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Operator: Ladies and gentlemen, welcome to the Sika 9 Months 2025 Results Conference Call and Live Webcast. I am Mathilde, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dominik Slappnig, Head of Communications and Investor Relations of Sika. Please go ahead. Dominik Slappnig: Thank you, Mathilde, and good afternoon, everyone, and a warm welcome to our 9 months results conference call. Present on the call today is Thomas Hasler, our CEO; Adrian Widmer, our CFO; Christine Kukan, Head of IR; and Jomi Lemmermann, IR Manager. We are excited to share with you the highlights and key messages for the 9 months. Earlier today, we published our results and made the investor presentation available on our website. With this, Thomas Hasler and Adrian Widmer will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. I hand now over to Thomas to start with the highlights of the 9 months. Thomas Hasler: Thank you, Dominik. And also from my side, a warm welcome to this afternoon call. And let me quickly summarize the publications of today and some highlights underlying that we would like to share with you this afternoon. Sika has delivered a resilient performance in the first 9 months in a market that has -- remains to be dominated by uncertainty of various kinds. We have been able to increase our sales by 1.1% in local currency despite a heavy impact from our China construction business with a double-digit decline. Also this year, we are facing an unprecedented foreign currency impact. It's almost 5% and primarily due to the weaker U.S. dollar. But let me summarize a little bit our regions. And here, starting with EMEA. EMEA has seen for the whole year so far, a very nice double-digit growth in the area, Africa and Middle East. This is in line with the trend we have seen from last year, and it's strong also to continue. At the Eastern Europe business, we see green sprouts of growth. Eastern Europe is moving back to growth. It's mainly coming from the residential, so from the retail side, but it is clear this has picked up in pace and will also support the future evolution in EMEA. The region overall has reached 1.5% organic growth in the first 9 months. Americas on the other side, offers huge opportunities in the U.S. Here, we are collecting everyday data center opportunities that are unprecedented and growing and are not impacted at all by the uncertainties that are influencing other segments. The data center business has become a cornerstone of our direct business in the U.S. Just similar to our infrastructure business, which is doing very well in the U.S. Also here, we see more and more the impact of the Infrastructure Act that is delivering us opportunities from the East to the West Coast. We also see that the U.S. currently has some uncertainty that holds back on the reshoring. But here, plenty of these projects are ready to start, and we are also expecting that soon there will be more clarity and then production or construction start -- can start soon. We also see in the mature market of North America, a huge backlog in refurbishment, which is an opportunity to come soon as this backlog cannot pushed out very long. When I come to Asia Pacific, this is the region which has been most challenged, mainly influenced by the decline in our China construction business. If you would take the China construction business out of the equation, actually, the region, Asia Pacific would have been the region with the highest growth -- organic growth of around 4% in local currency. This comes from Southeast Asia and India with high single-digit growth. But as I mentioned, the China business is challenged and also we have taken here decisive measure to take here the margin and profit orientation above the volume orientation. But let me now move further into the P&L. And here, I would see the material margin increased to 55%, a significant demonstration of the synergies that we have been able to further increase from the MBCC and other acquisitions, efficiencies in our operations, and also a good cost management on the input cost side. This has also then trickles down to the EBITDA margin, which has rise by 10 basis points to 19.2% compared to prior year. Also here, the bottom line impact by the FX is quite significant. It is almost CHF 100 million when we look at the EBITDA alone. As mentioned before, we are taking decisive actions. This is in line with our manage for results key principle. We introduced our Fast Forward investment and efficiency program today, which builds on our leadership position. It will enhance customer value. It will improve operational excellence through digital acceleration and therefore, drive growth and profitability in the future. This program is built on a few blocks like investments CHF 100 million to CHF 150 million in the coming years. It is also coming with a shorter-term oriented structural adjustments in markets where we see ongoing weak momentum. Here, the China construction most pronounced, where we are making adjustments, which come with one-off costs of roughly CHF 80 million to CHF 100 million in '25 and the workforce reduction of up to 1,500 employees. The program overall will drive annual savings of CHF 150 million to CHF 200 million per annum with the full impact to come then implemented in the year of 2028. But now I hand over to Adrian to provide us more details and flavors to the financial 9 months performance. Adrian Widmer: Thank you very much, Thomas, and good afternoon, good morning to everybody attending. After Thomas' highlights, I would like to now put additional insights here to the financial results. In a market environment that remains challenging, as we have heard, we have achieved a modest sales growth in local currency of 1.1% in the first 9 months of the year, driven by acquisitions, while organic growth was flat year-to-date, owing to a minus 1.1% decline in Q3, driven by China. Without China, organic growth year-to-date in local currency was 1.7% or close to 3%, including acquisitions overall. Acquisition growth primarily came from the initial contribution of the 5 transactions we have consummated this year, including some residual impact of last year's bolt-ons, overall adding 1.1% of additional growth in the first 9 months of 2025. Sales were clearly adversely impacted by foreign exchange effects, especially as mentioned, related to a weak U.S. dollar, but also the RMB and the general strengthening of the Swiss franc. Overall, adverse foreign exchange effects reduced local currency growth by 4.9 percentage points in the period under review with a Q3 impact of minus 5.9%, slightly improved from a more significant impact in Q2, but still above the overall run rate. Corresponding growth, therefore, in Swiss francs was minus 3.8% for the first 9 months. Looking at the regions, region EMEA showed a similar Q3 trajectory as in the first half year, growing 2.1% overall, 1.5% organic and 0.6% through acquisitions. As Thomas has highlighted, business performance was particularly strong in the Middle East and Africa, where we recorded double-digit growth, but also with a good momentum in Eastern Europe. Here, foreign exchange effects at minus 3.3% year-to-date remained unchanged in Q3. Sales in the Americas region increased by 2.9% in local currencies, while Q3 growth was in line with Q2. Overall, year-to-date organic growth was 0.8%, while acquisitions continued to add 2.1% of growth in the period under review. While the business year got off a good start, U.S. trade policy measures triggered the mentioned uncertainty in the markets and slowed down momentum. While this caused Sika's growth in the U.S. and Mexico to soften, performance remained solid in Latin America overall, but also in the U.S., as highlighted by Thomas, some strong momentum in several areas. Here, adverse foreign exchange effects were most profound and reduced local currency growth by minus 7% in the region in the first 9 months, driven by particularly here the strengthening Swiss francs against the U.S. dollar of more than 10% starting in Q2, but also the devaluation of the Argentinian peso. Sales in Asia Pacific declined by minus 3.9%, while organic growth was minus 4.3% for the period. This result is mainly attributable to the challenging deflationary market environment in the Chinese construction sector for which we are focusing here on protecting our margins and driving efficiency. If we exclude here the impact, sales in the region would have been around 4% in local currencies. And also here, most -- or the strongest market was in India and Southeast Asia and also in Automotive & Industry, where Sika continued to expand its share in its technologies in both the local as well as international manufacturers. Also here, an M&A impact, namely the acquisition of Elmich contributing here 40 basis points of growth, an adverse foreign exchange impact at minus 4.6% reduced here local currency growth to minus 8.5% in Swiss francs in the first 9 months. Now turning to the full P&L and looking at material margin. Here, we have, as highlighted, driven up gross result by 30 basis points year-on-year due to also a very strong Q3 expansion, 55% of net sales in the first 9 months. This is also in spite of the deflationary environment in China and a small dilution of 10 basis points coming from M&A, but also overall material cost in recent months, also driven by our procurement initiatives showed a slightly declining trend. Reported operating cost this year, including personnel costs as well as other operating expenses, decreased slightly under proportionally in the first 9 months of the year versus the same period of 2024. Here, continued strong MBCC-related synergy trajectory as well as efficiency measures were offset by ongoing yet reducing cost inflation, currency impacts as well as initial onetime cost of around CHF 18 million in Q3 related to our structural cost reduction program. In looking at personnel costs specifically, which were down by minus 0.3% year-on-year on a reported basis, we have seen continued underlying wage inflation at around 3.5% per annum on a like-for-like basis. This is partially and increasingly being offset by cost synergies as well as operational and structural efficiency initiatives, but negatively affected by this initial fast forward severance expenses. Other operating expenses decreased strongly over proportionally by minus 6.5%, driven by accelerated efficiency measures and MBCC synergies. Overall, the integration of MBCC is largely concluded, while strong delivery of synergies is ongoing. Realized total synergies amounted to CHF 130 million in the first 9 months of '25 an incremental CHF 41 million versus the same period of last year, representing an annual run rate of CHF 166 million and therefore, well on track to push towards the upper range of the increased guidance of CHF 160 million to CHF 180 million for this year. Overall, EBITDA margin, as highlighted, increased by 10 basis points to 19.2%, up from 19.1% in the first 9 months. Absolute EBITDA decreased under proportionally by minus 3.3% from CHF 1.702 billion to CHF 1.645 billion due to foreign exchange translation effects, broadly in line with the effect on the top line also here highlighting our strong natural hedge and decentralized cost base in line with invoicing currency. Depreciation and amortization expenses were virtually flat in absolute terms at CHF 407 million or 4.8% of net sales as favorable translation effects were offset by PPA effects on the intangible side as well as a slightly higher depreciation rate. As a result, EBIT ratio decreased by 10 basis points to 14.4%, while absolute EBIT also was impacted by currency translation effects. If we turn below the EBIT, here, net interest expenses decreased and continued to increase significantly by CHF 16 million to CHF 105.5 million in the first 9 months. This compared to CHF 121.6 million in the same period of last year. Decrease is largely related to the scheduled repayment of our first Eurobond in Q4 '24 that was taken out for the financing of MBCC. And in addition, other financial expenses also showed a favorable development, representing a net income of CHF 10.2 million, up roughly CHF 7 million compared to the same period of last year, unfavorable hedging cost development, lower inflation accounting effects and also higher income from associated companies. On the tax side, group tax rate increased from 21.5% to 23.8% in the first 9 months. This is largely related to a positive onetime effect in the previous year. This is primarily the deferred tax benefit relating to a foreseen legal restructuring. And this year, we had also higher withholding tax on internal dividends distributed in the second quarter this year. As a result, net profit ratio was modestly down to 10.1% of sales. This is 20 basis points lower than last year. And also here, absolute net profit of CHF 870.9 million was impacted by currency translation effects. On the cash flow side, operating free cash flow in the first 9 months was CHF 630 million, which continues to be about CHF 220 million lower than cash flow in the same period of last year. However, cash generation in Q3 was strong and in line with last year. And the reduction here is primarily due to unfavorable currency movements compared to last year, particularly impacting here hedging of intercompany financing, but also partially due to a modestly higher seasonal increase in working capital slightly higher CapEx as well as higher cash taxes. For the full year, we expect to partially close the gap in Q4 and full year operating free cash flow in line with our strategic targets of higher than 10% of net sales, additionally supported by group-wide working capital initiatives. With this, I conclude my remarks on the 9-month financials and hand back to Thomas for the outlook. Thomas Hasler: Good. Thank you, Adrian. Yes, let me be short and brief on the outlook. We have published our outlook, and we confirm for '25, our expectation of modest increase in net sales in local currency for 2025. And our EBITDA margin of approximately 19%, including the one-off costs from the Fast Forward program, which I referred to earlier. The medium-term guidance, we confirm our profitability and cash flow expectation with reaching the band of 20% to 23% EBITDA in 2026. And we have created here a new guidance based on the revised growth assumptions for the market of 3% to 6% local currency net sales growth for the period of '26 to '28. Dominik Slappnig: We are -- with this, basically, we are now opening the line for your questions, please. Operator: [Operator Instructions] The first question comes from the line of Ben Rada Martin from Goldman Sachs. Benjamin Rada Martin: I have three questions, please. My first was on, I guess, the annual savings you've introduced today, the kind of $150 million to $200 million amount. Could you maybe break down the source of these between the two programs being the efficiency program and investment program? The second would just be on pricing growth. I assume you're starting to have some conversations around 2026 pricing. Could you maybe just give us a steer on what kind of level of pricing growth you expect at the group level? And then finally, on China construction, thank you for the disclosure today around that business. I'd be interested for our kind of housekeeping side, what share of the China business would be in construction at the moment? And what would be the split between, I guess, the channel side and the project side within China construction? Adrian Widmer: Yes. Thank you, Ben, here for the question. I'll start with the first one. We will provide more granularity here on, let's say, sort of the breakdown and the content of the impacts here then in November. But maybe at this stage, we expect about CHF 80 million out of the CHF 150 million to CHF 200 million to hit the P&L in a positive way in 2026. On maybe the pricing, and I'll take this one here, too, we had about 0.6% price increase year-to-date here, excluding China. China in a negative environment with negative pricing, but about 60 basis points for the first 9 months, which we're expecting to sort of roughly stay at that level for the full year basis. Thomas Hasler: Good. And to the third question in regards to our China business, our China construction business is about 70% of our China business. The remaining 30% is related to the automotive industrial manufacturing business, a business that is growing nicely in line also, let's say, with the transformation to e-mobility and the increased volumes overall. The 70% of the construction-related business, the larger portion, also roughly about 70%, 75% is the indirect business. It's the business that is related to the tile setting business in the residential area. And then the 25% direct business is especially strong with sensitive infrastructure programs and with the foreign direct investments of multinationals building in China. As we all know, the residential business in China has some challenges with huge inventories still being around and the foreign direct investment business has declined this year substantially, roughly 25%. These are the two drivers for the very soft business that we are facing and also then mandating that we take here decisive steps to structurally adjust to this condition as we don't see that quickly to resolve in the near future. Operator: The next question comes from the line of Priyal Woolf from Jefferies. Priyal Mulji: I just got two actually. So the first one is just on the rebasing of the midterm local currency sales growth. Would you mind just reminding us what the contribution was from market growth back when the target was 6% to 9%? Was it around 2.5%? And I'm just asking that in the context that you've obviously cut the midterm target by 3%. Are you effectively now implying that market growth will be flat or possibly even down for the next couple of years? Or is there something else sort of buried in the target cut today in terms of lower outperformance or lower pricing or lower M&A. And then the second question is just on the CHF 120 million to CHF 150 million investments that you're talking about. Is that CapEx? Or is there some sort of P&L cost involved with that? Thomas Hasler: Okay. Thank you, Priyal. I'll take the first one. And here, you are absolutely correct. Our former guidance was built on a 2.5% market expansion. And our current or our adjustment is basically correcting for the current, but also for the foreseeable future and here is more neutral or slightly negative. The elements of the strategy, the market penetration and the acquisition are from our side, unchanged, but the market has changed substantially longer than anybody could have anticipated. And therefore, we made this readjustment, but it's mainly -- or it is the market that really is unpredictable at this point, and we have taken that down to a neutral, slightly negative level. Adrian Widmer: Then the second one here, Priyal, on the investment program, the CHF 120 million to CHF 150 million. This is largely CapEx. There is about a 30% OpEx element as this is also relating to implementation of platforms, ongoing support digitalization, also training activities and so on. So about 30% of this is ongoing here OpEx, which we don't see as sort of onetime costs, but really sort of ongoing implementation and support cost. Operator: We now have a question from the line of Paul Roger from BNP Paribas Exane. Unknown Analyst: It's [ Anna Schumacher ] on for Paul today. I have two. Does the rightsizing China suggests you believe the slowdown is structural rather than cyclical? And will it impact your distribution strategy in the country? And secondly, when do you expect to see any benefits of reshoring in the U.S.? And how meaningful could it be? And what are your expectations for U.S. infra next year? Thomas Hasler: Okay. Thank you. Yes, I think on -- we have to differentiate in China between the two segments. I think the residential market expectation also for the next 1 or 2 years are still on a very low level. So this overbuild is not being addressed and it is also of less a priority for the Chinese government. So here, this is a market that will remain challenged probably for a year or 2 longer. And therefore, our, let's say, adjustments are structural in nature by now serving the reduced volumes with our market leader position that we have in that segment and also adapting the portfolio to the key application, the tile setting and waterproofing area, where we have a dominant position and also, let's say, discontinue low-margin sections of that market. The distribution channels are well established. They are the backbone that we serve. Here, actually, we are adapting that distribution channel to increase the spread and be able to further get closer to the market. So here, actually, we are increasing, and this is also helping to get better coverage and build on our market leadership in the segments where we have very good margins and where we also see possibilities to outperform the market. The construction direct business is a business where we believe that this is cyclical in a way that this foreign direct investment has an impact. But at the same time, we have in China also a more maturing, let's say, base infrastructure in place that requires more refurbishment and renovation. We are working in building up this in China with our competencies. So here, I would say the foreign direct investments, not that speculative how fast that will normalize, but we have there also possibilities to offset. And here, we are structurally adjusting also to be more dominant in the refurbishment, which when you look at mature markets like Europe or the U.S., this is the core of our business in construction. It has been relatively small in China so far, but that's a great opportunity for us to offset some other weaknesses. And then on the U.S., I'm always optimistic about the U.S. market. The U.S. market has seen a great start into the year. It has then been challenged with uncertainties and unpredictabilities, which many projects for industrialization or reshoring have been put on hold, ready to go. These projects have been, let's say, engineered to the level where it can start digging and