I mean, is there any reason why you should be below the kind of 6% EBIT margin, which would be implied by this run rate for next year? And in particular, can you provide any kind of color what incremental margin headwinds you expect from currency next year, please? Stefan Dräger: So I'll give you the first part we keep reiterating. So the business cannot be judged by the quarter. So it can always be a bad quarter that does not mean that the worst is bad. And the same holds true if we have a very good quarter like. So if we look at the figures and analyze where we are, then we see we had an exceptionally good margin in the Q3. And so in addition, we had an exceptionally good margin in Q4 last year. So if we go back on an average margin for this coming Q4, then there is a reason to assume that it is not so extraordinary, then you might probably speak at the first glance. And going back to the margin to normal, that's partially fueled because there are some large tender businesses that start delivering in this current quarter. So it's better to be a little bit cautious with the forecast and development of the future. The effect of the currency, I hand over to Gert-Hartwig. Gert-Hartwing Lescow: Yes, there will be given current average rates, there will be an additional FX headwind. We are in the final steps of finalizing planning and currency adjustments, but it's possibly in the range of another percentage point margin. We will provide more clarity on that with the publication of our guidance for '26. Operator: [Operator Instructions] The next question comes from the line of Virendra Chauhan from AlphaValue. Virendra Chauhan: So for now, just one question around your margins. So Q3 was fairly strong margin. And like you pointed out in your notes as well as presentation that it came from the strong net sales growth that you saw in this quarter. Now, of course, the sales growth guidance as well being upgraded, is there a chance that we see a similar year-on-year margin expansion in Q4 as well, because Q4 of last year was also very strong, I think close to 12%, if I remember correctly. So that's my question around your EBIT margin, please. Stefan Dräger: As I just explained on the question from [Indiscernible] Q3 was a very good margin that resulted from a favorable mix of the products in the portfolio. And it is safe to assume that will normalize and decline slightly for the Q4 and for the future. And also keep in mind that Q4 in 2024 was also a very good margin if you compare the quarters. So keep that in mind and think about this so should not be overoptimistic for the good margin to persist. As I said in, we do not think in quarters because in single quarter can always be a little bit up or down versus the others. So we, as much as we appreciate the current good result and the general outlook on the single quarter and the margin, I expect that for the Q4, there could be a slight decline. The EBIT margin overall that is more the focus that is as we said in our guidance, the upper end of the previous guidance. And it is in line with what we said earlier that we strive for a continuous improvement of the EBIT margin that should be about the same figure as the calendar year. So for this year, it's 25 that we said that already a couple of years ago, then it should be plus/minus 5%. And again, 2026, you can think about the ballpark figure of 6%. Virendra Chauhan: Sorry, maybe can I just ask one more question. So on your connected care launch, the silent ICU that you had talked about on the previous call, and it was scheduled to be launched in H2 '25. So I had 2 bits on that. One is what is your early customer feedback? What is that? And then secondly, when do you expect in terms of a time line that this entire project or focus could translate into meaningful revenue generation for the firm? Stefan Dräger: The customer feedback from the ICU projects, it's very excited. So we are very happy to observe that, and we look very much forward to taking off. We just this we started our marketing campaign where we took the horn more explicitly for this approach. And so I expect that from the next year on, that can be effect to the business from these kind of projects. Operator: We now have a question from the line of Jean-Marc Mueller from JMS Invest. Jean-Marc Mueller: First, I would like to congratulate you on a very good Q3 results. Quickly on Q4. I mean, you spent quite some time when we spoke about the numbers adjusting them for one-offs. And it's fair to say that in Q4 last year, albeit the numbers was good, it was actually worse by roughly EUR 10 million than what it should have been because you had an impairment charge last year in Q4, right? The underlying number would have been EUR 124 million, not EUR 114 million. Gert-Hartwing Lescow: Yes, that is correct. Jean-Marc Mueller: So when you're now saying that Q4 might be maybe a little weaker than last year, are we talking about adjusted numbers or reported numbers? Gert-Hartwing Lescow: There is a range and what we try to emphasize is, and I think you're iterating that, Q4 last year was also operationally a strong quarter. And depending on the delivery and given that it is just by the total number of net sales, there is a higher, if you will, sensitivity to variations in net sales variations. There is a chance that we also get at the lower end when it comes to reported figures even. Not that we are striving for that, but the discussion was just wanted to point out that the Q4 was operationally and also nominally in spite of the charge, a relatively strong quarter. Jean-Marc Mueller: Yes. Okay. I understand. I understand. And maybe ask a little differently. I mean, it's the most important quarter, I understand that, and it's typically a big number when it comes to full year results. But the range of the guidance is still very wide. I mean we're talking from the lower end to the upper end, we're talking about roughly EUR 70 million EBIT range. Maybe you can help us a little bit what would need to happen that we really hit the lower end of the range and what has to happen that we get to the upper end of the range? Gert-Hartwing Lescow: There is a couple of factors. And obviously, firstly, I mean, let me just, that's not what we're planning forward. I think you're asking what risks, we have seen FX turning against us, and this could certainly be a risk going forward. We do see that in spite of the good development overall, we do see some areas where our business is developing not as nicely, if you will. We talked about China, in particular in the Q3, where we saw a bit of like up. We also see that our safety business, while very robust overall is in Germany, for example, being put under pressure due to the general market trends for the industry. Stefan Dräger: For the industry. And that s the customer to a chemical industry. Gert-Hartwing Lescow: We also see that in the U.S. for different reasons, many customers are reluctant to fully engage in investments. And to the degree that we see some of these risks to materialize over proportionally and perhaps not see the support or a bit of a slowdown in the support, we see a risk that we also get to the low end. But let me also reiterate, we would be disappointed if our margin falls below the 5%. But at this point, we wouldn't rule that out either. Jean-Marc Mueller: Okay. And the upper end would just be flawless execution of all the projects? Gert-Hartwing Lescow: Exactly. Exactly. The flawless execution will clearly lead to the upper end. Jean-Marc Mueller: But this is what you're good at, no, flawless execution? Gert-Hartwing Lescow: Well, you can keep the fingers, the thumbs pressed and I'm sure it will help us. Say you will get an FX development that for change is not running against us, but in our favor happen. Jean-Marc Mueller: No, no. I understood. And an add-on question quickly on the cash flow. I mean also Q4 last year, the cash flow was pretty solid despite that the working capital movement in Q4 was actually negative. What should we expect this year? I mean, we obviously, we should still expect a positive free cash flow, I would assume. But the magnitude, I mean, you lowered your investment guidelines. So I would assume that also cash flows in Q4 should be fairly strong. Is this a fair assessment? Or do you see things which will go against the strong cash flow in Q4? Gert-Hartwing Lescow: By and large, I would support that, and that leads is in our range of possible net financial debt, we expect in the normal course to be at the lower end, so more positively for us. There is no underlying risk for our Q4 cash flow situation. Operator: [Operator Instructions] We have a follow-up question from the line of Oliver Reinberg from Kepler Cheuvreux. Oliver Reinberg: Probably also two or three. I mean the first question would be on anesthesia. There was some kind of news flow in the industry. Obviously, Jetting now has lined up with Philips. And in fact, also GE has introduced and called out the kind of launch of a new workstation, which is more meaningful apparently. I'm not sure if this is kind of normal industry development? Or is there a certain risk that may provide a kind of headwind for Anesthesia going forward? That would be the first question, please. Stefan Dräger: I would say that's a normal industry development. There are discussions, say, all the time. And we're also having discussions and that's a normal thing. So we're not afraid of this development. Oliver Reinberg: Right. So when you're also having discussion, that means you also are generally open to more different new ways of distribution. Is that the way to understand that? Stefan Dräger: That's very correct. And so there are obviously the companies like that do not have certain modalities and they are seeking and contacting the ones that have, because they want to become a full service suppliers. So that's a long development. And that has its pros and cons. And as I said, we are not afraid of this setup. Oliver Reinberg: Okay. Perfect. Understand. And on China, I mean, we've seen an improvement in the first half. Q3 looks like a kind of a larger change to the opposite again. I mean this is larger volatility? Or because you're calling that out, is there any kind of specifics that happened here? And why has it happened if you have any visibility here? Stefan Dräger: Basically I would say there's nothing new. It's very fragile from where we ended last year. And so far, it's say, stable, but at a modest level. And it's not likely that it comes back to where it was. So, for various reasons. Oliver Reinberg: Understood. And last question, any update on the defense-related demand in Germany in terms of what have you seen so far? Is there any kind of acceleration being seen at the moment? Stefan Dräger: Please keep in mind that last year in Q1, we received a large order for this last Mask 2000 for the Army of roughly EUR 15 million. And so that obviously did not repeat this year. And despite this not repeating a single order effect from last year, our orders are currently having a double-digit growth of around 25% year-over-year for the defense business. So, it is eventually picking up, and we do expect to receive more than EUR 100 million in orders in the current year. Operator: [Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Stefan Drager for any closing remarks. Stefan Dräger: Thank you very much to all of you that with us today for your time and your interest in here, and we look very much forward to meet you again, hopefully, sometime in person in the future. Have a pleasant afternoon and evening. Goodbye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you.
Operator: Good afternoon. My name is Kelsey, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Carlisle Companies Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would like to turn the call over to Mr. Mehul Patel, Carlisle's Vice President of Investor Relations. Please go ahead. Mehul Patel: Thank you, and good afternoon, everyone. Welcome to Carlisle's Third Quarter 2025 Earnings Call. I'm Mehul Patel, Vice President of Investor Relations for Carlisle. We released our third quarter financial results today, and you can find both our press release and the presentation for today's call in the Investor Relations section of our website. On the call with me today are Chris Koch, our Board Chair, President and CEO; along with Kevin Zdimal, our CFO. Today's call will begin with Chris providing key highlights of the third quarter. Kevin will follow Chris and provide an overview of our Q3 financial performance and our outlook for the full year of 2025. Following our prepared remarks, we will open up the line for questions. But before we begin, please refer to Slide 2 of our presentation, where we note that comments today will include forward-looking statements based on current expectations. Actual results could differ materially from these statements due to a number of risks and uncertainties, which are discussed in our press release and SEC filings. As Carlisle provides non-GAAP financial information, we provided reconciliations between GAAP and non-GAAP measures in our press release and in the appendix of our presentation materials, which are available on our website. And with that, I will turn the call over to Chris. D. Koch: Thank you, Mehul. Good afternoon, and thank you for joining us for Carlisle's Third Quarter 2025 Earnings Call. Let's begin by turning to Slide 3 of the presentation. Carlisle's third quarter results reflect the strength of the underlying CCM business, offset by the ongoing challenging environment in both residential and nonresidential new construction. This, along with the M&A activity in our commercial channel, was communicated in our early September commentary. The vast majority of the continued weakness in new construction is driven by the continuation of higher interest rates, affordability challenges and economic uncertainty around inflation, coupled with job stability concerns and labor shortages. With respect to the post-M&A integration, as with any transaction, some turmoil and change was to be expected, and we anticipate that over the coming months, this will be resolved, and we will return to a more stable situation. Despite this turbulence, third quarter revenues came in at $1.3 billion, up 1% year-over-year, only slightly below the expectations we discussed on our July second quarter earnings call. This allowed us to achieve an adjusted EPS of $5.61. In Q3, CCM continued to execute on its Vision 2030 initiatives and delivered another solid quarter, maintaining adjusted EBITDA margin of over 30% as recurring revenue from reroofing activity provided a stable foundation amid near-term order volatility due to the previously discussed pressures in new construction demand and the temporary setbacks associated with challenges at a key distribution partner. Notably, reroofing demand, which represents approximately 70% of CCM's commercial roofing revenue remains strong. This momentum in reroofing activity is driven by the aging commercial building stock, a growing backlog of roofs reaching replacement age, energy efficiency mandates, new product solutions that reduce labor and the trust our customers place in the Carlisle Experience and our premium warranties. Outside of new construction and distribution impacts, CCM's underlying business performance remained consistent with our expectations. While CCM's performance was a bright spot, we continue to face the well-known market challenges at CWT, which have negatively impacted the business over the last 6 quarters. Elevated mortgage rates have led to increased monthly payment levels contributing to suppressed demand. The imbalance in sellers and buyers of homes has made transactions more difficult. U.S. housing supply has also made it difficult to afford a home. One estimate has shown that housing prices have risen over 45% since 2020, resulting in the medium home price of over $430,000, which is almost 5x higher than the median household income across the country. The measures of housing stock availability point to a growing gap between supply and demand, the root of the affordability problem, which is amplified by declining productivity and a shortage of skilled labor. As a result, it takes longer to build a house than it has in past decades. It's estimated that at least 3 million to 4 million additional homes need to be built to address the affordable housing shortage in the U.S. Despite the near-term challenges, imbalances and volatility, we remain confident in our ability to create value for our shareholders through our Vision 2030 strategies and initiatives. Carlisle remains a market leader, operating an imperative business in the most attractive market globally. The megatrends of energy efficiency, labor savings, growing reroofing demand and the demand for residential housing will continue to drive superior, sustainable and best-in-class financial performance for Carlisle. Carlisle's pivot in 2023 to a pure-play building products company has enhanced our focus on our industry-leading platforms, highlighted our leadership in attractive growth markets and positioned us to deliver innovative building envelope solutions to our customers, all to drive superior financial returns for our shareholders. During the quarter, we also maintained our commitment to disciplined capital deployment. We repurchased 800,000 shares for $300 million and raised our dividend by 10%, marking our 49th consecutive annual increase. We also continue to integrate our recent acquisitions of Bonded Logic, ThermaFoam and Plasti-Fab, and they continue to meet our expectations. Innovation is a core pillar of Vision 2030's playbook to create value, increase margins and drive market share growth. Our innovation pipeline continues to deliver tangible marketplace results. The new products we've introduced over the past 2 years, including RapidLock, SeamShield, APEEL and VP Tech are gaining meaningful commercial traction. These products are proven solutions that address real contractor pain points around installation speed, energy performance and long-term durability. With our increased investment and substantial focus on the understanding of the voice of the customer, we anticipate impactful and revolutionary new product introductions over the next decade. What's particularly encouraging about these new products is how these innovations align with broader industry trends. Building owners increasingly prioritize energy efficiency to reduce operating costs. Contractors face persistent labor constraints that make productivity-enhancing products more valuable. And our innovation road map specifically targets these market needs. This innovation strategy also directly supports our Vision 2030 objective of generating 25% of revenue from recently introduced products. It's a key driver of our plan to grow faster than our markets while expanding margins over time. Our M&A strategy is also creating meaningful value by expanding both our capabilities and our addressable markets. The MTL acquisition in 2024 has exceeded our expectations, allowing us to sell more content per roof through prefabricated metal edge systems, creating a more complete warranty and enhancing our reputation as providers of complete building envelope solutions. The Plasti-Fab and ThermaFoam integrations are also progressing and on track. We're capturing cost synergies while leveraging our national footprint to drive sales expansion. What's particularly powerful about our position in EPS insulation is our unique combination of in-house raw material production and the industry's most extensive geographic coverage in North America. This gives us structural cost advantages that enable us to serve national retail and distribution partners more effectively than any competitor. The Bonded Logic acquisition opens an entirely new growth avenue. UltraTouch recycled denim insulation addresses the large fiberglass insulation market with a differentiated value proposition focused on sustainability and performance. As building codes and consumer preferences increasingly favor environmentally responsible materials, we're positioned to capture share in a sizable category where we previously had no presence. As we move into 2026, we are optimistic that M&A markets will become increasingly more productive for Carlisle. As economic conditions improve, confidence in acquisition target financials will strengthen and the valuation gap between buyers and sellers will close, and we should see deal activity increase. This will bolster our long-term strategy of deploying capital in M&A to drive growth and market share. Meaningful bolt-on acquisitions will continue to play a significant role in our path to growth, and we hope to return to a pace of 2 to 3 acquisitions each year. Our operational initiatives continue to deliver solid returns on capital as well. Packaging automation investments in Kingman and Fernley, footprint consolidation initiatives and expanding in-house solutions for adhesive applications through our new flexible fast adhesive product are 3 specific examples of key initiatives that are utilizing capital to create a fundamentally more efficient cost structure that will drive even stronger margin expansion when higher volumes return. Beyond cost actions, we're executing growth initiatives that diversify our revenue streams. Our Home Depot relationship is expanding to include single-ply roofing, insulation, flashing and air barriers, creating new selling channels for our products. Our cross-selling efforts in retail continue to build momentum, and the Bonded Logic addition gives us an entry into attractive insulation categories where we can leverage our existing relationships. The combination of these operational improvements and strategic growth initiatives are positioning CWT to expand margins as we move through 2026, especially if end market recovery accelerates. Our capital allocation approach remains a core competitive advantage. The $1 billion bond issuance we completed in the third quarter provides significant strategic flexibility and cash for near-term opportunities while keeping our net debt-to-EBITDA ratio comfortably within our 1 to 2x target range. This enhanced financial capacity positions us to pursue multiple value creation paths simultaneously. Year-to-date, we've deployed $1 billion in share repurchases, taking advantage of valuation opportunities, and we are now raising our share buyback target to $1.3 billion for the year. The 10% dividend increase, our 49th consecutive annual increase, demonstrates our confidence in the business's ability to generate cash flow. We expect to generate approximately $1 billion of cash flow from operating activities this year, providing substantial capacity for continued innovation investments, strategic M&A that meets our disciplined criteria and ongoing capital returns to shareholders. Our track record of balanced opportunistic capital deployment reflects our commitment to maximizing long-term value creation. Looking ahead and keeping in mind the near-term transitory headwinds our markets are facing, we are revising our full year 2025 guidance to flat revenue with adjusted EBITDA margin down 250 basis points. While macroeconomic and distribution channel uncertainties persist, we remain confident in our Vision 2030 targets and ability to drive value creation through our recurring reroofing leadership, operational improvement initiatives and consistent execution of our Vision 2030 initiatives. As a reminder, the structural advantages underpinning our businesses remain fully intact. We compete in attractive end markets with favorable long-term fundamentals. The secular trends supporting our growth, recurring reroofing demand, energy efficiency requirements, adoption of labor-saving technologies and the persistent housing shortage all continue to create meaningful tailwinds. As a reminder, our Vision 2030 strategy provides clear direction through 4 key pillars: product innovation to drive differentiation and above-market growth, operational excellence through COS, exceptional customer service via the Carlisle Experience and strategic M&A to enhance capabilities and expand our addressable markets. We remain firmly committed to our Vision 2030 targets of $40 of adjusted EPS and maintaining an ROIC of 25% or greater, which we expect will generate over $6 billion in cumulative free cash flow through 2030, along with our anticipated organic revenue CAGR exceeding 5%, and we have multiple pathways to achieve these ambitious goals. In summary, Carlisle's third quarter performance once again showcased the earnings power of CCM. Despite the significant challenges in the new construction market and distribution channels, sales grew and adjusted EBITDA margin remained above our Vision 2030 target of 25%. With that, I'll turn it over to Kevin to provide additional financial details and color on our outlook for 2025. Kevin? Kevin Zdimal: Thank you, Chris, and good afternoon. I'll review our third quarter financial results starting on Slide 4. We generated revenue of $1.3 billion in the third quarter, an increase of 1% compared to the third quarter of 2024. The acquisitions of Plasti-Fab, ThermaFoam and Bonded Logic contributed $39 million of revenue in the quarter. Organic revenue declined 2% from the previous year as solid commercial reroofing was offset by the continuation of soft new construction activity in both residential and commercial end markets as well as residential repair and remodel. Adjusted EBITDA for the quarter was $349 million, resulting in an adjusted EBITDA margin of 25.9%, a decrease of 170 basis points from the prior year. This decrease was mainly due to lower volumes at CWT and our continued investments in innovation and enhancements to the Carlisle Experience. Adjusted EPS was $5.61, down 3% compared to last year. This year-over-year decline was the result of low organic earnings from the previously mentioned market challenges and additional net interest expense, partially offset by the benefit of share repurchases and contributions from our strategic acquisitions. Turning to our segment performance on Slide 5. CCM reported third quarter revenue of $1 billion, essentially flat year-over-year, reflecting the current construction environment. Reroofing growth has remained stable as building owners continue to address aging roof systems that must be replaced. However, headwinds exist as macroeconomic uncertainty has continued to put pressure on new construction as cautious builders delay project starts and the impact from near-term volatility caused by the consolidation of distributors, manufacturers and contractors in our industry. CCM's adjusted EBITDA was $303 million, down 8% compared to the prior year. Adjusted EBITDA margin for the quarter was 30.2%, which declined 260 basis points, primarily due to materials inflation driven by ongoing supply disruptions on ATO out of China and antidumping duties on TCPP from China in addition to our continued investments in innovation and enhancements to the Carlisle Experience. Moving to Slide 6. CWT reported third quarter revenue of $346 million, up 3% year-over-year with the contributions from recent acquisitions. Organic revenue declined 8% from the prior year due to lower volumes resulting from continued softness in commercial new construction and residential end markets as affordability challenges and higher interest rates continue to negatively impact demand. CWT's adjusted EBITDA was $60 million, a 13% year-over-year decline. CWT's adjusted EBITDA margin decreased 330 basis points from the prior year to 17.4% for the third quarter. This decrease was primarily the result of the impact of volume deleverage. Turning to Slide 8. Our financial position remains strong with flexibility to execute our superior capital allocation strategy. As of September 30, we had approximately $1.1 billion of cash and cash equivalents and $1 billion available under our revolving credit facility. During the third quarter, we issued $1 billion of debt. This strategic financing enhances our liquidity and provides additional capacity to pursue growth initiatives while maintaining our net debt-to-EBITDA ratio of 1 to 2x. As of September 30, our net debt-to-EBITDA ratio was 1.4x, well within our target range. Moving to Slide 9. We have generated free cash flow of $620 million in the first 9 months of 2025, and we are on track to exceed our free cash flow margin target of 15% for the full year. Our strong, consistent cash generation continues to support our balanced approach to capital deployment. Year-to-date, we have invested $199 million in the business through $91 million of capital expenditures and $108 million in acquisitions. We also returned over $1.1 billion to shareholders through $1 billion of share repurchases and $135 million of dividends. As Chris previously mentioned, we are now increasing our share buyback target to $1.3 billion for the full year of 2025. Our revised full year outlook for 2025 is on Slide 10. We now expect full year consolidated revenue to be flat year-over-year. This more conservative sentiment is based on our third quarter results and the fourth quarter outlook from our recent Carlisle market survey, which includes softer conditions in nonresidential construction compared to the prior survey. We expect CCM fourth quarter revenue to be down low single digits as continued strength in reroofing will be more than offset by new construction and distribution channel headwinds. CWT fourth quarter revenue is expected to increase low single digits as recent acquisitions are expected to more than offset continued market softness. We anticipate full year adjusted EBITDA margins to decline approximately 250 basis points compared to 2024, with fourth quarter adjusted EBITDA margins expected to be approximately 21%, primarily due to volume deleverage and strategic investments in the business. Before I close, I'd like to provide perspective on our current performance by highlighting Carlisle's long-term track record, as shown on Slide 11. Over the past 17 years, from the 2008 global financial crisis through the pandemic and subsequent supply chain disruptions, we've consistently delivered resilient strong margins across multiple economic cycles. This steady advancement reinforces our confidence in navigating today's dynamic market. Our business fundamentals remain strong. We are executing well on our key initiatives and maintaining our focus on investing in innovation, enhancing the Carlisle Experience and driving operational excellence through the Carlisle Operating System. Our strong balance sheet, superior capital allocation and our proven track record of performing through challenging economic cycles gives us confidence in our ability to achieve our Vision 2030 targets and create substantial value for our shareholders. I'll now hand it back to Chris. D. Koch: Thank you, Kevin. In conclusion, Carlisle delivered third quarter results that demonstrate the resilience and strength of our imperative business model. While we continue to navigate the unanticipated volatility and challenges of 2025, our focus remains clearly on our Vision 2030 strategy and the factors within our control: innovation-driven organic growth, operational excellence through the Carlisle Operating System, exceptional service through the Carlisle Experience, attracting and retaining top talent and superior capital allocation. As always, our results of future success would not be possible without the extremely talented and hard-working teams we have here at Carlisle. Their perseverance and commitment to stakeholder success shines exceptionally bright in these challenging times. I'd like to thank you for listening today and for your continued support and interest in Carlisle. That concludes our formal comments. Operator, we are now ready for questions. Operator: [Operator Instructions]. Your first question comes from Tim Wojs from Baird. Timothy Wojs: I'll stick to one question as you asked. But I guess on destocking, could you just kind of frame the impact in the third quarter and what's included in the fourth quarter? And I guess, as you've had like discussions with your channel partners, I guess, what's driving the destocking? And as we think about next year, do we kind of enter 2026 with kind of a clean slate from a channel inventory perspective? D. Koch: Yes, Tim, with respect to destocking, I think as we move into Q4, we've always seen this. We're going to have Q4 and Q1 are our lightest quarters of the year. We always see some reduction in inventory from where we were in the second and third quarters. Obviously, we build inventory towards the end of the first quarter and in the second quarter for the season. So when we did our market survey, we actually -- for the fourth quarter, we saw kind of normal seasonal patterns, somewhere around 1.5 to 2 months. So really, for us, there was -- I would say that normal destocking, there might have been a little bit more as certain distributors work through some things. I think we touched on this M&A transaction. As Carlisle, we've done a lot of M&A, and we understand how difficult those first years are and you're adjusting management teams, you're doing those other things. So there could be some effect there. But overall, we don't see a major impact on destocking. It could be a positive if we go into 2026 and we get some of the macroeconomic issues resolved, we get a little bit of a turnaround in new construction, both on the resi and non-resi. And if we can get this interest rate situation figured out and get some demand back there, it could be a real positive as we head into the Q2 '26. Operator: And your next question comes from Susan Maklari from Goldman Sachs. Susan Maklari: My first question is talking a bit about the Carlisle Experience and how you can leverage that in this kind of an environment to gain share? And with that, can you talk a bit about what you're seeing in terms of the competitive backdrop and how you're leveraging the Carlisle Experience to respond to that? D. Koch: Right. Well, I think you've got a couple of things going on. We've talked about declining new construction in both areas. I think people want to obviously use their labor more efficiently. We still have a labor shortage. Obviously, there's been even more publicized about the impact on construction, builders, construction markets from some of the immigration actions and things like that. So I think the Carlisle Experience that we talk about, where it's the right product at the right place at the right time, you're going to show the value here in helping contractors and builders operate more effectively. It also spills out into some of the other attributes, too, with or areas, excuse me, with some of our distributors where it can enable them to respond quicker to jobs, be a better service to their customers as well, maybe perhaps carry lower inventory. I know at -- the Home Depot, one of the key relationship strengths for Henry when we looked at their acquisition was the 24-hour response time nationally was a very big competitive advantage. And I think they've leveraged that to basically now if you went into a Home Depot store and you look at the Henry aisle, most of it, there's very little competitive product there in the Henry space. So I think that points to how you can distance yourself from competition with better service. We're investing in more Carlisle Experience. One is a program right now that we've enhanced our ability to tell contractors where their shipment is. So they -- much like we do on the retail side where we can see when the shipment leaves the manufacturer and then we can see where it is in the warehouse at either EPS or United or the Postal Service or FedEx. And then we can see when it's going to be delivered. We're building that capability too. And again, to help the contractor, the roofer know how to deploy and when to deploy labor and not waste that. If it's not coming in, they can redeploy it to a different job. So some big competitive advantages. We measure our experience with a Net Promoter Score. And when we look at those scores, we continue to see gains from the investments we made in customer service. Susan Maklari: Okay. That's great color. And then following up on that, can you also talk a bit about your willingness to invest in the business given the current environment relative to the robust cash flows that you're seeing? I also noticed that it looks like you took the guide for CapEx down a bit this year. Can you just talk about the interplay between R&D, the investments long term and what you're seeing near term and how that fits in with the cash generation? D. Koch: Sure. Well, we're very lucky to generate a lot of cash flow. I think the $1 billion that we've done, I think, the last 3 or 4 years certainly helps us when we have to pay increased dividends, invest in CapEx, M&A and share buybacks and that. And I think on the R&D side, we're applying dollars right now. But when you think about what the front end on R&D is, at least enhancing what we've been doing now, a lot of the investment is in people, processes. I'll tell you one area where we've put a lot of money is in VOC. So for probably the last 9 months to a year, we have a new leader in our voice of the customer area, Vice President, name is Julie Eno. She's brought in a new process, and we're spending quite a bit money proportionately to where we were on really working through customer insights. We've got a process for doing that. It takes time. So it's really a people process kind of investment right now. The goal there, obviously, to develop a consistent pipeline of strong concepts that are really ready for concept testing and then to move through our stage gate process. And the goal there is to generate the type of R&D outcomes that you would want to see that are hundreds of millions of dollars in revenue, not tens. So super pleased with what we're doing there. And on top of that, I think we've talked before about how we're investing in our R&D campus, enhancing our testing ability, enhancing our ability to test projects instead of taking out factory time to put it in a pilot line and things like this. So that investment will increase. That's more mechanical is that and concrete and burgers and roofs and things like that. And that will take more time to build, but that will show up here in 2026 and beyond. And I think all of that, again, to take out labor from the job and increase energy efficiency. And I think we've got a good pipeline going there. But it's got to be based on that voice of the customer. That's a big component we want to add because we want to make sure they hit the mark when we launch them. Kevin Zdimal: And then on your CapEx question, yes, the CapEx were still up 30% year-over-year from '24 to '25, going from $100 million to $130 million, investing in automation, AI and factories with preventive maintenance. So that investment continues. So the reduction in our outlook is just really -- we're a little too ambitious on some of the projects that we thought we'd get to in '25 that are sliding into 2026. Operator: And your next question comes from David MacGregor from Longbow Research. Joseph Nolan: This is Joe Nolan on for David. I just wanted to ask within -- I just wanted to ask within CCM, if you could talk about price versus volume? And if you could just give any detail on price cost in the quarter? Kevin Zdimal: In the quarter, pricing was flat for us in the CCM segment. So all the offset would have been in volume, which was also flat. So both the volume and pricing flat in the quarter. On the raw materials, as I talked about on the ATO and TCPP, those had a negative impact of $12 million, which was right in line with what we expected for Q3 on the raw materials. Joseph Nolan: Okay. Great. And if you could just give an update on how to think about price cost into 4Q, if there's anything changing there? Kevin Zdimal: Yes, really very similar to what the Q3 was. We're expecting price to be flat for CCM in Q4. Raw materials slightly lower than that just because that's a -- the fourth quarter is lower than third quarter on a volume side. So proportionately, that's what you'll see on the raw materials side for CCM. Operator: And your next question comes from Garik Shmois from Loop Capital. Garik Shmois: Just following up on that. I was wondering if you could provide the outlook for EBITDA margins in the fourth quarter by segment. Kevin Zdimal: Yes. So as we look at CCM, you start with the volume. We're looking for volume to be down about low single digits. Reroofing is still strong, but that being more than offset by the weaker new construction as well as some of the lingering distribution channel volatility that we talked about. And then we have pricing, as I said, flat, some of the negative raw materials that gets us down and continue to invest in what Chris was talking about on the Carlisle Experience as well as innovation that gets us to around 26% EBITDA margin for CCM in the fourth quarter. And then on the CWT side, we have revenues down low single -- or I'm sorry, up low single digits overall. We have organic down mid-single digits. And then obviously, the acquisition is having a positive impact there to get us up low single digits. Pricing on CWT side, down slightly less than 1%. No real impact from raw materials in the quarter. And that gets us to margins down 250 to 300 basis points compared to the prior year as a result of that lower organic volumes. Garik Shmois: That's helpful. And I just wanted to follow up on the destocking piece. Can you speak to your market share in CCM, how you're viewing that relative to the industry and what the outlook is just given the distributor dislocation that's happening right now? D. Koch: Yes, Garik, thanks. Pretty much, as we said, the underlying situation in CCM is pretty much the same. I don't see any long-term market share changes that have occurred right now. If we look at what happened in Q3, and I touched on the things that can occur when you do a transaction and you also have significant management turnover at really all levels. We did lose some share in certain areas because of really just being tied to that distributor channel partner. And so very hard for us to change that because at least one of those situations, we can confirm that we don't really have any other vehicle to get that to market as direct. They are our choice. So that old adage of when they sneeze, we catch a cold. That's what happened there. But as I said and as we believe this is temporary. It happens. We would have expected some turbulence after a big deal like that. It may continue in the third or fourth quarter. But overall, we think they're a great distribution partner. We think it will all get sorted out, and we'll be right back in the game where we should be. So a little minor effect, maybe Q3, Q4, but long term, no real changes. Operator: [Operator Instructions]. And your next question comes from Bryan Blair from Oppenheimer. Bryan Blair: If the combination of channel dynamics and competitive influence drives a bit more of a direct model -- direct sale model going forward in the industry. How do you see your teams positioning there? What are the positives and negatives if that occurs? D. Koch: Well, Bryan, I think it already has happened. I think one of our competitors publicly stated that they're already doing something like 30% of their business direct. And we would estimate that many of the other competitors are there. So I think that dynamic is already in place. For Carlisle, frankly, we've lagged it. When you look over the years, as recently as probably 5 years ago, we were probably doing somewhere between 3% and 5% direct. So it wasn't -- our preference had been to work with our distribution partners. They've done a great job for us. We still feel that's the optimal way to do it. But obviously, as our competitors have taken a more direct approach, we have too. So over the years, our team has already reacted. They've done a lot more work to connect directly to the end user. You can see in the Carlisle Experience, we have projects where contractors can directly look at shipments, quoting, things like that. So we can provide that, too. We ship, as a reminder, 70% of our product direct to the job site. So we're already interfacing directly on that shipment from factory to job site. So that's fully capable, we can do that. But again, our preference has been to sell through distribution and these value distribution partners. So we're probably somewhere in that mid-teens direct right now. So about half of what our competitors are doing. And I think we'd like to continue to work with our distributor partners. But as you said, things are changing, and we can step up on that model as well. So one of the things I always liked about Carlisle, we have scale. We have a factory presence warehousing, great teams, great sales team, 600-plus reps across the country. So I think from a flexibility standpoint, wherever the market goes, we'll be able to do that. I mean we're going to follow the lead of the contractor. However they want to buy, we're going to be able to do that for them. Operator: And your next question comes from Tomo Sano from JPMorgan. Tomohiko Sano: I'd like to talk -- ask about the pricing. You mentioned that for Q4, CCM is expected to be flattish, while CWT may decline by about 1%. So looking ahead to 2026, would you expect new products, innovation products and high-end product launch or other factors to support price increases? It's of course, like depending on the demand and volume side, but could you touch about that outlook, please? D. Koch: Yes. One of the things that we would expect out of new products and enhanced customer services that we could extract value from that. That's why we do it, Tomo. I mean that's our -- that's the reason is we are trying to increase the content per square foot in terms of pricing and value, and we will price to value. We've talked about that. So as we look to 2026, certainly, if the volumes can return to a healthy level, I think we can expect to see us being paid for those advantages. Now of course, we have to demonstrate the value to the building owner, to the contractor, to the architect. We have to communicate that the product enhancements we made or our Carlisle Experience, our operational excellence has value. But I think we've done a good job of that. So the real -- the thing for us is really volume. And if you look at what we've always said sets up for a good year is that there is some level of new construction, 0.5%, 1%, but we can't have a declining new construction market. Second, we want to see rational capacity utilization, which we've seen. I think the market has added factories in a very rational fashion. So that's good. We have labor shortages still, and we think that's important to drive some of this pricing. And then lastly, this increasing reroofing demand continues to be an underlying positive that we can rely on. So I think those things are in place and the only one that's not in place now really is new construction being positive. So if that turns around in '26, I would expect to see some nice upward momentum on pricing. Operator: And your last question comes from Keith Hughes from Truist. Keith Hughes: This disruption with distribution, was this something about inventory levels or price? Or what was the nature of it? And is it fully resolved that we won't feel it again in the first quarter in your results? D. Koch: I don't really know exactly what it was in those situations. I mean, I think each location probably was affected differently and integration is going on, like I said, management team changes, things like that. So across the country, it could be a variety of issues. You just know that in those situations, we didn't capture the sale. So I think I would expect because of the group and their expertise and their past experience that they'll get this resolved rather quickly. So we've got it going into Q4 and having some effect still. But my guess is they'll get it resolved and that '26 will be a year where they're going to want to come out and be fully intact and operational. Keith Hughes: Okay. And just one question on pricing in [ CWT ] specifically. There's a lot of stuff going on with MDI and tariffs and antidumping and all that kind of stuff. Are you seeing pricing go up there or expected to go up near term with some of these cost pressures? D. Koch: When we look at the raw material trends, I and Mehul can comment on this in maybe more detail. But when I look at the trends, it's been kind of a mixed bag. Certainly, MDI in '25 has seen an upward trend on price. But then you've got polyol that's seen maybe a lower trend. And then we go to EPDM polymers and they're on an increase. So in general, when I look across our raw material basket, it's probably a little bit more biased towards increases as we go into Q4. Do you want to add anything to that? Mehul Patel: Yes. Keith, just to add a little bit in terms of MDI and the antidumping duties that have been added. So while MDI prices have gone up through the first 3 quarters, and it's up year-over-year, I would say quarter-over-quarter now, it's still flat. So we're not seeing further increases. Just to add a little bit more on your CWT pricing question, Kevin noted that pricing is down less than 1% for CWT. So we're seeing some pricing pressure on select categories, mainly underlayments, which plays in the residential roofing segment, where there's some softer demand as well as on the insulation categories, but it's a very small amount of price. Operator: There are no further questions at this time. I'll hand the call over to Mr. Chris Koch for closing remarks. Please go ahead. D. Koch: All right. Thanks, Kelsey. Hey, this concludes our third quarter earnings call. I want to appreciate everyone's time. We know you're busy. Thanks for your participation. Thanks for the great questions and look forward to speaking with you at our next earnings call. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect. Have a great day.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the FIBRA Prologis 3Q 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Alexandra Violante, Head of Investor Relations. Please go ahead. Alexandra Violante: Thank you, Kate, and good morning, everyone. Welcome to our Third Quarter 2025 Earnings Conference Call. Before we begin our prepared remarks, please note that all information disclosed during this call is proprietary and all rights are reserved. This material is provided for informational purposes only is not a solicitation of an offer to buy or sell any securities. Forward-looking statements made during this call are based on information available as of today. Our actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by the forward-looking statements. Additionally, during this call, we may refer to certain non-accounting financial measures. The company does not assume any obligations to update or revise any of these forward-looking statements in the future, whether as a result of new information, future events or otherwise, except as required by law. As is our practice, we have prepared supplementary materials that we may reference during the call as well. If you have not already done so, I will encourage you to visit our website at fibraprologis.com and download this material. On today's call, we will hear from Hector Ibarzábal, our CEO, who will discuss our strategy and market conditions; and from Jorge Girault, our CFO, who will review results and guidance. Also joining us today is Federico Cantú, our Head of Operations. With that, it is my pleasure to hand the call over to Hector. Hector Ibarzabal: Thank you, Alexandra, and good morning, everyone. Today, I'd like to begin by addressing the geopolitical environment in which we are operating. Trade uncertainty has improved slightly as Europe and Japan have formalized new trade agreements with the U.S., while negotiations between China and the U.S. remain intermittent. On the other side, the U.S. has hardened its stance towards Mexico and Canada, implementing additional sector-specific tariffs outside of the USMCA framework. In this environment, most manufacturing customers remain cautious about expansions and new projects. We've observed some improvement in manufacturing leasing activity in certain markets and also signs of customers reconfiguring their supply chains to strengthen their presence in the U.S., seeking political goodwill. Overall, the outlook is constructive, though we continue to monitor developments closely. If a definitive resolution on tariffs doesn't emerge in the next 2 or 3 quarters, we believe uncertainty will become the new normal and customers will begin to move forward incorporating that uncertainty into their business risk assessments. Turning to our consumption-driven markets, Guadalajara and Mexico City continue to perform exceptionally well, fueled by both e-commerce growth and the modernization of supply chains by major retailers. These dynamic markets represent about 50% of our operating portfolio. We continue to see a robust pipeline of customers seeking large modern spaces to optimize operations, particularly in Mexico City, which accounts for nearly 40% of our activity. E-commerce continues to expand its market share with leading players making significant investments in new facilities. Thanks to this strong diversification, FIBRA Prologis delivered outstanding financial and operational results this quarter. Jorge will provide more details shortly. Talking about market dynamics, new leasing activity totaled 10 million square feet, up sharply from 5 million last quarter and roughly in line with the 2024 average of 11 million. We saw a rebound in manufacturing markets and a notable uptick in Mexico City. Net absorption reached 7.8 million square feet, impacted by move-outs in Tijuana, but still consistent with the average of the past 4 quarters. New supply declined 33% versus last quarter's to 10 million square feet, but this level was sufficient to increase vacancy by 40 basis points to 5.3%. Construction starts totaled 14 million square feet, reversing the downward trend of the previous 2 quarters and nearing a historical record. Market trends were relatively stable this quarter with consumption markets seeing low single-digit growth, while manufacturing markets were flat to a slightly down. Property values were also stable with marginal cap rate expansion in select submarkets, mainly Tijuana. While headwinds remain on the trade front, customers appear to be gradually making investment decisions in advance of the upcoming USMCA renegotiation. The path ahead may be bumpy, but we expect a constructive outcome. We continue to closely monitor customer sentiment and policy developments to ensure we maximize long-term value for all stakeholders. Turning to the Terrafina acquisition. On October 14, we launched the third tender offer for the remaining 10% at MXN 42.5 per certificate. We are optimistic about the results and expect to provide an update by mid-November when the tender offer closes. By reaching 95% ownership, our intention remains to delist Terrafina. At the same time, we are making solid progress elevating Terrafina's operating standards, bringing contracts to market rents, which has surpassed expectations and moving forward our disposition and asset recycling goals. We remain fully committed to our shareholders and to always placing their interest first. With that, I'll hand it over to Jorge. Jorge Girault: Thank you, Hector, and good morning, everyone. We're pleased to share that our third quarter results were strong and on track. We continue to see clear benefits from the Terrafina acquisition, especially in bringing rents to market and strengthening our balance sheet. Now let's go to our financials. FFO was $0.056 per CBFI, up 28% from last year, reaching $90 million in nominal terms. AFFO totaled $78 million, up 50% year-over-year. Operationally, it was also a strong quarter. We leased a record 4.1 million square feet above expectations, reaching $9.2 million for the year, which represents 70% of the total 2025 expirations. Period end and average occupancy remains high at 98%. Tenant retention stood at 82%. Net effective rent change was 47%, consistent with our portfolio mark-to-market levels. Same-store NOI, both cash and GAAP, grew around 15%, showing the combined effect of rent increases and the neutral impact of peso movement. Let me spend a minute on the balance sheet. We've successfully refinanced short-term debt in both FIBRA Prologis and Terrafina. We are now developing a comprehensive debt financing strategy to enhance our access to the broader debt capital markets. While this process will take time, it will ultimately strengthen our balance sheet, making it more flexible, value-driven and better positioned to support future opportunities. Regarding impact and sustainability, ESG. Our MSCI rating improved from BB to BBB and Standard & Poor's Corporate Sustainability score also rose from 55 to 60, reinforcing our commitment to transparency and continuous improvement. I want to spend some time on Terrafina tender offer. As Hector mentioned, we launched a third tender offer for about 10% of Terrafina remaining certificates at MXN 42.50 per CBFI. We encourage investors to take part of this tender to avoid holding any illiquid privately held vehicle in the future. In compliance with tender offer process, we want to be addressing questions related to the Terrafina on this call. Please refer to the public information and feel free to reach out to the Acting [indiscernible] or Citibank's teams if you have questions about the process. Let me move to our 2025 taxable distribution. We expect taxable income boosted by peso appreciation and projected inflation to exceed our 2025 distribution guidance. If by year-end, FX stays at these levels, total taxable income to be distributed will be about twice our cash guidance. Therefore, we will be combining CBFIs and cash in line with local FIBRA tax rules to comply with additional requirements. This approach will protect our balance sheet by avoiding new debt through pro rata certificate issuance. We will be making a portion of this additional distribution before year-end and the remainder once final FX and inflation figures are confirmed. Going to guidance. Due to our internal process, we are adjusting our disposition guidance to be between $0 and $50 million. We are also revising our acquisition guidance to be between $50 million and $100 million. And we're revising our CapEx as a percentage of NOI to be between 9% and 12%, given timing and our -- and new budgeting on maintenance CapEx. All other guidance remains unchanged. You can find the details on Page 8 of our supplemental financial information. We believe that the key driver for continued operational excellence will be energy accessibility and customer service, which remain core to our DNA. Before we wrap up, I want to recognize our teams on the ground for their outstanding execution this quarter. We remain laser-focused on our long-term strategy and ready to adapt when needed, always guided by discipline and agility. With that, let me turn it to Q&A. Thank you. Operator: [Operator Instructions] Your first question comes from the line of Rodolfo Ramos with Bradesco BBI. Rodolfo Ramos: My question is, it's a bit on your guidance. I mean, when you look at fundamentals, they continue to seem quite solid. We've seen the light at the end of the tunnel, stable occupancy. We're seeing still very high rent rollovers. So can you give us a little bit of more detail on your lower outlook for asset acquisitions and dispositions? I mean, is this is a more of a timing issue that we're close to the year-end and things haven't closed through or sellers, buyers are just a little bit more reluctant to transact in this current environment. So any detail on that and perhaps how you see it going into 2026 would be helpful? Hector Ibarzabal: Thank you for your question, Rodolfo. Indeed, as I mentioned in my opening remarks, we have been very active on our asset recycling strategy. And as of today, I am very pleased with the results that we are receiving so far. As you mentioned, what is happening and the main reason behind this review on guidance has to do with timing. We found that the potential buyers that are active for the first portfolio are players that are active in the market as of today. So we needed to design a clean room in order to be able to share information according to compliance. This on top of having a new antitrust commission is making us feel more comfortable to move for the first quarter of next year, the disposition of the first portfolio. Regarding acquisitions, that's something that we monitor permanently, and we feel that we are not obliged necessarily to do them. It's not that there is no opportunities, but it's important to do the right opportunities, and we will never be forced to do acquisitions just because we guide on them. That doesn't mean that we will be showing on 2026 important opportunities, but we are not seeing them happening on 2025. Operator: Your next question comes from the line of Gordon Lee with BTG. Gordon Lee: I have a quick question on TERRA''s not related to the tender. But you mentioned that Hector in your remarks that you have continued to progress on improving TERRA's operating standards and bringing them up closer to Prologis' own standards, both operationally and financially. And I was wondering if you sort of had to benchmark to 100, right, 100 is as much as you can improve. Where are you in that process? And is the remaining portion at all impacted by having 2 listed entities? Is it easier if you're able to only have one vehicle? Hector Ibarzabal: Thank you, Gordon. I think that all the standards that Prologis has with its portfolio are already 95% implemented into the Terrafina assets. We have now fully dedicated teams. And I think that we have importantly enhanced the service that is provided to customers. We as well have been invested a fair amount of money on bringing the operational standards of the building to what Prologis uses as a market practice. Having said this, we have been able to importantly increase the rent on the renewals, above 40%, I would say, in the rollover that we have been experiencing. It's going to take at least 3 more years to bring 100% of the Terrafina portfolio up to market standards. But I think what I would like to highlight is that we are showing execution in these buildings that we are already operating, I would say, it's going to be 1 year that we have been having full control among them. Regarding the listing of Terrafina, I think that -- and as I mentioned in my opening remarks, by mid-November, once that the third tender process is completed, we will be able, hopefully, to provide positive news about it. And Jorge mentioned in his opening remarks, our objective is still to get the listing Terrafina hopefully early next year. Operator: Your next question comes from the line of Piero Trotta with Citibank. Piero Trotta: I have a question on CapEx. I would like to know if you could tell us if there is a relevant difference in CapEx requirements between Terrafina's portfolio and Prologis. I ask that because Terrafina's portfolio is on average older than Prologis assets. So it would be great if you could tell us on that. Federico Cantú: Piero, thank you for your question. This is Federico. So we've been -- as we guided, we're spending a little bit less as a percentage of NOI and CapEx, driven by careful analysis and rationalization in our CapEx investments, and we feel comfortable with these levels. We are assessing, of course, we constantly assess all our buildings and Terrafina perhaps need a little bit more CapEx investment, but we're bringing them up, as Hector mentioned, in line to our standards, and we feel comfortable with those levels. I would like to highlight that we maintain laser focus in providing the highest standards of quality in all our buildings. Hector Ibarzabal: We anticipated that the Terrafina assets had some lag on CapEx, and that was part of the underwriting when we were targeting Terrafina acquisitions. So nothing of what has been happening has been a surprise to us. Operator: Your next question comes from the line of [ Elena Ruiz with Actinver. ] Unknown Analyst: My first question is on -- you mentioned in your press release at the end of quarter, FIBRA Prologis and Prologis U.S. had 2.9 million square feet under development or pre-stabilization. Could you give us like a regional breakdown of how that GLA is distributed? And the second one is, could you give a little more color on the almost 15% same-store NOI growth, which percent of it came from the appreciation of the Mexican peso and which percent came from rent increases? Hector Ibarzabal: Thank you, [ Elena, ] for your question. Following market conditions, Prologis as a [ FIBRA ] sponsor and the one responsible of doing 100% of our development has an important backlog in all of the markets in which we participate. As of today, we decided until further visibility about the new reconfiguration of the trade agreements is reached that development needs to be more cautious. This is not the case in Mexico City. In Mexico City is the market in which we are more active because we are trying to fulfill the needs of the major players that are expanding importantly in the most important consumption market, which is Mexico City as a big apple of Mexico. So we are active. We are entertaining as well some build-to-suit opportunities. And I can say that once the definitions are reached or once that we have a better visibility of how the market is going to be recuperating, we have the ability to restart development in a few weeks. Jorge Girault: [ Elena, ] this is Jorge. You made a question on the 15% cash and GAAP NOI. The main drivers for the rent change -- sorry, the NOI increase have to do with rent change on rollovers and annual bumps. That's about 2/3 of the increase. The other 1/3 has to do with a pickup in occupancy versus the same period. FX, to your question, was muted. We are about the same levels than this time last year. So FX did not have an impact this time or it was very small. Thank you, [ Elena ]. Operator: Your next question comes from the line of Francisco Chávez with BBVA. Francisco Chávez Martínez: We have seen some volatility in the EBITDA margin from the high 70s in the first half of the year to the low 70s in 3Q. Where do you see EBITDA margin stabilizing? Jorge Girault: Francisco, this is Jorge. The short answer to your question is it's going to be around 77%. And yes, we have seen volatility given the acquisition of Terrafina and everything that has to be done. But in the long term, you should be -- you should see 77% and that's around the number if you take the 9 months for the year. That's about the EBITDA margin for the 9 months. So there you are. Thank you. Operator: Your next question comes from the line of Jorel Guilloty with Goldman Sachs. Wilfredo Jorel Guilloty: I had a question on the leasing spreads, the cash leasing spread. So it's been going up for a bit and hit about almost 40% in 2Q '25, but we saw that it was 26% now in 2Q '25. And we also noticed that the amount of leases that were commenced it is a materially bigger number that we've seen in the past few quarters. So I just want to get a sense about this decline in the sense of is this -- do you see this as a one-off that's just pertaining to these leases that are being signed? And how should we think about these cash leasing spreads going forward? Do you think we go back to the 40s we've been seeing? Or is it between 25% and 40%. So I wanted to get any color you can get on that one. Jorge Girault: Jorel, thank you for your question. This is Jorge. I'll try to simplify your question and give you a straight answer. Leasing spreads depend on 2 things. One is whenever we lease -- we have -- the rent is signed vis-a-vis when it's going to expire. And the other part is where the market is, obviously. So if we lease something 4 years ago, which expires today, the leasing spread on that specific rent is going to be somewhere in the 50%, 60%. But if it's a 1-year lease, meaning that we leased it a year ago and today, maybe it's a 10% or 5% leasing spread. So I mean it depends on the bucket of leases that are expiring per quarter and their venue, you may. Also, it depends on -- remember that we do it on a net effective rent basis. So we put everything into the blender, not only the cash rent, but also the concessions that are given or the increases if they're fixed annual increases if they're fixed into the formula. So it has a lot of bits and pieces, if you may. But I would say that the main one is when these leases are done or originally signed vis-a-vis today. So hopefully, this gives you a little bit more color. Operator: Your next question comes from the line of David Soto with Scotiabank. David Soto Soto: Congrats on the results. I just have one question. Could you please provide some detail if you have seen potential consolidation of 3PLs in Mexico City? Or would you consider that this could be a trend in Mexico City? And as well, have you seen any move-outs due to consolidation of 3PLs in other regions? Hector Ibarzabal: Thank you for your question, David. The 3PLs had worked in Mexico City is cyclical. You see top executives leaving some of the important franchises and then they start their own business. They pay a lot of attention to the customer, they grow the business and then they are bought by someone else. What is happening nowadays is not different from what has been happening in the past. The 3PL that we have seen very active on buying some competitors is DSV. DSV is one of the most important customers that we have in Mexico. And we have very good communication with our customers. So sometimes we get to know this even before they do the transaction because they need to do some planning about consolidation, about leaving some of the spaces. And the fact that we have the largest portfolio help them to achieve their objectives. So this will keep on happening is nothing new what we're seeing today. Operator: Your next question comes from the line of Felipe Barragan with JPMorgan. Felipe Barragan Sanchez: So I have a question on sort of what you guys have been seeing this month of October. There have been some companies seeing some activity pick up this month. So I just wanted to do a channel check with you guys. That's it. Hector Ibarzabal: Could you repeat your question? We had some trouble getting to the main point. Felipe Barragan Sanchez: Yes, of course. So we've had some peers that have been commenting that throughout October, there's been an uptick in activity. So I just wanted to check with you guys if you guys have also seen an uptick in activity throughout October after the quarter end? Federico Cantú: Yes, Felipe, thank you. This is Federico. Yes, we have seen over the last few weeks, somewhat of an uptick in activity. Our pipeline is healthy across all our markets, including the border markets, of course. And I just wanted to mention, as companies navigate this uncertainty, which has prevailed over the last few months, some companies have had to decide on current conditions and their best guess as to what's going to happen going forward. As we all know, we're getting closer to the renegotiation of USMCA. I think there is a somewhat of a prevailing mindset that we're going to have a good outcome in the negotiation, hopefully. And so that is, I think, factoring into some decisions. Let's not forget that markets continue to demand from our customers. So they're having to make decisions. So we feel very good about both renewal and new leasing going forward and we're encouraged to see this recent activity. Operator: Your next question comes from the line of Alan Macias with Bank of America. Alan Macias: Just if you can provide an update on Prologis' development pipeline, the GLA of the development and in what markets and the leasing ramp-up that you have been seeing there? Hector Ibarzabal: Thank you, Alan. I would say that 95% of our activity is devoted in the Mexico City market on the development front. Particularly in Toluca, we have found interesting opportunities that are just in line with what the main players of e-commerce are requesting. We do see the expansion plans that they have, and we are positive that this activity will remain on 2026 and on. Operator: Your next question comes from the line of [indiscernible]. Unknown Analyst: I also have a quick question regarding land reserves, specifically with Terrafina. Do you consider part of disposal assets? Or do you consider looking at part of the development pipeline that you might... Hector Ibarzabal: Thank you for your question [indiscernible]. I think the land that Terrafina has in its [indiscernible], which is not significant compared to the backlog that Prologis has, is following exactly the same result that the assets. The land that is in our markets is being kept for future opportunities and the land that is outside of our markets is in the process of disposition. Operator: [Operator Instructions] I will now turn the call back to Hector Ibarzábal, CEO, for closing remarks. Hector Ibarzabal: I want to thank you all for your time devoted this morning to FIBRA Prologis. We know well how valuable your time and attention is. I feel very comfortable on our progress looking to year-end, and I am very excited about the opportunities that I see in front of us. According to our practice, we will be reachable to all of you any time. Talk to you soon. Operator: Ladies and gentlemen, that concludes today's call. You may now disconnect. Thank you, and have a great day.