building. And this is now a bit speculative question when will enough clarity be there. But I think with the tariff discussions, things are more and more becoming, let's say, not predictable, but it is easier for corporations to make conclusions. And I expect that we see in '26 on the reshoring, some nice progression as this holdback of projects as we see at the moment, will probably then be overwhelmed by also serving the increased demand. The consumption in the U.S. is not that bad. And I think this is a bit artificially pushed back. And here, I'm more optimistic that this will take place going into'26. Operator: The next question comes from the line of Elodie Rall from JPMorgan. Elodie Rall: I have three, if I may. First of all, on the China restructuring, you're talking about reducing headcount by 1,500. So can you give us a bit of color about how much that this represent as a percentage of China headcount? And also how much does this represent versus the CHF 80 million to CHF 100 million total cost savings? How much is China from there? And how could we think about China growth in H1, therefore, next year, given still the hard comp, I believe. So all the growth will be H2, I believe. Second, you talk about other weak markets driving this midterm growth outlook cut. So maybe you can elaborate on what they are? And lastly, on dividends, I was wondering if you would aim to protect the dividend level given additional cost savings -- costs this year. Thomas Hasler: Okay. Let me start with the China restructuring. The 1,500 employees and the largest portion from a single country comes from China. And it is a substantial reduction. It's a double-digit reduction of the Chinese workforce that is ongoing. This is something we are implementing without any further delay, but this is substantial. But we also have other markets that are -- or segments of markets is maybe the better way to put it because it's not countries or markets. It is actually segments that have softer performance. And here, this will then, in some, come up with the 1,500 employees. You asked about the China impact in H1 next year. it is clear that we will have some spillover from this year into next year as the effects that you have seen in Q3 and that we also expect to be significant in Q4 will, of course, compared to the base of the first half of '25, still be negative, but it will then also turn in the second half of next year and the impact will also, let's say, reduce. And as I mentioned before, Asia Pacific has a strong performance. It is the strongest if we exclude China. So here, we're also confident that Asia Pacific will contribute to the overall group growth next year, having strong engines in Southeast Asia and India. Then the dividend, maybe. Adrian Widmer: Well, maybe on the dividend, obviously, this is then a decision by the Board. This has not been taken yet, but I'm not expecting here that, let's say, the program will have a negative impact here on our dividend policy. Elodie Rall: And sorry, just to come back on China. How much does this represent in terms of the overall CHF 80 million to CHF 100 million cost savings -- cost this year, cost restructuring? Thomas Hasler: This is a bit too early. I mean we are going to really make an effort then in 4 weeks' time to give you more granularity about the program in regards to the investments, but also in regards to the cost split and so on. But it's clear, it is significant. I mean that's -- but it would be premature now to go into the details, but China is a large portion of the structural adjustment. Elodie Rall: And just to finish up on my previous question, what are the other markets that you have identified as weak? Thomas Hasler: Yes. The point is, as I mentioned, markets are soft. Weak is something I attribute to segments, segments where you see that, for instance, in Europe, we had a very good initiative on energy savings initiative coming from the Green Deal. These are fading. These are implications that we are, of course, considering also in our business. But the markets overall are soft. Europe is soft, but we see Eastern Europe is coming back. We also see that the northern part of Europe. So here, when I look into '26, I'm quite optimistic that we will see positive trends. Operator: We now have a question from the line of Ephrem Ravi from Citigroup. Ephrem Ravi: So two questions. Firstly, given the reduction in the overall growth target to Priyal's point, 2.5% was the market. But does this change your view on the market going forward? Or this is strictly a function of the fact that last 2 years, the growth has been less than your 2023 to 2028, 6% to 9%. So you're just resetting for the -- for what's already happened and your medium-term actual view in terms of how the markets are going to grow hasn't really changed. So it's just mainly a mark-to-market of what's already happened in terms of local currency growth so far? And secondly, China, I thought it was about CHF 1.2 billion of sales last year. And if it is down double-digit percentage, probably goes down to closer to CHF 1 billion. So given the low base, do you expect that to kind of be less of a drag going forward? So in theory, you should see faster growth just because of the mix effect of China not being a drag being on the numbers? Thomas Hasler: Yes. I think what is very important in our adjustment of our midterm guidance, this adjustment is related to our assumptions of the market compared to the original assumption. For us, most important is the outperformance of the market wherever they are. And this is in our strategy clearly outlined with the market penetration. We have not changed our ambitions on the outperformance of the competition and the market. And we also haven't changed our approach to be the consolidator in a very fragmented market through our acquisition activities, which I think also this year, we see with 5 transactions and the full pipeline of prospects. I think we are very confident on those elements where we have it in our hands. The markets, we had to reflect and also consider that there is also not a balancing act between the regions. We have a situation where actually softness is a global topic, with a few exceptions like maybe the Middle East, but not so relevant in the global scheme. So here, it is -- this is the driving factor for the adjustment is that we do reduce the market aspect, but do not change our commitment to outperform organically and then also on the acquisition, we will deliver as we originally have indicated. Operator: The next question comes from the line of Martin Flueckiger from Kepler Cheuvreux. Martin Flueckiger: Martin Flueckiger from Kepler Cheuvreux. I've got three questions. And I suppose I'll take one at a time. Firstly, I'd just like to go back to your statements regarding pricing in the 9-month period. If I understood you correctly, you were talking about 0.6% up year-to-date, excluding China. Now I was just wondering what does that mean for the group overall because that's really the number, I guess, that interests most people. That's my first question. I'll come back with the second one. Adrian Widmer: Yes. I mean, this means overall, it's pretty much a flattish picture for the group overall. Martin Flueckiger: Okay. And then secondly, you were talking about -- I think Thomas was talking about data centers being ramping up pretty rapidly in the U.S. Can you -- if I remember correctly, in the U.S., data centers account for about 8% of sales -- construction sales. Has that number changed in the 9-month period? And what kind of growth do you expect from this vertical in 2026? That's my second question. Thomas Hasler: Yes, you are right. This is about the magnitude. And this is the fastest-growing segment in construction and therefore, also logically, the contribution to the overall construction business in the U.S. is increasing, but it's about 8%. And what makes us very optimistic, I mean, these are also projects that are lined up. They are executed. They are actually rushed in execution whenever possible. So the lineup of projects that we have visibility gives us high confidence for the next 18 to 24 months. So this is a business that we like very much as it is also a premium business. It is driven by customers that buy not, let's say, products or systems, they buy peace of mind. They want to have undisrupted operations 24/7, 365. And that's a key element of our unique position in that market. Not only in the U.S., this spreads all over the globe because the owners of the data centers have very similar names at the end, and they don't want to take risks when they go abroad. And therefore, we are also leveraging that very much into Europe and other parts of the world. Martin Flueckiger: Okay. But sorry, just to clarify, when you say it's the fastest-growing segment in the U.S., I guess that's not really surprising. But I was just wondering whether you could tell us what kind of growth Sika is expecting from data centers in the U.S. in 2026. Do you have any broad idea at this point in time? Thomas Hasler: Of course, I have. And I would sum it up this is double-digit growing and this is significant. So it is not 10% or 11%. It's really a business that has drive and where we also put full focus on. This is the time. Martin Flueckiger: Okay. That's helpful. And then finally, my third question, could you talk a little bit about competitive pressures in construction chemicals this year, what you're seeing on the ground and whether it's intensifying or whether it's stable, whether there are any particular regions apart from China where you're seeing competitive pressures easing or worsening? Thomas Hasler: I think here -- I mean, China is a particular case, and I think Adrian indicated, China is, of course, price is super relevant. And as he mentioned, the overall group is at 0.6% without China. With China, we are at neutral. So China is a market in itself. But when I look at the rest of the globe, you can say -- when you have a booming market, pricing is probably less pressures because it's about getting the jobs done. We don't have booming markets everywhere. Therefore, I would say this is a normal situation where price is of high relevance, but nothing exceptional. Nothing -- would you say this is kind of strange. This is a normal behavior of markets when volume are slow, and this comes from small, medium, large. This is nothing in particular, nothing has really changed. But of course, when you have soft markets, then here, the tendency is that you have more pressure on price. But I think our performance in the first 9 months demonstrates we do have pricing power. We have here a leadership position that we can. This is probably for small players, midsized player, a bit less convenient as they are suffering more in soft times. Operator: We now have a question from the line of Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I've got some follow-ups, please. On the growth for 2026, the exit rate at the end of this year is likely to be breakeven, maybe even modestly negative if trends don't really change in your core markets. I'd like to understand how we get to 3% in 2026. I think Elodie touched on this question, but I'd like to hear explicitly if you actually think 3% is the right number for 2026 based on what you see today, appreciating that things can change or if in 2026, we should actually be anchoring around a number below that range within the potential for growth to accelerate into '27 and beyond. So that's the first question. And then the second question, just in terms of the guidance on year-on-year margin improvement into 2026. So this year, I think it's 19.5% to 19.8% without the costs. And then if I've got the moving parts right, you have CHF 80 million of cost saves from the program next year. You have CHF 40 million synergies still to come if I look at the midpoint of what you're guiding to. So that gives me about 100 basis points of margin improvement. But I'd expect your leverage is still going to be negative. I mean, if I look at that chart on Slide 8, I think it is, you have negative operating leverage this year with growth that's probably not dissimilar to what the growth is going to be like next year unless anything doesn't change. So what other levers should we be thinking about into next year that actually allow us to see margins rise? Is there something we should be thinking about on gross margins improving? Is there some other kind of cost initiative that we should think about beyond this CHF 80 million program, just like sort of ordinary course of business efforts that's sort of coming on top of the CHF 80 million sort of special program? So those would be the two questions. Exit rate on growth is clearly below the 3%. How do we get to 3%? And then how do we actually get higher margins year-on-year even withstanding the 100 basis points or so of improvement that comes from this program plus synergies not yet come through from MBCC. Thomas Hasler: Okay. Thank you, Cedar. And I take the first question, and it's probably the most difficult question because it is clear. We don't know what's going on to happen next year. So let me phrase it in a way. This is not a guidance for next year. But if we assume everything equal, China, Europe, North America and so on, your assumptions are correct, that the exit rate at the end of the year will be low modest growth going into next year. We will still have spillovers from China. We will have benefits from trends that are supporting, but the magnitude to the lower end of our midterm or our adjusted midterm guidance is still there. So this is not yet a guidance, but it's also not a promise that every year of the coming 3 years will be within that range. I think the first year is probably the one that has, let's say, the highest challenge, but we also anticipate that there's a good likelihood in '27, '28, where we can substantially also move on that depending on how markets are evolving. So here, I think we have to be clear. This is not a straight line. This is also a line of recovery, which we can drive to some degree ourselves. I think we have a healthy acquisition pipeline. We see there some opportunities. I think also when we look at the pricing power that we have and also expecting that China is going to, let's say, be less impactful. So we have this element as well. But this is not a guarantee at this point of time that this 3% to 6% will be applicable to every of the consecutive years. Over the 3 years, we are very confident. But going into next year, we will assess the situation, of course, we will assess the markets and then we will establish our proper guidance for 2026. Adrian Widmer: And on the, let's say, the elements here of the margin improvements, and it's essentially the ones we're driving. I think there is also an opportunity on, let's say, the material margin, the gross margin to continue to drive. I mean, you have the synergies, as you mentioned, there will be another 30 to 40 basis points. And our improvement, let's say, bucket, which will clearly be driven here by Fast Forward program here, let's say, the sort of the CHF 80 million impact plus the ongoing activities we have, but there is not going to be an additional, let's say, program on top of it, but really sort of driving the different elements to an EBITDA of above 20%. Operator: We now have a question from the line of Arnaud Lehmann from Bank of America. Arnaud Lehmann: Could we talk a little bit about the gross margin? I guess that was quite a solid performance in the third quarter. I think a 5-year [indiscernible] when there was back in Q3 2020. So is this the new normal? Is 55%, you believe the new normal going forward for Sika and into 2026? That's the upper end of your historical range? Or do you think there could be upside to this? My second question is coming back on the Fast Forward plan. Is it something you've been thinking about in the last years or in the last months, let's say, was it something you were going to do anyway? Or is this more of a reactive move on the back of the recent decline in Chinese volumes or maybe a little bit of both? And the third question and last one on -- you hinted in the previous question around M&A activity. Considering the slower trends in underlying markets, do you think you could ramp up M&A activity while remaining within the criteria of your A- credit rating? Adrian Widmer: Let me take here the first one. Thanks, Arnaud, for the question. I think here, of course, the 54% to 55%, that's is for us clearly sort of also a range where we sort of monitor and steer the business. I mean it's never been sort of a very sort of dogmatic, let's say, hard target. And I think there is several elements obviously impacting here material margin, which, again, for us is an important element to steer the business. I think we're obviously here that the pricing element, selling value, driving innovation, also being able for us to position our solutions at the higher value point is important and an ongoing activity. I think on the input cost side, we have more recently seen, I would say, a more favorable picture also driving here clearly initiatives to improve it. So I think there is obviously a bit of upside here on the material margin, although this is influenced by many sort of different elements. So I think it's obviously something we actively steer as one of our here profitability buckets overall. Thomas Hasler: Okay. Then Arnaud, on the Fast Forward question, it's an interesting question because it has both elements. Digitalization is something we have highlighted as a megatrend in our strategy. And we are doing quite well in progressing. We are doing -- we bring digital solution. We just announced this week our Sika Carbon Compass. You can say, yes, we do. We are implementing SAP across the globe. But honestly, the speed of adoption, the speed of implementation is, in my view, not the speed that I would like to see. Digitalization has a different speed than construction industry and the construction industry is our great opportunity to be here the unprecedented leader in digitalization. So this has been, let's say, something I have observed over a longer period of time than 2, 3 months. And I see this as a great opportunity here to make firm steps, invest into the customer value. The customers are challenged in many different ways. Digitalization can ease, let's say, those complexities, can make business easier to execute and focus on core things. I think this is something that we want to drive, and this is the opportunity to integrate it also into this fast forward program. We have done great. I mean, Sika has a unique data pool. It's the leader in the market, the innovation leader, it's the market leader. We have data all over the globe. We are creating a pool that we can exclusively use to do data mining and leveraging those competencies. So for me, I'm a big fan of this digitalization, and I'm happy that Fast Forward gives us now also the possibility to accelerate substantially, let's say, on the tools, on the solutions, but also upskilling our organization that we also here can adopt much faster than in a regular environment. The other part, let's say, the China, the restructuring in general is something that has become in line with our, let's say, guidance adjustment for the midterm. Markets are soft, markets, we cannot change them. But in markets that are soft, this is the best time to make substantial adjustments. This is the time to act because when you act at this time out of a position of strength, you can then -- when backlogs are worked off, when markets are turning, you are in the strongest position to benefit from a boom in construction that will come, that has to come. The underlying demand is there. It's not served. So it is also a point that came to our realization over the course of this year and then more pronounced in the second half, which ultimately results in this Fast Forward program with the two elements that are super relevant, short term improvements, but of course, then also more midterm, let's say, benefits for the customer, driving our growth and utilizing the unique, let's say, digital footprint that we can have and that we want to have going forward. This is something I consider these digital capabilities, a key competitive advantage that we are going to achieve. Here, size matters. The globalization matters. We have a global input. We have it from Japan, China, India, Middle East, Europe, North and South America. Now all these bundled together gives us huge opportunities, which I want to tackle with our Fast Forward in an accelerated way. Arnaud Lehmann: And on M&A? Thomas Hasler: Sorry, M&A. I think here, I come back to the prior question. I mentioned smaller and midsized companies are more challenged when it comes to pricing power in soft markets. And we see here a clear, let's say, pain level reach for small and midsized player that they are considering selling their companies, even so it is probably not the best time to get the best price, but they hang in there and they consider selling much more now than maybe a year or 2 ago. And yes, we do have here also opportunities to, let's say, to acquire for attractive multiples business that maybe a year or 2 ago would have rejected to entertain. And I do think with our strong cash generation that we also have the ammunition to serve those increased possibilities. But it's also -- I think as always, every challenge has its opportunity. The opportunities on M&A are excellent, and we have the power and the will also to take advantage. Operator: The next question comes from the line of Ghosh, Pujarini from Bernstein. Pujarini Ghosh: So I have a few. So my first question is on the EBITDA margin guidance for this year. So without the restructuring costs, you have not cut your margin guidance. And in 9 months, you've done 19.2%. So to get to the bottom end of the range without the restructuring, you would need to do something like 20.5% in Q4. And looking at the historical trends, we've never seen such a big jump between Q3 and Q4. So could you explain why this year might be different and the various levers that you could pull in Q4 to get close to your target? And my second question is just a housekeeping. So what is your current guidance on the tax rate for the full year and for future years? And finally, coming back to the China restructuring plan. So could -- so of the CHF 150 million to CHF 200 million cost savings, could you give the split between how much of this would come from the restructuring in China and how much from the investment program that you're going to do? Adrian Widmer: Thanks, Pujarini. I'll take here the question one by one. On the 2025 EBITDA guidance here, I think a couple of points. On the one hand, you're right, the 19.2% here in the first 9 months. As I mentioned here before, we have about CHF 18 million of here one-off costs already included in Q3. So that's one element that basically puts here, let's say, the anchor at 19.4% and also in terms of, let's say, the one-offs we're guiding for the CHF 80 million to CHF 100 million, not everything is EBITDA relevant. We have about 25% to 30%, which is more sort of write-downs and impairments overall, which obviously then for Q4, yes, means, of course, a solid profitability quarter to, let's say, get at least here to the lower range here of the 19.5% to 19.8%. On the tax rate, here we had in previous years as reported, also one or the other positive impact, one-off effect. I'm expecting here for this year sort of around 23% in terms of the overall tax rate, which is also the level here of the next years to be expected roughly. And thirdly, on the question here of, let's say, sort of the China impact and the breakdown, again, I would like to defer here the answer and more granularity then to our November event where we will provide more sort of granularity on the various aspects of the program. Operator: We now have a question from the line of Patrick Rafaisz from UBS. Patrick Rafaisz: Two questions. One is on your cash conversion targets. You confirmed the 10% plus for this year. I was just wondering with the extra spending for the Fast Forward program, both on the cost and the CapEx, would you already fully commit to a 10% plus cash conversion also for '26? That's the first question. Maybe related to that, can you also talk a bit about the phasing of these investments? And then the second question would be on China and the portfolio adaptation you talked about. Can you add some color around the share within the China business that we are talking about that you are exiting due to the maybe market conditions or too low profitability? And also how long that will take to implement? Adrian Widmer: Good. Well, let's -- thanks, Patrick. I'll take the first two on the cash conversion, yes, clearly also confirming for '26 here, the targets to remain in place in terms of the cash conversion of at least 10% of net sales. Obviously, here, there is an additional element of CapEx, but that will be within that threshold. Second one on the phasing, again, I'll try again to convince you that we will provide more granularity then on the various sort of elements of the program, also the impact and the phasing then at the end of November. Thomas Hasler: Good. And then Patrick, on the China business. Our China distribution business is built on exclusive distributors all over China. And with the start of the softness of the market, our China team has tried to introduce, let's say, lower-margin trading products to support our distributors so that they can take a bigger share of wallet. And this came, of course, at the backside that the top line was then still showing some progression, but dilutive on material and profit margin. And this came then to a level where we had to say this needs to be reversed. So this has been a rather short-term element that has been introduced, and it is also something that we can flush out relatively soon. But it will be visible this year and next year as we -- some part is still in this year from the first half, and it will be out in the second half next year. So we will have some comps there that are maybe not so clear to read, but this is rather something that has been used tactically, but had to be revised. And that's what I mean with the core range. The core range, which is our tile shaping range and waterproofing range, which we produce ourselves and not tolling products that are adjacencies. Operator: The next question comes from the line of Alessandro Foletti from Octavian. Alessandro Foletti: Just on the automotive business, maybe we don't speak much about it. Obviously, it has been growing strongly in China, but how is it doing in the other regions, particularly also, yes, Europe and the U.S., I would guess. Thomas Hasler: Yes. I take that lately. I think, yes, we haven't talked much. But as you have seen, our growth in the industrial area is at organically 0.8%. It is doing better than our construction organically. It has here support from China, but also our business in Europe and in North America is holding strong despite a declining volume situation. And also, especially in Europe, we have still, let's say, a bigger, let's say, variation of models in the market, which means we are carrying more complexity serving, let's say, our customers. And despite that, we can still have above the build rate top line and especially also maintain a very healthy bottom line in that business. It is having a different direction. I think in Europe, we see also going forward, probably a comeback of the incentives for the electrification. This will be very positive. Germany is considering this for the years to come. So I'm on the automotive side in Europe, with the conversion, we will have more contribution. We have more opportunities. So I think we will see a positive trend in Europe. And in North America, we have there a bit the holdback with the tariffs. The automotive business in North America is highly, let's say, linked between the three countries with the supply chain. We serve the market out of Mexico and of the U.S. But also here, there's a different demand. The electrification is less of a relevance. It is truck and SUVs, pickups are relevant. These are for us higher contribution vehicles anyhow. But we also expect that when the new North American trade agreement is finalized, which hopefully takes place by the beginning of next year, then there will be also clarity and investments in automotive so that they can come back with competitive offerings to the end market, which at the moment is hesitant to buy in North America. I'm optimistic. I mean the business also in Brazil is doing very well. The business in Southeast Asia is doing very well. They are, of course, of smaller volumes than the three main markets. But I think we will have year-over-year, nice contribution from the automotive or industrial side. Alessandro Foletti: Right. But I'm not sure I get it right. It seems from your talk that maybe both in Europe and the U.S. is maybe still slight negative or flattish? Thomas Hasler: Yes. Yes. I mean the build rates are minus 3%, minus 4%, the car build rates. And we are flattish in Europe and slightly below in North America. Operator: We now have a question from the line of Yassine Touahri from On Field Investment Research. Yassine Touahri: Just two questions on my side. We've seen oil prices coming off over the past couple of months. Does it mean that we should see limited raw material inflation in -- at the beginning of 2026? Or -- and also a relatively muted pricing environment? Should we think of the coming quarter being close to what we've seen with relatively prices up a little bit and costs broadly in line with this pricing? And then my second question would be on the competitive landscape. Do you see -- I think some of the largest building material company in China, CNBM and [ Conch ] have started to invest in mortar, in construction chemicals. Do you see competition in China being tougher today than it was 5 years ago? And another one on this -- on the competitive landscape. I think Kingspan in the U.S. is planning to open a PVC roofing membrane next year. Do you think it could have an impact on your activity? Or do you believe they will target different segments? Thomas Hasler: Okay. I think the first question was on oil prices, right? Yassine Touahri: Yes. And whether it means that we should continue to -- we could continue to have an environment with limited price increase and limited cost inflation. Thomas Hasler: Yes. I mean we -- this is quite volatile. It is low at the moment. This is, in general, for us a positive. But I would say it's limited. I mean, this is also what we have talked about this year. There is -- some commodities have some softening, but others are still increasing cement, for instance. So I think on the input side, I think we are having here as far as we can predict, we have a relatively stable environment. So that is giving us also the possibility to make our price adjustments in line with our margin expectation. So I'm not concerned. But of course, things can change if one source comes unavailable and prices could rapidly move upwards. But at the moment, it's not a major concern. The -- and the second question was on the competitive landscape in China. I mean, here, you have to see that we are the only remaining sizable international construction chemical player in China for years. This is not just yesterday or the day before. This is our position in China. We have an exclusive position in the direct construction market. This is -- these are the higher-end construction. I talked about the multinationals, but I also talk about, let's say, sensitive infrastructures, nuclear power plants and others, airports and so on. So we have been able -- I mean, there are thousands of players in China and super aggressive in all aspects, but we have been able to hold strong in this market. And I believe our possibility to benefit through our, let's say, global excellence in a market that is maturing in a market that is also demanding higher building codes. The government is pushing for higher building codes as they see the adversal effect of cheap, let's say, infrastructure built 10 or 20 years ago. And we have a reputation in China that is outstanding, and we can also enlarge our addressable market in China through this trend. So this is on the direct side. On the indirect side, I talked about our distribution. I talked -- but you have to see that this is an application where our company has a market-leading position in China. Our brand, our international brand stands for reliable products to the homeowners. Homeowners, they buy, let's say, expensive tiles from Italy and homeowners do care that they are installed with a brand of trust. That's our unique -- of course, our products are up to the highest standards. But it is also our network that involves not only the applicator, but also the owner bring across this value. And this is very difficult for, let's say, the mainstream Chinese competitors to attack us. They attack themselves. So it is Oriental Yuhong and Nippon Paints that are crossing each other's way left and right and through brutal price war try to steal each other's market. Our market is much more protected through our unique positioning with our brand in China. And then... Yassine Touahri: Kingspan, yes. Thomas Hasler: I think -- I don't know if I should comment. I mean, I don't see it as a threat, not at all. I mean the North American roofing market is huge, and it has sizable players. I mean, sizable. And we are active in a very, let's say, clear designated area with large commercial buildings, where we have a reputation, where we have specifications, where we have applicators, I feel well protected. I have no fear. But if you go in such a market where there are the big boys playing, I would say I have respect for the courage to go into that market, but that's not me to comment and it's not me to make assessments there. It is an attractive market. I agree. It is for us, a fantastic market. But I think we have here also a unique position with our focus on the high end on durable and sustainable solutions with owners, with the focus on clear commercial large-scale roofs. Dominik Slappnig: Thank you very much. I think this brings us to the end of our call. We take this opportunity as well to highlight the date of our Fast Forward Investor and Media Conference on November 27. The conference will be held in Zurich, Tüffenwies, and it will start at 10 a.m. CET. So for all these who would like to fly in and out the same day, I think this will be possible. With this, we thank you for listening to our call and for your interest in Sika. We wish you all the best. Thomas Hasler: Thank you. Adrian Widmer: Thank you very much. Bye-bye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good afternoon, ladies and gentlemen, and welcome to Eni's 2025 Third Quarter Results Conference Call hosted by Mr. Francesco Gattei, Chief Transition and Official Officer. [Operator Instructions] I'm now handing you over to your host to begin today's conference. Thank you. Francesco Gattei: Thank you, and good afternoon. Welcome to our Q3 2025 results call. Our results are a further confirmation of the successful execution of our distinctive and consistent strategy and innovative business model. We continue to generate growth and value, both from our traditional energy activity, such as E&P and also from emerging opportunities in the evolving energy market. In particular, the 8.5% year-on-year growth in production results directly from our consistent long-term focus and investment in E&P. We are delivering material progress against ambitious strategic objectives and Q3 was a further proof of tangible momentum in this respect. I will comment on our financial results in a little more detail shortly. However, it is very pleasing we have positive news to report from each of our main operating segments. Combining the excellent financial and operating performances and the ongoing progress in valorizing our businesses, we're also able to announce a further improvement of our balance sheet and a higher share buyback. Focusing on a few of the strategic highlights, I would especially pick out. At the beginning of August, Azule Energy, our business combination with BP in Angola and Namibia, began production from its operated Agogo West Hub development with the FPSO coming on stream only 29 months after FID, almost a year ahead of our plan. Indeed, this quarter was notable for the contribution from our upstream satellite start-ups with Vår reaching 400,000 barrel per day production with significant incremental production from the operated Balder X development that started up at the end of Q2 and Johan Castberg ramp-up, driving 45% year-over-year production growth. In October, we announced a joint venture FID on our Coral North floating LNG offshore Mozambique with startup expect in 2028. This leverages our successful Coral South development in production since 2022 with a remarkable 99.4% availability. And together with the 2 vessel in Congo, it will reinforce our leadership in this technology. I would also flag the progress we are making with YPF towards FID on Argentina LNG, employing the exact competencies I discussed in terms of floating LNG in Mozambique and Congo to access a material new integrated resource opportunity. A further successful example of Eni skills and strategy is in Ivory Coast, where in September, we completed the sale of a 30% stake of our operated Baleine field to Vitol, in line with our dual exploration approach. The world-class Baleine field was only discovered in 2021, but has already reached over 70,000 barrels per day from the first 2 phases with a planned Phase 3 to take gross production to over 200,000 barrels per day. Coral North, Argentina LNG and Baleine Phase 3 form just a part of a deep hopper of high-quality project in our development and pre-FID portfolio. In the quarter, we signed an agreement with GIP, a strategic partner in relation to a 49.99% stake in any CCUS holding, our consolidated global CCUS operation, confirming the significant growth and value creation potential in this transition business, unlocked by a further example of a version of our satellite model. Finally, in September, Eni received approval for its application to convert part of our Sannazzaro refinery into a biorefinery. It will add along with 3 sites in operation, 3 under construction and further identified opportunities, including our Priolo chemical sites to the targeted tripling of biofuel production capacity to 2030. This emphasized the meaningful growth in diversified income streams our transition segment is delivering. Turning now to our results. Q3 reflects remarkable progress in our key businesses and another excellent financial outcome. Pro forma adjusted EBIT of EUR 3 billion was 12% higher than Q2 and just minus 6% down year-on-year in U.S. dollar terms despite the 14% fall in crude oil prices. In the Upstream, production was 1.76 million barrels per day, up 6% year-on-year on a reported basis and 8.5% on an underlying supported by a new start-up and ramp-ups, good regularity and production optimization in the base. Pro forma EBIT of EUR 2.6 billion was consistent with the prevailing scenario with EBIT associated split reflecting the rise in production I highlighted at the Vår and Azule. In exploration, we have already added over 800 million barrels of new resource year-to-date. GGP reported another good quarter at EUR 279 million in pro forma EBIT in a quarter that is usually quieter, remaining focused on maximizing value and optimizing the gas and LNG portfolio. Our significantly reconstructed midstream business has become a highly consistent deliverer of financial performance. In our transition activities, Enilive reported EUR 233 million of pro forma EBIT, corresponding to EUR 317 million of EBITDA, around 23% up year-on-year in a quarter that is typically our best one for marketing, but also where we saw a recovery in bioomargin to pre-2024 levels. Plenitude pro forma EBIT of EUR 98 million was softer year-on-year, reflecting the effect of some of the retail incentives coming off, but partially offset by strong growth in renewable capacity. In transformation, refining returned to profit, helped by better industry margin and improved utilization, while chemicals, despite the continuing weak scenario, began to show some benefit from the restructuring now underway, albeit it is very early days. Adjusted net income of EUR 1.25 billion, effectively in line year-on-year came despite the $10 barrel fall in crude price and weaker U.S. dollar. That is a testimony to the growth and performance improvement in the business and a more efficient tax rate at 42% that reflects the impact of high-grading upstream production mix, the transition towards a more sustainable diversified overall income mix and the benefit of our restructuring and performance improvement initiatives. Cash flow from operations once again reflects efficient conversion of our earnings into cash, and we saw a Q3 working capital draw, reflecting our focus on efficient use of the balance sheet. Indeed, we have already realized a EUR 2.1 billion benefit to the balance sheet through prompt cash initiative in response to the weaker scenario. Gross CapEx in the quarter was EUR 2 billion, taking us to EUR 5.9 billion year-to-date. Net CapEx has totaled less than EUR 1 billion year-to-date. Outstanding agreed valorization yet to close primarily related to the agreed Ares investment into Plenitude for which we have completed all the condition precedent and with closing expected in early November, the sell-down in Congo and the GIP stake in CCUS, this totals almost EUR 3.4 billion. After EUR 560 million in share buyback and paying the quarter 3 dividend, net debt was EUR 9.9 billion, down again quarter-on-quarter and leverage stood at 19%. Taking into account the still outstanding announced portfolio action, pro forma leverage was 12%, equivalent to 11% gearing, a level at the minimum of the industry range. Looking ahead towards the full year, we are able to further improve some of our targets. We now expect full year production to be between 1.71 million, 1.72 million barrels per day, up from 1.7 million barrels per day, a 3% underlying increase versus 2024. We expect GGP pro forma EBIT for the full year to be over EUR 1 billion. We expect cash initiative and self-help and mitigating the impact of weaker scenario to deliver around EUR 4 billion benefit, up from EUR 3 billion previously. We confirm gross CapEx below EUR 8.5 billion, but we expect net CapEx on a pro forma basis to be less than EUR 5 billion, down from the EUR 6.5 billion, EUR 7 billion that we previously guided to. And we are raising expected cash flow from operation pre-working capital to EUR 12 billion from EUR 11.5 billion previously, representing an underlying EUR 1.3 billion improvement versus our initial guidance for the year, while we are narrowing our expectation of year-end pro forma leverage to 15%, 18%. Reflecting the strong underlying business performance, the balance sheet metrics and the proven capability of the company to execute its strategy in a very accretive way, we are raising the 2025 share buyback to EUR 1.8 billion from EUR 1.5 billion, of which EUR 840 million has been completed as end of September and around EUR 1 billion to date. This, as we have already done since 2022, effectively share the upside in financial performance we have generated in the year, preserve a conservative position in response to the uncertainty ahead and ensure our ability to invest consistently over the cycle for growth and shareholder value. In fact, Q3 represents all the major elements of our distinctive strategy in action in one place. We are competitively growing our key businesses. We are launching new projects while also securing further opportunity through our industry-leading exploration and technological know-how in the upstream and opening up new opportunity in the transition. Meanwhile, we are managing risk reward, realizing value through our dual exploration satellite strategy, allowing us to bring in down debt and share upside with shareholders. And with that, I am ready along with Eni top management here on the call to reply to your questions. Unknown Executive: Thank you, Francesco. Hello, everybody. We've got a queue of questions. [Operator Instructions] And we're going to start with the first question that comes from Biraj at RBC. Biraj