Operator: Good day, and thank you for standing by. Welcome to the Capital Power Third Quarter 2025 Analyst Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. speaker today, Roy Arthur. Please go ahead, sir. Roy Arthur: Good morning, everyone. My name is Roy Arthur, Vice President, Strategy, Planning and Investor Relations at Capital Power. Thank you for joining us today to review our third quarter 2025 results, which we published earlier today. Our third quarter report and presentation for this conference call are available on our website. During today's call, our President and CEO, Avik Dey, will provide an update on our business. Following that, Sandra Haskins, our SVP Finance and CFO, will present a review of the quarter and the financials for the company. Avik will then conclude the formal part of the presentation before we open the floor to questions from analysts in our interactive Q&A. Before we start, I would like to remind everyone that certain statements about future events made on the call are forward-looking in nature and are based on certain assumptions and analysis made by the company. Actual results could differ materially from the company's expectations due to various risks and uncertainties associated with our business. Please refer to our cautionary statement on forward-looking information on Slide 3 of our regulatory filings available on SEDAR. In today's discussion, we will be referring to various non-GAAP financial measures and ratios also noted on Slide 3. These measures are not defined financial measures according to GAAP and do not have standardized meanings prescribed by GAAP and therefore are unlikely to be comparable to similar measures used in other enterprises. These measures are provided to complement the GAAP measures, which are included in the analysis of the company's results from management's perspective. Reconciliations of these non-GAAP financial measures to their nearest GAAP measures can be found in our integrated annual report. We acknowledge that Capital Power's head office in Edmonton is located within the traditional and contemporary home of many indigenous peoples of the Treaty 6 region and Metis Homeland. We acknowledge the diverse indigenous communities that are in these areas. Their presence continues to enrich the community and our lives as we learn more about the indigenous history of the land in which we live and work. With that, I will hand it over to Avik. Avik Dey: Thank you, Roy. Good morning, everyone, and thank you for joining us. Before I begin, I'd like to thank and recognize our people who power our strategy forward and deliver on our growth and long-term resilience each and every quarter. The success we have achieved would not be possible without their efforts. I will also take a moment to acknowledge the upcoming retirement of Sandra Haskins, whose leadership and contributions have been instrumental to Capital Power's success I'll share a few more words about Sandra at the end of today's presentation. With that, I will now review Capital Power's 2025 third quarter results. This quarter perfectly highlights our strategy in action. With execution and value creation on multiple fronts, including contracts for assets with terms to 2040 and beyond in Canada and the U.S. and more recontracting opportunities in the near term. These efforts clearly demonstrate our ability to enhance contractedness across volume, price and duration. This quarter, we have further strengthened our position as one of North America's leading independent power producers. Key highlights for the third quarter include advancing commercial optimization with the execution of a long-term contract with improved economics for Midland Cogeneration Venture. This extension enhances visibility of future cash flows and demonstrates our ability to unlock value for existing natural gas generation. Also commissioning our first 2 Ontario battery storage project at York and Goreway, adding 170 megawatts of capacity contracted through 2047. And delivered on time and under budget. These projects enhance our contractedness, portfolio diversification and Ontario's grid reliability. With an excellent safety record after nearly 12 months of construction, these projects are a testament to our project execution capabilities. Continued construction of 3 solar projects in North Carolina, all on schedule and within budget, demonstrating our commitment to enhancing our renewables platform. The successful financial integration of our newly acquired PJM assets, Hummel Station and Rolling Hills, the largest acquisition in our history. These facilities performed above expectations in their first full quarter contributing meaningfully to adjusted EBITDA and adding over 45 new employees and contractors to our legacy of operational expertise. And finally, we generated 13.4 terawatt hours across our portfolio and completed 65% of planned outage days for the year. As we talked through our accomplishments, a consistent theme emerges of long-term lower risk growth across our portfolio. And at the core, we have this compounding growth of energy expertise and knowledge from the people at Capital Power. Together, these achievements reinforce our team's ability to consistently deliver, diversify our portfolio and execute with discipline to drive long-term shareholder value. In September 2025, we executed a new long-term contract with improved economic terms for Midland Cogeneration Venture, the largest natural gas fired combined electric and steam generation facility in the U.S. extending the contract to 2040 and providing 10 years of incremental contracted revenue. Michigan is an attractive and growing market for electricity. This contract is an important milestone for Capital Power as it reinforces the critical role of fished natural gas assets like MCV play in maintaining grid reliability as power demand grows. Starting in June 2030, MCV will receive enhanced payments under a new PPA for 1,240 megawatts or approximately 75% of its capacity. This will provide long-term revenue stability and increase annual adjusted EBITDA by roughly USD 100 million, an 85% increase over current contract pricing that the facility received today. When we talk about recontracting our assets, we often talk about preserving optionality for other opportunities. We are excited to see one of those opportunities advancing with a signed letter of intent with a leading colocation data center developer for a potential 250-megawatt project, highlighting how our flexible generation platform can serve new load growth reliably and efficiently. This presents an opportunity to secure superior economics from contracted capacity and build a relationship with a leading colocation data center. Developer. The MCV recontracting and other near-term recontracting opportunities tell a very clear story. That our strategy of commercial optimization is delivering. We can extend contracts, improve economics and secure long-term visible cash flows across core markets. all without taking on new build risk. It's a disciplined way to create value while strengthening the reliability customers depend on, and it builds on the theme of long-term lower risk growth in years to come. This quarter, our battery energy storage project achieved commercial operations. We are proud to add the 120-megawatt York and 50-megawatt Goreway best project to the Ontario grid, strengthening reliability and adding a new technology to our asset base. Not only were these our first-ever battery storage project, but they were also delivered on time, under budget and with an excellent safety record, a testament to our team's discipline and execution. Contracted through 2047, these facilities will add approximately $35 million in annual adjusted EBITDA over time. In addition to achieving operation of our best assets, we completed 70 megawatts of capacity upgrades at York and Goreway with contracts to 2035. Through our various growth and recontracting efforts, this portfolio has extended its weighted average contract life from approximately nearly 5 years to 11 years. Together, the Ontario projects demonstrate how our expertise in gas renewables and storage come together to deliver reliable, flexible power and long-term value. Our disciplined approach is driving success across our North American platform. It's another example of long-term lower risk growth that we believe we can continue. In our first full quarter under Capital Power ownership, the Hummel and Rolling health facilities achieved financial integration and delivered a strong adjusted EBITDA contribution performing ahead of expectations with higher dispatch and strong pricing. The energy price outlook in PJM is strong, and we continue to crystallize value for these assets using hedges with investment-grade counterparties having put in place approximately 9 gigawatts of hedges through 2027. We're also encouraged by continued strength in capacity pricing coming in at the cap of $329 per megawatt day for the '26-'27 auction, approximately 20% higher than the '25-'26 auction. The operation optimization and integration of Hummel and Rolling Hills demonstrate another clear example of our disciplined growth and ability to execute, and it's reflected in the strong financial results Sandra will walk you through next. Sandra Haskins: Thank you, Avik, and good morning, everyone. Our third quarter results highlight the strength of our diversified portfolio and disciplined execution. We continue to deliver on what we said we would do: growth, stable cash flows and a balance sheet that supports future expansion. In Q3, adjusted EBITDA was $477 million up approximately 20% from the same period last year. This increase was driven by strong contributions from our U.S. flexible generation portfolio following the addition of our PJM assets. The gains in the U.S. flexible generation portfolio were partially offset by lower results from La Paloma and Decatur, which were driven by generation. AFFO for the quarter was $369 million, up approximately 20% year-over-year reflecting higher adjusted EBITDA, current income tax recovery and partially offset by higher finance expense. For the 9 months of 2025, adjusted EBITDA totaled $1.166 billion, 15% higher than the same period last year, driven by the same factors impacting Q3 and lower emission costs and corporate expenses. AFFO for the 9 months ended September 2025 was $882 million, up 40% from the same period last year driven by the same factors impacting Q3 and a credit for parts at La Paloma and settlement of the off-coal compensation. The 2025 year-to-date financial performance positions us well to deliver strong 2025 results. To ensure portfolio reliability and better position our business to capitalize on stronger market fundamentals beyond 2026, we are updating the Alberta plant maintenance schedule. Updates to the maintenance schedule include an outage on our G3 unit in Q4 of 2025, previously planned for 2026. This will allow G3, which is the most efficient coal-to-gas converted unit in Alberta to be available through 2026 when we are conducting planned outages on all our other units in our Alberta portfolio. All newly installed turbines such as those at Genesee 1 and 2 undergo an infancy period, during which greater monitoring and maintenance is required to ensure long-term smooth operation. As such, G1 and G2 will have previously scheduled maintenance outages in 2026 extended but will still allow for normal operations in the interim. For Canadian flexible generation, the 2026 maintenance schedule will include approximately 40% more outage days than in 2025 and with an expected capital cost of approximately $25 per kW of nameplate capacity. For our U.S. flexible generation assets, we expect sustaining capital costs of approximately $30 to $35 per kW of nameplate capacity for the same time. While elevated compared to prior years, we believe this investment to be prudent to maximize asset life and efficiency, and we expect cost on a dollar per kW basis to decline in future years closer to $25 per kW on average across the fleet. It is also important to note that these costs are consistent with our expectations and do not reduce our view on the return potential for our assets that we have conveyed in the past. Current Alberta forward pricing indicates that implied spark spreads for Alberta merchant capacity are projected to rise by approximately 90% between 2026 and 2028. Earlier this year, the same forward suggested a more modest increase. The shift in expectations strengthens our conviction that 2026 is the optimal window for executing these outages. From both operational and financial point of view, this approach best positions us to capitalize on strengthening fundamentals in Alberta beyond 2026. Despite updates to planned outages and delays on Alberta projects, we are reaffirming guidance ranges that we updated in Q2 across our key metrics. For 2025, we continue to expect adjusted EBITDA between $1.5 billion and $1.65 billion. AFFO between $950 million and $1.1 billion and sustaining CapEx between $215 million to $245 million. These ranges reflect strong execution year-to-date and confidence in our diversified portfolio's ability to deliver stable growing cash flows. With that, I'll hand it back to Avik to conclude the call. Avik Dey: As we reflect on the third quarter, it's clear that 2025 has been a year of delivery. We've completed all our priorities for shareholder value creation as outlined on our January guidance call, from strengthening our U.S. platform to securing enhanced long-term contracts. The story here isn't just about individual milestones. It's about the strength of the collective, the team and the consistency. Our platform is doing exactly what we designed it to do, generate stable contracted cash flows while maintaining flexibility to capture upside in dynamic markets. That's the value of scale, diversification and disciplined capital allocation working together. Today, Capital Power stands as one of North America's top natural gas focused independent power producers. With a 12 gigawatt portfolio balanced across 5 core markets and backed by an experienced and passionate team. That balance allows us to manage risk, sustain growth and fund new opportunities, all while protecting the strength of our investment-grade balance sheet. Looking ahead, the foundation we built this year positions us to meet the accelerating demand for reliable power and deliver sustained value creation for shareholders in 2026 and beyond. This morning, we announced Sandra's plan to retire from her role on December 31, 2025. Sandra has been an integral part of our company's story, growth and success. Since joining in 2002, Sandra has led with integrity, strategic vision and an unwavering commitment to excellence. We're immensely grateful for her 23 years of service. Congratulations Sandra on your well-earned retirement. Scott Manson, our Chief Accounting Officer and Treasurer, will transition to Interim SVP Finance and CFO. A search for a new SVP Finance and CFO is underway, and a successor will be announced in due course. Sandra will support a smooth leadership transition by remaining in an advisory role until the end of Q1 2026. Before we begin our Q&A, I'd like to remind you that we will be hosting our 2025 Investor Day event on December 9 and 10 in Toronto. Our Investor Day will provide a deeper look at how our portfolio of natural gas renewables and storage forms the backbone of reliability today and the foundation for growth tomorrow. We're excited to demonstrate how disciplined execution, thoughtful capital allocation and a focus on operational excellence will continue to drive superior shareholder value and we look forward to sharing our long-term vision and the next phase of Capital Power's growth journey with all of you in person. With that, I will hand the call back over to Roy. Roy Arthur: Thanks, Avik. This concludes the formal part of the presentation. Operator, you can now begin the Q&A portion of the meeting. Operator: [Operator Instructions] Our first question is going to come from the line of Julien Dumoulin-Smith with Jefferies. Tanner James: This is Tanner on for Julien. Congratulations, Sandra. I just wanted to ask on the -- or start with here on the AESO large load Phase I, it's obviously in the pre-engagement phase. I just wanted to check in on your updated expectations for process. or ultimately, what could be the scope and how you're viewing -- how you're level-setting expectations going into the engagement phase beginning later this year. Avik Dey: Thanks for the question. As we've said before, firstly, we're excited about Phase 1 and potential parties coming into the province and really kicking -- kick starting the data center business. For Phase 2, we are going to be engaged. We think we're well positioned for Phase 2, given the excess capacity that we have at Genesee and we're overall constructive. As we said last quarter, we think the option value of our site at Genesee combined with the excess load that we have at Genesee positions us very well for that phase, but also just as importantly for anyone that's coming in through Phase I we believe we're best positioned to provide VPPAs for it. So I would say initial indications on Phase 1 are positive, which leads us to be more positive on Phase 2. And at the end of the day, this is an infrastructure play. So our positioning of having generation in place that we're in the process of unlocking in addition to the attractiveness of our site. Ultimately, we think that positions us well. Tanner James: Great. And maybe here, we can dive a little deeper into the discussion around MSSC, you mentioned in the quarterly report. Obviously, this proposed reform that's come up before and absent a technical solution, which I know you're exploring with AESO, it seems as though AESO kind of needs a philosophical change in its view of system risk due to singular unexpected failure or outage just prospectively, what are some signposts that we can look forward to indicate progress in these discussions or perhaps some evolution in AESOs thinking? And then should we still view long-term resolution of this issue as directly tied to FFR or [ FDR ] process outcomes? Avik Dey: It's a great question. Look, I think the AESO has been very constructive in their perspective on the MSCC (sic) [ MSSC ] limit to begin with was that for the G1 and G2 capacity originally, that 466 was the original capacity for G1 and G2. And I think the leading indicator on their constructiveness is going to be through the 2-way dialogue that we're having right now on the [ HESO ] solution because that will, one, validate single modal capacity over above 466, although our solution ensures that we work within the existing MSSC limits. So as we contemplate, this will be part of the Phase 2 conversation as well. But I think overall, I think it's up to us to demonstrate the technical viability of our solution, which we feel very good about. As you would have seen in the AESO disclosures. We've gone through preliminary testing already. And the AESO has been very constructive in working with us as we work to really cements the viability of 1-odd option. And then secondly, for the broader market, address the limit of 466. and potential increase of it. So I can't say much more than that, but I think the biggest indicator is going to be how we perform on validating our own HESO. Operator: Our next question will come from the line of Patrick Kenny with NBCM. Patrick Kenny: I guess starting with the co-location opportunity at MCV, just wondering if you could provide a bit more color on the potential timing for finalizing the PPA there and when the customer could potentially be online? And then also, if you could just remind us what the ultimate brownfield potential might look like for the site itself. And if you're able to scale this opportunity or perhaps bring in other data center customers over time as well? Avik Dey: Yes. Thanks for the question, Pat. As you know, the capacity at MCV is just over 1,600 megawatts. We've entered the long-term contract extension with CMS that speaks for 75% of that capacity. And then this 250-megawatt contract or LOI with the data center provider is a long-term contract in nature, but it does speak to 100% of the capacity at the site. . We do see potential expansion opportunities in and around our plants at MCV. I can't speak to specifics around that. But in addition, I would say our customer here has broader ambitions as well. And I think part of the optionality of MCV site specifically is what's resonating. So I can't speak specifically to how many megawatts or acreage are available and what that pathway is. But what I would say is, although we haven't addressed pricing specifically yet on the contract, our outlook is quite constructive, point one. Point two, we're talking about long-term contracts that are you can assume them to be well in excess of 10 years, closer to 15 years. And we've got capacity and access to transmission, distribution and potential upside in Michigan as well and at the site. So I think as we've indicated, we've got a handful of sites that all have this capacity and potential, and we're actively working to monetize those available megawatts. Patrick Kenny: Okay. Great. And then on the PJM assets, I think both Hummel and Rolling Hills ran at higher capacity factors in the quarter relative to your base guidance. Just wondering if that was just seasonal strength through the summer? Or if you're now thinking this higher level of generation might be sustained going forward? And if so, if you might be thinking about offering more capacity into the auction market this December from either facility? Avik Dey: Yes, we're not in a position to comment on what our plans for the upcoming auction are, I would say, early in terms of this past quarter, I would say you can presume it to be more around seasonality. But we're overall constructive of what we're seeing both in [indiscernible] and generation and dispatch of have been constructive. So I think the outlook for the auctions is equally constructive, but early signs are positive for the quarter and what we've seen. Patrick Kenny: Okay. And then on the Arizona assets, if I could, just curious, on the back of the recent Transwestern pipeline announcement, I'm wondering if that's helped spur any new commercial discussions with data center customers at either Arlington or Harquahala or perhaps accelerate some recontracting discussions with the local utilities just knowing that more gas supply is coming by the end of the decade to support the continued build-out of data center capacity across the state. Avik Dey: Yes. Look, in terms of affirming the long-term value of natural gas, I think this pipeline announcement is probably one of the biggest single data points for natural gas-fired generation in the U.S. in the last to 10 years, a major pipeline expansion, $5 billion project, 42-inch line only gets done with customers in place and offtake in place. So in terms of our own position between Arlington and Harquahala, we've had very constructive dialogue over the last -- the course of the last 1.5 years on whether it's upgrades, recontracting, potential growth opportunities. And those continue. I wouldn't say that they're better because of the announcement of the pipeline. The fact of the matter is we've been in those conversations over the last 2 years and been part of that overall dialogue affirming load growth in Arizona and the need for more gas to serve those load-serving entities. So I would say there's continuing interest in the market. I wouldn't say it's more because of the pipeline announcement, but I think our conversations and others have been a contributing factor to the pipeline and the firming of the outlook for the market in Arizona. Patrick Kenny: Okay. Great. And Sandra, congrats on your upcoming retirement. Operator: Our next question comes from the line of Benjamin Pham with BMO. Benjamin Pham: I also wanted to, first off, congratulate Sandra on the retirement as well. A couple of questions then on Alberta. If I can ask about that first. Look, with your maintenance schedule that you have here into 2026, is that really positioning for a different maintenance schedule beyond '26, i.e., instead of every 2-year cycle, you can just run the plants hard for 4 years to capitalize on the pricing situation? Sandra Haskins: No, Ben. It's not related to that at all. We did have scheduled maintenance plan for next year as normal course outages for those units. And what we're actually doing is addressing a larger scope of work just based on some of the identified operational changes that we want to make through the early days of commissioning. So they have identified incremental work that they want to do. And as a result of that, because the joint ventures that we have in Alberta are also going throughout each next year. It was going to be a really heavy outage year, which has prompted us to move G3 forward into 2025. It is an increase next year relative to what you've seen in the last few years where we've had relatively low planned outage days in Alberta as we went through the repowering of Genesee 1 and 2. As we get through '26 and '27 and start to see prices go up, we'll be at a period of time where we'll be back to a more normal cadence of outages at that point. So the scope of work, of course, will be dependent on run hours and what have you. But it's more just addressing some of those issues early on, which is consistent with our maintenance and operational practices. So prudent that we address everything early on and be able to have the availability and reliability going forward. So this doesn't create an incremental delay or pushing out further maintenance just gets us back on to a more normal schedule as we get through this initial period. Benjamin Pham: Okay. Got it. And just give me your hedge position to you on your deck in the back and the 12 gigs for 2026, it doesn't look like just because you're shifting some maintenance around G3, [ Ford ]. It doesn't look like you're overhedged for '26, just doing a quick high-level math on, is that correct? . Sandra Haskins: That's right. We would be basically flat next year. So base load flat. Benjamin Pham: Okay. And then maybe last one, maybe some comments on the forward curve for a pretty big upward move there versus beginning of the year. Can you talk about the trading liquidity in those other years? And is that almost just Phase 1 being priced into the forward curve? Sandra Haskins: We did see a jump up after the announcement of Phase 1 in those later years. So that definitely is a driver just as well as just normal course you expect as more supply gets absorbed in the market, you do start to see prices move up. But yes, Catalyst is definitely the Phase 1 announcement. So as far as our hedge position and the liquidity, I would say we're more hedged than we maybe would have been when you're looking out through '27 and '28. Just given some of the longer duration hedges that we have. So the liquidity still is not as robust as you would see in the more near term. But yes, we're fairly significantly hedged in -- through '27 and to a lesser extent, when you get to '28 where we're more modestly hedged. Operator: Our next question will come from the line of Maurice Choy with RBC Capital Markets. Maurice Choy: Just wanted to come back to your comments on Phase 1 of the AESO large load connection. Earlier, Avik mentioned that you could offer VPPAs as part of Phase I. We also know that a third-party developer has secured over 900 megs of the 1.2 gigawatts of allocation. So can I first confirm if you still have your 375 allocation from Phase I. And if not, what the big picture strategy here is for you? Avik Dey: Yes, Maurice. I can confirm that we don't have our 375. We made note of that at the last quarter. In terms of what may or may not be captured. I can't comment on that because it's not been announced or listed -- or disclosed at AESO. But I think we feel pretty good that there are going to be projects in Alberta, and we also feel pretty good that for anything that needs to have an in-service date in '29 or earlier that we're going to be in a good position to provide them energy. Energy risk management or a PPA if and when they get announced. Maurice Choy: Understood. And I would just follow-up to that. Like what do you think still remains in terms of the milestones before that gets announced? Is it just government policy? Is it just crossing the Ts and dotting the Is, how close are we to that to your VPPA? Avik Dey: Well, it's not our project. So I can't comment on where another project may be in the queue in their own negotiations. But I can say by virtue of our position in the market and our own decision-making around the 375, we understand that there's multiple projects in play that are advancing in the queue and will likely come out of the Phase I process. And what I would go back to on this, Maurice, is the decision on the 375 for us versus maintaining option value on the 1000 it's really about our whole business plan and focusing on long-term contractedness and optimizing the value per megawatt at our plants, NTE per KW and long-term pricing. And so we do have a strong bias in Canada, in particular, towards these larger projects because we think they're more likely to yield long-term contracts. That's not the case in the U.S. because of how mature the market is there and how much capital and how many players are chasing capacity in that market, where Alberta is a new and emerging data center market we continue to favor scale because of the likelihood of converting that into long-term PPAs. Maurice Choy: Understood. And maybe just to finish up on the same theme. There's obviously been a lot of discussion about potentially introducing nuclear energy in Alberta. I know that -- we've talked about this before by -- and I recognize that it's very early days. From Capital Power's perspective, what do you see your role being? And what are the conditions that you need to see before potentially investing in this technology in the province? Avik Dey: Well, I think if we put technology aside, specific [ FFR ] technology and just look through it, the lens of is nuclear viable in Alberta. We've engaged in this. We've got a best-in-class partner with OPG and the province and the federal government have been supportive of us looking at the viability of nuclear in Alberta. The province has been very clear in its interest to determine the viability of nuclear in Alberta. And so we're still in that early phase of, a, consultation; b, validating the technology; and c, understanding how nuclear would work within the existing framework, the electricity framework for the province. . So we do think that there is ultimately a role for nuclear. But we don't yet have the validation for how we would contract those assets in the existing energy-only market. But you can't get ahead of -- we can't get ahead of ourselves through the process. This would be a long-term commitment. We haven't had load like this. There's initial investment required to bring the industry to Alberta. And [indiscernible] has been to date that the existing market structure will continue, and you have to find commercial ways to bring in load. And so today, where these projects are longer duration, highly capital-intensive. Today, they are not economic to do or to FID or spend material capital on. But as we look out, our role is to manage that load growth over 10, 20, 30 years from a system planning perspective and understand that technology and understand when and if it's approved as a viable technology, how do we ultimately commercialize it. So it's a long-winded answer to really say that today, it's not economic. We're excited about it. We're exploring it with best-in-class experts. We're collaborating with government, and we're keen to move to the next step. But from a capital power perspective in terms of capital allocation, we're putting risk capital towards it. It's not something we expect to do in the short to medium term unless there's something material that changes commercially. Maurice Choy: Congrats yo both Sandra and Scott, we'll catch up at the investor day. Operator: Our next question comes from the line of John Mould with TD Cowen. John Mould: Starting off, I'd just like to pass on my congratulations to Sandra. I appreciate all your hope over the years, and congrats to Scott as well. Going back to MCV you've been able to both extend that contract and have this potential colocation piece the merchant capacity. Looking across the rest of the U.S. fleet, are there other sites with similar characteristics where you can potentially do both? Or is it really more a case of one or the other, either extending your existing contracts or looking to do something on the colocation side. And in those markets, how does the customer appetite for the colocation solution compared with the interest you saw in Michigan? Avik Dey: Thanks, John, for the question. So we have multiple opportunities at multiple sites. So I would say in the range of outcome, the things that we're focused on are upgrades expansions, recontracting and the data center opportunity. On our fleet, we have one or more of those opportunities on Hummel, Rolling Hills, Arlington, Harq, La Paloma. And I would highlight those as the ones that are most near term. What I would say, and this is something that we projected and advocated at our Investor Day in 2024 was we think that this is really about finding balanced energy solutions. And what that really means today is you have to work with and cooperate and collaborate with low-serving entities. As we demonstrated in MCV. So for us, the way we're attacking this opportunity set is really talking to everybody and understanding how we balance the needs of our partners and fellow players in the market, load serving entities and what their objectives are with what our customers' objectives are, whether it's a data center provider or some other large loads. And finding ways we can make win-win solutions, whether it's through upgrades, expansions, working with load-serving entities and then ultimately marrying those opportunities with our own whether it's behind the fence colocation or grid integrated grid connected opportunities. On the data center opportunity, specifically, as I've said before, we don't believe there's a large opportunity to do these data centers behind the fence because of reliability requirements. You can do it but the cost of generation to support 99.999% reliability will greatly exceed the economics of the price per megawatt to make that work. So we think being able to grid connect is a significant advantage. And then being able to work with stakeholders in those markets will be critical to successful outcomes. It's once again why we're bullish on the Alberta opportunity set, because there is transmission distribution and whether our role is to sell power and/or provide a site that we can sell. This is what we've seen and learned in the U.S. market, and that's what we've been leveraging in our approach in Alberta. John Mould: Okay. Great. And then maybe pivoting to that Alberta opportunity. Just in terms of an early look on the Phase 2 pre-engagement, it seems like bring your own power requirements going to be likely in some fashion for Phase 2 to reach that gigawatt scale opportunity, if you did host something at Genesee, which would you need to add new build there. I note that in existing to the spare capacity you've got at Genesee 1 and 2, you do have a 1.5-gigawatt early-stage combined cycle project there in the connection list. So how are you thinking about that? And how do you think about the relative attractiveness of deploying capital into potential new build in Alberta versus additional gas M&A in the U.S. Avik Dey: Yes, great question. So one, we're not contemplating new build in Alberta as part of our entry into that Phase 2. Second, we could contemplate it if there was a customer for it. but you need to look at the life of these assets versus contracting terms. We would not take merchant exposure on new build in Alberta. Third, relative to the U.S. or Alberta, I think whether it's -- and I'll focus more on expansion and repowering than a straight new build because I think it will be unlikely we will take on a new build, unless we've got strong partners and a strong offtake agreement, but those opportunities seem more prevalent in the U.S. today than they are in Canada. But I think from the expansion and repowering perspective, we see those as better near-term opportunities because you've got a better line of sight of having, a, in-service date that meets the needs of the customers. . So as we think about new build capacity in Alberta, the trick becomes, how do you look at a new build and have an in-service thing that meets the need of a customer. Again, that's why we feel so strongly about our position in the market. We've already paid for completed new build capacity through our repowering project in Alberta that's available now. And so we think that positions us very well relative to the market. But I think the new build piece for construction exposure or development capital exposure we have a bias to the U.S. market today. Operator: Our next question will come from the line of Robert Hope with Scotiabank. Robert Hope: My congrats as well to Sandra and Scott. Maybe carrying on the conversation on Phase 2. Has there been any changes to the customers that you're speaking there or the level of support that you're seeing for your kind of next phase of projects for Phase 2? Avik Dey: No, I can't say we've seen a different owner of different conversations or more conversations. The interest has been there for Alberta. Now that we have the guardrails for Phase I and Phase 2, there continues to be interest. So I expect when we get better visibility on what came out of Phase 2 expect to see more interest in particular, around larger customers. But I would say we haven't seen more interest or less it's continue to be the same. Robert Hope: Okay. I appreciate that. And then just as a follow-up on that. So the Phase II process, as was outlined by the AESO is quite long. When you think about your positioning and the fact that you have 450 megs at Genesee that are unused right now, like is there a way to potentially fast track that process? And are you in consultation with the government or the AESO because your situation is a bit different than a pure, bring-your-own-power-solution. Avik Dey: I think overall, the AESO and the ministries have been constructive on how to go into Phase 2. And I think there will be some bespoke conversations with parties. I think our focus right now is very clearly getting our technical solution approved which will unlock us to 566. And then over and above that, we've got additional capacity available. So for us, the sequencing, which is independent of the Phase 2 process, is let's get our technical solution validated and let's get the AESO on board with our solution and get those volumes unlocked. And I think we'll have constructive conversations in Phase 2. But I think most importantly, Rob, as you look at our portfolio, the way we look at it is whether it's through Phase 2 or Phase 1 and you look at the strip in Alberta on full price, our job is to go maximize value per megawatt on our plants and our dispatch. And so whether we're in Phase 1 or Phase 2 is less important than what's the probability we can go contract pricing, contract volumes at attractive pricing, short, medium and long term. So we feel really good about that opportunity set right now. And so the longer Phase 2 takes and the more volumes that get taken up in Phase 1 and the more interest there is in the market, I think the better liquidity we'll see in the back end of the curve and the more opportunities there will be for us to go contract, which is how we're looking at the opportunity set. We will continue to have this option on Genesee because our -- I firmly believe our site is one of the most attractive sites on the continent for a large data center because of our access to fiber because of our access to water because of our interconnect and because of the topography and location where we are at Genesee outside of Edmonton. So all those things are positive for the market overall. But most importantly, we feel strongly we're best positioned to sell power into this tightening market over the short to medium term. The outlook for Alberta is quite good right now as we look out from a tightening of the market and a pricing perspective and the limited number of generators there are in capacity there is. And being at the right end of the merit curve here with the lowest heat rate plant most efficient plant in the country and the largest plant providing net -- power net to grid, we think that we're pretty well positioned. Operator: [Operator Instructions] Our next question will come from the line of Mark Jarvi with CIBC. Mark Jarvi: Congrats Scott and Sandra and thanks for all the time over the last couple of years, Sandra, it's been great to work with you. Just on Midland. In the data center customer, can you talk about any regulatory approvals, the contract structure, what has to get done there? And then I think Pat asked the question of like when the load could ramp, if you could maybe just share some color in terms of when this could move forward. Avik Dey: Yes. Thanks for the question, Mark. So yes, there will be some regulatory procedural approvals required. And then secondly, we're not in a position to say when an in-service date would be for this project. We do think that over the next 6 to 12 months, we can firm up the opportunity in the contract in partnership with our customer here. But I think I can't give you more color than that right now. But you can assume that the in-service date, given the fact that we have existing power, given that we have existing capacity is it's short to medium term, not long term. . Mark Jarvi: Understood. And then coming back to the concept of the Phase 1 monetization in VPPA, like relative to when you brought up this concept on the Q2 call to now how would you say confidence level? Is it higher today than 3 months ago? Avik Dey: Yes. Well, just on the concept itself of us being able to sell power into this market. The confidence is the same because we had high confidence in Q2 on it as we work through it. So I don't think our confidence could be higher than it was then. It's the same in our ability to price power into this market. I think the only thing that's probably the market has more exposure to is there's rumor to be projects that are coming online. So we're excited to see which one -- which projects actually come through and get announced and how we can support their build . Mark Jarvi: Understood. And then it does seem like you think -- well, obviously, the megawatts that can't dispatch right now at Genesee could be counted as new megawatts for Phase 2, didn't seem too keen on building new generation unless you got a long-term contract. What about other technologies, battery, any solar? Or would you look to maybe power any data center site at Genesee through virtual PPAs with other developers providing gas? Avik Dey: You mean others building gas on our site? . Mark Jarvi: No, but more like a VPPA where they might build it or refurbish existing assets. And then part of the solution for the data center at Genesee might be some generation either co-located or adjacent plus some power through VPPAs. Avik Dey: Yes. I mean we're totally open-minded on that front. I think that's really -- that's been our point all along, which is I think we're one of the best, if not the best, in finding creative solutions to contracting power for customers, whether it's bespoke or whether it's in partnership with others. To answer your question of would we be open to other investments at our site, solar? No. Batteries? Maybe. But again, it's really going to come down to contractedness in terms and can we make our cost of capital. I think the growing opportunity, and I think this is a point I've made previously, our job in this market, whether it's us or any of our competitors as an industry, our goal is to sell more power and bring in more demand. And I think as an industry, we're doing a good job of that. And on a relative basis, I think we're exceptionally well positioned to sell that power given our fleet. So on Genesee, I think we're open-minded. So I'm not opposed to building. But today, I don't see it a long-term PPA to substantiate that investment. If and when that comes at us, we'll look at it, we'll pursue it. I think Phase 2, we'll see what other customers come to the table. But yes, overall, I feel pretty good. I don't -- I think -- I can't remember who asked the question, but in terms of the outlook on full prices and the more bullish curve that we have into '27, '28, yes, there was an upward movement post June around the announcement of Phase 1. But that was more than 4 months ago. So that firming of that price scenario in '27-'28, I think just more broadly speaks to the market's confidence that there will be growing demand in Alberta. And I think it's just a timing question now. Do we see much of that load in '27, '28 or '29. But overall, the support for higher prices and tightening supply, I think, is pretty favorable for Alberta. Mark Jarvi: Understood. Makes sense. And then you identified some sites in the U.S. with multiple options, I think Arlington Valley, Harquahala, Rolling Hills, Hummel, are any of those sites gas constrained if you do try to do uprates or expansions? Avik Dey: Well, I can't make a blanket answer on that because each site is different. So for example, we aren't constrained as I said, when we acquired Rolling Hills, we have available capacity at Rolling Hills, but we do not, at Hummel, we do think we have upgrade opportunities at a couple of our plants in WECC. But we don't see viability for a data center, or colocation of a data center upfront. But -- so I think the way I look at our portfolio today is, we've got, call it, 2.6 gigawatts of contracted capacity in the U.S. that expire between '29 and 2032. And we've got just over a couple of gigawatts of fully merchant capacity in the U.S., and we're trying to find ways to optimize that and increase it. So it's a site-by-site response. But as I said earlier in the call, those sites that I pointed out, there's one or more of those opportunities at each one of those sites. . Mark Jarvi: Got it. All right. Looking forward to connecting in a couple of weeks. Operator: Thank you. And I'm showing no further questions at this time. And I would like to hand the conference back over to Roy Arthur for closing remarks. Roy Arthur: Thank you, everyone, for joining us today. We appreciate your continued interest and support from the Capital Power story. We will conclude the call now. Thank you. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Ingela Ulfves: Good morning, everyone. A warm welcome again to Fortum's joint webcast and news conference for the investor community and media on our January-September interim report. My name is Ingela Ulfves, and I'm heading the IR team at Fortum. As always, this event is being recorded, and a replay will be available on the website later today. With me here in the studio are again our CEO, Markus Rauramo; and our CFO, Tiina Tuomela. Markus and Tiina will present the group's financial and operational performance during the third quarter and first 9 months of this year. I would also like to remind you of the upcoming Investor Day for analysts, institutional investors and other capital market participants to be held on the 25th of November. It is possible to attend both in person in Helsinki and also virtually online. The registration is open on our website until the 17th of November. As we do not want to preempt the content and discussions for the event, we aim to strictly focus on the Q3 performance and results in today's webcast and then leave all the other topics to be addressed during the Investor Day. We look forward to your participation and hope that as many as possible of you are able to join us then. Now let's go to our Q3 presentation, after which we will take your questions in the Q&A session. So with this, again, I hand over to Markus to start. Markus Rauramo: Thank you very much, Ingela. A warm welcome to our Q3 results call also from my side. I will start by going through the key elements of our quarterly highlights and our financial performance, then say a couple of words about the hydrological situation. After that, Tiina will provide more details on the financials and how the operational performance turned into our results. Let me now start with the highlights. Starting with a very positive point. Our third quarter achieved power price was higher than last year's level, EUR 46.1 per megawatt hour compared to EUR 44.1 per megawatt hour, supported by higher spot prices and strong physical optimization. Realized market prices, which means the blended price for Fortum's price areas were EUR 17 per megawatt hour higher than in the third quarter last year. Then a few words about the volume challenges we have faced this year. As you remember from earlier quarters this year, both nuclear and hydro volumes have been clearly below the normal level. The same situation continued during the third quarter. So this year has been abnormal when it comes to generation volumes. However, this should be seen as temporary due to hydrology and unplanned nuclear outages. It shows quite clearly in this third quarter, which is typically the smallest quarter result-wise in our business. As said, unavailabilities in our nuclear generation fleet still continue to impact the fourth quarter. Tiina will talk more about generation volumes in her part of the presentation. The efficiency improvement program is coming to an end now by the end of this year. Fortum reduces its annual fixed cost by EUR 100 million, excluding inflation gradually until the end of 2025. The full run rate will be effective from the beginning of 2026. In July, we announced the acquisition of a wind power project development portfolio in Finland, which we bought from the German renewables developer and constructor, ABO Energy. This acquisition strengthens our development pipeline for renewables as we prepare for future growth. With the acquired 4.4 gigawatt portfolio, Fortum's pipeline of onshore wind and solar projects in the permitting phase is approximately 8 gigawatts with more projects in the early development phase. Potential investment decisions for these projects will be made case by case. The projects will be backed by customer PPAs and need to meet our investment criteria. Currently, there is sufficient power supply in the Nordic area, and we can sell PPAs from our existing outright portfolio. Fortum's coal exit progresses with the decarbonization of the Zabrze CHP plant in Poland. Today, we announced that we will invest approximately EUR 85 million in the plant's retrofit. This is in line with our target to exit coal by the end of 2027. On another positive note, we also updated our optimization premium for the year 2025. Now we estimate the optimization premium to be approximately EUR 10 per megawatt hour for the year 2025. Previously, we forecasted EUR 7 to EUR 9 per megawatt hour for '25. The main reason for the increase is higher power price volatility. The lower nuclear volumes this year also contributed slightly to the higher premium. Then I move over to our main figures and financial KPIs. Here are our familiar comparable headline KPIs for the group's third quarter and for the first 9 months 2025. As you see, all KPIs decreased in all periods, which reflects the lower generation volumes. In Q3, our comparable operating profit totaled EUR 97 million, while comparable EPS amounted to EUR 0.08. On a cumulative basis, the group's comparable operating profit amounted to EUR 674 million. Our comparable EPS was EUR 0.59 per share. The operating cash flow was at a good level. However, it decreased to EUR 787 million. For the balance sheet, our leverage, defined as financial net debt to comparable EBITDA was basically unchanged at 1.0x at the end of September. Tiina will go into more details on the result analysis in her part. Next, I will say a few words about the market environment, especially hydro conditions. Let's look at the situation of the hydro reservoirs for the Nordic market. It's good to note this is not only Fortum's reservoirs. As we have communicated earlier this year, reservoirs were record full during the winter, meaning in the first quarter. However, the water was mainly in Norway and northern parts of Sweden, where Fortum does not have hydropower. As the winter was mild and the snowpack was thin, this resulted in minor spring floods. Because of this, the reservoir levels decreased fast in the spring. And as you can see, now the reservoirs are close to normal level. As we have said, generation volumes will be clearly lower this year. The unplanned outages in our nuclear fleet, mainly in Oskarshamn 3 in Sweden, reduced our annual nuclear volumes by approximately 3.6 terawatt hours for the full year 2025. This is based on announcements so far. The current estimate is that Oskarshamn would come back online on 1st of November. We have also highlighted the risk of lower hydro volumes for the full year. Unfortunately, this seems to be the case. For the last 12 months, hydro volumes are 17.8 terawatt hours compared to a normal hydro output year, which is between 20 and 20.5 terawatt hours. It is not possible to give an estimate for the full year as hydro conditions might change, but the assumption is that our annual hydro volumes will be below that of a normal hydro year. Still coming back to the power price volatility. Lately, we have again seen increased volatility, partly because of the introduction of the 15-minute market. The continued high power price volatility supports our capability to generate a premium through our optimization. From a value creation perspective, this is reflected in the updated guidance. We expect our optimization premium for this year to be approximately EUR 10 per megawatt hour. This concludes my part, and I would now like to hand over to Tiina to tell more about our business performance. Tiina Tuomela: Thank you, Markus. Good morning, everyone, also on my behalf. I will now go through our financials in more detail. Let's start with the key financials. I will start with some of the comparable KPIs. The comparable operating profit for the third quarter amounted to EUR 97 million. In the third quarter, both our comparable net profit and comparable EPS decreased. This reflects the lower result in the Generation segment. At the same time, our Consumer Solutions business is doing well as they generated a record high third quarter result. We are very satisfied with the Consumer Solutions result performance this year. Our comparable net profit for the quarter declined to EUR 70 million. Consequently, our comparable EPS for the third quarter declined to EUR 0.08 compared to EUR 0.14 last year. Comparable EPS for the last 12 months is now EUR 0.77. Our cash flow during the quarter declined by EUR 218 million and totaled EUR 131 million, mainly reflecting the lower result. Then over to the segment result for comparable operating profit. Compared to the previous year, our result in our Generation segment decreased, while both Consumer Solutions and Other Operations segment improved. In the Generation segment, comparable operating profit decreased by EUR 84 million to EUR 92 million, mainly due to the lower nuclear and hydro volumes, lower hedge power price and somewhat higher property taxes in nuclear and hydro in Sweden. It is also notable that similar to the second quarter, the hedge ratio was high also in this quarter as a result of the lower volumes. The result contribution from the Pjelax wind farm was slightly negative. Seasonality is reflected in the district heating business, which was loss-making, mainly impacted by lower sales price for power in Poland. As said, the third quarter shows good performance in our Consumer Solutions business. The comparable operating profit reached an all-time high third quarter level of EUR 23 million. This is an increase of EUR 17 million, which mainly relates to the improved electricity margin in the Nordics and improved gas margin in the enterprise customer business in Poland. In the other Operating segment, comparable operating profit improved by EUR 6 million, showing a negative result of EUR 18 million. The main reason for the improvement was lower fixed cost and higher internal charges for the services of enabling functions. Then let's move on to the cumulative result waterfall for the segments. When looking at the waterfall for the first 9 months of the comparable operating profit at the segment level, it shows the same pattern as for the third quarter. Compared to the previous year, the result in our Generation segment decreased, while both Consumer Solutions and other operation segments improved. In the Generation segment, comparable operating profit decreased clearly by EUR 305 million to EUR 648 million. The main reason were lower hydro and nuclear volumes, lower spot and hedge power prices and somewhat higher property taxes in Sweden as well as higher nuclear fuel cost. The result contribution of the Pjelax wind farm was slightly negative and lower than in the comparison period as a consequence of lower power prices. In the comparison period, the result of the renewable business was positively impacted by a sales gain of EUR 16 million for the divestment of the Indian solar power portfolio. The result of the district heating business was at the same level as in the comparison period. Lower fuel and CO2 costs as well as higher heat price offset the impact from lower sales price of the power. Reaching an all-time high level for the first 9 months, the Consumer Solutions segment's comparable operating profit increased by EUR 36 million and was EUR 96 million for the first 9 months of the year. The continued improvement was mainly as a result of improved gas margin in the enterprise customer business in Poland improved electricity margin in the Nordics and approximately EUR 13 million of cost synergies. In the Other Operating section, comparable operating profit improved by EUR 22 million and amounted to minus EUR 17 million, mainly due to the positive impact from divestment in the Circular Solutions business finalized in 2024, lower fixed costs and higher internal charges for the services of enabling functions. Then over to the leverage and liquidity. Our financial position continues to be strong, primarily supporting our objective to maintain a credit rating of at least BBB. It naturally also provides a good financial foundation in this uncertain and turbulent market environment, but it also caters for growth and shareholder returns. When considering our capital allocation principles, we balance leverage, investments and dividends while always keeping the credit rating in mind. Fortum's current long-term credit rating by both S&P Global Ratings and Fitch Ratings is now BBB+ with stable outlook. I want to go through the reconciliation of our financial net debt in the third quarter. As you can see, it is fairly unchanged. At the end of second quarter, our financial net debt was EUR 1,270 million. In the third quarter, the operating cash flow was EUR 131 million and investment amounted to EUR 122 million. The change in interest-bearing receivables amounted to EUR 14 million, while FX and other FX were EUR 9 million. So at the end of second quarter, our financial net debt was EUR 1,283 million and the leverage ratio for financial net debt to comparable EBITDA was at 1.0x. Looking at our debt portfolio and the loan maturity profile, I want to highlight a few things. At the end of the quarter, our gross debt, excluding leases totaled EUR 4.7 billion. Bonds are and continue to be our primary source of funding. Our maturity profile is very balanced, and there are no large maturities in any single year. The next maturing bond is EUR 750 million in 2026. At the same time, our liquidity position is strong. We have ample liquidity reserve, EUR 7 billion with EUR 3.1 billion of liquid funds and EUR 3.9 billion of undrawn committed credit facilities and overdrafts. The cost for our EUR 4.7 billion loan portfolio is 3.3%, while the interest income that we get for our EUR 3.1 billion liquid funds has come further down and is now 2.1%. With the strong liquidity position, we continue to optimize our cash and credit lines. The overall objective is to have sufficient liquidity while optimizing the balance between debt and cash to minimize funding costs. Then over to the final section, the outlook. The outlook section comprises 4 familiar elements: guidance for outright portfolio, taxes, CapEx guidance and our fixed cost reduction program. As we have stated already a few times today, we will fall clearly behind the normal historical output level this year because of announced availabilities in nuclear and lower expected hydro output. For the sake of comparison, in a normal year, our annual outright volume is approximately 47 terawatt hours. Based on announced outages, nuclear output for 2025 is now estimated to be 3.6 terawatt hours lower this year, of which 3 terawatt hours realized in the first 9 months of 2025. Our hydro output for the last 12 months was 17.8 terawatt hours compared to the normal level of 20 to 20.5 terawatt hours. About the hedges. At the end of the third quarter, our hedge price for the rest of 2025 was EUR 42 and the hedge ratio was 90%. The hedge price for 2026 is EUR 41, EUR 1 higher compared to the last time disclosed, while the hedge ratio increased by 10 percentage points to 70%. As an update today, our annual optimization premium for the year 2025 is estimated to be approximately EUR 10 per megawatt hour. Previously, it was between EUR 7 to EUR 9 per megawatt hour. The guidance for our corporate tax rate also remains unchanged for the years 2025 and 2026. We expect the comparable effective income tax rate to be in the range of 18% to 20%. The Finnish government plans to decrease the corporate tax from 20% to 18% from the beginning of 2027. There is, however, no official law in place yet. Our very preliminary estimate is that this would result in a 1 percentage point decrease in the corporate tax rate from the year 2027 onwards. I also want to repeat that in Sweden, the property taxes are revised from 2025. For Fortum, the increase of the property taxes is now estimated to be approximately EUR 30 million for the years 2025 to 2030. The major part of the cost increase is recorded in our fixed cost. We do not make any changes to our capital expenditure at this point of time as this year is about to come to the end. However, we will come back to this topic in our Investor Day. Finally, a few words in our fixed cost reduction program. For the first 9 months, our fixed costs were EUR 615 million. For the last 12 months, fixed costs totaled EUR 884 million. We reduced our recurring annual fixed cost base by EUR 100 million, excluding inflation by the end of this year with a new run rate from the beginning of 2026. Our current estimate is that the new run rate for our fixed cost base in 2026 will be approximately EUR 870 million. This includes the fixed cost increase of EUR 20 million in the Swedish property tax. As mentioned before, there are additional costs for growth in 2025. These are related to, for example, renewables development, site development, buildup of commercial organization and the hydrogen pilot project. This was all for my presentation, and we are now happy to answer your questions. So with this, Ingela, over to you. Ingela Ulfves: Thank you, Tiina, and thank you, Markus. So as this was a more straightforward quarter, the presentations were also a bit shorter. So now we are then ready to take your questions, and let's begin the Q&A session. You can also ask your questions in Finnish. Moderator, please go ahead. Operator: [Operator Instructions] Tiina Tuomela: The next question comes from James Brand from Deutsche Bank. James Brand: English, unfortunately. Two questions for me. The first is on demand. So you highlighted that energy demand was pretty much in line with last year. And you said that was after industrial demand experienced a slowdown, particularly in Sweden. I was wondering if you could just give a bit more detail in terms of what you're seeing there and what's caused that? Is that just the general economic situation at the moment? Or is there something else going on? That's the first question. And then the second is on the supply business. You've obviously had a great year in supply, and you've seen quite a significant step-up in profitability and it looks like you'll be producing EBITDA of comfortably over EUR 200 million this year, depending on what happens in Q4. I just want to get some color from you on whether you think the profitability that you've seen this year is sustainable going forward or whether it's been a slightly exceptional year and we would be expecting a step down in 2026. Not necessarily looking for a precise guidance, but just directionally, is this sustainable? Markus Rauramo: Thank you. English is absolutely fine. So on the first one, so I attribute the, let's say, sideways movement of the demand a bit to the global geopolitical turbulence. So difficult for our customers to take investment decisions. So if I put this into a big perspective, we see good signs of decarbonization and electrification going ahead. We get the incoming inquiries for new power, but investment decisions take long to take place. We see that the consumers are saving and companies are being very scrutinous about their costs. So that's my quick take on the customer side. Then on the supply side, I assume you meant our Consumer Solutions business. So the business has experienced so far a very stable year. So there have been a few surprises. There's been volatility, but something we have been able to manage. So we haven't had risk events like we had in '21-'22. So in these conditions, this is a good indicator of what the business is able to produce. But the team is doing really good work. We're getting in synergies from the earlier acquisitions, and Mika and his team are working on the efficiencies continuously. Operator: The next question comes from Harry Wyburd from BNP Paribas Exane. Harry Wyburd: The line went blank for me at the very beginning of the call. So apologies if I've missed something in the very early part. Can I -- so two questions. So firstly, the CMD, I presume you want to sort of keep things back. But I wondered if you could clarify one very specific thing, which is, have you been in negotiations with a data center or hyperscaler developer over a PPA during this quarter? And would you rule out or rule in that you might announce a data center PPA at the CMD on the 25th of November? And then the second one is on the data center tax in Finland. So I read in the press and I noted in the release that the government has gone ahead with raising the power tax on data centers in Finland. So I wonder that they also mentioned that there might be some offsetting support package. So I wondered if you could give us some color on what that support package might be and when it might be announced and whether there might be a bit of a blockage on data center PPAs until -- in Finland until that's been straightened out. And are you seeing any discussion elsewhere in the Nordics along these lines about potential tax increases on data centers and politicization of data center demand? Markus Rauramo: Thank you. So maybe, Tiina, if you take the more general tax question. And then for the -- regarding -- well, I don't think you missed anything material that you wouldn't be aware of in the very beginning. It was about the results and the markets. But then with regards to negotiations, we are in negotiations and discussions with actually several data center operators. So like we have said earlier, there are discussions going on about steel, aluminum, chemicals, hydrogen and data center operators are looking for electricity contracts. So I cannot -- and of course, I'll not preempt the CMD or Investor Day, but discussions are going on certainly on many fronts. Then on the -- more generally, so indeed, there's a discussion going on as we can see it globally in various places. Regarding location of new industries, including data centers and what kind of pressure that puts on the systems. And that's why we engage in discussions about how will the whole energy system develop and what are we doing to make sure that there's then additional supply if customers are willing to pay for that, and how do we also bring stability to the market as well. And on the Finnish case, particularly, indeed, this has been now in discussion for a longer time that would or would not be the lower tax rate be applied to data centers going forward. And now it seems that the government is going ahead with the tax increase, but then a compensating support for data centers up to a certain level. Those details, how does that work? And what are the approvals needed for this whole setup? I think that's very much in the works still. But Tiina, do you want to comment further on the Swedish Finnish tax? Tiina Tuomela: Well, maybe to put some numbers around what has been discussed currently. So in Finland, we have the electricity tax and there the general level for the tax is EUR 0.0224 per kilowatt hour. And then data centers have been among those reduced tax level, which has been EUR 0.05 per kilowatt hour. And now this will change. So data centers will go back to this general tax level. But as Markus said, there is also a plan to have some kind of support mechanism, which should compensate at least some part of the increase in the taxes. In Sweden, there has been also discussing about the electricity tax, and they reduced the level from EUR 0.04 per kilowatt hour to EUR 0.03 per kilowatt hour. So still Sweden, slightly higher than the Finnish tax level. Harry Wyburd: Got it. Okay. And sorry, just to clarify on the first one. I think in your past conference calls, you've generally said that you didn't have any substantive discussions on the go with data center developers. And I think your past comments were that generally interest was more in the shorter tenors of 3 to 5 years. So Markus, should I take your comments and I know you want to hold back for the CMD, but should I take that as a change in the comment there? Has the nature and substantiveness of your negotiations on PPAs changed since we last had the conference call on Q2? Markus Rauramo: Not materially. But in the CEO comment, you would have noted that we said that we continue to see robust demand and that we thought very carefully. So like I said in the previous -- for the previous question, there is geopolitical turbulence. We see all kinds of questions around is the transition happening and so on. But our customer pipeline for the discussions we are having with the different sectors, that looks very similar to earlier quarters. So clearly, it looks like that industries and commercial actors continue to look for places where to locate their businesses. So the robust is the good work. Operator: The next question comes from Anna Webb from UBS. Anna Webb: Two from me and then maybe a clarification, if I can. So firstly, on data centers, when you do the site development, can I ask if you bundle that with PPA contracts, so you always do the sell the site and the PPAs or if they're sold separately? And what's the rationale on how you do that? Secondly, I think you said you had a negative contribution from the Pjelax wind farm, which was an issue as well earlier in the year. Can I ask what drives this because the operating cost for that should be pretty low. So I know you mentioned low power prices, but how do you get to a negative result, still a little bit unclear to me? And also whether that's a kind of one-off effect or you think this might be a headwind into the future? And then finally, just if I can clarify on the volumes. I know you said hydro volumes are variable and you can't comment on full year guidance. But if Q4 is normalized, can you comment on how much has the debt in the first 3 quarters has been versus a normal year? And so if Q4 was normal, what the loss would be on hydro, that would be really helpful. Markus Rauramo: Okay. I can start with the data center question. And then Tiina, if it's okay, if you can comment on the Pjelax impact and the hydro and nuclear volumes. So as you would know, when we developed the -- what is now becoming the Microsoft cluster in the capital region in Finland, we developed 3 sites, then found Microsoft and we sold the sites. And we actually did -- we bundled that with a deal to do the world's largest heat offtake. So we try to look for solutions where actually, we do a win-win both for our customers, for the society and ourselves. So this is supporting the Clean Heat Espoo project and decarbonization leading to a massive excess heat offtake. Of course, our interest is that we would do PPAs with the site development. But then we need to look at the various customers' situations that how committed can one be at the stage when we do the sites. And this is a dynamic discussion that we're having all the time, depending on the demand for the sites, what all can we bundle to that. But there is no one size fits all for these situations. Tiina Tuomela: All right. Then moving to the Pjelax. So we commented that in the third quarter, the Pjelax result was negative like previous year as well. So these are usually the quarters when the power prices are low, and this is also the reason. If we look at it on cumulative basis, so we can say that we are nearly to the 0 level. So it is, in that sense, let's say, seasonal. And the main reason really is the power price in the market and what the wind farm will capture. So even though the average price in the market is high, then when it's windy, so then the prices tend to be lower. So the capture rate has been lower now in the summer months. Then about the volumes. So what comes to the hydro volumes, so we have stated the average production is between 20 to 20.5 terawatt hours per year. And this year, I would say that particularly the second quarter was the biggest difference. There, we had the production volume of 3.7 terawatt hours, which is absolutely the lowest ever production volume in our history. And that was due to the lower inflow to the water reservoirs. And this second quarter, the hydro volumes were roughly 1.5 terawatt hours lower than our average production. So that gives some kind of indication. What is the difference to our average production in general. In third quarter, the production was lower than the previous year, but not that much difference to if we compare the longer-term average. Now the hydro reservoirs are nearly on roughly on the 0 level or 1 terawatt hour lower. So now the outlook for the remaining of the year looks fairly kind of normal. Operator: The next question comes from Julius Nickelsen from Bank of America. Julius Nickelsen: Just two for me. One follow-up on these PPA discussions that you've mentioned with the data centers and the industry. I mean, to the level that you can comment, do you see in these more long-term discussions that there is demand to pay a premium to the current futures curve? Because if I look at the '27 hedging that you've now disclosed, it doesn't seem that there's much premium to the current futures. And then secondly, on the optimization premium, obviously, the upgrade to EUR 10 this year. I mean, you haven't touched the long-term guidance is 6% to 8%. Is it still fair to say that given how the opportunities shape out at the moment that at least for the next 1 or 2 years, we should be more at the upper end of that scale? Or is that difficult to forecast? Markus Rauramo: Okay. Again, I'll take the first question. And Tiina, do you want to comment on the -- then on the optimization premium. Tiina Tuomela: Yes. Markus Rauramo: So indeed, compared to the implied forward curve, which I have to say is very thin. So liquidity is not high at all when you go further out. So when we think about the pricing, if we go out a few years and longer, then our price curve -- implied price curve is upward sloping. And that reflects the point of view that like was highlighted by the Pjelax example that new capacity with these prices is very hard to get to the market. So the prices need to be higher for new supply to come to the market. So to start with the further out we go in time, the higher our expectation for the price and then on top of that, there is still the optimization premium. So what we agree with the customer is then separate from what we get on top of that. Then the third element I'll mention is the different characteristics. So the more specific the customer demand is tied to the profile. If you want 8,500-hour product, that will have an impact on the availability of the product. If it's RFNBO earmarked to a certain asset, even more. And this we see practically in the PPA. So we talk about several euros of impact for longer-term contracts depending on what characteristics a particular contract would have and then optimization premium on top of that. And that's a good bridge to Tiina. Tiina Tuomela: All right. Very good. Thank you. Thank you, Markus. So the optimization premium, so we had a guidance for this year, EUR 7 to EUR 9 per megawatt hour, and we increased that after a very strong first quarter. So then the volatility was high, and we said that the optimization premium was around EUR 10 per megawatt hour. What we have seen that the volatility in the market has increased. Also, as Markus mentioned, our production volume has been somewhat lower, which was improved the number. But also what we can see that the predictability is getting more difficult. So therefore, what we have done that we fine-tuned the guidance further we go to the year and see how the optimization premium will develop. So EUR 10 for this year and for the time being, for the next year, EUR 6 to EUR 8 per megawatt hour. Operator: The next question comes from Louis Boujard from ODDO BHF. Louis Boujard: Two on my side. Maybe the first one regarding the hedging strategy. We see indeed that going forward, '26, '27 price are slopping down on a hedge point of view. At the same time, optimization is quite strong and is expected to remain quite strong. So I was wondering if you were thinking about eventually changing a little bit your hedging strategy going forward, notably in terms of duration or in terms of openness to the market prices in the short term so that you could capture better the short-term volatility of the market instead of having a stronger visibility into lower prices. And maybe the second question would be regarding what you mentioned on the wind farm Pjelax, notably regarding the fact that the capture price in the end below the one of the market regarding the fact that the wind, of course, blow for everyone at the same time. Do you think that it would make sense eventually to consider some investments in specific dedicated battery systems, which could be related to the different farm that you could develop in the future so that you could improve the returns expected from these wind farms? That would be my second question. Markus Rauramo: Okay. Thank you. So with regards to the hedging strategy, so of course, this has -- for the 13 years I've been with Fortum, this has always been the question that what is the strategy? And the idea with the hedging is to get visibility into the short-term cash flows. Then when we go longer out, then we can adjust also our operations. So when you go 3 years out, then we can do changes in our resources and processes and so on. If we look at spot price this quarter, the average in our areas was EUR 37. So rather close to the hedge price. So then having an open position wouldn't have had a huge impact, but negative nonetheless versus achieved power price. But in the comparable quarter last year, it was below EUR 20. So then being open would have impacted our result massively if we just look at the spot prices. So that's where the fundamental driver comes from. Then mostly when we do the bilateral hedging, as we did also in NASDAQ, it is financial hedging. So then we have still the possibility for the physical optimization. And then, of course, we have the risk that can we deliver the power at spot delivery, but that we settle, of course, always on a daily basis. But financial hedging with customers and then leaving the optimization. In the longer run, we have said that we want to get to 20% rolling 10-year hedge level. So we wish is that we target to stabilize the cash flows also going further. And the idea with doing PPA-backed investments, if there is need for additional power stems from that when we make investments, whether it's wind or solar or any other, the payback times typically are quite long and then stability has a positive impact on our internal cost of capital and thereby the return requirements. And that's a good bridge to the second question, which is that do we consider batteries or other flexibility connected to renewable investments? The answer is yes. So that's part of our development. We are typically citing also space for batteries connected with the renewables investment so that there is a possibility to do it if the financial conditions are there. Historically, we have built some batteries since a long time. Actually, when Tiina was heading generation even, we were doing that so already many, many years ago. And I believe that batteries will be -- of course, they will be a needed part of the system. What we see happening on that front also is that there are new uses coming for the -- that are catalyzed by volatility. For example, electrified heating, which I mentioned earlier, so heat offtake, heat pumps, electrical boilers, they can utilize very flexibly the low cost or even negatively priced towers. So the volatility will change also the business opportunities, and we are capturing those as we speak. Louis Boujard: Can I maybe a very quick follow-up? Markus Rauramo: Sure. Louis Boujard: Yes. Just wondering regarding the batteries. Do you consider that currently the regulation is supportive enough for you? Or does it need any change? Markus Rauramo: So of course, there are issues that need to be considered, for example, on the consumer side, when we have investments behind the meter, of course, then the taxation and grid fees and so on, these are of a lesser issue. But when we get to a communication between customer assets and the market, then these are things that need to be seriously addressed on European level and national level. Operator: [Operator Instructions] The next question comes from Harrison Williams from Morgan Stanley. Harrison Williams: Two for me and possibly one clarification. Firstly, on the optimization premium, so I appreciate that it's very strong this year with guidance at EUR 10 per megawatt hour. Can you give us what that number would be had you had a normalized nuclear year? Because clearly, that is helped a little bit by the lower nuclear volumes. Just understanding if that's within the 6% to 8% range or kind of above the top end of that. The second question I had was again going back to PPAs. I mean, I guess we've not yet seen any of these longer-term PPA contracts being struck. And trying to understand, is this a case of offtakers not being certain on the kind of volume requirements in the 5- or 10-year period? Or is this a mismatch between pricing expectations because you say yourself that you have maybe a higher exited forward curve than what we can see on our screens. So trying to understand where that is. Is that a volume mismatch? Or is that a price mismatch? And then the final clarification, thank you for the color on nuclear volumes this year. Can we clarify that next year, you are still expecting a normalized 26 terawatt hour output? Or is there anything we should be aware of? Markus Rauramo: Okay. So if I take the PPA question and Tiina, if you take again the optimization premium and volume question, so then we start to follow our pattern here. Tiina Tuomela: Yes, we will. Markus Rauramo: Okay. So for the long-term PPAs, so of course, we have a kind of inherent wish when we do new investments that are volatile and also we have the capture rate issues. So they would benefit from visibility long term. Otherwise, historically, we have been hedging in the short term. So the drive to do long-term PPAs isn't really coming primarily from our side, but it is how we communicate is based on what we hear from the customers. So customers are making inquiries on 3-year, 5-year, 7-year, 10-year and even longer PPAs. There are a couple of points I see there. One is this whole geopolitical situation. So the customers' investment plans are taking time to materialize. So our customer pipeline has stayed very stable. Like I said, the outlook from that point of view is robust. Then a contradictory point is that if I look at the Nordic traditional heavy industries, they typically would have a wish to get visibility for various inputs. But the order books, whether it is steel or chemicals or pulp and paper, they tend to be rather short. So we talk about months or a year. And then locking in input costs create a basis risk, which we all are very familiar with. So even if something would look inherently very affordable, there's still a risk that your incomes go below your costs and then you have out-of-the-money contract. So this is one structural thing that continues to be impacting our customers' ability to do long-term contracts. But overall, there is structural demand for power, power availability. And if the format to get that to the customers is the PPAs, then structurally, we're heading that way. We haven't done massive PPAs that we would have announced separately. But if you look at our hedging levels and the volumes, that actually implies that we're doing hundreds of bilateral contracts, also longer-term PPAs, which you can see in the 10-year rolling hedge ratio. So we are doing also long-term PPAs, but the volumes are not massive. But they're a good indication in line with what I said earlier. And then to the optimization premium and nuclear volumes. Tiina Tuomela: Alright, thank you. So when we calculate the optimization premiums, so we take the full volume, as you said, so 47 terawatt hours in the normal year. This year has been exceptional when it comes to the nuclear, so 3.6 terawatt hours more outages what we planned at the beginning of the year and also hydro being somewhat lower, particularly because of this low second quarter. Of course, what is the final number will depend on what will happen and how we run in the fourth quarter. But if we take roughly to give you an idea, so the optimization premium would have been roughly at the same level as the previous year. So previous year, it was EUR 8.7, so somewhere EUR 8.5 or that range with the normal, normal without particularly the nuclear extensions. Then what comes to the next year nuclear production. So the normal year, we have indicated is roughly 46 terawatt hours. And all the time, the nuclear producers will put the UMMs with the updated outages. And what we now know is that Loviisa and also Oskarshamn 3, they have a normal cyclical longer outages. So those are normal and planned and goes according to the schedule, but they are a bit taking the production volume lower. Operator: The next question comes from Harry Wyburd from BNP Paribas Exane. Harry Wyburd: Sorry to monopolize and to come back, but I'm sorry to really labor this topic, but it's driven a 10% or nearly 10% move in your shares since this morning. So it's really important, I think, to get the language sort of understood correctly. So I think from my question earlier, I interpreted that you were -- there maybe been a positive change in your discussions with data center operators versus what you told us at Q2. In the subsequent questions, you've kind of mentioned that if you did a big PPA, you'd announced that separately. You're doing -- you're not really doing big long-term PPAs. I think really to distill it down, what I think the market is questioning here is, are you poised to sign a big long-term PPA with a sort of big industrial data center operator. So just to really clarify what you said, is it plausible that you could sign a significantly sized long-term PPA with a data center operator or announced it in the next few weeks? Or is that something that we should interpret from your comments that is less what you're looking at, at the moment? Sorry for the long question. Markus Rauramo: That's absolutely okay. So like I said, I think the one word, the robust says it very well. So when we look at all the customer segments, there is continuous activity. And from our point of view, we see that electrification, decarbonization are driving industries. It will be more efficient. Clean power is actually more affordable than fossil power, the brand promises that companies have made, these are all pushing ahead what we have been preparing for. So the underlying activity is at a good level. But then in all honesty, there's a lot of uncertainty. So even with all these discussions, we don't know what they will materialize into before deals are done. And to -- not to try to shy away from the question, but to give you color on how do we address this is that we see the potential, but we see a lot of uncertainty. And that's why our preparation is that we're spending almost EUR 100 million a year in developing the renewables pipeline, pumped hydro, batteries, even new nuclear as a feasibility study for the future. We're developing the sites. So we want to create the optionality that if there is additional demand, we can answer that. And then we have the efficiency programs, the availability. We improve our processes to be able to serve from our existing portfolio. So it is not 1 or 2 discussions that we are having. It's a big list of customers that we're talking with all the time and preparing for that potential. Sorry for not being able to be clearer than that, but this is the very kind of honest picture of what is happening. But bottom line is that I'm positive about the whole decarbonization, electrification opportunity and the Nordics are in an excellent position to answer that. But it seems that the overall sentiment has a lot of uncertainty. So investment decisions also take time. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Ingela Ulfves: Thank you so much. Thanks for all your questions. Very interesting. And also happy to have gone through now the Q3 performance. As there were some technical issues in the beginning, I would just quickly repeat what I said about the Investor Day. So it was a reminder that we will host the Investor Day on the 25th of November and also then saying that the registration is open until the 17th of November. You're able to attend both in person in Helsinki, most welcome to join us in -- at the event, but then also participate virtually online. But with this, thank you for your participation, and we all wish you a very nice rest of the day. Markus Rauramo: Thank you very much. Have a good day. Tiina Tuomela: Thank you. Bye-bye.
Operator: Thank you for standing by. My name is Danielle, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation Conference Call. [Operator Instructions] I would now like to turn the call over to Ryan Thomas. Please go ahead. Ryan Thomas: Thank you, Danielle, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's Third Quarter Financial Results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; Brian Sohocki, Chief Credit Officer; and Mike McCuen, Chief Lending Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on Page 3 of the slide presentation. For a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike. Thomas Michael Price: Thank you, Ryan. Our performance in the third quarter reflects broad-based momentum across our regions and lines of business. Key highlights include our return on assets improved to 1.34% and our core pretax, pre-provision ROA grew 10 basis points to 2.05%. Net interest margin expanded 9 basis points to 3.92% marking another quarter of improvement. Average deposits increased 4%, reflecting balanced growth across all of our geographies. The cost of deposits declined 7 basis points to 1.84% underscoring effective pricing discipline, balanced with growth. Loans were up $137 million or 5.7% despite some payoff headwinds in commercial real estate. Loan growth saw meaningful contributions from equipment finance, commercial banking, indirect and home equity lending. Mortgage lending provided a headwind to balance sheet growth, although some of that runoff was by design, and the outlook for the business is improving. Geographically, we had strong loan contributions from all markets in Ohio and Pennsylvania. Fee income remained resilient post Durbin, representing 18% of total revenue, a healthy quarter-over-quarter improvement in our wealth business was offset by slower gain on sale income. The third quarter efficiency ratio improved to 52.3% from 54.1% in the second quarter, reflecting good expense control. Tangible book value grew 11.6% annualized on a linked-quarter basis and 9.1% year-over-year. On the credit side, core provision expense increased by $2.4 million quarter-over-quarter, reaching $11.3 million. As disclosed last quarter, we had a $31.9 million dealer floor plan customer who was out of trust. In the second quarter, we set aside $4.2 million in reserves for this relationship. In the third quarter, a receiver was appointed to liquidate the collateral. The out of trust amount and related liquidation costs rose as the process evolved. During the third quarter, $5.5 million was charged off, an additional $3.1 million was added to reserves, resulting in a net provision impact for this relationship of $4.4 million in the third quarter. This recent dealer floor plan fraud is isolated, and we expect it to be largely resolved by year-end. As of September 30, our floor plan exposures totaled $122 million across 21 traditional auto, and RV relationships with individual exposures ranging from $2 million to $18 million. Net charge-offs for the quarter were $12.2 million, primarily driven by the aforementioned $5.5 million dealer floor plan charge-off, and $2.8 million associated with the sale of 5 recently acquired Center Bank loans. This was an opportunistic sale utilizing the allocated loan mark from the acquisition with only $100,000 in provision expense. These 2 items accounted for 34 basis points of the quarter's 51 basis points of net charge-offs. With the dealer floor plan relationship now at $16 million, nonperforming loans declined to 0.91% compared to 1.04% in the prior quarter. Our loan portfolio maintains negligible exposure to private credit funds, equipment finance firms, NDFIs or subprime lenders. Our recent Center Bank acquisition in Cincinnati is exceeding our customer retention expectations. We're grateful for the opportunity that acquisition has given us to accelerate the build out of that region. On the digital front, we see good growth in services and high digital satisfaction and survey results. We continue to add customer-facing features to our platform and to improve productivity through the use of RPA and AI. We are excited about the outlook for First Commonwealth and the confluence of profitable growth, a regional focus leading to better low-cost deposit gathering and higher fee income, coupled with lower credit costs in the future. With that, I'll turn it over to Jim Reske, our CFO. James Reske: Thanks, Mike. This quarter's core results show you what a little bit of NIM expansion and loan growth can do. Pretax pre-provision net revenue or PPNR, was up by $4.3 million over last quarter and nearly every financial metric improved. An increase in spread income overcame a modest decline in fee income, and a negligible increase in expenses, leading to improvements in core EPS, NIM, core ROA, core ROTCE and efficiency. And even though provision and charge-offs were up, as Mike mentioned earlier, the key asset quality measures of nonperforming loans and classified loans improved from last quarter as well. So let's look at the details. Spread income improved by $4.9 million over the last quarter on balanced loan and deposit growth. The net interest margin, or NIM, expanded by 9 basis points from 3.83% last quarter to 3.92% this quarter. The expansion was primarily driven by a 7 basis point decrease in the cost of deposits to 1.84%. Loan yields were largely flat this quarter as a 3 basis point decrease in purchase accounting marks was mostly made up for by a $25 million macro swap that matured on August 25 as well as the continued upward repricing of fixed rate loans. Fourth quarter NIM will feel the full effect of the Fed September cut and potentially today as well as any further cuts during the quarter, offset by the continued upward repricing of fixed rate loans as well as the expiration of $75 million of macro swaps in the fourth quarter. Plus, there's usually a seasonal decline in deposits this time of the year, which we would need to replace with more expensive borrowings if the past predicts the future. These factors could put some short-term downward pressure on the NIM in the fourth quarter. But we expect the NIM to recover in 2026, to roughly the level of the quarter just ended or about 3.9%, give or take 5 basis points as usual. In 2026, the expiration of $175 million in macro swaps and the expected continued upward -- the continuation of upward fixed rate loan repricing helps to blunt the effect of falling short-term rates on loan yields. That projection assumes that we'll have two more rate cuts this quarter and 4 next year, resulting in a steepening yield curve. It also assumes that we continue our mid-single-digit loan and deposit growth, along with projected improvements in the deposit mix that we expect to bring the cost of deposits down in keeping with the projected decline in loan yields. Core fee income, excluding securities gains, declined slightly from last quarter by $261,000. As Mike mentioned, we had lower gain on sale income, which was due to some REO gains in the second quarter and a $400,000 decrease in SBA gain on sale income. These decreases were somewhat offset by improved performance in our wealth division with trust up $0.5 million, and brokerage up $0.4 million from last quarter. We expect fee income to gradually increase in 2026. Core noninterest expense, or NIE, excluding merger expense, was up slightly from last quarter by $350,000, largely due to salary expense, driven by increased incentive accruals based on recent performance and loan growth. Looking forward, we currently expect that expenses will grow by approximately 3% next year. We repurchased approximately 625,000 shares in the third quarter at an average price of $16.81. We had $20.7 million of share repurchase authorization remaining at quarter end, most of which we intend to execute on in the remainder of '25, assuming our share price remains close to current levels. And with that, we'll take any questions you may have. Operator: [Operator Instructions] Our first question is from Daniel Tamayo of Raymond James. Daniel Tamayo: Maybe we just start on the credit side. It seems like the -- everything was kind of ring-fenced for the most part around the credits you referenced, the floor plan and the credits from center. Let me just make sure I have this right. So the floor plan relationship at quarter end is $16 million. You gave some info on the floor plan in total, $122 million, I think, Mike, but the floor plan relationship with the fraud is $16 million now. And then do you have the -- that's right, sorry. Thomas Michael Price: That's correct. It went from $31.9 million to $16 million this past quarter. And $122 million overall floor plan exposure. Daniel Tamayo: Okay. And the, I guess, remaining stress in that particular relationship you expect to be resolved in the fourth quarter? Or did I not hear that? Thomas Michael Price: Yes, largely, we're just unwinding it. Daniel Tamayo: Okay, okay. And what are reserves on that loan now, did you say? Thomas Michael Price: 4.4. Daniel Tamayo: 4.4, okay. And then the relationship from the Center acquisition that is driving these, what are the numbers on that? I don't know if I have those. Thomas Michael Price: Yes, there were 5 recently acquired Center Bank loans, and we had an opportunity to sell those loans with a minimal hit. So I don't know if you want to expand upon that. Brian Sohocki: Yes, sure, Mike. This is Brian. There was 5 loans. They were all marked at our original time of acquisition. And as Mike mentioned, the charge-off of $2.8 million resulted in only provision of just over $100,000 for the quarter. They were PCD loans and the mark did not reduce the carrying value. So you see the charge-off, but you don't see the impact on provision. Daniel Tamayo: Okay. And so those have been sold now and they're gone. Okay. All right. Great. And as it relates to the rest of the portfolio then, back in the kind of historical range for charge-offs? Or do you have any thoughts on where net charge-offs kind of or provision, whatever is easier discussed moves here? Thomas Michael Price: Yes. No change from prior comments from a charge-off perspective, expectation is to operate in the mid- to high 20 basis point range. Last quarter, we said 25 to 30 basis points. And similarly, from a provision basis, that will grow with our loan growth, respectively. Daniel Tamayo: Okay. All right. Terrific. And then I guess just finally on the credit side, and I'll step back here. The NPL is down at 92 basis points of loans. Does that feel like a really relatively comfortable level for you guys? Maybe that's the wrong way to phrase it. Is it -- do you expect kind of stability from there? Do you expect that number continues to come down? Thomas Michael Price: We expect it to come down. And we have a nice slide in our deck, our supplementary deck that really shows historically where credit quality has been. And we really -- if you look on Page 10, bottom left quadrant there, we've just been really quite elevated from third quarter of last year, fourth quarter and first quarter of 2025, where we were between $61 million and $76 million of nonperforming assets. Brian Sohocki: I'll just add to Mike's comment that we'll have the tailwind of the majority of the dealer floor plan wind down in the fourth quarter and then kind of normalization of cleanup of the portfolio from there. Operator: Our next question comes from Karl Shepard from RBC Capital Markets. Karl Shepard: Just a quick one on the floor plan credit. I think you implied this, but as you see it today, no incremental provision from this in 4Q? Thomas Michael Price: That's correct. Karl Shepard: Okay. And then, Jim, I guess, on the margin, I was a little surprised to not see loan yields tick up a little bit higher. So I was hoping you could help us with what the fixed asset repricing was and then kind of what the accretion headwind was? And then just kind of how you see loan yields trending? James Reske: Yes. The fixed asset repricing was still 87 basis points. That is in the third quarter. That was a little bit down from the second quarter, but it's partly reflective of the rate cut. So still positive. That led to a positive replacement yields for the portfolio of about 25 basis points overall. The fixed rate production right now is running about 1/3 of the total production. The 87 basis points of positive on the fixed rate means the whole portfolio is repriced up at about 25 basis points, but the fixed rate repricing -- up repricing hopefully will persist even after there's a few more rate cuts. Karl Shepard: Okay. And then since you gave it, I guess, I'll ask a little bit about the 2026 NIM expectations. In the past, we've talked about your models kind of shooting it up towards 4% or even higher for the margin. Is that still the case, and this is a reflection of maybe a little bit of conservatism or some expectation of competition, or just help us understand kind of -- you're pretty thoughtful about this stuff, but what do you see that gives you that 3.90% number? James Reske: Yes, I appreciate the question. Happy to tell you everything our thinking behind it and then you can make your own judgments as usual. I don't know if a sense of conservatism, but we do have more rate cuts in this projection that we had in the past. So there's 2 this year and then 4 by the end of next year. I would tell you that the pattern is not even in the projection we have, which we get from a third party that is probably the same third-party most banks use. If the rate cuts are quarter-by-quarter next year, 28, 18, 9 and 40. So they're kind of backloaded next quarter. But all that does in the model in that kind of rate scenario is take the yield on loans overall down by 15 basis points. And then because rates are falling, we can take the cost of deposits down by about the same amount, 15 basis points, and that ends up being a picture of NIM stability. So the numbers that we're pushing 4% probably just had a slightly higher rate forecast than we have this quarter. The other thing I just would note, it's not a parallel yield curve shift. It's a steepening curve, which is generally -- that's good for banks. So that helps a little bit. It helps us on the short end. We feel the pay in short end of our loans that are linked to the short-term rates. So we are able to bring the deposit costs down. And if in a mid- to long-end part of the curve stays up or goes up a bit, that helps with the fixed asset repricing. All that's going into the mix, and it's ended up looking pretty stable from here. Operator: Our next question comes from Charlie Driscoll from KBW. Charles Driscoll: This is Charlie on for Kelly. With a lot of the NIM expansion driven by the deposit repricing this quarter and then expecting basic cuts to increase here. Can you kind of flesh out some of the deposit repricing dynamics going forward? Maybe just dive into the drivers behind like the near-term compression and then a little bit of the neutrality from there? James Reske: Yes. I'll just give you a little color on the deposits. This is Jim. A little color on the deposits and what's happening in the quarter. We're really happy to see the deposit balances growing. That was really -- and we kept saying this using this term, that was a nice edge this year to be able to grow deposit balances and simply the cost of deposits down, but we've been able to do that. What's happened is that we have grown this time deposit portfolio and kept that deposit portfolio, the pipelines were relatively short, like most banks. So in the second quarter, for example, we had $400-and-some million of CD maturities. In the third quarter, we had over $800 million. So it's managing those maturities and managing them, being able to reprice that maturity downward while still keeping the retention rate at an acceptable level. The retention rates have been pretty good on time deposits. They always end up being around 80%, which we think is about the industry average anyway. And then if you look at other deposits like money markets, our transaction accounts, our retention rates on those are actually over 90%, which we think is better than the industry average. We kind of track that pretty closely. And then I'll give you one more fact, just if it helps you. On money market accounts, we've been able to reprice those as well. So in the second quarter, money market accounts, 83% of the money market accounts had a yield over 3%. 83% of the money market account balances had a yield over 3%, and now that has gone from 82% to 49%. So we've been able to kind of manage the pricing of that while still maintaining even growing deposit balances. I hope that extra color answers your question, is a little helpful. Charles Driscoll: Yes, that's great color. I appreciate that. Thomas Michael Price: This is Mike. I would just add that for the people in the room, Mike McCuen, Jim Reske, Jane Grebenc, and Norm Montgomery, they monitor this every other week. And they're looking at the loan and deposit volumes that come on, they're looking at the net impact on liquidity and also the impact on margin. This is something that we feel between our fingers every other week, and we make game-day decisions of where we're at and where we're going and how we're going to get there. And I just love the process, and it also just keeps us informed in what's happening in the bank. James Reske: By the way, all of us -- speaking for all of us, supported by great teams of people all read kind of give us data and help us keep our fingers on that policy. Charles Driscoll: I appreciate the insight into the woodworks there. Regarding organic growth, it's come in pretty steady. Can you just speak to the expectations moving forward if payoffs are starting to pick up, maybe sizing up that headwind? And on the talent you got from Center Bank or anything in particular you're focusing on or excited about in terms of growth? Thomas Michael Price: Yes. Some of the payoffs that we've seen are really healthy commercial real estate projects, refinancing into permanent markets, nonrecourse in the 5s. So that's not something we're going to do. And so that's some of the headwind that we see that's continued into the fourth quarter. However, we have a lot of -- we just have a lot of offense between consumer, mortgage equipment finance, indirect auto, our loan growth is going to be more constrained by liquidity versus our ability to go out and execute. So that's kind of -- that's going to be the check rein on all of this. Mike McCuen, anything you want to add? Michael McCuen: I totally agree. Yes, I agree. I think the volumes -- production volumes are good, tempered by some payoffs, but feel pretty good going into next year on production results. Thomas Michael Price: Yes. And our guidance remains mid-single digit. Just a surprising bright spot this past quarter is growing home equity loans, like $15 million or $16 million. And so we just have a lot of ways to get there. Operator: [Operator Instructions] Our next question comes from Matthew Breese from Stephens Inc. Matthew Breese: Jim, you had mentioned that with the Fed cuts, you expect a little bit of near-term NIM pressure. To what extent might we see NIM pressure in the fourth quarter? James Reske: Yes, it's always hard to guess. I mean, even the standard guidance I was giving, I always say plus or minus 5 basis points because it -- every model has been perfect. But it's probably in that range. I don't think we go as far as 5 to 10, Matt. That would be a little extreme for the 1 quarter and then bounce back. So it's probably in the 5 basis point range. Matthew Breese: Okay. Is it possible, let's just say we get a few cuts this quarter. We're down to 5 bps. Is it possible to get down another couple of basis points in the first quarter from bleed over and maybe an additional cut in the first quarter as well before we start to see some stabilization? James Reske: Yes. Absolutely possible. I mean, so much -- we're trying to do a projection based on a rate forecast, which has a ton of rates implied within it. But in our bank, and we've just seen that the reality is there's a lag. So there's -- if there's a rate cut, it hits the prime portfolio and SOFR portfolio right away. And then there's a lag in how we price the deposits. So there's always -- it's never perfect. So you get some effects right away, and then over time, the liability side catches up. And the seasonal change in deposits, I'm just throwing that out there so that people aren't surprised about that. We kind of see this every year. We saw in different categories. Some of this is consumers doing holiday spending. But -- and some of it goes from fourth quarter into the first quarter, commercial accounts as well. So that happens just like it does every year, we'll be borrowing at the marginal rate, and that's a little more expensive. So that recovers early in the year next year. Matthew Breese: And then you had also mentioned that you expect some improvement in deposit mix next year. What's behind that assumption? And maybe help us out with where you think we'll see some of the largest kind of mix shifts? James Reske: Just have a real push towards transaction accounts, and I gave some time deposit numbers a few minutes ago. We've loan time deposits because we had to do some of that just to raise the deposit balances, but we have a deep, deep push towards transaction accounts across the bank, both in consumer and commercial. Jane, I don't know if you wanted to add anything because that kind of your. Jane Grebenc: I can just reiterate it. And it's been grind -- transaction accounts are grinding, and it means we've been grinding the amount for a couple of years now. We're starting to throughput that labor and we'll just keep grinding. Matthew Breese: Got it. Okay. Maybe just a couple more. Securities were down this quarter. We're now below 13% of total assets. It feels on the low side for you. Could we see some growth there in the coming quarters? James Reske: Probably not. I think we're going to hold it about where it is. I mean, our plan right now is to replace the runoff really slow anyway, but replace it and really not grow that portfolio. Part of that thinking is that we just want to use that liquidity -- use that liquidity for loan growth and not leverage up the bank by borrowing money to buy securities. So probably where you see it now is a level we plan to hold it probably through '26. Matthew Breese: Great. And then just on equipment. Equipment finance continues to be a real driver of underlying C&I, is plus 10% a quarter sustainable? Or where do we start to see that revert to the mean? Thomas Michael Price: We're probably about a year away. This is Mike Price. And we've been really pleased. We've been pleased with the yields and also with the credit performance. And -- but we also have a team that's been doing this for about 25 years. So we feel good about that. Mike, anything you want to add? Michael McCuen: No, I think there's some incentives this year when it comes to depreciation and we expected that to impact and benefit equipment finance. At least for the next few quarters, we feel pretty good about that growth. Operator: Our next question comes from Daniel Cardenas from Janney Montgomery Scott. Daniel Cardenas: If could you provide some color on the competitive factors on the lending side right now? I've heard a lot of give on structure and pricing in various markets, wondering if you're seeing the same thing within your footprint? Thomas Michael Price: I do think it depends on the market, Dan, and I'll let Mike take this. This is his, but I think there's a big difference between Columbus, Ohio and rural Pennsylvania, but there's -- Mike, what would you add? Michael McCuen: I would say yields -- margin on the yields has probably dropped 25 basis points over the course of the year. And we really haven't changed much in our structure approach, but that's hurt the yields to your earlier question. I would say the metro markets are much more competitive than the rural markets, as Mike just said. On structure, it's gotten more aggressive. We mentioned the permanent markets, the agency lending. Those are very aggressive right now. It's not something we do, but it does impact our balance sheet. Is that helpful, Dan? Daniel Cardenas: Yes, sir. I appreciate that. And then maybe color on the M&A front. I mean, we've seen activity pick up a little bit here recently. Wondering what you're seeing come across your desk if chatter has picked up, or it's slowed down from last quarter? Thomas Michael Price: I think there's more conversations. I think, for us, we really wanted to help our depository and our liquidity. And we've had -- but a lot of conversations that we're pretty prudent, maybe too prudent at times, as I said last quarter, but we're hopeful that we can grow through acquisition. We've been stuck at about $12.5 billion, and crossing $10 billion, you normally lose a lot of your mojo as it relates to your profitability. We've been able to maintain that really with an eye to realistically get to 140, and we fell a little short this quarter because of credit on the ROA side. It was just -- it's not an excuse. We need to have a great NIM and we need to have a great ROA, irrespective of the size. But certainly, if we had a right acquisition or 2 that could get us down the road a couple of billion dollars more, that would be terrific. Our bias is generally smaller because of the risk better and make sure that it's a good depository that can help our liquidity and help fund the bank. And I don't know if that's particularly helpful, Dan. Operator: That concludes our Q&A session. I will now turn the conference back over to Mike Price for closing remarks. Thomas Michael Price: Yes. Thank you. I appreciate your interest in our company. I would just add that we've really shifted to deliver the bank regionally, and we really expect the payoff of that to be not just to better deliver the mission, the better grow households and low-cost deposits in the depository and then also better grow our fee income. We do feel like we can grow the loans, and the other thing that's kind of interesting and exciting, I think, is as we look at as an executive team, 30 operating plans for our lines of business for our business units for our geographies as part of our strategic planning process, we really feel there's probably 1, 2 or 3 ways that we can continue to get more efficient. Using technology like robotic process automation or AI or just better straight-through processes. So we just have bright people that can look at their operation and make it better. And so there's just a lot of things that we're excited about the company, to move the company forward and make it better. And we just also have a pretty talented team up and down throughout the organization. So thank you again. Look forward to being with a number of you over the course of the ensuing weeks, and just appreciate you. Operator: This concludes our conference call. You may now disconnect.