Borkhataria: I have 2, please. The first one is in the Upstream. One of the surprises today was the really strong production figure. And at least according to my model, that's the highest figure you reported since the pandemic. So could you just unpack the moving parts there quarter-on-quarter outside of the strong performance from Vår? And in particular, I believe there was a TSC adjustment this quarter. Wondering whether you could quantify that and tell us if there's any sort of follow-through into Q4 and '26? And then the second question is on Chemicals. Just noted no improvement in the sort of underlying results despite the crackers being shut down. So what should we expect going forward? Should those losses start to reduce from Q4? Or are there sort of additional shutdown costs coming through? Francesco Gattei: Okay. I leave the answer about production and comparison versus previous quarter to Guido Brusco and clearly, the Versalis to Adriano Alfani. Guido Brusco: So the increase quarter-to-quarter, both sequential and year-on-year are due to, as you rightly pointed out to Norway, Johan Castberg and Balder X, but also the accelerated start-up in Angola with Agogo and better performance in the ramp-up of our project in Mexico, Ghana, Nigeria and also overperformance in Ivory Coast. This, along with strong operational continuity in all geographies and an optimized major turnaround plan, particularly in North Africa. So the combination of all these 3 elements resulted into this remarkable performance. Francesco Gattei: Now Adriano. Adriano Alfani: Yes, Francesco. First, thanks for the question. About the shutdown of the chemical plant, as we previously said in different investor call, we always say that the benefits of the shutdown of the cracker start to be materialized 100% after more or less 9, 12 months that we shut down the crackers. So considering that we have stopped Brindisi at the end of Q1 and Priolo at the beginning of Q3, we expect to see some benefits starting from the second half of 2025 that is in the ballpark of EUR 40 million, EUR 50 million compared to the first half of 2025. But most of the improvement we will start to see from the significant improvement from the second half of 2026 that will be materialized in more than EUR 200 million on a yearly basis. That said, the scenario remained very weak, and this is also the reason why despite the improvement on our cost base due to the restructuring, we are not seeing a major improvement in our results quarter-on-quarter because what we are saving from restructuring is compensating the lower scenario. Unknown Executive: Thanks, Biraj. We're going to move to Santander and Alejandro Vigil. Alejandro? Alejandro Vigil: Congratulations for the strong results. The first question is about the outlook in terms of production for the coming quarters because we are seeing a very strong exit rate of about 1.8 million barrels per day. If this could be a good indication of the level for 2026 of volumes? And the second question is about the LNG business. You are very active in new capacity in terms of LNG, the Argentina, Mozambique, the joint venture in Indonesia. Just if you can elaborate about your view about this potential risk of overcapacity and how you're managing your portfolio of contracts? Francesco Gattei: I will give it to Guido the answer. Guido Brusco: So yes, clearly, our exit rate is strong. We are envisaging an exit rate in the quarter between 1.78 million and 1.80 million. We still have quite a strong and visible pipeline of high-quality projects. We still have 2 start-up coming by the end of the year. One is the Congo LNG and also we have a gas project in Angola operated by Azule. We also have project already in execution, as mentioned by Francesco, Coral North and others in the UAE, Hail and Ghasha and some in North Africa, along with projects which are coming in Indonesia, but those are, of course, in the plan period and not in 2026. As far as the LNG portfolio, we have a target of 20 million tonnes per annum. And this target, we want to combine also with a very diversified portfolio of opportunity. Currently, we have LNG assets in Indonesia. We will have soon in Mozambique with Coral North. We have in Congo and we'll expand it in Nigeria, in Angola. And we are complementing this with portfolio with U.S. Recently, you may recall, we've signed a 2 million tonnes per annum contract with Venture Global. And of course, last but not least, Argentina. Argentina is a 12 million tonnes per annum project in the second largest and world-class asset, which is Vaca Muerta. We are doing it with YPF, and we are targeting to have an FID sometime next year. Unknown Executive: Alejandro, I got that mixed up because we're now going to Alessandro. Alessandro Pozzi, Mediobanca. Alessandro Pozzi: I have 2. If I can go back to the production. I'm aware the guidance for next year is provided with the full year results. But I was wondering, given the very strong exit rate, should we -- and also the additional start-ups you will have in 2026, should we assume a further increase from Q4 into 2026 before factoring in the new JV with Petronas? And while on the topic, can we maybe have an update on where we are in terms of negotiations with Petronas? Guido Brusco: So you can imagine, there are a lot of moving parts, but we can confirm what we said at the last capital market update. We have an underlying of 3%, which, of course, we confirm over the plan. Sometimes, this is not a progressive growth because project comes over cycle and -- but we can confirm that growth. As far as concerned, the Petronas deal, we are in very advanced negotiations, and we are planning quite soon to sign binding documents for the joint venture. Alessandro Pozzi: Can you confirm the contribution to the production for next year? Guido Brusco: This is part of the underlying 3% growth year-on-year. As I said, there are many moving parts. There are new projects, new entry like the JV of -- with Petronas. There is also -- there are also some further M&A operations. There are also -- of course, there is also the decline of the field. So overall, we confirm the 3% underlying. Unknown Executive: Thanks, Alessandro. We are going to move back to London now with Josh Stone at UBS. Josh? Joshua Eliot Stone: Two questions, please. Firstly, on the buyback. Can you just talk about the factors that went into your decision to lift it this quarter? Because clearly, your business has been performing better. But at least until recently, oil prices are on a declining trend. So was there any consideration made about maybe holding back some buyback for next year to conserve cash? And to what extent was that factored into your new buyback level of EUR 1.8 billion? And then the second question, Namibia. Just hoping to get some latest thoughts there after your recent well results at the Land finding gas condensate. And maybe if you could just share your latest learnings about the asset and what potential next steps could be in terms of appraisal and whether this could be a potential fast-track development in your view? Francesco Gattei: I will answer about the buyback and then give the floor to Guido for the Namibia questions. On buyback, you have seen that the policy that Eni has already, let's say, confirmed for a number of years is substantially to start with a buyback announcement during the Capital Market Day and then a policy of, let's say, driving or sharing the upside in different form. The upside is the upside related to scenario increasing the CFFO, but also upside related to the capability to perform the strategy faster to benefit of more valuable M&A and deleveraging. Actually, this has occurred 3 times in the last 4 years. And many of these cases was not related to the improvement of scenario that actually declined, but then the capability to do better in terms of execution. This year, we have already announced in July, if you remember, this potential improvement. It's, let's say, a quite unique position in the market. Nobody is able to raise its distribution in this time and then nobody is able to reduce debt during the same period, while executing a full effective strategy in terms of project and growth in different parts of the business. So we are extremely, let's say, happy to share this opportunity and this value creation with our shareholders. And we think that the EUR 300 million was a fair evaluation of the improvement. And clearly, this also proves that we are quite confident on the capability to manage any kind of downturn or soft price in the next year. And then I'll leave back to Guido. Guido Brusco: Yes. On Namibia, as you know, we drilled 3 wells, very successful. The first one, Sagittarius discovered hydrocarbon with no observed water contact. The second Capricornus, we've tested and we were surface constrained with a flow rate of in excess of 10,000 barrels per day. And the third one, Volans showed a high condensate to gas ratio, but -- and we found 26 meters of net pay of rich gas condensate. So 3 successful wells, which they've not only found significant hydrocarbon, but they are also located at a very short distance from each other, in conventional deepwater, less than 1,500 meters. So clearly, they offer an excellent prospect for future development. Unknown Executive: We're going to move to Al Syme at Citi. Al? Alastair Syme: Argentina LNG Phase 3, one of the big changes in Argentina has been this incentive regime for large investments or RIGI. What do you think this legislation does to improve the profitability? And I guess, maybe put another way, would the project work without that legislation? And then secondly, I just wanted to ask, given you've done this big asset transaction, Baleine and Congo FLNG for, I think, $2.65 billion. I'm wondering what the invested capital is -- that you're essentially selling, sort of what multiple of invested capital have you been able to sell this asset at? Francesco Gattei: On Argentina, I give the question to Guido, then I will answer. Guido Brusco: In Argentina, investment in shale are been made since more than 10 years. So in 2013, it started the investment cycle in Argentina, and this is far before the RIGI legislation. RIGI legislation, of course, is a big enabler, particularly for the export of the LNG. And so that's the legal framework, and we are confident with this legislation and with this framework to make an investment decision in the country. Francesco Gattei: About the Congo LNG, as you know from also the other transaction that we have already completed with Vitol. This is based on an effective date that is 1/1/2024. And therefore, there are investments in the meantime, but we do not provide this kind of level of details that will be clearly also part of the final settlement at the closing time. Unknown Executive: Thanks, Al. We're going to move to Irene Himona at Bernstein. Irene? Irene Himona: My first question is on Enilive, where clearly, you're seeing very strong biofuel margins, improvements in your throughput and utilization. Can you give us a sense of how those are evolving in Q4, please? And then perhaps if you can split the marketing versus biorefining contribution to EBIT in the quarter? And then my second question, going back to tax, but not the P&L tax, more the cash paid tax, which fell almost halved sequentially. Is there any guidance at all on that? Is it -- are we likely to see a reduction in that cash tax rate aligned with the P&L reduction? Francesco Gattei: About the -- I will answer about the tax, and then I will give to Stefano Ballista for the Enilive. You've seen that in the last year or years, there is an improvement in the tax rate, both on the -- clearly the reported tax rate and the cash tax rate. This improvement is mainly related to a transformation of the company with the contribution of different geography in the upstream and therefore, the capability substantially to have more production and more results coming from lower tax regimes in this segment. Clearly, the contribution of the transition business, the possibility of the increase of return in Italy related to the fact that there is a transformation activity going on with the possibility to recover the deferred tax effects and also the contribution of satellites that are cash neutral from this point of view. So all this is a structural change that impacted both the nominal tax rate and the cash tax rate. So we have already said that we are expecting in terms of tax rate an improvement versus what we originally thought. So now we are moving in the range between 46% and 48%, while about the tax rate related to the cash tax rate, we are moving around the 28% to 29%. And now Stefano, please. Stefano Ballista: Irene, thanks for the question. Yes, the strong result of Enilive in this quarter have been driven mainly by the significant improvement of the biofuel scenario, coupled with a very good asset performance capturing this increased value. In terms of value, we can think about the sort of 80-20 in terms of overall contribution. Deep diving on biorefinery and looking at the scenario. What's going on is a progressive rebalancing of the supply-demand dynamics. This is fully in line with the direction we expected. There are some key reasons, some structural key reason pretty much on demand. Demand is improving. On a yearly basis, in Europe, we see above 6 million tonnes on a yearly basis compared to the 4.5 million last year. And this improvement has been, let's say, concentrated in the second half of the year. The reason is related to sustainable aviation fuel. We mentioned in previous call, the need for getting logistics in place in order to deliver SAF to customers. This is exactly what's going on. On top, actually, there is also a drive of extra demand coming from the expectation of the deployment in several countries of the Renewable Energy Directive #3. An example, a key example is Germany. It has to be approved, but the proposal is very relevant. The most relevant thing is the ban, the proposed ban of double counting by itself, this means above 1 million ton of extra demand on top of the number I said before for next year. So these are the 2 key structural reasons. On the supply side, I want to mention another structural reason. It has been confirmed the duties for sustainable aviation fuel coming from U.S. There was a doubt in the first half of the year, this duty are there for HVO due to clear the tax credit that is in U.S. It has been confirmed it's going to be applied to SAF as well, and this is another reason strengthening the market. Unknown Executive: Very good. Thanks, Irene. We're going to move to Peter Low at Redburn. Peter? Peter Low: Maybe the first, just on disposals. Can you just confirm the expected time line for the remaining ones, so kind of Congo to Vitol and then the Plenitude stake sale. But then beyond that, should we think of those as being the end of large disposals? Or are there other positions across the portfolio you're working to monetize? And then just on the net CapEx guidance, you've lowered it for the full year, but it looks like gross CapEx is broadly unchanged. Can you perhaps walk through the moving parts that have allowed you to lower that net CapEx guidance? Francesco Gattei: Yes. About the portfolio, we can, as we have already mentioned, confirm that we are very close to cash in the EUR 2 billion related to Ares acquisition of a 20% in Plenitude. All the condition precedents were completed. We do expect to have this contribution in a period of weeks. This will imply substantially a benefit on our leverage in the range of more than 4%. On the other side, we are still clearly waiting all the natural process authorization for the other transaction, the one that is related to Congo that takes some more time. So this is still ongoing, but it is a process that is maturing progressively. And about the contribution for next year, clearly, this year was extremely, let's say, rich in terms of opportunity. We have benefit from disposal that we matured last year in terms of closing, and we completed for the cash in this year. And also, we were able to fast track some of our disposal within the year. This acceleration is also at the basis of the improvement in the net CapEx results. You're right that the gross CapEx are substantially in line with expectation. But clearly, they were revised down during the first quarter once we announced the first estimate for the cash initiative that includes also CapEx reduction. In terms of what are the future, the future is that the dual exploration model is a living model. So it's continued to generate opportunity. You know that we explore with high stake, and there is also some results already emerging in different geographies. You know also that in Indonesia, we have a 10% disposal on the assets that will not be included in the business combination. And clearly, we are also evaluating other opportunities that could come in terms of valorizing our portfolio and aligning capital. Another element that will be cashed in within the end of the year, I was forgetting is the contribution of the CCUS, so the deal with GIP. Unknown Executive: Thanks, Peter. We're going to move to Michele Della Vigna at Goldman Sachs. Michele Della Vigna: And again, congratulations on the very strong results. Two questions, if I may. First, I wanted to start with biofuels. Very clear comment on RD. I was just wondering on SAF, if the mandatory blending does not increase from 2% until 2030, don't you see the risk that with new capacity coming on stream that market could soften over the next couple of years? And then I was wondering if you could give us perhaps a bit more visibility on what drives that EUR 1 billion upgrade in the cash initiative. And in case the macro deteriorates in 2026, how much flexibility do you see on your CapEx budget? And where do you think you could potentially cut some of your net investments? Francesco Gattei: Stefano for the biofuel. Stefano Ballista: Yes, Michele, thanks for the question. On SAF, for sure, is driven by the mandatory mandates, given the penalties -- underlying penalties. So this is, let me say, it's a given. On top of Europe, now at 2%, we got higher target like in U.K. already in place. Clearly, an increase sort of step-up of the target along the time line is going to help demand on SAF. This is something that could be addressed. On top, actually, there are demand like in Japan, this is a global market. In Japan, they approved the 10% in 2030. There are some discussion even in other country in order to get SAF mandatory at defined percentage given it's the only way to decarbonize the aviation sector. On top, actually, there are some sign on voluntary demand. This is going to be driven also by, let me say, the supportive incentives that at specific level will be put in place. An example is the Heathrow Airport, where half of the gap between jet, biojet and jet is supported with a limited amount clearly by the institution. This kind of approach is going to support demand. And then lastly, let me add, there is the CORSIA program. It's a program that has to be fulfilled by all the ICAO countries, all the countries that participate to the ICAO. Up to now, it's just voluntary. It's going to be mandatory from 2027, and this is going to drive demand above in countries that today doesn't have any obligation. In terms of overall demand supply, a biorefinery that can produce -- HVO can produce SAF. So there is flexibility is a core lever to address market evolution. We don't know exactly the growth, the demand of SAF, but there are clear mandates on overall HVO growth. And given current project in place and even current decision, let's say, of delay in terms of projects from other players on top of technical difficulties that other players are getting into in this new business and given current trajectory of overall biofuel, HVO and SAF, we see the market definitely a bit tight in the medium term. Francesco Gattei: Contrary, for the -- sorry, for the difference related to the estimate on cash initiative 2025, the previous one that was EUR 3 billion and now it's EUR 4 billion is substantially a mix of different factors. One is that we derisked some of the actions that we risked in the first half. You have to consider that we have a way to optimize or evaluate substantially our storage activity on oil, some ETB, so our trading activity on trading of oil. We have some additional value coming from swap of bond from fixed to variable, et cetera, et cetera. And the main contribution in this round in this last quarter is related to the additional initiative related to trading, another EUR 100 million that is EUR 300 million, another EUR 100 million that is related to this swap -- liquidity swap on our cash strategic pool and this EUR 400 million -- more than EUR 400 million that is related to the derisking of the previous cash initiative. So almost EUR 800 million are related to these 3 different items. About next year, I can tell you that the flexibility, the plan is under -- still under preparation, early phase of preparation. But generally, we are working with -- in the first year of the plan in a 20%, 25% flexibility. So we are speaking on a gross CapEx, something in the range of EUR 2 billion. Unknown Executive: Thanks, Michele. We're going to move to Henry Tarr at Berenberg. Henry? Henry Tarr: I had one really, which was around the GGP business and the sort of consistency of profits there. We've seem to have had much better profitability sort of through the summer and kind of consistent upgrades over the last couple of years. Is -- do you think this is a durable level of profit for this business? Or do you think it's related to -- so are there sort of structural changes post the change in your supply makeup that mean that this is a more durable supply or stream of profits? Francesco Gattei: Cristian Signoretto will answer. Cristian Signoretto: Well, yes, you're right. I mean, the third quarter has been a good quarter. And I would say, in this case, the major driver of the performance was what I would call the locational spreads. So in Europe, but also globally, we have taken advantage of premium market vis-a-vis the flexibility that we have in our assets in order to move the gas and LNG where the premium was actually higher. I think as we said, as Francesco said at the beginning, I mean, we have reengineered the business. Clearly, the lack of the Russian gas and our development of our new gas projects and LNG projects upstream have really changed the shape of our portfolio. We tend to be much more attentive to make sure that we can create enough optionality and flexibility in our portfolio in order to make sure that the new volatility environment that we are facing, and I think we will be facing in the future will be structurally creating headroom and opportunities for us to tap on. So I'd say, I mean, this is a trend that we will see continuing in the future. Unknown Executive: Thanks, Henry. We're going to move to Martijn Rats at Morgan Stanley. Martijn Rats: Yes. A lot have been covered, but just 2, if I may. So I noticed that Rosneft has a 30% stake in Zohr. And I was wondering if you could say a few words on how -- if that has any impact on you as the operator of the project. Maybe not, but I just wanted to kick that off. And then the other one I wanted to ask about your European gas sales volume. They were down sort of 15% this quarter year-on-year. European gas demand is not very strong, but it's not that weak either. Is that due to the portfolio changes that you just alluded to? Or is there another specific reason for that decline? Francesco Gattei: Cristian, if you would like to answer, and then I will go back to the sanctions. Cristian Signoretto: Well, the drop in the European sales this year have fundamental reason is linked to the fact that we have terminated the contract with which we were selling gas to BOTAS in Turkey via the Blue Stream. This was linked to, let's say, the pipeline itself. So I mean, this is a business that we are trying to unwind also in terms of participation in the pipeline. So that is the biggest contributor to the sharp -- to the drop in the sales into Europe. On the other hand, I mean, as I told you before, I mean, the demand in Europe is shrinking. We are adjusting our portfolio to the new reality. We are much more focused on creating more value from the single molecule than clearly getting more molecules into the market. Francesco Gattei: And about the impact of the new sanction introduced by the U.S. administration, it's still very early because clearly, there are details that have to be analyzed and clearly, the full impact to be completely assessed. What we can clearly say is that we will ensure full compliance with the sanction. But we have to also take into account that we have a very limited interaction with these 2 companies in of our assets. And generally, we are speaking about minority stakes and nonoperated stakes. So we believe at the end that there shouldn't be any material impact on ongoing operation due to this sanction activity. Unknown Executive: Thanks, Francesco. Thanks, Martijn. We're going to move now to Mark Wilson at Jefferies. Mark Wilson: You speak to how this quarter is really seeing strategic initiatives coming through, certainly with the satellites in Norway and U.K., and that's been a number of years in the making. So I'd like to ask about what appears to be clearly another strategic angle, and that's the use of floating LNG. I'd argue you appear to be the leader in that concept now with the second Coral vessel sanctioned, Congo [ FMG ] coming on stream, just 33 months in Argentina, initial development being 2 vessels of an even larger capacity. We know there's certain security benefits and clearly, speed if Congo FLNG is anything to go by. But could you speak to the CapEx, OpEx and emissions intensity benefits versus production of FLNG versus onshore? And any improvements expected between the 2 Coral vessels? And I did note in the previous answer, you spoke to getting more value out of a single gas molecule. So I think that relates to it. Francesco Gattei: Yes, Guido can provide all the details. Guido Brusco: Clearly, we have built a technological hedge on floating LNG. We are currently the largest operator of floating LNG and results, both in terms of delivery and performance are outstanding. Just to name a few of them. On Coral South, we delivered the project on time, on cost despite the COVID and the uptime of the floating LNG is just outstanding. I was mentioned by Francesco in his speech, 99-plus percent. In Congo, we have 2, one in operations and one coming, and we've just sanctioned Coral North recently with the start-up expected in 2028. In terms of security, it's pointless to say that is safer and basically provides and disconnect completely from any turbulence from onshore, and we are seeing it how successful was the choice in Mozambique. In terms of cost, costs are -- I mean, we are in the deepest -- in the, I would say, steepest part of the learning curve. So if I compare cost from the first floating LNG and the cost of the project in -- of the future project in Argentina and the current project in Coral North, the reduction is significant. The industry is making significant progress in driving down to the point that we are reaching level comparable, if not better, in some geographies of the onshore LNG plant on a million tonne per annum basis. In terms of -- you said the emissions, of course, we are applying the best available technology. And in some cases, it's not the floating LNG, but I just want to mention one in Angola on the FPSO Agogo, we are basically -- we are actually capturing CO2 and reinjecting CO2 in the reservoir through the gas injection, which is used for gas recovery. So even on an emission basis, we are doing significant progress and driving down emissions on a unit production basis. Francesco Gattei: I will also add that it is an opportunity to exploit associated gas reserves in certain, say, conditional fields where this gas potential will not be improved, cannot be recovered. And this potentially could become a cap on oil production. This is exactly the case of Congo. So it's not just a matter of cost, but it's a matter of value towards the opportunity and the optionality that this technology will add to your capability to exploit resources. Unknown Executive: Thanks very much, Mark. And I think a subject we'll end up returning to. So we're going to move from Mark to Italy to Massimo Bonisoli at Equita. Massimo, are you still there? Massimo Bonisoli: Two questions left on Enilive. The first on new Sannazzaro biorefinery. Can you explain how the configuration feedstock and product profile differ from your existing biorefineries like Venezia or Livorno? And the second one is on the antitrust fine on Italian biofuel distribution. If you could elaborate on any potential impact this ruling may have on the profitability and competitive positioning of your fuel distribution business following the fine? Francesco Gattei: I will ask Pino to answer to the first, and then I will answer to the second one. Giuseppe Ricci: Thank you, Francesco. About Sannazzaro, Sannazzaro is a brownfield biorefinery because we will recover an existing hydrocracker unit very recently realized in Sannazzaro in 2010, very high pressure. And in this way, because of the high pressure and the good configuration, we will be able to maximize the flexibility to produce SAF. Production of SAF in Sannazzaro is an upside because there is the direct connection by pipe to the big Malpensa airport that is a big hub for the Central Europe. And about the feedstock, the flexibility of feedstock will be the same of Livorno or the other refineries, a mix of western residue and vegetable oil coming from not in competition food areas, including our agri business. The logistics system will provide different channels of supply of feedstock and distribution of products in order to maintain the flexibility. The unit is expected to be completed by 2028 in order to be in production at the end of this year. Francesco Gattei: About the fine that was proposed decided by the AGCM on biofuels. First of all, what we can say that clearly, we appeal against this decision that we judge as substantially incorrect. The biocomponent is aligned in terms of pricing because as you have already -- you know very well and from the fact that there is a very limited number of feedstock and a very, let's say, small market. This is substantially aligning the cost of this element to the different operators. So everything is happening in a very transparent way and the cost of obligation for all the players in the market are substantially similar. Secondly, the change of information that was considered in breaching of the competitive rule was, in fact, a legitimate change between the party on fuel supply agreement that requires this quarterly communication. In terms of competition, clearly, this is nothing to do with competition. As we said before, this is an element that is a key issues for the market, the growing market in terms of capacity is the capacity of the feedstock, the key element of risk. We are working on the capability to develop our own agri hub, and this component is a mechanism to derisk in terms of both quantity and value, the contribution of our own internal production. So we think this is something that we are trying to defend through building an integrated chain also on this side. Unknown Executive: Thanks very much for that question, Massimo. We're going to move now to Nash at Barclays. Nash, are you there? Naisheng Cui: Two questions from me, if that's okay. The first one is around technology. I was very impressed at your Technology Day in Milan earlier this year. I just wonder if you can talk about your progress over there, your deployment of technology, AI and how does that add momentum for your operation and the financial performance into next year and beyond? Then my next question is on working capital movement. Given some of the volatilities we have seen, I wonder if you can give us a bit of color on working capital in Q4 and Q1, please? Francesco Gattei: I leave to Lorenzo Fiorillo, Head of our R&D Technology Group business to answer about the artificial intelligence, and I will come back for the working capital. Lorenzo Fiorillo: Thank you, for the question. What I can say that we use AI since a while, it's not just in the last years. Internally, we are more than 200 use cases we are developing. We found a lot of advantages in using AI application within the company in optimization, find solution and helping us in creating better scenario. The use of a big number of data and important technology and technical expertise as well as digital competencies internally and with high-performance computing, for sure, is a fantastic habitat for us to develop this kind of tool, which is very helpful for us. The progress for us is to continue on agentic model for AI, and this is the way we are going to develop in the next years. Francesco Gattei: About the last quarter, the next quarter, we do expect substantially a very limited drawdown in terms of working capital. This quarter was substantially aligned and neutral. Overall, in the full year, we have a positive working capital in the range of EUR 2 billion. On next year, clearly, we have to assess all the working capital activity based on the new plan that requires also a definition of the scenario first and clearly, all the activity that we are performing in the different businesses. Unknown Executive: Thanks, Nash. We're going to go to the last 3 questions now. So the first one of those is Bertrand Hodee. Bertrand, are you there? Bertrand Hodee: Yes. I have 2 very short questions left. The first one is on Coral North. So you just took FID in September. But when looking at the annual report 2024, in fact, you already booked 329 million barrels of equivalent of proved reserve. Even if your share has risen from 25% to 50% in the project, as Exxon pulled out, looks to me that you've already booked the full reserve of Coral North in '24. And the second question is, so EUR 1.8 billion of buyback for fiscal year '25, EUR 0.8 billion been already bought back. And so there's EUR 1 billion left. How should we split those EUR 1 billion between the remainder of the year '25 and '26, please? Francesco Gattei: I leave the answer to Coral North to Guido. Guido Brusco: Yes, of course, yes, you are right. We booked last year. This year is the JV FID. We took the joint venture FID. And in terms of share, as you rightly pointed out, it is a bit disproportionate compared to our share of the project, which is 25% because we've reached a swap agreement with one of our partner between the onshore and the offshore molecules. Francesco Gattei: About the buyback, we generally do not provide guidance in terms of, let's say, weekly or next or planning plan of buying because clearly, this is a sensitive matter. Clearly, we publish every week what is the amount that we have bought, and you have seen, I would say, some steps or the pace of this buyback activity. As you correctly said, there is still EUR 1 billion to be bought in front of us. We have 3 months of 2025 and then 4 months in 2026. I think that there are different combinations, but will not change too much. Unknown Executive: Thanks, Bertrand. We're going to move to Chris Kuplent at Bank of America. Chris? Christopher Kuplent: I've got one question remaining, Francesco, and it's quite a high-level one. I remember you often arguing why go over and beyond on a CFFO payout promise when you have so many great opportunities to invest. And I just wanted to double check where you are on that theme, in particular, because if I add up the dividend, the new buyback, I end up in sort of plus 40% territory. Is that -- are you signaling something into the coming years that you are now more comfortable being in that 40% plus range than you were previously? Francesco Gattei: First of all, the percentage that you're referring to, the 41%, 40%, I think, is substantially the same number also because we have a quite positive expectation on the quarter that is coming. So I don't think this is an element of concern. On the other side, as you have seen, we are able to find solution opportunity or value inside the organization that you are able to raise on a quarterly basis. I refer in particular in this case as the cash initiative on the capability to execute the strategy on the production performance. So I think that generally, I see more upside. And therefore, I confirm that we are moving within the 35%, 40% range. I confirm that we continue to be selective in opportunity. I confirm that we have still a long list of opportunity that allow us to be extremely capable to select with the best one for the right time. And so I think that we are able to tick all the different boxes to reach our goals and confirming also an attractive distribution plan for our shareholder without modifying our view on what is the right amount of distribution that we should provide in order to ensure growth and capability to defend our balance sheet. Unknown Executive: Great. Thanks, Chris. We're going to move to the last question now. If anybody has more questions, we can deal with those directly afterwards, but I'm conscious we've moved over the hour. So the last question is Matt Lofting at JPMorgan. Matthew Lofting: Apologies for being late joining. I wanted to just come back on the strength of the cash flow generation by the company this year. I think you sort of stated this morning that the underlying improvement or upgrade versus the original plan at the beginning of the year is sort of close to EUR 1.5 billion. And it struck me that it was a higher proportion of the sort of the original plan start point. Could you sort of break down what some of the key wins have been from that perspective? And perhaps then secondly, also, if we take a step back and put it in the context of full year plan cash flow expectations, I'm interested in the extent to which you sort of see that underlying improvement is running ahead of your 4-year plan baseline or whether it's a case of sitting within the 4-year plan, but having accelerated the delivery of that cash? Francesco Gattei: Sorry, but I should ask you to make the second question again because the line was extremely noisy. So if you can repeat the second question, please? Matthew Lofting: Yes. Francesco. I was just interested if you could share any thoughts on the extent to which that EUR 1.3 billion underlying improvement represents an upside or an incremental delivery of cash flow compared to your 4-year plan baseline or whether it's the case that you're delivering cash flow faster within that 4-year plan? Francesco Gattei: Okay. Thank you. Now I can tell you sure that about the performance, the improvement of the underlying that clearly take into account of the scenario impact of this EUR 1.3 billion, we have practically EUR 500 million that are related to the Upstream. Clearly, upstream is a result of the improvement in terms of production that you are referring to, capability substantially to have a different mix that is generating more value. And clearly, in this plan, there is also some benefit from the different tax regime in the different new production contribution that are coming up. There is GGP. GGP, we have revised the guidance during the year, and this clearly is transferring value from the EBIT also to the cash generation. We are here in the range of EUR 300 million. On Enilive, there is again EUR 300 million. This EUR 300 million of Enilive is split between improvement in terms of marketing and from biofuel is related to the capability to have a good performance from our biorefineries. There is also a small improvement in terms of Versalis because clearly, unfortunately, on Versalis, we are seeing the negative side, but this is because it's a scenario that is classically hiding the contribution that Versalis is gaining from the shutdown and from the anticipated shutdown. So overall, these are the key elements that are showing improvement. Clearly, what we can say about next year is early to say. I would say that production enhancement upgrading of E&P is continuing. GGP performance is subject to the volatility, but also to the capability to have a larger optionality in the different contracts in the different assets. So this is another element that should help to capture upside also next year. On Enilive, clearly, we are expecting to have a continuous improvement in particularly a better scenario that we would like also to capture through the budget. And we do expect clearly on Versalis a more visible evidence of the recovery that is related to the new configuration of assets. So I think these are the elements. Unknown Executive: Thanks very much. That's -- and thank you, Francesco. That's bringing to an end the conference call. I'm conscious we have run a bit late, but I wanted to include as many people as possible. Those people who weren't able to ask a question, please do get in contact with the team here, and we'll be delighted to help. That's it. Have a great weekend, and thanks for joining us. Francesco Gattei: Thank you.