Operator: Good day, and welcome to the Silgan Holdings Third Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Alex Hutter, Vice President, Investor Relations. Please go ahead, sir. Alexander Hutter: Thank you, Anna, and good morning. Joining me on the call today are Adam Greenlee, President and CEO; Philippe Chevrier, EVP and COO; Bob Lewis, EVP, Corporate Development and Administration; and Kim Ulmer, SVP and CFO. Before we begin the call today, we would like to make it clear that certain statements made on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore, involve a number of uncertainties and risks, including, but not limited to, those described in the company's annual report on Form 10-K for 2024 and other filings with the Securities and Exchange Commission. Therefore, the actual results of operation or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements. In addition, commentary on today's call may contain references to certain non-GAAP financial metrics, including adjusted EBIT, adjusted EBITDA, free cash flow and adjusted net income per diluted share or adjusted EPS. A reconciliation of these metrics, which should not be considered substitutes for similar GAAP metrics can be found in today's press release under the non-GAAP financial information portion of our Investor Relations section of our website at silganholdings.com. With that, I'll turn it over to Adam. Adam Greenlee: Thank you, Alex, and we'd like to welcome everyone to Silgan's third quarter earnings call. Our third quarter results continue to show the resilience of our business model, the success of our strategic initiatives and the power of our unique portfolio of products as we delivered another quarter of strong financial performance. Our teams executed well during the quarter and adapted our operating plans to the changing market conditions we identified midyear, delivering on our strategic growth initiatives, including meaningful organic growth in high-value dispensing products and Metal Containers for pet food, achieving our cost reduction goals and working closely with our customers to meet their unique needs as we head into the end of the year and begin to plan for 2026. We delivered 10% adjusted EPS growth to the first 3 quarters of the year, returned over $120 million in cash to our shareholders through dividends and share repurchases, successfully integrated the Weener acquisition and are on track to reduce leverage near the midpoint of our range, just over 12 months after closing the acquisition. Our Dispensing and Specialty closures segment delivered another quarter of significant year-over-year growth and record adjusted EBIT in the third quarter with nearly 40% growth in dispensing product sales and continued success in the markets we serve. Our team successfully responded to the anticipated decline in sports drinks volumes following more subdued first half volumes for these products. We've completed the integration of Weener and have one additional contractual volume based on the combined power of our innovation teams, complementary portfolios of products and the new product technology this acquisition brings to our platform. Our long-term customer relationships continue to expand as the execution and focus of our teams remains a key competitive advantage in our markets to drive organic growth that outpaces our peers and the end markets we serve. Our core high-end fragrance and beauty business continues to win in the market, with 15% organic growth in fragrance volumes in the third quarter, and we are seeing incremental opportunities in health care and pharma end markets that should contribute more meaningfully in 2026. Our Metal Containers business delivered strong volume growth of 4% as expected, with a 10% increase in product for pet food market and a partial recovery in the fruit and vegetable markets as our team successfully navigated the impact of the bankruptcy of one of our large fruit and vegetable customers during the quarter and executed on our cost reduction plan. In custom containers, our teams continue to build on our commercial success as comparable volumes grew 4% after adjusting for the impact of lower margin business exited to achieve our cost savings initiatives, and continue to deliver exceptional operating performance as they execute on our cost reduction plans. As expected, our adjusted EBIT margin expanded 180 basis points, largely as a result of these cost reductions, and we're on track to have a record year of adjusted EBIT and adjusted EBITDA for custom containers. Turning to our expectations for the balance of 2025. We are adjusting our outlook to reflect higher interest expense and a higher tax rate and lower volumes in our Dispensing and Specialty closures and Custom Container segments for certain personal care and home care products in the fourth quarter. As 2025 has progressed, it has become clear that North American consumer trends have become more bifurcated with certain high-end products continuing to perform very well, while other products appear to have been impacted by a subset of the North American consumer that is stretched by both inflation and muted wage growth. As a result, some consumers are being more selective with their purchases and focusing their buy around essential, low-cost goods like shelf-stable food cans and delaying purchase decisions for products that may be more sensitive to promotional activity like hard surface cleaners or hand lotions. On the other hand, the high-end consumer continues to drive growth, for instance, in the fragrance and beauty markets where we are expecting another quarter of double-digit fragrance volume growth in the fourth quarter. As a result of these trends, demand for some of the products for which consumers are being more selective with their purchases, predominantly for the personal care and home care markets in our Dispensing and Specialty closures and Custom Container segments, while they are growing, they appear to have been below the levels our customers were anticipating throughout 2025. Our customers remain committed to growing volumes in these products and end markets over time, and we remain very well positioned to capture that growth. But given the growth trend in 2025 fell below expectations, our customers have shifted priorities in the fourth quarter to more closely align their inventories, exiting the year with the levels of demand they have experienced throughout 2025. As a result, we are now expecting Dispensing and Specialty closures and Custom Containers volumes to decline by a mid-single-digit percentage in the fourth quarter, and have proactively taken the step of reducing our own inventories in the fourth quarter as well. Outside of these specific products, we have seen signs of stabilization in the North American sports drink closures market as we enter the fourth quarter. It appears the challenges we saw in the market earlier this year have been contained in the second and third quarters as we expected. Our expectations for Metal Containers volume and profit are unchanged, and we're on track to grow volume by a mid-single-digit percentage in the fourth quarter and full year, driven primarily by mid- to high single-digit growth in pet food and higher fruit and vegetable pack volumes. Before I turn it over to Ken to discuss our financial results and outlook, I want to take a few minutes to provide some high-level commentary on our businesses. Our Dispensing and Specialty Closures segment has provided tremendous organic and inorganic growth for our company over the past decade. And while the growth rate of some of the products in our portfolio this year have fallen short of our and our customers' expectations, nothing has changed about the way we think about the growth in this segment. The dispensing products in this segment, which represent approximately 65% of sales and 75% of adjusted EBITDA, post the Weener acquisition are expected to grow by at least a mid-single-digit rate. And with above-average portfolio margin for these products should provide mix enhancement to this segment. Our growth in this segment is underpinned by a long pipeline of product innovation and customer portfolio additions, which we believe will drive above-market growth rates as our teams continue to compete and win in the marketplace. The food and beverage products in this segment have historically shown modest growth driven by new customer acquisitions or product innovations from our existing and new customers. While the beverage innovation in the hot fill category over the past few years has been somewhat below historical levels, that we would typically see in the segment, we still believe the category is a stable one for Silgan as we continue to be well positioned with the major players in this category as a key strategic partner. From an inorganic perspective, we continue to see significant opportunities to expand our Dispensing and Specialty Closures business in new and existing end markets through acquisitions with similar growth and financial profiles to the businesses we have acquired over the past 8 years with mid-20s percentage EBITDA margins and mid-single-digit organic growth. Our Metal Container segment has been the benchmark of the Silgan portfolio since our inception. And within our portfolio generates amongst the highest returns of any of our businesses as a result of the relatively stable nature of overall demand over time. The resilience of the profit profile through all economic circumstances due to our contractual cost pass-throughs and relatively low cash requirements to operate this customer partnership model that results in strong free cash flow generation. Over time, we have significantly improved the profitability of this business through cost reductions and organic growth and currently see opportunity for both continued growth opportunities in our pet food markets and further cost reductions in this business. While 2024 and 2025 have presented some unique challenges with regard to one customer's specific financial situation, we believe it is likely that our customers' business will emerge stronger than it has been over the past several years once this process is complete. However, should our volumes remain at the current levels for this customer, we see a potential cost reduction opportunity of at least $10 million over the next couple of years as we align capacity with demand. Our customer partnerships remain a key differentiator for Silgan in the marketplace as these long-term arrangements provide tremendous stability to the business as well as a significant growth opportunity as clearly demonstrated in the pet food market. As a reminder, approximately 90% of our Metal Containers business is under long-term contracts, which typically range from 5 to 10 years in length. And excluding the volumes from the customer that is currently undergoing a reorganization, approximately 90% of our contractual volume is with large blue-chip customers, nearly all of whom are investment-grade rated, publicly-traded companies under contracts that extend through the next several years. We continue to believe this unique business creates exceptional value for our shareholders, driven by its stable earnings, low capital requirements and strong free cash flow generation, superior returns and growth. In fact, after continuing to see strong growth in our differentiated aluminum products for the pet food segment in 2024 and 2025, we anticipate investing in additional capacity in 2026 to support continued contractual volume growth with our long-term partners. Our Custom Containers business has demonstrated the value we provide in the small and medium run length market, delivering consistently strong operating performance and a best-in-class service model and is on track to deliver another year of record profit. As we look to the future for this business, we see significant opportunities to expand as our service model continues to resonate in the markets we serve. We have long said that this market, which is the most fragmented market we participate in, would benefit from consolidation. And with some of that consolidation having taken place already, we believe we are well positioned as a differentiated value-added player in this market. While the growth in this business can be somewhat episodic and lumpy from year-to-year, the long-term trajectory and the growth of this business is clear. We remain focused on the opportunities that lay ahead for the company and are confident in our ability to execute on our plan as the structural changes and evolution in our portfolio have positioned us to drive growth in our business in the near term and long term. While some of the market developments in 2025 have not been as predictable as in the past, we remain excited with the incremental opportunities that we have -- that have materialized during the year, and we are focused on delivering strong free cash flow and achieving our deleveraging objectives into the year-end. As we begin to look into next year, we continue to see tailwinds in our business and anticipate higher earnings and free cash flow in 2026. With that, Kim will take you through the financials for the quarter and our estimates for the fourth quarter and full year of 2025. Kimberly Ulmer: Thank you, Adam. As Adam highlighted, we reported another quarter of strong financial results in the third quarter that were consistent with our expectations with continued success in our Dispensing business and the execution of our cost reduction plan more than offsetting headwinds in sports drinks volumes and Metal Containers price cost in the quarter. Net sales of $2 billion increased 15% from the prior year period, driven primarily by growth in dispensing products, including the addition of the Weener business and the contractual pass-through of higher raw material and other manufacturing costs. Total adjusted EBIT for the quarter of $221 million increased by 8% on a year-over-year basis, driven by strong growth in dispensing products, including from the acquisition of Weener, improved price/cost in Custom Containers, higher volumes in Metal Containers and the benefits of our cost reduction efforts, which were partially offset by expected lower volumes for sports drinks in North America and unfavorable price/cost, including mix in Metal Containers. Adjusted EPS of $1.22 was slightly above the prior year quarter as the improvement in adjusted EBIT was mostly offset by higher interest expense and a higher tax rates. Turning to our segments. Third quarter sales in our Dispensing and Specialty Closures segment increased 23% versus the prior year period, primarily as a result of the increase in sales from Weener and higher volume for the high-value dispensing products. As anticipated, volumes for Food and Beverage closures declined 5% during the quarter, driven by a double-digit decline in North American hot fill products, predominantly for sports drinks. Record third quarter 2025 Dispensing and Specialty Closures adjusted EBIT increased $18 million or 19% versus the prior year period as a result of the contribution from Weener and higher organic volumes of high-value dispensing products. In our Metal Container segment, sales increased 13% versus the prior year period as a result of favorable price/mix due to the contractual pass-through of higher raw material and other costs, higher unit volumes of 4% and a 1% benefit from foreign currency translation. Volume growth during the quarter was a result of 10% growth in products for pet food markets, which represents approximately half of our unit volumes in Metal Containers, and higher volumes of fruit and vegetable markets, which was partially offset by lower volumes for soup markets due to the timing of orders in 2025. Metal Container adjusted EBIT decreased slightly as a result of less favorable price cost, including mix in the current year quarter due to less favorable production efficiencies associated with inventory management in the quarter. In custom containers, sales increased 1% compared to the prior year quarter, driven by improved price mix in the current year quarter. Unit volumes were comparable to the prior year, including the impact of lower margin business exited as a result of a planned footprint optimization to achieve the previously announced cost reduction volumes. Excluding the lower margin business exited to achieve cost reduction plans, volumes increased 4%. Custom Containers adjusted EBIT increased 15% as compared to the third quarter of 2024 due to favorable price/cost, including mix, primarily as a result of cost savings initiatives. Turning to our outlook for the fourth quarter of 2025. We are providing an estimate of adjusted earnings in the range of $0.62 to $0.72 per diluted share. Fourth quarter earnings are expected to be negatively impacted by the reduction in volumes for the North American personal care and home care markets, as Adam discussed, and the related impact of under-absorbed costs as we take extended downtime and reduce our inventory. The total impact of lower volumes, extended downtime and associated inventory reductions in the fourth quarter is expected to be a $25 million headwind in the quarter versus our prior estimates. In addition, fourth quarter earnings are expected to be negatively impacted by higher interest expense related to the recent Eurobond issuance as well as a higher-than-expected tax rate due to the geographical mix of profits. Dispensing and Specialty closures and Custom Containers fourth quarter volumes are expected to decline by a mid-single-digit percentage, while Metal Container volumes are expected to grow by a mid-single-digit percentage, driven by continued strong growth in pet food and higher fruit and vegetable volumes. From a segment perspective, we now expect a high single-digit percentage increase in total adjusted EBIT in 2025, driven primarily by an approximately 15% increase in Dispensing and Specialty closures adjusted EBIT with Custom Containers adjusted EBIT of approximately $10 million year-over-year. Our expectations for Metal Containers remain unchanged, and we continue to expect approximately $10 million of year-over-year improvement in adjusted EBIT in the segment for the year. Based on our current earnings outlook for 2025, we are maintaining our estimate of free cash flow of approximately $430 million, a 10% increase from the prior year as a result of earnings growth and working capital improvement. We continue to expect capital expenditures of approximately $300 million. That concludes our prepared comments, and we'll open the call for questions. Anna, would you kindly provide the directions for our question-and-answer session? Operator: [Operator Instructions] We'll take our first question from Ghansham Panjabi with Baird. Ghansham Panjabi: Adam, just zooming a little bit and kind of looking back over the last 3 years when you had a previous sort of inventory destocking cycle, et cetera. This seems like the second iteration almost a double dip, if you will, in terms of volume improvement and then some level of decline, et cetera. What do you sort of attribute this towards this go run and how does this go run compared to the first iteration back in 2022 and 2023? Adam Greenlee: I think it's a really good question because I think there are some very stark differences between what is occurring in the fourth quarter now versus kind of what we're dealing with in the very broad destocking post pandemic cycle that we dealt with in 2023. Maybe I'll start with 2023 and just talk about it that was a broad-based the cycle post-pandemic that really affected all of our products and pretty well described, I think, throughout the portfolio. And then I think about what's going on in 2025, and I'll just start with last quarter and say, we did have a large customer bankruptcy. Unfortunately, that had a negative impact to our '25 earnings. We had very poor weather that affected the sports drink category. We've already talked about those, but those are very unique one-off instances that we think affected 2 of our key markets and fruit and veg, fresh fac and then our sports drinks category. And really, I think the difference now is the kind of the bifurcation of consumer activity, right? So we've got our high-value, high-end products continue to do well that are targeted at kind of a higher-income consumer. I think the lower to mid tier of income consumer is really struggling. I mentioned earlier that between inflation and maybe some muted wage growth they're trying to stretch dollars at point of purchase. And we're seeing it. Gansham, I think we've talked for many, many years that the food can business is a bit of an indicator of the broader economy. We are seeing strength in food cans as those consumers that are making that purchase point and -- decision and trying to stretch the dollars moving into categories like shelf-stable cans for nutrition. So it's pretty consistent with what we've seen in the past. And then likewise, we see in some products, we've specifically called out kind of hard surface cleaners and hand soaps and lotions and some of the other products that move into our personal care categories, those are nondiscretionary, but in fairness, those can be stretched, right? You can move that purchase from one month to another, whereas when you're feeding your family and you're stretching those dollars, that purchase point decision becomes pretty clear. And again, we're seeing it. We've also, I think, collectively, the market, in general, we've taught consumers to buy on promotion. And if there's not promotional activity that is moving volume or is very focused on moving volume. We have seen consumers be reticent to make that purchase and purchase decision. And we're seeing effective promotional activities drive volume, much like we've seen to some degree in our wet pet food category. Ghansham Panjabi: Okay. That's helpful. And then just related question. So within the last 3 months, last -- 3 months ago, you called out weakness in food and beverage closures in North America, now it's Personal Care and Home Care. Do you see that broadening to perhaps even pet food? I mean, is that a risk as you kind of think about how the sequencing will work through the early part of -- into 2026? Adam Greenlee: Yes. So to answer your question directly, no, we don't. And we just delivered 10% growth in Q3 in our Pet Foods segment we're expecting high single-digit growth in the fourth quarter, which we communicated on the last call as well. So Pet Foods is playing out exactly as we thought it would. For the year, we're looking at mid-single-digit growth in the Containers business, the Metal Containers business. So really, everything is playing out exactly as we expected. I'll go back to your point on food and beverage. Again, we were very specific that, that conversation, while we talked about food and beverage, it was very specific to sports drinks, and related to the really bad weather and wet weather that really limited the drink occasions for those products in the early part of the summer, and our customers responded to that with further inventory reductions because they were not getting the sell-through because the drink occasions were limited. They also hold back their promotional dollars and allocated them to other categories. So I just think it's different and I think it's much different than it was in '23 back to your earlier question, and we think it's isolated to these specific instances. So it's back to -- it's the bifurcation of the consumer and the consumer that's stretching the dollar is making those purchase point decisions and focus on low-cost nutrition at this point. Operator: We'll now take our next question from George Staphos with Bank of America. George Staphos: I guess the first question I had, even though it's not surprising given the ultimate release today, Adam, why did DSC miss on what was -- I think at one point in time, you said mid- to high 20s revenue growth for the quarter. I didn't hear kind of a specific comment there. I don't think I did, and I had a couple of follow-ons in terms of what's going on in the business and your vantage point? Adam Greenlee: Sure. Yes, you're right, George. So as we guided kind of mid- to high 20s and delivered something like 22%, 23%, it was really the late September change that we were seeing some pressure in the Personal Care and Home Care market. So really, the change started to really show in our numbers kind of late in the month of September. And as we really pressed hard for additional forecast clarity and visibility with our customers, that's what led to the ultimate reduction here for Q4 as well. George Staphos: Okay. So look, just on that point, it's kind of a minor point. But since you already were seeing signs of this in late September, did you ever think about -- what were your considerations in terms of maybe just doing a guidance reduction or pre-announcement? Recognizing the third quarter was coming in, in line, the fourth quarter was going to look a lot different versus what was implied for the fourth quarter in your prior guidance. Adam Greenlee: Yes. So I mean, certainly some conversation around that, George, but maybe just to reiterate what you said, our third quarter came in exactly with our expectations. And in fairness, we were trending ahead of the third quarter prior to this conversation regarding personal care and home care products. It takes a little bit of time to work with our customers to work all the way through their forecast. Obviously, as I would relay the information here, George, we're really good a week out. We're great a week out. We're really good a month out. And as we get kind of further and further out with our customers, it takes more time for them to aggregate their forecast information and for us to then react to it. So while we did see volumes starting to soften in late September, we didn't have forecast until the kind of first -- probably late first week, second week of October from our customers, and then we're putting our plans together and did not feel it was within the timeline to talk about it prior to this call. George Staphos: Okay. That's fair. It's just given the volatility that we've seen in equities over the last number of quarters with variation from performance and guidance. That's kind of what drives the question. We understand. So if we look at the pretax amount of $25 million, and that's what we were getting and very, very simplistically apply the mid-single digit to the revenue in DSC and Custom Containers, I wind up with a relatively high incremental margin. Now I know you're saying there's decrementals from overhead absorption and so on. But can you give us a bit more color in terms of how much is the absorption versus the impact from earnings? And how does that split across the segments? And is it pretty even on the mid-single-digit decline, I think you said for both segments? Adam Greenlee: Yes. So I think maybe to carve into that, George. So the $25 million, I think you can think about $20 million in DSC and $5 million in Custom Containers. And then -- this will apply to both businesses because we did take proactive actions to mitigate kind of the impact here and make sure we secured our free cash flow to obtain our deleveraging goals for the year. So of the $25 million, I'd say it's probably half of that is going to be related to volume and half of it is going to be related to kind of us taking cost out and reducing our own inventories in response to the customer forecast change. So it's kind of a 50-50. And I think that the volume is not a permanent reduction by any stretch, and we'll expect to recover that in future periods. The lost inventory -- or the impact of the inventory is kind of a onetime gain that we likely aren't going to recover. Robert Lewis: Okay. My last one, I'll turn it over. So if we take the midpoint of your guidance for this year to $3.71, and so that means you're trading right now roughly at less than 10x trailing 12 months. And while I know you're not guiding on '26, we'll take it if you have it, but we assume we'll have to wait until February for that. We assume any growth at all, you're at 9x, and that's the lowest valuation Silgan's been at, I think, in 20 years, even with your Dispensing acquisitions. So clearly, it's a very skeptical market out there relative to Silgan, recognize the market has been volatile period. So what mile markers are you going to tell investors here and now and then analysts that we should hold you to in terms of fourth quarter and 1Q to mark your progress and to gain -- it's kind of to Ghansham's question as well, gain more faith in the outlook for the next year. Adam Greenlee: Sure. Thanks, George. Look, performance matters, and we'll take full ownership and accountability of the performance of the business. So you're right, we're not providing '26 outlook yet or Q1 guidance. So if you're looking for a marker, I think it's very clear that we need to deliver the fourth quarter as we've discussed here already on the call and you saw in the press release. So I think holding us accountable and we're holding ourselves accountable for delivering the free cash flow, deleveraging, as we've talked about. And again, unfortunately, it's not the growth that we anticipated for 2025, but delivering a year of growth in 2025, while setting ourselves up for growth, not only in EPS for '26, but also in free cash flow. Robert Lewis: So 1Q, should we be looking at low to mid-single-digit growth across the platform? That's what I was kind of getting at. Thanks guys, sorry about that, because I know fourth quarter is what it is, but... Adam Greenlee: Yes. Thanks, George. We're just not going to comment on outlook for Q1 at this point. Operator: We'll take our next question from Matt Roberts with Raymond James. Matthew Roberts: Adam, I was wondering in Dispense, if you could help parse that down a bit more. First, could you isolate the revenue mix exposure to just those personal and home care products and how much those markets are expected to be down? Fragrance that continues to shine. Is that just general demand resilience? Or how much of that 15% growth was really innovation ahead of holiday releases? And then lastly, within that segment, you did say health care and pharma could contribute more meaningfully in '26. How much growth do you think that could bring in 2026? Adam Greenlee: Got it. So I'll do the last one quickly for you, Matt. The health care and pharma for '26, we'll be talking about that on our next call when we're providing guidance for '26. So we've got contractual wins that will impact '26 favorably, and we'll get into that in a little more detail in the future period. Back to your beginning of the question, for personal care and home care products, again, how about this from a volume perspective, we were guiding to kind of mid-single-digit growth for Q4 and now expect a mid-single-digit decline in volumes for Q4 versus prior year. So that's kind of the magnitude. It's sort of an average margin for the portfolio. And then you rightly highlighted the fragrance business. Again, as we said on the last call, we were expecting double-digit growth in Q3. We delivered that. We're expecting double-digit growth in Q4 as well and are positioned for nice growth in '26. And the reasons why I think you touched on a couple of them. One, we continue to win a disproportionate amount of the new product launches in the space where we compete and win every single day, and that's in the premium end of the fragrance and beauty market. So a lot of product innovation from our teams, and that's winning and being rewarded in the marketplace. And then as our customers continue to innovate, we are being chosen as the partner of choice to help them get their products to market. And that's been a successful story really since we've been probably all the way back to the Albéa acquisition in 2020, no 2021, excuse me. And that is set up for continued growth going forward. And I think as we've talked, Matt, once you're kind of -- it's not pharma, it's not health care, but it's pretty darn close. Once you're spec-ed in, you have a long runway with those product launches that occur. And so we benefit in the long term, but again, continue to win a disproportionate amount of the new product launches being made by customers as well. Robert Lewis: Matt, just one point of clarification. The margins on these products in Personal Care Home Care. Their average for dispensing, which is obviously higher for the overall portfolio of DSC. So there's mix involved as well. Matthew Roberts: That makes sense. And then as a follow-up on Weener. So you've talked about for 12 months now. Could you break out what the 10 or 12-month revenue and EBITDA contribution was from that business? Any update on the $20 million in synergies achieved to date? And it sounded like Personal and Home Care was isolated to North America. Is that really in legacy products or any impact on the Weener portfolio given it has, I think, about 1/3 U.S. exposure. Adam Greenlee: Yes, great question. And really, the Personal Care and Home Care impact within the legacy business. So that's the traditional Silgan side of Dispensing Closures business. So Weener, Matt, honestly, it's fully integrated. It's nearly impossible now. Yes, we had a standalone P&L, but we've made investments into their facilities. So it would gone into legacy Silgan facilities. So it really is difficult to try to break anything out there. What I'll say is that the product portfolio that came over with the acquisition continues to perform well. And right in line, if not slightly ahead of expectations in many of the cases. And the synergies, yes, so very detailed synergy estimates that we come up, we do bottoms up synergies. The phasing is very specific. So there are no surprises. So we delivered exactly what we expected from a synergy standpoint and really have another 6-ish months to deliver the remaining synergies. So right on track. I think it's $20 million of the $25 million have been delivered and we're in good shape to deliver the balance. Operator: Our next question will come from Gabe Hajde with Wells Fargo Securities. Gabe Hajde: Adam, I'm trying to reconcile, I think in your comments, you said you expect 2026 free cash flow to be up from 2025. Appreciating that you guys. It sounds like you're obviously whittling down, I think you said some of your own inventory this year. And historically speaking, we've kind of seen an inverse relationship with production EBITDA and cash flow, right? So if you're ramping up earnings, typically cash flow is going to go the opposite direction and vice versa. So -- and unless the business is in wind down or something like that, I'm curious how you're thinking about or what the levers are to grow cash flow in '26 to be in '25. Adam Greenlee: Yes. And I don't disagree with what you said, Gabe . I think for us, if we're looking at '26 it's continued improvement in working capital and incremental programs that will execute next year, frankly, just as we have been doing for the last several years. So a, there's always room to improve, but we've got specific working capital initiatives that we'll be executing in '26. Gabe Hajde: Okay. And then I guess maybe to George's point on communications as it relates to expectations and things like that. Outside of giving us a view about earnings for next year or guidance on volumes. Is there anything that you can think of to do that would instill some confidence and conviction in sort of the strategy? Because I do believe that DSC should be a faster growing, higher-margin segment. You guys have spent a lot of time and effort over the past 3 to 5 years to reposition the business. So I'm just curious from your perspective as there are other considerations to infill some confidence. Adam Greenlee: Sure, Gabe. Look, it's -- I think performance matters, delivery upon expectations matters. I think if we take a half a step back and and talk about our businesses. dispensing of specialty closures is still growing and is delivering tremendous organic growth and inorganic opportunities for the business. I think it's some of the legacy applications have been a bit of a challenge in 2025 specifically. Metal Containers has done exactly what we expected it to for the year, and we're going to have another record year of performance in our Custom Container segment. So I think just how we communicate that to the market. And we talked, I think, even on the last call about as we think about giving guidance for 2026, it's likely that we're going to be a little more conservative as far as our outlook of what we'll be delivering for the business to try to take into account more of the unknown things like the customer bankruptcy and whether that impacted a specific product. Gabe Hajde: Okay. Maybe anything on the capital redeployment side? I know leverage is a consideration, but... Adam Greenlee: Yes. Look, capital allocation is a focus for us, certainly here in our corporate office all the time. And so we did buy back about $60 million worth of of shares in the third quarter. Clearly, we thought there was a dislocation in the market, and we were opportunistic with that. We continue to evaluate our capital allocation all the time. And again, I'll just say we thought there was a dislocation in Q3, and we were opportunistic with that. Unknown Executive: Yes, Gabe, I think what's not said in that is that our leverage point is kind of stripping back towards the midpoint of the range after we fully integrated the Weener acquisition. So what that means is that we're well positioned to continue looking for M&A opportunities to deploy capital and continue to grow the business. Operator: We'll take our next question from Mike Roxland with Truist Securities. Michael Roxland: Adam, can you tell us why you're seeing North America hot fill beverage is a good market to be in. Obviously, stating some issues this year. It seems like it only started to recover from a volume perspective, last year from destocking. And at the same time, one of your peers is looking to exit. So I would love to get just any color you have about why you think this is a business that it makes sense to be in. Adam Greenlee: Yes. It's always been a really good business for Silgan, very stable I think if you go back a decade, growth rates were a little bit more accelerated than we've gotten to today, but it is still a growing market. And we think that we're very well positioned with the largest players in that market. When we think about sports drinks specifically, it's really not a commodity beverage. It's a higher volume beverage in some of the specialty applications that we deal with. But nothing close to kind of the CSD water market from a volume standpoint. So those packages are differentiated. The beverages themselves are differentiated and there's a lot of technology that goes into the packaging around those products. So the closures that we provide to the North American beverage market, particularly for these hostile beverages, is a technologically advanced solution versus some of the other more commoditized products. And we believe we get value for providing the silicon service model along with really technologically advanced closure systems for the beverage market. So we've always thought it's a good market, Mike, and it's provided a really stable growth overtime and none of us had anticipated the weather challenge that the sports drinks category was going faced earlier in the year. We think it's isolated to the year. For the most part, I would tell you, volume played out in the second and third quarter, ultimately, as we expected, fourth quarter volumes have stabilized and we think that the inventory corrections took place in Q2 and Q2 and Q3 as we had discussed previously. Michael Roxland: Got it. So if I heard you correctly or came correctly, there was a double-digit decline in volumes of hostile for sports drinks in 3Q. So that was line with... Adam Greenlee: Yes. Right at 10% food and beverage and DSC was down, call it, 5%, and the hot fill beverage of course and sports drinks was down 10%, but that was right in line with where we expected it to be. Michael Roxland: Got you. Okay. And then just one quick follow-up. In terms of Metal Containers, that -- any update on the cost of growing through bankruptcy volumes came in better than we were expecting earlier in the quarter. See you guys for your significant increase in pet food. But just wondering where that Metals Container bankruptcy stands and whether the $10 million EBIT impact, you mentioned last quarter is still relevant for 2H. And do you have any sense of what that impact could be for 2026? Adam Greenlee: Yes. So metal containers had a really good third quarter, right? Volume came in right as expected, not only for the pet food market, as you mentioned, Mike, but also before the customers going to the bankruptcy. So really, we don't have an update. We can tell you timing would indicate at this point that there should be some indication of resolution to the bankruptcy proceeding, call it, around year-end. So we think as we go into '26, we'll have much greater clarity, but just want to make it really clear, that customer did exactly what they said they were going to do in Q3 and volumes were right in line with our expectations. There's a little bit of rollover into Q4 as some of the pack was a little bit later than the September date for Q3 that we typically talk about. So I think everything is going essentially as planned. I think the thing that we want to make really clear is, we think we're probably at a low point with volume for that customer, given what happened in '24 and in '25. There could be a potential where a new owner wants to grow the business and put put support behind that brand, that would be a great thing because we'll be able to utilize the capacity that essentially we put on hold for this customer in a requirement-based contract. If that doesn't happen, if we just maintain the volume that we have right now. Again, I think as I said earlier today, we're going to look to take out costs. And I think that's kind of at least in the $10 million range as I sit here now. It will all be in 2026, but that's kind of the magnitude that we see at the current volume level. Operator: Our next question will come from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: You have a lower outlook for the fourth quarter, but your free cash flow for the year is unchanged. Why is that or what are the compensatory mechanisms to generate the same amount of free cash flow this year? Adam Greenlee: Yes. So Jeff, we -- obviously, with the reduction from our customers, we look to drive cost out of our system in Q4. And as we take additional downtime, obviously, that's going to allow for us to reduce our inventory as well. So really, a couple of components of working capital improvements, but it's really driven by the inventory reductions that we're taking, I'll just say proactively as a response to our customers, reducing demand in Q4. Jeffrey Zekauskas: Propylene values have really come down. And I would think that this might be an opportunity in your Dispensing to build inventories. Do the polypropylene and propylene changes make a difference to that business? Adam Greenlee: It does, and I think you got it exactly right. It is a business that has the most impact, and I'll come back to that in a second. Our Custom Containers business is very tight on the pass-through mechanisms. And there isn't much benefit or detriment to moves in resin. I'd say the same thing about our food and beverage closures. When you get to the Dispensing Systems business, while we've made improvements in reducing the lag, they still exist. So we are a little more subject to kind of a quarterly lag, maybe a little bit longer in some cases. And so we kind of have a benefit or detriment depending upon how resin is moving. This most recent change is a pretty significant one. And we have included a couple of hundred thousand of upside in our forecast for the most recent change that just happened at maybe late last week in the resin market. So I think you've got it right. That's the business that gets impacted and polypropylene is their largest component of buy in that business. Operator: Our next question will come from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: Apologies if this was asked earlier, but I guess I just wanted to ask about the last few quarters we've had a few discrete items show up and they were -- I guess, did you contemplate potentially preannouncing those items at all? And maybe that would help kind of frame that they are kind of onetime in nature. Did you contemplate that this time around as well or no? Adam Greenlee: I don't -- we talked about it a little bit earlier, Arun. And I think the message I was trying to convey was really, while we did see some softening in a couple of the markets, Personal Care and Home Care products, in Dispensing and Specialty closures and Custom Containers, very late in September. It wasn't until we got all the way through the October, early October forecast cycle. So this was a second -- late first week, early second week of October, that we were running through those numbers and then had to do our kind of reaction and what we were going to proactively do it Silicon to respond to the reduced demand requirements from our customers in Q4. So I just -- I would say Q3, we delivered exactly what we said we were going to do. And that was a very well known to us as we exited September and nothing to talk about there. And the Q4 forecasting process was pretty dynamic given the magnitude of the change and working with our customers and internally to Silicon to make sure we got that right. Arun Viswanathan: Okay. And then I guess on a related -- or not necessarily related, but along the lines of clarifying what's in each business, is there a way to kind of segment out maybe within DSC how much of that business you would consider as highly cyclical or prone to some more of this volatility versus the portion that is maybe higher growth and less cyclical I think that the sports drinks side, while you highlighted a number of positives also does exhibit some of that cyclicality, whereas fragrance and some other markets, maybe more structural growers. So could you help kind of frame that maybe in the buckets for DSC and maybe even Metal Container, I imagine is not so much included there because it's a little bit more mature. But yes, maybe for DSC, that would be helpful. Adam Greenlee: Yes. I mean, Arun, here's how we think about our Dispensing and Specialty closure segment. It's basically all of it are consumer staple products. So we really don't view any of that business as being cyclical in nature. Yes, we've had a couple of onetime instances here like really bad weather that affected the sports drinks category. And I think the reality is it hasn't been clear yet, I'll just try to say it one more time. This inventory correction is our customers' growth, they are growing. They did not grow in 2025 as much as they had anticipated. So this Q4 correction is kind of moving from a mid- to high single-digit growth expectation for those categories, back to a mid-single-digit growth or maybe a low single-digit growth in certain products. So it's kind of -- it's fixing, running through the year with higher expectations for growth. They're still growing. So that's what we've been working through with our customers. So I really don't think that our products are cyclical in nature. I agree with your point. I think how I would probably try to bucket that, I'm looking around the table to my team and say, we think we have a bifurcated consumer right now, and that's what's driving this activity. The higher-end consumer is doing exceptionally well and is buying products and driving growth for our company. The mid- to lower-end consumer is really thinking hard about where they're spending their dollars and how they're stretching those dollars. We get the benefit to your very point in our Metal Containers business because nutrition and low-cost nutrition is a really important item for all consumers, particularly for that portion of the consumer portfolio. So I mean we have products in Personal Care. We do Home Care products like hard surface cleaners. We think those products continue to get it purchased. It's just maybe they're put to purchased a month later. We'll see what happens with 2026 and tax initiatives from the U.S. administration. But I do think no caps on tips. I do think no caps on over time is a very clear response trying to provide some support to that lower and mid-tier consumer that is trying to stretch dollars today. Arun Viswanathan: Okay. And then just lastly, on the free cash flow. So the $430 million sounds very respectable in light of what's going on. And I know that you're taking an inventory hit right now in Q4. Just 2 things. So would you say that the inventory reduction that you're proactively pursuing will address all of that and maybe it lingers a little bit into Q1, but does get you a substantial part of the way there. And then given that you will be generating that level of free cash flow, could you potentially more aggressively pursue share buyback, just given what's going on with the stock here today and more recently? Adam Greenlee: Yes. So we do think the inventory reduction, both for our customers and for us is going to be limited to Q4. And to your point of Arun, that part of us being able to deliver the $430 million of free cash flow. I think as we sit here today, again, we talked a little bit about capital deployment and capital allocation. I'll just repeat what I said earlier that we repurchased $60 million of shares in the third quarter because we thought the market was dislocated. And I think we have the ability to consider capital allocation in any of the tools that we have in our toolkit. And I think as Bob said, very clearly, we're getting back to the midpoint of our leverage ratio by the end of the year. So we've got flexibility, whether it be it for M&A activity, whether it be for share recurs activity, we aren't announcing anything by any stretch today, but I think all things are on the table as we move forward. And focusing on delivering value to our shareholders. Operator: We'll now take our next question from Anthony Pettinari with Citi. Anthony Pettinari: Following up on Arun's question, is it possible to talk a little bit more about what your Dispensing and Specialty closures customers are saying about the weakness in Personal Care and Home Care. I mean are they expecting volume growth in '26? Or are they changing product mix or promotions or strategies to grow volumes. Just wondering how they're -- kind of what they're sharing about maybe volume outlook? And do they see this as sort of a speed bump or an adjustment or something that could be kind of longer duration. Adam Greenlee: Yes. So I think just to cut right to the chase, Anthony. It is an adjustment to where we have been, right? So those markets are -- and those customers are delivering growth in 2025. Just want to try to be really clear about that. it just is going from a mid- to high single-digit expectation to a low to mid-single-digit expectation. And that adjustment for the year is occurring all in Q4. So these aren't growing markets. They are growing categories, they are growing products. And the expectation is very clearly that they will grow in 2026 as well. And I think what I would say is from a conservative standpoint, I would say you would think about them growing in the low to mid-single digits in 2026 versus the original expectation for '25 of mid to high. So that's probably adjustment that we're thinking about as we turn to '26 even though we're not giving guidance yet. That's how we're thinking about these specific markets. Anthony Pettinari: Okay. Okay. That's very helpful. And then just switching gears to Metal Containers. Is there any dialogue with Metal Containers customers on rising metal costs? Or are you seeing any kind of like push out of buying into '26 potentially? Is anyone waiting for tariffs maybe to get pulled back or some kind of move in metal. I'm just curious if you've seen any kind of push from 3Q to 4Q or maybe 4Q into '26 on Metal Containers. Adam Greenlee: Yes. So as I think you know, Anthony, the metal component is the largest cost component of a metal food can. So it is literally a daily conversation with our customers and a really important one. So maybe to get to the end of the question, so no pushout from Q3 to Q4 for us and our franchise customer model, they pay the same value for the can in January that they're going to pay in November. So really, we don't see that within a year kind of product moving between quarters. I think maybe there's 2 things to talk about as we think about turning the calendar to '26, yes, I think we're going to have maybe -- hopefully, we'll see more clarity on what happens from the tariff perspective and kind of the rulings that are expected between now and the end of the year from the court system. That is probably -- it would drive some activity, I would think if the courts overturn the tariffs. I think the other component is, right now, we're looking at sizable increases and the raw materials on the steel side of the Metal Containers business for '26. So in fairness, we're actually having prebuying conversations with some customers ahead of inflation that we're all expecting for 2026 outside of whatever court ruling happened between now and then. So that's more of the conversation versus trying to push orders out into '26 at this point. Operator: We'll now take a question from Daniel Rizzo with Jefferies. Daniel Rizzo: So back in -- you mentioned that these are legacy issues with the destocking. I was wondering if back in 2008, 2009, the Great Recession, we saw something similar and how long it lasted during that kind of downturn? Adam Greenlee: 2008, 2009, what I do remember about that and your testing with them, so that was quite a few years ago. Metal Containers volume was accelerating into the great recession, right? So that's sort of what I was mentioning earlier that for a very long time at Silgan, Metal Containers was an indicator of economic activity because you would see as times got tougher, metal food cans were the beneficiary of that. And we're seeing that to some degree now. So I'm trying to think of how the other categories performed then. I just would say, as consumer stretch dollars without knowing, specifically, Dan, I would assume that it was a very similar kind of phenomenon that impacted our Custom Container segment at that time and probably our beverage segment of our closures business prior to dispensing joining Silgan in 2017. Daniel Rizzo: And then conversely, if credit is eased and the consumer is seeing some relief, how long that lets kind of flows through to your customers than to you guys? Is it relatively quick? Or does it take a couple of quarters? Or how should we think about that if things were to improve for the consumer because of that? Adam Greenlee: Well I missed the first part of your question. So.. Daniel Rizzo: If credit eases and consumers... Adam Greenlee: Yes. I do think that, that -- again, you're talking about the consumer that's making a purchase point decision of feeding their family or buying that hard surface cleaner in a given month. So I think you take a little bit of that pressure off. And ultimately, that consumer because these are not cyclical products, they're consumer staples. I think they buy both products, and that's what we've seen for a very long time. So if you provide that relief to those consumers. I do think purchase patterns return more to normal as we've seen for many years in this business. Daniel Rizzo: And I'm just curious about is there time frame that we should about, how fast it flows through to you specifically? Adam Greenlee: I think that will flow through pretty quickly. If the consumer is -- has relief and is less worried about stretching that dollar. I think those decisions get made at the purchase point right then it's pretty quick. Operator: We will now take a follow-up from George Staphos with Bank of America. George Staphos: I'll just keep it to one since it's late. So as you look out to next year, I know you're not guiding per se, but you did say you do expect low to mid-single-digit growth in Dispensing and Specialty. Metal should do at least as well as this year, assuming you have a new owner of the affected customer, which would mean that volumes are at least flat. I forget exactly what you said as custom, but what would be the reasons why you wouldn't have growth in 2026, in volumes and in earnings versus '25, recognizing you're not giving formal guidance here. What is the biggest at this juncture concern you have? Would it be uncertainty in tariffs, although in some ways, that could actually help you? What would it be? And should we at least expect some growth next year? Adam Greenlee: I think as we're putting the building blocks together for '26 and as you alluded to, and we said early, we're not done yet. But you're right. I think you've got some of the positives there. I think some of the headwinds that we're going to face is, it's increased interest expense. Obviously, we've got the new bonds, we'll have a full year of the new 4.25% volumes that we just issued in Europe. Our investment grade bonds, the 1.4% that come due in April. So we'll probably be very opportunistic just as we were in 2025 as we think about refinancing those bonds, but 1.4% even if we're utilizing our revolver. We're going to have negative arbitrage on that rate as well. So interest expense will be a headwind, and we're going through the development of exactly what that headwind looks like. I mean tax will continue to be a slightly different profile for us going forward. With the Weener acquisition, we've got quite a bit more income outside of the United States. And the U.S. is our lowest cost tax jurisdiction for many, many years. That was -- will continue to be our largest tax jurisdiction. But we have more growth outside of the U.S. at higher tax rates. So I think it's going to probably be north of 25% without giving any guidance yet, and we'll see where we wind up as we get through the business planning process. And I think you had the rest of the components, right? I'll go back to what I said at the beginning of the call. Nothing's changed as far as how we as a company think about the growth profile of our dispensing, especially closure to business, nothing has changed about how we think about the growth profile of our Metal Containers business. And nothing has changed about how we think about the growth profile of our Custom Containers business. We have very unique instruments or attributes this year that are impacting our performance. And unfortunately, we're dealing with that as we speak. But we don't anticipate those repeating in 2026. Operator: And that does conclude our question-and-answer session for today. I'd like to turn the conference back over to Mr. Adam Greenlee for any additional or closing comments. Adam Greenlee: Thank you, Anna. We appreciate everyone's interest in the company, and we look forward to sharing our fourth quarter and full year 2025 results in January. Operator: And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.
Operator: Good day, and welcome to the OneSpaWorld Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead. Allison Malkin: Thank you. Good morning, and welcome to OneSpaWorld's Third Quarter 2025 Earnings Call and Webcast. Before we begin, I'd like to remind you that certain statements and information made available on today's call and webcast may be deemed to constitute forward-looking statements. These forward-looking statements reflect our judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting our business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter 2025 earnings release, which was furnished to the SEC today on Form 8-K. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. An explanation of these metrics can be found in our earnings release issued earlier this morning. Joining me today are Leonard Fluxman, Executive Chairman and Chief Executive Officer; and Stephen Lazarus, President, Chief Operating Officer and Chief Financial Officer. Leonard will begin with a review of our third quarter 2025 performance and provide an update on our key priorities. Then Stephen will provide more details on the financials and guidance. Following our prepared remarks, we will turn the call over to the operator to begin the question-and-answer portion of the call. I would now like to turn the call over to Leonard. Leonard Fluxman: Thank you, Allison. Good morning, and welcome to OneSpaWorld's Third Quarter 2025 Earnings Conference Call. It's a pleasure to speak with you all today to share our record third quarter results, which were delivered at the high end of guidance, marking our 18th consecutive quarterly period of year-over-year growth in total revenues and adjusted EBITDA. Our sustained rates of growth demonstrates the power of our complex global operating platform and our team's unwavering commitment to deliver exceptional experiences for our guests and outstanding performance for our cruise line and destination resort partners. In addition, our execution of our asset-light business model continues to generate strong free cash flow, enabling us to create significant value for shareholders through an increasing quarterly dividend, share repurchases, accelerated debt paydown and strategic investments across our operations. Turning now to the highlights of the quarter. Total revenues, income from operations and adjusted EBITDA represented all-time records and net income was a third quarter record. Total revenues increased 7% to $258.5 million compared to $241.7 million in the third quarter of 2024. Income from operations increased 5% to $26.3 million compared to $25 million in the third quarter of 2024. Net income increased 13% to $24.3 million compared to $21.6 million in the third quarter of 2024, and adjusted EBITDA increased 6% to $35 million compared to $33 million in the third quarter of 2024. At quarter end, we operated health and wellness centers on 204 ships with an average ship count of 199 for the quarter. This compares with a total of 196 ships and an average ship count of 195 ships at the end of the third quarter of fiscal 2024. Also at year-end -- at quarter end, sorry, we had 4,466 cruise ship personnel on vessels compared with 4,204 cruise ship personnel on vessels at the end of the third quarter of fiscal 2024. The quarter marked meaningful progress in our key priorities. Let me share some of those highlights. First, we captured highly visible new ship growth with current cruise line partners. We continue to solidify our market leadership during the quarter, introducing new health and wellness centers on board for new ship builds during the quarter, Royal Caribbean Star of the Seas, Virgin Brilliant Lady, Princess Cruises, Star Princess and Celebrity Xcel. For the year, we remain on track to introduce health and wellness centers on to 2 additional new ships commencing voyages in the fourth quarter, giving us a total of 8 new ship builds in 2025. Second, we continue to expand higher-value services and products. These higher-value services, including MedSpa, IV therapy and Acupuncture to name a few, helped to grow sales productivity with strong double-digit increases in the quarter. We continue to introduce these services to more ships and expand offerings with the latest innovations in adding to our growth. In addition, we continue to elevate the innovation in our medi-spa services with the expansion of our rollout of next-generation technology with the Thermage FLX and CoolSculpting Elite, which offer improved results and reduced treatment time by up to 50%. These new technologies generated between 40% and 60% growth for these treatments in Q3 versus last year. In addition, Acupuncture remains in high demand with equally strong growth rates. The adoption of LED light therapy within this service remains a high conversion add-on treatment. At quarter end, Medi-Spa services were available on 150 ships, up from 144 ships at the end of the third quarter last year. We continue to expect to have Medi-Spa offerings on 151 ships this year. Third, we focused on enhancing health and wellness center productivity. This is best reflected in the delivery of across-the-board increases in key operating metrics, including revenue per passenger per day, weekly revenue, pre-cruise revenue and revenue per staff per day. Without a doubt, our unsurpassed ability to identify, onboard and retain staff is leading to this performance. In fact, staff retention remains a key contributor to our consistent gains in operating metrics as experienced team members are driving incremental revenue through more effective customer recommendation. The quarter saw a 5-point increase in staff retention versus Q3 2024 with experienced staff generating significantly higher revenue per day versus first contract staff. We continue to take pride in being a desired employer and strive to create an environment that fosters retention. In addition, we continue to invest in best-in-class training and have recently redesigned our talent management processes to further support productivity and long-term growth in our operating metrics across all of our staff members. Our enhanced sales training continues to fuel increases in the number of guests using the spa, service frequency, service spend and retail and average guest spend per guest. Fourth, we possess a strong and durable balance sheet, which, combined with our ongoing successful growth, enabled us to advance each of our capital allocation objectives in the quarter. These are to invest in future growth, return value to our shareholders and reduce debt. To this point, in the third quarter, we were active on our stock buyback. We paid our quarterly dividend and reduced outstanding debt. Additionally, as Stephen will share, the Board approved a 25% increase in our quarterly dividend payment to $0.05 per share, which reflects our company's consistent after-tax free cash flow generation and positive long-term growth prospects. As we close out the year, we remain confident in our outlook with our business continuing its favorable momentum at the start of the fourth quarter. In addition to the introduction of 2 new health and wellness centers beginning voyages through year-end, we are also excited by our developing initiatives employing emerging AI technologies to enhance our unique global positioning toward delivering increasing exceptional experiences for our guests and service to our partners. We believe this, along with the continued discipline with which we execute our asset-light business model, positions us well to deliver strong results for our stakeholders and shareholders in the near and long term. As Stephen will share momentarily, we have increased our 2025 guidance at the midpoint of our previous ranges for annual revenue and adjusted EBITDA. With that, I will turn the call over to Stephen, who will provide more details on our third quarter results and guidance. Stephen? Stephen Lazarus: Thank you, Leonard. Good morning, everyone. We are pleased with our third quarter performance, which included record results in total revenue and adjusted EBITDA and continued strong and predictable cash flow generation. We continue to expand our innovation, products and services and leverage our strong operating platform and technology enhancements to deliver strong revenue and profit growth while employing our balanced capital allocation strategy to reduce capital to shareholders. Fueled by our strong cash flow generation, driven by our capital-efficient asset-light business model that generates predictable strong free cash flow, we returned $4.1 million to our shareholders through our quarterly dividend payment and $17.6 million from the repurchase of 816,000 common shares during the quarter, while repaying $11.3 million on our term loan facility. Also reflecting our positive long-term outlook, we opportunistically returned an additional $15 million to our shareholders from the repurchase of an additional 722,000 common shares thus far in the fourth quarter. And our Board approved a 25% increase in our quarterly dividend payment to $0.05 per share. Before I provide details on our third quarter results, I would like to provide additional perspective on our AI initiatives. These initiatives are expected to deliver measurable improvements across key areas of our business with actions in place to enhance revenue, create operational efficiencies to drive greater profitability as we grow while increasing the speed of our decision-making through automation and streamlining of our business processes. Here are some highlights of each initiative. First, as it relates to revenue enhancement, we have implemented a machine learning-powered project designed to optimize yield and revenue, which is actively being tested on 40 vessels. By leveraging advanced recommendations and algorithmic optimization, this initiative aims to unlock additional revenue by optimizing utilization. Second, operational efficiency. In this regard, we are seeing early success with our automated problem resolution and inquiry tool, which has now been deployed across 180 vessels. This technology has led to dramatic improvements in response times and reduce the need for help desk hours. Third, automation and streamlining, which is part of our broader efficiency initiative to continue to explore and develop automation solutions to reduce manual work and streamline operations. Although still in the early stages, these efforts are expected to enhance productivity and operational scalability over time and are expected to further increase our key operating metrics. Overall, our AI initiatives demonstrate our commitment to leveraging cutting-edge technology to strengthen our market position and deliver value to our shareholders. Turning now to a review of the fourth quarter -- third quarter. In total, for the third quarter, total revenue increased 7% to $258.5 million compared to $241.7 million for the third quarter of 2024. The increase in service revenue and product revenues were driven by a 4% increase in average guest spend, fleet expansion due to 2025 new builds and a 1% increase in revenue days, which positively impacted revenues by $7.8 million, $6.8 million and $3.2 million, respectively. Contributing to the increased volume and spend was $2.7 million in increased prebooked revenue at health and wellness centers on board, and this was offset by a $1 million decrease in our destination resort revenue, partially due to the close of hotels where we had previously operated. Cost of services increased $12.5 million attributable to the $13.6 million increase in service revenue compared to the third quarter of 2024. Service margin was a healthy 17.3%, up versus both the first and second quarter of 2025, but marginally below the same quarter a year ago, simply due to mix. Cost of product increased $2.7 million attributable to the $3.2 million increase in product revenue. Salary, benefits and payroll taxes were $8.4 million compared to $8.6 million in the quarter prior year. Net income was $24.3 million or net income per diluted share of $0.23 compared to net income of $21.6 million or net income per diluted share of $0.20 for the third quarter of 2024. The change was primarily attributable to a $1.3 million increase in income from operations and a benefit from a $1.1 million decrease in net interest expense. The $1.1 million decrease in net interest expense was primarily due to lower debt balances and lower effective interest rates. Adjusted net income was $30.4 million or adjusted net income per diluted share of $0.29 as compared to adjusted net income of $27.3 million or adjusted net income per diluted share of $0.26 for the third quarter of 2024. And adjusted EBITDA was $35 million an improvement from $33 million in the third quarter of 2024. Moving on to the balance sheet. We continue to possess a strong balance sheet at quarter end with total cash of $30.8 million after giving effect to the repayment of $11.3 million in debt, repurchasing $17.6 million of our common shares and paying $4.1 million in support of our quarterly dividend. In addition, we had full availability of our $50 million revolving line facility, giving us total liquidity of $80.8 million as of September 30, 2025. Total debt was $85.2 million at September 30, 2025, compared to $98.6 million at December 31, 2024. Also, at quarter end, we had $57.4 million remaining on our $75 million share repurchase authorization. And post quarter end, we repurchased an additional 722,000 outstanding common shares, returning another $15 million to shareholders. Therefore, as of today, we have $42.4 million remaining on that $75 million share repurchase program. We continue to expect the disciplined execution of our growth initiatives and strong cash flow generation driven by our asset-light business model to enable the payment of ongoing quarterly dividends while evaluating opportunities to repurchase our shares and retire debt. We believe this positions us well to create long-term value for our shareholders. Turning now to guidance. As we look ahead, we are excited about our business and continue to expect total revenue for fiscal 2025 to increase in the high single-digit range, reflecting our strong year-to-date performance and our positive outlook as well as the addition of 2 new health and wellness centers on cruise ships beginning voyages during the fourth quarter. Adjusted EBITDA is now expected to increase by 10% at the midpoint of our guidance range as we deliver increasing productivity from our enhanced products and services. For the full fiscal year 2025, we expect total revenue in the range of $960 million to $965 million, which represents an increase of 8% at the midpoint versus fiscal year 2024 and adjusted EBITDA is expected in the range of $122 million to $124 million, which represents an increase at the midpoint of 10% versus fiscal 2024. For the fourth quarter of 2025, we expect total revenue in the range of $241 million to $246 million and adjusted EBITDA is expected in the range of $30 million to $32 million. And with that, we will open up the call for questions. Bailey, if you could please do that. Operator: [Operator Instructions] Our first question comes from Steven Wieczynski with Stifel. Steven Wieczynski: So Leonard or Stephen, I'm wondering about how we should think about the benefits from some of this AI technology you guys have been implementing. And what I mean by that is, if we look at margins in the second quarter, they were up about 70 basis points year-over-year. And in the third quarter, they were down about 20 basis points. So not sure if you can help us think about maybe the cadence of how margin expansion or contraction should look moving forward as you kind of go through and implement some of this technology. Stephen Lazarus: So as we talked about last quarter when we started talking about some of these initiatives, we've mentioned then and we continue to say today that it's likely the second quarter of next year when we start to become more specific about one of -- what those expected improvements will be. We are encouraged with what we see thus far, but frankly, it's just too early to commit to specific increments, et cetera, but we hope to be able to do that by the second quarter of next year. Steven Wieczynski: So as we think about the fourth quarter and the first quarter, basically assume nothing is in there, correct? Stephen Lazarus: That would be a good assumption to assume that it's consistent with the cadence that it's been tracking at and then improvements thereafter. Steven Wieczynski: Okay. And then, Leonard, I don't know if this is for you or still, Stephen, but I want to understand maybe spend patterns a little bit more on board. Maybe if you could give us some more color on what you're seeing more so in real time in terms of guest spending. I'm wondering if you've seen any changes through October, whether that's through attachment rates, a difference in spending across land-based versus maritime or really any kind of change in demand for higher-end services versus traditional treatments. Just you're just trying to understand and get a feel if guests are starting to change their behaviors at all. Leonard Fluxman: Yes, Steve, I'd tell you our PPDs, our revenue per passenger per day, everything is positive. The spend is up, attachment rates are consistently good, pre-cruise revenue consistently staying strong. I mean we have not seen any kind of material reduction in spend. I mean we also look at what we're deploying in terms of marketing tools, discount rates, additional incentives, and it's very consistent with what we've seen over the past few quarters. So in short, we haven't seen anything materially change for our business so far. Operator: Our next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: I think you mentioned that service margin was down a little bit on mix. Could you kind of clarify what's happening with the mix? Stephen Lazarus: Yes. It's really just a function, Sharon, of where -- which cruise lines are generating slightly different revenue and the agreements that we have with those cruise lines. It's not something that was necessarily unexpected to us and nor is it something that we think based upon what we're seeing in October flows through into October. So we would expect to see margins continue to be strong. And as you know, right, I mean, 17.3% was very healthy. That was versus a second quarter of 16.6% in the first quarter of 17%. So I think we should focus on the positive there, which is that it is higher than both of those quarters, although just marginally down versus the third quarter of prior year. Sharon Zackfia: Yes. I just wanted to clarify that you weren't seeing passengers kind of shift down into kind of lower price point services, but it sounds like it's ship mix, not necessarily the actual... Stephen Lazarus: We're definitely not seeing them shift down. And remember, our model provides us with a degree of insulation in that we're only servicing a small proportion of the customers on board to the extent that those customers that want to spend money, enjoy their vacation and experience the spa, we're still absolutely seeing that. Sharon Zackfia: Great. And then I wanted to ask a follow-up. We've been getting a lot of questions on the global minimum tax. Can you kind of talk about OneSpaWorld and how or if you will be impacted by that beginning next year? Stephen Lazarus: Our expectation remains that we will not be impacted. We are still finalizing and are very deep in the process of doing some reorganizational changes to make sure that, that happens. But upon successful implementation of those changes, at this point in time, we continue to believe that we would not be impacted by global minimum income taxes. Operator: Our next question comes from Max Rakhlenko with TD Cowen. Maksim Rakhlenko: Nice job in the quarter. So first question, in the release, you noted that you saw a noteworthy increase in guest counts, frequency as well as average spend. Just what do you attribute that to? And then is there a way to think about the magnitude of the step-up that you may be seeing? Leonard Fluxman: We -- say that again, Max. We saw an increase in traffic, which is the amount of passengers we saw, which is a function of some of the newer ships coming into service in the fourth quarter, obviously. And then the penetration rate actually moved up positively as well from the second quarter. So that just meant we were getting more of that traffic on the ships into the spas and the penetration rate increased moderately, which is a good sign. But we're also focusing the staff on facility utilization, as we mentioned on our last call, last quarter, which is how do we better utilize not only our staff, but the facilities themselves on sea days, port days, what we can do to take and try-train staff to fill in the gaps and get better utilization. So where we see the demand remaining high, we see the utilization maxed out, we will go to the cruise lines and have a discussion not just on real estate, but more importantly, on getting an extra birth, which is never an easy discussion, but something that sometimes yields an increase. And if it does, obviously, and we show them where the demand comes from, it will be a great thing to have. So now we have the data to support the facility utilization. And as I mentioned before, it's a metric that we will produce at some point in the future, probably at the end of second quarter next year. But it's something that we're focusing on internally to improve that metric itself. Maksim Rakhlenko: Got it. That's really helpful. And then, Stephen, how are you thinking about the right level of cash to hold on the balance sheet in the context of likely continued declines in interest rates? Should we assume that you're going to put more cash to work as what we saw both in 3Q and quarter-to-date? Or what's the plan ahead? Stephen Lazarus: We'll continue to have a balanced capital allocation strategy. We like to keep $25-or-so million of cash on the balance sheet. But as you know, we do have a $50 million availability on the line of credit. And so I think the way we think about it is continued optimization of the capital allocation strategy for the near term, share repurchases would remain at the top of that -- on the top of the list. Opportunistically, though it's not programmatic, then the dividends, which, as you know, we increased by 25% now to $0.05 a quarter. And then if it makes sense, we'll pay down a little bit more of the debt or more over time, but that's the order of prioritization. Operator: Our next question comes from Gregory Miller with Truist. Gregory Miller: I thought I'd start off on a question on staffing. You mentioned in the prepared remarks that you redesigned the talent management process. Could you elaborate on the kind of changes you're implementing? Leonard Fluxman: Yes. So we're focusing clearly, obviously, around solution selling. We're putting people into different modalities and not just sort of pinning them to one modality. So there's much more of a shared philosophy around where staff can be used, where before they'd be only used for one type of modality, which is allowing us, as I mentioned before, Greg, to get the better utilization out of our facilities. So the focus is not limiting staff just to one type of service where before we thought that might have maxed out the benefits of each of them just specializing. We see that it's better to use them across different modalities, so enhancing our facility utilization overall. Gregory Miller: And then I'd like to shift over to the AI front. If I heard correctly, the revenue enhancement projects are on 40 vessels, which is an impressive ramp-up already compared to the piloting you were doing previously. But if I heard correctly, the operating efficiencies have been launched on 180 vessels so far. So I'm curious what's driving the disconnect of more focus at this stage on the AI implementation on the operating efficiency side versus the revenue enhancement side. Stephen Lazarus: It's not a matter of more focus, Greg. It's a matter of the simplicity of rolling out one versus the other. The revenue enhancement is -- has more complexity and requires specific training for the managers on board, whereas the operational efficiency is rolling out apps, which are much simpler and can be shown how to use much more easily. So it's simply a matter of what is easier to be done. Operator: Our next question comes from Drew May with Northcoast Research. Andrew May: So a little bit of a calmer-than-expected hurricane season this year, but one saw a little more itinerary changes and extra sea days. Was there any tangible headwind or benefit you guys call out from storm activity during the quarter? Stephen Lazarus: No, nothing tangible or material, Drew. Andrew May: Okay. Got it. And then next question was a little bit of a step-up in the CapEx this quarter. Was that kind of related to the AI initiatives? Or is there anything else you guys could call out there? Stephen Lazarus: No, those are related to the AI initiatives. We have talked about CapEx being at a slightly elevated rate this year and potentially next year as well as we make investments in those projects. So that was a big piece of it. There was a smaller piece related to rolling out some of this additional Medi-Spa equipment on board, but the majority is related to these projects. Operator: Our next question comes from Assia Georgieva with Infinity Research. Assia Georgieva: Leonard, I wanted to follow up on your comment about adding an extra birth. I imagine with adding more staff, we might see the productivity metric come down in Q2, but that would be because of the structural change as opposed to actual productivity coming down. Is that fair? Just wanted to clarify. Leonard Fluxman: Yes, it should not depress that metric. The only reason we would go to a cruise line and ask for an increased birth would be because we're not getting to the right level of penetration or productivity that we could if we had that staff member. So it would be purely accretive if we added it, not for the sake of just having it. Assia Georgieva: Correct. And again, I was trying to understand, so I don't overly focus on the metric, and I understand having more bodies, obviously, would be helpful to the overall revenue generation and penetration rates. My second question is, some of your banners seem to be making sort of a deployment shift not only in 2026, I imagine it will be in '27 and beyond to shorter voyages, including in Europe and the shift to more ships in the Caribbean and the Bahamas and also shorter voyages there. It seems that shorter voyages typically are a good thing for you. Is that the correct interpretation still? Leonard Fluxman: They always -- they've always been very decent. And we try and look at 3, 4 as a 7. So we stagger it that way. We market it that way. We know on the 4-day, we've got a little bit extra time. So even though it's separate cruises, we try and structure that for the high demand periods or the at-sea period. So yes, I wouldn't say there's a material difference today than it was before. It's still -- they still prove out to be quite decent for us, yes. Assia Georgieva: So you don't see any net-net impact at this point? Leonard Fluxman: Not really, no. I haven't seen anything so far, nor do we expect to see anything material. Assia Georgieva: And sort of related to that, with the further development of private island destinations, is that an opportunity to further build out your infrastructure on these private islands, basically the marquee ones? Can you discuss that a little bit? Leonard Fluxman: Yes. No, we definitely are looking at it very seriously. We're talking to 1 or 2 of the banners who have additional islands that they're building out. I think there's an opportunity for us to do something alongside them. I think with the existing operations, we're looking at where we can add or improve the facilities on some of the older sort of islands. So we think there's tremendous opportunity for us to participate more so when these ships are calling at these fantastic slots in the islands, Mexico for Royal Caribbean. I mean all of them have a very nice island experience today and some are enhancing it, as you've seen with NCL and others, Royal announcing Santorini yesterday. I mean it's just very exciting because you see they're combining both the land and sea vacation and are meeting that expectation very well. Assia Georgieva: Santorini sounded really good when I heard that yesterday. So yes, it did catch my attention. And lastly, and I'll let you go. In terms of prebooked services, has that rate moved? I know it has been difficult sometimes to be fully integrated within the banner's internal prebooking engine, but they themselves seem to be doing a great job of increasing penetration, and I'm hoping that you are benefiting from that as well. Is that the case? Leonard Fluxman: Well, I think it's encouraging certainly that prebooking is getting mentioned on particularly yesterday's call, I think they mentioned that it's close to 50% and continues to grow. For us, it's a high focus item. We talk about it in all of our business reviews. We have some initiatives that we're looking at in terms of AI for next year to help enhance the prebook. So I think for us, there's equally a stronger focus on the prebook because we know they spend up to 30% more than somebody who doesn't prebook. And I think prebooking is just going to continue to get stronger, not only for the cruise lines, but for us as well over time. Assia Georgieva: What is your current rate roughly, if you don't mind sharing? Leonard Fluxman: It's about 22% of service revenue, which excludes Medi-Spa. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Leonard Fluxman, Executive Chairman and CEO. Leonard Fluxman: Right. Thank you all for joining us today. We look forward to speaking with many of you at our upcoming investor conferences, meetings and when we report our fourth quarter results in February. Thanks, everybody. Have a good one. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita Third Quarter 2025 Earnings Call. [Operator Instructions] Mr. Eliason, you may begin your conference, sir. Nic Eliason: Thank you, and welcome to our third quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our third quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements, except as may be required by law. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website. I will now turn the call over to Javier Rodriguez. Javier Rodriguez: Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. We are accustomed to operating in a dynamic health care environment and today is no different. The government shutdown is on its 29th day and key health care policy decisions remain in flux. And while these developments have real implications, we remain focused on what matters most, providing excellent care. This focus is not only in the best interest of our patients, but continues to generate consistent financial results. Our third quarter performance was in line with our expectations and keeps us on track to achieve our full year guidance. These results also enable continued investment to improve the lives of our patients and enhance the experience of our teammates and physicians. Today, I will share the highlights of our third quarter performance, update our guidance for the full year and walk through a few swing factors for 2026. But first, as always, we will begin with our clinical highlights. Today, I will feature our research team, known as DaVita Clinical Research, or DCR. Powered by a dedicated team of medical directors and data scientists, in fact, by one of the largest patient data sources in the country, DCR has been instrumental in advancing kidney care research. A few metrics that puts this team's contributions in perspective. DCR maintains more than 250 research sites in the United States and has conducted more than 500 clinical trials. This team of researchers has helped achieve FDA approval for dozens of ESKD drugs and DCR research and data has fueled more than 700 clinical publications. With a drive toward innovation and patient safety, DCR has helped to develop new therapies, improve outcomes and generate benefit to patients and physicians across the kidney care community. This long-standing commitment underscores our position as a leader in clinical research. Most recently, DCR is evaluating outcomes of middle molecule clearance using middle cut-off dialyzers, which will provide critical U.S. specific data and has the potential to represent a significant step in advancing patient outcomes. This is just the latest example of how DaVita is advancing the development of new therapies and actively shaping the future of kidney care. Transitioning now to our financial performance. We delivered the third quarter adjusted operating income of $517 million and adjusted earnings per share of $2.51. These results were consistent with our internal expectations. Joel will provide detail on the quarter, but at the highest level, we continue to manage patient care costs effectively while the U.S. treatment volume was down approximately 1.5% year-over-year. Before I cover full year guidance, let me provide a bit of detail on one of the ongoing strategic priorities: investing in technology infrastructure. As a reminder, last year, we completed the rollout of our next-generation clinical platform. We continue to enhance that system and are making other long-term investments to replace our scheduling system and further upgrade our revenue operations technology. Simultaneously, we're adopting AI solutions across our platform. This includes internally developed use cases, opportunities with commercially viable applications and working with external providers. While these projects result in higher G&A growth, we believe that these investments are critical to advancing clinical care, improving the experience of our patients and teammates and driving long-term cost efficiencies. Let me now transition to our full year outlook. We're reaffirming the midpoint of our guidance ranges for adjusted operating income and adjusted earnings per share, while narrowing each range. We now anticipate full year adjusted operating income between $2.035 billion and $2.135 billion and adjusted earnings per share of $10.35 to $11.15. I recognize that many of you are already looking ahead to 2026. While it's too early to provide formal guidance, let me walk through several key variables that will influence our perspective on next year. First is volume. We faced several headwinds in 2025 that we don't expect to recur, including Hurricane Helene, the severe flu season and the cyber incident. Beyond those discrete events, and as I talked about last quarter, we will continue our efforts to drive clinical progress to improve mortality and support treatment growth. Second is payer mix, where there's active policy debate right now. We're among the many who are closely monitoring the impact of enhanced premium tax credits on commercial mix. We'll also be assessing the ongoing recalibration of Medicare Advantage landscape, as evolving market dynamics from government policy and payer behavior affect Medicare Advantage enrollment and insurance mix. Third is Integrated Kidney Care or IKC. We're awaiting the release of final 2024 performance year results from the government CKCC program. The timing of the release and the recognition of the associated operating income could shift between 2025 versus 2026. We feel good about our progress in 2025 and it's an important reminder that timing of operating income remains difficult to predict. In short, there remains a range of potential outcomes for 2026 and we expect to learn more about each of these factors over the coming months. And as customary, we'll provide formal guidance during our fourth quarter earnings call in February. To wrap up my comments, we remain on track to achieve our full year goals. Meanwhile, our long-term investment in IT and clinical innovation, strengthen our ability to deliver superior patient care and create sustainable value. As we look to 2026, we're monitoring a number of variables that will shape the coming year, and we remain confident in our ability to navigate them effectively. I will now turn it over to Joel to discuss our financial performance in more detail. Joel Ackerman: Thank you, Javier. Third quarter adjusted operating income was $517 million, adjusted earnings per share was $2.51 and free cash flow was $604 million. I'll provide detail on the individual components of our results, beginning with U.S. dialysis. First, on treatment volume. U.S. treatments per day declined 1.5% versus the third quarter of 2024, in line with our expectations. The decline is primarily the result of 2 factors: First, the mix of days as this quarter was slightly skewed towards Tuesdays, Thursdays and Saturdays as compared to Q3 last year; second was the negative impact of the census trends from higher mortality from a severe flu season and lost admissions opportunities as the result of Hurricane Helene and the cyber incident. Next, revenue per treatment increased approximately $6 versus the second quarter. This was primarily driven by rate increases, higher revenue from phosphate binders and the negative impact of the cyber incident on Q2 RPT. These improvements were offset by a slight decline in payer mix and normal variability. We continue to expect full year RPT growth will be at the low end of our original 4.5% to 5.5% guidance. Achieving this will require some acceleration of RPT in Q4, which we expect from vaccines, normal rate increases and higher-than-typical impact from the resolution of aged claim balances. Now moving to patient care costs. PCCs per treatment increased by approximately $5 sequentially. The majority of the change was the result of typical increases in wages and higher pharmaceutical expense due to higher dispensing volumes of phosphate binders relative to the second quarter. Excluding the impact of phosphate binders, patient care costs continue to outperform our expectations from the beginning of the year. We continue to expect full year PCCs per treatment to increase between 5% and 6% versus 2024. International adjusted operating income was $27 million. This was down $9 million versus the second quarter, primarily due to the onetime benefit that we called out last quarter. In IKC, our value-based care business, our Q3 adjusted operating loss was $21 million. As I have mentioned in the past, the quarterly phasing of IKC is hard to forecast. That said, we feel good about achieving flat or better IKC adjusted operating results in 2025 as compared to last year consistent with our guidance from the beginning of the year. In aggregate, third quarter operating results were in line with our expectations. At the midpoint of our tightened adjusted operating income range, the implied guidance for the fourth quarter represents an approximately $60 million sequential increase. We expect this fourth quarter improvement to be primarily driven by higher treatment volume due to better treatment day mix, sequentially higher revenue per treatment and timing of IKC revenue, offset by typical seasonal increases in patient care costs and G&A. Switching to capital allocation. During the third quarter, we repurchased 3.3 million shares, and we have repurchased an additional 400,000 shares since the end of the quarter. Year-to-date, through today's earnings call, we have repurchased approximately 10 million shares representing approximately $1.5 billion. As a reminder, the 400,000 shares we repurchased in October were pursuant to our publicly filed repurchase agreement with Berkshire Hathaway. According to that agreement, just prior to each DaVita earnings call, we buy from Berkshire the number of shares necessary to return its ownership to 45%. This transaction is contractual and formulaic. We finished the quarter with leverage at 3.37x consolidated EBITDA within our target leverage ratio of 3 to 3.5x. As we look to the remainder of 2025, as Javier mentioned, we are reaffirming our guidance for full year adjusted operating income with a midpoint of $2.85 billion and adjusted earnings per share with a midpoint of $10.75, while narrowing the band of each range. We look forward to sharing full year results and providing 2026 guidance when we speak again in February. That concludes my prepared remarks for today. Operator, please open the call for Q&A. Operator: [Operator Instructions] Our first caller is Kevin Fischbeck with Bank of America. Kevin Fischbeck: Great. I guess a couple of things came out from your prepared remarks. I guess the first thing, you talked about the volume number for next year. I guess I understand the onetime items that you highlighted this year. How do you think volumes would have played out this year ex those 3 -- I guess it was 4 items that you -- or 3 items that you mentioned, the hurricane, cyber and flu. What would that number look like this year? Joel Ackerman: Yes, Kevin, I'll take that. I think the number is probably about a 75 to 100 basis point headwind on '25 volume from those 3 things combined, and that's a combination of census and missed treatment rate. Kevin Fischbeck: Okay. And the other thing that jumped out on our volumes was that you just mentioned working to improve mortality. Is there anything that you can provide color on there? I assume that's not something that necessarily shows up in a given quarter, but maybe there's optimism that, that can improve next year? Or is that a slow steady improvement over time? Javier Rodriguez: Yes, Kevin, as you called it out, it's steady over time. We are looking at all our clinical protocols, looking at time on therapy, fluid, other protocols, GLP-1s and other medications to try and see what the best way to go after this because we really have to lower our mortality. Of course, over time, we will talk about the mid-molecule clearance, and -- but back to your point, that will take time. Kevin Fischbeck: Yes. Okay. And then last question for me. On the MA enrollment point about that being -- it sounds like it's a bigger swing factor than I might have thought it would have been for 2026. I understand that it is influx. Are you -- when you say swing factor, does it -- are you talking about just shifts in membership between payers that, that could have a meaningful impact as your rate with different payers are significant enough to move the needle? Or are you worried about declines in MA enrollment, broadly speaking, back into traditional Medicare or Medicare plus supplemental? Javier Rodriguez: At the end of the day, you highlighted 2 variables, which is mix. And within that mix, there's a different revenue within each payer. We're agnostic on that because we don't know which way it's going to go. On the other hand, you do have different enrollment and you're seeing a lot of payers talk about their volatility in their enrollment. So we're just highlighting that we don't have any particular insight but rather, it feels like the marketplace is more dynamic at this juncture. Kevin Fischbeck: Okay. But that is a potentially big enough swing factor that you felt necessary to call out? Is it -- I guess in my mind, I don't think about it as being that big of a variable, but it is. Javier Rodriguez: Well, significance, obviously, is in the eyes of the beholder. But at the end of the day, there's enough dynamics and enough membership in there that you could see a scenario where it could swing in one direction or another. So we wanted to call it out. I mean if you were going to talk about revenue per treatment next year, you have that dynamic. And then, of course, you have open enrollment, which has the dynamic of the tax premium credits that's being discussed right now with the federal government. And so those 2 are just a little more in the air as we speak than in normal years. Joel Ackerman: That's said Kevin, I think I agree with Javier, we're trying to highlight where there might be variability. That said, I think it is safe to say that commercial mix is a more significant financial swing factor than MA mix. Operator: Our next caller is Andrew Mok with Barclays. Andrew Mok: I appreciate all the color on 2026. Maybe just back on the volume side. You called out the 75 to 100 basis points of discrete items that are not going to recur next year. So I guess, is it fair to think of that as a reasonable starting point as we contemplate potential growth for next year? And Javier, I think you noted investments in technology, infrastructure, scheduling systems. Are any of those items expected to have a meaningful impact on treatment growth? Or is there anything else that you can do in your control to influence the volume environment? Joel Ackerman: Yes, Andrew, I'll take the first one. So if you were to translate that 75 to 100 bps from '24 to '25, I think '26 over '25, again, if you're comparing year-over-year growth rates, you're probably looking at a 50 to 75 basis point structural improvement in '26 growth relative to '25 growth. And that comes largely from the flu and the cyber incident. The hurricane is kind of annualizing out and is offset the -- kind of the benefits of that is offset by the fact that there's a small headwind in '26 over '25 from day mix. Just as a reminder, '25 over '24 had a 20 basis point day mix headwind. And then '26 over '25 has an additional 10 basis point headwind. '27 will be a tailwind. Javier Rodriguez: And when you do all that math and you net it all out -- when you do all that math and you net it out, if you start with 2025, where we've guided to 75 to 100 basis point decline in volume, and I would say from where I'm sitting now, that probably looks like it's going to be closer to 100 basis points, missed treatment rate is really the culprit around that. So let me use negative 100 basis points as the math for 2025 growth, you would say structurally, you would adjust that to say before all the other dynamics. So I'm not giving guidance here, I'm just trying to bridge how to think about the starting point for building '26, you'd improve that negative 100 basis points in '25 by 50 to 75. So you'd start with kind of an adjusted growth in '25 of negative 25 to negative 50 off of which to build a '26 number. Andrew Mok: Got it. And do you want to comment on... Javier Rodriguez: Andrew, and for your second question, we are investing in a lot of things. U.S. specifically, will impact volume. The short answer is we don't know specifically volume, but if you were to expand that question to the P&L, I would say that we are optimistic, and we're working hard. Some of the models that we're working on could impact volume. For example, we are working on something that would risk stratify hospitalization. And if we can make an intervention, it changes hospitalization that would, of course, impact volume. On the other side, we're doing models to affect the cost structure, things like administrative things in the call centers and revenue operations that can do authorizations in a much more rapid way and more reliable way that would likely get you a higher collection. So those are a couple of the examples of the things that I highlighted in the opening. Andrew Mok: Great. And on the premium tax credits, I think the last estimate of the headwind you gave was $120 million over 3 years. Is that still a good number to think about? And can you comment on your growth in the exchanges and how that's played out throughout the year? Javier Rodriguez: Sure. I think that number is still a good number. The reality is, as you know, you have to think about what happens with these extended premium tax credits. And the way that we have it thought out is that if they go away, we would lose that $120 million roughly over a 3-year period, but it's not evenly spread out. We would have something -- our estimates are somewhere like $40 million in year 1, $70 million in year 2 and $10 million in year 3. And the reason why it's a little lumpy is because our models divide the population. And so we assume that our existing patients because they are in high need of insurance and understand the need for coverage would be more likely to retain that coverage. And also, in many cases, it is the most affordable option. That math changes when you grab the second group, which is those patients that yet don't know that their kidneys are going to fail, so they're CKD patients, and they might let their insurance lapse. And in that case, when their kidneys fail, they would become Medicare patients. And of course, there's a spectrum in there because some of these people in CKD 4 are already pretty ill. And so they might opt up for an exchange. So when you do all that math, and as you can see, it's full of assumptions, you get into that sort of lumpy '26, '27 and '28. And then, of course, we're watching with Congress because there's a lot of conversations going on, conversations about some kind of off ramp, meaning that they change the enhanced tax credits over time. There's also talk about lowering the poverty level to different levels. And then, of course, there's conversations about doing nothing. And so all these assumptions will change depending on what happens. Joel Ackerman: And Andrew, just on your question on private pay mix, mix is down about 15 basis points in the quarter, which I would call normal variability and year-over-year, it's flat. Operator: [Operator Instructions] Our next caller is A.J. Rice with UBS. Albert Rice: Maybe there's an obvious answer to this, but the headline number looks like your operating income for the quarter was about $50 million below the consensus. I know you're saying it was in line with your expectation, and you've not changed the midpoint for the year as to where you think. Is it just a matter of people were mismodeling given the day counts you're referencing for the third and fourth quarter relative to what you were internally thinking? Or what is going on there if you have any view? Joel Ackerman: Yes. So we don't give quarterly guidance, and we appreciate this can lead to a little bit of a mismatch with the Street. Let me -- I think the best way to explain it is how we're thinking about it, which is if you look at Q4 over Q3 to hit the midpoint of our guide, we need about a $60 million uplift in OI. And the way we think we get there, and these numbers are all approximate, first, there's the typical headwind from seasonal costs, and we see that both in patient care costs and G&A. I'll call that out as roughly a $30 million headwind. That's offset by 3 things. First is volume, which is really about a day mix issue. Q3 had a 60 basis point headwind on day mix year-over-year. Q4 has a 60 basis point tailwind on day mix, and that's worth about $15 million. Second is IKC, which is, call it, plus $25 million from Q3 to Q4 to hit the IKC guide we gave at the beginning of the year. And the last would be revenue per treatment of, call it, a $50 million pickup. There's some seasonality in that from vaccines and normal rate increases. There's also, I'd say, more than typical variability from resolution of older claims with payers. These happen virtually every quarter. They're hard to predict, both in terms of size and timing. They, I'd say, more often than not are weighted towards Q4, although not every year. And for Q4 of '25, we just expect these to be more favorable than usual. Albert Rice: Okay. Well, that's helpful to explain it, I think. On the cyber-attack and you're taking this charge for the Mozarc relationship, do they have impact on the adjusted earnings? Maybe cyber-attack, what was the earnings and volume impact in the quarter that you estimate specifically to that event? And then the Mozarc charge, it looks like there's some -- you are expecting it to be a drag somewhat for next year or 2, and now you're taking the charge, does that eliminate the drag? And is that meaningful in operating earnings? Joel Ackerman: Yes. So let me take these one at a time. So first on Mozarc, the answer is the charge will largely eliminate the Mozarc drag on the P&L next year. It doesn't hit the operating income line. It hits the other income line. So it's not in our adjusted operating income, but it is in our pretax. And that's been a significant drag, both last year and this year, and it will get pretty close to 0 for next year. In terms of cyber, the big impact was last quarter through both RPT and volume. As we play it forward in Q3 and Q4, the impact goes way down, and it's primarily volume. The cost side of it has been non-GAAP, both last quarter and this quarter. Operator: Our next caller is Pito Chickering with Deutsche Bank. Pito Chickering: So one more question on treatment growth. I feel a little bit like a broken record here, so I apologize. But can you talk specifically about new patient starts in 3Q and how that changed year-over-year? And also on mortality, how is mortality trending in the third quarter versus the first half of the year? And then finally, any impact from IOTA on treatment -- or on new patient starts or treatment growth? Joel Ackerman: Pito, the last part of your question, any impact from what was -- I missed that? Pito Chickering: It's IOTA, the new bundled system for kidney transplants. Joel Ackerman: Okay. Yes. No impact from that. Going back to the original part of your question, I'd say volume for the quarter came in largely as expected with a little bit more pressure on missed treatments than we expected. Remember, we called missed treatment rate out as elevated in Q2 as a result of the cyber-attack. They came down off that peak, but still running higher than in Q3 of 2025. In terms of both admissions and mortality, there's really not a lot new to call out there. Admissions continues to run within the normal band that we've seen post COVID. And mortality, again, down versus Q1, but that's largely a flu phenomenon. There's really no pattern or trend to call out about mortality either quarter-over-quarter or year-over-year. Pito Chickering: Okay. And then can you talk about the timing of the IKC funds? I think typically, they closed at the end of the third quarter for the previous calendar year. Was there any changes to the timing of those contracts? And have you already settled some of those funds in October for calendar '24? Joel Ackerman: Yes. So the big change on IKC timing for the year was moving some of the revenue from plan year '24 from what we would have thought would have been the back half of the year and some of which would have hit in Q3 into Q2. And that's why IKC was so strong in Q2, and we called it out as timing. So that's really the big thing I would call out. Look, I think timing on IKC will continue to be difficult to predict. A lot of it is a function of when we get information from payers as well as the federal government and our ability to recognize revenue is really subject to the timing of that, which we don't have control over. Pito Chickering: Okay. And then last one for me. The implied fourth quarter guidance range is pretty wide, I think it's like $0.80. What would have to happen in order for you to be at the low end versus the high end of the guidance? And if you think about the midpoint, I know you talked about treatment growth and the tailwind coming from the day mix. But what treatment growth should we be modeling to get to the midpoint of the guidance? Joel Ackerman: So in terms of what's driving the range, I would point to both RPT and IKC as the things that probably have the most potential mix there. In terms of treatment volume growth, what you should expect for Q4 is year-over-year volume growth that is positive. Nothing to write home about 20, 30 bps somewhere in that range, but positive -- for the same reason it was so negative this quarter, which is the day mix being a headwind; next quarter, it's a tailwind, which is why it will drive it positive. Pito Chickering: Okay. And then last one here, does market share -- what do you think the market share has done in '25 if we exclude this cyber incidents? Joel Ackerman: Yes. Look, it's a really tough question. The best way to answer that question is USRDS data. But the latest USRDS data is for Q1 of '25. It just came out both Q4 of '24 and Q1 of '25. And the reality with the quarterly USRDS data is we think the incidence data is more reliable. The prevalence data is less reliable. So you put that all together, there is no -- there's almost no USRDS data to use to really try and predict what's going on with market share. Javier Rodriguez: But if you grab that data as imperfect as it is, and you grab the intelligence that we have in the field and you make the adjustments for roughly the 1,600 patients that are both impacted by the PD in the cyber outage, we have no reason to see any meaningful shift in market share. Operator: Our next caller is Justin Lake with Wolfe Research. Justin Lake: Joel, our growth sounds like it's got to be about $10 sequentially of improvement. Is that the right ballpark? Joel Ackerman: I think it's more like $8. Justin Lake: Okay. And how much of that do you think is this collection that we would think of as maybe nonrecurring in the same magnitude? Joel Ackerman: I would -- it is -- I called out $50 million of RPT improvement, and that's about $7 of RPT. It is the biggest component of that. So I don't want to give an exact size there. This is ranges upon ranges, but it would be more than half, I'd say, is probably a reasonable estimate. Justin Lake: Perfect. And then the fourth quarter volume assumption, I apologize if I missed it, but did you give a number there in terms of what you're assuming for volume? Joel Ackerman: Look, you can back into it more or less. And on treatment volume, it would be growth of somewhere around 20 or 30 bps. And remember, that's treatment volume, it's not treatments per day, it's not NAG. It would be an absolute year-over-year growth of about 20 or 30 bps. Operator: Our next caller is Ryan Langston with TD Cowen. Ryan Langston: You mentioned changes in payer mix driving RPT down a bit. Can you give us what the commercial treatment mix was in the quarter or at least a proportion from -- or the change from second quarter? And Joel, I heard you mentioned the sequential components in RPT, appreciate that, but does the 4Q guide assume any sort of positive move in that payer mix? Joel Ackerman: I don't think it will be a significant component of it. In terms of where mix is today, it's right around 11%. It was down 11% -- I'm sorry, it was down 15 bps from Q2 to Q3. It went from just above 11% to just below 11%. Ryan Langston: Okay. And last thing, I guess, over the past year or 2, we've seen nice growth in RPT, the binders, of course, but focus on the revenue cycle improvements. I guess where are we at in the life cycle of those or seeing at least some outsize benefit from those. Javier, I heard you mentioned some initiatives in your prepared remarks. But just anything on revenue cycle initiatives and improvements would be helpful. Joel Ackerman: Yes. I would say some people would ask what inning of the game we're in. I think that's the wrong metaphor. This is a continuous process that I don't think we -- kind of we finish and then we move on. I think there's -- there'll be a continuous process for years and years to continue to get better at it. Remember, a 1% improvement in ROPS collections is equal to about $120 million of OI. So even if we can just get 10 or 20 basis points year in, year out, there's real value there. The cyber incident definitely slowed things down there, and -- but we're continuing to invest there. As Javier said, AI is an opportunity, just old-fashioned automation is an opportunity there as well. So I would say we're not -- there's more to be had there. It's not going to feel like it did in '23 and '24, where it's really moving the needle in a big way, but I think there will be -- continue to be opportunity there year in and year out. Operator: At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments. Javier Rodriguez: Okay. Thank you, Michelle, and thank you for all of your questions. As we wrap up today, I will leave you with 4 thoughts. First, early in the year, we faced 2 unexpected challenges with meaningful economic impact. We navigated through those issues, delivered clinical excellence for our patients and remain on track to achieve our annual guidance. All the while, we continue to invest creating long-term capabilities. Second, we will continue our disciplined capital allocation strategy, including share repurchases. Third, we provided a few forward-looking thoughts on next year. Although the current dialogue is focused on enhanced premium tax credits, more broadly, we'll be monitoring open enrollment which is perhaps the biggest variable heading into 2026. And finally, the clinical and operational processes behind middle molecule clearance will take approximately 3 years to see results, yet the potential to enhance patient lives is meaningful and exciting. Thank you all for joining the call, and be well. Operator: Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
Operator: Good afternoon, everyone. Welcome to the Shenandoah Telecommunications Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Lucas Binder, VP of Corporate Finance for Shentel. Lucas Binder: Thank you, Michelle. Good afternoon, and thank you for joining us. The purpose of today's call is to review Shentel's results for the third quarter of 2025. Our results were announced in a press release distributed after the market closed this afternoon, and the presentation we will be reviewing is included on the Investor page on our investor.shentel.com website. Please note that an audio replay of this call will be made available later today. The details are set forth in the press release announcing this call. With us on the call today are Ed McKay, President and Chief Executive Officer; and Jim Volk, Senior Vice President and Chief Financial Officer. After the prepared remarks, we will conduct a question-and-answer session. I refer you to Slide 2 of the presentation, which contains our safe harbor disclaimer, and I remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements. Additionally, we have provided a detailed discussion of various risk factors in our SEC filings, which you are encouraged to review. You are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements. With that, I will now turn the call over to Ed. Go ahead, Ed. Edward McKay: Thanks, Lucas, and good afternoon, everyone. So thanks for joining us today. So as we begin the call, I'd like to share our vision for Shentel. We're focused on 4 key pillars that are driving operational execution and positioning us for long-term value creation. First, we are focused on building on our success. We have a proud history of delivering exceptional local customer service and deploying high-quality networks in smaller markets. We're enhancing that foundation by integrating advanced technology and AI to boost operational efficiency. For example, we're currently using AI to streamline our technical support operations and optimize digital marketing, ensuring that the right offer reaches the right customer at the right time. Our second pillar is successfully completing our build. Finishing our network expansion remains a top priority, and I'm very proud of our team's achievements over the past 6 years. At the end of Q3, Glo Fiber reached a major milestone, passing 400,000 homes and businesses in our greenfield expansion markets. We remain on track to substantially complete our build by the end of 2026. Our third pillar is accelerating growth. We're focused on driving penetration rates in Glo Fiber markets and expanding our commercial fiber business. We're growing the size of our direct sales team, and we have simplified our online purchase experience and launched targeted digital marketing with compelling rate plans. Our 100% fiber optic Glo network gives us a clear competitive edge and our many unique commercial fiber routes connect our smaller markets back to major metropolitan data centers. Finally, we're focused on achieving positive free cash flow. Prior to our heavy investment cycle in Glo Fiber expansion markets, Shentel consistently delivered positive free cash flow. Returning to that position is a key milestone, and we remain on track to reach positive free cash flow for the full year 2027, driven by declining capital intensity and continued customer growth. To support this transition, we plan to refinance our credit facilities through a hybrid structure, asset-backed securitization for our Glo Fiber and commercial fiber businesses paired with a new credit facility for our incumbent broadband business. We expect this approach to lower our cost of debt, strengthen our credit profile and increase financial flexibility. These improvements will position us to capitalize on opportunities in a consolidating industry and deliver greater value to our investors. We anticipate completing the refinancing in the coming months. Thank you for your continued trust in Shentel. We remain focused on operational excellence, strategic agility and delivering value to our customers and shareholders. Starting on Slide 4, we share some of our key highlights from the quarter. We reached the milestone of 400,000 total Glo Fiber passings, driven by 21,000 homes released to sales in the third quarter. Glo Fiber data revenue-generating units grew to 83,000 at the end of the quarter, representing year-over-year growth of 39.5% and Glo Fiber revenues grew 41.1%, reaching $21.3 million. Consolidated revenues reached $89.8 million, an increase of 2.5% year-over-year. Adjusted EBITDA climbed to $29.7 million, up 11.7% year-over-year, and our margins expanded 300 basis points to 33%. Jim will provide you with more details on the key drivers of our financial results in a few minutes. Moving to Slide 5, we show our integrated broadband network that spans more than 18,000 fiber route miles across 8 states. Our markets have compelling competitive dynamics that differentiate us from our broadband peers. 92% of our Glo Fiber passings are duopoly markets with only one fixed broadband competitor. And in our incumbent markets, 70% of our passings have no fixed broadband competitor. On Slide 6, our sales and marketing team continues to drive growth in our Glo Fiber expansion markets. In the third quarter, we added 6,400 new customers and approximately 7,200 total data, video and voice revenue-generating units. 600 of the new customer additions were from our recent Blacksburg, Virginia acquisition that we closed and integrated in July. Over the last 12 months, we've added more than 23,000 data RGUs across the Glo Fiber expansion markets. We ended the third quarter with approximately 83,000 Glo Fiber customers, 39% increase year-over-year. Our total Glo Fiber revenue-generating units reached more than 97,000 at the end of the quarter, up 37% from the same period a year ago. Moving to Slide 7, Glo Fiber passings exceeded 400,000 at the end of the third quarter, an increase of 81,000 year-over-year. Broadband data penetration in our Glo Fiber expansion markets climbed 2.1 percentage points to 20.6% at the end of the third quarter. As shown on Slide 8, growth in our Glo Fiber expansion markets has followed a consistent predictable pattern with steady increases in data penetration rates as cohorts mature. We typically achieve 15% data penetration rates within the first year and 25% by year 3. Our earliest cohorts, which launched in 2019 and 2020 have now reached an average data penetration rate of 37%. We're also pleased with our sales and marketing team's ability to quickly engage customers when launching new neighborhoods as demonstrated by our 8% penetration rate for communities introduced in the third quarter. On Slide 9, monthly broadband data churn for the quarter remained steady at 1.17%. As a reminder, third quarter is the seasonally highest churn quarter due to greater move churn, especially around schools and universities. Our broadband data average revenue per user remained strong in the third quarter at roughly $77, supported by customer adoption of higher speed tiers. In the middle of the third quarter, we introduced new promotional rate plans that offer enhanced speeds with a 5-year price guarantee. As a result of this new plan, we saw an increase in subscriber gross additions in the second half of the quarter with 68% of our new residential customers choosing speeds of 1 gig or higher, including 12% choosing speeds of 2 gig and 3% choosing speeds of 5 gig. As a greenfield overbuilder and share taker, we have not raised broadband service prices since we launched Glo Fiber 6 years ago. In addition, our fiber networks have ample excess capacity and are superior to our competitors' DOCSIS networks in providing faster symmetrical speeds. Our new promotional plans leverage our competitive advantage as well, and we believe they will be a key driver in accelerating growth. As more customers select these new plans, we expect minimal impact to data ARPU in the next couple of quarters and a decline of approximately 1% for 2026. Turning to Slide 10, we show our operating performance for the incumbent broadband markets. At the end of the third quarter, we served about 112,000 broadband data customers, reflecting a year-over-year increase of 580. Data voice and video RGUs totaled 160,000 at the end of the third quarter, down 3% year-over-year, primarily due to video customers moving to online streaming options. Total broadband homes and businesses passed in our incumbent markets grew to 248,000 at the end of the quarter, up about 14,000 over the same period a year ago. This increase was driven by construction of new government-subsidized passings in previously unserved areas. As a result, approximately 20% of our incumbent broadband passings are now equipped with fiber-to-the-home technology. As shown on Slide 11, these new passings represent a strong growth catalyst in our incumbent markets, and we're seeing data penetration exceed 45% 5 quarters after a neighborhood is launched. Our oldest cohort from first quarter of 2023 has reached 61% penetration, and we've achieved an aggregate penetration of 30% across more than 19,000 subsidized passings. Moving to Slide 12, monthly broadband data churn improved 6 basis points year-over-year, reaching 1.61% in the third quarter. Our rate card strategy of offering higher speeds and more value for the same price continues to be effective in mitigating churn. Broadband data ARPU declined 1% from a year ago as expected to $82. Our commercial fiber business is highlighted on Slide 13. In the third quarter, we continued to execute with sales of almost $157,000 in incremental monthly revenue, an increase of 19% over the prior year quarter. This followed record-setting sales in the first half of the year. We're seeing strong performance across a broad and diverse customer base, including wireless carriers, mid-market and enterprise customers, wholesale partners, educational institutions and state and local governments. Our service delivery team installed $215,000 in new monthly revenue in the third quarter, similar to prior periods. Average monthly compression and disconnect churn remained very low at 0.4% in the third quarter, driven by exceptional support from our Network Operations Center and our sales team. So I'll now turn the call over to Jim to walk you through our financials and outlook for the rest of 2025. James Volk: Thank you, Ed, and good afternoon, everyone. I'll start on Slide 15 with the financial results for the third quarter 2025. Revenue grew 2.5% to $89.8 million, driven by another quarter of strong Glo Fiber expansion market revenue growth of $6.2 million or 41.1%. The Glo Fiber revenue growth was partially offset by declines in our other lines of business. Incumbent broadband markets revenue declined $1.6 million, primarily due to a 15% decline in video RGUs due to customers switching to streaming video services. The commercial fiber revenue declined $1.1 million, primarily due to $900,000 in noncash deferred revenue adjustments for one of our national wireless carrier customers and a $500,000 decline in early termination fees earned in 2024. Excluding these variances, commercial fiber revenue grew 2.3% over the same period in 2024. RLEC revenue declined $1.3 million, primarily due to lower government support revenue and a 21% decrease in DSL subscribers, as many of these customers have migrated to our recently constructed broadband Internet service. Adjusted EBITDA grew $3.1 million or 11.7% to $29.7 million, driven by the previously mentioned revenue growth and $900,000 in lower operating expenses as we recognize synergy savings from the Horizon acquisition. Adjusted EBITDA margins increased 300 basis points to 33% in the third quarter of 2025. Moving to Slide 16, we invested $212 million in capital expenditures year-to-date, net of $39.9 million in government subsidies collected. We constructed over 1,700 route miles of fiber in the last year, and we have completed construction on 89% of the planned 22,000 government subsidized unserved passings in our incumbent markets. We expect to complete this construction in mid-2026, and this will be a driver of lower capital intensity in future years. Turning to Slide 17, we are reiterating our annual guidance. We expect 2025 revenues of $352 million to $357 million and adjusted EBITDA of $113 million to $118 million. CapEx, net of grant reimbursements of $55 million to $65 million, is expected to be $260 million to $290 million. I'd now like to update you on our liquidity and debt position on Slide 18. Liquidity was $230 million on September 30, including $23 million in cash, $118 million in available revolver capacity and $72 million in remaining reimbursements under available government grants. At the end of the third quarter, we had $535 million of outstanding debt. Our first material maturity is July 2027. Thank you. And operator, we are now ready for questions. Operator: [Operator Instructions] Our first question will come from the line of Frank Louthan with Raymond James & Associates. Frank Louthan: So I want to get your thoughts on creating longer-term shareholder value either through M&A, either as a buyer or a seller. Is that on the table? And then, if not, what else can you do for -- to drive higher shareholder returns? And that's the first question. And then I have a follow-up. Edward McKay: Sure, Frank. This is Ed. Appreciate the question. The industry is consolidating, and we want to be a player in that. And we think our -- the refinancing we're working on gives us the flexibility to be a player there, and we're looking for opportunities to expand our footprint. We're also looking to drive efficiencies in our business. Some of the technology we're deploying will help us there. And also, we'll be gaining some efficiencies as we wind down our construction process. James Volk: Yes. Frank, if I could add to that, the Glo Fiber expansion is coming to an end in 2026, and we expect the positive free cash flow inflection point is a significant accomplishment, and we will begin generating several years in front of us of significant free cash flow in '28 and beyond. So I think that will be another driver based upon our organic plan. Frank Louthan: Okay. All right. And then -- so I think you mentioned you're at 30% penetration in your subsized passings. Can you remind us how many subsized passings are you -- have you been granted and what you get? And then ultimately, what's sort of the target penetration for those builds? Edward McKay: Yes. So Frank, in our incumbent cable markets, about 22,000 is what we're targeting. And we expect penetration in the high 60% range. We also have several thousand other passings in Glo Fiber markets as well. Operator: Our next question comes from the line of Hamed Khorsand with BWS Financial, Inc. Hamed Khorsand: I just wanted to say your pricing action you took with Glo Fiber, what sparked that? Are you seeing increased competition or just a lack of consumer willingness to take on the new service that you have to feel like you had to do a new pricing scheme? Edward McKay: Yes. Hamed, good question there. So Comcast launched a 5-year price guarantee in our markets in June. We did see a little bit of impact there on the gross add side, no impact on the churn side, though, but we decided to respond with our own 5-year guarantee. We've got enhanced bandwidth speeds. And that 5-year guarantee started in mid-August, and we've seen a significant lift in gross adds since then. In fact, they're above the levels we experienced before Comcast launched their 5-year plan. But we continue to believe we have a competitive advantage there, not only with speed, but with our local customer service and our network reliability as well. Hamed Khorsand: Why isn't this growth leading to you raising your guidance? James Volk: Hamed, this is Jim. I can respond to that one. It takes several quarters for growth to accumulate here. So it's not something that you get in the first quarter. But our customer churn is very low, as you're aware. Generally, we've been averaging about 1% per year. So we think these customers will be with us for 100-plus months. So it will take an accumulation of higher gross adds for a couple of quarters before we see a significant lift in our revenues and EBITDA. Operator: And I'm showing no further questions, and I would like to hand the conference back over to Jim Volk for any further remarks. James Volk: Yes. Thank you all for joining. We're at a very exciting point in our evolution, and we look forward to updating you at our next quarterly call. Have a good evening. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Q3 2025 Analyst Conference Call. I'm Moritz, your Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ioana Patriniche, Head of Investor Relations. Please go ahead. Ioana Patriniche: Thank you for joining us for our third quarter 2025 results call. As usual, our Chief Executive Officer, Christian Sewing, will speak first; followed by our Chief Financial Officer, James von Moltke. The presentation, as always, is available to download in the Investor Relations section of our website, db.com. Before we get started, let me just remind you that the presentation contains forward-looking statements, which may not develop as we currently expect. We, therefore, ask you to take notice of the precautionary warning at the end of our materials. With that, let me hand over to Christian. Christian Sewing: Thank you, Ioana, and good morning from me. As you will have seen, we delivered record profitability in the first 9 months of 2025. We are tracking in line with our full year 2025 goals on all dimensions. 9 months revenues at EUR 24.4 billion are fully in line with our full year goal of around EUR 32 billion before FX effects. Adjusted costs at EUR 15.2 billion are consistent with our guidance. Post-tax return on tangible equity is 10.9%, meeting our full year target of above 10%. And our cost/income ratio at 63% is also consistent with our target of below 65%. Profitability is significantly stronger than in the same period of 2024, even if adjusting for the Postbank litigation provision, which impacted last year's result. Through organic capital generation, our CET1 ratio rose to 14.5% in the quarter. This reflects our latest share buyback program, which we completed this month and a significant proportion of next year's distributions. Asset quality remains solid. Provisions were in line with expectations, and we had no exposure to recent high-profile cases. In short, we are fully focused on delivering on our 2025 targets. Let me now turn to the operating leverage, which drove our profit growth on Slide 3. Pre-provision profit was EUR 9 billion in the first 9 months of 2025, up nearly 50% year-on-year or nearly 30% if adjusted for the Postbank litigation impacts in both periods. Similarly, adjusted for the Postbank litigation impact, operating leverage was 9% and profit before tax was up 36%. We saw continued revenue growth of 7% with momentum across the businesses. Net commission and fee income was up 5% year-on-year, while NII across key banking book segments and other funding was essentially stable. 74% of revenues came from more predictable revenue streams, the Corporate Bank, Private Bank, Asset Management and the financing business in FIC. Cost discipline remains strong. Noninterest expenses were down 8% year-on-year with significantly lower nonoperating costs, largely due to the nonrepeat of Postbank litigation provisions, while adjusted costs were flat. Let me now turn to our progress on the pillars of strategy execution on Slide 4. We are on track to meet or exceed all our 2025 strategic goals. Compound annual revenue growth since 2021 was 6%, in the middle of our range of between 5.5% and 6.5%. In a changing environment, we are benefiting from a well-diversified earnings mix. Operational efficiencies stood at EUR 2.4 billion, either delivered or expected from measures completed. In other words, 95% of our EUR 2.5 billion goal. Capital efficiencies have already reached EUR 30 billion in RWA reductions, the high end of our target range, and we see scope for further efficiency through year-end. During the quarter, we launched our second share buyback program of 2025 with a value of EUR 250 million, which we completed last week. This takes total share buybacks in 2025 to EUR 1 billion. So together with our 2024 dividend paid in May this year, total capital distributions in 2025 reached EUR 2.3 billion, up around 50% over 2024. This brings cumulative distributions since 2022 to EUR 5.6 billion. Finally, a word on our business on Slide 5. We are delivering strength and strategic execution across all 4 businesses in our Global Hausbank in 2025. All 4 businesses have delivered double-digit profit growth and double-digit RoTE in the first 9 months. Corporate Bank continues to scale further the Global Hausbank model and delivered strong fee growth of 5% in the first 9 months, while recognized as the best trade finance bank. Our Investment Bank has been there for clients through challenging times this year and has seen an increase in activity across the whole client spectrum, institutional, corporate and priority groups. Private Bank has made tremendous progress with its transformation so far this year, with 9 months profits up 71%. Our growth strategy in Wealth Management is paying off. Assets under management have grown by EUR 40 billion year-to-date with net inflows of EUR 25 billion. And in Asset Management, the combination of fee-based expansion with operational efficiency drives sustainable returns of 25%. We are benefiting from our strength in European ETFs and expanding our offering in that area. To sum up our performance in 2025 to date, we have delivered record profitability due to continued revenue momentum and cost discipline. Our 9 months performance is in line with our full year financial goals on all dimensions. We are on track to reach or exceed our strategy execution targets. We have demonstrated strength across all 4 of our businesses. Our capital position is strong and supports our aim of distributions to shareholders in excess of EUR 8 billion payable between 2022 and 2026. Before I hand over to James, I want to briefly address our future. We have built very strong foundations for the next phase of our strategic agenda. And with our positioning in the strongest European economy, we stand to benefit from powerful tailwinds coming from German fiscal stimulus, structural reforms and renewed client confidence. We look forward to discussing this with you at our Investor Deep Dive in London in November. James Von Moltke: Thank you, Christian, and good morning. As you can see on Slide 7, we saw continued strong delivery this quarter against all the broader objectives and targets we set ourselves for 2025. Our revenue growth, cost/income ratio and return on tangible equity are all developing in line with our full year objectives. Our capital position is strong, and our liquidity metrics are sound. The liquidity coverage ratio finished the quarter at 140%, and the net stable funding ratio was 119%. With that, let me now turn to the third quarter highlights on Slide 8. Our diversified and complementary business mix resulted in reported revenue growth of 7% year-on-year or 10% if adjusted for foreign exchange translation impacts. Due to the nonrecurrence of a provision release related to the Postbank takeover litigation matter from which we benefited last year, third quarter nonoperating costs and noninterest expenses were both higher year-on-year. The tax rate of 26% in the third quarter benefited from the reduction of deferred tax liabilities due to the change in the German corporate tax rate, which will start to decline after 2027. We continue to expect the 2025 full year tax rate to range between 28% and 29%. In the third quarter, diluted earnings per share was EUR 0.89 and tangible book value per share increased 3% year-on-year to EUR 30.17. Before I go on, a few remarks on Corporate and Other with further information in the appendix on Slide 36. C&O generated a pretax loss of EUR 110 million in the quarter, mainly driven by shareholder expenses and other centrally held items, partially offset by positive revenues and valuation and timing differences. Let me now turn to some of the drivers of these results, starting with net interest income on Slide 9. NII across key banking book segments and other funding was EUR 3.3 billion. Private Bank continued to deliver steady NII growth, supported by the ongoing rollover of our structural hedge portfolio and deposit inflows. Corporate Bank NII was slightly down quarter-on-quarter, reflecting lower one-offs, while it continues to be supported by underlying portfolio growth as well as hedge rollover. With respect to the full year, we continue to benefit from the long-term hedge portfolio rollover detailed on Slide 24 of the appendix and are on track to meet our plans on a currency-adjusted basis. Turning to Slide 10. Adjusted costs were EUR 5 billion for the quarter. Cost discipline across the franchise remains strong. Compensation costs were up on a year-on-year basis, primarily reflecting the higher performance-related accruals, higher deferred equity compensation and the impact of increasing Deutsche Bank and DWS share prices. With that, let me turn to provision for credit losses on Slide 11. Stage 3 provision for credit losses increased in the quarter to EUR 357 million as provisions for commercial real estate continued to be elevated, while the prior quarter included model-related benefits. Stage 1 and 2 provisions reduced to EUR 60 million and were driven by further model updates, which, as in the prior quarter, mainly impacted CRE-related provisions. Wider portfolio performance and asset quality remain resilient. While the macroeconomic and geopolitical environment continues to create uncertainty, we continue to expect lower provisioning levels in the second half of the year relative to the first half year, primarily due to the expected absence of additional notable model effects impacting Stage 1 and 2. We are actively monitoring and managing risks from private credit, which, as outlined on Slide 28, accounts for about 5% of our loan book. Our private credit exposure predominantly reflects lender finance facilities extended to high-quality financial sponsors backed by diversified pools of loans. These facilities are overwhelmingly investment-grade rated internally and are underwritten and maintained with conservative LTVs. We apply conservative underwriting standards, including our assessment of sponsor and investor quality, loan sizes and structural features. We are comfortable with our portfolio. And as Christian said, we had no exposure to recent high-profile cases. As you might expect, we remain vigilant and have undertaken additional portfolio reviews in light of these events. With that, let me turn to capital on Slide 12. Strong third quarter earnings, net of AT1 coupon and dividend deductions led to an increase in the CET1 ratio to 14.5%, up 26 basis points sequentially. RWA were flat during the quarter. As we head into the fourth quarter, let me remind you of the 27 basis point CET1 benefit we still have from the adoption of the Article 468 CRR transitional rule for unrealized gains and losses, which will expire at the end of the year. Also, following revised EBA guidance from June 2025 regarding the calculation of operational risk RWA under the new standardized approach, we must now perform the annual update of operational risk RWA already by the end of 2025, which is expected to lead to a 19 basis point drawdown in CET1 ratio terms. All else equal, therefore, these 2 items applied to the third quarter would lead to a pro forma CET1 ratio of approximately 14%, which is also roughly where we currently expect to finish the year. Our third quarter leverage ratio was 4.6%, down 11 basis points, principally from higher loans and commitments alongside increased settlement activity at quarter end. Tier 1 capital was essentially flat in the quarter as the derecognition of the USD 1.25 billion AT1 instrument that we called in September materially offset the quarter-on-quarter increase in CET1 capital. Let us now turn to performance in our businesses, starting with the Corporate Bank on Slide 14. In the third quarter, Corporate Bank achieved a strong post-tax return on tangible equity of 16.2% and a cost/income ratio of 63%, maintaining its high profitability. Both metrics showed a year-on-year improvement for the quarter as well as for the first 9 months of 2025. As anticipated in the previous quarter, Corporate Bank revenues remained essentially flat compared to the prior year quarter, demonstrating resilience in a [indiscernible] challenging environment. Margin normalization and FX headwinds were offset by interest hedging, higher average deposits and 4% growth in net commission and fee income, driven by continued expansion in corporate treasury services. On a sequential basis, revenues were slightly lower as the prior quarter benefited from one-off interest hedging gains and seasonally stronger net commission and fee income. Loans and deposits remained essentially flat on a reported basis. Adjusted for foreign exchange movements, loan volumes increased by EUR 5 billion year-on-year, driven by growth in the trade finance business and by EUR 1 billion sequentially. Deposit volumes remained strong with underlying growth both year-on-year and sequentially, offsetting the runoff of concentrated client balances. Noninterest expenses and adjusted costs were essentially flat as effective cost management mitigated the impact of inflation and investments in client service. A release of provision for credit losses, reflecting a release of Stage 1 and 2 and a low level of Stage 3 provisions demonstrates the continued resilience of the loan book. I'll now turn to the Investment Bank on Slide 15. Revenues for the third quarter increased 18% year-on-year with continued strength in FIC supported by a material improvement in O&A. FIC revenues increased 19%, driven by strong performance across businesses. Macro products and credit trading demonstrated material year-on-year improvements following strong market activity through the quarter, while financing continued its momentum with revenues again higher than the prior year period, driven by an increased carry profile, reflecting targeted balance sheet deployment. Moving to O&A. Revenues were significantly higher both year-on-year and sequentially, increasing 27% and 22%, respectively. Debt origination was the biggest driver as both leveraged and investment-grade debt grew revenues year-on-year with the leveraged finance market particularly active, having recovered well since the second quarter. Equity origination revenues increased 57%, driven by strong issuance activity, including an improved IPO market. Advisory revenues were essentially flat year-on-year as the industry fee pool moved away from our areas of strength. However, pipeline for the fourth quarter is encouraging. Noninterest expenses were higher year-on-year, primarily driven by the impact of higher deferred compensation and increased litigation charges. Provision for credit losses was EUR 308 million, significantly higher year-on-year, with Stage 1 and 2 provisions materially impacted by further model updates during the quarter and Stage 3 impairments. Let me now turn to Private Bank on Slide 16. The Private Bank continued its disciplined strategy execution and delivered a strong quarterly performance. Profit before tax doubled, reflecting 13% operating leverage in the quarter. Return on tangible equity rose to 12.6%, showing robust growth both sequentially and year-on-year. Revenues increased driven by a 9% rise in net interest income from deposits and lending, while net commission and fee income was essentially flat year-on-year. Growth in discretionary portfolio mandates, specifically in Germany, was partially offset by lower net commission and fee income from cards, payments and postal services this quarter. Growth in Personal Banking was mainly driven by higher investment and deposit revenues. Lending revenues were up slightly, helped by the absence of an episodic item in the prior year. The continued expansion in Wealth Management and Private Banking was supported by solid momentum in discretionary portfolio mandates. Sustained cost efficiency underpinned by transformation benefits led to a 9 percentage point improvement in the cost/income ratio to 68%. Personal Banking continued its transformation with 24 additional branch closures in the quarter, bringing the total to 109 this year. These actions contributed to workforce reductions of 1,000 in the first 9 months, demonstrating continued strategy execution. Business momentum remains strong with significant net inflows of EUR 13 billion, supported by successful deposit campaigns. Underlying credit trends showed improvements with provision for credit losses benefiting from model updates. Turning to Slide 17. My usual reminder, the Asset Management segment includes certain items that are not part of the DWS stand-alone financials. Profit before tax improved significantly by 42% from the prior year period, driven by higher revenues and resulting in an increase in return on tangible equity of 9 percentage points to 28% for this quarter. Revenues increased by 11% versus the prior year. Growth in average assets under management, both from markets and net inflows resulted in higher management fees of EUR 655 million. In addition, performance fees saw a significant increase from the prior year period, primarily due to the recognition of fees from an infrastructure fund. Noninterest expenses and adjusted costs were essentially flat, resulting in a decline in the cost/income ratio to below 60% for the quarter. Quarterly net inflows totaled EUR 12 billion with EUR 10 billion into passive products, including Xtrackers, which also recorded its best day ever this quarter in terms of net new assets. SQI, advisory services and cash contributed a further EUR 3 billion of net inflows, which more than offset EUR 2 billion in net outflows from multi-asset and active equity products. Assets under management increased to EUR 1.05 trillion in the quarter, driven by positive market impact and the aforementioned net inflows. During the quarter, DWS received the necessary licenses to open a new office in Abu Dhabi, strengthening its regional presence and client engagement in the Middle East, reinforcing its position as the preferred gateway to Europe for global investors. For further details, please have a look at DWS’s disclosure on their Investor Relations website. Turning to the outlook on Slide 18. We are on track to meet our full year 2025 targets and remain confident in our trajectory to deliver a return on tangible equity of above 10% and a cost/income ratio of below 65%. Our year-to-date performance supports our revenue and expense objectives. Our asset quality remains solid. And despite uncertainty from developments around CRE as well as the macroeconomic environment, we continue to anticipate lower provisioning levels in the second half. Our strong capital position and third quarter profit growth provide a solid foundation as we head into 2026. We also completed our second buyback, taking total buybacks in 2025 to EUR 1 billion, and we reiterate our commitment to outperforming our EUR 8 billion distribution target. And we look forward to providing you with an update on our forward-looking strategy and financial trajectory at our next Investor Deep Dive on November 17. With that, let me hand back to Ioana, and we look forward to your questions. Ioana Patriniche: Thank you, James. Operator, we're now ready to take questions. Operator: [Operator Instructions] And the first question comes from Tarik El Mejjad from Bank of America. Tarik El Mejjad: Two from my side, please. First, I mean, you printed a strong Q3 results, which put you well on track to deliver on your '25 targets being revenues, cost, RoTE or capital. Can you run us through your thoughts on achieving your '25 targets and whether more importantly, Q4 would see similar or better trend than Q3 or on the flip side, we should expect some -- or could be some negative surprises. I'm always asking this because it's very important and it sets the tone for the trajectory and credibility of your medium-term targets to be released in 3 weeks' time. The second question, longer term, can you please discuss how a bank like yours would benefit from the German fiscal stimulus? I mean, how important is it as a lever, sorry, to your medium-term profitability? And maybe you can take an opportunity to update us on how the implementation of fiscal stimulus is going and the merits of it. Christian Sewing: Thank you for your question. Let me start on both questions. First of all, we agree with you. It's unbelievably important that we achieve our targets for 2025 to further build up the credibility. But to be honest, we are highly confident in doing so. First of all, let me reiterate again also what James said at the end of his comments. A, we are really happy with the first 9 months performance. I think it really shows our strength. And it also actually shows the continuous improvement, the momentum, the validity of the strategy and in particular, in the times where we are with these geopolitical uncertainties, this concept of the Global Hausbank is actually gathering more and more momentum and clients want our advice, be it private clients, corporate clients, institutional clients. And therefore, to be honest, I'm really confident that we see this momentum also going into Q4. On the revenue side, look, we had a robust, actually, I would say, a very good start in October on the investment banking side. We have a good visibility when it comes to the pipeline on the O&A side for Q4. And the predictable or more predictable businesses are looking very solid for the fourth quarter, in particular, Private Bank and Asset Management. On the Asset Management side, it's not yet over the year, but I can -- actually, I would expect higher performance fees even coming in. So there is even some upside to the already quite positive outlook. So from a revenue point of view, while Q4 is always seasonally a bit weaker than the others, but it's actually in line with our plan, even potentially higher than the plan, and that makes me absolutely confident that we can achieve the EUR 32 billion. I think we know how to manage costs. We have shown that quarter-by-quarter. The same discipline will be applied to the cost line in Q4. And therefore, I think simply from an operating performance, I'm confident that we show another good quarter. From a risk point of view, look, we are there what we told you at the end of Q2 that the second half of 2025 will show lower provisions than the first half. We have started to see that in Q3. And from a credit portfolio point of view, I'm confident. I feel comfortable. We haven't been involved in those cases, which were quite heavy in the media, shows actually the underwriting criteria we have, the discipline we have. And therefore, I'm confident there. And that shows me overall, while there is always obviously some seasonal issues, but looking actually at Q4, it all adds to my high confidence that we will meet and potentially even exceed our targets when it comes to return on equity, when it comes to the cost/income ratio. And also as important actually to our target to shareholder distributions well above EUR 8 billion. And therefore, I think we also have actually a very, very good capital story, and I'm sure James will talk about that. With regards to Germany and how we build this into our plan, now I don't want to be defensive when I refer to our IDD in 2.5 weeks' time because obviously, we will talk about that far more in detail. But also, again, for -- or as an answer to your question, look, first of all, I have not changed my view on Germany and the stimulus program and what Germany will do, so to say, over the next 2 to 3 years. The government is clearly reiterating that growth and competitiveness is at the core of their agenda. And while there is noise about the speed of implementation, which I understand, we all wish even for a speedier implementation, we should also actually think about what has been done next to the, so to say, adjustment of the dead break. And actually, there are very concrete discussions between the government and other institutions, including ours, how to deploy now the EUR 500 billion, be it on infrastructure or be it on defense. But we have seen other reforms on the tax side, the investment booster, initial changes to social and pension reforms. And look, when we discuss with the government, there is clearly more to come. And therefore, we are very optimistic that Germany is able to grow by 1.5% in 2026. I can also see actually that, again, while the private corporates are calling for even speedier implementation, actually, on Monday, it came out that the ifo Business Climate Index was at the highest level since 2022. Now this is also much needed, but you can see that it's going into the right direction. You know about this Made for Germany initiative since the start end of July, when I reported here for the first time, we have almost doubled the number of companies which are participating. We are now at a committed number of more than EUR 730 billion of revenues -- of investments -- I'm sorry, not revenues of investments committed for the next 3 years. So of course, we need to keep the pressure on the government, and that is obviously needed. But I'm actually very optimistic that Germany will leave this flat growth scenario, which we have seen for too long and is coming back to growth. And that obviously helps us and more details on the IDD. Operator: And the next question comes from Joseph Dickerson from Jefferies. Joseph Dickerson: I've got a question first on private credit in a couple of areas. So I've seen your disclosure on Slide 28. And it seems to me that people tend to conflate private credit with other aspects of asset-backed finance and sponsor lending. So I guess, could you just give us your perspective on private credit and the outlook? What are the areas of risk you're looking at? And what are the areas of opportunity that you are also assessing because it seems like only months ago, this was a big area of opportunity for banks. So it would be interesting to have your opinion on the opportunity. And then just on nonbank financial institutions because I know the disclosure in the U.S. is different from Europe, where I don't think there's a precise definition, but how do you assess NBFIs and counterparties in that regard? So that's, I guess, the first question around private credit. And then secondly, on the CET1 ratio with the OCI filter and the op risk, which I think was pulled forward in the Q4. Can you confirm that going forward, you'll distribute capital down to the 14% threshold sustainably? Because I think that's an important point for investors. James Von Moltke: Thanks, Joseph, for your questions. It's James. I'll -- let me start with the capital item you mentioned. So the short answer is yes. And we feel -- we wanted to indicate with the pro forma we gave even greater confidence about our distribution path from here. And let me just make sure that our comments were understood. The 2 items that we called out in the commentary are ones that we've talked about before. But we think we're in a position now through the EBA guidance and our own actions to bring both into the year-end ratio. You may recall that we talked about some volatility potentially in the ratio, so a high step off, which would not have given you a clean view of our position going into '26. We think we can now do that. And hence, the guidance of 14%, we think is really encouraging because it puts us in the position to generate excess capital from the start of the year essentially and then potentially distribute that. Now I'd also make the point that with the interim profit recognition that we have, as we sit here today, EUR 2.4 billion of capital is disregarded in the ratio. So the 14.5% excludes EUR 2.4 billion of distributions that are earmarked for distribution next year. And of course, 50% of net income in the fourth quarter would also be ready for distribution based on that 50% payout ratio. And then we would be in a position to exceed that based on earnings above that 14% starting point. So we wanted to send a strong message that we're starting at the top of our range. And that gives us greater confidence even than when we spoke a quarter ago. Just going essentially in reverse order, the NBFI disclosure really isn't very helpful because it captures all sorts of things that investors aren't looking for like clearing houses and insurance exposures and the like. And hence, the additional disclosure that we provided of approximately 5% of the loan book being to private credit. We talked a little bit about the nature of that lending. You asked about the opportunity. Look, we've been in this market for a very long time. So the FIC financing business is not new for us. We've been in structured credit lending for many, many years. And as a consequence, we think we have real capabilities to innovate and take advantage of opportunities in the market as they develop from here. We also have a good track record in terms of underwriting and discipline against our risk appetite. And so while we do see spread compression in the business that's coming from the additional capital going into private credit, whether that's from banks or from private credit industry players, we also see opportunities to innovate and grow the book. We've been very disciplined, as I say, in that business, but it is one that we've successfully and I think, profitably grown in the past. And we think that's continuing notwithstanding the spread compression point I made earlier. Joseph Dickerson: Great. So just to conclude on the Q4 capital position, it sounds like you're creating a position of strength for next year. James Von Moltke: Position of strength, absolutely. We talked about the OCI filter starting in the third quarter of last year. It was a feature of CRR3 that we and other banks availed ourselves of. So a temporary protection of about EUR 800 million in unrealized losses on essentially sovereign debt. And then we've also talked about the fact that in the old regulatory guidance, we would only recognize op risk RWA increases in the standardized approach that refer to the prior year's revenues. Based on new EBA guidance, that's expected to be recognized already in the year. And those are the 2 items we're calling out. And the good news for investors is it will take the volatility out of our disclosure, but the guidance of a 14% endpoint, we think, is encouraging. Operator: And the next question comes from Giulia Miotto from Morgan Stanley. Giulia Miotto: I want to first follow up on the capital distribution point. Is it fair to expect 2 buybacks next year? So one with Q4, of course, and then the second one, I don't know, perhaps towards midyear results given that you start already from 14%, you build excess capital from there and you intend to distribute everything down to 14%. And then -- and to be clear, I'm trying to confirm that there are no potential downgrades to the at least EUR 1.5 billion of buybacks expected in '26 from consensus. And then secondly, thank you for the additional disclosure on private credit. That's helpful. I think you stated that these are exposures to high-quality lenders, investment grade with conservative LTV. Do you disclose the average LTV and also concentration? How big is the largest exposure? Would you be able to give these numbers, which I think could reassure investors even further? James Von Moltke: Sure, Giulia, thank you. So again, going to the distribution piece, yes is the short answer. We're all kind of reacting to the rules as they have evolved in Europe as to how to craft the distribution policies and go through the approval hurdles. But in our case, I think investors should expect that in the, call it, the first half, maybe 7, 8 months of the year, we would be in a position to distribute what is accrued, if you like, on the basis of that 50%. And then assuming there is in our capital plan, excess capital, then it would take a second application and second approval process to do that, actually similar to what we ultimately did this year. But obviously, as net income rises and the forward view comes into focus, those numbers essentially increase with earnings. The other thing just to point out is that we talked about last quarter the sort of sustainably above concept. And what I want to make clear is that it means that in our capital plan, that amount of capital above 14% isn't just a flash in the pan goes away. But it also means that opportunities that we see in the capital plan as they materialize also can produce excess capital. To give you an example, FRTB is still in our capital plan and were that to be pushed out or amended that then our capital plan would potentially show additional excess capital. Equally, good news or in the sense of slower demand for capital in the businesses can also create excess capital. So I want to be clear that, that's how it works. But -- and therefore, Giulia, in your framing of it, that's what the second application would then take into account with the passage of time. On private credit, we do disclose on Page 28, the LTV associated with the -- with that 75% block that we refer to as lender finance. So that's the diversified pools of credit that have back leverage against them, and that is below 60% with an LTV maintenance covenant in, I think, most or all of the facilities. And that's actually reasonably typical of the type of lending here. In fact, when you go into other types of private capital lending, say, subscription finance or NAV financing, you find LTVs even lower in the case of NAV financing, significantly lower than that 60%. So we take it to be -- except in the case of fraud and fraud only really hurts you when you're in a single lender facility or single asset facility. And we have a very small exposure to that type of nonrecourse single asset as a percentage, again, of that 5% of the loan book. So hopefully, that gives you some color for what the exposures look like. Giulia Miotto: This was super clear. Just if I can follow-up, can you quantify the exposure to this single lender facility that you just mentioned? James Von Moltke: I think it's less than 5% of the 5% by memory. So it's a very small exposure. And actually, I would add to that, Giulia, that in those cases, given that it's single asset, the oversight that we put and the LTVs we're willing to lend at are even more conservative than when it's a pool. So we -- again, no one is ever going to be perfect in lending, but we feel that these portfolios are very robust in terms of their protection attachment points and oversight. Giulia Miotto: Great. And the last follow-up. The 60% LTV is on 75% of this private credit exposure. On the remaining 25%, what sort of LTVs do you have? James Von Moltke: Average would be lower than the given the composition that I mentioned of what is otherwise there. Operator: Then the next question comes from Flora Bocahut from Barclays. Flora Benhakoun Bocahut: I wanted to ask you a first question on the op risk comment you made regarding the annual update that is coming at year-end. I just want to understand how much of a one-off this is because you mentioned annual event when you comment on it. So is this something that's going to hit again every year? And if so, do you have an idea of the magnitude? So just to assess how recurring an event this could be? And the second question is on the Corporate Bank revenues. The fee growth is clearly positive, but has been slowing a bit this quarter. The NII declined slightly sequentially, which you commented on. For you to make the guidance for the full year, it would imply a boost suddenly sequentially in that revenues for Q4. So anything you can give us on how confident you are that there is going to be a rebound Q-on-Q in the Corporate Bank revenues in Q4? James Von Moltke: Thanks, Flora. Yes, the op risk item is now a permanent feature in the standardized approach to operational risk RWA. It also, by the way, removes the volatility intra-year. So we will record a number in December, and that will be flat through the balance of the year. I think it runs off a 3-year average. So each year, you have to update for that year's new revenue number in the 3-year. On CB, I do think we're looking at a, what I'll call a trough in revenues. Now I think we want to be a little bit cautious about that prediction. But to us, NII should be passing through a trough, a sort of a mild increase going into Q4. But beyond that fee and commission income, there's always -- remember, a little bit of sequential seasonality. Q2 tends to be the highest quarter of the year because of dividend season and what happens in the trust and agency business. So Q3 is always a little bit softer. But this steady build of the fee and commission income streams in the Corporate Bank, we expect to continue in the years ahead. Obviously, we'll talk more about that on November 17. But it has a -- so I would expect to see Q4 continue to show momentum, perhaps accelerating momentum against where we've been very recently. And again, it's a business where you compete for business with RFPs and put on the business. So you have some visibility into, if you like, a pipeline of new activity coming through in Corporate Bank. Christian Sewing: Let me just add to the last point. I think this is a really good point James is making. Just take, for instance, the example of Miles & More in Lufthansa, where for the last 2 years, actually, we have invested in the transition now to the Corporate Bank. And that we actually can see on various fronts, in particular, on the payment platforms with supplying new technology. So I would -- as James is saying, I would expect a slightly increasing number in Q4 in the Corporate Bank. But in particular, the investments we are doing for the fee and commission business are building up and building up. So it's actually quite a nice story. Now even more important is that if you -- despite the Q3 number, which was slightly lower than the consensus was, look at the profitability of the Corporate Bank. It again increased, and that also shows that more and more we apply technology, and that means that our process is getting more efficient and cost/income ratio is going into the right direction. So overall, despite potentially a non-beat on the consensus of revenues, the overall development in the Corporate Bank makes me actually very confident. James Von Moltke: Actually, probably one thing just to add. I think, Flora, you may have asked for the op risk, the RWA number that we're assuming in Q4, it's about EUR 4.5 billion that would, we think, mechanically come into the denominator for the ratio, just to close that gap. Operator: And the next question comes from Andrew Coombs from Citi. Andrew Coombs: If I could ask one on the Investment Bank and then one on the Private Bank. So on the Investment Bank, if you take the provisions, you talked about model effects driving higher Stage 1 and 2. But perhaps you could elaborate on that and confirm that that's a one-off model change, you wouldn't expect it to repeat. And then secondly, on the Private Bank, very, very good broad-based strength across both personal and wealth management. It looks like the margin trends you're seeing there, particularly around the deposit book are very different to the corporate bank. So perhaps you could touch upon that. And also the operating leverage in that business. You've managed to grow revenues and still strip out costs at the same time. So where do you think the operating leverage could move to? James Von Moltke: So Andrew, I'll briefly take the first item. The -- so look, it was about EUR 100 million of it was in total in Stages 1 and 2. And that was almost entirely driven, I think, by model changes. And it was a probability of default model that we changed this quarter. Last quarter was an LGD model. And Look, we've been updating the models to reflect where we are today in the interest rate cycle, new data that's come in. But to your question, that we're done for the year. The model adjustments that lie ahead are negligible. And actually, over the full year full firm, the model impact will be -- will also be relatively immaterial. So that's what it is in there. So EUR 100 million of the EUR 300 million was model items, EUR 100 million or thereabouts was CRE. Christian Sewing: And Andrew, on the second question. Look, if you compare the Private Bank and the Corporate Bank, we have to be fair because the starting point for the Private Bank, obviously, from a cost/income ratio profitability is a completely different one than the Corporate Bank, and we had to expect these improvements. Now the good thing is that Claudio is really running a very, very clear strategy in doing 2 things. On the one hand, continuous growth on the top line, in particular, when it comes to asset gathering. If you look at the assets under management in Wealth Management, but also in the Private Bank with the deposit campaign and strategy, it's really looking well. And I told you in my initial remarks to the first question that I expect actually that the private bankers will also show a very solid Q4. And on the other hand, all the investments we have done over the last years are actually finally paying off in terms of cost saves. And that makes me most confident that next to the nice continuous top line growth, we will see a continued flow of cost reduction because we are going more and more into straight-through processes, in particular, in Personal Banking. You have seen, so to say, month-by-month new items when it comes to digital technologies, whether it's a new mobile app. And you can see that these investments are paying off and that costs are coming down. We are continuously reducing our branches and move into more digital setup. So that momentum, which you see is obviously forecasted and expected to hold also into the next years. But when you compare to the Corporate Bank, we need to be fair. It was a different starting point. Operator: Then the next question comes from Stefan Stalmann from Autonomous. Stefan-Michael Stalmann: I would like to follow up on the point that you made, Christian, regarding the Lufthansa credit card portfolio. I think that's now coming basically on board. Could you maybe remind us roughly of what kind of revenue impact we should expect there? And the second question relates to your very helpful disclosure of the daily trading P&L, Slide 26. You have now had a couple of quarters where you have very strong trading days very much at the end of the quarter or maybe one of the last 1 or 2 days of the quarter, around EUR 100 million often. Can you provide any color of what exactly is causing this kind of spike towards quarter end? Or is it a pure random walk? Christian Sewing: Stefan, thank you. So I won't give you the detailed numbers because it's a one-to-one relationship, and we shouldn't do this. But a, we are in the middle of the transition from an IT point of view, I think this is very important because we talk about a large transition from one bank to the other. It's going actually very, very smoothly. We started with the pilot at the end of Q2. We have increased the volume then over Q3, and now we are in the middle of moving all clients actually to our offering and very, very encouraging start in October. And overall, it is clearly a revenue increment to the Corporate Bank, which is well in the double digits per year. And in my view, with more upside. And the more upside is actually the cross-selling, which we are able to do in our Global Hausbank from corporate to private clients. I mean this is the strength of Deutsche Bank that we can now actually apply that to 19 million private clients, and that's what we are going to do. Secondly, this is a signal to other operators with similar loyal cards and similar systems that Deutsche Bank can handle that, and that makes this business so attractive you think also when you think about other corporate clients. So on the individual clients, clearly value enhancing and good revenues, but I expect far more actually from cross-selling and with other corporates. James Von Moltke: And Stefan, it's a good observation that the markets revenues will often have a strong sort of quarter close. It depends on the quarters. But very often, it is essentially as we evaluate reserves, so day 1 P&L and illiquidity reserves and the like in the business that those determinations are made towards the end of a month or a quarter. That is kind of one of the reasons why guidance in the business isn't always perfect to do. But there's also events during those last, say, 10 trading dates that can influence the result that are part of the, as you say, the actual ebb and flow of the markets. And then there are also some quarters in which we have specific transactions that are taking place and through our systems. that are, if you like, just happening to take place or designed to take place at the quarter end. This is a quarter where, in fact, we had all 3 of those things. So it was a very strong finish. But to your question, it's not entirely accidental that the quarter can finish strong, especially with the reserve releases. And some of this is difficult to predict precisely. Operator: And the next question comes from Nicolas Payen from Kepler Cheuvreux. Nicolas Payen: I have 2 questions, please. The first one will be on your structural hedging actually. Could you tell us how you think about your structural hedge supporting your NII trajectory for the next few years? Because at the end of the day, it's supposed to become a strengthening tailwind. So if you just could discuss how you think about it and also maybe with your strong deposit performance, especially in PB, could we see further notional increase supporting further your NII trajectory? And the second one would be on your loan development, especially on the investment bank has actually been very strong. And just wondering what drove that strong increase sequentially. James Von Moltke: Nicolas, thank you. So yes, and I would point you to the disclosure on Page 24 of the deck, where we show you the hedge amount and the future benefits we expect from the hedge. The answer is we are relatively programmatic about our Caterpillar. So the assessed duration of the deposit books and rolling over the hedges of that. And you can see in the disclosure. And of course, that increases as the deposit books grow and particularly as the Private Bank deposit book grow because it's longer -- it's deemed to be longer tenured or modeled as longer tenured, and it is more euro-based than the corporate bank book. So that -- what we're showing you is essentially what that -- just the model or the hedge revenues will be in the future, and they do benefit from growth. Think of it as a static portfolio here, but growth in deposits will increase that going forward further. I want to make one other point here. I think we asked -- we've talked to this in one of the previous calls, but we also take positions to anticipate deposit growth or protect ourselves from specific market environments that we see. So it is a little bit more dynamic than simply this one 10-year Caterpillar. But in essence, it produces the revenues that you see here. What's driven the loan growth in the Investment Bank? Over the course of the year, it's principally been in the private credit portfolio that we talked about. So we have seen good opportunities to deploy the balance sheet there. But also O&A has seen some growth essentially as the business grows and we see more activity, you've also seen some deployment there. Operator: And the next question comes from Tom Hallett from KBW. Thomas Hallett: So firstly, I'm just wondering if there are any underperforming assets on your books, which may be deemed noncore? Because I can see some articles on the DWS data center sale in the pipes. There's previously been talked about India and possibly Poland. And then secondly, maybe thinking a little bit ahead and possibly to the Investor Day, but will you look to run the business on a cost/income basis or an operating leverage basis or absolute basis? And what are the hurdle rates for allocating capital out to the businesses? And I kind of say that because I see the allocations continue to increase towards the Investment Bank. James Von Moltke: So Tom, I'll take that, and Christian may want to add. Let me just, first of all, say that I don't want to speak to specific actions or events in terms of things we might exit until we're done with that. And -- but certainly, we're looking at the businesses, and we've talked about this since Q4 with this SVA shareholder value-add lens with a real focus on driving more of the balance sheet to being above hurdle and showing real discipline there. Now, there are a number of ways to do that. It can be pricing. It can be, again, reallocation of capital internally. But we do have that discipline, and we'll talk more about that on November 17 when we come together for the Investor Deep Dive. Christian Sewing: I think you said it all. And the only thing is, Tom, I think we already started to implement that step by step. You have seen some action already in the German mortgage book where Claudio decided to exit sub businesses exactly for that reason. I think we are now in the position to do this, whether it's on the pricing side, whether it's on the more consequent capital allocation. So as James is saying, you will hear far more on that in November 17, but I can also tell you that we started to do that, and it shows the first very positive impacts like you see in the Private Bank. Operator: The next question comes from Anke Reingen from RBC. Anke Reingen: The first is just coming back on private credit. I mean, I guess you gave quite a lot of detail on the credit side. But can you sort of like give us an indication on how much the business has sort of like contributed to the top line business of private credit and driven the growth just in terms of is there could potentially be a risk if that area is becoming under more scrutiny? And then secondly, I know we have your Investor Day coming up in November, but just looking backwards and acknowledging 2025 isn't quite completed. But if you look back on the 2022, 2025 plan, what are sort of like the lessons learned in terms of good and bad when you embark on your new plan? James Von Moltke: Goodness. The second is a long open-ended question that I might give to Christian, but we'll both have, I think, lessons learned to share from the last several years. Look, I would simply point to the financing, the FIC financing revenues you see on Page 15. And obviously, it's not all private credit. There are other activities than private credit in there, including incidentally commission and fee income that typically is earned from distribution of assets. So whether it's asset-backed facilities or warehousing of, say, CMBS before issuance. So there's a bunch of things going on. To your point about risk, look, it's a banking book business, which we think is attractive in terms of its stability in the revenues, its predictability in terms of the spread that we can earn and its risk profile. I mean we've been -- as we're preparing for today, we've been racking our brains as to whether we have had a risk event, sort of a loss event, at least in the portfolios we've been talking about today. And I said earlier that we think we've got some really good intellectual property. So is there a risk to the business in terms of a difficulty in the cycle potentially. But to be honest, given the nature of the business, we don't really see that or our own appetite, acknowledging that our appetite has been disciplined and consistent over the years as we've been in the business. So the short version is we like the business. We think we can continue to grow, but we'll grow in a measured and sort of risk-appropriate way. Christian Sewing: Look, Anke, really good question. And I actually need to think a little bit longer about that. But let me start with 2 or 3 lessons learned from a good point of view, from a good side, and then I'll give you also one where I think we could have done better. Number one, remember when we did this, that was 10 days after Russia invaded Ukraine. And a lot of people told us, don't go for an IDD, and we did it. And that shows our underlying confidence in this bank, the strength of this bank, that the Global Hausbank is exactly the right strategy and that we continue with that IDD. And to be honest, I'm really proud of this organization, what they have delivered in those years, which were full of uncertainties, but they kept to the plan. The team worked very, very hard. And I think it was at the end of the day, exactly the right decision to go out. And that was the first thing that if you are convinced with something, you should also be courageous, and we did this, and it was the right thing. Number two, lesson learned whenever you do an IDD, you need to take your team on a journey. And it's not only, so to say, for the market and for you, but it's also something where you need to motivate 90,000 people. And I think we did this. Can we do even that in a better way? Yes. And we learned some lessons, and you will see it then on November 17 when we talk about how we carry that out internally because it's a story not only for the market, but for our people because our people are driving this bank. Number three, I think the Global Hausbank strategy in itself, huge success. And as I said, we can see that it's developing better and better from quarter-to-quarter because people want to have their anchor in times of uncertainty, and that's actually we are that European answer to that. Number four, with certain, so to say, portfolio decisions, we could have been more consequential, I would say. And that is certainly a lesson which we have learned. And you know what, there is now time to correct that. And therefore, I'm looking forward to the next IDD. Operator: And the next question comes from Chris Hallam from Goldman Sachs. Chris Hallam: So 2 for me. And the first one, once again, on capital. So 14.5% headline CET1, 14% pro forma for Article 468 and the op risk headwinds that you flagged. So you should see around 20 or 25 basis points of cap gen via retained earnings in Q4. So I guess, finishing the year 14.2%, 14.3%. You've mentioned you want to finish around 14% -- so I guess just anything else to flag in Q4, maybe on the RWA side or on an accrual rate above 50%? And then anything you can already see coming early next year? I'm just trying to think about what sort of position you're going to be in by the time we get to Q4 numbers in the AGM. And then the second, which is a slight follow-up to the points you made earlier, Christian. In the Private Bank, you've kind of had this story so far this year of growing deposits but declining loans. And so what's your best sense of how that evolves in the coming few quarters or through the balance of next year because rates are coming down, borrowing is becoming more affordable. The economy is doing a bit better. You've been investing in the digital setup, as you mentioned. But then against that, you've got this capital discipline focus. So I'm just trying to get the balance of perspective there. James Von Moltke: Thanks, Chris. It's James. I'll take the first, and I think Christian will do the second. Look, the only thing that is at this point now seasonal, given the adjustments we walked you through is really the share repurchases we do for equity comp delivery in the first quarter. Now the first quarter tends to be seasonally from an earnings perspective, also among the strongest. But otherwise, it is simply the math of organic or net income less the 50% payout assumption and then offset by growth or demand in the businesses. Now sometimes we overestimate demand. And that can, as I said earlier, produce excess capital, but we, of course, wish to support the businesses, support clients with the capital deployment. So we want to be reasonably conservative in our capital planning to ensure that we have that room to grow. You have had lots of changes in rules and methodology and so on over the years. I would see that slowing down now that we're in CRR. That should become more-rare. Now, I want to be careful about a forward-looking statement given how much is built into this. But internal capital generation, all of that considered in a range of about 25 to 30 basis points has been -- if you peel through it all, kind of a norm. And the question is going to be where all of the ingredients fall out going forward. But short version is we do feel we're in a strong position to generate excess capital and do so kind of on an accelerating basis in the years ahead. Christian Sewing: Look, Chris, on the Private Bank, we clearly have our plans to continue to grow deposits and use that kind of attractive funding to replace more expensive sources. On the business overall, I would say we expect a flattish loan growth in Private Bank overall. Now clearly, some growth to see in Wealth Management. I think it's an attractive area where we can actually grow, and we have plans to do so. In other areas in the Private Bank when it comes to mortgages, I would say it's rather flattish because, again, we are absolutely measuring that portfolio via SVA. And if it's not value accretive, we won't grow that. And overall, in the Private Bank, like I said before, Chris, if you look out longer for the next 3, 4, 5 years, the real big upside in the Private Bank is on the asset gathering business and on the investment business. And not only with our market position in wealth management, but in particular, when it comes to retail and personal banking. And that's all tied to the plans of the German government because you will see that next to the state pension, there is a necessity that on the private side, people need to do more, and this is where we are looking into. There, we are working on a digital offer. There, we are working on offers for retail clients to grow that business. And if you think about our Postbank clients, which are the majority of the retail clients and their access to those products, it's actually, for the time being, not very much used, and that shows the opportunities we have in that business. So our focus when it comes to the Private Bank is clearly on the asset gathering side. Operator: And the next question comes from Jeremy Sigee from BNP Paribas Exane. Jeremy Sigee: Just a couple of follow-ups, please, on the Private Bank and the Corporate Bank. On the Private Bank, you talked about further cost savings. Are there any step change cost saves still to come through in the Private Bank, particularly from integration-related or system takeout? Any step change? Or is it just incremental process efficiency kind of bit by bit from here? And then second question on the Corporate Bank. You mentioned growth in trade finance year-on-year. And I just wondered what areas that was coming from? Is it Germany, Rest of World, any particular industry sectors? Christian Sewing: Jeremy, on the Private Bank, to be honest, let's also wait for the IDD because you get a quite good outlook for the next 3 years, what we are doing there. But it's a continuous improvement. Continuous improvement from actions which we have started to implement. If you think about the plan how to reduce branches and make that business more digital for our clients, then this is something which you plan in '23, '24. And we now see the effects. And therefore, I'm so happy actually with the quarter-over-quarter cost takeout Claudio can do in particular in the personal bank, but that is going to continue because we know already now how many branches we close in '26 and later on. Secondly, we are working constantly on straight-through processing, and that is with regard to payments, that is with regard to the lending process, that is with regard to the investment process. And that is the reason why we have changed the bank initiatives and investments, and you will see that as obviously then cost efficiencies going forward. So I would expect a continuous improvement on that side, but more details in the IDD. James Von Moltke: And Jeremy, I'm not aware on the trade finance question, I'm not aware of any particular sort of trend or concentration that we're seeing in terms of where the growth is coming from. You'll recall that we've been sort of waiting for the growth from the balances. We kind of were stuck at that kind of 115 level. We do now begin to see some growth. And the place where our emphasis is in structured trade finance. And so that's really the business that we're seeking to grow. Operator: And the next question comes from Mate Nimtz from UBS. Julius Nimtz: Yes. Just 3 shorter questions, please. The first one would be on the IB. In the cost base, G&A expenses show about a EUR 100 million increase quarter-on-quarter. I'm aware that some of that is some pickup in nonoperating items, litigation. But any further explanation on that step-up? And how should we think about the year-end from this perspective? Then the second question is still mainly staying with the IB commercial real estate. Could you give us an update on that asset class on that part of the book? Provisions are still at a high level, particularly Stage 3. I think in the commentary, you called out on the slides, West Coast defaulted assets still. Any thoughts you can share on the outlook in Q4 and next year would be helpful. And just the last one on the Private Bank, and I'm cognizant this is something you'll talk about, hopefully, in 2.5 weeks. But we are seeing a return on tangible equity now firmly above 10% for the second quarter in a row, 12.6% in Q3, impressive step-up from a mid-single-digit level in the previous couple of quarters, and that's without much movement, obviously, on lending. Is this the bare minimum level we should be having in mind as a base going into 2026? And any further improvement on the cost side or coming from investment products will offer the upside. Is that the right way to think about it? Christian Sewing: Thank you for your question. I take the last one. Look, we clearly expect further operating leverage in the Private Bank, and we will talk about that in 2.5 weeks' time. But very happy that we are above 10%. That's what we promised you. That's what we delivered. And from here, the way is up. James Von Moltke: And then, Mate, on the 2 items you said on IB cost base, nothing noteworthy there. There was a bank levy that we booked in Q3 that gets mostly allocated to IB and then some odds and ends in terms of professional services, market data going up and the like, but nothing that I would call out. On CRE, we talked about this going on, I think, 2 years plus. And there's obviously been a cycle and that cycle has taken us close to the severe stress that we initially called out on a -- for the stress tested portfolio. I do -- while I'm cautious about calling an end to this, and I don't think we're there. There's still going to be some provisions, we think that will come in time. But as I've said before, they tend to be valuation adjustments on existing defaulted positions. And in a sense, they're becoming more and more concentrated, as we called out last quarter in the West Coast of the United States in the office portfolio. So as that sort of bleeds out and comes to a steadier level, I would expect to see this begin to fall off in the next several quarters. And you've seen, again, some signs of strength as cautious as I'd like to be on East Coast, I think office has significantly recovered and other aspects of commercial real estate outside of office have been strong. So we're looking at it as we think in a healing process. Operator: And the next question comes from Kian Abouhossein from JPMorgan. Kian Abouhossein: Just coming back to CRE. On Page 29, if I look at the Stage 3 loans in the IB, I guess that's where the -- some of the CRE issues rose. And just trying to understand if you can give a little bit more detail, is the several loans? Is this 1 or 2 loans where you had default issues? And coming back to the outlook question, I mean, if I look at the comment on Page 30, advanced stages on the down cycle reached, but U.S. office headwinds remain, considering most of your book is actually office related. I'm just wondering what gives you the confidence on your previous statement, the last question that actually we're going to see an improvement here considering your low coverage levels? And then the second question is on... James Von Moltke: I'm sorry go ahead. Kian Abouhossein: Apologies. Risk-weighted asset outlook. How should we think about the risk-weighted asset outlook? Should we think about it's going to remain flattish going forward? Or should we think about growth, but then you potentially have further optimizations to do, which leads to the flattish number, i.e., growth with this net is what I'm trying to get to. James Von Moltke: Yes. So Kian, thanks for the follow-up. Look, it's a handful of loans. And I'd say concentrated in this quarter, say, less than 10. So there was a concentration of events that -- where we saw valuation changes. And one thing I've been tracking now for several quarters is the number of loans that is coming up for refinancing or extensions where we see either events or new appraisals coming down the pike. And Kian, the answer to your question is those things are beginning to slow down, what I'd call perhaps the forward-looking indicators on these things. So again, I want to be cautious now having thought we'd found the bottom and discovered false dawns, but it does feel like it's very late cycle at this point on this down cycle in commercial real estate. On RWA, to be honest, we'd like to see healthy growth just of the businesses and client demand. And as I said earlier, we think our capital plans absolutely accommodate that growth. But to your point, we will continue to work on efficiency and also sort of portfolio collect -- sort of concentration, if you like, or optimization as time goes on. And we think that, that can contribute to even further improving revenue to RWA profiles and more efficient capital usage. And that would be an offset to the simple, if you like, unweighted growth in the balance sheet and business. Kian Abouhossein: And just on -- when you say you're coming to the kind of end of the cycle of these kind of readjustments on the loans, the duration must be quite long in the CRE book, more than 2 years at least. So I'm just wondering why we would think about having reached the peak or maturity of the cycle of making adjustments at this point? James Von Moltke: Typically, Kian, 5 year -- the structures typically are 5 years. They tend to be extendable. And so -- and the point to your question is we haven't done a great deal of new lending. So this is a portfolio that's now quite seasoned in terms of either having been extended and refinanced or having gone into default and through sort of a restructuring or into real estate owned. So it's really a question of seasoning of the existing portfolio and a forward look on to loans, as I say, that are coming up to events. But those that are still open are robust properties. And that's other than a handful, and that's really what's giving us a forward view. Operator: So it looks like there are no more questions at this time. And I would like to turn the conference back over to Ioana Patriniche for any closing remarks. Ioana Patriniche: Thank you for joining us and for your questions. For any follow-ups, please come through to the Investor Relations team, and we look forward to speaking to you at our fourth quarter call. Operator: Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.