Operator: Good day, and thank you for standing by. Welcome to the Hexagon Q3 Report 2025 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anders Svensson, President and CEO of Hexagon. Please go ahead, sir. Anders Svensson: Thank you, operator. Good morning, and welcome to our third quarter 2025 earnings presentation. Today, we have an extended session with a bit of a different format. So I will take a moment now in the beginning just to walk you through how it will work. So in a moment, I will start by taking you through the third quarter performance. First, from a group perspective, and then focus on Hexagon core business performance in the third quarter. I will then hand over to Mattias Stenberg, the CEO of our potential spin-off company, Octave, and he will talk about the Octave performance during the quarter. Mattias will then hand over to Norbert Hanke, our interim CFO, who will cover the financials for Hexagon Group in a bit more details. Following this, I will take an additional roughly 20 minutes or so, to discuss my initial thoughts from my first full quarter at Hexagon, including also immediate priorities, with a focus then on -- also here on Hexagon core. And we will then, of course, open up for questions-and-answers. But starting then with our third quarter performance, and I start directly on the highlights. So in the third quarter, we made solid progress in our financial metrics and delivered a great deal of operational progress. Organic growth was 4%, with growth driven strongly by a demand in Autonomous Solutions and also across some of the other customer segments, such as aerospace and defense, electronics, machine control, mining and general manufacturing. Operating margin strengthened quarter-on-quarter, despite that Q3 is normally our seasonally weakest quarter, but it remained below our targeted levels. Across Hexagon Group, we have identified a cost efficiency program, which has been in action now and will begin to benefit margins gradually from the coming quarter here, the fourth quarter and will then have full effect by the end of 2026. Cash conversion in the quarter was good at 77%, considering that Q3 is normally the weakest quarter in the year. And we remained on course to achieve our annualized target of 80% to 90%. We also made some strategic operational moves during the quarter. We have previously announced the sale of our D&E business in Manufacturing Intelligence to Cadence for EUR 2.7 billion. And we made some changes to the executive leadership team ahead of the potential separation of Octave. And this separation is still on track for the first half year of 2026. And I will talk more about these changes in a moment. But first, I will walk you through the announcement where we are addressing our cost issue. So at my first call during the second quarter report, I committed to review the cost base of Hexagon to address the recent challenge in our operating margins. So across Hexagon Group, we have identified EUR 110 million of potential savings with around EUR 74 million being related to Hexagon core and EUR 36 million being related to Octave. And as I said, we expect to see these benefits gradually starting from the fourth quarter this year and then with full effect at the end of next year. The cost to achieve these efficiencies will be around EUR 113 million. In Hexagon core, we also conducted a review of our balance sheet, which we identified a charge of EUR 186 million related to primarily innovation in history and also some other items like inventory and also discontinued products. These charges were also taken during the third quarter. And I'm very confident that these situations will be less likely in the future as I expect our businesses to manage their profit and loss and balance sheet within normal operations, and key steps we are taking here is to give divisions full accountability for financial performance. It will also enable operational and product decisions to be taken closer to customers to ensure a market fit and also that customer needs are met. We're also strengthening our governance for approvals and review systems, and we are implementing a new performance management system to enable swift response. I'll now turn into recent changes to our executive team. So we have announced that David Mills is stepping down as CFO from Hexagon for personal reasons, and he will be replaced on an interim basis by Norbert Hanke until we find a permanent replacement. We didn't want to see David go, but I understand the reasons and he has my full support. But I'm very happy that David has agreed to remain available for us for the next 6 months as a financial adviser and that we also have a very competent and knowledgeable interim replacement here with Norbert. We have also announced that on the separation of Octave, Ben Maslen and Tony Zana will transition to the Octave leadership team, where Ben will be the CFO, and Tony will be Chief Legal Officer and Corporate Secretary. Ben and Tony has been key members to the Hexagon executive team for many years and still are. And while I'm sorry to see them go, I'm also delighted to see them progress into these new roles with Octave. And I have no doubt that they will be instrumental in driving value for Octave and embrace the future that this company is going into as an independent listed company. And I'm pleased to announce that replacing Ben is Andreas Wenzel. Andreas joins us from ABB, where he has held a number of senior roles, including Head of Strategy and M&A. Replacing Tony will be Thomas De Muynck, who joins us from Jones Day where he was the Head of the Brussels practice. Thomas joined us early in this month, and I'm very happy to welcome him on board to the team. Turning now to the next slide. I will talk briefly on the decision to sell our D&E business. In early September, we announced the sale of our D&E business to Cadence for EUR 2.7 billion. The engineering and simulation market has been consolidating rapidly and electronical design and automation suppliers, EDA suppliers, have been increasingly taking a leading role in this consolidation. And we are then consolidating with physical simulation suppliers like our own D&E business, and we have seen this with other companies like Siemens, Altair and Synopsys, Ansys. And this is a trend which is very difficult for Hexagon to follow. It is therefore better that we dedicate our time and attention to our core, which is precision measurement, positioning and autonomy technologies, where we can use our market leadership position to drive best-in-peer group growth and margin levels. And just to make it very clear for everyone, this is not an exit from software at Hexagon. Post the potential separation of Octave and the sale of D&E, Hexagon software and services revenue will still account for above 40% of revenues and 25% recurring revenues, and we expect these amounts to continue to grow also in the future. The funds released by the transaction expected to be in the amount of EUR 1.4 billion will help support us to build and develop our businesses while also maintaining a very robust balance sheet. We expect the transaction to close during the first quarter of 2026. I'm now turning to the next section, and that's the financial performance of Hexagon core in the third quarter. So I'll move directly into that. So Hexagon core, that means excluding Octave business, grew by 5% organic in the third quarter with an adjusted operating margin of 27%. This is a solid financial performance in challenged end market environments. I will now turn into a focus on Manufacturing Intelligence. So MI reported revenues of EUR 445 million, represent a 3% organic growth versus 2024. There was a strength in general manufacturing and electronics, and it was somewhat offset by continued soft demand within automotive. There was growth across all geographies with good demand in the Americas and growth also in EMEA, where automotive weakness was offset by a strong demand in aerospace. China also grew with 3% in the quarter, strength within electronics and general manufacturing, but signs of weakness is also here within automotive. The division reported EUR 112 million EBIT and an operating margin then of 25.1%, and it was impacted by some negative currency effects. In fixed currency, if you compare the margin year-on-year, it was actually better in 2025 than in 2024. So turning now to Geosystems, where we reported revenues of EUR 353 million during the quarter. And I'm happy to say that represented a 1% organic growth compared to last year. And it was really good to see a return to growth after 6 quarters of negative growth. Last time we had a positive growth was the fourth quarter of 2023. So good to see that we are back on positive numbers. We saw continued growth in the software portfolio and associated recurring revenues and a good contribution from our new product iCON trades, which continues to grow very well. This was, however, offset by continued weakness in hardware related to construction and heavy infrastructure, where the market remains very weak, especially in China. The Americas continued to grow, and there was a return to modest growth in EMEA. Asia remained challenged, of course, given the exposure to China heavy manufacturing or heavy infrastructure, particularly in high-speed railway, offsetting the continued good growth that we actually have in India. And here, maybe adding some interesting facts that in average 2022 to 2024, China was building 3,600 kilometers of rail every year. If you compare to the first half year of 2025, they only was building 301 kilometers. So it's almost a drop of 85%. And that is, of course, impacting Geosystems deliveries in China. EBIT declined to EUR 95 million with an operating margin of 26.9%, reflecting the combined effects of low volume in some product segments, the weaker product mix because the product mix going into this heavy infrastructure is a really positive contributor and also then we had negative currency impacts. Finally, I turn into Autonomous Solutions. And I'm happy to say here we have the standout performer in the quarter, delivered revenues of EUR 178 million, representing 19% organic growth compared to the prior year. There was a very strong performance in aerospace and defense. Mining was also growing well and end markets in agriculture actually remain challenging. So here's the problem child within this division currently. But it's market related, and the agriculture is currently in a serious downturn, and we are seeing signs of improvement, but still it's very low compared to where it should be. By geography, growth was strong in the Americas, which represented the majority of the aerospace and defense demand in the quarter. APAC also grew well, supported by demand in the autonomous road trend project within Australia and EMEA declined, but that was on tough comparables. EBIT came in at EUR 65 million, represented an increased EBITDA margin -- EBIT margin to 36.6%, driven by strong volume, positive product mix, but slightly offset by currency. So in summary, a very solid performance within Hexagon core in general. And I will now hand over to Mattias, who will cover the Octave performance. Mattias Stenberg: Yes. Thank you, Anders, and good morning, everyone. We'll start with, I thought, since this is the first time we report like this publicly for Octave, I thought we'd start with a short description on what the business is and what we do. So we are a market-leading provider of enterprise software that ultimately helps customers design, build, operate and protect mission-critical industrial and infrastructure assets. In terms of numbers, we had about EUR 1.5 billion revenue last year. As you can see also from the slide, we have high recurring revenue and high profitability. We have roughly 7,400 employees around the world. And we have a very strong, I would say, A+ list of customers. As you can see, roughly 60% of the global Fortune 500 companies are customers of Octave today. And you can see some of the logos there on the slide, but of course, many, many more. So what could we do if we move to the next slide and talk about our core pillars. I think, first of all, it's important to say what makes us unique is that we connect all of these pillars together into one platform, one natively integrated data platform, right, all the way from design, build, operate and protect. So you will see product names out to the right here on the slide, some of the flagship products, obviously, SmartPlant 3D, EcoSys, EAM, ETQ, et cetera. But the way we go to market is really by selling a platform. We're selling solutions. We're delivering value, not selling individual products. I think an example of that is that you can also see that products like SDx2, which is our data platform, shows up in several of the different pillars here. Design is our biggest area, as you can see from the revenue contribution pie there. Build would be our smallest one, operate our second largest, and that's also been the fastest growing over the last couple of years. But moving into the quarter, how did we do on the next slide. I guess the headline number is that we grew organic growth 1%. And one has to remember first that we come from several years of good growth, right? I think that's one important thing to say. The other thing to say is that our recurring revenue grew 6%. So I feel confident that we're building momentum for the future. We're adding customers, adding seats, et cetera. So the base is growing. And you can see that by our SaaS revenue that grew strong double digits. However, our lease revenue was flattish, which obviously had a, what you say, dampening effect on the recurring revenue compared to the SaaS. To offset this growth, we did have a decline in perpetual licenses. This is a revenue that varies quite a lot by quarter. It depends if you get a big deal in one quarter or the other, the other thing one has to say also is that it is an intentional strategy and has been for quite a while to transition this revenue into subscription revenue. So if you look at the slide there as well, we described that the license revenue is now 13% in this quarter of total revenue. And this is the revenue that we will gradually, over time, transition to SaaS. If you look at the profitability, we did 26% operating margin, which was lower than last year. And I think it's a combination of things. I mean, one, that the perpetual licenses were down that has a high drop-through. Also that we've had some additional investments partly due to making the company ready for being a stand-alone public company and also to integrate the other business units, SIG, ETQ and Bricsys that we have taken on recently. Important to say, however, that this is a temporary downturn in the margin. We are taking cost effects like Anders talked about. And my expectation is that this will put us back on a growing margin trajectory. If we move to the next slide, I wanted to highlight one very important strategic win we had in the quarter. We won a multiyear 8-figure deal. And I guess you could say also there was very high 8 figures, and I see this as proof that our strategy of selling a platform and our relatively new product, SDx2 is delivering value in the market and to customers. It really also sets a precedent, I think, for other owner operators that want to digitalize their assets. And it will clearly also influence and incentivize other players in the ecosystem, such as EPCs, suppliers, contractors to adopt our platform as they see big owner operators adopting it. Okay. On the next slide, I wanted to say a few words about some key initiatives that are going on right now. Like I mentioned, we are transitioning our business to a SaaS model. So you will see more of that going forward. I also mentioned that we are investing in making the company ready to be a stand-alone public company. Also wanted to highlight the strategic disposal that we did earlier this summer of some noncore assets in the HexFed business, which historically sat in the SIG division. It was around EUR 90 million of revenue, and this will strengthen our margin profile and, yes, sharpen focus for us going forward. Like I also mentioned, we are in the midst of integrating these businesses into one. We are making very good progress on that and we'll, yes, soon complete that. We're also, like Anders mentioned, completing the cost saving program, which will, like I mentioned, put us back on a growing margin path. Finally, we are also making improvements to our organizational structure. So if you go to the next slide, I wanted to highlight the management team that we have put together here over the last couple of quarters. I'm not going to read every resume here, but if you -- there was this press release in September where you can read more about this if you're interested. But I would say it's a world-class management team that we put together that we think really will help us scale this business. It's a combination of Hexagon executives like Ben and Tony that Anders mentioned. And then we have some executives from the former ALI division as well as 2 new recruits that I wanted to say a few more words about. So we've hired a Chief Product Officer in Jay Allardyce. He is a recognized leader in the industry across AI and enterprise software. He has had prior leadership roles at HP, GE, Uptake and Google. So I think he will be a great addition to our strategy and product teams. We also have hired Tamara Adams or Tammy, as she goes by, who is a strong CRO with lots of experience in the industry. She has had recent roles at Honeywell, Oracle and most recently as Chief Revenue Officer of a company called Dotmatics, which recently was acquired by Siemens. So in summary, I'm very happy with the team we put together, and I'm sure they will help us scale this going forward. Finally, on the next slide, I wanted to say a few words about the time line and what you can expect there. So we are obviously well aware of that the U.S. government shutdown, which is impacting the SEC and the review process, but we still feel that we are on track to complete the spin-off in the first half of next year. Also, like we mentioned before, Octave will be listed on a U.S. National Securities Exchange with the Swedish depository receipt expected to run for approximately 2 years. And also like we mentioned in the report, we will -- we are planning to hold an Octave Investor Day sometime in the first quarter next year, and we will come back with an exact date when we have it. So thank you very much. And then I'm handing over to Norbert. Norbert Hanke: Yes. Thanks, Mattias. In the following financial update, I will take you through the Q3 performance for the Hexagon group. Turning now to the next slide. Let us begin with the Q3 2025 income statement. Taking the sales bridge first. Revenue were EUR 1.3 billion, generating reported growth of 0%. Currency was a negative minus 4% on sales, and there was a positive plus 1% from structure, resulting in organic growth of 4%. Gross margin were stable at 67%, considering the impacts of FX. We continue to be confident in driving gross margin expansion as we will have positive impacts from new product releases. Operating earnings decreased by 7% to EUR 349 million, corresponding to a margin of 26.8%. I will break this out further in the profit bridge. Interest expenses and financial costs decreased from EUR 44 million to EUR 32 million, given a delta on earnings before tax of minus 5%. Taxes being at 18%, in line with prior years, bringing us down to an EPS of EUR 0.096 also declining by minus 5%. Just for reference, the EBIT1, including PPA includes EUR 27 million of amortization and so dilutes the EBIT1 percentage to 24.7%. Next slide, please. Moving on to the gross margin development. As I mentioned on the previous slide, we saw stability in the gross margin once adjusting for currency. On a rolling 12-month basis, gross margin of 67% is broadly in line with the prior year. Turning now to the profit bridge, please. So during Q3, currency continued to be dilutive, reducing EBIT margin by 30 basis points. The structural element was accretive with solid contribution from acquired companies such as Septentrio and Geomagic as well as by the sales of the dilutive assets in Octave. The organic impact was negative, diluting the margin by 240 basis points. This mainly reflects a cost base that is not yet fully aligned with the current level of demand. To address this, we have started a cost program to rightsize the organization and mitigating this impact going forward. We expect the benefits to contribute or to start to contribute gradually from the fourth quarter of 2025 and beyond. Turning to the next slide, please. Moving on to the Q3 cash flow, which is a strong performance when taking seasonality into account. The adjusted EBITDA variance at minus 2% demonstrates the continued stronger cash leverage versus the EBIT1 variance at minus 7% due to the increase in D&A. The working capital represented a build of EUR 32.4 million in the quarter, an improvement to working capital management last year that results in a 1% increase in the operating cash flow before tax and interest, which leads to a solid cash conversion of 77% versus 70% last year. Interest payments marginally decreased as expected and cash taxes remained at a similar level to Q3 last year. The nonrecurring items cash outflow of EUR 38.8 million versus the prior year of EUR 22.7 million brings an operating cash flow of EUR 139 million, decreasing by minus 3%. Next slide, please. Moving on to the working capital trend. The Q3 net working capital being a build of EUR 32.4 million versus the prior year build of EUR 56.2 million decreased the proportion to rolling 12-month sales to 5.3%, lower than the prior year level of 8.3%, which is still below the 10% threshold we aim to achieve. To conclude, the divisions have continued to mitigate an uncertain environment to deliver growth, solid cash conversion and stable gross margin. Negative currency has been a headwind to EBIT1 margin development, and we are working to address the cost base through the announced cost program. I will now hand back to Anders. Anders Svensson: Thank you, Norbert. And I will then start by summarizing the third quarter. So to conclude, in Q3, we have seen solid development in our financial metrics. Organic growth of 4%, an improvement in margins quarter-on-quarter and a good cash flow considering the usual seasonalities for the third quarter. While improved, our operating margins remain below our expectations and below our targets. And as a result, we then launched an efficiency program aiming to achieve cost savings of EUR 110 million. And this, we expect to have gradual benefits from the fourth quarter this year with full effect the end of 2026. We do not see the immediate market environment that currently is characterized by delays in customer decisions, as Mattias mentioned and also within the Hexagon core businesses, and we don't expect that to change in the near term. So we see a similar environment in the beginning here of the fourth quarter. But we have also released a lot of products in recent quarters, and we see that as we are set up in a good way when the positive environment returns. Operationally, we had a successful quarter. The sale of D&E, as I mentioned, as one of the key highlights and the release of those funds will then further fund growth for both Octave and Hexagon core. And finally, then, the potential separation of Octave remains on track for completion in the first half of 2026. I'll now turn to my first quarter review slides. So in this section, unless I otherwise mentioned or it's otherwise stated in the slides, it would be relating to Hexagon core businesses. And that means then the type of businesses that are left after the potential spin-off of Octave, of course. And this includes then our business areas, Manufacturing Intelligence, Geosystems, Autonomous Solutions and also the Robotics division. So I will take you through my initial thoughts and observations after now almost exactly 3 months being at Hexagon. And I will then talk about actions we are taking to drive performance further and some more details about our upcoming CMD. So I turn into the first slide here. So Hexagon has created superior value for many decades now, at least 2-plus decades, and we have the potential setup to continue to generate superior value creation for decades to come. And today, we are at a very exciting inflection point in our company's history because our industrial customer base, they value precision and quality more than ever as they try to meet the increased quality demands of everything getting more tight, more small and with less tolerances and also the increased sustainability challenges. They're also driving towards full autonomy as a response to the shortage of skilled labor in the world. Our industry-leading technologies regarding sensors, software and AI are allowing us to deliver ever more value-adding products and services to our customers, and we are well placed to seize the opportunity for autonomous operations in many industry verticals going forward. Our new operating model will enable us to take full advantage of our profitable growth opportunities. But first, a little more on the opportunity ahead. So I turn to the next slide. So Hexagon is ideally positioned to enable autonomy in many industry verticals, and we will do this by combining our capabilities and offerings within various fields. We possess market-leading measurement and positioning technologies, combining