Ulla Paajanen-Sainio: Good afternoon, everyone. Welcome to Outokumpu's Third Quarter 2025 Results Webcast. My name is Ulla Paajanen, and I'm currently in charge of Outokumpu's Investor Relations. Our speakers today are CEO, Kati ter Horst; and CFO, Marc-Simon Schaar. Kati will explain us about the highlights of the quarter, progress of our EVOLVE strategy, as well as the fourth quarter outlook. Marc-Simon will concentrate on business areas and financials. Before handing it over to Kati, let me remind you about our disclaimer since we might make forward-looking statements during the presentation. Kati, please go ahead. Kati Horst: Thank you, Ulla, and warmly welcome also from my side to our Q3 results call. So today, we'll be talking about the Q3 results and the outlook for Q4 as usually, but I'll be also making some comments on how are we moving forward with our EVOLVE strategy with an important step. But let's start then with the Q3 results. So our adjusted EBITDA amounted to EUR 34 million during the quarter, and this was very much reflecting the weakness in the European market. If we look at the highlights of the quarter, I could also say that we are really very much now focusing on cost competence on one side and then the transformation on the other side. If we start with the stainless steel deliveries, they decreased by 11% and mainly due to the very continued subdued demand in Europe. If we look at Europe alone, deliveries decreased by 12% and then the decrease in Americas in stainless steel market for our deliveries was 6%, so half of the Europe. Then if we look at our short-term cost-saving measures, we are very well on track. So year-to-date, Q3 end, we have now reached EUR 42 million of savings and will reach the promised EUR 60 million by end of the year. We are also proceeding with our planned restructuring plan for EUR 100 million before the end of 2027. So we have started now collective negotiations in all our key production countries in Europe and are proceeding with those. Hopefully, everything being clear then by the end of the year. And then the exciting news of today, we are investing about USD 45 million in a new pilot plant in the U.S. to scale up our proprietary technology for low-carbon metals, and I will come back to that a bit later. If we look at the market conditions now in Europe and Americas, especially through the lens of imports, you can see here that in quarter 3, in Europe, the imports increased to 29%. And this is very much what we've been commenting in the past quarters as well that the tariffs in the U.S. will put more pressure on the European market, and we will see more Asian imports coming in. And this is exactly what you see on the left side of the chart. Regarding then the Americas imports, we currently don't have the Q3 figures because of the government shutdown. So the only weaker figure from Q3 we have is July, which shows here now an increase to 33%. I would think that the imports probably are bit a similar level in Americas in Q3 as Q2 once we get the numbers. Then commenting on a group level, the overall picture, you can see that our deliveries were at a low level in Q3. This comes really from the weak market conditions in Europe. We have not lost market share. It is really the weakness in the market. And then if you look at what is the bridge from our Q2 result to Q3, you can see that it's very much about deliveries, getting some help from raw material costs. And then in Ferrochrome side, we had a bit higher deliveries, but when you translate the U.S. dollar euro rate, then that was now hitting us on the pricing side. And then we had also maintenance stops in the quarter, which impacted the result. We comment every quarter now on the EBITDA run rate improvement. This is an initiative that started in '23 and we will end the program by the end of '25. So currently, we are at EUR 336 million of cumulative savings and improvements and will reach the EUR 350 million as targeted. Many of these improvements are something that you only will see really coming through in our books when the market conditions improve. But to highlight a bit what did we -- for instance, what kind of improvements we had in Q3, it's very much about Circle Green -- bigger volumes for Circle Green, where we have a clear premium, and then also some good impacts from district heating solutions. And then in Americas, we had further savings through process optimization in Calvert. Then to the more exciting news. So you know that in Capital Markets Day in June, we talked about our new technology, and we said that we are looking at the next phase and the investment for that. So now we have made that decision, and we'll be investing in a new pilot plant in New Hampshire in the U.S. to scale up the technology from this daily 1 kilogram production level to 1 tonne. And here, we are concentrating in the first instance on chromium. So we would be producing enriched Ferrochrome and also chromium metal. And these new production pathways we're looking at for high-purity metals are very much applicable to high-value markets like aerospace, defense and energy sectors. And in the future, then we can also look at other metals, like we said before, for instance, nickel. But now we concentrate with the scale-up on chromium. And then if we look at a bit what we communicated before, what is the phase we're talking about here. So the lab scale, we spent about 4 years to really arrive at the technology. And now we will want to show that we scale it up for industrial feasibility and then also so that we have a competitive production cost with this process. And once we have achieved this, the idea is that this plant would be operational during the first half of '27, then we are in the next step looking at industrialization, probably with a commercial plant with a capacity of about 10,000 tonnes in the first instance and then really taking advantage of the technology in the next step for bigger scale up. But this is the phase where we are. And now it's time to show that this technology can be scaled up and it's feasible in industrial production with a cost competitiveness. So that's our focus right now in the next phase. So very excited about that. Then a couple of comments on sustainability and starting with safety. So the news that I'm not so happy about is our safety performance during the Q3. We were fully on track with our safety targets by the -- until the end of August, but we had a disappointing month of September with 6 incidents that involved 9 people, both our own people and contractors. And now our -- very much our target is to get back on track. So our target level on total recordable incident frequency rate is 1.5, and now year-to-date, we are at 1.9 after the disappointing September, and we have all hands on deck to get back to the performance we are used to. On the positive side then, we continue to have a very high recycled material content, now 3 quarters in a row at a record high level of 97%. This talks to a very high scrap use and also some other raw materials, which is also good for our sustainability result. And we are also continuously progressing towards our SBTi climate target. And then the last item here is, we're developing our portfolio for Circle Green. We're getting more customers for that. And I'm very happy to announce that we now have a collaboration with Parcisa. And Parcisa is a leader in design and manufacture of tankers for liquid transport. So very nice to have new customers for Circle Green. And now I will then hand over to Marc-Simon to go more in detail in our business area results and the finance in overall. So Marc-Simon, the floor is yours. Marc-Simon Schaar: Thank you, Kati. Good afternoon, good morning, everyone, and thank you for joining us today. It is clear that given the current market environment, maintaining strong capital discipline remains one of our key financial priorities. Let's start by taking a closer look at our financial position at the end of the third quarter. During the third quarter, our net debt increased to EUR 230 million. And despite the increase, we maintained our strong liquidity of EUR 1.1 billion, supported by a new 3-year term loan. This clearly demonstrates the continued strong support from our lending partners. And in light of the weak market conditions, we are continuing to emphasize capital discipline, particularly through tight working capital management. With that, let's move on and look at the performance of our business areas during the third quarter, starting with BA Europe. In Europe, the demand from end users remained soft across key sectors, especially in construction and domestic appliances with no real signs yet of any immediate recovery. The European manufacturing PMI showed some improvements in August, but soon fell back to below 50, indicating contraction. The construction PMI dropped even further to around 46. Distributor inventories declined somewhat, particularly in Germany, but still remain at medium to high levels given the weak demand. Added to that, and despite being positive, ongoing uncertainty around the CBAM mechanism, as well as timing and the final definition of the new safeguard measures has created additional caution among buyers. As a result and combined with a typical seasonal slowdown, volumes in business area Europe fell by 12% quarter-on-quarter. The higher share of Asian imports now around 29%, also continued to put pressure on sales prices. According to CRU, standard 304 prices in Europe fell sharply by more than EUR 150 per tonne compared to the previous quarter. The negative volume and price impact was partly offset by lower raw material costs and ongoing cost-saving measures, as well as higher fixed cost absorption due to increased production ahead of the annual maintenance shutdown and the ERP rollout. However, as guided earlier, the planned maintenance activities in business area Europe had a negative impact on our profitability. Let's now move across the Atlantic and take a look at business area Americas. Also in the U.S. and in Mexico, the manufacturing sector remained in contraction during the third quarter with only a slight improvement visible in Mexico. The increase in U.S. tariffs on steel and aluminum imports from 25% to 50% in early June this year continued to support domestic producers. However, underlying demand across North America remained subdued. Only the oil and gas sector is holding up somewhat due to the higher energy demand from the increase in data centers and activities from reshoring manufacturing into the U.S. are not yet visible. With the weak demand, distributor inventory days increased further and above year-to-date averages. Overall, deliveries in business area Americas declined by around 6% quarter-on-quarter, while average prices improved, supported by the tariff changes, as mentioned earlier. The benefit from higher prices was partly offset by increased raw material costs and lower fixed cost absorption due to reduced production, a deliberate move to balance working capital in a weak market. Then next, let's look at the performance of our business area Ferrochrome. Globally, Ferrochrome producers in Southern Africa continued to face capacity shutdowns driven by high electricity costs. This led to higher chrome ore export, especially to Asia, where margins are more favorable. In the U.S., new tariffs on the Brazilian imports strengthened the demand for our Ferrochrome products, which are not subject to U.S. tariffs. In Europe, we have also seen an increasing interest as steel mills are looking for European low-emission alternatives for raw materials, which are subject to CBAM regulation. So the demand for our low-emission Ferrochrome remained solid throughout the quarter with deliveries up by 3% despite the usual seasonal slowdown. On the other hand, sales prices declined, largely due to a weaker U.S. dollar. Our profitability was also affected by timing differences between foreign exchange derivatives and the realization of the weaker U.S. dollar in sales, as well as higher energy costs and lower fixed cost absorption linked to the seasonal lower production. With that, let's turn to the group's overall financial position and working capital development. As mentioned earlier, net debt increased to EUR 230 million during the quarter, mainly reflecting lower profitability in a weak market, a few one-off items and our annual insurance premium payments. Now the one-off items include costs related to the U.S. wage class action settlement as well as foreign exchange impacts from the weaker U.S. dollar. Those stemming from internal currency swaps we use to optimize our cash across the group. Normally, in a soft market, we would expect a reduction in working capital. However, this quarter reductions were limited as we prepared for our annual maintenance shutdown as well as the ERP system and supply chain solution rollout in business area Europe. Nevertheless, we continue to focus on tight working capital management and preserving our strong liquidity position going forward. With that, I will now hand it back to you, Kati. Kati Horst: Thank you, Marc-Simon. So let's then move to look at our outlook and guidance for the Q4. So on the outlook, we said that the group stainless steel deliveries in the fourth quarter are expected to decrease by 5% to 15% compared to the third quarter and mainly due to the market weakness in business area Europe, and the seasonal slowdown in business area Americas that happens in the fourth quarter. Asian imports to Europe still remain high compared to the low demand in the stainless steel market. Then we have maintenance breaks in business area Europe and Americas as well as the rollout of the new ERP system and supply chain solution in business area Europe. And those impacts are expected to have about -- are expected to have an impact of about minus EUR 20 million on our adjusted EBITDA in the fourth quarter compared to the third quarter. And then with the current raw material prices, no major raw material-related inventory or metal derivative gains or losses are forecasted to be realized in the fourth quarter. And therefore, our guidance for Q4 2025 is that the adjusted EBITDA in the fourth quarter of '25 is expected to be lower compared to the third quarter. Moving then forward to discuss and summarize a little bit, what I really want to emphasize that, despite the current challenging market conditions we are now having in Europe and that heavily impact our performance, I'm very confident about our future direction. With the EVOLVE strategy, we take clear steps towards the higher resilience and better performance through cost restructuring and investments in profitable growth that support diversifying both our offering and geographical footprint. And as you know, today, we announced that we are now investing for growth through the pilot plant for innovative proprietary technology in the U.S. So that's the transformative part. And then on improving our competitiveness, we are trying to implement as quickly as we can this EUR 100 million restructuring program to get the structural savings in and to help our competitiveness, especially in Europe. Then in Americas, we see Americas as an interesting growth market, but rather beyond standard stainless steel. And the change I have made in Americas' management is that we have Johann Steiner, who has been also leading our strategy work at Outokumpu now appointed as President in BA Americas, and he will be an excellent support to the team there to work further on the Americas strategy. And our recruitment for Johann's successor is ongoing in final stages. Then there are also some positive news from the market, I would say, a bit of light in the end of the tunnel when you look at the European market. We are very happy and very supportive of the strong proposal that European Commission has made for more effective safeguards. And I think the important items there are that the quotas are halved by nearly half. That the tariffs then on top of the quotas will propose to be in the rates of 50%. And then the principle of melted and poured is planned to be introduced and then we would get these new safeguards latest by the end of -- or by the mid-'26. So I think the package as such is very strong. Now of course, we are very much hoping and supporting decisions on this still this year, and -- so we get clarity on, is it going to be mid next year or is it going to be, hopefully, also a little bit earlier that we get these safeguards in. And then the other item that is important for Outokumpu because we are clearly the sustainability leader in the industry, both in Ferrochrome and stainless steel, that we do get a Carbon Border Adjustment Mechanism in place in Europe to ensure that the green transition in Europe can continue the investments that are needed for that. And those who have invested in that finally start getting some benefit out of that, and we can keep this industry in Europe. So I think own actions, very important, cost competitiveness, investments in growth, and next to that then some of the positive things that we see next year with the safeguards and with the CBAM being implemented. So I will end the presentation there. And I think then it's time for us to move to the questions and answers. Operator: [Operator Instructions] The next question comes from Tristan Gresser from BNP Paribas Exane. Tristan Gresser: First, maybe on the quotas. Can you share a little bit more your view on the implementation of those new quotas as they are? And also, are you optimistic about the new quota that could be implemented before July next year? And on their own, are those quotas enough? I mean it seems to me that the issue is more about the prices than volumes. In the past, we've seen imports falling and plunging a lot, but not really helping the market. So would love to have your view there. Kati Horst: So maybe I'll start, and if Marc-Simon you have something to add then you can do that. I think the total package not only that the quota levels will be halved, but then also the tariffs above the quotas, the melted and poured principle, that the measures don't have a definite deadline but will be reviewed. I think the whole package as such, and you cannot move quarterly quota from one quarter to another. There are like many elements in this proposal that I think altogether support and give an impression of clearly stronger safeguards. So therefore, I'm quite positive about the proposal. And then if you look at the Asian import level is now almost 30% in Europe, this quotas would have that import level to about 15%. And I think that is what we need in Europe to create a level playing field for European producers so we can utilize the capacity enough, otherwise it's going to be closed. So if we want to keep a steel industry in Europe, it's important that these measures are now taken. Marc-Simon Schaar: And then maybe on the timing, you asked about the timing of the quota here as well. So as Kati was mentioning earlier, the latest being mid of 2026 just before then the current safeguards expire. Now it's very difficult to speculate, and we don't want to speculate really on the timing of it. I think we have seen a very good proposal by the Commission and now we are waiting here, the discussions also within the member states of the -- of Europe and also within the parliament and then seeing whether we have then also the support from the member states basically. Tristan Gresser: Okay. No, that's clear and helpful. My second question is on CBAM. What would you need to see in the text of CBAM, whether provisional or final, to really make a difference for your European business next year, given that most of the carbon intensity differential is on Scope 3 with Asia, how optimistic are you that it's going to be implemented? And also just following up on CBAM, you said that uncertainty around CBAM is putting order activity a bit behind. But what we've seen for carbon steel makers is that CBAM uncertainty is actually pushing more buyers towards domestic producers because of that uncertainty. So I'm just trying to square that out and why this uncertainty that is placed on importers should not benefit you near term? Kati Horst: Yes. I would say -- so first of all, I think it's quite clear, at least from the discussions that we have recently had with the Commission that CBAM will be implemented as of January. What we are, of course, hoping is clarification before the end of the year, what are the reference values and how will it exactly work? What scopes are included. So there are, of course, question marks still, and I think it's also not good this uncertainty for our customers, both on Ferrochrome and stainless steel that there's not more clarity right now. But CBAM will come. And whatever form it comes, I think it will be supportive. But of course, from our perspective, having all the scopes in it would be helpful for us and even better. But I think even a form that is not perfect is better than nothing. That's how I would see it. And then if we look at our customer industries, we have, of course, discussed a lot with our customers as well. There is a discussion with the Commission also that how would you compensate them for export business, if I look at our customer side. But I would also say that we have many customer sectors that also support CBAM and actually would want to be included under CBAM as steel-intensive users, so that for instance, in appliances, you don't then get a situation that products are brought to Europe with a much higher carbon footprint and then they have to face that. So there's definitely still work to be done to make CBAM an effective system. But I think starting it with now is the first step that has to happen in January. Operator: The next question comes from Adahna Ekoku from Morgan Stanley. Adahna Ekoku: I've got 2 questions from my side. So first, just on business area Ferrochrome. Could you help us a little bit here with the outlook into Q4? So we saw higher volumes quarter-over-quarter, but then this was partly offset by the dollar and higher electricity costs. So how are you expecting these factors to trend looking into the next quarter? Kati Horst: So you know that we don't guide the business area. So I will not be very specific. But I think in general, I would say that we see our Ferrochrome business being in a good place and continuing to deliver good result. So quite confident of Q4 on Ferrochrome. Marc-Simon Schaar: Maybe if I can just add 2 further points to it. Certainly, we see a weak market environment and demand situation from the stainless steel sector. But as we pointed out earlier as well, the demand for our Ferrochrome is solid. So while you see some negative impacts on the one hand side in terms of volume, then the offsetting on the other side here as well. But then -- yes, then going forward as well, I mentioned earlier, and that is valid for the group, that we are having strong focus on tighter working capital management that will also impact our production then in the fourth quarter and something to be taken into consideration as well. Adahna Ekoku: Okay. That's clear. And maybe looking to 2026 and on CapEx and whether you could provide any kind of early steer here. At the CMD, you outlined the higher maintenance needs. So I was wondering, is there any flexibility here? And any indication as to how much growth CapEx will be allocated to next year given the kind of continued weak backdrop? Marc-Simon Schaar: Yes. Good question. I think in the Capital Markets Day, I mentioned indeed that our maintenance CapEx going forward at a level of EUR 100 million with some backlog recovery for next year, bringing it to EUR 200 million. But at the same time, also clearly stated that we are observing the market environment, the market situation as well. And we are clearly observing the situation and making the plan for next year. Right now, as we are, certainly, we will adjust our CapEx, what we have communicated to the Capital Markets Day, taking the weak market situation into account, but we'll come back with further guidance then in our next report. Operator: The next question comes from Anssi Raussi from SEB. Anssi Raussi: I have a couple of questions left, and I start with your guidance. So you mentioned that you expect some negative impact on your EBITDA for Q4 quarter-over-quarter due to maintenance break. But I think you guided EUR 10 million negative impacts also for Q2 and Q3, so what's the net impact now? And have you ramped up your maintenance activity all the time during this year? Or how should we think about this? Marc-Simon Schaar: Anssi, good afternoon. We do have had maintenance work in the second quarter, yes, and in line with our guidance. But this maintenance work was towards the end of the quarter. It will also -- or has continued into the fourth quarter as well, number one. We also see maintenance break in the Americas with our annual maintenance shutdown on our melt shop and other assets in the U.S., which having an impact. And I think in our guidance, we were also talking about our rollout of our ERP system and supply chain solution here as well, which will have an impact on volume on the one hand side, which is already covered on the volume side, but certainly also on our production and the cost level. And these both together is then what makes then the EUR 20 million impact quarter-on-quarter. Anssi Raussi: And just to clarify that we are talking about net impact quarter-over-quarter. Marc-Simon Schaar: Yes. So this is a bridge impact, so quarter-on-quarter. Anssi Raussi: Okay. And maybe my second question on these tariffs in the U.S. So if you look at your deliveries in the business area Americas, I guess it's clear that your average selling price has increased less than the so-called list price if we look at the price data from CRU. So what's the mechanism here like? Does it take longer to see the full impact? Or how does it work? Kati Horst: Yes. Maybe if I comment on that, I think the full impact will be seen more in Q4, I would say. But then we need to also take into account that the Americas market as demand as such is not very strong. There's also new capacity coming to the market, and there's also a mix impact always when you look at the pricing. But prices have increased in Q3, and I think the full impact will be visible in Q4. Marc-Simon Schaar: Indeed, the full impact is in Q4, but quarter-on-quarter I would not take any significant improvements into account here just to be more cautious and realistic. And then maybe just to add, when it comes to CRU data, I think also here we need to see what is the -- where is the timing difference between order intake and then also the realization of prices as well. Operator: The next question comes from Dominic O'Kane from JPMorgan. Dominic O'Kane: So I have 2 questions. My first question actually follows on from your last comment. I note you, obviously, practice is not to comment on specific business areas. But given the Q4 guidance for shipments and given the pricing outlook, I think it's reasonable to assume we'll see another negative EBITDA quarter for Europe. So I'm just wondering if you could just help us contextualize maybe what you're seeing in terms of pricing currently for Europe. You've talked to the Q3 CRU comment, which is obviously backward-looking. But have you seen any discernible change in your customer behavior or order book following on from the European Commission safeguarding proposal earlier this month? Has there been any indication that customers are looking to acquire metal sooner than that framework comes into existence? That's my first question. Marc-Simon Schaar: Maybe if I can start and then you can add, if needed. While we're not in a position to guide on prices here, particularly going forward, I think in our outlook for the fourth quarter, we're talking about a volume decrease quarter-on-quarter in the range of 5% to 15%. And I think the split between Europe and Americas is almost 50-50 here to say. And we also talked about the maintenance costs and impact from our ERP rollout here as well. As well, we also mentioned that Asian imports are still on a high level. They actually have increased towards the end of the third quarter. And of course, that is also impacting then our business. This is probably as much I or we can say here on the current situation and outlook. And in line with what we mentioned also earlier is that, yet we do see a wait-and-see attitude still in the market with customers or the industry being cautious around the definition and the mechanism on CBAM and the safeguards here as well in terms of timing. So that needs to be taken into consideration as well, as such no clear signs yet of any improvements, as I mentioned in my part of the presentation. Dominic O'Kane: That's clear. And then my second question, just on net debt stepping into Q4 and the working capital bridge. Given the maintenance, is it reasonable to assume that we would expect to see a higher net debt at the end of Q4 versus Q3? Marc-Simon Schaar: While we're not giving specific guidance on our net debt going forward, there are a couple of elements we need to take into consideration. On the one hand side, we have paid our second tranche of the dividend in October. I think it was the 22nd of October with a cash out of EUR 61 million. And in my part, I also clearly stated that we continue to focus on tight working capital management, and this is what we will have in focus in the fourth quarter. I also mentioned the impact on our profitability as a result thereof. And having said that, so with the current assumptions, we don't expect a major increase in net debt in the fourth quarter. Operator: The next question comes from Joni Sandvall from Nordea. Joni Sandvall: Maybe a bit of follow-up on the quotas that we have been speaking already. I know it's a bit early looking into '26, but is there -- do you see any risks of import surging ahead of potential implementation of these quotas? Kati Horst: Maybe if I answer that. There can be some, but let's remember as well that the delivery times are still quite long also from Asia. I think the most important thing now is that the decision comes this year and the timing is communicated and the decision comes. And I think that will then already be helpful earlier than when actually the quotas come in place. Because you need to take into account then what's the moment that your deliveries would actually be on the European border. So there can be some surge in the Q1 or something, but I would think the most important thing is now we get the decision and clarity and then that will start impacting markets. Marc-Simon Schaar: I think most important is really lead times. Kati Horst: Yes. Marc-Simon Schaar: On the one hand side we do have a quota system still in place. It's not sufficient, I know, I understand, and that's what we are reporting for many quarters and years right now. But the window of opportunity is rather short. Joni Sandvall: Okay. That's clear. Then a question related to the pilot that you announced today. You are speaking already towards end of this century the 10-kilotonne industrial size production. So could you give any indication of what kind of CapEx we could be looking for this kind of industrial facility? Kati Horst: It is very, very premature. Also depends where the investment would be. So no, I cannot give a figure. I can say that it's more than EUR 45 million that I can say for the next phase. But I'm sorry, I can't give a better number right now. So that we will need to really look at then more detailed, because we also learn now in this process about what would that kind of investment look like when it comes to machinery and setup. And where we would invest, would it become kind of being part of our Ferrochrome plant or somewhere else has also influenced. So it's too premature, unfortunately, to comment on that. Joni Sandvall: Yes. That's clear. And then lastly from me, the ERP rollout that you have been mentioned many times and the supply side solutions. So could you give any indication, have you completed this? Or have you faced any interruptions on that front? Marc-Simon Schaar: Well, it's quite a sizable project, I must say, with -- we started basically a couple of years back in Germany and also in Sweden. And now we have our largest site in Tornio, Finland. And with that rollout, we're closing the loop, so to say, and have all of our assets or the majority of our assets on the same platform, which provides certain opportunities and advantage for us. Having said that, we are -- we have started the rollout at the beginning of the quarter, and it has been going in the size and magnitude of these kind of projects relatively well, and we're still in the process of rolling it out. Joni Sandvall: Okay. And lastly, maybe a quick question on the Ferrochrome and the FX impact on the profitability. Now here in Q3 you were speaking about timing impacts there, but could you give any indication how much that was? Marc-Simon Schaar: Yes. I think the impact is around EUR 8 million quarter-on-quarter. So you have a positive impact in the second quarter of EUR 4 million from the derivative and then the realization in the sales price, then the negative EUR 4 million impact in Q3. So the delta is around EUR 8 million. Operator: The next question comes from Maxime Kogge from ODDO BHF. Maxime Kogge: My first question is on Ferrochrome. So we have seen actually quite significant cutbacks in South Africa. I think Merafe talked about a 50% decrease in the own production year-on-year in 2025. So I guess that opens some volume opportunities for you. Do you expect to benefit from that perhaps not in Q4, but further ahead? And do you see room to get back to nameplate capacity in Ferrochrome because you're currently running at below 80% there? Kati Horst: So maybe I start by saying, yes, we do see that we do benefit from that situation. And I think the way it shows currently is that we are getting new customers. We have more trial orders. And even though there may be -- there have been some rumors on the market one of the producers probably coming on stream in February, at least for a short time, I think the customers maybe are not trusting that fully. So I think going forward, we see strong demand for our Ferrochrome. And as you know, there is still capacity to be utilized. So we are somewhat flexible in that, and we'll follow how the market develops. Now Q4, our focus is to make sure that we prioritize cash. So we will also make sure that our inventories come down also in Ferrochrome. But we have opportunities to increase the production when the market needs that. Maxime Kogge: Okay. Second question is on your chrome investment. I was curious to understand why you had chosen the U.S. for this investment actually because the raw material will come from Europe. So isn't there the risk of tariff impact associated with this decision? Kati Horst: So here, we are still in the pilot phase what we are talking about now for the coming 2 years. We are still talking about scaling up the technology. And our scientists that have been working on the technology for 4 years in our lab close to Boston, that's where they are. And in this phase it doesn't really matter to be close to the metal where that comes from. In the next phase that would be different depending on what metal you use. So in this phase, I think it's more important that we can use the capabilities and the knowledge to build the Phase 2 plant, and it's handy for us to have it close to the lab in the U.S. So that's the main reason it's in U.S. Maxime Kogge: Okay. Makes sense. And just the last one is on your U.S. strategy. So you seem to be considering rather the high-end segment of the market and try to get away from the mass market. But I found that curious given that one of your competitors is precisely investing in that segment, plus given the lower import pressure that also opens some opportunities there for lower-end products, yes. So any light on that would be helpful. Kati Horst: No, I think we've been just kind of clarifying it that we are not necessarily looking at increasing our capacity in standard stainless steel in U.S., but looking at how we can develop our portfolio, for instance, in Calvert to the higher-end products or do investments or acquisitions that support our strategy to more -- to advanced materials. So our feasibility study on high-nickel alloys in Avesta is still ongoing and progressing well. And if you, in general, look at that kind of products, they travel quite well in the world. Of course, there are tariffs now in the U.S. Will they be there forever? It's a global market for that kind of product, so I think we definitely have interest for that kind of markets also in the U.S. And then developing our technology, there are probably different paths that could be for Europe, could be for U.S. So we definitely continue exploring the U.S. market and continue with our strategy work. But I think one thing we have defined if we just add capacity in the standard stainless steel, we are not transforming this company. So that's, I think, is a clear sign that we are looking at different kind of products. Operator: The next question comes from Meet Mehta from Barclays. Meet Mehta: So I have one question. So in the presentation on Slide #23 for BA Europe, you are saying that there was a positive raw materials impact. But if I look at your press release, it is saying that there was a raw material related inventory losses of EUR 4 million. So what am I missing here? Marc-Simon Schaar: The raw material impact is -- our raw material costs, the EUR 4 million, EUR 5 million impact, I guess you're referring to is the net of timing and hedging effect of buying alloys basically. So the difference between when you buy and when you sell. This is the timing impact and then netted by your hedging activities. Meet Mehta: So that you are considering under this line item, right, the net timing of hedging, right? Marc-Simon Schaar: This is under net of timing and hedging, yes. Meet Mehta: Yes. And I've -- a second question is on net debt. So I mean, this, I mean, as you have said, right, this was a sudden increase and even if you try for this type raw material -- so is there a chance that we might see a decrease on the net debt side? Or should we consider that it will remain in line with EUR 230 million? Marc-Simon Schaar: I think the latter one, as I was mentioning earlier before. So remaining around the current level. Operator: The next question comes from Bastian Synagowitz from Deutsche Bank. Bastian Synagowitz: My first one is actually also a quick follow-up on the situation around the, I guess, the ERP and the maintenance costs. So do you expect that to possibly drag into the first quarter as there are any other maintenance break coming up? I guess, you had a very high intensity of maintenance costs this year. And clearly, it makes a lot of sense to do those when the market is weak to be ready whenever the market does come back. But I guess, just for our purpose, wherever you've got the visibility, if you could, I think it would be very helpful for you to flag these things a little bit earlier. I guess, the ERP side, at least, would generally have caught you by surprise. But first of all maybe if there anything which comes and drags on into the first quarter, if you could share that with us, that will be great. Marc-Simon Schaar: Sure. Right now, as far as we can see, it does not drag into the third quarter, to answer your question. And then maybe on the ERP rollout, this is also something which I mentioned in the last interim or webcast here as well as part of our working capital development. But now going forward, with maintenance and then also being in the U.S. and Europe and the ERP rollout all in one quarter, clearly know the impact in Q1. So these are really one-off items, so to say, if you compare quarters with each other. Bastian Synagowitz: Okay. Very clear. The second one is on CapEx. So I guess in the release, I guess you stated that the EUR 200 million investment into the annealing line is under review. Now from my understanding, a very large part of the targeted EUR 100 million cost savings was actually tagged to that. So what does this mean for the cost savings? Do you think that you can fully compensate for that somehow and find different areas of savings even if that investment does not happen? Could you maybe just talk about that? And also maybe if you have any visibility already on how much cost savings contribution we can pencil in for 2026? Marc-Simon Schaar: Yes. So the -- Bastian, the EUR 100 million does not include -- is not depending on the AP 1 investment, so the annealing and pickling line investment in Tornio. So that is not included. The EUR 100 million are coming from other measures such as streamlining, delayering layoffs, reduction in positions, other quality and efficiency improvements. Bastian Synagowitz: Got you. Okay. So that stands totally separate and the EUR 100 million target basically is still fully intact. Kati Horst: Yes. Marc-Simon Schaar: Absolutely. Absolutely. Bastian Synagowitz: Perfect. And then just also coming back to, I guess, the most cryptic part here, which is around CBAM. And of course, it does seem like the situation is still vague with regards to the benchmarks, et cetera. But I guess, we're just a couple of weeks away really from, I guess, when it starts. And I guess, you must already be discussing the current order book. So I'm wondering, how do real-life discussions on that front really look like at the moment? So do you start to reflect this in Q1 already with customers? As Tristan said earlier, in carbon steel, we can see that happening. And if the -- if whatever impact comes and even we don't know how much it is, but there will be something, I guess, there must be some increment also on the pricing side. So even without going into any details, I mean, could you just say that you're basically looking a little bit more confident here into Q1 pricing? I guess, you've been always a bit more confident on Ferrochrome than stainless actually. So maybe you can start with Ferrochrome first here. Kati Horst: So maybe I can come back on your question on CBAM and maybe repeat a little bit what I said. So I think there's a lot of confusion and uncertainty among our customers, whether it's Ferrochrome or stainless steel, what it actually means. And what we are missing, we are missing the clear message on the reference values. And that's why we are really hoping that we would get more information now before the end of the year. And based on our latest discussions with the commissioner, for instance, that we are expecting that there would be more information before the end of the year. So I think that would clarify more the situation to our customers. Of course, we try to educate our customers, how does this kind of situation work, but we don't have the reference values from a Commission yet. So that is the uncertainty on the market. I think there's no uncertainty that CBAM wouldn't come, but it's just what does it exactly mean in different products and what scopes are included, so that is still the uncertainty. But we have not seen -- and I think because of this uncertainty, we have not really seen it yet influence buying behavior, for instance, now in the end of the year. And maybe that's also reflected with a weak market, our customers also doing their cash management. But of course, it should support pricing going forward. Marc-Simon Schaar: Yes. Pricing and lead times are very short right now with a weak market environment. Bastian Synagowitz: Okay. So it's not yet in that sense reflected. But how do you -- how will you treat this from your end at the moment, given the uncertainty? Do you just -- would you just, for example, would you just put in the flexible component there in your pricing discussions, whatever the outcome is in the course of the fourth quarter? Kati Horst: I don't think we are in -- we want to discuss our pricing strategy at this moment. So sorry, I can't answer that. Operator: The next question comes from Tristan Gresser from BNP Paribas Exane. Tristan Gresser: Just on the downstream project in Tornio that's been put on hold. Just wanted to confirm with you the status of the 2 lines in Krefeld, they're shut or not. And also in Q2 already, you shared some estimates on the negative impact on the mining tax in Finland and the removal of the state aid on energy. Can you now confirm those negative headwinds for next year? Kati Horst: No, we cannot confirm them yet. The discussion is ongoing. That's a proposal based on which we have commented. And we are, of course, discussing with different instances in Finland. The proposal is now in the parliament, and it's a big issue for the whole mining industry in Finland, not only for Outokumpu. And why the AP 1 investment is on hold is that if this tax impact and electrification removal comes, all that together, of course, impacts also our mining cost, Ferrochrome cost and therefore, also then the stainless steel cost. And then our calculations for the AP 1 investment, comparing it also with Krefeld and the cost position will need to be looked at again. But we don't have clarity yet whether this proposal will hold or not. So that's why the investment decision is on hold. Tristan Gresser: Krefeld Kati Horst: Yes, Krefeld, of course, we have -- it's linked to the investment decision. So we will wait with the investment decision to see what happens. Marc-Simon Schaar: Yes. But again, I think very important to clarify that those -- the impact or the improvements from such investments are not included in the EUR 100 million restructuring measures, which we have. They still hold, and we are very confident to get those also, as communicated earlier. Tristan Gresser: Okay. So the government can still change course and it's still in parliament. And for the stated, on energy, how much of a benefit was it last year, or even this year? Usually, do you receive in Q4, Q1? What was the number? And is it in Europe EBITDA, Ferrochrome EBITDA? How does it work? Kati Horst: In Finland, it's about EUR 20 million, which is divided between Ferrochrome and stainless steel. But on Finland level, on group level, it's about EUR 20 million annual. Marc-Simon Schaar: Yes, from a cash impact and half of that with a P&L impact and the other one then requires investments into decarbonization. Tristan Gresser: Okay, that's very clear. And maybe last question, the Avesta melt shop, is the decision to be made still before year-end? Or can it be pushed to early 2026? Kati Horst: Well, we have progressed really well with our feasibility study. So that starts to be ready. But I think we still are looking at different options. So let's see what it looks like. I would think more probably next year's topic also given the current market environment. Marc-Simon Schaar: Tristan, I need to qualify, I think, not 100% sure in which way I said it. But the P&L impact is EUR 20 million, the cash EUR 10 million because you need to invest into decarbonization, just to make that sure, clear that we're on the same page. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Kati Horst: So thank you very much for joining our Q3 call, and thank you for being so active with very, very good questions. So market conditions in Europe continue to be challenging. That's something we have to deal with. That's why we are driving our cost restructuring plan to improve our competitiveness. At the same time, we are also taking steps with our EVOLVE strategy and investing in the pilot plant in the U.S. to develop our technology in enriched Ferrochrome and chromium metal. So thank you very much for joining and then talk to you again when we have the Q4 result ready. Thank you very much. Marc-Simon Schaar: Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to the Modine Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations. Please go ahead. Kathy Powers: Good morning, and welcome to our conference call to discuss Modine's second quarter fiscal 2026 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. The slides that we will be using for today's presentation are available on the Investor Relations section of our website, modine.com. On Slide 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission. With that, I'll turn the call over to Neil. Neil Brinker: Thank you, Kathy, and good morning, everyone. Last quarter, we announced plans to significantly expand our U.S. manufacturing capacity for data center products. We are continuing to invest in our fastest-growing businesses and are actively advancing the strategy. In fact, we are accelerating other planned investments to meet the unprecedented demand for our products. Our Climate Solutions segment continues to deliver, posting a 24% increase in revenue. This includes contributions from our 3 acquisitions earlier this year: AbsolutAire, L.B. White and Climate by Design International. As we integrate these businesses, we are applying 80-20 principles to drive value by improving margins, increasing capacity utilization and unlocking commercial opportunities to cross-sell into new markets. Bringing these respected brands into the Modine portfolio not only broadens our product offerings but also brings scale to HVAC Technologies. Excluding these acquisitions, organic sales increased 15% from prior year, driven primarily by a 42% increase in data center sales. Over this past quarter, we've made substantial progress on our capacity expansion. I'm pleased to report that we have officially launched chiller production in our Grenada, Mississippi facility. In total, we plan to have 5 chiller lines in Grenada and are currently producing on 2 of these lines. We are working on getting the incremental production lines in place and are on schedule to launch full production by the end of this fiscal year. We've also made good progress in Franklin, Wisconsin and Jefferson City, Missouri. Franklin is scheduled to launch initial production of data center products this quarter, with volumes ramping through Q4. We will have 4 chiller lines in Jeff City, with the first 2 launching the fourth quarter and the remainder planned for later next fiscal year. The final site for our expansion has been secured in Grand Prairie, Texas just outside of Dallas. This facility is planned to fully come online early next fiscal year and will have 5 chiller lines. Both the Franklin and the Dallas locations are being designed for flexible manufacturing with the ability to produce multiple products that can be flexed based on demand. Both facilities will be able to produce modular data centers, which we see as a great opportunity. We've made initial shipments to 1 customer and are currently working through some design modifications. In addition, we are in early stages of discussions with others, including both hyperscaler and neocloud customers. We are excited to be able to support our strategic customers with innovative products that offers rapid deployment and scalability. We are making good progress overall, but current hurdles include the hiring and training of the workforce, which is a heavy lift for the organization. In total, we've hired 1,200 employees to support data centers so far this year, including temporary and contract workers, and talent we've strategically redeployed from our Performance Technologies segment. This added significant additional cost this quarter, with little incremental revenue, resulting in temporary margin erosion in Climate Solutions. We expect this to continue in Q3 and then improve in Q4 when volumes begin to ramp. We expect a significant jump in revenue between Q3 and Q4 driven by new capacity coming online. Outside the U.S., we successfully launched production of data center products at our new Chennai, India facility. This strengthens our ability to serve customers in the APAC region with locally manufactured product. Furthermore, we are planning to expand chiller capacity in the U.K. to support demand for both hyperscaler and colocation customers in Europe. This incremental capacity is anticipated to come online early next fiscal year. I currently see a path to deliver more than 60% revenue growth in data center this year on our way to achieve over $2 billion in revenues in fiscal 2028. This year marks a period of major investment in our data center businesses, driven by strong market demand. This is hard work for our organization, and we are addressing challenges and making adjustments along the way. In addition, this represents a major transition for the business, evolving from a low-volume, high-mix manufacturing operation to a high-volume producer. This is not a shift in strategy as we remain committed to serving as a premium, highly customizable provider. However, we will now be able to deliver these specialized products at scale to meet the needs of our largest customers. This is important as large data centers, especially those specializing in AI applications, require our products to be delivered at a much greater rate than we have historically provided. Fortunately, Modine is highly capable of ramping scale production on highly engineered product designs. A competency, we have honed over many years with our Performance Technologies business. This expertise is also why we have been successful in leveraging internal resources to support these critical projects. We have the right team in place, and we are hyper focused on execution to deliver these innovative products our customers require. I want to stress again, this is a very heavy lift for the data center team, but I remain confident in our ability to execute, meeting our targets and customer commitments. Please turn to Page 5. Our end markets and Performance Technologies segment continues to be challenged, but actions we've taken in response to these conditions are having a positive impact. Although revenues this quarter were down 4% from the prior year, adjusted EBITDA was up 3%. The segment adjusted EBITDA margins increased by 90 basis points, primarily due to the cost control measures we've taken out over the past few quarters, including actively reallocating resources to the Climate Solutions segment. We are monitoring market conditions closely, and we will continue to make adjustments as necessary. I'm pleased to announce that the segment is now being led by Jeremy Patten, who joined our team as the President of Performance Technologies segment last month. Jeremy's previous experience with transformational change with an 80/20 mindset makes him uniquely qualified to take on the challenges and opportunities ahead. I'm happy to welcome Jeremy to the team and have confidence that he will continue the momentum created over these past quarters to drive margin improvement as we transform this portfolio. I'm extremely proud of the hard work being done in both segments to drive towards our vision of evolving our portfolio in pursuit of highly engineered mission-critical thermal solutions. This is creating a great deal of organizational change and a heightened level of complexity. This includes integrating 3 acquisitions, expanding capacity across multiple locations around the globe to support data center growth and exploring strategic divestiture opportunities in Performance Technologies. We are moving people into new roles in support of these plans and are incurring temporary cost increases to support future growth. Although we will encounter obstacles along the way, this team is up for the challenge, giving me further confidence in our ability to reach our long-term targets. With that, I'll turn the call over to Mick. Michael Lucareli: Thanks, Neil, and good morning, everyone. Please turn to Slide 6 to begin reviewing the Q2 segment results. Climate Solutions delivered another quarter of strong revenue growth with a 24% increase in sales. Driving this growth was data centers, which grew $67 million or 42%. HVAC Technologies increased $17 million or 25%, driven by inorganic sales from our recent acquisitions. This was partially offset by lower indoor air quality sales and lighter preseason stocking orders for heating products. Heat Transfer Solutions grew 2% or $3 million due to higher volume with commercial refrigeration and coatings customers. Climate Solutions second quarter profit margins were lower than normal and adjusted EBITDA declined 4%. I want to review a few temporary factors that contributed to the decline this quarter. The largest impact was due to significant investments relating to the data center capacity expansion, including direct and indirect labor and overhead expenses needed to build out new production lines and facilities. As Neil previously covered, we're expanding production lines at several existing locations while also preparing to launch a few new facilities. These actions are required to meet the growing customer demand for Modine products and more than double our revenue. While we expect to see sequential revenue growth in Q3, we won't begin to realize significant volumes in the new production facilities until our Q4. We also had a lower margin in HVAC Technologies, which was mostly due to a negative mix impact. This was driven by lower preseason heating sales, combined with the early integration steps for the 3 most recent acquisitions. Heating represents some of our highest margin products and the acquisitions are very early in the integration 80/20 phases. Within this product group, we anticipate a sequential margin improvement as we enter the heating season and began to implement 80/20 across the acquisitions. And finally, in HTS, the prior year included several million dollars of commercial pricing settlements from heat pump customers. As we implement a major step function change in our data center production capabilities, we anticipated that there would be significant unabsorbed costs as we launch the expansion plans. Looking to the second half of the year, we currently expect sequential margin improvement in Q3, but the margin will remain below normal operating levels until Q4. Then in Q4, we should begin to see more significant volumes from our new production lines, which will allow us to more fully absorb the fixed incremental costs and exit the year at more normalized profit margins. Before moving on to Performance Technologies, I want to highlight that the demand for Modine data center solutions continues to grow, and we're increasing our revenue outlook for the current fiscal year. In order to support this growth and achieve our $2 billion goal, we need to make significant capacity investments while still delivering on our earnings targets. And this will set the stage for further revenue growth and margin improvement with the ability to move well above historical profit margins. Please turn to Slide 7. Performance Technologies revenue declined 4% from the prior year. Heavy-duty equipment revenue was relatively flat with stronger sales to construction and mining customers, offset by lower GenSet sales. On-highway applications decreased 3% or $7 million, driven by lower commercial vehicle demand, including specialty vehicle and bus customers. Despite the tough market conditions, adjusted EBITDA improved 3% from the prior year and the adjusted EBITDA margin increased by 90 basis points to 14.7%. The margin increase was mostly driven by significant cost reductions and improved operating efficiencies. Tariffs remain a significant challenge for all market participants, but our team is working hard to recover these increases through surcharges, along with our normal pass-through mechanisms. In addition, we're reorganizing this business and reducing costs wherever possible, which resulted in a nearly $7 million reduction in SG&A expenses this quarter. The team remains focused on margin improvement despite ongoing challenges with the end market demand. As we look ahead, Q3 typically represents the lowest volume quarter due to seasonal patterns and holiday shutdowns by our OE customers. As a result, we expect that the Q3 margin will be down sequentially from Q2, but should be above the prior year, then stepping back up sequentially in Q4 as we've done in previous years. Until the markets turn around, we'll stay focused on costs and operating efficiencies, which will allow us to drive higher operating leverage and margins when volumes improve. Now let's review total company results. Please turn to Slide 8. Second quarter sales increased 12%, driven by the revenue growth in Climate Solutions. The gross margin declined 290 basis points to 22.3%, driven primarily by the factors I covered on the Climate Solutions slide. SG&A expenses declined in the quarter, driven by Performance Technologies cost savings initiatives, partially offset by incremental SG&A and the acquisitions in Climate Solutions. The net result was a 4% improvement in adjusted EBITDA from the prior year with a margin of 14%. With regards to EPS, the adjusted earnings per share was $1.06 or 9% higher than the prior year. I want to again summarize the key items that impacted the Q2 margin and how we currently see our consolidated results for the balance of the year. For Q2 consolidated results, the adjusted EBITDA margin benefited from the year-over-year improvement in Performance Technologies. This was offset by the lower margin in Climate Solutions, as I reviewed on that segment slide. As we look to Q3, we anticipate the adjusted EBITDA margin will remain below normal levels in this quarter. Then based on the sequential improvements by both segments in Q4, we expect a significant increase in the sequential margin, which should be more in line with the prior year. Based on this second half outlook, we would exit the fiscal year at the highest quarterly margin rate, and we would fully expect additional margin expansion in the new fiscal year, consistent with our fiscal '27 goals. Now moving on to cash flow metrics. Please turn to Slide 9. Free cash flow was a negative $31 (sic) [ $30 ] million in the second quarter. We anticipated lower cash flow primarily due to higher inventory builds and CapEx in Climate Solutions. We continue building significant data center inventory to support customer demand and delivery schedules in the second half of the year. And second quarter free cash flow also included $9 million of cash payments, primarily related to restructuring and acquisition-related costs. Net debt of $498 million was $219 million higher than the prior fiscal year-end directly related to the acquisitions of AbsolutAire, L.B. White and Climate by Design. With the investments in acquisitions and capital during the first half of the year and the associated earnings, our balance sheet remains quite strong with a leverage ratio of 1.2. Based on our earnings and cash flow outlook, we expect that the leverage ratio will decline further by fiscal year-end. Now let's turn to Slide 10 for our fiscal 2026 outlook. As we cross the midpoint of our fiscal year, we're raising our revenue outlook and reaffirming our earnings outlook. For fiscal '26, we now expect total company sales to grow in the range of 15% to 20%. For Climate Solutions, we're raising our outlook for the full year sales to grow 35% to 40% with data center sales now expected to grow in excess of 60% this year. With regards to data center sales growth, we anticipate sequential increases in Q3 and in Q4 with the second half year-over-year sales growth exceeding 90%. During the next quarter, the team will be further preparing numerous production lines, both in existing and new facilities to support the strong orders. In Q4, we anticipate our first full quarter of significant production volume from these new production lines. For Performance Technologies, we're raising our sales outlook with revenue now anticipated to be flat to down 7%, improving from the prior range of down 2% to 12%. We expect that the end markets will remain depressed with the ongoing trade conflicts and cautious market sentiment having a negative impact on market recoveries. However, last quarter, I explained that revenue was trending more favorable due to foreign exchange rates and the large amount of material cost recoveries. While the underlying market volumes have not recovered, we expect higher revenue as these trends have continued, and we're adjusting the outlook accordingly. I want to point out that while the large cost recoveries helped to protect our absolute level of earnings, they don't have a positive impact on our profit margins. With regards to our full year earnings, we're balancing the higher revenue outlook with margins running temporarily below normal levels. Based on this, we're holding our fiscal '26 adjusted EBITDA outlook to be in the range of $440 million to $470 million. For cash flow, we anticipate generating free cash flow in the second half of the year, but lower as a percentage of sales compared to the prior year. For the full year, we expect free cash flow to be in the range of 2.5% to 3% of sales. This is directly related to the significant investment in data center capacity that we're making this year, along with higher working capital to support this rapidly growing business. This also includes cash required to fully fund our U.S. pension plan prior to our planned annuitization in the third quarter. With the conclusion of this large project, we'll be able to remove a very large liability from the balance sheet along with the time and cost to manage it. And consistent with our previous outlook, we're not including any cash proceeds from potential divestitures this year. Looking ahead to next year, we anticipate that our free cash flow margin will return to previous levels and be in line with our fiscal '27 targets. To wrap up, we have a lot of moving pieces this quarter, including significant cost reductions in Performance Technologies combined with large investments in Climate Solutions for the 3 acquisitions and the data center expansion. This represents a lot of change, and the team will continue to execute as we've done throughout our transformation. These activities are critical elements of our strategic transformation and capital allocation strategy. We remain confident that these actions are setting the stage for long-term sustainable growth for Modine shareholders. With that, Neil and I will take your questions. Operator: [Operator Instructions] And our first question will come from Matt Summerville with D.A. Davidson. Matt Summerville: Can you maybe first -- on the Climate side of the business, can you maybe first parse out year-over-year margin contraction on sort of what was data center driven, what was mix driven and what those headwinds were maybe providing a bridge in basis points? And then sort of more of a definitive sort of layout in terms of how you get back to "normal" in fiscal fourth quarter, which I would assume implies 21%-ish at the segment level. And then, Mick, in your prepared remarks, you also added color on a comment that Climate has the potential going forward to punch well above historical profitability. So maybe if you could frame that? And then I have a follow-up. Michael Lucareli: Yes. Neil, do you want me to take it first? Yes. Matt, thanks for the question. So if we start first with your Q2 question, as we break down the margin, if we want to talk about basis points, the biggest portion of the margin in the quarter was on the data center expansion side, about 225 to 250 basis points on the data center side, and that was about $10 million to $12 million of higher costs really split between labor and overhead, a little bit of material in there, and Neil can talk a little bit more about that. And then on the HTS side, last year, we had some really large heat pump settlements, if everyone would recall after the market downturn, that was about 125 basis points. And then on the HVAC Technologies and kind of other, it was about 100 basis points. HVAC Technologies was mostly a mix issue and some start-up integration costs on the acquisitions. So that's the breakdown of Q2. Neil and I can give you a walk to -- as we get to Q3 and Q4, before I turn it back to Neil, the thing I would -- you asked at the end about beyond. So when we give you the walk, we are building capacity to not only get to our goal of the $2 billion, but we'll have capacity to produce more than that. That's not running every plant 3 shifts, 7 days a week. Obviously, once we get to normal production levels and you move -- start moving towards full capacity, the incremental margins are quite high. So that's why I said once we get to normalized levels -- production levels, we'll get to more normal EBITDA margins for CS and then beyond very high incremental or variable contribution rates. Neil, maybe I'll turn it back to you on how we're looking at Q3 and Q4. Neil Brinker: Yes. The piece that I'll add to that is that we expected some level of launch costs. I mean that's to be expected. We added over 1,200 people into the organization over the last few months. Those are a little -- it turned out to be a little bit more -- a little higher than what we anticipated, but we have to understand root cause and what that is, and we do understand that. Essentially, we had such high demand and expectations for our customers to pull in dates and ship product early that we had to divide our resources, and we went with multiple launches at once. So we recognize the impact of that. We recognize the cost of that. And we have now reverted back to the standard launch process, which is more controlled. We have the right amount of specialists on the job in terms of how we do it. We're leveraging 80/20 for scheduling and lead times, and we've got better alignment around our customer expectations and schedules. So we try to do something a little bit different to meet the demand. We try to do something a little bit different to launch faster to help support our customer schedules, and it was costly to do that. Matt Summerville: Appreciate that color. If I can stay in -- yes. Michael Lucareli: Just quick to -- you asked about the ramp too. The step-up, we talked about some improvement in Q3 and then you had asked -- I want to make sure we address. You asked about getting back to a 20-plus percent type level in Q4. For us, implied guidance, about 90% in the second half, we do see sequential growth. So the growth rate continuing to improve. And for us to get to our Q3 targets, we probably need $40 million to $50 million of incremental capacity coming online. And that's -- if we have 2-plus chiller lines, we're good there. To get to Q4 another $75 million to $100 million of volume revenue capacity, and that would be roughly a minimum another 5 chiller lines. And we can cover that with you guys online or offline. A lot of you know those plans. We're on track. And that doesn't include sales of any other products, air handlers or on the modular side. But if you're thinking about that ramp up, it's really bringing on fully producing at least 2 lines in Q3 and then another 5 lines, talking chillers only in Q4. Matt Summerville: Super helpful, I appreciate all that detail. I want to stay inside the data center business for my follow-up, 90 days ago, you mentioned establishing a data center sort of goal approaching $2 billion in fiscal '28. Now you're talking about a number over $2 billion just 90 days later. Did something change with order activity, funnel, customer acquisition? And ultimately, as you get to the tail end of this capacitation journey, both in North America and now in the U.K., where will your capacity actually be? And should we be thinking about maybe something a bit materially higher than $2 billion in '28 based on what I'm describing there? Neil Brinker: Yes. Thanks, Matt. What's changed in the last 90 days is definitely. The order and the funnel rates. And we're seeing more demand. We're seeing our relationships with our customers continue to evolve in a great way and the aperture in terms of the scheduling and the outlook has widened to where we can see more, and it gives us more confidence to continue to deploy CapEx. So that's what has changed. We've seen it with not only expanding our product lines and what we have today, but also new products that we're going to market with and launching. One example of those would be our modular data centers. So that -- the market looks pretty promising, and we feel that we have the right technology to support it, and we feel we have the right time lines to meet the customer demands, and it's just confidence, giving us more confidence in terms of where we're at. Operator: And our next question comes from David Tarantino with KeyBanc Capital Markets. David Tarantino: So I just want to follow up on the margin commentary. Just what gives you the confidence that margins should normalize going into 4Q beyond just the accelerated capacity just given investments should continue? And I know it's further out, but how should we think about margins as it relates to the longer-term targets that you laid out as you accelerate the rate of production here? Is the 4Q implied run rate a sustainable way to think about kind of the longer-term margins? Neil Brinker: Yes. So thank you, David. A few things, right? We're doing a lot of -- there's a lot of new, new products, new process, new plant, new people. And that's not efficient most of the time in these launches, and we recognize that. But every time we do this for every product that we ship, we learn from it. And when we learn from it, that's going to make us better. So as we work through the Grenada launch, we work through our Rockbridge launch in data centers, we learned a lot that we know that we can apply those lessons learned as we continue to roll out more chiller lines, for example, or more modular lines in different facilities in different factories. So it's the learning. It's the ability to get more efficient. It's our expertise in terms of design, design for manufacturability, design for quality, all those things that we're getting better at as we launch gives us the confidence that we'll improve the margins as we move out later in the calendar year. Michael Lucareli: Yes, David, the only thing I would add is that margin improvement is twofold, building what Neil said. So if you think about the challenges of starting a new facility or a new line. So one, I'd say our mature data center regions and plants are operating at margins at or above the segment. And we knew as we hold more volume into existing stable facilities, we could get the margin higher. Then as we launch a new greenfield, there's fixed cost absorption issues just to get to a scale to cover the incremental fixed cost. And then what Neil also covered in some of these cases where we've had extra labor or training, you have inefficiencies. So the message and how the ramp will work is we are -- as the new lines come on, we are now bringing on more volume to leverage our fixed costs. And as we get better at it, the negative on a normal conversion is inefficiency. We're also shipping away it and improving our processes. So it's a volume and a lean initiative, if you want to think about it that way. David Tarantino: And I want to follow up on Matt's second question, just given the acceleration in investments here, how are we thinking about this as it relates to the shape of the growth longer term to get to the targeted above $2 billion in sales by fiscal 2028. And I just want to clarify that, that is kind of a slight raise versus prior expectations? And if so, where -- what is the new target in terms of sales capacity in terms of the investments you're making? Neil Brinker: Yes. We -- I mean, we haven't come out with a specific number. We're always going to give ranges. But again, the order profiles, the new product launches, the new product development that we're working on, new regions that we see that are timed perfectly for our execution in terms of how we launch these facilities and factories and deploy the CapEx. So we just have a lot of visibility, and there's a lot of interest and there's a lot of desire for our products because of the technologies. We've put ourselves in a really good position over the last few years where we've acquired the right technologies. We've developed the right technologies. We've built the relationships with all the major hypers, neocloud providers, colocation providers. They're generally growing at pretty good rates. So we have -- our funnel continues to grow, which gives us the further confidence to deploy capital and to hire people to launch products. Operator: And moving next to Chris Moore with CJS Securities. Christopher Moore: Let's stay with data centers. So when you've talked about data centers in the past in terms of Modine's positioning, expected growth, one of the consistent themes has been you're focused on providing a relatively small subset of the market, exceptional products and services. So when you think about, just for example, $2 billion data center target in fiscal '28, just trying to get a sense as to how you view the total addressable market in calendar '27. I mean is $2 billion, is that 10% of the available HVAC market? Is it a bigger percentage of that? Just trying to understand kind of where that puts Modine in the overall kind of structure of the HVAC market on the data center side. Neil Brinker: Sure. Thank you for that. Around $2 billion -- and remember, the TAM is going to continue to grow as we've seen the amount of CapEx that's being deployed in the data center market across the board. So your TAM is expanding. And are we expanding at a similar rate. We're growing above the market. We're growing faster than the market. So we're gaining share. So we were single digit, low single digit when we started this journey. Last year, we got into double digit, low double digits. And if we get into the $2 billion range with some assumptions that we've made on market size and what that available market is that we can address, it probably puts us anywhere between 15% and 20% at that point, Chris. Christopher Moore: And maybe just my follow-up. Recognizing you don't necessarily look at your data center solutions discretely, air cooled versus liquid cooled. When you talk again about the $2 billion target, how do you view the relative contribution of air versus liquid at that level? Neil Brinker: Well, you need both in this space today. It requires both. They complement one another. But where we're seeing a lot of the growth and where we're seeing a lot of the demand with our closest customers is with the deployment of AI. So it's going to require a great chiller product, which we have. It's going to require the air cooling products that we have to help augment it and CDUs as well. So we're seeing the growth, and a lot of the growth is coming from AI expansion. Michael Lucareli: And on the margin, there's a relatively consistent margin profile across the product suite. Obviously, service is at the highest end, and we get a lot of questions on that. That will grow as our installed base grows over time, but the contribution margin is relatively consistent across our product suite. Operator: Our next question comes from Noah Kaye with Oppenheimer. Noah Kaye: I mean so much focus today on these margins and the incrementals, certainly for good reason. I may want to ask a different way. Is the right way to think about what's going on here that you've largely front-loaded a lot of the investments associated with the multiyear capacity ramp and that perhaps starting with 4Q, we started to see more normal incrementals in CS and specifically in data center. If that's the case, even though you're opening more plants over the coming years, again, what gives you confidence that we can see that kind of level of normal incrementals based off of the specific products that you're making and the configuration of the lines that you're setting up? Michael Lucareli: Do you want me to take that? Yes. Noah, it's Mick. Well, probably the best example we can give if we look at the last year, where 1.5 years ago or before that, we moved and we launched production of chillers in North America for the first time. And last year on the data center side, we were able to generate margins that were in line with the rest of the segment or the rest of our data center business. And if I recall, we had a quarter or 2 a really high margin on leveraging that volume, and we had a nice improvement last year. It really is about -- and Neil is talking about this, it's a rinse and repeat of products, existing products that we know how to make and doing that in a disciplined manner. Challenges can become when you're making a new product in a new location. But we're basically -- it's a copy paste of what we've been doing in the U.K. and in North America. So the bigger -- again, the bigger issue, like you said, for the first 6 months, it's literally getting the building, the equipment and then bringing in everyone and training them and bringing in all the materials. And then there's still a practice and an improvement as you launch. That to me is the biggest hurdle. And then once that's done, then we've been doing this for 10 years. We know what the profit margins will be. Noah Kaye: Yes. So then to put a finer point on it, what should incrementals look like as we get into '27? Michael Lucareli: Early to say in '27, but what I would say on incrementals is typically at a gross profit line, we'd be looking at a 30% type incremental gross profit to each dollar of sales when we're running at existing facilities, and we're adding more volume. Noah Kaye: And then just to ask one question on PT, bringing Jeremy and getting some traction on margin improvement. Maybe just talk a little bit about current focus areas for the business and any update on the divestiture process? Neil Brinker: Yes. Certainly, it's a great resource to have having Jeremy on board, and he's going to continue to drive the same playbook that we've been driving, continue stabilizing the business, making sure that we are running the business as efficiently as possible, stay close to our customers, continue to build out the order funnel -- the order and the funnel. So when we start to see some market recovery, we're put in a really good position that we can execute on platforms and programs that we've won through our innovation and technology. So it's the same playbook, and he's going to be able to accelerate that and bring some more structure around it. Noah Kaye: And any update on the divestitures or we save that for another call? Neil Brinker: Business as usual there. I mean we're always looking strategically in terms of what our best options are. I think we've got a pretty good history and a trend that through product line strategies that we can execute on those year-over-year. You've seen that over the last few years, and I'm pleased with where we're at in terms of the progress of that today. Operator: We'll go next to Brian Drab with William Blair. Brian Drab: Just given that we just touched on the Performance Technologies there, what are you seeing, Neil, in those end markets, off-road, on-road, demand for your components in those end markets over the next 12 months? Neil Brinker: Yes. We've been in this cycle for quite some time. I mean it's been 1.5 years. These cycles typically can last anywhere from 1.5 years to 2 years. And really following the trends and the announcements of the large OEMs to position ourselves for when there is a rebound in the market. So we're tracking that closely with our customers, the largest OEMs. We're looking at their inventory levels. We understand what programs we're on and where we can facilitate and turn on manufacturing faster, but it's -- we're reading the end markets through our OEMs at this point. Brian Drab: Okay. And my sense there is that it's stabilizing. I mean, would you agree with that? Or do you think there's another way... Neil Brinker: Yes. I think there's some recent reports, as of today that suggest there could be some stabilization and that the inventory levels are right. Those are early indicators. I'd like to see a trend first. But yes, that's fair. Brian Drab: Okay. There's -- no surprise, I'm going to ask a question on data center. So there's some massive projects, obviously, happening all around the world. And I'm just wondering, specifically in the U.S., some of these massive projects, I assume you'll be part of. Is there -- are you seeing any -- in some different regions where you don't have manufacturing capacity, maybe close enough to the site or service capability close enough to the site that have come up in the last several months where you're saying, okay, we're going to be -- we won this business, we're probably going to have to set up some new capabilities closer to one of these massive sites kind of like -- I think you're doing in Texas. Neil Brinker: Yes, it's a fair question. And yes, you're correct. There's opportunity to expand globally. Priority one is the United States. I mean that is where our biggest customers are. That is the biggest market, that's half the global market. We've got to make sure that we're executing and we're delivering on the products that are desired in this industry today, which we provide that improve total cost of ownership, improve power use effectiveness, improve water use effectiveness. We need to do that in the U.S. We need to do that well. And that's what we're working on. We've also launched in India recently. So we did our first pilot build there, and that new India facility will help us with our customers as they grow and not only in India, but in Southeast Asia as well. So that's another area that we have a disparate team that's focused on that, that is going to launch and follow our customers per their request. And then we're also seeing demand in Europe as well. We have our facilities there. We can support Europe. We're adding another chiller line there. We added a facility there last year, another 400,000 square foot facility to help expand and grow in Europe. And then lastly, we're seeing large opportunities, and we're communicating with potential customers with large -- in large region, particularly in the Middle East. So we have won some orders there. We've been able to service those orders out of our Spanish -- out of our Spain facility. And at some point in time, would we make some investments there, potentially. But with the current capacity that we have, we can serve the Middle East through India as well as Spain, and we're pretty comfortable with that. But definitely, we're global. Definitely, we see the reach. We see expansion, probably the biggest programs and projects outside the United States and Europe, we're seeing is in the Middle East. Brian Drab: Okay. And then just one more on that topic. Inside the U.S., when you won this opportunity in Texas, it came -- my impression was that it came kind of suddenly and was just this incredible opportunity that presented itself. Have you had any other situations like that or maybe as a result of that one, where there's -- you've had another giant project come your way over the last -- I guess, since we talked to you last on the 1Q call. Neil Brinker: Yes, yes. I mean we see -- for sure. And we're seeing these things, and it's -- we're on earlier stages. We're in earlier stages, and we have more ability to have influence as well. Operator: [Operator Instructions] And we'll go next to Jeff Van Sinderen with B. Riley Securities. Jeff Van Sinderen: Just since we're on the topic, in the data center area, is there any more color you can provide on maybe how customer concentration is evolving? You mentioned some other new customers you might pick up. I think at one point; you spoke to one -- there was one hyperscaler that you maybe didn't have yet as a customer. Has that converted to a customer? Are there still major new customers pending that could further increase demand? And then also just curious on the modular product demand, how that's progressing? Neil Brinker: Yes. Thanks for that question. We have great relationships with the hyperscalers, and we're building relationships with -- we're building further along with some of our new hyperscalers. We're advancing our products. We're advancing our discussions that gives us confidence that we can grow those. So if we think about the 5 major hypers today, 2 of them are the majority of what we do today. So there's a lot of expanding and expansion that can happen now that we have the networks inside the other 3 and now that we have the technical specs and capabilities that we've been able to prove and meet with them. So there's a lot of expansion just within the hypers today. And then you can expand outside of that with the neocloud providers. I think we've been very successful with one neocloud provider that gives us the ability to -- it's proven our capabilities that driven genuine interest with the others. And then geographically, we talked about some other areas that there are going to be some large players where we can expand. So certainly, there's the ability to do that. And the only reason why we have that ability is because we have the products and now, we have the relationships with the biggest -- with some of the biggest data center providers in the world. Jeff Van Sinderen: And then I think you mentioned in some of your earlier comments about having a wider aperture and generally improving visibility for the data center product demand. How far out can you see in the data center business at this point? And I know sometimes maybe customers pull sooner than you think. I think you spoke to that a little bit. What does demand for the data center solutions look like if you go out a year or 2 years or as far as you can see? Neil Brinker: Well, you're right. So some of these things are pretty urgent and sudden and they can be -- we want to do the best we can to please our customers, especially our largest ones. So those are things that we have a pretty quick reaction and we're very quick to react in terms of being able to produce and get that product out, albeit inefficiently, we can at least drive the revenue growth and satisfy the customers' demand. But when that's not the case, and you have -- it's more strategic and you're working with customers that are thinking about where they're going to advance and where they want to move and deploy capital. We can see anywhere from 3 to 5 years out. And I would say with the majority of our largest customers, we have that visibility. And that's really helpful in terms of allowing us to make sure that we're strategically deploying capital in the right places and that we're adding the facilities and factories in the right regions. Jeff Van Sinderen: And then... Neil Brinker: I mean one example of that is what we did in India, right? I mean that was in place. We talked about that a year ago, and we want -- the major driver to move and have facilities and capacity in India was because our customers ask for it. They specifically said, hey, we're going to be here in a couple of years, and we need your help and support. Are you guys willing to invest in that region? So that's a good example of the outcome of having these conversations years in advance so that we can have the facility up in time. Jeff Van Sinderen: Right. So in other words, you're not going someplace with a new facility where there might not be demand, you're really -- you're building to demand. Neil Brinker: Correct. For the -- yes, we're building to demand and the demand is high. There's great demand for our products. There's the technology and the solutions are premium in the marketplace, and we see it. And that's why we're deploying the amount of CapEx that we are. Jeff Van Sinderen: Okay. And then if I could just squeeze in one more. Just on the CDU part of your business, I guess, how do you see the liquid cooling business evolving? Maybe does that become a concentration business for you? How much of the business do you think liquid cooling could comprise, I don't know, a couple of years out? Neil Brinker: Yes, that's specific direct-to-chip liquid cooling. All of our products can apply in the liquid cooling space. You need our products for that. The air cooling solutions will apply in the liquid cooling space. If you get direct-to-chip, CDUs are certainly beneficial and helpful. I continue to see that market evolve. I think there's been some new technologies in that space. I think there's some interesting areas that we've helped our customers in terms of providing different ways of doing that. And you can see some of those announcements out there. So we'll have a product. There will be customers that need it, but not everybody in order to do liquid cooling. And it's just one more -- it's one more product in an ever-evolving suite of products that we have. And we'll always try to do it in a way to differentiate. So it's not a me-too product. So we'll do it a unique custom bespoke CDU for our customers tied to our firmware and software. So it does things that others can't do, and it's differentiated. But again, it's just one more product in a series of products that we have that continue to evolve. Operator: And we have a follow-up question from David Tarantino with KeyBanc Capital Markets. David Tarantino: Could you just give us some color on the range of outcomes you embedded within the ramp implied in the second half? Just kind of what's inside and outside of your control in terms of hitting both the sales and margin targets this year. Michael Lucareli: Yes. We really tried to take it, as we always do, David, down the middle. We've got, as Neil said, one of the challenges we're trying to balance is the demand has increased. Neil has said this before multiple times, but the more we can make, the more we can sell. So we've aligned to internal targets that we're stretching to get to from a manufacturing, and we've pulled those back and both with customers, so we don't disappoint them and with guidance where we've tried to kind of strike down the middle. On the other side, you always have risk that you have a hiccup with a line or some more inefficiencies. But I would say, as we look at it now, we try to go right down the middle. In addition, we talked a lot about the chiller ramps. The other areas where we're getting equal right opportunities for more [indiscernible] on the air side. And certainly, a lot of customers are interested on the modular side, even though those are early days. And those are things we've tried to balance -- keep to balance out the chiller launch risk as well. David Tarantino: And then maybe one more, if I may. Just on HVAC technology and the weakness there. Could you break out kind of the underlying trends between the core business and the recent deals and how we should expect this to progress through the balance of the year on both the top and margin lines? Neil Brinker: Yes. I think generally, the acquisitions are on target. They're doing what we would expect them to do. The indoor air quality business is performing well. It's in line with what we expect at market rate. And what we're entering now is what we call our heat season. This is -- the next couple of quarters for the heat business is going to be big for us. So that's the traditional Modine heaters as well as the L.B. White acquisition. This is the time of year where we start to see our customers and distributors really start to draw on our inventory levels. Michael Lucareli: Yes. And just a quick couple of numbers on that to help you out in, as we look at the total segment for CS in there with the acquisitions, we would assume HVAC Technologies would have growth -- total growth well over 40%, 45%. And organically, that would be mid- to high single-digit organic with the balance being from the acquisition. Operator: And that does conclude our question-and-answer session. I would now like to turn the conference back to Kathy Powers. Kathy Powers: Thank you, and thanks to everybody for joining us this morning. The replay will be available through our website in about 2 hours. Thanks. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Operator: Hello, and welcome to The Vita Coco Company's Third Quarter 2025 Earnings Conference Call. My name is Daniel, I'll be coordinating your call today. Following prepared remarks, we will open the call to your questions with instructions to be given at that time. I'll now hand the call over to John Mills with ICR. John Mills: Thank you, and welcome to The Vita Coco Company's Third Quarter 2025 Earnings Results Conference Call. Today's call is being recorded. With us are Mr. Mike Kirban, Executive Chairman; Martin Roper, Chief Executive Officer; and Corey Baker, Chief Financial Officer. By now, everyone should have access to the company's third quarter earnings release issued earlier today. This information is available on the Investor Relations section of The Vita Coco Company's website at investors.thevitacococompany.com. Also on the website, there is an accompanying presentation of our commercial and financial performance results. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also during the call, we will use some non-GAAP financial measures as we describe our business performance. Our SEC filings as well as the earnings press release and supplementary earnings presentation provide reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and are available on our website as well. And with that, it is my pleasure to now turn the call over to Mike Kirban, our Co-Founder and Executive Chairman. Michael Kirban: Thanks, John. Good morning, everyone. Thank you for joining us today to discuss our third quarter financial results and our expectations for the balance of 2025. I want to start by thanking all of our colleagues across the globe for our continued strong performance, particularly in a very fluid environment and for their commitment to The Vita Coco Company and advancing our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. Although I'm incredibly pleased with our third quarter performance, I'm even more excited by the underlying momentum in our category and our very high execution levels, which bodes well for our future. Coconut water remains one of the fastest-growing categories in the beverage aisle, growing 22% year-to-date in the U.S. and 32% in the U.K. based on Circana data and over 100% in Germany based on Nielsen data. This, coupled with our significantly improved inventory position versus last year, has resulted in very strong retail growth for our brand. Year-to-date, according to our retail data, Vita Coco Coconut Water, excluding our coconut milk-based products like Treats is growing 21% in retail dollars in the U.S., 32% in the U.K. and over 200% in Germany. This has led to similarly strong global net sales, gross profit, net income and adjusted EBITDA performance for our third quarter. Year-to-date, our international business is accelerating, driven by strong performance in Europe. Our increased investment this year in the U.K., Germany and other select European markets is paying off with healthy growth and brand share wins. The acceleration of the category that we saw in late 2024 has continued through 2025, which, combined with improved inventory and strong execution is producing exceptional year-to-date results. Looking forward, we expect to maintain strong growth trends as we invest in and develop the coconut water category in our priority markets and our asset-light model and strong cash generation position us well to take advantage of the opportunities ahead. Big picture, I believe that the coconut water category is in the very early stages of gaining mainstream appeal on a global level. Coconut water looks to be transitioning from niche to mainstream, and we are at the forefront of that trend. If we can continue the household penetration and consumption gains that we are seeing, I'm confident that coconut water will one day be as large as some of the major beverage categories across the beverage aisle. And now I'll turn the call over to our Chief Executive Officer, Martin Roper. Martin Roper: Thanks, Mike, and good morning, everyone. I'm pleased to report Vita Coco's continued strong performance in the third quarter. Net sales in the quarter were up 37%, driven by growth of Vita Coco Coconut Water of 42%, benefiting from strong growth in the coconut water category and improvements in our available inventory and service levels. Our branded scan results in the United States were very strong, even with a slight drag in our scans created by the changes in the Walmart set late last year, which we estimated was a mid-single-digit drag to our total U.S. branded scans in the third quarter. We are benefiting from strong volume growth and the impact of the 2 price increases taken in the U.S. this year, the first in mid-May to cover our normal inflationary cost of goods increase and the second in mid-July to cover the dollar impact of the 10% baseline tariffs announced in April. The cumulative effect of these price increases on shelf in the U.S. is best viewed on a 2-year basis, which is showing as approximately 7% in the last quarter according to Circana. To date, we think the price elasticity impacts from these increases are within expectations. but we need more time to understand the impact of the July increase and to see competitor moves before thinking about any further price increases to cover the additional tariffs announced in August. Since November last year, we have been in the juice set at Walmart with significantly reduced assortment. We currently expect this juice set to be reset in mid-November. We've been told that our current total points of distribution will grow significantly compared to the current sets and also above levels we had before the move to the juice aisle. We are optimistic that we don't have complete visibility to understand the competitive dynamics of the new set and the actual shelf space allocated for our SKUs beyond the expected distribution gains. The private label business remains strategically important to us with greater uncertainty on costs, particularly due to the announced tariffs and some intermittent service issues from some of our competitors as the category accelerates, there have been more inquiries than normal about our private label services. In addition to the new U.S. private label relationship announced last quarter, we now expect to regain in early 2026, some private label service regions with key retailers that we had previously lost. We view this as a positive signal on our quality, service and pricing and reinforces our belief in the competitive advantage of our supply chain. Other than increasing tariffs and slightly softer ocean freight, our cost of goods has been pretty stable since we last spoke to you. We believe ocean freight rates during the quarter were still elevated relative to historical levels, but we saw rates soften through the quarter and since quarter end. We are operating primarily on spot rates with some fixed price arrangements on certain lanes to secure capacity, which allow any lower rates to benefit our P&L probably early next year, depending on the timing of inventory flows. Corey will cover our outlook for the balance of the year. For 2026, the most difficult element to predict is the applicable U.S. tariffs we'll be operating under. During the quarter, there were signals that the administration is willing to offer exemptions for products related to natural resources not available at scale domestically to meet U.S. demand, which gives us more optimism that coconut water could potentially receive waivers. If we do not receive any waivers and tariffs are uphold, we will continue our mitigation efforts. And ultimately, if significant tariffs remain and other offsets like ocean freight are not sufficient, we will evaluate the potential to take more pricing next year to further mitigate the impact of tariffs. We have a global diversified supply chain, which positions us well to deal with the dynamic U.S. tariff situation. The majority of our supply comes from the Philippines and Brazil, with the remainder principally coming from Thailand, Vietnam, Malaysia and Sri Lanka. Our current weighted average tariff rate on coconut water shipping to the U.S. from source country at the end of the quarter is estimated at a blended rate of approximately 23%, which is before any significant moves to mitigate the 50% tariffs on coconut water from Brazil. We are currently seeing tariffs into the U.S. applied to approximately 60% of our global cost of goods and believe that this is a good approximation for the cost of goods that U.S. tariffs are applied to. We are developing and executing plans to avert some of our Brazil production to Canada and Europe and to cover U.S. demand more completely from Asia, which could help further mitigate our average tariff rate. We have started preparations for this diversion but may choose for service and responsiveness reasons to source some production from the U.S. from Brazil on an ongoing basis. As the applicable tariff rates change in the future, we will adapt our plans. To summarize, our category is very healthy. Our brand is performing well, and our supply chain is supporting very strong growth and together with potential future pricing, we believe that we'll be able to mitigate the potential tariff impact long-term and to remain very competitive in our markets. We are confident in our team's ability to execute and deliver our plans for the balance of 2025 and 2026, and our confidence in the category and Vita Coco brand trends remains very high. Longer-term, we believe that we will benefit when ocean freight rates return to historical levels and that when all of our tariff mitigation efforts are in place, this should allow us to achieve or beat our long-term financial targets. With that, I will turn the call over to Corey Baker, our Chief Financial Officer. Corey Baker: Thanks, Martin, and good morning, everyone. I will now provide you with some additional details on the third quarter 2025 financial results and our outlook for the full year. Net sales were very strong for the third quarter, increasing $49 million or 37% year-over-year to $182 million. Vita Coco Coconut Water grew 42% and private label grew 6%. Our quarterly results benefited from the continued strong category growth, the restoration of a key club retailer promotion in the U.S. as well as the depressed third quarter reported last year when we were significantly inventory challenged. Please note that the key retailer promotion that ran in late Q3 and early Q4 this year has created unusually healthy scan trends in the U.S., and I would suggest that you look at a 2-year growth rate for an appropriate reading on the underlying momentum. On a segment basis, within the Americas, Vita Coco Coconut Water increased net sales 41% to $132 million and private label decreased 13% to $14 million. Vita Coco Coconut Water saw a 30% volume increase and a price/mix benefit of 8%. The branded price/mix benefit was driven by the cumulative effect of our 2 price increases in 2025. Our other product category grew 182%, primarily reflecting the national launch of Vita Coco Treats. Our international segment continued to deliver exceptionally strong results in the third quarter with net sales up 48% and Vita Coco Coconut Water growing 47%, driven by strong growth across our major markets. Private label sales increased 70% due to strong sales of private label coconut water within our current customer base. For the quarter, consolidated gross profit was $69 million, an increase of $17 million versus the prior year. On a percentage basis, gross margins finished at 38% for the quarter. This was down approximately 110 basis points from the 39% reported in the third quarter of 2024. This decrease in gross margin resulted from higher year-on-year finished goods product costs and the baseline 10% import tariffs announced in April, plus a very minor impact from the August tariffs that collectively created a $6 million tariff impact in the quarter. This was partially offset by our combined pricing actions and lower year-on-year ocean freight expense as well as the recovery of a reserve for private label packaging. Moving on to operating expenses. SG&A costs increased $10 million to $41 million within the quarter, driven primarily by higher people-related costs and increased marketing expenses. Net income attributable to shareholders for the quarter was $24 million or $0.40 per diluted share compared to $19 million or $0.32 per diluted share for the prior year. Net income benefited from higher gross profit and a lower year-on-year tax rate, partially offset by higher SG&A spending and the lower gain on derivatives than in the prior year. Our effective tax rate for the third quarter of 2025 was 22% versus 25% last year, which is primarily driven by the discrete tax benefits and a favorable geographic mix of pretax profits. Third quarter 2025 adjusted EBITDA was $32 million or 18% of net sales compared to $23 million or 17% of net sales in 2024. The increase in adjusted EBITDA was primarily due to higher net sales and gross profit, partially offset by higher SG&A expenses. Turning to our balance sheet and cash flow. As of September 30, 2025, our balance sheet remained very strong with total cash on hand of $204 million and no debt under our revolving credit facility. We have generated $39 million of cash year-to-date, driven by our strong net income, partially offset by increases in working capital, primarily due to increased accounts receivable. Our updated guidance reflects our current best assumptions on marketplace trends and timing of our shipments as well as the continuation of the U.S. tariff levels announced in August. Based on our current trends, we are raising our full year net sales guidance to between $580 million and $595 million. We expect full year gross margins of approximately 36% with higher finished good costs, including tariffs relative to last year being partially offset by our increased pricing and slightly lower logistics costs. The impact of U.S. tariffs announced in April and August has increased through the year. For the full year, we expect to see an increase in our cost of goods of between $14 million and $16 million versus the prior year. We expect our average tariff rate on imported U.S. goods to peak at the previously mentioned rate of 23%, and this should start hitting our P&L late in the fourth quarter, depending on actual sales and inventory usage. Our sales expectation is based on a tougher Q4 net sales comparable to last year when we benefited from distributor and retail inventory rebuild. We expect full year SG&A expenses to increase high single digit versus 2024. This, combined with our expected higher net sales is resulting in a higher adjusted EBITDA guidance of $90 million to $95 million. Our full year SG&A increase is due to increased people investments, including increased incentive and stock compensation and higher year-on-year sales and marketing expenses and other focused investments to support the delivery of our growth objectives as we aim to maintain a strong branded growth momentum into 2026. We look forward to providing additional updates and formal 2026 guidance on our next earnings call. And with that, I'd like to turn the call back to Martin for his closing remarks. Martin Roper: Thank you, Corey. To close, I'd like to reiterate our confidence in the long-term potential of The Vita Coco Company, our ability to build a better beverage platform and the strength of our Vita Coco brand and the coconut water category. We are confident in our ability to navigate the current environment and are excited about our key initiatives to drive growth. We have strong brands and a solid balance sheet and believe that we are well positioned to drive category and brand growth, both domestically and internationally. Thank you for joining us today, and thank you for your interest in The Vita Coco Company. That concludes our third quarter 2025 prepared remarks, and we will now take your questions. Operator: [Operator Instructions] Our first question comes from Bonnie Herzog with Goldman Sachs, your line is open. Bonnie Herzog: I had a couple of questions on your guidance. First, you raised your top-line growth guidance, but it does imply a sharp decline of about 15% in Q4 at the midpoint. So I understand you've got a tough comp in the prior year to lap, but I guess I wanted to better understand this expectation. Was there a pull forward of shipments from Q4 into Q3, for instance? Is there anything, I guess, in particular, expected in Q4 as it relates to private label? And then on EBITDA, your new guidance implies a big ramp in growth in Q4. So could you give us some more colour on the drivers of that expected acceleration? Michael Kirban: So from a top-line perspective, as we've talked about, we've been focused on the full year. And the quarters, especially around Q3, Q4 are quite hard to tell. We would ask you to take a look at the 2-year stack, which in the underlying base business is still very, very strong. Half 2 and quarter-on-quarter is showing double-digit growth on a 2-year CAGR in the underlying business. And we do have the current trends of the private label business, which as we talked about in Q2, I believe Q2 was down in the mid-30s. We would expect that trend to continue. Martin referenced new private label business starting in 2026. At this point, we don't expect any impact from that, but we may get some -- as you know, the timing of private label is quite challenging, so at the midpoint, we feel there's still a strong underlying growth trends embedded in there, offset with the private label. And then from an EBITDA perspective, we've embedded the tariffs at the 23%. We currently see inbounding to the country. Those will gradually increase through the quarter, peaking at that 23% roughly at the end of the quarter. And then it's the current level of pricing. Bonnie Herzog: Okay. And just want to verify, there's nothing that we should think about as it relates to inventory levels in terms of Q3 versus Q4? Nothing to call out there? Michael Kirban: Yes, it's quite hard for us. We don't have complete visibility to inventory, which is why we stay focused on the full year. Q3 had the large retailer promotion. So the timing of that may have been a little heavier in Q3. And as we've talked about, we expect improved distribution at Walmart, how that shifts to distributors and exactly when that inventory will pull is hard to call as well. So I would stay focused on the 2-year second half trends, maybe and you'll see a very strong growth. I would just add that I think we think distributor inventories at the end of the quarter were healthy and sort of ready to support the Walmart set process. And obviously, how those adjust through the end of the year, as you know, can produce a little bit of noise at the end of the year, but we currently think inventory levels are appropriate based on the activity we see in Q4. Bonnie Herzog: Okay. Super helpful. And if I may just squeeze in a quick question on private label because it certainly has been a focus, and you touched on this, hoping for maybe just a little bit more color on what you touched on the recent private label customer wins. How do we think about these wins, meaning offsetting some of the prior losses, if at all? And then as you think about your private label business, how do you believe it's advantaged maybe versus peers? And how do we think about your approach to private label next year and beyond? Is this something you're going to aggressively pursue? Michael Kirban: Yes. I think as we've said all along, Bonnie, we view the private label business as one that's complementary to our brand on a number of factors, both on the supply chain side and the retailer relationship side. And so we intend to continue to seek private label business or regain private label business and be competitive in it. As it relates to how we think about our competitive position, we believe that we are uniquely placed to provide large private label programs with diversified supply of private label across multiple countries, multiple factories. And we also believe that some of our sourcing leads to a cost advantage and a service advantage and a quality advantage. Now that doesn't always play out in how those bids are awarded. And so it hasn't all been wins, but we certainly believe that we are strategically well positioned to compete going forward. As it relates to your question, we're obviously not providing any sort of '26 guidance here. What I would say is that we recovered some of the regions that we lost, but not all of them. So we still have some headwinds next year, which may or may not be offset by some of the wins on the new customer front. But it's sort of, you know, to us, we lost regions early in the year, and we're regaining some of them. To us, that shows that our sort of supply position is competitive on a quality service and price perspective. And it gives us hope that we can recover more, but obviously, there are no guarantees and nor have anything been announced or those are more expectations and hopes over, let's say, a multiple year period as opposed to a single year period. So I think next year, private label probably will still be a slight drag for us, but obviously, the category on a lost business basis. But the category is very healthy. It's growing. The private label business that is retained is growing because the private label business is healthy, too, similar to the category. So again, I would just say we're optimistic for a good '26, but we're not in a position to provide guidance. Operator: Our next question comes from Chris Carey with Wells Fargo Securities, your line is open. Christopher Carey: The implied Q4 gross margin, a couple of questions there. So the first is just the Brazil tariffs. Is it reasonable to assume that Q3 did not include much of those and those will be heavily concentrated in Q4? And so I'd love some perspective on that because Q4 has some seasonality that is lower than Q3, but there's also this new cost factor. So I'd love maybe a bit more detail on how you see that impact. The second thing is how are you thinking about some of the headlines around tariff? What are some of the key markers that you're looking for as it pertains to Brazil? The reason I ask is because at what point do we start thinking that you may need to take some pricing going into the front half of next year? How long will you assess the tariff backdrop before making that decision? Michael Kirban: I think for starters, the headlines are interesting and definitely worth looking into. I mean, the numbers that we've given in terms of what tariffs look like for us as of the end of the quarter are -- could change. And this is what we're dealing with is the uncertainty around it. I mean if you look at the headlines over the weekend, obviously, Trump and Brazil's President Lu had a good meeting and have committed to getting a trade deal done and Brazil has asked for relief on the 40% reciprocal tariff. It hasn't been denied, hasn't yet been approved, but we're hopeful that we'll see some changes on a positive level as it relates to Brazil. And then even as you look at some of the other trade deals that are getting done, if you even look at Cambodia and Malaysia, which happened this weekend, coconuts are listed as excluded from the tariffs in those trade deals. Coconut water is not yet. This is something, obviously, we're hopeful for and working on. But I think it's pretty clear that the administration is looking to exclude unavailable natural resources. We've just got to make sure that coconut water is recognized. And so as these trade deals continue to get done with different countries which we source from, we're hopeful that we'll see some improvement to the tariff numbers that we've talked about. But as of now, that's where we stand. Martin Roper: And Chris, going back to start of your question, which was did the increased tariffs from early August hit the Q2 P&L. Maybe, Corey, you could take that. Corey Baker: Yes, Chris, it was a small amount. If we think of the tariffs as April and August, the August tariffs had very little impact on Q3, a slight bit at the end, and that will ramp-up towards that 23% rate. And we anticipate that would hit late in the quarter, November, December time frame and then be at that steady rate through next year, barring any of these changes we're hopeful for. Martin Roper: And then, Chris, relative to your pricing question, we took pricing in July to mitigate the 10% baseline tariff from April on a dollar basis, right? And I think we indicated in the call that, that was showing up as like a 7% pricing on Circana on a 2-year basis comparison to 2 years ago is how it's showing up. And that would, I suppose, also include the May. So that's the impact of both pricing. We're still monitoring the impact. There's certainly been a slight volume decline with the pricing, but in line with our expectations, but we want to monitor it. We're also monitoring competitive actions and movements on private label pricing, where we expect private label pricing to follow the tariffs rate because it's a cost-plus business model for our retailers. And so we're monitoring that to see what happens. We don't feel in a rush to sort of mitigate further the tariffs while we wait for that. We're also working on the mitigation strategies, particularly as it relates to Brazil, which is the outlier in our tariff environment at 50%. And those mitigation activities revolve around taking Brazil production to other countries other than the U.S. it's not as simple as just a switch because you have to get packaging in place, you have to get approvals in place. So we're working to be able to do that over the next few months and certainly complete that if the Brazil tariffs stay in place by the end of next year. So we want to see how those mitigation efforts go. You said the tariffs is very fluid. It is obviously very fluid. We don't want to take price if we effectively have to give it back. So we're thinking we'll make pricing decisions in Q1 that might take effect Q2 based on our view on where tariffs are and mitigation actions are in Q1. We're reserving the right to take pricing or not take pricing based on what we see in the marketplace and what we think is right for the brand long-term. Christopher Carey: Perfect. A quick follow-up or perhaps not, but international, just give us a sense of where we are in the international journey. I suppose you're going to say early, but it's really starting to come through. So how are you thinking about the growth runway in international? And just remind us on your capacity to service that international market given your supply? Martin Roper: Yes. Let's start with the capacity. As we sort of have talked about for like the last 18 months, we started adding capacity because we saw the category accelerating both in the U.S. and in our core markets internationally. And so we've been adding capacity to support growth rates in the mid-teens or a little bit higher, and that is progressing well. It's a lot of work and a big shout out to the team involved. We're adding 1 to 2 or more factories a year. And it's -- there's a lot of hard work going on in that. So we don't see a capacity issue in supporting this over the next few years. And then as it relates to your international question, we view category development in our core markets internationally, which we would describe as the U.K. and Germany as being underdeveloped versus the U.S. And I would refer you to our investor presentation from June, where we provided an estimate of consumption per population, right, by different countries. So you'll see there that the U.K. is about 1/3 of the U.S. Germany is like 10% of the U.S. So it's pretty early. And obviously, the U.S. is still growing. So we see it as early innings. And I think big picture, longer-term, the way we think about it in our 5-, 10-, 15-year planning, I suppose I do 10-year planning, Mike does 5-year planning. We want Europe to be as large as the U.S., right? So is it possible that, that could happen? Absolutely. Populations are good, demographics, income levels, health orientation are all good. So we think coconut water is still in early innings in Europe. Operator: Our next question comes from Robert Ottenstein with Evercore ISI. Robert Ottenstein: And congratulations on another terrific quarter. I want to kind of double or triple click down on international, which just seems super exciting. So just to help us get a little bit more granularity on the business. Can you give us a sense based on what you've learned today, how the international market in terms of Europe, is there a significant difference in terms of the consumer occasions and how they look at the category? How would you compare the competitive intensity in Europe versus the U.S., margin profile? And then just in terms of this quarter, was there anything unusual that perhaps flattered the results? Martin Roper: Yes, sure. I'll try and get to all of these. Let's see, international is very exciting. International for us is sort of largely Europe. That's where the strength is. It's led by the U.K., which was launched about 11, 12 years ago, probably a little bit off on that, but effectively 10 years behind the U.S. in its launch trajectory. In the U.K., there is a healthy category, but our brand has over 80% share of it. It is largely cold in the stores, which is a difference to obviously the U.S. where we're warm shelf. And the competitive players sort of really don't -- aren't that strong because with over 80% share, there's not -- no one really talk about. About 5 years ago, Innocent juice had a coconut water brand that probably had 10%, 15%, 20% share, but that has largely been squeezed down to low single digits. And so we have a very strong position, and we're focused on growing the category and then obviously maintaining our share of the category. As the category growth continues, obviously, retailers get excited and they introduce new brands, et cetera, but it's largely small stuff, and I don't think we see any impact from that. But would I expect the competitive environment to continue to be active? Yes, of course. The rest of Europe, for the most part, has been small for us up until about 2 years ago. We put a commercial leader into Germany to try and open up the private label business. In a lot of the rest of Europe, private label is actually a very big player in coconut water, whereas in the U.K., it isn't as big a player. And in many of those countries, private label is the largest sort of nonbrand brand, but obviously, it's across multiple retailers, but it's very significant. So we led with developing retail relationships with private label, and that then allowed us as coconut water growth started to take off, we were asked whether we bring the brand in, and we were able to do so. We're in very early innings in Germany. We have national authorizations. Germany retail is interesting in that national authorization doesn't result in distribution in many of the retailers, you have to then go get a regional approval and then actually go store or store collective to get -- to build that out. So we're in pretty early innings there. And as I look at the next 2 years, the blocking and tackling is actually delivering on the national distribution that we've been awarded by selling it at the regional and the local level. And that's probably a multiyear task. Interestingly, as we launched Vita Coco into Germany, we saw the category growth accelerate. I think that's partly because there aren't strong brands there that are investing and have good brand recognition. And we've been able to gain a very significant piece of that growth. So we've gone from effectively 0% branded share to a healthy brand share by grabbing that growth. That said, the private label business has also accelerated. So it's been good for the category. And obviously, we try and compete in that. So we're trying to take some of the learnings from these markets. They're different than each other, right? And they're different both on where the category is and the retail environment and think very carefully about which markets to prioritize next, obviously, with a weight on maybe the larger markets like France and Spain. But we're also testing different routes to market in more fragmented markets like the Benelux, which is currently growing very healthily for us through a partnership with the distributor there. So we have different models that are working. And I think we're happy to be patient, and we're not trying to blast it out and overstretch ourselves. We're trying to build it from the ground up, and we feel pretty good about healthy international trends for the next few years based on that European business. You asked about margin. We mostly do not use distributors. We do have some reps. There are some distributors for small markets. So there isn't a distribution layer. It's direct to retail. So pricing in the market is lower than in the U.S., pricing to consumer because of that. And margins are good. It benefits from lower ocean freight costs from Asia to Europe mostly. So that can support a lower price structure. But the margins are perhaps maybe on a branded side, a little less than they are in the U.S., but they're still very nice and appealing. And I think I've touched on every one of your questions, but if I miss one, please re-ask. Robert Ottenstein: Yes. Just was there anything in this quarter on the international that flattered results in any way? Martin Roper: Just strong demand. Michael Kirban: Yes. Operator: Our next question comes from Christian Junquera with Bank of America. Christian Junquera: Just 2 questions. A quick clarification question. Just the tariff impact for 2025, did you guys say $14 million to $16 million? And if so, that implies a blended tariff rate for this year about like 6% to 7%. And then the expectation or what you guys are expecting is it jumps to 23% in 2026. Did we catch that correctly? Corey Baker: The $14 million to $16 million, Christian, is correct. The percentage, the 23% is of the applicable finished goods amount, which we've quantified as approximately 60% of our global cost of goods. So I'm not sure of your -- the math you have on, 6%. Martin Roper: So you have to remember that the tariffs were imposed initially in April, first week of April at a 10% rate. And what hits our P&L is delayed by when those tariffs flow through our inventory. So as an example, a 10% tariff applied on April 7 to a container leaving Asia wouldn't arrive in the U.S. until maybe early June and then wouldn't get sold out of our inventory probably until July. So our tariff impact in Q2 didn't really MERIT talking about. So we didn't talk about it in Q2 as a dollar amount. We talked about $6 million impact in Q3, which would largely reflect the 10% baseline tariff imposed in April because that would be the inventory flowing through our P&L in Q3. And as Corey indicated, the blended tariff rate based on our current sourcing at the end of the quarter is 23% of containers shipping at the end of the quarter from source. That rate will which is the rate that effectively was put in place in early August, flows into our P&L in mid-late Q4, but is the rate that is applicable for next year. So that's the reason that the $14 million, $16 million looks small to you because effectively, it's on half year and effectively, at least half of that year is only at 10% -- sorry, half of that 6 months is only at 10%. Does that make sense? Christian Junquera: Yes. Yes. That's very, very helpful. Thank you for the clarification. And then if we just can go into -- and you've talked about it, but just the levers to offset the higher tariff rate for next year, right? You guys have the higher pricing that you took this year that's going to carry over. And I mean, potentially lower ocean freight. I mean looking at the chart, it looks like rates keep going down. Do you have any expectations for ocean freight next year? And I don't know if I'm missing anything else, any other levers at your disposal. Michael Kirban: I mean that's the biggest benefit. That is the biggest benefit for the offset ocean freight... Martin Roper: We're talking to suppliers and trying to work out things that we can do, but this isn't a particularly large margin business for them. Obviously, we're asking whether their governments can help as well, right? We're trying to optimize our sourcing to take advantage of the different tariff rates. But really, that means trying to avoid Brazil, if we can, right? And the base pricing we took in July that was, again, incremental to our May pricing was designed to cover the dollar impact of the 10% baseline. Obviously, we're evaluating the impact of that. And if we think we have to take more pricing and it's prudent given the competitive environment and our brand trends and everything else and all our mitigation efforts, then we will consider it. But we're a little reluctant to rush into pricing if indeed some of these tariffs may be waived under the trade agreements that Mike was talking about. We obviously have the Supreme Court case coming up next week, which may or may not also declare that the tariffs don't apply. So we're a little reluctant to rush into pricing until we get a better feel for all these impacts. Operator: Our next question comes from Jon Andersen with William Blair. Jon Andersen: A couple of questions. We talked a lot on the call about headwinds from ocean freight -- ocean freight tariffs, I'm sorry. But I did want to ask a little bit more about ocean freight because the rates look like they've been cut in half year-over-year, and that started happening earlier this year, the decline year-over-year and down 50% starting in the midyear. And I think you're operating of, as you pointed out, a lot of spot situations right now. And again, I don't know the exact kind of composition of your cost of goods, but the freight piece seems like a big piece of the cost of goods. And if that's come down to that degree, it seems like that would be much more impactful than the tariff piece here. So we'd be looking at a pretty good margin outlook -- gross margin outlook for '26. How do you kind of think about that? Martin Roper: So one way to think about that is we've indicated that the tariffs applied to 60% of our global cost structure. If you apply 23% to that, you get -- come out at like 13% of our revenue is tariffs. That's a huge number, right? And the last time ocean freight spiked, which was '22, really spiked. We talked about a total transportation impact of $65 million, which included domestic transportation, and we said 2/3 of it was ocean. So the ocean freight, you can extrapolate an ocean freight number from that $65 million, and you can get back into -- that was when rates were $10,000, $12,000, $14,000, right? So ocean freight is an important part of our cost structure, but I would caution you not to overestimate it and to use those data points that we've provided. And I'm going to say, Corey, did we provide a percentage of transportation costs in one of our investor presentations. Corey Baker: A few times in the years, we have in the range of 1/3, but it varies up and down and... Martin Roper: Up and down based on ocean freight... Corey Baker: Yes. We haven't quantified the tariffs, obviously change that equation. Martin Roper: Yes. So I think, Mike, said earlier that ocean freight is an important opportunity for mitigation. And obviously, we're not actually doing anything. We're benefiting from market changes. So it's a benefit from market change that can be an offset. But the tariff impact, if it were to stay, is pretty significant. You mentioned what's going on with ocean freight. If you look back a year on the indexes, the indexes were in the low 3,000s, and they're currently sort of -- I'm looking at the global index, it's currently in the low 2,000s. So it's down 33%, but it went up last year and had a couple of peaks that cost us, right? So yes, current ocean rates are lower than they've been for at least a year, but the change is perhaps not as big as the 50% as you were talking about, like it's not down 50% versus a year ago. Jon Andersen: And what -- I think I have in my notes that ocean -- well, freight in aggregate in COGS is 30%, 35%. Is that -- with the balance being finished goods? Is that a reasonable way to think about it? Michael Kirban: I believe that number is transportation and logistics. So it's warehousing, drayage, ocean freight, internal transportation, distribution, et cetera., ocean freight is a subset of that number. Jon Andersen: A component of that 1/3 of COGS or so. Okay. The other question I had was just on the guidance. I haven't -- I guess the guidance implies 4Q sales of around $105 million, which looking at what you did in Q3, $182 million, it's like a 42%, 43% sequential decline in sales from Q3 to Q4. We haven't seen anywhere near that kind of a seasonality or change in the past. I know there's a little bit of seasonality, but again, a 45% decline is big. Any -- I just want to make sure I understand what's causing that. Michael Kirban: Jon, I don't see those levels of declines year-on-year, but maybe we're... Jon Andersen: No, sequentially, sequentially. Martin Roper: So Q3 was very big. We benefited from the major promotion that we skipped last year, right? Michael Kirban: And it erodes from the out of stock. Martin Roper: So I would just -- obviously, there's lots of moving pieces here. But on branded, maybe you look at the decline in '23, which would have been a comparable year on a promotional side. And then obviously, we have the private label decline that we prefer you to look at in Q2 rather than the Q3 number. So it's tough modelling Q4 for us and we're providing the best view that we can. And again, we have some uncertainty on exactly how the private label falls through the end of the year and into next year. So it's just -- that's one of the reasons for me taking the ranges. Michael Kirban: That feels like maybe the bottom or below the guidance range. Is that -- so we can follow up. Martin Roper: Yes. Operator: Our next question comes from Michael Lavery with Piper Sandler. Michael Lavery: Just wanted to touch on capital allocation. You mentioned now your cash balance over $200 million. I know in almost the same breath, you point out the share buyback authorization, though it's a small piece of that even if, of course, you always reauthorize more. But what's the expectations for use of cash? I know you've always had M&A on your kind of to-do list, but it hasn't been a big factor ostensibly because there hasn't been something interesting or at the right price. But how do we think about what the cash is meant to go for? Martin Roper: So I think our priorities haven't really changed. And the first one is growth of the core business. I would say that with the growth we're seeing and our planning for next year, we'll probably be building inventory as we finish this year into next year. And obviously, we're a pretty inventory-intensive business given so much of it sits on the water. And so I would just draw your attention to that, while also recognizing that $200 million is a very healthy cash balance for a company of our size. So our next sort of priority is innovation and supporting our innovation efforts. Third priority is M&A for something that will deliver value to our shareholders. And I think we've talked about M&A a lot in the 3, 4 years we've been public and obviously haven't done anything. So we're prudent, and we're not looking to do M&A for M&A's sake. That's certainly not part of our mission statement. And then as we look at what's going on in all those 3 areas; growth, innovation and M&A, if we believe we have excess cash, then our intentions would be to apply it to share buyback at stock prices that we think are fair for our long-term shareholders. So that's how we think about it. And I don't think anything has really changed. And certainly, as the cash builds, it becomes more of a conversation, but I don't expect us to change our approach to it. Michael Lavery: Okay. And just on Treats, a follow-up there. It seems like it would be a pretty nicely incremental part of the portfolio. Is that a fair characterization? And even if so, do you find it can be sort of a gateway to the coconut water part of the portfolio, too? Or are you seeing any interplay there that it might be attracting new users who then also switch to the coconut water side of the business? Michael Kirban: Yes. I mean we're seeing a lot of consumers coming into the brand through Treats, which is really nice to see. So exactly what you mentioned, they're coming into the family. And then kind of like what we've seen over the years with our pineapple flavor and our extra coconut flavor, those are kind of the entries for the category and then the hope is that they stay within the brand. And you see a lot of people then move to the original pure coconut water, the blue one. So Treats, it's early, but we aren't seeing cannibalization. We are seeing a lot of new consumers coming into the brand through Treats. So that is the idea. Hopefully, they stay with coconut water and drink it for different occasions in different flavors and formats. Martin Roper: And just a couple of comments on how Treats gets reported. On a shipment basis, it's reported in other -- so the coconut water reporting on a shipment basis does not include treats, right, and it's indicative again of the health of the category. On a Nielsen, Circana basis, Treats gets reported sort of not necessarily in coconut water, but it might get reported in sort of milk-based products because it's a coconut milk-based products. And so I would just caution you to work out if it is being reported or not in our Circana data, it's not in the coconut water definition that we buy. And it was order of magnitude, I'm looking, Corey, would have added an incremental 4 percentage points to our Circana growth rate. But indeed, we reported in our investor deck because our investor deck reports coconut water growth rates that don't include Treats. Operator: Our next question comes from Eric Serotta with Morgan Stanley. Eric Serotta: Great. First question would be in terms of pricing. I know you said that you're waiting on further pricing to see what the competitive environment looks like. What are you seeing in terms of -- have competitors moved on pricing in as we sit here today at the end of October, you guys moved early August. I know that some competitors were on a different kind of pricing cadence over the past few years. So what are you seeing in terms of pricing from your competitors today? I know you can't speculate about the future there. And then just to follow up briefly on Treats. What does the repeat purchase look like on that? And was -- it looks like it was nicely incremental to this year. Do you see it building next year? Or is that, in some ways, going to be a tougher comparison with the launch this year? Michael Kirban: Let me take the pricing, Eric, and then Martin can talk to the Treats performance. I'd say on pricing, and we tend to use Circana as a measure of what we're seeing in the market. We're seeing a few different things. Some competitors took pricing early and quite a bit and have maintained at that level and not moved incrementally in response to tariffs. Others have moved 1 or 2 times, and we're seeing some moves in some private label more recently up on a second tariff move. And then others have not moved at all. So there seems to be a differing strategies across the market. Obviously, we lead the market by a wide margin, and we've moved. So we'll see -- continue to monitor closely on additional moves. Corey Baker: Yes. I think we're also monitoring the tariff -- what tariffs actually could end up being. I think there's still so many moving parts between Brazil and trade deals getting done. I think there's a lot of questions to be answered. Michael Kirban: That's quite hard. Martin Roper: Yes. And because of the timing of the August tariffs, I'm not sure we've seen anyone moving relative to that. But obviously, we would expect people to have to move particularly on the private label side. So that's a good reason to sort of wait. With regards to Treats, I think as Mike said, it's providing a different gateway for consumers to come into the brand. That's good. I would say we're seeing acceptable repeat rates, if not positive repeat rates and our challenge is to drive more trial, so more visibility of the brand. And so that probably requires a little bit more investment, et cetera. And so that's what we're planning for next year. I think you asked about next year. Obviously, it's very difficult to sort of project next year, we do think that we will get some Treats distribution gains. While we did very well on Treats this year. We didn't, for instance, get it into Walmart. And I think our expectation is that we would get it into Walmart in the resets and some other places as well on sets next year. So I think we still have another year of growth for Treats just based on the launch before distribution growth before sort of -- and then obviously, we are trying to drive adoption on top of that, but it certainly should be a positive next year. Operator: Our next question comes from Jim Salera with Stephens. James Salera: I first wanted to ask on just the kind of composition of the growth this year. If I look at the slide deck, it looks like multipacks have been kind of the biggest incremental driver, which I would kind of read as a proxy for increased purchase with existing households. Please correct me if you think that that's a wrong read there. But with the inclusion in modern hydration upcoming, do you view that as an opportunity to really introduce the brand to new households if it's more visible on shelf? Or is that a way to maybe pick up some lapse opportunity with people that were buying it, but then it gets shuffled around in the store and they kind of lose track of it and don't follow up with. Martin Roper: So we view the multipack strategy as a way of increasing value to our customer while also increasing velocity and potentially putting more product in their pantries, right, which potentially increases their own consumption. And I think that's what we're seeing. Some of the multipack strength is also a little bit driven by multipacks are much more predominant in club type environments. And so if club is strong as a channel, which it obviously is in the current economic environment, you are seeing some growth from multipacks from that point side. As it relates to how is that all filling into total growth, we still see our growth as a nice balance of new households and increasing velocity per household. Our rough approximation is half of the growth is coming from new households, and half is coming from increased consumption per household. And so that's what we think is currently going on. Obviously, numbers in this area are available, but messy. James Salera: Great. And then I appreciate all the color around COGS and kind of the moving pieces next year, and you guys still have some stuff you want to look at before you give '26 guidance. But if I just take the 4Q exit rate on tariffs, coupled with kind of running forward the ocean freight rate through into '26 and blend that together, it would imply FY '26 gross margins are kind of flat to down modestly. Is that a fair way to characterize it just as we're thinking about -- and I appreciate, obviously, there's plenty of moving pieces on tariffs. But assuming no changes there, the gross margin would be kind of down modestly next year? Michael Kirban: That sounds like '26 guidance, Jim. Martin Roper: It was a good try. Michael Kirban: It was good try. Martin Roper: Jim, I wish the same I think we're covered by very smart analysts with very smart support team. Operator: [Operator Instructions] Our next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Eric Des Lauriers: And congrats on a really impressive quarter. My question is on tariffs. So you've outlined several levers you can pull to offset the impact of tariffs. But I'm wondering sort of what levers you have to pull or what's in your power to do in terms of lobbying for coconut water to be excluded from tariffs like other coconut products are. Do you have any levers to pull here? Is there anything from a lobbying or even import classification perspective that you're able to do? Martin Roper: Yes, it's what we're working on. I've been spending time in D.C. and doing exactly that and working from both the angle of the producing countries in their negotiations and discussions and also on the U.S. administration side. So we're doing -- we're making every effort that we can. Eric Des Lauriers: That's great. And then just a question on the marketing spend outlook. Just overall, should we expect a general increase in marketing spend as a percentage of sales going forward given balance sheet strength, investments in Treats, consumer education efforts. Should we expect a general increase as a percentage of sales? Or do we have enough kind of robust top-line growth that sort of this current level of marketing spend as a percentage of sales is a good guide going forward? Michael Kirban: Yes. As we think about the long-term, and there's variability year-to-year, but broadly, we would expect sales and marketing expenses to track net sales or branded net sales over the long-term. Operator: Our next question comes from Gerald Pascarelli with Needham & Company. Gerald Pascarelli: I just had going back to tariffs. If they remain in place as is, can you just speak about how long the process is should you choose to reroute shipments from Brazil to international markets? And then I guess, based on your current sourcing, is it possible to reroute all shipments from Brazil to international markets? Or is that just not practical based on your supply chain? I guess any color there would be helpful. Martin Roper: Yes. So to reroute, we need to develop packaging that the factory and the new market it's going to be servicing. And we also need to get any validations for that factory in that country or with that retailer that are required. So those processes might take 3 months, could take 9. So it's a moving target. We've started working on those things back in August, September. But equally, the urgency on working on them, while it's urgent, we're also sensitive that once we start buying that materials, if Brazil tariffs go away, then we've got this packaging in the wrong location for a non-optimized supply chain because Brazil is optimized to supply to the U.S. So answer to your question is we're working on it. We're pulling triggers that we think are appropriate given the uncertainty around the 50% tariffs from Brazil. And if the 50% were to stay in place, our hope would be to have our weighted average tariff rate down from 23% to closer to 20% by the end of the year. We may still choose to source some items from Brazil for certain markets and/or customers and/or for strategic reasons because it's got a much shorter lead time in servicing the East Coast of the U.S. So we may not fully exit Brazil as it relates to U.S. demand, but that's where we would think we could get to by the end of the year -- end of next year. Gerald Pascarelli: That's very helpful. And then I guess just going back to the prior question, in your trade discussions, are you hearing anything that maybe makes you more optimistic on the potential for a lower negotiated rate from the 50%, specifically based on the significant inflation that the U.S. is seeing from Brazil coffee. Is that playing a factor? Do you think that will play a factor as we look out over the near term here? Corey Baker: Yes. I think it's also -- it's things that we're hearing in meetings, but we're also hearing publicly discussed from both sides. And they're looking to make progress in the very near term. So we're hopeful that something happens in the near-term, specifically as it relates -- most specifically as it relates to this 40% reciprocal tariff hopefully being relieved, but we will see how that plays out. Operator: This concludes the question-and-answer session. I would now like to turn it back to Martin Roper for closing remarks. Martin Roper: Thank you, everyone, for joining the call today, and we very much appreciate your interest in The Vita Coco Company, and we look forward to talking to you again in 2026. Cheers. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, good day, and welcome to the Q2 H1 FY '26 Earnings Conference Call hosted by Larsen & Toubro. [Operator Instructions] I now hand the conference over to Mr. P. Ramakrishnan from Larsen & Toubro. Thank you, and over to you, Mr. Ramakrishnan. Parameswaran Ramakrishnan: Thank you, Ruthuja. Good evening, ladies and gentlemen. A warm welcome to all of you into the Q2 H1 FY '26 Earnings Call of Larsen & Toubro. The earnings presentation was uploaded on the stock exchange and in our website around 6:20 p.m. Hope you had a chance to take a quick look at the numbers. I will first walk you through the important highlights for Q2 FY '26 in the next 20 to 25 minutes or so, post which we will take questions. Kindly note that when the Q&A session starts, I will also have with me our Deputy Managing Director and President, Mr. Subramanian Sarma. Before I begin the overview, the disclaimer from our end, the presentation, which we have uploaded on the stock exchange and our website today, including the discussions we may have on the call today may contain certain forward-looking statements concerning L&T's business prospects and profitability, which are subject to several risks and uncertainties, and the actual results could materially differ from those in such forward-looking statements. I would request you to go through the detailed disclaimer, which is available in Slide 2 of our earnings presentation that we have uploaded today. I will start with a brief overview on the economic conditions in India and the Middle East, which are key markets for the company, especially for the Projects and Manufacturing businesses. The country that is India's economic outlook continues to remain optimistic. The domestic conditions are favorable with GDP growth for FY '26 projected between 6.5% to 7%, largely driven by retail consumption resilient services sector and steady CapEx. The new private sector capital expenditure plans are also being driven by increased investments in manufacturing, renewables, real estate, digital infrastructure and power generation projects, even as the public infrastructure continues at a steady pace. The economic growth in the Middle East is expected to remain stable, supported by a rebound in oil output, controlled inflation and continued diversification into non-oil sectors. However, flat oil revenues as lower prices offset the higher production may lead to a renewed focus on efficient and prioritized spending. Countries in the region are increasingly prioritizing natural gas and renewables over oil for domestic power generations as part of their long-term economic diversification strategy. This shift supports their transition to cleaner energy while enabling higher oil exports and greater value capture through petrochemicals production. Having covered the macro landscape, let me share some few important highlights for the quarter. The L&T's onshore and offshore hydrocarbon businesses have secured each ultra mega orders in the Middle East. The onshore order involves the setting up of a natural gas liquids plant and allied facilities, while the offshore order involves multiple packages, including EPC, installation of offshore structures and upgradation of existing facilities. During the quarter, we have entered into strategic MOUs and partnerships across our renewables, green energy, defense and semiconductor businesses, strengthening the foundation for our future growth. The renewables business within the Infrastructure segment has entered an MOU with ACWA Power for the renewables and grid scope of the Yanbu green ammonia project in Saudi Arabia. The scope involves multiple facilities, including solar photovoltaic, wind and battery energy storage system plants, along with associated substations and transmission lines. The cooperation involves a commitment from L&T to enter an EPC contract once the final proposal is accepted. L&T Greentech Limited, a wholly owned subsidiary has entered into a joint development agreement with ITOCHU Corporation of Japan to develop and commercialize a 300 KTPA green ammonia project at Kandla in Gujarat. Under the agreement, L&T Energy Greentech and ITOCHU will collaborate on the development of the facility with ITOCHU planning to offtake the product for bunkering applications in Singapore. The company has formed a strategic partnership with Bharat Electronics to support the AMCA program of the Indian Air Force. The consortium has submitted an expression of interest in response to a notification issued by the Government of India's Aeronautical Development Agency. L&T Semiconductor Technologies, another wholly owned subsidiary, acquired the power module design assets of Fujitsu General Electronics of Japan. As part of the transaction, the semiconductor company has acquired Fujitsu's R&D equipment, design patents and various intellectual properties related to power module technologies. Additionally, the semiconductor subsidiary has signed an MOU with the Indian Institute of Science Bangalore to jointly develop a national 2D innovation hub. The envisioned hub will serve as a world-class facility focused on next-generation semiconductor innovation beyond silicon chip technologies, placing the country at the forefront of global semiconductor research and development. Besides this, the company has reached an in-principle understanding with the government of Telangana, wherein the government will take over the Hyderabad Metro SPV by refinancing the current debt and acquiring the entire equity stake in L&T Metro Rail Hyderabad Limited. The contours of the final agreement are being finalized, and we expect this transaction to get consummated by the end of the current fiscal FY '26. The company has secured a sustainability-linked trade finance facility from a commercial bank worth USD 700 million. The facility is aligned with international sustainability standards and ties its terms to the KPIs such as greenhouse gas emission intensity and freshwater withdrawal, which are critical to L&T's operations. I will now cover the various financial performance parameters for Q2 FY '26. We continue to witness strong ordering activity in Q2 FY '26 across India and the Middle East, with order inflows growing 45% Y-on-Y. Supported by this sustained momentum, the order book expanded to INR 6.67 trillion as of September 2025, reflecting a 31% Y-on-Y increase and providing a strong revenue visibility in the near future. Our group revenues grew 10% Y-o-Y in Q2 FY '26. The execution levels remain broadly in line with expectations, barring a few sector-specific challenges. The Projects & Manufacturing portfolio margin improved from 7.6% in Q2 of the previous year to 7.8% in Q2 FY '26. As of September 2025, the net working capital to revenue ratio remained healthy at 10.2%, an improvement of almost 200 basis points Y-on-Y. Our continued emphasis on capital efficiency also translated into a further improvement in the return on equity, which rose to 17.2%, up 110 basis points Y-o-Y. I now move on to the individual performance parameters. During the quarter, the group order inflow stood at INR 1,158 billion, registering a Y-on-Y growth of 45%, reflecting the continued traction across our key businesses. Within this, the Projects & Manufacturing, that is the P&M portfolio delivered a strong performance with order inflows of INR 968 billion, up 54% Y-on-Y, underscoring the broad-based demand environment across both domestic and international markets. The growth in the P&M portfolio was broad-based with domestic order inflows growing 40% Y-on-Y and international inflows up 62% Y-on-Y. The order inflows during the quarter were driven by strong activity across hydrocarbon, buildings and factories, heavy civil and the renewable subsegments. During the quarter, the share of international orders in the P&M portfolio stood at 65% as compared to 62% in the Q2 of the previous year. Moving on to the prospects pipeline for the near term. We have an overall prospects pipeline of INR 10.4 trillion vis-a-vis INR 8.1 trillion at the same time last year. This represents an increase of 29% on a Y-on-Y basis. The increase in the prospects pipeline is mainly led by infrastructure and hydrocarbon segments. The broad breakup of the overall prospects pipeline for the near term is as follows: Infrastructure, INR 6.50 trillion vis-a-vis INR 5.42 trillion last year, representing an increase of 20%. Hydrocarbons, INR 2.93 trillion vis-a-vis INR 2.25 trillion last year, representing an increase of 30%. Carbon Light Solutions, the prospects pipeline as of September '25 is INR 0.46 trillion as compared to INR 0.24 trillion last September 2024. The green and clean energy opportunities aggregate to INR 0.18 trillion as compared to INR 0.01 trillion last year. The increase is primarily because of gas to power-related opportunities outside of India. The Heavy Engineering and the Precision Engineering Systems, which aggregate to what we call the Hi-tech Manufacturing segment, the order prospects as of September '25 is at INR 0.31 trillion as compared to INR 0.16 trillion last year. Moving on to the order book. The order book as of September 2025 stands at INR 6.67 trillion, up by 31% as compared to September '24 last year. The Projects & Manufacturing order book has a balanced geographic mix with 51% of the order book coming from domestic markets and 49% from outside India. Out of the international order book of INR 3.27 trillion, around 84% is from Middle East and the balance 16% is from other parts of the world. The client-wise composition of the domestic order book of INR 3.4 trillion as of September '25 is as, central government constitutes 14%, state government and local authorities, the order book share is 24%, public sector corporations 32% and the private sector composition is at 30%. As you may note, the share of the private sector in our domestic order book has increased from 21% as of March '25 to 30% as of September '25. This growth reflects improved activity in the residential and commercial real estate, power generation and data storage solutions as well as the minerals and metals sector. Approximately 12% of our total order book of INR 6.67 trillion is funded by bilateral and multilateral funding institutions. Again, 91% of our total order book is from infrastructure and energy. You may refer to the presentation slides for further details. No major orders were deleted during the quarter. And as of September, the share of slow-moving orders is around 3%. Coming to revenues. The group revenues for Q2 FY '26 at INR 680 billion registered a Y-on-Y growth of 10%. The international revenues constituted 56% of the revenues during the quarter. The strong execution momentum in the Energy and Hi-Tech Manufacturing segments drove the overall group revenue growth for the quarter, while execution in the Infrastructure Projects segment was a little subdued during the quarter. Within the overall group revenue, the P&M businesses recorded revenue of INR 490 billion for Q2 FY '26, marking a 10% growth over the corresponding quarter of the previous year. Moving on to EBITDA margin. The group level EBITDA margin without other income for Q2 FY '26 is 10% as compared to 10.3% in Q2 of the previous year. The decline in EBITDA margin is primarily due to the margin compression in our IT&TS segment. The detailed breakup of EBITDA margin business-wise, including other income, is given in the annexures to the earnings presentation. Our EBITDA margins in the P&M business portfolio has improved from 7.6% in Q2 FY '25 to 7.8% in Q2 FY '26. The segment-wise EBITDA percentages will be shared in detail during the discussion on the segment performance. Our consolidated PAT for Q2 FY '26 at INR 39 billion is up by 16% as compared to Q2 of the previous year. The increase in PAT is reflective of improved activity levels and efficient treasury management. The group performance, the P&L construct, along with the reasons for the major variances under the respective function heads is provided in the earnings presentation. You may go through for further details. Coming on to working capital. Our group NWC to sales ratio has improved from 12.2% in September '24 to 10.2% in September '25, mainly due to an improvement in the GWC to sales ratio backed by strong customer collections during the last 12 months. Our group level collections, excluding Financial Services segment for Q2 FY '26 is INR 600 billion as compared to INR 620 billion in Q2 of the previous year. The year-on-year dip is primarily timing related as we had witnessed a very strong collection growth in the first quarter of the current financial year. With the continued focus on customer collections, our cash flow from operations, excluding Financial Services segment between April to September 2025 is at INR 106 billion as compared to INR 61 billion in H1 of the previous year. We have added a slide on group cash flows, excluding L&T Finance in the annexure alongside the reported cash flow slide to give more clarity on the cash flow performance. Finally, the trailing 12-month ROE for Q2 FY '26 is 17.2% as compared to 16.1% in Q2 of the previous year, an improvement of 110 basis points. Very briefly, I will now comment on the performance of each business segment before we give our final comments on our outlook for the remaining part of FY '26. The first would be infrastructure. The segment order inflow grew 6% in Q2 FY '26 on a Y-on-Y basis, driven by strong domestic private sector demand spanning residential, commercial buildings, airports, data centers, pump storage projects, ferrous and nonferrous facilities, solar PV manufacturing plants and semiconductor fab facilities that were witnessed during the quarter. These together account for nearly 60% of the domestic orders for the quarter. Like I mentioned earlier, our order prospects pipeline in infra for the near term is around INR 6.50 trillion as compared to INR 5.42 trillion during the same time last year, representing an increase of 20%. The infra prospects pipeline of INR 6.5 trillion comprises of domestic prospects of INR 4.25 trillion and international prospects of INR 2.25 trillion. The subsegment breakup of the total order prospects in infra segment is as, the share of transportation infrastructure is 21%; Heavy civil infrastructure is 16%; water and affluent treatment, 15%; Power Transmission and Distribution, 14%; Buildings and Factories, 13%; Renewables at 11% and Minerals & Metals at 10%. The order book of this segment is at INR 3.95 trillion as of September '25 with the execution period around 3 years. The revenues for the quarter in the Infrastructure segment registered a marginal decline of 1% Y-on-Y, largely attributed to an extended monsoon season and slower progress in the rural water supply projects, which continue to face sector-specific challenges. In addition, a few large renewable projects are in the initial execution phase. Our EBITDA margin in the segment was at 6.3% in Q2 FY '26 as compared to 6% in Q2 FY '25. The margin uptick has been driven by improved execution efficiency. Moving on to the next segment, which is Energy Projects, which comprises of hydrocarbon and carbon light solutions. The order inflows in this segment were robust at INR 382 billion in Q2 FY '26 as compared to INR 78 billion in Q2 FY '25. The segment order book was helped by receipt of ultra mega orders across onshore and offshore verticals of the hydrocarbon business in the Middle East. We have a strong order prospects pipeline of INR 3.57 trillion for the segment in the near term, comprising of hydrocarbon prospects of INR 2.93 trillion, carbon light solutions of INR 0.46 trillion and the clean energy prospects of INR 0.18 trillion. The hydrocarbon prospects remain predominantly international with approximately 93% of the opportunities is overseas, while carbon light solution prospects are primarily domestic and clean energy is largely driven by gas to power opportunities. The order book of the Energy segment is at INR 2.14 trillion as of September '25 with the hydrocarbon order book at INR 1.66 trillion and carbon solutions -- carbon light solutions at INR 0.48 trillion. The Q2 FY '26 revenues for the segment at INR 131 billion registers a robust growth of 48%, driven by the execution ramp-up in international hydrocarbon projects and commencement of execution in the carbon light solution orders secured in the recent past. The Energy segment margin in Q2 FY '26 is at 7.3% vis-a-vis 8.9% in Q2 of the previous year. The margin decline for the quarter in the hydrocarbons business was primarily due to cost overruns in some few domestic and international projects. These projects are in the final stages of execution and are expected to conclude over the next few quarters. We do anticipate soft margins in the segment to persist in the near term. As already communicated during our Q1 FY '26 earnings call, this is factored into our FY '26 P&L margin guidance. The Carbon Solutions margin improvement benefited from a favorable customer claim. The Clean Energy businesses within the Energy segment is in the incubation stage and is yet to meaningfully contribute to the segment numbers. We will now move on to the Hi-Tech Manufacturing segment, which primarily comprises of Precision Engineering Systems and the Heavy Engineering business. The lower order inflow in Q2 FY '26 is to order deferrals in both the businesses. The order book of the segment is INR 391 billion as of September '25 with the Precision Engineering order book at INR 328 billion and the Heavy Engineering order book at INR 62 billion. Our order prospect pipeline for the near term in this segment is around INR 315 billion, comprising of INR 251 billion of precision engineering prospects and the remaining INR 64 billion from the Heavy Engineering business. The segment revenue at approximately INR 28 billion registered a strong growth of 33% Y-on-Y with robust execution momentum across both the businesses. During the quarter, operational efficiencies aided margin improvement in Heavy Engineering, while lower margin in PES, that is the Precision Engineering Systems, is largely reflective of larger share of early-stage jobs and costs incurred on certain development projects. Moving on to the next segment, IT and Technology Services, which comprises 2 listed entities, LTI Mindtree and LTTS and as well as our newly incubated business of digital platforms, data centers and semiconductor design. The revenues of this segment at INR 133 billion in Q2 FY '26, registered a growth of 13%. The segment margin variation vis-a-vis previous year is largely due to the subdued margins in LTTS and costs incurred towards the newly incubated businesses. I will not dwell too much on the segment as both the companies in the segment are listed and the detailed fact sheets are already available in the public domain. We move on to L&T Finance Limited. Here again, the detailed results are available in the public domain. But to sum up, Q2 witnessed -- Q2 for L&T Finance witnessed the highest ever quarterly retail disbursement and improved collection efficiency. The Financial Services business achieved 98% retailization of its loan book in September '25, well ahead of its Lakshya 2026 targets. The ROAs remain healthy at 2.4% for Q2 FY '26 and adequate capital is available on the balance sheet to pursue growth in the medium term. Moving on to Development Projects segment, which primarily includes Nabha Power and Hyderabad Metro. The higher average fares post the fare hike that we did in the current year has led to the revenue growth and margin improvement of Hyderabad Metro. The average fare per passenger has increased from INR 38 in Q2 FY '25 to INR 46 in Q2 FY '26. The average ridership during the quarter was at 4.39 lakh passengers per day as compared to 4.68 lakh passengers per day in the same period of the previous year. At the PAT level, the Metro -- Hyderabad Metro posted a loss of INR 1.75 billion in the current quarter as compared to a loss of INR 2.07 billion in Q2 of last year. As I stated earlier, we have reached an in-principle understanding with the Government of Telangana, where the government of Telangana will take over the debt and the equity of L&T from the concerned SPV, which is L&T Metro Rail Hyderabad. The EBITDA margin of this segment was impacted by a litigation-related provision in respect of Nabha Power. Moving on to the others or the last segment. This segment comprises Realty, Industrial walls, construction equipment and mining machinery, rubber processing machinery and the residual world -- residual portion of the Smart World business. The segment witnessed healthy order inflow growth driven by higher presales in the Realty business and increased orders in the construction equipment business. The segment revenue at INR 14.2 billion declined by 14% Y-on-Y, primarily driven by the lower handover of residential units in the Realty business. The segment margin improvement was primarily due to sales of commercial space in the Realty segment. We have given the segment breakup between Realty and other businesses within the segment as part of our annexures in the presentation. Before I conclude, let me cover the guidance on the various parameters for FY '26. Order inflows. We witnessed a strong ordering momentum in H1 of the current financial year, and we see a robust prospects pipeline for the near term. We are confident of exceeding our full year FY '26 guidance of 10% growth in group order inflows for the current year. As we speak, we are also well placed to secure a few ultra mega opportunities. On revenue, the group revenue grew by 13% in H1 FY '26, in line with our expectations. As highlighted during the Q4 FY '25 earnings call, we expect a stronger revenue visibility in the second half of the fiscal year, driven by a ramp-up in the execution. Accordingly, we maintain our full year revenue growth guidance at 15%. Coming to the EBITDA margin for the P&M business. As you may have seen, the EBITDA margin for the P&M business has improved by 10 basis points in H1 FY '26. With the execution momentum expected to pick up in H2, we are reasonably confident to achieve our full year EBITDA margin target of 8.5%. On working capital, our guidance for working capital for FY '26 remains unchanged at around 12% by March 2026. With this, I conclude. Thank you, ladies and gentlemen, for the patient hearing. We can now begin the Q&A part of the call. In the interest of time, I would encourage all the participants to stick to the broader questions on strategy and outlook to take full advantage of the presence of our Deputy Managing Director and President, Mr. Subramanian Sarma. The bookkeeping questions can be taken up by the IR team at a suitable time. Thank you. Operator: [Operator Instructions] The first question is from the line of Mohit Kumar from ICICI Securities. Mohit Kumar: My first question is, sir, as per media, it seems we are quiet ahead in Kuwait in large projects. Is it possible to help us with the prospect pipeline and the sustainability of these prospects in the country from the medium-term perspective? Subramanian Sarma: Yes, Sarma here. Good evening, all of you. You're right. I think this was a public opening. So we are -- have an L1 position on 3 of the bids we have submitted out of 5, I think, adding up to about $4.5 billion. We'll have to see how the whole process now moves on in terms of budget allocation, but we are kind of optimistic that they should be able to get the extra funds because all these prices are -- though we are L1, the prices are above the budget. So they are completing their process for getting additional funding. And that should get done by this quarter or maybe latest by next quarter. And hopefully, this should come through. We are hoping for that. What was the other question? Yes. I mean I think the overall -- in terms of opportunities, the pipeline looks strong in terms of what is available in Saudi, in Qatar and Kuwait and also the joint operation of [indiscernible]. And also, there are a lot of opportunities coming in UAE. So we are quite bullish on Middle East now for the time being. Mohit Kumar: Yes. My second question is, sir, of course, the rising order book in Middle East. What are the execution challenges while sustaining the profitability? Are you with any big order book which you think of the level at which we have -- we don't have to worry about the resource mobilization? Subramanian Sarma: No, you don't need to worry because we worry about the order book in terms of our risk exposure. We have a very good robust system here internally. Mr. Shankar Raman and the team and Govindan and team, we have a very strong risk management system. They interrogate all the businesses in terms of country exposure and geopolitics, et cetera. So we have strong system there. And we are very cognizant of that in terms of what is our exposure. Our experience has been good. The customers are paying well. All these companies are national oil companies. They have a reasonably good cash flow, and we have not seen any payment risk. The commercial terms and conditions, what is available in the contracts are quite reasonable, acceptable, pretty balanced. And the execution risks are more or less same as what we have been having experiencing in the past and historically, I mean, in the sense that we have to be sort of aware of the supply chain constraints and logistic constraints and local work availability. I think we have overcome many of those through having strategic partnership at the time of bidding and negotiating some of the critical high-value orders during the bidding and back-to-back contracts and things like that. So we know the market, we know the risk and we have a plan to mitigate those risks. So by and large, I would not be too concerned about [indiscernible]. Mohit Kumar: Understood. My last question, sir, as the media we are looking to invest in electronic manufacturing services. Can you please explain the kind of investment within the EMS is interesting to us and the expected investment and the market potential? Parameswaran Ramakrishnan: So Mohit, I will take that. We are in a way, we have a Precision Electronics part as a small sub item under our Precision Engineering business, and we have a unit in Coimbatore. As part of our Lakshya L31 strategy, we are seriously looking into expanding the electronic part of our L&T's portfolio. Various options are being explored, including the need to set up units in some parts of the country. At this juncture, it's a little premature for us to comment on the extent of investments and which areas we will be covering. Kindly wait maybe in sometime, in May '26, once we complete our financial results and we are ready with our stat plan for L31, we will be in a position to possibly give you a more greater detail of the future business prospects and the investment potential, along with the opportunities insofar as this business is concerned. Operator: [Operator Instructions] The next question is from the line of Mohit Pandey from Citi Group. Mohit Pandey: Sir, my question is on the Infrastructure segment. So when you mentioned execution pickup into it, is it safe to assume infrastructure execution also has been seen as picking up? And associated question is on margin. So this quarter despite revenue decline, there has been 30 bps of margin expansion in infra. So safe to assume that is sustainable because that looks driven by execution efficiencies? And also you mentioned a sizable jump of incremental orders have been via private sector. So what could that mean for margins? And are these generally lower generation compared to a non-private sector orders in the infrastructure? That would be my question. Parameswaran Ramakrishnan: So thank you, Mohit. I think you were asked to ask 1 question. You asked 4 questions now. Okay. I'll take one by one. So the infra revenue, there has been a sort of -- infra revenue has been stagnant for Q2 of the current year. Having said this, one of the main reasons, as I explained, was because of extended monsoon across many parts of the country that affected the pace of execution. And secondly, and this I have mentioned in the Q1 earnings call also that because of the payment-related issues with respect to certain projects in the water and affluent treatment segment, we have slowed down execution, okay? Having said this, the overall revenue guidance that the company has provided for 15% of full year is on track, okay? And this we can confirm. And we do believe -- and as you know that the H2 for infrastructure is a far more busier 2 quarters as compared to a relatively subdued H1. So this is baked in terms of how the revenue map -- revenue growth has happened. This is baked into our 15% overall P&M guidance on revenues. And as far as number 2 point is concerned, I think over the years, the infra margins have come down, have been southward bound for various reasons. But given the fact of rigor of execution and better control on project execution time lines and with also looking to ensure that the growth is related to the collections we get, this has finally resulted into a slow improvement in the infra margins. We do believe that infra margins will be a little northward. But since we don't give margin guidance for the individual P&M segment, this is also baked into overall FY '26 target of 8.5%, okay? So number three, of course, the share of private sector orders have gone up, largely driven by real estate and the carbon light type of orders. So one important thing is, as far as private sector orders is concerned, obviously, the execution momentum in line with the payments, I think, will be faster. This is something I think we have always maintained a share of -- higher share of private orders could potentially result into an improved working capital situation. But having said this, as far as margins is concerned, we should be seeing it as the execution of the projects progress. But let me also tell you that the company, as Mr. Sarma was referring to the answer to the previous question, we are ensuring a proper risk mitigation or risk evaluation mechanism while we bid for projects concerning the customer, the sector and the geography. Operator: The next question is from the line of Aditya Bhartia from Investec. Aditya Bhartia: My first question water segment. How big is the segment in the overall scheme of things? What proportion of domestic order book could be from the water segment? And is it that we are really going slow on execution given the payment challenges? Or are you seeing some improvement around that? Parameswaran Ramakrishnan: Sorry. As far as the water segment is concerned, the order book that we have is around INR 400 billion. Subramanian Sarma: 7% of the total order. Parameswaran Ramakrishnan: 7% of the total order book. And these are projects which have been related to the Jal Jeevan Mission projects. And once the allocation of the government start coming in, we do expect the execution momentum to smoothen out in the subsequent quarters. Aditya Bhartia: Understood. So as of now, we are going very slow on execution of these projects. They are not really contributing. They're not -- there is no money that's getting stuck over there because we are just going slow on execution itself. Parameswaran Ramakrishnan: Yes. Money is getting slow on execution, but we are not just building up execution without getting paid. Aditya Bhartia: Understood, sir. And sir, my second question is on Realty, wherein for the last couple of quarters, we've been seeing very high margins. I mean, if we look at this quarter, revenues might have been lower, but margins have been exceptional. So how should we think about this business from the perspective of next 2 or 3 years? What's the road map? What kind of growth should we be seeing in? And what kind of margin should we be building in? Parameswaran Ramakrishnan: So the issue is in so far as the Realty business is concerned, it is more of an accounting development because in a particular quarter, when you have a higher handing over of the residential units, the entire sales and margin gets clocked in, unlike the other P&M business where the margins get crystallized over the period of execution. So this is at a point of time, recognition of sales and margin. To that extent, you can have some quarters margins dipping at the overall P&M level because of lower residential -- lower handing over of residential units. And in case of any quarter where the number of units go up, then consequently, the Realty business will show a better profit. And this apart from -- in a particular quarter, if there is a particular sale -- a sale of a commercial property, that adds up also to the overall margin. So for example, in the current quarter, we have had in terms of a sale of a commercial property along with sale of TDR rights has enabled the profitability to go up almost by INR 0.9 billion. Aditya Bhartia: Understood, sir. And could you give us some road map on how we should think about the Realty business for next few years? What kind of growth should we anticipate in terms of residential project sales and any large commercial project that we should be aware of? Parameswaran Ramakrishnan: So as of now, the way we are focusing is that we will try to expand the presence in the cities of the Mumbai Metropolitan region, National Capital Region, Bengaluru, Chennai. And this development will be happening through a mix of monetizing of our existing land parcels, acquisition of new land real estate parcels, and also increasing growth through the joint development route. As we speak now, the order book for the real estate segment, that is where we have secured the flat purchases have happened, but we're yet to handover is in the range of INR 120 billion. And we have an unsold inventory of almost INR 40 billion for the near term. So this will be -- I think over the next 2 to 2, 3 years, this will get converted to revenues. But long and short, we -- you could see an increased visibility of L&T Realty in terms of the overall perspective on the real estate sector in the regions or the locations that I spoke about. We also will continue to focus on select commercial property developments in some of these areas, driven by the market demand. So it will be largely led by residential property development and interspersed with some commercial properties at some certain locations. Operator: The next question is from the line of Bharanidhar V from Avendus Spark. Bharanidhar Vijayakumar: Can you tell what is the total funding L&T places into Hyderabad Metro by way of both equity and not funding? And how much of that are we getting through this deal? And how from accounting point of view, this will have an impact on, say, any one-off income or any [indiscernible] in the coming quarters? Parameswaran Ramakrishnan: Okay. So the total investment of L&T in Hyderabad Metro till date is in the range of INR 70 billion, okay? And since as it is there in the public domain in terms of the incentives and the Hyderabad Metro has a debt of almost INR 130 billion, okay? Now until now, the losses of the Hyderabad Metro, they are all factored in our consolidated financial results, okay? So if you see this time, if you have seen our advertisement in the stand-alone, which is the investment that we are carrying at INR 70 billion, we have now brought the investment to what we believe as a realizable value by tendering our stake to the government of Telangana at INR 20 billion. And thereby, we have taken an impairment charge in Q2 of the current financial year in L&T stand-alone results. The fact is insofar as the consolidated results go, the YTD cumulative losses of Hyderabad Metro is already adjusted against the INR 70 billion of our investment. And consequently, the Hyderabad net worth -- share of net worth in our consolidated books is actually even lower than the current standalone post impaired value of INR 20 billion. So technically speaking, tomorrow, if we were to do the -- if tomorrow, we were to do the divestment, there could be a chance that the consolidated financial statements will actually possibly show a marginal credit in the P&L because the consolidated financial statements has the share of net worth is almost INR 10 billion as compared to the restated value of INR 20 billion. Is that clear, Bharani? Bharanidhar Vijayakumar: Sir, so one question follow-up is that the INR 7,000 crores or INR 70 billion of book value or net worth that is reflected in Metro balance sheet, we are essentially selling we are realizing INR 2,000 crores from the buyer. Parameswaran Ramakrishnan: So consequently, you see that impairment charge in the stand-alone. Bharanidhar Vijayakumar: Okay. Okay. Fine. So I will take up some follow-up on this later. My second question is on, say, our Indian domestic order inflow, while we are doing very well on the private side, the order inflow from state sensor definitely is lower than what it was in the past. What is our outlook on that going forward? Is it set of customers likely to improve? Or where do you see that going? Parameswaran Ramakrishnan: Okay. So one of the major reasons for the share of private sector order inflow going up in the recent maybe last 4 or 5 quarters is because of a higher amount of real estate transactions or real estate development, both commercial, real estate -- sorry, residential, data center development. All of this, we have seen a strong traction from the various developers, number one. Number two is, if you note that in the Q1 that we had reported order inflows in domestic also included carbon-light private sector orders that we secured, okay? And we do expect as far as coal-based power plant ordering is concerned, you see as is evident that there's a lot of projects up in the pipeline, which is a mix of both state-owned or central public sector-owned project opportunities and also some of the major private sector power plant producers also setting to expand their current power plants or new greenfield. So we do believe because of this increase in the -- or revival of the coal-based power plant equipment business, the share of private sector has actually gone up. Bharanidhar Vijayakumar: So I got that. My only question was areas like metros, bridges, all these things which used to be a major part, it seems to be slowing down. So that was my question, meaning... Parameswaran Ramakrishnan: That is mostly on the government funded no. So we do have a sizable amount of opportunities as far as central government or state government or public sector corporation is concerned in the areas of energy, which comprises hydel, thermal that I spoke about, nuclear. So the entire energy landscape is there. And we do see sizably large opportunities in the transportation infra in terms of roads and elevated corridors. In fact, the order prospects that I communicated for heavy civil and transportation infra, to the extent they are all domestic, they are largely all government projects only. Operator: [Operator Instructions] The next question is from the line of Shirom Kapur from Jefferies. Shirom Kapur: I just wanted to ask about your 34% growth in domestic orders this quarter. Could you highlight what drove this? And what are some of the major orders that contributed here? Parameswaran Ramakrishnan: So the major orders that we secured on the domestic side is the pump storage project that we secured from a private sector client, which is almost INR 35-odd billion, plus a whole lot of residential and commercial real estate orders that we have secured from private sector developers. Shirom Kapur: Noted. And just if you could help break up the order prospects into domestic and international and within domestic, what the breakup should be across your segments? Parameswaran Ramakrishnan: So I guess -- yes, I think we have been giving quite an articulated granular detail. But let me put it like this, that the total order prospects that we have given for domestic and international, we'll stay and put with it. We will see at an appropriate point of time. In case something is very major for a particular subsegment, we will give the details at that point of time. Operator: The next question is from the line of Sumit Kishore from Axis Capital. Sumit Kishore: My question is in relation to the hydrocarbon margins, which were subdued and the explanation given around cost overruns in certain international and domestic jobs that are approaching completion. So what were the reasons for the cost overrun on a generic basis? And how can we be sort of assured that going forward for a substantial international order book, some of these issues will not get repeated. So that's my question. Subramanian Sarma: Yes. Again, this is Sarma here. This is a bit of a phasing issue. I mean we have in our portfolio mixture of projects. Some of them are old legacy projects, some of them are new projects and some of them are, like I said, we have new projects waiting to be awarded. So in this quarter and maybe for some time, I think we'll have -- some of these legacy projects are closing. I mean some of these projects are large projects which have been running even during the pre-COVID time, it was awarded. So I think as they close, there have been some cost overrun because of COVID. But definitely, there is a contractual entitlement for us, we'll pursue those. But as per our internal policy, we don't recognize any entitlement unless it is approved. So I think that will manifest maybe in the future at some point in time. But otherwise, going forward, the portfolio is quite reasonable. And in fact, the market is quite buoyant, and we are very selective and our intention is to pick up jobs, which will help us to realize better margin in the future. Parameswaran Ramakrishnan: The current southward movement in energy margins is big. I reiterate is big when we have given the guidance of 8.5%. Sumit Kishore: Very clear. Sir, just a follow-up here on margins. Given the fixed price order backlog now would also be close to 50% of the order backlog, how are you thinking about the commodity price risk to margins here for the order backlog? Subramanian Sarma: Yes. I mean I think this question keeps coming up. But in general, we are in the business where we have fixed price models. And like I said, I think when we are bidding, we take a lot of care in terms of trying to have back-to-back contracts with -- for construction, back-to-back contracts for major high-cost items in supply chain. And so that we have a reasonable sort of cover, I mean, risk mitigation on those items. And of course, we also have a strong treasury group, which gives us a reasonable forecast about how the commodity prices will move. Based on that movement -- based on that forecast, we also provide certain adequate provisions in terms of contingencies, commodity contingencies, specifically in our pricing. So I think broadly, we are covered unless we have a very, very unexpected situation like what happened in Ukraine-Russia war, which is something nobody could forecast. We kind of, yes, built in that in our pricing. Operator: The next question is from the line of Amit Anwani from PL Capital. Amit Anwani: Sir, my question pertains to the strategic partnership with Bharat Electronics for AMCA. So here, it would be better to understand what role L&T will have in this joint venture? And what is the long-term strategy? We understand that we have supplied wings and I think some other components for LCA in the past, and we have been doing that. Wanted to understand, are we getting into full-fledged aircraft manufacturing in the future? Is there any capability which is required? Any investments required? Any thoughts and details on this joint venture consortium, yes? Parameswaran Ramakrishnan: So I will take that. So the Aeronautical Development Agency, which is the customer, is likely to shortlist the eligible bidders for the AMCA program based on the expression of interest where we also provided. This shortlist is expected in the current quarter, October to December '25. Basis the shortlist, we expect the customer to issue the request for proposal, that is RFP sometime in Q4 of the current financial year. And the announcement of the winner to build the prototype most likely is going to happen Q4 of the next financial year after the bidding process. Now in terms of the L&T Bharat Electronics JV for this particular program is essentially the scope of the JV is to build the prototype airframe, fixtures, system integration, and the flight certification of the prototype. As of now, both L&T and BEL are equal partners in the JV, which is it will be a separately incorporated company that will house this transaction in case the particular consortium gets the -- becomes the winner. And in terms of how the work will be shared between L&T and the other partner will be finally assessed after we receive -- go through the entire details of the request for proposal. Our understanding is that the order for the prototype will be one single PO for the entire value. And most likely, if it is awarded in the Q4 of the next financial year, then in terms of the prototype getting delivered, I think it's sometime in '28, '29, the test flight to happen in FY '29, '30, then followed by the usual trials. So in terms of serial production, I guess we are still around 8 or 9 years away, okay? I've given you quite a detailed perspective of this. Now beyond this, I think I don't have anything to talk about. Amit Anwani: Right. So for prototype, any investment which would be required once we get this order by Q4 next year, if at all, this is coming to us. Parameswaran Ramakrishnan: So there are so many ifs and buts, so we should get the order in Q4, hopefully. So we will have to evaluate the scope. This is the RFP scope. That time, we will be able to understand. But since it is a prototype, a prototype, usually, the customer works with the contractor or in this case, the consortium and ensure that there is no -- the consortium will not suffer in principle any cash outflow. It is like a sort of a funded project. Operator: The next question is from the line of Atul Tiwari from JPMorgan. Atul Tiwari: Another question on this BEL, L&T consortium. So what kind of risk you run? Suppose this is obviously a technically complex project. And if you get it and in case there are unusual delays because of some technology challenge is out of your control. So do you have to fund that over next several years? Or is there some kind of carve-out clause? Could you throw some light on that? Parameswaran Ramakrishnan: So Atul, it is like this. L&T in the past with respect to the PES business, okay, we have engaged with the customer across the major other two forces that we usually deal with. In terms of -- when it comes to a prototype, it is usually cash neutral for the contractor like us. So that is the principle we believe will be followed when it comes to the AMCA program as well. But it is still early days because once the RFP is rolled out, then only we'll be able to clearly understand the outcome of the proposal. But given our past experience, usually prototypes have a 0 cash implication because the customer, along with the contractor, in this case, the consortium will jointly work to have a successful prototype done. So the customer also has a sort of, I would say, a skin in this whole transaction. Atul Tiwari: Okay, sir. And just to confirm, sir, you said that the winner, eventual winner will be announced by fourth quarter of FY '27. Parameswaran Ramakrishnan: That's our understanding as we speak now. Operator: The next question is from the line of Girish Achhipalia from Morgan Stanley. Girish Achhipalia: I wanted to just check with Mr. Sarma that we are almost doing $4.5 billion, $5 billion worth of international projects last couple of quarters. The order prospect pipeline is also very strong. I wanted to understand like you've been with the company since 2016, I believe, and you've seen a lot of cycles up and down, a lot of contracts, competition. How do you think about the next couple of years in terms of different types of jobs that are coming through? And I wanted to understand the win rate typically that we've enjoyed in the last 12 months across, let's say, infra and then within hydrocarbon offshore versus onshore, if you can just split that up? And also on the domestic opportunity, are you seeing any prospects on nuclear? And how much of coal-based order pipeline is still left in the domestic side that could come through in the probably more medium term? Subramanian Sarma: For your information, I've been with the company since 2015. So I completed 10 years, not 2016. Anyway, I see this has been, like you said, we had a good run over the last decade. The industry is cyclic, but I think what has happened is that our share of the market was not that good in the previous years, and we have established ourselves now as a major player. So we are able to access larger market share -- larger market. So I think our ability to access larger projects, multibillion-dollar projects has now enhanced substantially over this decade. So therefore, our ability to continue to build a strong order pipeline has substantially increased over the last few years. Today, as you see, I mean, we are winning quite a few $3 billion, $4 billion projects, which was not the case earlier. So I'm quite bullish. I think we will continue to have that market available to us, and we'll bid in a disciplined way. And I think this run will continue for some more time, at least for next 2, 3, 4 years. I mean, beyond that, I cannot predict. So all in all, I'm quite optimistic. When it comes to domestic on the thermal power, the market is, like I said, has suddenly become very buoyant and very active because of the two reasons. One is that the renewable power round-the-clock availability has become a bit of an issue. So we need additional power -- stable power generation to stabilize the grid. And two is that there is a general increase or forecast increase in the power demand because of the sudden acceleration of the AI and the data centers, which are going to consume a huge amount of power. So a combination of that, I think there are a lot of plans coming up. It can be met through either thermal power or nuclear or other means. But I think nuclear -- thermal power becomes the most simplest and fastest solution. So we've seen a significant uptick in that. We have picked up about 13.5 gigawatts. We are going ahead with expansion of our capacity, and we are gearing up for ideal, taking up additional maybe 10, 15 gigawatts in the next 2, 3 years. That's how we see the market now. Parameswaran Ramakrishnan: So I think I told Girish, that the order prospects pipeline for CarbonLite is almost INR 460 billion as of September. Girish Achhipalia: Okay. And sir, just one small follow-up. In international, I understand that the oil sensitivity to GDP for larger countries like Saudi Arabia and UAE is coming down. Is there a different approach that the customer is taking irrespective of whether he's in infra or offshore or onshore versus the previous cycles? Like if you can qualitatively remark on how confident or are you seeing closures happen at a faster clip? Or is there a little lesser competition? I mean, what is driving the market share higher? Subramanian Sarma: No, I think there were projects which were of different size, right? I mean I think there were -- earlier, we were able to compete in a segment which was less than $1 billion. So we had a different level of competition. Now when we move up the ladder and then we are able to access multibillion dollars, I think the level of competition and intensity of competition changes. I mean I think now I believe that for larger jobs, we are better placed to win, and we have a reasonable win rate on those projects. I mean many of these projects are very critical. I mean some of them are like gas development projects. Many of these countries are committed to those projects. I don't expect too much of sensitivity to the current spot market prices. These are long-term views. And next 2, 3 years, I mean, at least I can talk about only 2, 3 years beyond that, I cannot predict. I expect to see multiple projects. And our order book is so strong that we have almost 3 years of workflow in our hand. And we pick up some more projects in the next 1 year or so, we will have about almost more than 3 years of workflow. So I think that brings a lot of stability to our business. Operator: The next question is from the line of Parikshit Kandpal from HDFC Securities. Parikshit Kandpal: So my first question is on the margins. So now with the share of international order book growing, for the thesis of improvement in margins from this year, P&M margins from FY '26 and building over the next 2, 3 years, so does it get challenged somehow? Parameswaran Ramakrishnan: So Parikshit, this is P.R. As you know that we have a way of taking the margin guidance restricted to the year under question or under review, okay? We'll get back to you in terms of how the margin uptick looks like in the subsequent periods. Having said this, I also referred to the improvement in infra margins is now slowly changing in terms of going into the positive trajectory. And we do expect that this particular momentum to continue in the future quarters, okay? Insofar as the softness in the margins for the Energy segment in the current 6 months is concerned, I did refer to this during the Q1 call that the softness in margins is going to be reflected in Hydrocarbon performance in the current year. Hopefully, by the time March '25 gets over, many of the cost or the cost overruns in certain select jobs that we secured in the earlier years will get into -- they're all in the final stage of execution, which is also baked in our revenue and margin guidance. So we do also expect that margins in the subsequent periods to improve. Now to what extent the improvement will happen, we will communicate that once we close March '26 and give the guidance for the next year. Parikshit Kandpal: Okay. So the second question is on Hyderabad Metro. So now you said that INR 2,100 crores is somewhere where it settles. So is this a cash inflow, and is it adjusted for the INR 900 crores of the support which we have received from the Hyderabad Metro? So basically, I want to understand how -- will this be a cash item or a non-cash item from the government side? And what will be the quantum likely? Parameswaran Ramakrishnan: So as we understand basis the discussions that have happened, L&T will get a cash consideration against tendering its 100% equity stake in the Metro SPV to the particular vehicle which the government of Telangana will propose as the buyer and L&T should be getting cash. That's the understanding. And this has got nothing to do with the INR 900 crores that the SPV received as part of the soft loan assistance. So that loan has already got -- is residing in the SPV as an interest-free long-term debt. What we are talking about this L&T exiting its entire -- or divesting its entire exposure in the Metro SPV to the government of Telangana. So the SPV debt of INR 13,000-odd crores will be taken by the buyer as the new equity shareholder when they take the stake -- when they purchase the stake from L&T. And that consideration as we speak now, is in cash. Parikshit Kandpal: The INR 2,100 crores you receive in cash, so net-net. Parameswaran Ramakrishnan: Around -- I did not tell a number. I said around INR 2000 -- 21 -- INR 20 billion or INR 2,000-odd crores. Parikshit Kandpal: Okay. And just the last thing on the NWC. Last quarter, you highlighted that because of the water receivables, there was a negative impact on NWC of about 75 basis points because there was delay in receivables collections on the water side. So if you can quantify in this quarter, 10.2% NWC, so how much better it would have been if the water receivables have come on time? Parameswaran Ramakrishnan: So I will not -- okay, let me put it like this. The fact is that we have slowed down execution also means that the position of the segment remains as the same as it was in June. okay? Wherever the projects are getting executed in that segment, when we are getting paid, that execution happens. But let me tell you, when we talk about 10.2% as the working capital at the group level, the share of projects and manufacturing working capital is 7.8%. Operator: The next question is from the line of Renu Baid from IIFL Capital Services. Renu Baid: Just a couple of bookkeeping quick questions. On the power equipment terminal portfolio, you mentioned that you are targeting 10 to 15 gigawatts of incremental orders in the next couple of years. So given the order book that we have at what utilization levels are we working through? And do you see that the market today with the existing only two domestic vendors is stretched in terms of supply and Chinese BTG equipment manufacturers are probably getting the feedback in the market? Subramanian Sarma: No, I think the government has taken a stock and both us and BHEL are working on expanding the capacity. Chinese equipments are not something which is preferred. And we have given -- even 6 months back before these awards came, we had given a commitment to the ministry that we will add our -- enhance our capacity to almost 5.5, 6 gigawatts. We are looking at even further expanding this in the next 6 to 9 months' time. So between us and other supplier, which is BHEL, we believe that we should be able to handle this. The time lines are a little longer, which is acceptable to most of the PPP developers. So I don't expect Chinese products to come in. It will be between us and other Indian manufacturers. Renu Baid: Got it. And second, just to clarify, broad-based, whatever we understand of the Hyderabad Metro at the console level, net of all the losses, et cetera, that you have booked is close to about INR 10 billion at the end of first half. So incrementally, even if on a stand-alone level, the book value has been brought down to investment value has been brought down to INR 20 billion. On a console basis, we still would be having net positive impact on the transfer of -- or receive of the cash consideration. Parameswaran Ramakrishnan: So Renu, I think I responded this in the -- as an answer to the previous question. So it is like this, let me put it like this. In the stand-alone, the Hyderabad Metro is valued at INR 20 billion. In the consolidated, it is valued because the original investment of INR 70 billion has taken all the losses YTD. So in the console, it is around INR 10 billion. Now if we were to do the divestment today, the stand-alone further, there will be no profit, no loss because you are getting cash against the INR 20 billion that you have restated. And in the consolidated, you will have the gain because obviously, you are getting value at INR 20 billion as compared to the value that you hold at INR 10 billion. Renu Baid: True. And the debt or whatever... Parameswaran Ramakrishnan: Debt goes to the -- it is residing in the SPV. So one of the fundamental attributes to this transaction or understanding is the vehicle, which the government of Telangana will propose, the buying vehicle will take over the complete debt as it is, which is today around INR 130 billion. Renu Baid: And of this, the L&T support to -- in debt format to the SPV would be how much at the end of the first half? Parameswaran Ramakrishnan: So the entire debt, the debt comprises of roughly order of magnitude, INR 80 billion in terms of medium-term nonconvertible debentures and a commercial paper portfolio of the balance, I would say, INR 40 billion to INR 50 billion adjusted for the movement that will happen. So the debt is having a guarantee of the parent. So the fact is when the debt moves in, the guarantees all fall off. So there will be no further recourse after the transaction is consummated, there will be no recourse on L&T as far as Hyderabad Metro operations is concerned. Renu Baid: So technically, we will be completely out of the asset by the end of fiscal '26 once the transaction is closed. Parameswaran Ramakrishnan: That's the target. Renu Baid: And will we continue to have any O&M responsibility with the asset or be completely out? Parameswaran Ramakrishnan: The Metro itself has an O&M contractor, which is doing the operations and maintenance. The understanding is we will have no further obligation right or any sort of indemnity post the transaction. Operator: The next question is from the line of Priyankar Biswas from JM Financial. Priyankar Biswas: One very quick question from my side. Earlier, we used -- earlier like almost like 5, 6 years back, we used to talk about landing platform docks as an opportunity in Defence. So recently, there has been some approvals and movement regarding that. So are we considering LPDs in our prospects? I mean, this year or maybe the next? So that's the first. Parameswaran Ramakrishnan: It does not feature in the current prospects. But once that opportunity comes where it is in a position to get bid, it will get added. Priyankar Biswas: Okay. So it's like a potential that may be there potentially, let's say, next year or the year after that somewhere whenever it comes up. So that would be... Parameswaran Ramakrishnan: Whenever it comes. At this juncture, don't ask me timelines because it's not yet come into -- it is not featured in our current order prospects. Priyankar Biswas: Sir, one more question that I have because there was a mention of green ammonia project in Kandla. So is there more such projects that are planned by L&T? And if so, how should we look at the CapEx that may be required? And what is the business economics for it? Parameswaran Ramakrishnan: So the -- you're referring to the joint development opportunity for the green ammonia project with ITOCHU, right? Are you referring to that? That's the one we are looking -- we had actually put it in the public domain. Sir, would you like to comment on that? Subramanian Sarma: Yes, there's no problem. So that project is under evaluation, and we will go through the process. And once we work out the economics, and then we'll have discussion with ITOCHU. And I think for all these development projects, we have a very standard where we have metrics -- financial metrics in terms of return on investment, IRR, project IRR, et cetera, et cetera. So we will not pursue any of those projects unless it meets those criteria. So I think that applies to the ITOCHU and any other future potential opportunities. I mean, there are a few which we are discussing both in domestic and international customers, a bit too early to sort of specify those prospects. But as a principle, I think the process will be the same. We'll engage with the customers. We'll have an MOU and we'll go through the process and we'll evaluate. And if they meet the IRR criteria and the risk criteria, then we'll go ahead. Otherwise, we will not. Priyankar Biswas: Okay, sir. And just one more thing. You had already provided a detailed answer regarding Middle East oil in earlier questions. My question right now is more on the Middle East renewables and, let's say, T&D for that matter. So can you shed some light like what sort of, let's say, market shares we have in, let's say, the GCC renewable space and T&D? And how do you see the order prospects similarly like for this, let's say, 2, 3 years down the line? Subramanian Sarma: We are one of the largest EPC contractors in the renewables sector. I think the projects we have in the portfolio are sometimes -- I mean, most of them are very iconic and are being done for very large customers like ACWA and Masdar and UAE, our performance in these projects have been pretty good. Some of the projects we have executed ahead of time and the customer is extremely happy and they want to engage us more and more. And I see -- I'm quite optimistic again on this sector as well. Parameswaran Ramakrishnan: In fact, the softness of our renewables opportunity starting with KSA, we are extending this relationship across as we move... Subramanian Sarma: [indiscernible . Yes, we have gone to [indiscernible] also. So I think it's -- currently, it is a good story, yes. Priyankar Biswas: Sir, can you give some light on like gigawatt size opportunities? Like what is the size of the KSA market? What do you... Subramanian Sarma: They have about 18 gigawatts and maybe there is another 15 gigawatt of opportunities in the next 2 years. Operator: Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to Mr. P. Ramakrishnan for closing comments. Parameswaran Ramakrishnan: Okay. So thank you, everyone, for taking this call. It was a pleasure to interact with all of you. Good luck and wishing you all the very best. Thank you. Operator: Thank you. On behalf of Larsen & Toubro, that concludes this conference. Thank you for joining us, and you may now disconnect your line.
Operator: Good day, everyone, and welcome to the Verisk's Third Quarter 2025 Earnings Results Conference Call. This call is being recorded. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Verisk's Head of Investor Relations, Ms. Stacey Brodbar. Ms. Brodbar, please go ahead. Stacey Brodbar: Thank you, operator, and good day, everyone. We appreciate you joining us today for a discussion of our third quarter 2025 financial results. On the call today are Lee Shavel, Verisk's President and Chief Executive Officer; and Elizabeth Mann, Chief Financial Officer and Interim Head of Claims. The earnings release referenced on this call as well as our traditional quarterly earnings presentation and the associated 10-Q can be found in the Investors section of our website, verisk.com. The earnings release has also been attached to an 8-K that we have furnished to the SEC. A replay of this call will be available for 30 days on our website and by dial-in. As set forth in more detail in today's earnings release, I will remind everyone that today's call may include forward-looking statements about Verisk's future performance, including those related to our financial guidance and our recently announced pending acquisition of AccuLynx. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance is contained in our recent SEC filings. A reconciliation of reported and historic non-GAAP financial measures discussed on this call is provided in our 8-K and today's earnings presentation posted on the Investors section of our website, verisk.com. However, we are not able to provide a reconciliation of projected adjusted EBITDA and adjusted EBITDA margin to the most directly comparable expected GAAP results because of the unreasonable effort and high unpredictability of estimating certain items that are excluded from projected non-GAAP adjusted EBITDA and adjusted EBITDA margin, including for example, tax consequences, acquisition-related costs, gains and losses from dispositions and other nonrecurring expenses, the effect of which may be significant. And now I'd like to turn the call over to Lee Shavel. Lee Shavel: Thanks, Stacey. Good morning, everyone, and thanks for joining us today for our third quarter earnings call. Today, I will provide broad context on the results and allow Elizabeth to go into more detail on the financial review. I will also offer some relevant perspective from recent C-suite meetings with our largest clients. Finally, with AI being a focus for investors in our sector, I will update you on the AI enhancements that we've delivered and are developing for our clients and what we believe AI represents for the industry and for us in the coming years based on extensive engagement with our clients on the topic and ground truth experience from our active AI-enhanced solutions. Now let's turn to the third quarter results. Verisk delivered organic constant currency revenue growth of 5.5% driven by strong subscription revenue growth of 8.7%. This growth compounded on top of the solid growth delivered last year. In the quarter, we experienced an exceptionally low level of severe weather resulting in a decline in claims assignments across our Xactware system. This and other factors drove transactional revenue declines of 8.8% on an OCC basis. Despite the transactional revenue impact, we delivered 8.8% OCC adjusted EBITDA growth with expanded EBITDA margin of 55.8%. Looking at our year-to-date performance, we delivered 7.1% OCC revenue growth, 9.4% OCC adjusted EBITDA growth and a 56.3% margin, which reflects the underlying strength and resilience of our business and is fully consistent with our organic guidance for the year. Our strong subscription growth reflects continued strategic engagement with our clients and a much improved dialogue on the value that we are delivering and how we can tailor our solutions to their individual needs. As an example, last month, I attended with several of my direct reports, the CIAB Insurance Leadership Forum in Colorado and hosted 40 strategic client meetings. What we heard consistently from our clients was, one, that they need more data from us to better integrate across their businesses and functions, and they've demonstrated in new solutions like excess and surplus that they're willing to increase their data contributions. Two, a high interest in the AI enhancements that we've developed using our data sets where they can get immediate benefit without heavy investment. And three, strong support for the efficiency driving multi-partner integrations that we provide in our property estimating solutions and specialty business and that we are developing an anti-fraud and extreme event solutions. It is for this reason that we remain committed to investing in integrations to deliver value to clients. I'd also highlight three meetings just in the past month with clients where we have not had previous C-suite engagement. These discussions included comprehensive reviews of where we support these clients across underwriting, risk and claims but most importantly, our discussion centered around future planning on how we can integrate and augment that support to align with our operating, data, AI and financial objectives, elevating and adapting to how our clients are evolving in this ever-changing environment. In every meeting, the conclusion is that there is more opportunity for us to work together. Concretely, our elevated strategic engagement is leading to more pipeline opportunities. And in fact, 2025 is on track to be our strongest sales year yet with sales teams across Verisk exceeding an ambitious quota for the second straight year. Digging into our AI strategy further and given the heightened focus on the topic from investors and analysts, I believe it's important to share a few perspectives on what we are doing and what we've been experiencing. First, AI is top of mind for our clients as well. They've been exploring the technology and its potential and have turned to Verisk as an active partner in helping them evaluate use cases and to support their operational objectives with our data sets and content. Through our strategic engagement, our Chief Information Officer and Chief Global Data Officer, have participated in meetings to help our clients on key issues, including data architecture, vendor management and governance. Additionally, many of our clients want to understand Verisk's AI investment and deployment strategy so that they can align and prioritize their own investment. This underscores the connection we have to the industry and its support for the fundamental and central utility function we provide by developing and deploying a technology that the industry can benefit from at a much lower cost of ownership and investment. Second, and proceeding from the first, our deployed AI applications have been enthusiastically embraced by our clients. As an example, in XactXpert where we utilize AI to advise claims professionals in estimate review. We now have over 40 clients using the solution, including 6 of the top 10 carriers and year-to-date, sales performance is now more than double original quotas. And XactXpert can now be further enhanced by XactAI, adding GenAI capabilities like photo tagging through a new solution, which launched just this month and already has 273 users, including a top 10 carrier. On the development front, we've had very positive reactions to our AI query tools for ClaimSearch and [ SavvyR ] for regulators, with about half of our 30 [ SavvyR ] states signed on, allowing our clients to more easily interrogate our data through natural language interfaces. Third, it's all about the data. AI relies on high-quality and usable data to train the models, and I can say with confidence that Verisk's content, which includes data, language, analytics and models is built upon proprietary data that is not publicly available and is structured, cleansed, vetted and designed by us to take advantage of the power of AI. Additionally, our clients continue to reinforce the value of our content and the importance of integrating it into their workflows. Our investments in Core Lines Reimagine and the success we've had as demonstrated by our subscription growth is the clearest evidence that our curated data sets remain the fuel that powers insurance analytics. While it is still early, we are experiencing increased usage of our content as the introduction of AI tools in certain of our solutions is making it easier for our clients to interact with driving value for our clients. Further, we continue to grow the number of contributors to our existing data sets, onboarding 10 new statistical data contributors so far in 2025. Verisk's clients are also actively supporting our new initiatives to build greenfield contributory data sets across anti-fraud and for the excess and surplus lines. Specifically, our new digital media forensics currently has 106 contributors, including 5 of the top 10 carriers, representing over 600 million digital images. With E&S, insurers are responding positively to our initiative to collect data for this growing market. We began this initiative less than a year ago and have already received commitments and actual data from several companies representing billions of dollars of premium. Our ability to provide analytics on their data and benchmark this data to the admitted market, leveraging our statistical data is also driving additional interest in contribution. Fourth, it's not just about AI. While AI is a powerful tool making the insurance industry better, requires human expertise and collaboration. We are connecting ecosystems across the industry that bring material efficiencies and improved data sets to drive better results. Our Whitespace and Xactware platforms are compelling models of the value we can deliver to clients across the industry. Fifth, AI is enhancing our own internal processes and product development as we leverage advanced technologies to better ingest and interrogate data to advance our models and analytics. In our Extreme Events business, we are using the power of AI to simulate globally correlated atmospheric perils with a level of realism and reliability that traditional approaches cannot achieve. Specifically, we are using deep learning AI models to correct biases in raw output of a climate model, ensuring that the frequency and intensity of extreme events align with observed reality. In addition, we're also using generative AI techniques to introduce details that capture the local impact of these large events. In short, our clients are more interested in working with us on AI because of our experience and the economic utility of using our solutions. Our proprietary data is more valuable with increasing AI utilization because of its breadth and usability. Our clients are contributing more data and actively supporting the development of new contributory data sets demonstrating their commitment to Verisk's partnership. Our growth opportunities are expanding by the rapid adoption of solutions like XactXpert and the robust pipelines we have across many of our new inventions. We have been investing in these solutions and enhancements for several years while maintaining our strong margin profile. And finally, we believe our long-term growth and margin model is enhanced by the integration of AI into our own processes and across the industry overall. Beneath the near-term light weather impacts reflected in our current quarter's results is clear and unmistakable evidence that our strategic engagement initiatives, enhanced go-to-market strategy and product invention, including AI, are enhancing the value of our data and expanding our growth opportunities. Before I turn the call over to Elizabeth, let me share recent developments on the AccuLynx transaction. FTC approval of the transaction has been delayed. We have received a second request for information, and we continue to have productive engagement with the FTC, working within the conditions of the federal government shutdown. Consequently, we do not expect to realize any material benefit from the pending transaction in 2025 and have removed any operating results from our 2025 guidance. We are proactively engaged with the FTC and continue to believe in the strategic and financial merits of the transaction. With that, I'll turn it over to Elizabeth for the financial review. Elizabeth Mann: Thanks, Lee, and good morning to everyone on the call. On a consolidated and GAAP basis, third quarter revenue was $768 million, up 5.9% versus the prior year, reflecting growth across both underwriting and claims. Net income was $226 million, a 2.5% increase versus the prior year while diluted GAAP earnings per share were $1.61, up 5% versus the prior year. The increase in diluted GAAP EPS was driven by sales growth, operating leverage and a lower average share count. Moving to our organic constant currency results. Adjusted for nonoperating items, as defined in the non-GAAP financial measures section of our press release, our operating results demonstrated balanced growth across the business. In the third quarter, OCC revenues grew 5.5% with growth of 5.8% in underwriting and 5% in claims. We did experience two temporary factors that impacted growth in the quarter. Namely, first, a historically low level of weather activity and therefore, claims volumes that were significantly lower than our estimate of a typical year. And two, the reduction in a government contract, which we had spoken to you about previously. Together, those factors combined for an impact of approximately 1% to overall Verisk OCC revenue growth in the quarter. We view these factors as temporary and continue to have confidence in our ability to deliver results in line with our long-term target for this year for 2026 and beyond. The clearest demonstration of the health of our business is the growth of our subscription revenues. Subscription revenues, which comprised 84% of our total revenue in the quarter, grew 8.7% on an OCC basis, compounding on the 9.1% OCC growth we delivered in the prior year quarter and consistent with growth levels in the first half of the year. This quarter's growth was broad-based across most of our subscription-based solutions with outperformance across our largest businesses. Within forms, rules and loss costs, we continue to execute on our innovation agenda through the Reimagine program, which is driving solid price realization in the renewal process across all client tiers. In the third quarter, we launched 3 new modules as the latest demonstration of the increased value we're delivering to clients and the industry. For example, our new indication center delivers key rating elements to our clients 2 months sooner than our traditional loss cost review process. This allows insurers to begin responsive rate actions sooner and more confidently when incorporating Verisk data into their pricing and underwriting management. We remain on track to deliver all 20 planned Reimagine releases in 2025, reinforcing our commitment to innovation and execution discipline. We are also driving double-digit subscription growth in Extreme Event Solutions through the expansion of contracts with existing clients, solid renewals and the addition of new logos globally, including competitive wins. We are seeing strong appetite from clients to subscribe and expand their hosted relationship with Verisk in preparation for the transition to our fully SaaS-based Verisk Synergy Studio, creating a more durable and more deeply aligned client partnership. Within our anti-fraud business, we have continued to achieve strong price realization through enhancement of the solution and the continuation of our ecosystem strategy. In addition, we have driven outsized growth with noncarrier clients like third-party administrators and healthcare subrogation companies as we are focused on building and expanding solutions specifically geared for their use cases. Additionally, we are seeing meaningful interest in our advanced anti-fraud inventions, including claims coverage identifier and digital media forensics and have a rich pipeline of future opportunities. And finally, we delivered double-digit subscription growth across our Specialty Business Solutions and Life Solutions businesses, where we are driving new sales and expanding relationships with existing clients. Our transactional revenues, which comprised 16% of total revenues, declined 8.8% on an OCC basis. The principal factor for the transactional revenue decline with lower transactional volumes in our Property Estimating Solutions business, resulting from historically low levels of weather activity. Weather events in the third quarter as tracked by NOAA, declined 18% versus last year and were 31% below the 5-year average. According to Verisk's own PCS data, third quarter weather event frequency and severity declined 30% and 78%, respectively, on a year-over-year basis. In fact, this third quarter marks the lowest level of storm events in the U.S. since 2017, and 2025 is on track to be the first year since 2015 without a named U.S. hurricane to make landfall so far. This has translated into lower level of transactional claims assignment and fewer subscription overages across our Property Estimating Solutions business. This quarter of lighter weather activity has validated our strategy to increase the level of subscription volume in our PES business as it has reduced the weather-related variability for both us and our clients. As discussed last quarter, we continue to see softness in our Personal Lines Auto business relating to competitive pressures. In addition, we are experiencing tougher comparisons on certain non-rate action deals as carriers have been more successful achieving greater rate adequacy. Finally, transactional revenue growth was negatively impacted by ongoing conversions to subscriptions across our business. As we look ahead to the fourth quarter, we remind you that we do have another very tough weather comparison as last year, we saw an uplift in revenue from hurricanes, Helene and Milton. Moving to our adjusted EBITDA results, OCC adjusted EBITDA growth was 8.8% in the quarter, while total adjusted EBITDA margin, which include both organic and inorganic results, were 55.8%, up 60 basis points from the prior year. This level of margin expansion reflects our ongoing cost discipline, including the benefits of our Global Talent Optimization as well as the core leverage from sales growth. It also reflects continued investment in our business across many projects, including Core Lines Reimagine, Verisk Synergy Studio and in new and advanced technologies, including AI. Over the past 5 years, we have delivered over 500 basis points of margin expansion, while self-funding investments in some large-scale transformative technology and product upgrades, including our cloud migration, Core Lines Reimagine, the ERP implementation and artificial intelligence. Specific to AI, we continue to develop inventions across our business units that include AI and as we mentioned, we have many solutions commercially available today. And we have confidence that like our other tech transformation, we will be able to self-fund this investment while also continuing to deliver margin expansion in line with our target. Moving down the income statement. Net interest expense was $42 million in the third quarter compared to $32 million in the same period last year, due to higher debt balances and higher interest rates, offset in part by higher interest income on elevated cash balances. During the third quarter, we acted opportunistically to take advantage of favorable bond market pricing and issued $1.5 billion in senior notes to finance the announced acquisition of AccuLynx. We are earning yields on those cash proceeds, which significantly reduced the net interest expense. Our reported effective tax rate was 25.3% compared to 22.9% in the prior year quarter. The year-over-year increase was driven by a lower level of employee stock option exercise activity in the current year and a onetime tax benefit in the prior year period. We continue to believe that our tax rate will fall in the 23% to 25% range for the full year. Adjusted net income increased 1% to $241 million, and diluted adjusted EPS increased 3% to $1.72 for the quarter. The increase was driven by revenue growth, margin expansion and a lower average share count. This was partially offset by higher depreciation and interest expenses and a higher tax rate. On a reported basis, net cash from operating activities increased 36% to $404 million, while free cash flow rose 40% to $336 million. This increase was driven primarily by an improvement in the timing of collections as well as lower cash taxes paid due to changes in the tax code associated with the treatment of research and development costs. We remain committed to returning capital to shareholders. During the third quarter, we paid a cash dividend of $0.45 per share, a 15% increase from the prior year. Additionally, we repurchased $100 million of common stock. As of September 30, we had $1.2 billion in capacity under our share repurchase authorization. Turning to guidance. Though it is not our typical practice to update guidance following 3 quarters, we want to provide more transparency given the recent delay in approval for the AccuLynx transaction. We do not expect to realize any material financial benefit from the pending transaction in 2025 and have therefore removed any operating results from our 2025 guidance. More specifically, we expect consolidated revenue to be in the range of $3.05 billion to $3.08 billion. We expect adjusted EBITDA to be in the range of $1.69 billion to $1.72 billion and adjusted EBITDA margins to remain in the 55% to 55.8% range. We now expect net interest expense to be in the range of $165 million to $185 million, reflecting the impact of cash earned on the proceeds from the bond transaction. From a tax perspective, we are still expecting to be in the range of 23% to 25%. Taken all together, we continue to expect diluted adjusted earnings per share in the range of $6.80 to $7. A complete listing of all guidance measures can be found in the earnings slide deck, which has been posted to the Investors section of our website, verisk.com. And now I will turn the call back over to Lee for some closing comments. Lee Shavel: Thanks, Elizabeth. We are excited about the growth opportunities ahead and have confidence in delivering on our long-term strategy and driving value creation for shareholders. We continue to appreciate all the support and interest in Verisk. Given the large number of analysts we have covering us, we ask that you limit yourself to one question. With that, I'll ask the operator to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Manav Patnaik of Barclays. Manav Patnaik: I just had a question on the deal. You obviously included in the guidance last quarter. You raised the debt, so you feel confident in the closure. So I was just curious what -- if you could give us some more color on perhaps what's in question here. And somewhat tied to it, I know obviously, you have that strategic agreement with ServiceTitan as well, which I think you said was the main competitor of AccuLynx. So how does all that play into this? If you could help us with that. Elizabeth Mann: Yes, Manav, thanks for the question. Look, the FTC is reviewing the deal, and we continue to work collaboratively and expeditiously with them through the government shutdown. So we're making progress towards approval of the deal. On ServiceTitan, we did -- we announced a partnership with them through our Property Estimating Solutions business. And so they integrate through the Xactware platform. I'm not sure we would say they are the main competitor of AccuLynx. They are one because of their recent IPO that people have asked questions about. Operator: Your next question comes from the line of Toni Kaplan of Morgan Stanley. Toni Kaplan: I was hoping you could talk about what you're seeing in the competitive landscape regarding AI startups. You have a very strong moat with your proprietary data. But I imagine there are some parts of the workflow that AI startups are trying to infringe upon. And so just wanted to hear anything you're seeing in the market with regard to that. Lee Shavel: Sure. Thanks, Toni. I appreciate the question. And we've obviously described in the opening comments on what we've been doing with AI. And so certainly relevant to that is what we are seeing and what our clients are seeing. And I think as you suggest, there are a lot of kind of general AI companies that are looking to apply their large language models to kind of broad data sets or individual client data sets. Others that are coming up with kind of bespoke solutions for specific functions. But I think as you allude to, without access to kind of the proprietary content in terms of data sets that we have, expertise, specific knowledge of the insurance industry challenges that they face, it's difficult to achieve scale in delivering value for clients. That's why we feel we're in a very strong position to be a partner to our clients, given the expertise, given the data set. We've seen receptivity. And there also is a higher degree of confidence that we're able to deliver and be a reliable partner with them on their AI efforts. But it is something that we continue to monitor to determine if it is a solution that a client sees value in. And it's -- we can be supportive in providing data that becomes an opportunity for us. And it's also very consistent with the connected ecosystem that we have developed in our Property Estimating Solutions area and are developing in other dimensions of our business. So if it is something that is relevant and our data sets are valuable and it delivers value to the clients, that becomes an opportunity for us to participate in. Operator: Your next question comes from the line of Faiza Alwy of Deutsche Bank. Faiza Alwy: Lee, thank you for the comments you made upfront around the continuing strategic dialogue with your customers. You mentioned a few things like increasing usage and more contributory data. I'm wondering if you can share your thoughts around future pricing opportunity, especially in light of decelerating net written premiums in the insurance industry that we're hearing. And I understand that there isn't a formula, but just curious how you're thinking about that future pricing opportunity given the various dynamics? Lee Shavel: Yes. Thank you very much for the question, Faiza. We think it is a very real opportunity. First and foremost, because I think both we and our clients recognize that we can provide incremental value to them in a variety of ways. And in those strategic dialogues, the elements that we discussed and kind of relate to the revenue opportunity is for instance, most directly as we've experienced with XactXpert, as we're experiencing with XactAI and developing in other areas, we have been able to deploy an AI enhancement to their productivity that adds value, and we have been able to realize upsell revenue from that enhancement. So that is a very clear direct and immediate opportunity that we're executing on. Secondly, the ability to integrate our data sets, either directly into their AI strategies or integrating our own data sets to meet some of their functional objectives is incremental value for them. And so that becomes an element of an opportunity for us as we are looking at our subscription contracts where we have the ability to factor that in, recognizing that we're creating value. And so there's an opportunity to participate in that. I would draw a connection to the very strong subscription growth that you were seeing across our business is a function in large part of the modernization of our data sets through our Core Lines Reimagine function that has expanded our clients' ability to utilize our data sets and integrate them into their workflows. So it's a natural expansion on that front. So -- and then finally, as I alluded to in the call, we're using AI to improve the quality of our underlying products, and I specifically noted our use of it in the CAT modeling area. And so we're strengthening that product. And if it is a stronger product competitively delivering more value to our clients, that naturally becomes a pricing opportunity. And we've seen very strong subscription growth from our CAT modeling area as well, I think, reflective of that continued investment and innovation within that product set. Operator: Your next question comes from the line of Andrew Steinerman of JPMorgan. Andrew Steinerman: Elizabeth, I heard your list of kind of dynamics around the auto underwriting solutions revenues and that the main product there is LightSpeed. The things I didn't hear you say on that list was when looking at that end market, auto underwriting growth of their policies has been decelerating. That's kind of been well documented during earnings season. And I thought that might be a headwind as well, as well as just the level of shopping around auto. And if you could just highlight for us what you guys currently see as the uniqueness of LightSpeed with insurers now? Elizabeth Mann: Yes. Thanks for the question, Andrew. Yes, that business itself doesn't have any particular linkage to premiums. So that wouldn't impact the performance of that business. Shopping activity has been in line more or less. So that hasn't been a major driver of change for that. On LightSpeed, I think we've talked before about the merits of that business. The ability for carriers to deliver a bindable quote in real time, and that value continues. So that strategic benefit is there. Lee Shavel: And Andrew, one other factor is if you -- it sounds like you have, if you're observing on the dynamics in the auto insurance rate, rate adequacy has improved dramatically and as a consequence, some of the opportunities, kind of cyclical opportunities that we've seen previously in the non-rate action area has been less prominent than it was when profitability on the auto underwriting side was less robust. Operator: Your next question comes from the line of George Tong of Goldman Sachs. Keen Fai Tong: You mentioned your full year guide now excludes the impact of AccuLynx. Can you clarify how much of the guide reduction was due to the removal of the deal versus other factors like maybe extreme weather coming in lighter than expected? Elizabeth Mann: Yes. Thanks, George. As usual, for a full year guide, we don't break down the pieces of it. You can kind of map the sequential changes that we've done. Keen Fai Tong: I guess how much of the change is organic versus M&A related? Elizabeth Mann: Yes. That's -- we've given you the aggregate level. Operator: Your next question comes from the line of Ashish Sabadra of RBC Capital Markets. Ashish Sabadra: In the prepared remarks, Elizabeth, you've highlighted, the difficult comps from hurricanes as we get into the fourth quarter. We estimate that was almost 100 basis points of tailwind last year. So is it right for us to assume that we see an incremental 100 basis points of headwind from 3Q going into 4Q or was some of it headwinds pulled into 3Q? So any color there. But also as we think about other offsets, are there -- Lee, you mentioned really good sales momentum this year and last year as we start to see some of those sales translate into revenue into fourth quarter? Or are those more going to contribute for '26 and beyond? Elizabeth Mann: Yes. Thanks, Ashish, for the question. Yes, you're right. In the fourth quarter, we will be comping that strong impact from hurricanes Helene and Milton that was in the fourth quarter of last year. As we typically say, at the beginning of the year, we tend to forecast for an average year of weather. Last year had the significant hurricane impact, and this year is shaping up to be a light year on the weather side. So those factors are likely to persist into the fourth quarter in general, but on a full year basis, we are in line with the guidance and the long-term targets. And yes, as we talked about some of the sales opportunity, the momentum that we're having in the sales force and with the new product adoptions will be continuing into next year. Operator: Your next question comes from the line of Gregory Peters of Raymond James. Charles Peters: So I'll focus my one question on the cash flow numbers. I know Elizabeth you called out some discrete items like tax and I'm not sure to the extent other variables might be affecting it. But I think from a bigger picture perspective, is there any step change in your conversion rate of free cash flow on an annual basis? And if so, what are the driving factors on that? Or I guess when I think about free cash flow for '26, I'm just wondering how I should look at your results in the third quarter and interpret -- and extrapolate that into how I think about next year? Elizabeth Mann: Yes. Thanks for the question, Greg. And we're happy to highlight the strong free cash flow in this quarter and for the full year. I called out there was a cash tax benefit in the third quarter. There was also -- if you look on a year-to-date basis, there was a first quarter tax refund. On a -- if you normalize for those, the free cash flow growth, I'd call it strong double digits. Another benefit that's helping us this year, although there's some quarterly variability to it is we are seeing better collections and lower DSOs as we take advantage of the Oracle and the ERP implementation that we've had. So there's some quarterly variability in that, but an improvement over last year. If you strip through all of that, we'd say probably the free cash flow growth is roughly in line with EBITDA growth, but that's kind of an ongoing benefit that we expect to continue. And so this -- yes, this strong free cash flow growth is and will be the fuel to continue to drive our capital allocation engine, and we can choose to deploy that in continued organic investment in M&A and in return of capital where we have and can continue to lean in. Operator: Your next question comes from the line of Kelsey Zhu of Autonomous Research. Kelsey Zhu: You called out the competitive pressure in auto 2 quarters in a row now. So I was just wondering if you can give us an update on what is happening in that market and your strategy to maintain or expand share in that market? Elizabeth Mann: Yes. Thanks for calling out, Kelsey. It's nothing new from last quarter. It's just the financial impact, which is in line with what we had called out in the last quarter. So no change. I think on there, we're spending time from a product side. We are focusing on the client feedback and the opportunities for competitive differentiating -- differentiation. We are focusing on areas where we may have a deeper data set and some deeper analytic objects that can build unique value proposition for the clients. Operator: Your next question comes from the line of Jeff Silber of BMO Capital Markets. Jeffrey Silber: You mentioned premium growth levels in an answer to another question. I was wondering if you can just refresh our memory, what is the industry growing at this year? And what are your expectations for next year? Elizabeth Mann: Yes. Thanks, Jeff. As you know, these -- the data takes a while to review, and it also varies line by line. In aggregate, across the industry, we were seeing high single-digit premium growth in 2024. Depending on the line that is perhaps normalizing to mid-single digits in 2025. But again, I'll remind you, while there is some input to some of our contracts to the net premium growth, that is only an input and not necessarily a main driver. We're focusing on the value delivery in those contracts. Jeffrey Silber: And what are folks forecasting for next year? Lee Shavel: I think based upon what I see, Jeff, is they're expecting kind of that similar normalization into the mid-single digits. And obviously, it's going to vary by -- from product line to product line. And so I would just say directionally, what we're seeing is that normalization from a more inflation-oriented growth that elevated the industry for a while to a more normalized low to mid-single digits growth. But I also want to take the opportunity to reprise some of the statistics that we provided that over the past 15 years, there has not been a significant differentiation of our organic revenue growth rate in soft or hard markets. I think the variation was between 6.8... Elizabeth Mann: 6.8%. So historically, since we've been public in the soft market years, our growth has been about 6.8%, in hard market years, it's been, on average, 7.3%, so a slight impact. Lee Shavel: And it underscores the fact that our revenue growth is tied to the value that we deliver and the expanding adoption of data and analytics by the insurance industry, which we continue to see. And as I mentioned in my remarks, we believe that AI is an accelerant to the effective utilization of our data sets. So while we do look at overall industry premium growth as an indicator, it really is driven by data and technology adoption and the value that we're able to deliver in our function as an effective utility for the industry. Operator: Your next question comes from the line of Alex Kramm of UBS. Alex Kramm: It seems like a lot of things have been asked and answered already. But maybe quickly on M&A. I know you're obviously focused on AccuLynx and driving that forward. But just maybe some general perspective on how that -- how your M&A outlook has changed over the last 3 months? Do you feel like you have capacity for other things? What have prices done? And Lee, as you engage with the C-suite here more, are there any specific workflows that clients are asking for that you feel like M&A is the answer for those? Lee Shavel: Yes, Alex, thank you very much for the question. First, as you can imagine, we are very focused on the AccuLynx transaction. As Elizabeth indicated, we're continuing to work collaboratively and expeditiously with the FTC to execute that transaction, which we still fully believe in the strategic and the financial merits of. And so naturally, while we continue to monitor the market for opportunities that are additive where we can add value, I might say that our primary focus is on those deals, AccuLynx as well as the closed SuranceBay deal to make certain that those are effective. So we want to maintain our focus on delivering value and executing those transactions primarily. But you always want to be aware of what is happening in the market. It's an interesting question in terms of what we're hearing from clients. I would say that while it tends not to be oriented to acquisition targets, I would kind of extend their desire to see a more centralized efficiency and connectivity as a part of what they do. And I would probably use SuranceBay as an example of where we've heard from our life clients that the kind of the regulatory element that SuranceBay provides is very additive and connective to what we're providing on the policy administration side. So -- and feedback that we received with regard to AccuLynx in terms of the ability to improve efficiency and connectivity for contractors and carriers is a benefit that we've talked about previously. So those are elements and anything that augments our data sets and allows them to be utilized more effectively or more broadly in the industry is what we're hearing from clients. Operator: Your next question comes from the line of Russell Quelch of Rothschild. Russell Quelch: I appreciate your comments on AI and the opportunities that it brings to Verisk. But are there any of your large carriers that are talking to you about how they want to leverage AI to garner greater insights from their own sort of large amount of data they hold, particularly in the property insurance space. And I'm wondering if they are, how you think that could impact the long-term usage of contributory databases as perhaps the sole source of data for insurance pricing like it currently is? Lee Shavel: Thank you for the question, Russell. So certainly, our clients are looking to utilize AI against their existing businesses. But what I would emphasize is that their ability to analyze their own data, the overall market perspective of how the industry as a whole is performing and the benchmarking function remains very critical to that. What we have seen is that when clients are increasing the sophistication of their data assessment within their own lines of business, it increases their interest in comparing what they are doing to the industry as a whole. And because of the very rich data sets that we have, we can offer an enhancement and augmentation to what they are trying to do internally. Just using that internal data not enriched by the data sets, whether we have in [ pro metrics ] to give very detailed information on properties that they can benchmark their own assessments against or the loss cost information that we have or the catastrophic risk exposure that we're able to model, all of that is an enhancement to what they are attempting to accomplish within their own applications. And so a key pillar of our ANI strategy beyond developing the tools, beyond using AI for our own benefits is understanding what our clients' needs are so that we can partner and enhance what they're doing. We've heard that consistently. One kind of specific -- other specific example of even a data set in our admitted lines business becomes very relevant in benchmarking excess and surplus performance because it is a reference market for that. And as they have been increasingly sophisticated in tracking and contributing that data, that becomes an incremental value opportunity for us to provide that type of benchmarking and validation. So I think the point that I would summarize for you is that while they are looking to do these to analyze their own data, the connectivity and the enhancement of what we can provide becomes even more relevant. Operator: Your next question comes from the line of Scott Wurtzel of Wolfe Research. Scott Wurtzel: Just on AccuLynx, despite the closing of the transaction getting delayed given the second request. Just wondering, is there anything on the sort of technical integration side that you can do during this sort of interim period to when the deal is eventually closed sort of speed up the overall integration process with AccuLynx? Elizabeth Mann: Thanks a bunch, Scott. The short answer is no. We are -- the legal requirements are to operate independently as two separate companies until that approval is given. Operator: Your next question comes from the line of David Motemaden of Evercore. David Motemaden: I just wanted to just ask -- I don't want to focus too much on 1 quarter too closely. But Elizabeth, you had talked about 6.8% OCC growth in softer markets, but it was 6.5% this quarter if we normalize for the light weather and the government contract. So I guess, why -- what is it about the environment now, which I think is still -- I wouldn't say we're in a soft market yet, I guess what's dragging down the OCC growth now from that 6.8% in the soft markets that you had sort of spoke about? Elizabeth Mann: Yes, David, look, there's always going to be some quarterly variability. This is not -- that was that 6.8% was an average across many different years, which themselves had a range of outcomes. So we've -- some of the factors I talked about this quarter were some of the swings and you may continue to see that in the future. But in the long term, we're very confident that we can continue to deliver growth rates within the long-term organic targets. Lee Shavel: Yes. And David, the other differentiation that I would make is looking at the subscription growth, you can see that, that remains exceptionally strong and a function, again, of the value that we're delivering. I think when we are talking about softer or hard markets, that really is going to play out in the subscription growth from a value perspective whereas clearly, within this quarter, that differentiation, that 6.5%, is primarily transactionally driven. So I would just -- I would make that distinction as you were thinking through that issue. Operator: [Operator Instructions] Your next question comes from the line of Jason Haas of Wells Fargo. Jason Haas: So if we look at the OCC growth that you reported, the 5.5%, you called out 1 percentage point from government and also the weather headwinds. So even if you add that back, you're at 6.5%. In the prior quarter, you were at 7.9%. So I'm trying to understand what caused that deceleration? Because in response to an earlier question, you said that the auto competition sounds like that's been a similar level. So yes, I'm just -- I think we're trying to figure out what caused that deceleration. And I think the concern is that your customers are seeing lower growth than they did last year. So is that what's weighing on the growth? Or can you unpack what caused this deceleration? So we can get some confidence for how the growth could accelerate going forward. I guess that will be past 4Q because you'll have a tough compare. But yes, you can unpack that, I think that gives us a lot more confidence and would be very helpful. Elizabeth Mann: Yes. Thanks a bunch for the question, Jason. Yes, as we map to the last quarter, look, I called out a couple of factors in Q2 that were going to impact the second half of the year. We talked about the government contract and we talked about the softness in the auto space. Those have played out in line with the way we talked about in the prior quarter. So I think on the auto softness side, we called it out as something we saw coming ahead. It wasn't necessarily impacting the second quarter yet, which is, of course, why we called it out as something for the second half of the year. So -- and then what we hadn't yet seen at the time was the light weather activity which typically that third quarter is the prime quarter for severe convective storms and North Atlantic hurricanes. So it's really those factors that are impacting it. Again, of those three, what we call temporary factors, two of them were as anticipated and then the weather was an additional point. I think going back to our emphasis on the subscription revenue, that strength there demonstrates what we think -- if -- somewhere in your question was, are we seeing customer hesitation and the answer is no. You can see that in the subscription growth. You can see that in the strong sales momentum that we've highlighted. So we really do think it is a function of the temporary factors. Lee Shavel: And I would just add to that. As you heard us say, we remain very confident in our ability to continue to deliver growth in that 6% to 8% range on an ongoing basis, notwithstanding the temporary factors that Elizabeth just described, the fundamental dynamics of client demand, the integration, the elevated dialogue, AI opportunities that we are experiencing and are demonstrated in our subscription growth that underpins our ongoing confidence of adhering to our long-term growth model. Operator: Your next question comes from the line of Andrew Nicholas of William Blair. Andrew Nicholas: Just one quick one for me. Just on AccuLynx, I understand you're going through the second request from the FTC, and you can't do anything from an integration perspective. But have you been able to have maybe more lengthy dialogues with your clients on the strategic merits to that deal and maybe the opportunity for increased engagement in that part of the insurance ecosystem to this point? And if so, would be curious to see what the feedback has been on that front. Lee Shavel: Yes, Andrew, let me start and Elizabeth, who's been involved in our interim claims role can supplement this. Obviously, the announcement has been in the public domain. Our clients have been interested. We've been spending time describing what we think the strategic and the business merits are. And I think we have received an endorsement from them in terms of what we can accomplish across both the data and the connectivity element. So obviously, this all remains subject to the process, and we continue to work, as we've said, collaboratively and expeditiously with the FTC to bring this to a close, but we have been engaged. Elizabeth Mann: Yes. I would just add from the dialogue that I've had with clients on the claim side. We've had, I would say, high-level discussions in line with operating as 2 separate companies. So we've gotten positive feedback for the deal, a positive feedback in terms of the benefits it would bring to the industry, but we haven't gone into specific discussions as that would not be appropriate. Our primary focus right now is on completing the deal. Operator: Your next question comes from the line of Jeff Meuler of Baird. Jeffrey Meuler: I just want to make sure I'm mapping the headwinds you're calling out correctly to subs and transactional. So I guess, subs growth decelerated by 60 basis points into a tougher comp. It sounds like the government headwind is in subscription, if you can confirm that. And then for transactional, that's where you're seeing both the weather headwind or the majority of it and the auto headwind or the preponderance of it is also in transactional, if you can confirm that? And just to be clear, what we're talking about, is this just like one lost client in a business where you've forever been in a challenger position? Elizabeth Mann: Yes. Thanks for the question, Jeff. On the subs trans breakdown, that's -- yes, that's right. The government contract is entirely subscription. The weather and the auto piece are primarily transactional, but do have a bit of impact on subscription as well. And so the subscription growth is all the more notable in absorbing those headwinds as well and pointing to the strength around the business. On the auto side, it's a bit more general than that. Operator: With no further questions, that concludes our Q&A session and today's conference call. We thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Modine Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations. Please go ahead. Kathy Powers: Good morning, and welcome to our conference call to discuss Modine's second quarter fiscal 2026 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. The slides that we will be using for today's presentation are available on the Investor Relations section of our website, modine.com. On Slide 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission. With that, I'll turn the call over to Neil. Neil Brinker: Thank you, Kathy, and good morning, everyone. Last quarter, we announced plans to significantly expand our U.S. manufacturing capacity for data center products. We are continuing to invest in our fastest-growing businesses and are actively advancing the strategy. In fact, we are accelerating other planned investments to meet the unprecedented demand for our products. Our Climate Solutions segment continues to deliver, posting a 24% increase in revenue. This includes contributions from our 3 acquisitions earlier this year: AbsolutAire, L.B. White and Climate by Design International. As we integrate these businesses, we are applying 80-20 principles to drive value by improving margins, increasing capacity utilization and unlocking commercial opportunities to cross-sell into new markets. Bringing these respected brands into the Modine portfolio not only broadens our product offerings but also brings scale to HVAC Technologies. Excluding these acquisitions, organic sales increased 15% from prior year, driven primarily by a 42% increase in data center sales. Over this past quarter, we've made substantial progress on our capacity expansion. I'm pleased to report that we have officially launched chiller production in our Grenada, Mississippi facility. In total, we plan to have 5 chiller lines in Grenada and are currently producing on 2 of these lines. We are working on getting the incremental production lines in place and are on schedule to launch full production by the end of this fiscal year. We've also made good progress in Franklin, Wisconsin and Jefferson City, Missouri. Franklin is scheduled to launch initial production of data center products this quarter, with volumes ramping through Q4. We will have 4 chiller lines in Jeff City, with the first 2 launching the fourth quarter and the remainder planned for later next fiscal year. The final site for our expansion has been secured in Grand Prairie, Texas just outside of Dallas. This facility is planned to fully come online early next fiscal year and will have 5 chiller lines. Both the Franklin and the Dallas locations are being designed for flexible manufacturing with the ability to produce multiple products that can be flexed based on demand. Both facilities will be able to produce modular data centers, which we see as a great opportunity. We've made initial shipments to 1 customer and are currently working through some design modifications. In addition, we are in early stages of discussions with others, including both hyperscaler and neocloud customers. We are excited to be able to support our strategic customers with innovative products that offers rapid deployment and scalability. We are making good progress overall, but current hurdles include the hiring and training of the workforce, which is a heavy lift for the organization. In total, we've hired 1,200 employees to support data centers so far this year, including temporary and contract workers, and talent we've strategically redeployed from our Performance Technologies segment. This added significant additional cost this quarter, with little incremental revenue, resulting in temporary margin erosion in Climate Solutions. We expect this to continue in Q3 and then improve in Q4 when volumes begin to ramp. We expect a significant jump in revenue between Q3 and Q4 driven by new capacity coming online. Outside the U.S., we successfully launched production of data center products at our new Chennai, India facility. This strengthens our ability to serve customers in the APAC region with locally manufactured product. Furthermore, we are planning to expand chiller capacity in the U.K. to support demand for both hyperscaler and colocation customers in Europe. This incremental capacity is anticipated to come online early next fiscal year. I currently see a path to deliver more than 60% revenue growth in data center this year on our way to achieve over $2 billion in revenues in fiscal 2028. This year marks a period of major investment in our data center businesses, driven by strong market demand. This is hard work for our organization, and we are addressing challenges and making adjustments along the way. In addition, this represents a major transition for the business, evolving from a low-volume, high-mix manufacturing operation to a high-volume producer. This is not a shift in strategy as we remain committed to serving as a premium, highly customizable provider. However, we will now be able to deliver these specialized products at scale to meet the needs of our largest customers. This is important as large data centers, especially those specializing in AI applications, require our products to be delivered at a much greater rate than we have historically provided. Fortunately, Modine is highly capable of ramping scale production on highly engineered product designs. A competency, we have honed over many years with our Performance Technologies business. This expertise is also why we have been successful in leveraging internal resources to support these critical projects. We have the right team in place, and we are hyper focused on execution to deliver these innovative products our customers require. I want to stress again, this is a very heavy lift for the data center team, but I remain confident in our ability to execute, meeting our targets and customer commitments. Please turn to Page 5. Our end markets and Performance Technologies segment continues to be challenged, but actions we've taken in response to these conditions are having a positive impact. Although revenues this quarter were down 4% from the prior year, adjusted EBITDA was up 3%. The segment adjusted EBITDA margins increased by 90 basis points, primarily due to the cost control measures we've taken out over the past few quarters, including actively reallocating resources to the Climate Solutions segment. We are monitoring market conditions closely, and we will continue to make adjustments as necessary. I'm pleased to announce that the segment is now being led by Jeremy Patten, who joined our team as the President of Performance Technologies segment last month. Jeremy's previous experience with transformational change with an 80/20 mindset makes him uniquely qualified to take on the challenges and opportunities ahead. I'm happy to welcome Jeremy to the team and have confidence that he will continue the momentum created over these past quarters to drive margin improvement as we transform this portfolio. I'm extremely proud of the hard work being done in both segments to drive towards our vision of evolving our portfolio in pursuit of highly engineered mission-critical thermal solutions. This is creating a great deal of organizational change and a heightened level of complexity. This includes integrating 3 acquisitions, expanding capacity across multiple locations around the globe to support data center growth and exploring strategic divestiture opportunities in Performance Technologies. We are moving people into new roles in support of these plans and are incurring temporary cost increases to support future growth. Although we will encounter obstacles along the way, this team is up for the challenge, giving me further confidence in our ability to reach our long-term targets. With that, I'll turn the call over to Mick. Michael Lucareli: Thanks, Neil, and good morning, everyone. Please turn to Slide 6 to begin reviewing the Q2 segment results. Climate Solutions delivered another quarter of strong revenue growth with a 24% increase in sales. Driving this growth was data centers, which grew $67 million or 42%. HVAC Technologies increased $17 million or 25%, driven by inorganic sales from our recent acquisitions. This was partially offset by lower indoor air quality sales and lighter preseason stocking orders for heating products. Heat Transfer Solutions grew 2% or $3 million due to higher volume with commercial refrigeration and coatings customers. Climate Solutions second quarter profit margins were lower than normal and adjusted EBITDA declined 4%. I want to review a few temporary factors that contributed to the decline this quarter. The largest impact was due to significant investments relating to the data center capacity expansion, including direct and indirect labor and overhead expenses needed to build out new production lines and facilities. As Neil previously covered, we're expanding production lines at several existing locations while also preparing to launch a few new facilities. These actions are required to meet the growing customer demand for Modine products and more than double our revenue. While we expect to see sequential revenue growth in Q3, we won't begin to realize significant volumes in the new production facilities until our Q4. We also had a lower margin in HVAC Technologies, which was mostly due to a negative mix impact. This was driven by lower preseason heating sales, combined with the early integration steps for the 3 most recent acquisitions. Heating represents some of our highest margin products and the acquisitions are very early in the integration 80/20 phases. Within this product group, we anticipate a sequential margin improvement as we enter the heating season and began to implement 80/20 across the acquisitions. And finally, in HTS, the prior year included several million dollars of commercial pricing settlements from heat pump customers. As we implement a major step function change in our data center production capabilities, we anticipated that there would be significant unabsorbed costs as we launch the expansion plans. Looking to the second half of the year, we currently expect sequential margin improvement in Q3, but the margin will remain below normal operating levels until Q4. Then in Q4, we should begin to see more significant volumes from our new production lines, which will allow us to more fully absorb the fixed incremental costs and exit the year at more normalized profit margins. Before moving on to Performance Technologies, I want to highlight that the demand for Modine data center solutions continues to grow, and we're increasing our revenue outlook for the current fiscal year. In order to support this growth and achieve our $2 billion goal, we need to make significant capacity investments while still delivering on our earnings targets. And this will set the stage for further revenue growth and margin improvement with the ability to move well above historical profit margins. Please turn to Slide 7. Performance Technologies revenue declined 4% from the prior year. Heavy-duty equipment revenue was relatively flat with stronger sales to construction and mining customers, offset by lower GenSet sales. On-highway applications decreased 3% or $7 million, driven by lower commercial vehicle demand, including specialty vehicle and bus customers. Despite the tough market conditions, adjusted EBITDA improved 3% from the prior year and the adjusted EBITDA margin increased by 90 basis points to 14.7%. The margin increase was mostly driven by significant cost reductions and improved operating efficiencies. Tariffs remain a significant challenge for all market participants, but our team is working hard to recover these increases through surcharges, along with our normal pass-through mechanisms. In addition, we're