multiple types of sensors. We utilize these to deliver sophisticated real-time digital twins, including reality like full 3D environments of buildings and cities. And we leverage advanced analysis on [ AI ] to unlock the value of petabytes of data that we generate. The combination of these capabilities position Hexagon to be a clear leader in the emerging field of Autonomous Solutions. Many of our industrial customers have embarked on a journey towards these autonomous operations as they increasingly struggle to find skilled and qualified labor. And hence, they need to move towards so-called lights-out production. And here, of course, our new humanoid robot, AEON, is a prime example of enabling industry autonomy. Measurement and positioning new technologies and industrial autonomy are only going to become more important as industrial customers face these significant challenges. So let's see how our products are helping. So turning to the next slide. Since late 2024, we have launched a number of important product innovations, which combine our most advanced sensor with latest technology on AI and digitalization. All of them also bring significant advances on autonomy. Taking some examples from this page, we have talked previously quite a lot about AEON and iCON trades. And also last quarter, we talked about MAESTRO, our new coordinate measurement machine. So I will focus on the other one here. So in Manufacturing Intelligence, we have the ATS800, which is the first laser tracker ever to merge scanning and reflector tracking into one system. This portable metrology device is automation-ready and uses AI to pinpoint the true center of each measurement, detect features like holes and edges, et cetera, and this is huge to speeding up the process and removing the need for human intervention. And also now in the beginning of October in Geosystems, we just launched the TS20. And that's the first new total station platform in, I would say, 20 years plus. And it's a full hardware and software overhaul it's the first total station with on-device AI, which enables it to recognize and lock into any prism without user input. And this drastically reduces errors, setup time and operator dependency. And this is a direct response from Hexagon to the shortage of skilled surveyors. So combining our skills in measurement and positioning technologies, digital twins and advances in AI to deliver solutions for industrial autonomy is key for Hexagon, and we are in the middle of this journey. So the products you can see here on the page represent profitable growth opportunities ahead. And this potential is, of course, largely not reflected in Q3 financial performance and will also not be very much reflected in Q4. But going forward, these products will play a major role in Hexagon's delivery. So turning to the next slide. So we know that Hexagon historically demonstrated that we can generate strong organic growth with excellent operating margins. And on this slide, I try to demonstrate a bit the relationship between organic growth and profitability during the last 2 years. And we can see here in this recent history that we have 2 trends. One is that the organic growth has been impacted by the macro backdrop, and we can see it's been negative or at best flattish, while the operating margins have been subject to increasing cost levels internally and hence, a dislocation from our top line alignment and -- a top line development, which has been flat. So you can see we have dropped even more when it comes to profit. The recent quarter shows some signs of reversal of this trend. And with our increased cost focus going ahead here, combining this with our new operating model, we intend to generate a delivery model within Hexagon core that supports profitable growth generation. So let's have a look at the steps we have taken, moving then to the next slide. During the third quarter, we have taken 2 really important steps to enable us going forward to perform at our full potential. The first one is our new operating model, which embraces best practices of decentralization, but then applies them to the specific situation of Hexagon. So we have established 17 divisional P&Ls with our externally reported businesses with dedicated management team, and this would improve accountability within these organizations considerably. This would also improve our ability to quickly respond to end market changes and also to customer changes and make us generally faster to take decisions. It also means that product and operational decisions will move closer to customers, ensuring that we take the right decisions related to the different market dynamics and ensuring we don't take decisions centrally where we don't have the input from markets and customers. The second step that we have taken is to realign our operational performance, and that was to do this restructure program that we communicated of EUR 110 million. And this should be understood that this is in addition and completely unrelated to the operating model. If we would have kept the same model as we already had, we would have launched the same program. So it's not related. We already communicated that we are addressing the cost base challenge to respond to the pressures on these margins. And alongside this, we have taken the decision to review the balance sheet as well and in particular, related to historic R&D spend. This would help us to baseline performance so we can measure our divisional leaders properly on performance going forward. This baselining will only happen once, and we expect our divisional leaders to manage their P&Ls and balance sheet going forward as a part of normal operations, with adjustments only being taken for exceptional circumstances going forward. It could be such acquisitions with partly overlapping offerings. It could be a new COVID situation when we need to, as a group, react quickly. And it could be large restructure within the group, like the spin-off of Octave for example. All other items need to be handled within the business of day-to-day operations. Turning now to some more details on R&D, where we have taken the decision to make these impairments. So innovation power is one of Hexagon's greatest skills and assets and is something that we will nurture also going forward. However, in recent years, investments in R&D has spiked, as you can see in the graph there. And that's mainly due to related to somewhat delayed core product developments and cost overruns in some major innovation projects, and we have seen this not only in one division, it's been actually in several divisions where some of our key renewal projects has been fairly late to market. The positive thing is they're coming to market now. And so that's really positive to see with the TS20, et cetera. But this has meant that we have seen significantly increased R&D spend, while at the same time, the benefits of our organic growth and margins have not yet materialized to be seen. Maybe to be added here as well, there are some elements in this spike that related to software acquisitions that in relation has a generally higher R&D spend than our normal businesses. But with these new product launches across '25 and '26, we expect R&D to stabilize on an absolute basis and then to decrease on a ratio versus sales. However, as we reviewed our innovation and product portfolio, it also became clear that in some cases, we have invested into innovation that turned not fully to meet customer requirements or the target end market situation has changed or we have decided to exit a specific offering. This means that there are some product lines that are not performing and will not be able to generate a return. So we have, therefore, taken the decision to impair EUR 186 million in Hexagon core. Most of this then is related to these R&D spends, but there's also some related to inventories. And this will give our businesses the opportunity to reset and move forward from a more comparable basis. So we are also then able to performance manage on actual performance and not on historical effects. As I mentioned earlier, our new operating model will help us to avoid that we face the need to do such impairments again in the future. I move to the next slide. So this is explaining a bit the new management structure. So we will have 17 profit and loss accountable businesses, which are part of -- these are sort of the main part of our operating model. So I will explain a bit how it will work. So Hexagon has always operated with decentralized structure, which has then entailed a lot of freedom for the divisional presidents to run their businesses, and it has kept the corporate cost levels quite low. However, within the former divisions, the organizational structures became quite overly complex sometimes with slow decision-making and not always focused on end customers. So our new operating model establish clear and common management blueprint on a more granular level. And also, we have historically called divisions. They will now be called business areas instead, and they will have divisions reporting into them. So the previous divisions, Manufacturing Intelligence, Geosystems, Autonomous Solutions will now be called business areas. And they will then have the dark boxes, the 17 -- or you can say 16 smaller dark boxes reporting into them. But externally, we will still report on the business area level. And then you have the 17 dark blue box, which is robotics, and that will then continue to report into the CEO. Division leaders and their teams will then have mandate to deliver superior value creation within the businesses. And I move to the next slide to show how those mandates will be set up. So a division can have a mandate of stability, profitability or growth depending on where they are in the current situation. So we refer to these 3 stages as strategic mandates. And that sets the overall direction for the business and how the management and leadership of those divisions should basically think every morning when they wake up. If you are in stability, it does, of course, not mean that you need to restructure or sell parts of your business. You can also transform it organically. And if you are in growth, it doesn't mean that you need to buy everything, you can also grow organically. But we will allocate capital accordingly. So more capital allocated towards where you are in growth and less when you are in profitability and almost nothing when you are in stability. Moving then to the next slide. So a decentralized management structure with full accountable divisions can only create value sustainably if it's combined with a strong governance and a clear performance management system. And here, we are taking a major step forward at Hexagon with the introduction of scorecards. At the core of the scorecard system is a set of standardized financials and nonfinancial KPIs, which are closely tracked for all divisions in a fully consistent way. The scorecard system will significantly improve transparency, accountability and also speed of action taking to steer the division in the right direction and to pull the right levers to change direction or create more value. I then turn into the next slide, and that's the summary. So Hexagon is a strong company with a bright future ahead. Our fundamentals are very good. We are the market leader in precision measurement technologies. We have strong exposure to high-growth end markets and emerging field markets like industrial autonomy. And this places us very well to capture the opportunities presented from several macro trends, including the main one, labor shortages and skill shortages, increasing quality demands and also, of course, sustainability and safety demands. Our innovation and expertise is second to none, and that's reflected in several of the exciting new products that I showcased in an earlier slide. And as we have a clear plan to achieve superior value creation going forward, we are taking immediate actions to address our cost base. And in addition, we're implementing best practice decentralized operating model, establishing these 17 divisions with full accountability. Operational decisions will then be taken faster and innovation will be anchored in markets and close to customer needs. And last, we will manage our division portfolio very closely for performance and value creation, applying proven tools like strategic mandates and the scorecard system. Turning then to the next slide, where we are inviting you all to Hexagon's Capital Markets Day in 2026. And that's on the 30th April. It will be showcased in London. And on this event, we will discuss in much more detail business area strategies, including the divisional mandates that we have identified. And also, we will also discuss then new financial targets for Hexagon core '26 and forward. So we are really looking forward to seeing you all there. And with that, I think that summarizes the presentation, and we will now move into the Q&A section. Operator: [Operator Instructions] And your first question today comes from the line of Johan Eliason from SB1 Markets. Johan Eliason: I was wondering a little bit, I mean, your new setup of the Hexagon core looks excellent to me. One issue that's been high on the agenda over a couple of years has been the way you capitalize R&D and now obviously, you impair a lot of that. Will you change the strategy regarding R&D capitalization going forward? Anders Svensson: So thanks, Johan, for the question. We will not basically change the way we run capitalization is IAS 38. We will make sure, of course, that we are not capitalizing too early of any of the projects. We will manage our portfolio more like an insurance company. If we believe that we take a larger risk in one project, we can't afford to take larger risks in all projects. So we can manage all that within the normal operational structure of the company. So what we are doing is more strengthening around how we do governance when we approve projects to be started, how we review projects during the way to make sure we don't continue to invest in something that we are aware of will be difficult in a go-to-market situation. So the answer to your question is we will not change the methodology of capitalization and by then restating all our history or something like that. So we will keep the current way of operating, but we will operate more carefully and more controlled and with a tighter governance. Johan Eliason: Excellent. And then secondly, you will have a very strong balance sheet after the D&E divestment next year. How are you thinking about the balance sheet of the spin-off Octave? Is that a business that should be run on a net cash position? Or how should we think about how to split the balance sheet going forward? Anders Svensson: Yes. So this is a decision that the Board will take at the right stage in the process on how we divide the assets, net debts and the firepower within the company generated from the D&E sale. So that's a question we would need to come back to you on. Johan Eliason: Okay. I guess that's topics on the Capital Markets Day. Then just finally, a short question also for Mattias here. In Octave, you talked about lease revenue stable. I'm not sure I understand what lease revenues are. You have subscription license and services in your pie charts. How does this corroborate to each other? Mattias Stenberg: Yes. Yes, good question. And first of all, I should say we will break all of this down for you in more detail at the Investor Day, right, since we are in a public filing process, and we're still a division of Hexagon. There's -- we're not going to give all of the details today. But basically, leases are -- it's also subscription revenue, but it's month-to-month leases, right, of seats. So think of it, it fluctuates more than the SaaS revenue, right? So that's why it's, yes, more, I guess, short-term volatile than the SaaS, if that helps you. Operator: And your next question comes from the line of Erik Golrang from SEB. Erik Pettersson-Golrang: I have a couple of questions. So we'll start with Geosystems and China, which was weaker. And you talked about the development on the high-speed rail side in China. So given you have some peers in China growing much faster, is that basically an end market split dynamic that means Geosystems is growing so much lower? Anders Svensson: Sorry, we had a little bit of a problem here with the sound in the beginning of the question. Would you mind to repeat it? Erik Pettersson-Golrang: Sure. So on Geosystems development in China and your commentary there that a lot of the weakness is related to your exposure towards high-speed rail and that development. And so your take is basically that it's an end market split that means that you are growing slower than particularly some of the local peers in China. Anders Svensson: Yes, I would say the end market exposure that we have in China is related to where very high precision is required and not in the general sort of market for our competitors. So we are in the top-tier segment within China. And the top-tier segment is not required everywhere, of course. It's required when you have sort of high-speed railway manufacturing and other very large infrastructure projects. So our exposure to that sector within construction is much higher than our competition. So when something happens to that specific part of the market, we get hit very hard. And that's exactly what happened if you compare that to local competitors. Erik Pettersson-Golrang: Okay. And then as a follow-up on that, any -- there was never a plan to do with Geosystems similar to with -- as you do with MI now, making China a separate unit within to make it operate a bit more autonomously given developments in China? Anders Svensson: The question is good. And -- but that option is actually not available because the reason why we can do that in MI is that we have been very good in history on localizing our products and our innovation also is localized. So within MI, we have a good, better and best offering. Best is basically the offering that we use globally and the good and better offering is the offering we use within China for China. And it's fully manufactured, developed, et cetera, within China. If you look at Geosystems, basically, very little is localized in terms of supply chains, innovation, et cetera, to China. So it's mainly a global offering that we have. So a lot of the products are imported to China. And this is the reason also, of course, why we are only present in Geosystems in the top-tier segment and not in the general segment in the market. So completely different situations within those 2 businesses. So it wouldn't make any sense to do that within Geosystems. Erik Pettersson-Golrang: Okay. Then for Mattias on Octave, just if you can give some more perspective on the low growth rate. I get that you say that growth has been high for a few years, but I guess that depends a bit on the starting point you use and you certainly have some peers that are growing quite a bit faster. So what -- I mean, what kind of growth rate would you like to get out of Octave in the midterm? Mattias Stenberg: Yes. I mean I'm not going to give a forecast today, as you can imagine, since we are doing the Investor Day in Q1. But fair to say is that it needs to be higher the growth, and it needs to be higher the margin. And I feel confident when I see recurring revenue growing a lot faster than the headline number, the reported revenue. So yes, I mean, I think that's -- I'll stop there, I think, and then we'll discuss more in Q1. Erik Pettersson-Golrang: Okay. Then just one quick at the end. You mentioned for Hexagon core and the peer-leading profit margins. What peers will you compare with? Anders Svensson: We have different peers in the different businesses, of course. So if you look at first, maybe you start with AS, you have peers like Sandvik, Epiroc, Metso, et cetera, right? And if you look at MI, you have ZEISS, Siemens, to some extent, Sandvik as well. You look at Geosystems, you have Trimble, FARO, NavVis, Topcon, do you want to add any? Mattias Stenberg: No, I think that's Renishaw. You mentioned already. Anders Svensson: Renishaw, yes. Mattias Stenberg: That's all, good. Operator: And the question comes from Sven Merkt from Barclays. Sven Merkt: Maybe first, following the R&D impairment, how should we think about R&D capitalization going forward? It looks like you're on track to capitalize around EUR 500 million this year and amortize EUR 300 million. So this gives you a net benefit of EUR 200 million. Where is that heading going forward? Norbert Hanke: Yes, it's Norbert here. From our point of view, as we are managing now the cost -- the R&D costs, and you have heard as well going forward on this, that we are very selective, right, in the sense and we will be very focused. It will be going down in the sense that overall, I think from our point of view, it will slowly decrease the gap from our point of view. Anders Svensson: Yes. And maybe adding here, so let there be no mistake, we are not doing the write-down of the balance sheet to improve the results. And actually, if you would compare going forward with the new products being released and the impairments we are doing on the balance sheet, it's basically a wash from the performance and the gap within the third quarter this year. So there will be no sort of big benefit in our reported results from this impairment. What this impairment does is to set up the new management of divisions and business areas on a right level so we can actually performance manage them on their operational performance and not performance manage them on historical mistakes that we have on the balance sheet that are not generating a return. So this is the reason why we do this. And that enables us then us and the Board to make sure that we take portfolio decisions that are based on facts and not skewed by historical balance sheet issues. That's the reason. Sven Merkt: Okay. Got it. And of the capitalized R&D that you have on the balance sheet at the moment, how much is sitting within Hexagon core versus Octave? Mattias Stenberg: We will not give any, say, further information on that, honestly. We'll do it when we have the spin. You will see it then. Anders Svensson: Yes, you will see it