reorganizing this business and reducing costs wherever possible, which resulted in a nearly $7 million reduction in SG&A expenses this quarter. The team remains focused on margin improvement despite ongoing challenges with the end market demand. As we look ahead, Q3 typically represents the lowest volume quarter due to seasonal patterns and holiday shutdowns by our OE customers. As a result, we expect that the Q3 margin will be down sequentially from Q2, but should be above the prior year, then stepping back up sequentially in Q4 as we've done in previous years. Until the markets turn around, we'll stay focused on costs and operating efficiencies, which will allow us to drive higher operating leverage and margins when volumes improve. Now let's review total company results. Please turn to Slide 8. Second quarter sales increased 12%, driven by the revenue growth in Climate Solutions. The gross margin declined 290 basis points to 22.3%, driven primarily by the factors I covered on the Climate Solutions slide. SG&A expenses declined in the quarter, driven by Performance Technologies cost savings initiatives, partially offset by incremental SG&A and the acquisitions in Climate Solutions. The net result was a 4% improvement in adjusted EBITDA from the prior year with a margin of 14%. With regards to EPS, the adjusted earnings per share was $1.06 or 9% higher than the prior year. I want to again summarize the key items that impacted the Q2 margin and how we currently see our consolidated results for the balance of the year. For Q2 consolidated results, the adjusted EBITDA margin benefited from the year-over-year improvement in Performance Technologies. This was offset by the lower margin in Climate Solutions, as I reviewed on that segment slide. As we look to Q3, we anticipate the adjusted EBITDA margin will remain below normal levels in this quarter. Then based on the sequential improvements by both segments in Q4, we expect a significant increase in the sequential margin, which should be more in line with the prior year. Based on this second half outlook, we would exit the fiscal year at the highest quarterly margin rate, and we would fully expect additional margin expansion in the new fiscal year, consistent with our fiscal '27 goals. Now moving on to cash flow metrics. Please turn to Slide 9. Free cash flow was a negative $31 (sic) [ $30 ] million in the second quarter. We anticipated lower cash flow primarily due to higher inventory builds and CapEx in Climate Solutions. We continue building significant data center inventory to support customer demand and delivery schedules in the second half of the year. And second quarter free cash flow also included $9 million of cash payments, primarily related to restructuring and acquisition-related costs. Net debt of $498 million was $219 million higher than the prior fiscal year-end directly related to the acquisitions of AbsolutAire, L.B. White and Climate by Design. With the investments in acquisitions and capital during the first half of the year and the associated earnings, our balance sheet remains quite strong with a leverage ratio of 1.2. Based on our earnings and cash flow outlook, we expect that the leverage ratio will decline further by fiscal year-end. Now let's turn to Slide 10 for our fiscal 2026 outlook. As we cross the midpoint of our fiscal year, we're raising our revenue outlook and reaffirming our earnings outlook. For fiscal '26, we now expect total company sales to grow in the range of 15% to 20%. For Climate Solutions, we're raising our outlook for the full year sales to grow 35% to 40% with data center sales now expected to grow in excess of 60% this year. With regards to data center sales growth, we anticipate sequential increases in Q3 and in Q4 with the second half year-over-year sales growth exceeding 90%. During the next quarter, the team will be further preparing numerous production lines, both in existing and new facilities to support the strong orders. In Q4, we anticipate our first full quarter of significant production volume from these new production lines. For Performance Technologies, we're raising our sales outlook with revenue now anticipated to be flat to down 7%, improving from the prior range of down 2% to 12%. We expect that the end markets will remain depressed with the ongoing trade conflicts and cautious market sentiment having a negative impact on market recoveries. However, last quarter, I explained that revenue was trending more favorable due to foreign exchange rates and the large amount of material cost recoveries. While the underlying market volumes have not recovered, we expect higher revenue as these trends have continued, and we're adjusting the outlook accordingly. I want to point out that while the large cost recoveries helped to protect our absolute level of earnings, they don't have a positive impact on our profit margins. With regards to our full year earnings, we're balancing the higher revenue outlook with margins running temporarily below normal levels. Based on this, we're holding our fiscal '26 adjusted EBITDA outlook to be in the range of $440 million to $470 million. For cash flow, we anticipate generating free cash flow in the second half of the year, but lower as a percentage of sales compared to the prior year. For the full year, we expect free cash flow to be in the range of 2.5% to 3% of sales. This is directly related to the significant investment in data center capacity that we're making this year, along with higher working capital to support this rapidly growing business. This also includes cash required to fully fund our U.S. pension plan prior to our planned annuitization in the third quarter. With the conclusion of this large project, we'll be able to remove a very large liability from the balance sheet along with the time and cost to manage it. And consistent with our previous outlook, we're not including any cash proceeds from potential divestitures this year. Looking ahead to next year, we anticipate that our free cash flow margin will return to previous levels and be in line with our fiscal '27 targets. To wrap up, we have a lot of moving pieces this quarter, including significant cost reductions in Performance Technologies combined with large investments in Climate Solutions for the 3 acquisitions and the data center expansion. This represents a lot of change, and the team will continue to execute as we've done throughout our transformation. These activities are critical elements of our strategic transformation and capital allocation strategy. We remain confident that these actions are setting the stage for long-term sustainable growth for Modine shareholders. With that, Neil and I will take your questions. Operator: [Operator Instructions] And our first question will come from Matt Summerville with D.A. Davidson. Matt Summerville: Can you maybe first -- on the Climate side of the business, can you maybe first parse out year-over-year margin contraction on sort of what was data center driven, what was mix driven and what those headwinds were maybe providing a bridge in basis points? And then sort of more of a definitive sort of layout in terms of how you get back to "normal" in fiscal fourth quarter, which I would assume implies 21%-ish at the segment level. And then, Mick, in your prepared remarks, you also added color on a comment that Climate has the potential going forward to punch well above historical profitability. So maybe if you could frame that? And then I have a follow-up. Michael Lucareli: Yes. Neil, do you want me to take it first? Yes. Matt, thanks for the question. So if we start first with your Q2 question, as we break down the margin, if we want to talk about basis points, the biggest portion of the margin in the quarter was on the data center expansion side, about 225 to 250 basis points on the data center side, and that was about $10 million to $12 million of higher costs really split between labor and overhead, a little bit of material in there, and Neil can talk a little bit more about that. And then on the HTS side, last year, we had some really large heat pump settlements, if everyone would recall after the market downturn, that was about 125 basis points. And then on the HVAC Technologies and kind of other, it was about 100 basis points. HVAC Technologies was mostly a mix issue and some start-up integration costs on the acquisitions. So that's the breakdown of Q2. Neil and I can give you a walk to -- as we get to Q3 and Q4, before I turn it back to Neil, the thing I would -- you asked at the end about beyond. So when we give you the walk, we are building capacity to not only get to our goal of the $2 billion, but we'll have capacity to produce more than that. That's not running every plant 3 shifts, 7 days a week. Obviously, once we get to normal production levels and you move -- start moving towards full capacity, the incremental margins are quite high. So that's why I said once we get to normalized levels -- production levels, we'll get to more normal EBITDA margins for CS and then beyond very high incremental or variable contribution rates. Neil, maybe I'll turn it back to you on how we're looking at Q3 and Q4. Neil Brinker: Yes. The piece that I'll add to that is that we expected some level of launch costs. I mean that's to be expected. We added over 1,200 people into the organization over the last few months. Those are a little -- it turned out to be a little bit more -- a little higher than what we anticipated, but we have to understand root cause and what that is, and we do understand that. Essentially, we had such high demand and expectations for our customers to pull in dates and ship product early that we had to divide our resources, and we went with multiple launches at once. So we recognize the impact of that. We recognize the cost of that. And we have now reverted back to the standard launch process, which is more controlled. We have the right amount of specialists on the job in terms of how we do it. We're leveraging 80/20 for scheduling and lead times, and we've got better alignment around our customer expectations and schedules. So we try to do something a little bit different to meet the demand. We try to do something a little bit different to launch faster to help support our customer schedules, and it was costly to do that. Matt Summerville: Appreciate that color. If I can stay in -- yes. Michael Lucareli: Just quick to -- you asked about the ramp too. The step-up, we talked about some improvement in Q3 and then you had asked -- I want to make sure we address. You asked about getting back to a 20-plus percent type level in Q4. For us, implied guidance, about 90% in the second half, we do see sequential growth. So the growth rate continuing to improve. And for us to get to our Q3 targets, we probably need $40 million to $50 million of incremental capacity coming online. And that's -- if we have 2-plus chiller lines, we're good there. To get to Q4 another $75 million to $100 million of volume revenue capacity, and that would be roughly a minimum another 5 chiller lines. And we can cover that with you guys online or offline. A lot of you know those plans. We're on track. And that doesn't include sales of any other products, air handlers or on the modular side. But if you're thinking about that ramp up, it's really bringing on fully producing at least 2 lines in Q3 and then another 5 lines, talking chillers only in Q4. Matt Summerville: Super helpful, I appreciate all that detail. I want to stay inside the data center business for my follow-up, 90 days ago, you mentioned establishing a data center sort of goal approaching $2 billion in fiscal '28. Now you're talking about a number over $2 billion just 90 days later. Did something change with order activity, funnel, customer acquisition? And ultimately, as you get to the tail end of this capacitation journey, both in North America and now in the U.K., where will your capacity actually be? And should we be thinking about maybe something a bit materially higher than $2 billion in '28 based on what I'm describing there? Neil Brinker: Yes. Thanks, Matt. What's changed in the last 90 days is definitely. The order and the funnel rates. And we're seeing more demand. We're seeing our relationships with our customers continue to evolve in a great way and the aperture in terms of the scheduling and the outlook has widened to where we can see more, and it gives us more confidence to continue to deploy CapEx. So that's what has changed. We've seen it with not only expanding our product lines and what we have today, but also new products that we're going to market with and launching. One example of those would be our modular data centers. So that -- the market looks pretty promising, and we feel that we have the right technology to support it, and we feel we have the right time lines to meet the customer demands, and it's just confidence, giving us more confidence in terms of where we're at. Operator: And our next question comes from David Tarantino with KeyBanc Capital Markets. David Tarantino: So I just want to follow up on the margin commentary. Just what gives you the confidence that margins should normalize going into 4Q beyond just the accelerated capacity just given investments should continue? And I know it's further out, but how should we think about margins as it relates to the longer-term targets that you laid out as you accelerate the rate of production here? Is the 4Q implied run rate a sustainable way to think about kind of the longer-term margins? Neil Brinker: Yes. So thank you, David. A few things, right? We're doing a lot of -- there's a lot of new, new products, new process, new plant, new people. And that's not efficient most of the time in these launches, and we recognize that. But every time we do this for every product that we ship, we learn from it. And when we learn from it, that's going to make us better. So as we work through the Grenada launch, we work through our Rockbridge launch in data centers, we learned a lot that we know that we can apply those lessons learned as we continue to roll out more chiller lines, for example, or more modular lines in different facilities in different factories. So it's the learning. It's the ability to get more efficient. It's our expertise in terms of design, design for manufacturability, design for quality, all those things that we're getting better at as we launch gives us the confidence that we'll improve the margins as we move out later in the calendar year. Michael Lucareli: Yes, David, the only thing I would add is that margin improvement is twofold, building what Neil said. So if you think about the challenges of starting a new facility or a new line. So one, I'd say our mature data center regions and plants are operating at margins at or above the segment. And we knew as we hold more volume into existing stable facilities, we could get the margin higher. Then as we launch a new greenfield, there's fixed cost absorption issues just to get to a scale to cover the incremental fixed cost. And then what Neil also covered in some of these cases where we've had extra labor or training, you have inefficiencies. So the message and how the ramp will work is we are -- as the new lines come on, we are now bringing on more volume to leverage our fixed costs. And as we get better at it, the negative on a normal conversion is inefficiency. We're also shipping away it and improving our processes. So it's a volume and a lean initiative, if you want to think about it that way. David Tarantino: And I want to follow up on Matt's second question, just given the acceleration in investments here, how are we thinking about this as it relates to the shape of the growth longer term to get to the targeted above $2 billion in sales by fiscal 2028. And I just want to clarify that, that is kind of a slight raise versus prior expectations? And if so, where -- what is the new target in terms of sales capacity in terms of the investments you're making? Neil Brinker: Yes. We -- I mean, we haven't come out with a specific number. We're always going to give ranges. But again, the order profiles, the new product launches, the new product development that we're working on, new regions that we see that are timed perfectly for our execution in terms of how we launch these facilities and factories and deploy the CapEx. So we just have a lot of visibility, and there's a lot of interest and there's a lot of desire for our products because of the technologies. We've put ourselves in a really good position over the last few years where we've acquired the right technologies. We've developed the right technologies. We've built the relationships with all the major hypers, neocloud providers, colocation providers. They're generally growing at pretty good rates. So we have -- our funnel continues to grow, which gives us the further confidence to deploy capital and to hire people to launch products. Operator: And moving next to Chris Moore with CJS Securities. Christopher Moore: Let's stay with data centers. So when you've talked about data centers in the past in terms of Modine's positioning, expected growth, one of the consistent themes has been you're focused on providing a relatively small subset of the market, exceptional products and services. So when you think about, just for example, $2 billion data center target in fiscal '28, just trying to get a sense as to how you view the total addressable market in calendar '27. I mean is $2 billion, is that 10% of the available HVAC market? Is it a bigger percentage of that? Just trying to understand kind of where that puts Modine in the overall kind of structure of the HVAC market on the data center side. Neil Brinker: Sure. Thank you for that. Around $2 billion -- and remember, the TAM is going to continue to grow as we've seen the amount of CapEx that's being deployed in the data center market across the board. So your TAM is expanding. And are we expanding at a similar rate. We're growing above the market. We're growing faster than the market. So we're gaining share. So we were single digit, low single digit when we started this journey. Last year, we got into double digit, low double digits. And if we get into the $2 billion range with some assumptions that we've made on market size and what that available market is that we can address, it probably puts us anywhere between 15% and 20% at that point, Chris. Christopher Moore: And maybe just my follow-up. Recognizing you don't necessarily look at your data center solutions discretely, air cooled versus liquid cooled. When you talk again about the $2 billion target, how do you view the relative contribution of air versus liquid at that level? Neil Brinker: Well, you need both in this space today. It requires both. They complement one another. But where we're seeing a lot of the growth and where we're seeing a lot of the demand with our closest customers is with the deployment of AI. So it's going to require a great chiller product, which we have. It's going to require the air cooling products that we have to help augment it and CDUs as well. So we're seeing the growth, and a lot of the growth is coming from AI expansion. Michael Lucareli: And on the margin, there's a relatively consistent margin profile across the product suite. Obviously, service is at the highest end, and we get a lot of questions on that. That will grow as our installed base grows over time, but the contribution margin is relatively consistent across our product suite. Operator: Our next question comes from Noah Kaye with Oppenheimer. Noah Kaye: I mean so much focus today on these margins and the incrementals, certainly for good reason. I may want to ask a different way. Is the right way to think about what's going on here that you've largely front-loaded a lot of the investments associated with the multiyear capacity ramp and that perhaps starting with 4Q, we started to see more normal incrementals in CS and specifically in data center. If that's the case, even though you're opening more plants over the coming years, again, what gives you confidence that we can see that kind of level of normal incrementals based off of the specific products that you're making and the configuration of the lines that you're setting up? Michael Lucareli: Do you want me to take that? Yes. Noah, it's Mick. Well, probably the best example we can give if we look at the last year, where 1.5 years ago or before that, we moved and we launched production of chillers in North America for the first time. And last year on the data center side, we were able to generate margins that were in line with the rest of the segment or the rest of our data center business. And if I recall, we had a quarter or 2 a really high margin on leveraging that volume, and we had a nice improvement last year. It really is about -- and Neil is talking about this, it's a rinse and repeat of products, existing products that we know how to make and doing that in a disciplined manner. Challenges can become when you're making a new product in a new location. But we're basically -- it's a copy paste of what we've been doing in the U.K. and in North America. So the bigger -- again, the bigger issue, like you said, for the first 6 months, it's literally getting the building, the equipment and then bringing in everyone and training them and bringing in all the materials. And then there's still a practice and an improvement as you launch. That to me is the biggest hurdle. And then once that's done, then we've been doing this for 10 years. We know what the profit margins will be. Noah Kaye: Yes. So then to put a finer point on it, what should incrementals look like as we get into '27? Michael Lucareli: Early to say in '27, but what I would say on incrementals is typically at a gross profit line, we'd be looking at a 30% type incremental gross profit to each dollar of sales when we're running at existing facilities, and we're adding more volume. Noah Kaye: And then just to ask one question on PT, bringing Jeremy and getting some traction on margin improvement. Maybe just talk a little bit about current focus areas for the business and any update on the divestiture process? Neil Brinker: Yes. Certainly, it's a great resource to have having Jeremy on board, and he's going to continue to drive the same playbook that we've been driving, continue stabilizing the business, making sure that we are running the business as efficiently as possible, stay close to our customers, continue to build out the order funnel -- the order and the funnel. So when we start to see some market recovery, we're put in a really good position that we can execute on platforms and programs that we've won through our innovation and technology. So it's the same playbook, and he's going to be able to accelerate that and bring some more structure around it. Noah Kaye: And any update on the divestitures or we save that for another call? Neil Brinker: Business as usual there. I mean we're always looking strategically in terms of what our best options are. I think we've got a pretty good history and a trend that through product line strategies that we can execute on those year-over-year. You've seen that over the last few years, and I'm pleased with where we're at in terms of the progress of that today. Operator: We'll go next to Brian Drab with William Blair. Brian Drab: Just given that we just touched on the Performance Technologies there, what are you seeing, Neil, in those end markets, off-road, on-road, demand for your components in those end markets over the next 12 months? Neil Brinker: Yes. We've been in this cycle for quite some time. I mean it's been 1.5 years. These cycles typically can last anywhere from 1.5 years to 2 years. And really following the trends and the announcements of the large OEMs to position ourselves for when there is a rebound in the market. So we're tracking that closely with our customers, the largest OEMs. We're looking at their inventory levels. We understand what programs we're on and where we can facilitate and turn on manufacturing faster, but it's -- we're reading the end markets through our OEMs at this point. Brian Drab: Okay. And my sense there is that it's stabilizing. I mean, would you agree with that? Or do you think there's another way... Neil Brinker: Yes. I think there's some recent reports, as of today that suggest there could be some stabilization and that the inventory levels are right. Those are early indicators. I'd like to see a trend first. But yes, that's fair. Brian Drab: Okay. There's -- no surprise, I'm going to ask a question on data center. So there's some massive projects, obviously, happening all around the world. And I'm just wondering, specifically in the U.S., some of these massive projects, I assume you'll be part of. Is there -- are you seeing any -- in some different regions where you don't have manufacturing capacity, maybe close enough to the site or service capability close enough to the site that have come up in the last several months where you're saying, okay, we're going to be -- we won this business, we're probably going to have to set up some new capabilities closer to one of these massive sites kind of like -- I think you're doing in Texas. Neil Brinker: Yes, it's a fair question. And yes, you're correct. There's opportunity to expand globally. Priority one is the United States. I mean that is where our biggest customers are. That is the biggest market, that's half the global market. We've got to make sure that we're executing and we're delivering on the products that are desired in this industry today, which we provide that improve total cost of ownership, improve power use effectiveness, improve water use effectiveness. We need to do that in the U.S. We need to do that well. And that's what we're working on. We've also launched in India recently. So we did our first pilot build there, and that new India facility will help us with our customers as they grow and not only in India, but in Southeast Asia as well. So that's another area that we have a disparate team that's focused on that, that is going to launch and follow our customers per their request. And then we're also seeing demand in Europe as well. We have our facilities there. We can support Europe. We're adding another chiller line there. We added a facility there last year, another 400,000 square foot facility to help expand and grow in Europe. And then lastly, we're seeing large opportunities, and we're communicating with potential customers with large -- in large region, particularly in the Middle East. So we have won some orders there. We've been able to service those orders out of our Spanish -- out of our Spain facility. And at some point in time, would we make some investments there, potentially. But with the current capacity that we have, we can serve the Middle East through India as well as Spain, and we're pretty comfortable with that. But definitely, we're global. Definitely, we see the reach. We see expansion, probably the biggest programs and projects outside the United States and Europe, we're seeing is in the Middle East. Brian Drab: Okay. And then just one more on that topic. Inside the U.S., when you won this opportunity in Texas, it came -- my impression was that it came kind of suddenly and was just this incredible opportunity that presented itself. Have you had any other situations like that or maybe as a result of that one, where there's -- you've had another giant project come your way over the last -- I guess, since we talked to you last on the 1Q call. Neil Brinker: Yes, yes. I mean we see -- for sure. And we're seeing these things, and it's -- we're on earlier stages. We're in earlier stages, and we have more ability to have influence as well. Operator: [Operator Instructions] And we'll go next to Jeff Van Sinderen with B. Riley Securities. Jeff Van Sinderen: Just since we're on the topic, in the data center area, is there any more color you can provide on maybe how customer concentration is evolving? You mentioned some other new customers you might pick up. I think at one point; you spoke to one -- there was one hyperscaler that you maybe didn't have yet as a customer. Has that converted to a customer? Are there still major new customers pending that could further increase demand? And then also just curious on the modular product demand, how that's progressing? Neil Brinker: Yes. Thanks for that question. We have great relationships with the hyperscalers, and we're building relationships with -- we're building further along with some of our new hyperscalers. We're advancing our products. We're advancing our discussions that gives us confidence that we can grow those. So if we think about the 5 major hypers today, 2 of them are the majority of what we do today. So there's a lot of expanding and expansion that can happen now that we have the networks inside the other 3 and now that we have the technical specs and capabilities that we've been able to prove and meet with them. So there's a lot of expansion just within the hypers today. And then you can expand outside of that with the neocloud providers. I think we've been very successful with one neocloud provider that gives us the ability to -- it's proven our capabilities that driven genuine interest with the others. And then geographically, we talked about some other areas that there are going to be some large players where we can expand. So certainly, there's the ability to do that. And the only reason why we have that ability is because we have the products and now, we have the relationships with the biggest -- with some of the biggest data center providers in the world. Jeff Van Sinderen: And then I think you mentioned in some of your earlier comments about having a wider aperture and generally improving visibility for the data center product demand. How far out can you see in the data center business at this point? And I know sometimes maybe customers pull sooner than you think. I think you spoke to that a little bit. What does demand for the data center solutions look like if you go out a year or 2 years or as far as you can see? Neil Brinker: Well, you're right. So some of these things are pretty urgent and sudden and they can be -- we want to do the best we can to please our customers, especially our largest ones. So those are things that we have a pretty quick reaction and we're very quick to react in terms of being able to produce and get that product out, albeit inefficiently, we can at least drive the revenue growth and satisfy the customers' demand. But when that's not the case, and you have -- it's more strategic and you're working with customers that are thinking about where they're going to advance and where they want to move and deploy capital. We can see anywhere from 3 to 5 years out. And I would say with the majority of our largest customers, we have that visibility. And that's really helpful in terms of allowing us to make sure that we're strategically deploying capital in the right places and that we're adding the facilities and factories in the right regions. Jeff Van Sinderen: And then... Neil Brinker: I mean one example of that is what we did in India, right? I mean that was in place. We talked about that a year ago, and we want -- the major driver to move and have facilities and capacity in India was because our customers ask for it. They specifically said, hey, we're going to be here in a couple of years, and we need your help and support. Are you guys willing to invest in that region? So that's a good example of the outcome of having these conversations years in advance so that we can have the facility up in time. Jeff Van Sinderen: Right. So in other words, you're not going someplace with a new facility where there might not be demand, you're really -- you're building to demand. Neil Brinker: Correct. For the -- yes, we're building to demand and the demand is high. There's great demand for our products. There's the technology and the solutions are premium in the marketplace, and we see it. And that's why we're deploying the amount of CapEx that we are. Jeff Van Sinderen: Okay. And then if I could just squeeze in one more. Just on the CDU part of your business, I guess, how do you see the liquid cooling business evolving? Maybe does that become a concentration business for you? How much of the business do you think liquid cooling could comprise, I don't know, a couple of years out? Neil Brinker: Yes, that's specific direct-to-chip liquid cooling. All of our products can apply in the liquid cooling space. You need our products for that. The air cooling solutions will apply in the liquid cooling space. If you get direct-to-chip, CDUs are certainly beneficial and helpful. I continue to see that market evolve. I think there's been some new technologies in that space. I think there's some interesting areas that we've helped our customers in terms of providing different ways of doing that. And you can see some of those announcements out there. So we'll have a product. There will be customers that need it, but not everybody in order to do liquid cooling. And it's just one more -- it's one more product in an ever-evolving suite of products that we have. And we'll always try to do it in a way to differentiate. So it's not a me-too product. So we'll do it a unique custom bespoke CDU for our customers tied to our firmware and software. So it does things that others can't do, and it's differentiated. But again, it's just one more product in a series of products that we have that continue to evolve. Operator: And we have a follow-up question from David Tarantino with KeyBanc Capital Markets. David Tarantino: Could you just give us some color on the range of outcomes you embedded within the ramp implied in the second half? Just kind of what's inside and outside of your control in terms of hitting both the sales and margin targets this year. Michael Lucareli: Yes. We really tried to take it, as we always do, David, down the middle. We've got, as Neil said, one of the challenges we're trying to balance is the demand has increased. Neil has said this before multiple times, but the more we can make, the more we can sell. So we've aligned to internal targets that we're stretching to get to from a manufacturing, and we've pulled those back and both with customers, so we don't disappoint them and with guidance where we've tried to kind of strike down the middle. On the other side, you always have risk that you have a hiccup with a line or some more inefficiencies. But I would say, as we look at it now, we try to go right down the middle. In addition, we talked a lot about the chiller ramps. The other areas where we're getting equal right opportunities for more [indiscernible] on the air side. And certainly, a lot of customers are interested on the modular side, even though those are early days. And those are things we've tried to balance -- keep to balance out the chiller launch risk as well. David Tarantino: And then maybe one more, if I may. Just on HVAC technology and the weakness there. Could you break out kind of the underlying trends between the core business and the recent deals and how we should expect this to progress through the balance of the year on both the top and margin lines? Neil Brinker: Yes. I think generally, the acquisitions are on target. They're doing what we would expect them to do. The indoor air quality business is performing well. It's in line with what we expect at market rate. And what we're entering now is what we call our heat season. This is -- the next couple of quarters for the heat business is going to be big for us. So that's the traditional Modine heaters as well as the L.B. White acquisition. This is the time of year where we start to see our customers and distributors really start to draw on our inventory levels. Michael Lucareli: Yes. And just a quick couple of numbers on that to help you out in, as we look at the total segment for CS in there with the acquisitions, we would assume HVAC Technologies would have growth -- total growth well over 40%, 45%. And organically, that would be mid- to high single-digit organic with the balance being from the acquisition. Operator: And that does conclude our question-and-answer session. I would now like to turn the conference back to Kathy Powers. Kathy Powers: Thank you, and thanks to everybody for joining us this morning. The replay will be available through our website in about 2 hours. Thanks. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Operator: Hello, and welcome to The Vita Coco Company's Third Quarter 2025 Earnings Conference Call. My name is Daniel, I'll be coordinating your call today. Following prepared remarks, we will open the call to your questions with instructions to be given at that time. I'll now hand the call over to John Mills with ICR. John Mills: Thank you, and welcome to The Vita Coco Company's Third Quarter 2025 Earnings Results Conference Call. Today's call is being recorded. With us are Mr. Mike Kirban, Executive Chairman; Martin Roper, Chief Executive Officer; and Corey Baker, Chief Financial Officer. By now, everyone should have access to the company's third quarter earnings release issued earlier today. This information is available on the Investor Relations section of The Vita Coco Company's website at investors.thevitacococompany.com. Also on the website, there is an accompanying presentation of our commercial and financial performance results. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also during the call, we will use some non-GAAP financial measures as we describe our business performance. Our SEC filings as well as the earnings press release and supplementary earnings presentation provide reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and are available on our website as well. And with that, it is my pleasure to now turn the call over to Mike Kirban, our Co-Founder and Executive Chairman. Michael Kirban: Thanks, John. Good morning, everyone. Thank you for joining us today to discuss our third quarter financial results and our expectations for the balance of 2025. I want to start by thanking all of our colleagues across the globe for our continued strong performance, particularly in a very fluid environment and for their commitment to The Vita Coco Company and advancing our mission of creating ethical, sustainable, better-for-you beverages that uplift our communities and do right by our planet. Although I'm incredibly pleased with our third quarter performance, I'm even more excited by the underlying momentum in our category and our very high execution levels, which bodes well for our future. Coconut water remains one of the fastest-growing categories in the beverage aisle, growing 22% year-to-date in the U.S. and 32% in the U.K. based on Circana data and over 100% in Germany based on Nielsen data. This, coupled with our significantly improved inventory position versus last year, has resulted in very strong retail growth for our brand. Year-to-date, according to our retail data, Vita Coco Coconut Water, excluding our coconut milk-based products like Treats is growing 21% in retail dollars in the U.S., 32% in the U.K. and over 200% in Germany. This has led to similarly strong global net sales, gross profit, net income and adjusted EBITDA performance for our third quarter. Year-to-date, our international business is accelerating, driven by strong performance in Europe. Our increased investment this year in the U.K., Germany and other select European markets is paying off with healthy growth and brand share wins. The acceleration of the category that we saw in late 2024 has continued through 2025, which, combined with improved inventory and strong execution is producing exceptional year-to-date results. Looking forward, we expect to maintain strong growth trends as we invest in and develop the coconut water category in our priority markets and our asset-light model and strong cash generation position us well to take advantage of the opportunities ahead. Big picture, I believe that the coconut water category is in the very early stages of gaining mainstream appeal on a global level. Coconut water looks to be transitioning from niche to mainstream, and we are at the forefront of that trend. If we can continue the household penetration and consumption gains that we are seeing, I'm confident that coconut water will one day be as large as some of the major beverage categories across the beverage aisle. And now I'll turn the call over to our Chief Executive Officer, Martin Roper. Martin Roper: Thanks, Mike, and good morning, everyone. I'm pleased to report Vita Coco's continued strong performance in the third quarter. Net sales in the quarter were up 37%, driven by growth of Vita Coco Coconut Water of 42%, benefiting from strong growth in the coconut water category and improvements in our available inventory and service levels. Our branded scan results in the United States were very strong, even with a slight drag in our scans created by the changes in the Walmart set late last year, which we estimated was a mid-single-digit drag to our total U.S. branded scans in the third quarter. We are benefiting from strong volume growth and the impact of the 2 price increases taken in the U.S. this year, the first in mid-May to cover our normal inflationary cost of goods increase and the second in mid-July to cover the dollar impact of the 10% baseline tariffs announced in April. The cumulative effect of these price increases on shelf in the U.S. is best viewed on a 2-year basis, which is showing as approximately 7% in the last quarter according to Circana. To date, we think the price elasticity impacts from these increases are within expectations. but we need more time to understand the impact of the July increase and to see competitor moves before thinking about any further price increases to cover the additional tariffs announced in August. Since November last year, we have been in the juice set at Walmart with significantly reduced assortment. We currently expect this juice set to be reset in mid-November. We've been told that our current total points of distribution will grow significantly compared to the current sets and also above levels we had before the move to the juice aisle. We are optimistic that we don't have complete visibility to understand the competitive dynamics of the new set and the actual shelf space allocated for our SKUs beyond the expected distribution gains. The private label business remains strategically important to us with greater uncertainty on costs, particularly due to the announced tariffs and some intermittent service issues from some of our competitors as the category accelerates, there have been more inquiries than normal about our private label services. In addition to the new U.S. private label relationship announced last quarter, we now expect to regain in early 2026, some private label service regions with key retailers that we had previously lost. We view this as a positive signal on our quality, service and pricing and reinforces our belief in the competitive advantage of our supply chain. Other than increasing tariffs and slightly softer ocean freight, our cost of goods has been pretty stable since we last spoke to you. We believe ocean freight rates during the quarter were still elevated relative to historical levels, but we saw rates soften through the quarter and since quarter end. We are operating primarily on spot rates with some fixed price arrangements on certain lanes to secure capacity, which allow any lower rates to benefit our P&L probably early next year, depending on the timing of inventory flows. Corey will cover our outlook for the balance of the year. For 2026, the most difficult element to predict is the applicable U.S. tariffs we'll be operating under. During the quarter, there were signals that the administration is willing to offer exemptions for products related to natural resources not available at scale domestically to meet U.S. demand, which gives us more optimism that coconut water could potentially receive waivers. If we do not receive any waivers and tariffs are uphold, we will continue our mitigation efforts. And ultimately, if significant tariffs remain and other offsets like ocean freight are not sufficient, we will evaluate the potential to take more pricing next year to further mitigate the impact of tariffs. We have a global diversified supply chain, which positions us well to deal with the dynamic U.S. tariff situation. The majority of our supply comes from the Philippines and Brazil, with the remainder principally coming from Thailand, Vietnam, Malaysia and Sri Lanka. Our current weighted average tariff rate on coconut water shipping to the U.S. from source country at the end of the quarter is estimated at a blended rate of approximately 23%, which is before any significant moves to mitigate the 50% tariffs on coconut water from Brazil. We are currently seeing tariffs into the U.S. applied to approximately 60% of our global cost of goods and believe that this is a good approximation for the cost of goods that U.S. tariffs are applied to. We are developing and executing plans to avert some of our Brazil production to Canada and Europe and to cover U.S. demand more completely from Asia, which could help further mitigate our average tariff rate. We have started preparations for this diversion but may choose for service and responsiveness reasons to source some production from the U.S. from Brazil on an ongoing basis. As the applicable tariff rates change in the future, we will adapt our plans. To summarize, our category is very healthy. Our brand is performing well, and our supply chain is supporting very strong growth and together with potential future pricing, we believe that we'll be able to mitigate the potential tariff impact long-term and to remain very competitive in our markets. We are confident in our team's ability to execute and deliver our plans for the balance of 2025 and 2026, and our confidence in the category and Vita Coco brand trends remains very high. Longer-term, we believe that we will benefit when ocean freight rates return to historical levels and that when all of our tariff mitigation efforts are in place, this should allow us to achieve or beat our long-term financial targets. With that, I will turn the call over to Corey Baker, our Chief Financial Officer. Corey Baker: Thanks, Martin, and good morning, everyone. I will now provide you with some additional details on the third quarter 2025 financial results and our outlook for the full year. Net sales were very strong for the third quarter, increasing $49 million or 37% year-over-year to $182 million. Vita Coco Coconut Water grew 42% and private label grew 6%. Our quarterly results benefited from the continued strong category growth, the restoration of a key club retailer promotion in the U.S. as well as the depressed third quarter reported last year when we were significantly inventory challenged. Please note that the key retailer promotion that ran in late Q3 and early Q4 this year has created unusually healthy scan trends in the U.S., and I would suggest that you look at a 2-year growth rate for an appropriate reading on the underlying momentum. On a segment basis, within the Americas, Vita Coco Coconut Water increased net sales 41% to $132 million and private label decreased 13% to $14 million. Vita Coco Coconut Water saw a 30% volume increase and a price/mix benefit of 8%. The branded price/mix benefit was driven by the cumulative effect of our 2 price increases in 2025. Our other product category grew 182%, primarily reflecting the national launch of Vita Coco Treats. Our international segment continued to deliver exceptionally strong results in the third quarter with net sales up 48% and Vita Coco Coconut Water growing 47%, driven by strong growth across our major markets. Private label sales increased 70% due to strong sales of private label coconut water within our current customer base. For the quarter, consolidated gross profit was $69 million, an increase of $17 million versus the prior year. On a percentage basis, gross margins finished at 38% for the quarter. This was down approximately 110 basis points from the 39% reported in the third quarter of 2024. This decrease in gross margin resulted from higher year-on-year finished goods product costs and the baseline 10% import tariffs announced in April, plus a very minor impact from the August tariffs that collectively created a $6 million tariff impact in the quarter. This was partially offset by our combined pricing actions and lower year-on-year ocean freight expense as well as the recovery of a reserve for private label packaging. Moving on to operating expenses. SG&A costs increased $10 million to $41 million within the quarter, driven primarily by higher people-related costs and increased marketing expenses. Net income attributable to shareholders for the quarter was $24 million or $0.40 per diluted share compared to $19 million or $0.32 per diluted share for the prior year. Net income benefited from higher gross profit and a lower year-on-year tax rate, partially offset by higher SG&A spending and the lower gain on derivatives than in the prior year. Our effective tax rate for the third quarter of 2025 was 22% versus 25% last year, which is primarily driven by the discrete tax benefits and a favorable geographic mix of pretax profits. Third quarter 2025 adjusted EBITDA was $32 million or 18% of net sales compared to $23 million or 17% of net sales in 2024. The increase in adjusted EBITDA was primarily due to higher net sales and gross profit, partially offset by higher SG&A expenses. Turning to our balance sheet and cash flow. As of September 30, 2025, our balance sheet remained very strong with total cash on hand of $204 million and no debt under our revolving credit facility. We have generated $39 million of cash year-to-date, driven by our strong net income, partially offset by increases in working capital, primarily due to increased accounts receivable. Our updated guidance reflects our current best assumptions on marketplace trends and timing of our shipments as well as the continuation of the U.S. tariff levels announced in August. Based on our current trends, we are raising our full year net sales guidance to between $580 million and $595 million. We expect full year gross margins of approximately 36% with higher finished good costs, including tariffs relative to last year being partially offset by our increased pricing and slightly lower logistics costs. The impact of U.S. tariffs announced in April and August has increased through the year. For the full year, we expect to see an increase in our cost of goods of between $14 million and $16 million versus the prior year. We expect our average tariff rate on imported U.S. goods to peak at the previously mentioned rate of 23%, and this should start hitting our P&L late in the fourth quarter, depending on actual sales and inventory usage. Our sales expectation is based on a tougher Q4 net sales comparable to last year when we benefited from distributor and retail inventory rebuild. We expect full year SG&A expenses to increase high single digit versus 2024. This, combined with our expected higher net sales is resulting in a higher adjusted EBITDA guidance of $90 million to $95 million. Our full year SG&A increase is due to increased people investments, including increased incentive and stock compensation and higher year-on-year sales and marketing expenses and other focused investments to support the delivery of our growth objectives as we aim to maintain a strong branded growth momentum into 2026. We look forward to providing additional updates and formal 2026 guidance on our next earnings call. And with that, I'd like to turn the call back to Martin for his closing remarks. Martin Roper: Thank you, Corey. To close, I'd like to reiterate our confidence in the long-term potential of The Vita Coco Company, our ability to build a better beverage platform and the strength of our Vita Coco brand and the coconut water category. We are confident in our ability to navigate the current environment and are excited about our key initiatives to drive growth. We have strong brands and a solid balance sheet and believe that we are well positioned to drive category and brand growth, both domestically and internationally. Thank you for joining us today, and thank you for your interest in The Vita Coco Company. That concludes our third quarter 2025 prepared remarks, and we will now take your questions. Operator: [Operator Instructions] Our first question comes from Bonnie Herzog with Goldman Sachs, your line is open. Bonnie Herzog: I had a couple of questions on your guidance. First, you raised your top-line growth guidance, but it does imply a sharp decline of about 15% in Q4 at the midpoint. So I understand you've got a tough comp in the prior year to lap, but I guess I wanted to better understand this expectation. Was there a pull forward of shipments from Q4 into Q3, for instance? Is there anything, I guess, in particular, expected in Q4 as it relates to private label? And then on EBITDA, your new guidance implies a big ramp in growth in Q4. So could you give us some more colour on the drivers of that expected acceleration? Michael Kirban: So from a top-line perspective, as we've talked about, we've been focused on the full year. And the quarters, especially around Q3, Q4 are quite hard to tell. We would ask you to take a look at the 2-year stack, which in the underlying base business is still very, very strong. Half 2 and quarter-on-quarter is showing double-digit growth on a 2-year CAGR in the underlying business. And we do have the current trends of the private label business, which as we talked about in Q2, I believe Q2 was down in the mid-30s. We would expect that trend to continue. Martin referenced new private label business starting in 2026. At this point, we don't expect any impact from that, but we may get some -- as you know, the timing of private label is quite challenging, so at the midpoint, we feel there's still a strong underlying growth trends embedded in there, offset with the private label. And then from an EBITDA perspective, we've embedded the tariffs at the 23%. We currently see inbounding to the country. Those will gradually increase through the quarter, peaking at that 23% roughly at the end of the quarter. And then it's the current level of pricing. Bonnie Herzog: Okay. And just want to verify, there's nothing that we should think about as it relates to inventory levels in terms of Q3 versus Q4? Nothing to call out there? Michael Kirban: Yes, it's quite hard for us. We don't have complete visibility to inventory, which is why we stay focused on the full year. Q3 had the large retailer promotion. So the timing of that may have been a little heavier in Q3. And as we've talked about, we expect improved distribution at Walmart, how that shifts to distributors and exactly when that inventory will pull is hard to call as well. So I would stay focused on the 2-year second half trends, maybe and you'll see a very strong growth. I would just add that I think we think distributor inventories at the end of the quarter were healthy and sort of ready to support the Walmart set process. And obviously, how those adjust through the end of the year, as you know, can produce a little bit of noise at the end of the year, but we currently think inventory levels are appropriate based on the activity we see in Q4. Bonnie Herzog: Okay. Super helpful. And if I may just squeeze in a quick question on private label because it certainly has been a focus, and you touched on this, hoping for maybe just a little bit more color on what you touched on the recent private label customer wins. How do we think about these wins, meaning offsetting some of the prior losses, if at all? And then as you think about your private label business, how do you believe it's advantaged maybe versus peers? And how do we think about your approach to private label next year and beyond? Is this something you're going to aggressively pursue? Michael Kirban: Yes. I think as we've said all along, Bonnie, we view the private label business as one that's complementary to our brand on a number of factors, both on the supply chain side and the retailer relationship side. And so we intend to continue to seek private label business or regain private label business and be competitive in it. As it relates to how we think about our competitive position, we believe that we are uniquely placed to provide large private label programs with diversified supply of private label across multiple countries, multiple factories. And we also believe that some of our sourcing leads to a cost advantage and a service advantage and a quality advantage. Now that doesn't always play out in how those bids are awarded. And so it hasn't all been wins, but we certainly believe that we are strategically well positioned to compete going forward. As it relates to your question, we're obviously not providing any sort of '26 guidance here. What I would say is that we recovered some of the regions that we lost, but not all of them. So we still have some headwinds next year, which may or may not be offset by some of the wins on the new customer front. But it's sort of, you know, to us, we lost regions early in the year, and we're regaining some of them. To us, that shows that our sort of supply position is competitive on a quality service and price perspective. And it gives us hope that we can recover more, but obviously, there are no guarantees and nor have anything been announced or those are more expectations and hopes over, let's say, a multiple year period as opposed to a single year period. So I think next year, private label probably will still be a slight drag for us, but obviously, the category on a lost business basis. But the category is very healthy. It's growing. The private label business that is retained is growing because the private label business is healthy, too, similar to the category. So again, I would just say we're optimistic for a good '26, but we're not in a position to provide guidance. Operator: Our next question comes from Chris Carey with Wells Fargo Securities, your line is open. Christopher Carey: The implied Q4 gross margin, a couple of questions there. So the first is just the Brazil tariffs. Is it reasonable to assume that Q3 did not include much of those and those will be heavily concentrated in Q4? And so I'd love some perspective on that because Q4 has some seasonality that is lower than Q3, but there's also this new cost factor. So I'd love maybe a bit more detail on how you see that impact. The second thing is how are you thinking about some of the headlines around tariff? What are some of the key markers that you're looking for as it pertains to Brazil? The reason I ask is because at what point do we start thinking that you may need to take some pricing going into the front half of next year? How long will you assess the tariff backdrop before making that decision? Michael Kirban: I think for starters, the headlines are interesting and definitely worth looking into. I mean, the numbers that we've given in terms of what tariffs look like for us as of the end of the quarter are -- could change. And this is what we're dealing with is the uncertainty around it. I mean if you look at the headlines over the weekend, obviously, Trump and Brazil's President Lu had a good meeting and have committed to getting a trade deal done and Brazil has asked for relief on the 40% reciprocal tariff. It hasn't been denied, hasn't yet been approved, but we're hopeful that we'll see some changes on a positive level as it relates to Brazil. And then even as you look at some of the other trade deals that are getting done, if you even look at Cambodia and Malaysia, which happened this weekend, coconuts are listed as excluded from the tariffs in those trade deals. Coconut water is not yet. This is something, obviously, we're hopeful for and working on. But I think it's pretty clear that the administration is looking to exclude unavailable natural resources. We've just got to make sure that coconut water is recognized. And so as these trade deals continue to get done with different countries which we source from, we're hopeful that we'll see some improvement to the tariff numbers that we've talked about. But as of now, that's where we stand. Martin Roper: And Chris, going back to start of your question, which was did the increased tariffs from early August hit the Q2 P&L. Maybe, Corey, you could take that. Corey Baker: Yes, Chris, it was a small amount. If we think of the tariffs as April and August, the August tariffs had very little impact on Q3, a slight bit at the end, and that will ramp-up towards that 23% rate. And we anticipate that would hit late in the quarter, November, December time frame and then be at that steady rate through next year, barring any of these changes we're hopeful for. Martin Roper: And then, Chris, relative to your pricing question, we took pricing in July to mitigate the 10% baseline tariff from April on a dollar basis, right? And I think we indicated in the call that, that was showing up as like a 7% pricing on Circana on a 2-year basis comparison to 2 years ago is how it's showing up. And that would, I suppose, also include the May. So that's the impact of both pricing. We're still monitoring the impact. There's certainly been a slight volume decline with the pricing, but in line with our expectations, but we want to monitor it. We're also monitoring competitive actions and movements on private label pricing, where we expect private label pricing to follow the tariffs rate because it's a cost-plus business model for our retailers. And so we're monitoring that to see what happens. We don't feel in a rush to sort of mitigate further the tariffs while we wait for that. We're also working on the mitigation strategies, particularly as it relates to Brazil, which is the outlier in our tariff environment at 50%. And those mitigation activities revolve around taking Brazil production to other countries other than the U.S. it's not as simple as just a switch because you have to get packaging in place, you have to get approvals in place. So we're working to be able to do that over the next few months and certainly complete that if the Brazil tariffs stay in place by the end of next year. So we want to see how those mitigation efforts go. You said the tariffs is very fluid. It is obviously very fluid. We don't want to take price if we effectively have to give it back. So we're thinking we'll make pricing decisions in Q1 that might take effect Q2 based on our view on where tariffs are and mitigation actions are in Q1. We're reserving the right to take pricing or not take pricing based on what we see in the marketplace and what we think is right for the brand long-term. Christopher Carey: Perfect. A quick follow-up or perhaps not, but international, just give us a sense of where we are in the international journey. I suppose you're going to say early, but it's really starting to come through. So how are you thinking about the growth runway in international? And just remind us on your capacity to service that international market given your supply? Martin Roper: Yes. Let's start with the capacity. As we sort of have talked about for like the last 18 months, we started adding capacity because we saw the category accelerating both in the U.S. and in our core markets internationally. And so we've been adding capacity to support growth rates in the mid-teens or a little bit higher, and that is progressing well. It's a lot of work and a big shout out to the team involved. We're adding 1 to 2 or more factories a year. And it's -- there's a lot of hard work going on in that. So we don't see a capacity issue in supporting this over the next few years. And then as it relates to your international question, we view category development in our core markets internationally, which we would describe as the U.K. and Germany as being underdeveloped versus the U.S. And I would refer you to our investor presentation from June, where we provided an estimate of consumption per population, right, by different countries. So you'll see there that the U.K. is about 1/3 of the U.S. Germany is like 10% of the U.S. So it's pretty early. And obviously, the U.S. is still growing. So we see it as early innings. And I think big picture, longer-term, the way we think about it in our 5-, 10-, 15-year planning, I suppose I do 10-year planning, Mike does 5-year planning. We want Europe to be as large as the U.S., right? So is it possible that, that could happen? Absolutely. Populations are good, demographics, income levels, health orientation are all good. So we think coconut water is still in early innings in Europe. Operator: Our next question comes from Robert Ottenstein with Evercore ISI. Robert Ottenstein: And congratulations on another terrific quarter. I want to kind of double or triple click down on international, which just seems super exciting. So just to help us get a little bit more granularity on the business. Can you give us a sense based on what you've learned today, how the international market in terms of Europe, is there a significant difference in terms of the consumer occasions and how they look at the category? How would you compare the competitive intensity in Europe versus the U.S., margin profile? And then just in terms of this quarter, was there anything unusual that perhaps flattered the results? Martin Roper: Yes, sure. I'll try and get to all of these. Let's see, international is very exciting. International for us is sort of largely Europe. That's where the strength is. It's led by the U.K., which was launched about 11, 12 years ago, probably a little bit off on that, but effectively 10 years behind the U.S. in its launch trajectory. In the U.K., there is a healthy category, but our brand has over 80% share of it. It is largely cold in the stores, which is a difference to obviously the U.S. where we're warm shelf. And the competitive players sort of really don't -- aren't that strong because with over 80% share, there's not -- no one really talk about. About 5 years ago, Innocent juice had a coconut water brand that probably had 10%, 15%, 20% share, but that has largely been squeezed down to low single digits. And so we have a very strong position, and we're focused on growing the category and then obviously maintaining our share of the category. As the category growth continues, obviously, retailers get excited and they introduce new brands, et cetera, but it's largely small stuff, and I don't think we see any impact from that. But would I expect the competitive environment to continue to be active? Yes, of course. The rest of Europe, for the most part, has been small for us up until about 2 years ago. We put a commercial leader into Germany to try and open up the private label business. In a lot of the rest of Europe, private label is actually a very big player in coconut water, whereas in the U.K., it isn't as big a player. And in many of those countries, private label is the largest sort of nonbrand brand, but obviously, it's across multiple retailers, but it's very significant. So we led with developing retail relationships with private label, and that then allowed us as coconut water growth started to take off, we were asked whether we bring the brand in, and we were able to do so. We're in very early innings in Germany. We have national authorizations. Germany retail is interesting in that national authorization doesn't result in distribution in many of the retailers, you have to then go get a regional approval and then actually go store or store collective to get -- to build that out. So we're in pretty early innings there. And as I look at the next 2 years, the blocking and tackling is actually delivering on the national distribution that we've been awarded by selling it at the regional and the local level. And that's probably a multiyear task. Interestingly, as we launched Vita Coco into Germany, we saw the category growth accelerate. I think that's partly because there aren't strong brands there that are investing and have good brand recognition. And we've been able to gain a very significant piece of that growth. So we've gone from effectively 0% branded share to a healthy brand share by grabbing that growth. That said, the private label business has also accelerated. So it's been good for the category. And obviously, we try and compete in that. So we're trying to take some of the learnings from these markets. They're different than each other, right? And they're different both on where the category is and the retail environment and think very carefully about which markets to prioritize next, obviously, with a weight on maybe the larger markets like France and Spain. But we're also testing different routes to market in more fragmented markets like the Benelux, which is currently growing very healthily for us through a partnership with the distributor there. So we have different models that are working. And I think we're happy to be patient, and we're not trying to blast it out and overstretch ourselves. We're trying to build it from the ground up, and we feel pretty good about healthy international trends for the next few years based on that European business. You asked about margin. We mostly do not use distributors. We do have some reps. There are some distributors for small markets. So there isn't a distribution layer. It's direct to retail. So pricing in the market is lower than in the U.S., pricing to consumer because of that. And margins are good. It benefits from lower ocean freight costs from Asia to Europe mostly. So that can support a lower price structure. But the margins are perhaps maybe on a branded side, a little less than they are in the U.S., but they're still very nice and appealing. And I think I've touched on every one of your questions, but if I miss one, please re-ask. Robert Ottenstein: Yes. Just was there anything in this quarter on the international that flattered results in any way? Martin Roper: Just strong demand. Michael Kirban: Yes. Operator: Our next question comes from Christian Junquera with Bank of America. Christian Junquera: Just 2 questions. A quick clarification question. Just the tariff impact for 2025, did you guys say $14 million to $16 million? And if so, that implies a blended tariff rate for this year about like 6% to 7%. And then the expectation or what you guys are expecting is it jumps to 23% in 2026. Did we catch that correctly? Corey Baker: The $14 million to $16 million, Christian, is correct. The percentage, the 23% is of the applicable finished goods amount, which we've quantified as approximately 60% of our global cost of goods. So I'm not sure of your -- the math you have on, 6%. Martin Roper: So you have to remember that the tariffs were imposed initially in April, first week of April at a 10% rate. And what hits our P&L is delayed by when those tariffs flow through our inventory. So as an example, a 10% tariff applied on April 7 to a container leaving Asia wouldn't arrive in the U.S. until maybe early June and then wouldn't get sold out of our inventory probably until July. So our tariff impact in Q2 didn't really MERIT talking about. So we didn't talk about it in Q2 as a dollar amount. We talked about $6 million impact in Q3, which would largely reflect the 10% baseline tariff imposed in April because that would be the inventory flowing through our P&L in Q3. And as Corey indicated, the blended tariff rate based on our current sourcing at the end of the quarter is 23% of containers shipping at the end of the quarter from source. That rate will which is the rate that effectively was put in place in early August, flows into our P&L in mid-late Q4, but is the rate that is applicable for next year. So that's the reason that the $14 million, $16 million looks small to you because effectively, it's on half year and effectively, at least half of that year is only at 10% -- sorry, half of that 6 months is only at 10%. Does that make sense? Christian Junquera: Yes. Yes. That's very, very helpful. Thank you for the clarification. And then if we just can go into -- and you've talked about it, but just the levers to offset the higher tariff rate for next year, right? You guys have the higher pricing that you took this year that's going to carry over. And I mean, potentially lower ocean freight. I mean looking at the chart, it looks like rates keep going down. Do you have any expectations for ocean freight next year? And I don't know if I'm missing anything else, any other levers at your disposal. Michael Kirban: I mean that's the biggest benefit. That is the biggest benefit for the offset ocean freight... Martin Roper: We're talking to suppliers and trying to work out things that we can do, but this isn't a particularly large margin business for them. Obviously, we're asking whether their governments can help as well, right? We're trying to optimize our sourcing to take advantage of the different tariff rates. But really, that means trying to avoid Brazil, if we can, right? And the base pricing we took in July that was, again, incremental to our May pricing was designed to cover the dollar impact of the 10% baseline. Obviously, we're evaluating the impact of that. And if we think we have to take more pricing and it's prudent given the competitive environment and our brand trends and everything else and all our mitigation efforts, then we will consider it. But we're a little reluctant to rush into pricing if indeed some of these tariffs may be waived under the trade agreements that Mike was talking about. We obviously have the Supreme Court case coming up next week, which may or may not also declare that the tariffs don't apply. So we're a little reluctant to rush into pricing until we get a better feel for all these impacts. Operator: Our next question comes from Jon Andersen with William Blair. Jon Andersen: A couple of questions. We talked a lot on the call about headwinds from ocean freight -- ocean freight tariffs, I'm sorry. But I did want to ask a little bit more about ocean freight because the rates look like they've been cut in half year-over-year, and that started happening earlier this year, the decline year-over-year and down 50% starting in the midyear. And I think you're operating of, as you pointed out, a lot of spot situations right now. And again, I don't know the exact kind of composition of your cost of goods, but the freight piece seems like a big piece of the cost of goods. And if that's come down to that degree, it seems like that would be much more impactful than the tariff piece here. So we'd be looking at a pretty good margin outlook -- gross margin outlook for '26. How do you kind of think about that? Martin Roper: So one way to think about that is we've indicated that the tariffs applied to 60% of our global cost structure. If you apply 23% to that, you get -- come out at like 13% of our revenue is tariffs. That's a huge number, right? And the last time ocean freight spiked, which was '22, really spiked. We talked about a total transportation impact of $65 million, which included domestic transportation, and we said 2/3 of it was ocean. So the ocean freight, you can extrapolate an ocean freight number from that $65 million, and you can get back into -- that was when rates were $10,000, $12,000, $14,000, right? So ocean freight is an important part of our cost structure, but I would caution you not to overestimate it and to use those data points that we've provided. And I'm going to say, Corey, did we provide a percentage of transportation costs in one of our investor presentations. Corey Baker: A few times in the years, we have in the range of 1/3, but it varies up and down and... Martin Roper: Up and down based on ocean freight... Corey Baker: Yes. We haven't quantified the tariffs, obviously change that equation. Martin Roper: Yes. So I think, Mike, said earlier that ocean freight is an important opportunity for mitigation. And obviously, we're not actually doing anything. We're benefiting from market changes. So it's a benefit from market change that can be an offset. But the tariff impact, if it were to stay, is pretty significant. You mentioned what's going on with ocean freight. If you look back a year on the indexes, the indexes were in the low 3,000s, and they're currently sort of -- I'm looking at the global index, it's currently in the low 2,000s. So it's down 33%, but it went up last year and had a couple of peaks that cost us, right? So yes, current ocean rates are lower than they've been for at least a year, but the change is perhaps not as big as the 50% as you were talking about, like it's not down 50% versus a year ago. Jon Andersen: And what -- I think I have in my notes that ocean -- well, freight in aggregate in COGS is 30%, 35%. Is that -- with the balance being finished goods? Is that a reasonable way to think about it? Michael Kirban: I believe that number is transportation and logistics. So it's warehousing, drayage, ocean freight, internal transportation, distribution, et cetera., ocean freight is a subset of that number. Jon Andersen: A component of that 1/3 of COGS or so. Okay. The other question I had was just on the guidance. I haven't -- I guess the guidance implies 4Q sales of around $105 million, which looking at what you did in Q3, $182 million, it's like a 42%, 43% sequential decline in sales from Q3 to Q4. We haven't seen anywhere near that kind of a seasonality or change in the past. I know there's a little bit of seasonality, but again, a 45% decline is big. Any -- I just want to make sure I understand what's causing that. Michael Kirban: Jon, I don't see those levels of declines year-on-year, but maybe we're... Jon Andersen: No, sequentially, sequentially. Martin Roper: So Q3 was very big. We benefited from the major promotion that we skipped last year, right? Michael Kirban: And it erodes from the out of stock. Martin Roper: So I would just -- obviously, there's lots of moving pieces here. But on branded, maybe you look at the decline in '23, which would have been a comparable year on a promotional side. And then obviously, we have the private label decline that we prefer you to look at in Q2 rather than the Q3 number. So it's tough modelling Q4 for us and we're providing the best view that we can. And again, we have some uncertainty on exactly how the private label falls through the end of the year and into next year. So it's just -- that's one of the reasons for me taking the ranges. Michael Kirban: That feels like maybe the bottom or below the guidance range. Is that -- so we can follow up. Martin Roper: Yes. Operator: Our next question comes from Michael Lavery with Piper Sandler. Michael Lavery: Just wanted to touch on capital allocation. You mentioned now your cash balance over $200 million. I know in almost the same breath, you point out the share buyback authorization, though it's a small piece of that even if, of course, you always reauthorize more. But what's the expectations for use of cash? I know you've always had M&A on your kind of to-do list, but it hasn't been a big factor ostensibly because there hasn't been something interesting or at the right price. But how do we think about what the cash is meant to go for? Martin Roper: So I think our priorities haven't really changed. And the first one is growth of the core business. I would say that with the growth we're seeing and our planning for next year, we'll probably be building inventory as we finish this year into next year. And obviously, we're a pretty inventory-intensive business given so much of it sits on the water. And so I would just draw your attention to that, while also recognizing that $200 million is a very healthy cash balance for a company of our size. So our next sort of priority is innovation and supporting our innovation efforts. Third priority is M&A for something that will deliver value to our shareholders. And I think we've talked about M&A a lot in the 3, 4 years we've been public and obviously haven't done anything. So we're prudent, and we're not looking to do M&A for M&A's sake. That's certainly not part of our mission statement. And then as we look at what's going on in all those 3 areas; growth, innovation and M&A, if we believe we have excess cash, then our intentions would be to apply it to share buyback at stock prices that we think are fair for our long-term shareholders. So that's how we think about it. And I don't think anything has really changed. And certainly, as the cash builds, it becomes more of a conversation, but I don't expect us to change our approach to it. Michael Lavery: Okay. And just on Treats, a follow-up there. It seems like it would be a pretty nicely incremental part of the portfolio. Is that a fair characterization? And even if so, do you find it can be sort of a gateway to the coconut water part of the portfolio, too? Or are you seeing any interplay there that it might be attracting new users who then also switch to the coconut water side of the business? Michael Kirban: Yes. I mean we're seeing a lot of consumers coming into the brand through Treats, which is really nice to see. So exactly what you mentioned, they're coming into the family. And then kind of like what we've seen over the years with our pineapple flavor and our extra coconut flavor, those are kind of the entries for the category and then the hope is that they stay within the brand. And you see a lot of people then move to the original pure coconut water, the blue one. So Treats, it's early, but we aren't seeing cannibalization. We are seeing a lot of new consumers coming into the brand through Treats. So that is the idea. Hopefully, they stay with coconut water and drink it for different occasions in different flavors and formats. Martin Roper: And just a couple of comments on how Treats gets reported. On a shipment basis, it's reported in other -- so the coconut water reporting on a shipment basis does not include treats, right, and it's indicative again of the health of the category. On a Nielsen, Circana basis, Treats gets reported sort of not necessarily in coconut water, but it might get reported in sort of milk-based products because it's a coconut milk-based products. And so I would just caution you to work out if it is being reported or not in our Circana data, it's not in the coconut water definition that we buy. And it was order of magnitude, I'm looking, Corey, would have added an incremental 4 percentage points to our Circana growth rate. But indeed, we reported in our investor deck because our investor deck reports coconut water growth rates that don't include Treats. Operator: Our next question comes from Eric Serotta with Morgan Stanley. Eric Serotta: Great. First question would be in terms of pricing. I know you said that you're waiting on further pricing to see what the competitive environment looks like. What are you seeing in terms of -- have competitors moved on pricing in as we sit here today at the end of October, you guys moved early August. I know that some competitors were on a different kind of pricing cadence over the past few years. So what are you seeing in terms of pricing from your competitors today? I know you can't speculate about the future there. And then just to follow up briefly on Treats. What does the repeat purchase look like on that? And was -- it looks like it was nicely incremental to this year. Do you see it building next year? Or is that, in some ways, going to be a tougher comparison with the launch this year? Michael Kirban: Let me take the pricing, Eric, and then Martin can talk to the Treats performance. I'd say on pricing, and we tend to use Circana as a measure of what we're seeing in the market. We're seeing a few different things. Some competitors took pricing early and quite a bit and have maintained at that level and not moved incrementally in response to tariffs. Others have moved 1 or 2 times, and we're seeing some moves in some private label more recently up on a second tariff move. And then others have not moved at all. So there seems to be a differing strategies across the market. Obviously, we lead the market by a wide margin, and we've moved. So we'll see -- continue to monitor closely on additional moves. Corey Baker: Yes. I think we're also monitoring the tariff -- what tariffs actually could end up being. I think there's still so many moving parts between Brazil and trade deals getting done. I think there's a lot of questions to be answered. Michael Kirban: That's quite hard. Martin Roper: Yes. And because of the timing of the August tariffs, I'm not sure we've seen anyone moving relative to that. But obviously, we would expect people to have to move particularly on the private label side. So that's a good reason to sort of wait. With regards to Treats, I think as Mike said, it's providing a different gateway for consumers to come into the brand. That's good. I would say we're seeing acceptable repeat rates, if not positive repeat rates and our challenge is to drive more trial, so more visibility of the brand. And so that probably requires a little bit more investment, et cetera. And so that's what we're planning for next year. I think you asked about next year. Obviously, it's very difficult to sort of project next year, we do think that we will get some Treats distribution gains. While we did very well on Treats this year. We didn't, for instance, get it into Walmart. And I think our expectation is that we would get it into Walmart in the resets and some other places as well on sets next year. So I think we still have another year of growth for Treats just based on the launch before distribution growth before sort of -- and then obviously, we are trying to drive adoption on top of that, but it certainly should be a positive next year. Operator: Our next question comes from Jim Salera with Stephens. James Salera: I first wanted to ask on just the kind of composition of the growth this year. If I look at the slide deck, it looks like multipacks have been kind of the biggest incremental driver, which I would kind of read as a proxy for increased purchase with existing households. Please correct me if you think that that's a wrong read there. But with the inclusion in modern hydration upcoming, do you view that as an opportunity to really introduce the brand to new households if it's more visible on shelf? Or is that a way to maybe pick up some lapse opportunity with people that were buying it, but then it gets shuffled around in the store and they kind of lose track of it and don't follow up with. Martin Roper: So we view the multipack strategy as a way of increasing value to our customer while also increasing velocity and potentially putting more product in their pantries, right, which potentially increases their own consumption. And I think that's what we're seeing. Some of the multipack strength is also a little bit driven by multipacks are much more predominant in club type environments. And so if club is strong as a channel, which it obviously is in the current economic environment, you are seeing some growth from multipacks from that point side. As it relates to how is that all filling into total growth, we still see our growth as a nice balance of new households and increasing velocity per household. Our rough approximation is half of the growth is coming from new households, and half is coming from increased consumption per household. And so that's what we think is currently going on. Obviously, numbers in this area are available, but messy. James Salera: Great. And then I appreciate all the color around COGS and kind of the moving pieces next year, and you guys still have some stuff you want to look at before you give '26 guidance. But if I just take the 4Q exit rate on tariffs, coupled with kind of running forward the ocean freight rate through into '26 and blend that together, it would imply FY '26 gross margins are kind of flat to down modestly. Is that a fair way to characterize it just as we're thinking about -- and I appreciate, obviously, there's plenty of moving pieces on tariffs. But assuming no changes there, the gross margin would be kind of down modestly next year? Michael Kirban: That sounds like '26 guidance, Jim. Martin Roper: It was a good try. Michael Kirban: It was good try. Martin Roper: Jim, I wish the same I think we're covered by very smart analysts with very smart support team. Operator: [Operator Instructions] Our next question comes from Eric Des Lauriers with Craig-Hallum Capital Group. Eric Des Lauriers: And congrats on a really impressive quarter. My question is on tariffs. So you've outlined several levers you can pull to offset the impact of tariffs. But I'm wondering sort of what levers you have to pull or what's in your power to do in terms of lobbying for coconut water to be excluded from tariffs like other coconut products are. Do you have any levers to pull here? Is there anything from a lobbying or even import classification perspective that you're able to do? Martin Roper: Yes, it's what we're working on. I've been spending time in D.C. and doing exactly that and working from both the angle of the producing countries in their negotiations and discussions and also on the U.S. administration side. So we're doing -- we're making every effort that we can. Eric Des Lauriers: That's great. And then just a question on the marketing spend outlook. Just overall, should we expect a general increase in marketing spend as a percentage of sales going forward given balance sheet strength, investments in Treats, consumer education efforts. Should we expect a general increase as a percentage of sales? Or do we have enough kind of robust top-line growth that sort of this current level of marketing spend as a percentage of sales is a good guide going forward? Michael Kirban: Yes. As we think about the long-term, and there's variability year-to-year, but broadly, we would expect sales and marketing expenses to track net sales or branded net sales over the long-term. Operator: Our next question comes from Gerald Pascarelli with Needham & Company. Gerald Pascarelli: I just had going back to tariffs. If they remain in place as is, can you just speak about how long the process is should you choose to reroute shipments from Brazil to international markets? And then I guess, based on your current sourcing, is it possible to reroute all shipments from Brazil to international markets? Or is that just not practical based on your supply chain? I guess any color there would be helpful. Martin Roper: Yes. So to reroute, we need to develop packaging that the factory and the new market it's going to be servicing. And we also need to get any validations for that factory in that country or with that retailer that are required. So those processes might take 3 months, could take 9. So it's a moving target. We've started working on those things back in August, September. But equally, the urgency on working on them, while it's urgent, we're also sensitive that once we start buying that materials, if Brazil tariffs go away, then we've got this packaging in the wrong location for a non-optimized supply chain because Brazil is optimized to supply to the U.S. So answer to your question is we're working on it. We're pulling triggers that we think are appropriate given the uncertainty around the 50% tariffs from Brazil. And if the 50% were to stay in place, our hope would be to have our weighted average tariff rate down from 23% to closer to 20% by the end of the year. We may still choose to source some items from Brazil for certain markets and/or customers and/or for strategic reasons because it's got a much shorter lead time in servicing the East Coast of the U.S. So we may not fully exit Brazil as it relates to U.S. demand, but that's where we would think we could get to by the end of the year -- end of next year. Gerald Pascarelli: That's very helpful. And then I guess just going back to the prior question, in your trade discussions, are you hearing anything that maybe makes you more optimistic on the potential for a lower negotiated rate from the 50%, specifically based on the significant inflation that the U.S. is seeing from Brazil coffee. Is that playing a factor? Do you think that will play a factor as we look out over the near term here? Corey Baker: Yes. I think it's also -- it's things that we're hearing in meetings, but we're also hearing publicly discussed from both sides. And they're looking to make progress in the very near term. So we're hopeful that something happens in the near-term, specifically as it relates -- most specifically as it relates to this 40% reciprocal tariff hopefully being relieved, but we will see how that plays out. Operator: This concludes the question-and-answer session. I would now like to turn it back to Martin Roper for closing remarks. Martin Roper: Thank you, everyone, for joining the call today, and we very much appreciate your interest in The Vita Coco Company, and we look forward to talking to you again in 2026. Cheers. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.