clearly when you have this potential spin executed. Sven Merkt: Okay. Fair enough. And final question, just on the cost savings. How much of that should we expect to really flow through profit and how much you might reinvest elsewhere? Anders Svensson: So what you see on the EUR 110 million of savings that we have communicated, that is what we expect flowing to the bottom line at the end of 2026. So that is net. That is not gross. But you -- I want to add one thing. You should not calculate a big effect in Q4. That is important to understand because this is a process that will take time before you will see the effect. And you will see gradual effect starting in Q4 this year, but then it will ramp up during '26 and give the full benefit at the end of the year. Operator: We will now take our next question. And your next question comes from the line of Johannes Schaller from Deutsche Bank. Johannes Schaller: Three, if I could. I mean, firstly, on the impairments. You said there are certain kind of areas, products, initiatives that are now discontinued or maybe where you didn't have the success you wanted to see. Could you give us a little bit more detail on what that is and which kind of areas are not part of the strategy and the growth profile of Hexagon anymore? And should we expect that this is it now in terms of impairments, maybe for the next 1 or 2 years? Or is that more an ongoing process where maybe in 6 months' time, you also find other areas? That would be my first question. The second was just coming back to China. I know you don't guide, but could you give us a bit of a sense kind of when you would expect that region to be back to growth? And then lastly, just on the Cadence stake that you got as part of that sale, what's the strategy here and the plan with that stake? Anders Svensson: Okay. I counted at least the 4 questions, but... Johannes Schaller: Apologies, you're right. Anders Svensson: No worries. No worries. So starting with the impairment, I will give you a couple of examples where we mean -- what I mean there. It could be related to market changes. We have, for example, one project that we have developed for autonomous driving mass production. And this, as you know, has been quite delayed coming to market all over the world, basically -- maybe except China, where it has come to market a bit at least. So when the main producer of cars then decides to cancel the platform, we have nowhere to allocate this to get any revenues for this. So this is something we need to write off, right? So that's market change. Then you have misalignment to customer needs. And this is also related to ourselves, but customer needs can also change over time, right? It could be, for example, we have developed a product and the expectation of operations from customer is 4 hours, and we can operate for 20 minutes. We don't fulfill the sort of sound levels that are required by the customer, et cetera, which means that we basically can't offload this product even if we would discount it 90% because nobody would buy it. So this is something we need to write off. It's useless, won't generate any revenue for us. And then you have the third area then, and that is when we decide as we now restructure our company given the potential spin-off of Octave, and we are refocusing Hexagon core. We then have areas that we believe are not suitable for us to continue to invest in and continue to take a part of, and they're not contributing positively, either in growth or in profitability. And we have then decided to exit those areas and those products, and then we need to write those off. I will, for competitive reasons, of course, not mention exactly which products these are in this call. And then if we go into -- will this be an ongoing thing? And I think I answered that question during my presentation, I hope, at least twice, but I'm happy to do it again. So my expectation is that our divisions and business areas need going forward to manage this in their operational normal day-to-day business and the operational profit and loss and balance sheet performance, and they will be monitored closely to make sure that we achieve this. The decisions in those divisions will then be taken closer to customers, so we are sure that we are aligned to market needs, customer needs, market changes all the time. We will have a stronger governance also before we start projects and also during projects to ensure that we stop projects early on when we notice that they are no longer aligned with market or customer expectations. And we will have a new performance management system to enable swift response when we see that some of the KPIs that we follow are getting off track. So this is not that some will come back on a regular basis. And I hope we won't do this at all going forward, unless we have one of those big things that I mentioned could be a potential spin-off like Octave. That will, of course, make us do some things in terms of realignment structure, et cetera. It could be that we, as a company, need to react very quickly together, like a new sort of COVID situation or something like that. So those are the kind of situations where we might have to do this again on a higher level on a group level. But otherwise, it could also be that we buy a bigger company and there is product overlap and we need to make some impairments of some of that asset, of course. But those are the only examples. It should not be from normal operations and normal R&D development. That should be managed in the day-to-day business in the day-to-day results. And then China guidance, we are not guiding forward on China, but there are areas in China that are performing very well. So if you look at Manufacturing Intelligence, we are growing quite well in Manufacturing Intelligence on a constant basis in China. I think in Q2, we grew 10%. In Q3, we grew 3% organically. So we continue to grow. The different markets are strong there. Electronics, general manufacturing, we're doing very well. Then we have this construction and larger infrastructure projects, which is very weak currently. And when that change into being more positive again, I mean, your guess is as good as mine, right? So we are all hoping that, that will change quickly. But unless that change, we will not see a speed up or an improvement in Geosystems performance. And Geosystems is now, I would say, what is it, 20% negative growth year-on-year or so. So that is affecting, of course, the full number for China for us. But when that turns, that business turns, of course, we will start seeing better numbers from China on the group level. But underlying, ALI is performing quite well in China. Manufacturing Intelligence is performing well in China. And Autonomous Solutions, which is more bumpy, given mining orders, et cetera, are performing well from time to time in China as well. So our China issue is related to large infrastructure and construction within China currently. And then Norbert, do you want to take the Cadence? Norbert Hanke: Sure. So the question was on the Cadence, if I understood this correctly, because it's a while ago that you asked and the question here was related regarding net gain, I assume from... Anders Svensson: I think it's the EUR 810 million that we have as Cadence shares, right? Ben, you can maybe... Norbert Hanke: Yes. I think, obviously, the focus at the moment is to close the deal, Johannes, and that's still on track for the first quarter of next year. It's obviously a very nice stake to have. Cadence is a super strong company with a great outlook. So it's a nice stake to have. But I think we'll have to come back to you on what the plans for it are because it's tied to the capital allocation discussion between Octave and Hexagon, and that's obviously a decision for the Board. So I think we'll come back to you on that. Operator: We will now go to the next question. And the question comes from the line of Mikael Las en from DNB Carnegie. Mikael Laséen: All right. You stated here, that the division priorities will follow the sequence stability, profitability and growth on Page 37. Could you give a sense of how Hexagon Core is distributed across the 3 categories? And maybe give some examples from the 17 P&L accountable divisions on Page 36. Anders Svensson: Yes. Thanks, Mikael. We will give more clarity on how we rank the different businesses in the Capital Markets Day. We have just now launched the new organizational structure. It will be implemented basically from the 1st of January across the group finally. So it's too early to give any input on that externally. But I would also like to say that if you are in stability, it doesn't mean that it's a bad business. Even a good business could be in stability. I would even say that our D&E business was in stability phase. It's a very good business, but we didn't really know what to do with it. It wasn't growing for us. We were not the right owner for it. So that's why the decision was basically to offload it and reallocate those proceeds into where we are stronger and have a stronger market position. So it doesn't mean that if you are instability that you're a bad business. But in general, of course, we would like to move all our businesses into the growth scenario or strategic mandate. But we have a range of different businesses also within the different divisions. So there's a lot to go through here and to set up with the business areas and the divisions themselves. So we have to come back with that on the Capital Markets Day. Mikael Laséen: Okay. Fair enough. And just curious here about the book-to-bill ratios for the MI segment, if you can maybe comment on that or other areas where you have bookings leading sales? Mattias Stenberg: At the moment, we don't have -- I don't have the information with me now, but we'll come back to you directly afterwards in a sense. Anders Svensson: We will come back to you afterwards and give you the facts. Operator: We will now take the next question. And your question comes from the line of Ben Castillo-Bernaus from BNP Paribas. Ben Castillo-Bernaus: I guess a couple for Mattias to start with on the Octave business. Obviously, some headwinds there from the transition from licenses to SaaS. I just wondered what's your assumption on how long you expect that to take? And so you're sort of mostly SaaS business? And then I guess, related to that, the margin headwinds that we're seeing there at the moment. Obviously, there's some one-off costs going through there. I guess if you look out to 2026 and the sort of margin trajectory, what's your working assumption at this point in time? Mattias Stenberg: Yes, good questions. But what you said I had to be boring and answer you will get to know in the Investor Day in Q1, right? I'm not prepared to give outlook at this point. But we will lay that all out in detail at the Investor Day. Ben Castillo-Bernaus: Okay. I'll try one maybe that can be answered. Just on Autonomous Solutions, obviously, super strong performance there this quarter. How much of that was kind of anticipated and predicted, if you like? And was there any kind of one-off in there that we should think about just in that performance? Mattias Stenberg: Yes. Thanks. If you look at Autonomous Solutions, I mean, we, of course, know our order intake, right? So this -- our result was quite expected internally. Very strong order intake in aerospace and defense area. Also Mining has been very strong, and you can see that also, I think, in related companies reporting Mining numbers also on very good levels. So in general, the underlying markets in here are doing very well. And we have a good order intake in those markets that will also generate a good performance going forward. So we expect Q4 to also perform well. Q4 has a bit tougher comparable, so it will not be on a similar level, but we expect a continued strong market demand within Autonomous Solutions. And as I mentioned, the weakness we see in Autonomous Solutions is agriculture, which is in a quite serious downturn globally. And that weakness is also expected to continue during Q4. So we see a relative similar business climate in the fourth quarter. Operator: We will now go to our final question for today. And your final question comes from the line of Magnus Kruber from Nordea. Magnus Kruber: I just wanted to get back to the delta between impairments and -- or amortization capitalizations in R&D. So is the message that it will be relatively similar in the coming quarters, but gradually over time, it will narrow. And if that's the case, do you expect your new strategy will be able to offset this headwind on the margin side in the coming, say, 2, 3 years? Anders Svensson: Yes. Thanks, Magnus. Yes, that's correct. So given that we are releasing lots of new products to the market, like the TS20 now here in October, for example, we see that amortization of those products released will then completely net the gain that we will get from this impairment. So this impairment by itself will not move basically the amortization and capitalization gap. It will be on the same level in Q4 and in Q1 as it was in Q3. So that's correct. And then going forward, we expect, of course, these new products to generate higher sales numbers. And that is how we will compensate the shrinking gap between amortization and capitalization. And I want to make clear that to capitalize R&D is not dangerous if you capitalize good R&D, then that's the way it should be done, right? And then you take the cost over the life cycle of the product. So that's completely right in how it should be done. The dangerous thing is to capitalize and then not release the product and try to fix it and further capitalize a product which is not good. And then when you release it, you don't get the sales and you only get the amortization. So that is the danger. And that is what the new management structure will make sure that we avoid going forward. Magnus Kruber: Fantastic. That's very clear. And with respect to the EUR 110 million savings, could you characterize a little bit on how the sort of we should expect this to be filtering through 2026? Is it more linear or back-end loaded? Or what's the character of the implementation? Anders Svensson: I would say it's very linear. So you can model in linear with probably less in Q4 than going forward. Magnus Kruber: Perfect. And then just a final one, Geosystems China, I think you said down 20% or something, if I read that right. How do you characterize that slowdown? How long it has been going on? And is there any element of that, that's structural compared to cyclical, would you say? Anders Svensson: I would say it's generally cyclical connected to the large infrastructure projects like the rail. It's impacting very much for Geosystems. In China, we don't have good sales of our whole offering portfolio. We have good sales of the top tier of our offerings, the most sort of precise measuring equipment. That is what we sell in China. On the mid-tier offering, we have very strong local competition. So we have a very little footprint given that we don't have local manufacturing, local R&D, et cetera, within Geosystems. So that's why we get so heavily impacted when there is an effect on those type of industries. And it's been going on now for what is it, could it be something 12 months? Mattias Stenberg: 12 months, round about. Anders Svensson: Yes, that we see this effect coming in for Geosystems. And of course, since this is our top offering, that also gives a weaker mix for Geosystems because we have best margins on these top-tier products because we don't have any competition basically. So that impacts Geosystems mix negatively. And you can also see that in the year-on-year drop in Geosystems in financial performance when it comes to operational margin. You can see the effect there as well of the lack of sales of those top-tier products. Operator: I will now hand the call back to Anders Svensson for closing remarks. Anders Svensson: Thank you, operator, and thank you, everyone, for attending, listening and putting good questions for us. Our next report will be on January 13th -- 30th, sorry. Thanks. Good correction, January 30th, next year. So hoping to see you all then. And until then, be safe. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to the USCB Financial Holdings, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Luis de la Aguilera, Chairman, CEO and President. Please go ahead. Luis de la Aguilera: Good morning, and thank you for joining us for USCB Financial Holdings Q3 2025 Earnings Call. With me today reviewing our Q3 highlights is CFO, Rob Anderson; and Chief Credit Officer, Bill Turner, who will provide an overview of the bank's performance, the highlights of which commence on Slide 3. The third quarter of 2025 continued to reflect disciplined financial performance across all key metrics, marking our third consecutive quarter of record fully diluted earnings per share. For the quarter ended September 30, 2025, the bank posted net income of $8.9 million or $0.45 per diluted share, up from $6.9 million or $0.35 per share in the third quarter of 2024. During the third quarter, our profitability metrics remain among the best in our peer group. Return on average assets increased to 1.27% compared to 1.11% a year ago. Return on average equity improved from 15.74%, up from 13.38% last year. Our efficiency ratio strengthened to 52.28%, reflecting disciplined expense management and operating leverage. Net interest margin expanded to 3.14% compared to 3.03% in the same quarter last year. Net interest income before provision for credit losses was $21.3 million, up $3.2 million or 17.5% from the prior year, supported by solid balance sheet growth and prudent pricing discipline. Total assets reached $2.8 billion as of September 30, 2025, representing a 10.5% year-over-year growth. Total deposits ended the quarter at $2.5 billion, marking a robust 15.5% year-over-year increase. Growth was broad-based across business and consumer segments. Our diversified deposit-focused business verticals, namely Association Banking, Private Client Group and Correspondent Banking now account for $672 million or 27% of total deposits. These deposit-focused verticals are highly scalable. And in the past year, we have added new production personnel to further support our growth plans. Liquidity remains strong and well above policy limits, providing ample flexibility to support loan growth and capital initiatives. Loans held for investment grew to $2.1 billion, an increase of more than $199 million or 10.3% from $1.9 billion on September 30, 2024, reflecting steady customer demand and solid credit quality. Again, as consistently focused -- again, we consistently focus on credit quality and diversity, and our loan book has significantly diversified in composition as 42% of our loans are now non-CRE. Credit performance continues to be exceptionally strong. Nonperforming loans declined to just 0.06% of total loans, down from 0.14% last year. The allowance for credit losses totaled $25 million at year-end, representing 1.17% of total loans. During the quarter, we completed a successful $40 million subordinated debt issuance, providing efficient capital at attractive terms. Most of the proceeds were used to repurchase approximately 2 million shares at a weighted average price of $17.19 per share, underscoring our confidence in the intrinsic value of our stock and our commitment to returning capital to shareholders. Following these transactions, tangible book value per share grew to $11.55, 6% higher than the prior year. Our capital position remains a key strength. As of September 30, total risk-based capital ratios were 14.2% for the company and 13.93% for the bank, well above regulatory minimums. Overall, the third quarter's record performance reflects the strength of our business model, our focus on relationship-based growth and our commitment to deliver long-term value to our shareholders, customers and employees. On the following page is self-explanatory, directionally showing 9 select historical trends since recapitalization. Profitable performance based on sound and conservative risk management is what our team is focused on consistently delivering. So let's now draw our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson. Robert Anderson: Thank you, Lou, and good morning, everyone. Looking at Pages 5 and 6, I would describe the third quarter of 2025 as a highly successful quarter for USCB. In fact, it was another record for us. Net income was $8.9 million or $0.45 per diluted share, and that's up 29% over the prior year. Return on average assets was 1.27%. Return on average equity was 15.74%, and these metrics benchmark incredibly well when compared to peers. The most notable activity in the quarter was the $40 million sub debt raise and repurchasing 2 million shares or 10% of the company. The weighted average price per share of the buyback was $17.19. While the 2 million share repurchase happened on September 4, the weighted average diluted share count for the quarter was marginally impacted to 19.755 million shares versus the ending share count of 18.1 million. On a pro forma basis, assuming the repurchase happened on day 1 of the quarter with the same $8.9 million of earnings would have equated to an EPS amount of $0.49. This number should help you when updating your estimates for 2026. While the summer months cooled off our loan growth for the quarter, we put excess cash to work in our securities portfolio. As a reminder, our securities portfolio is still reflective of the COVID era, yielding 3.03%. As discussed in previous calls, this represents a tremendous opportunity for us to improve go-forward earnings. I will elaborate more on this in a bit. With the sub debt raise and the excess cash on the balance sheet and in anticipation of loan demand, the NIM retreated slightly to 3.14%. The efficiency ratio was steady at 52.28%. Tangible book value per share was $11.55 and reflects the impact of the share repurchase. And last, credit metrics remain benign. So with that overview, let's discuss deposits on the next page. Average deposits increased $166 million or nearly 29% compared to the prior quarter and are up $380 million or 18% year-over-year. During the quarter, we issued $100 million of brokered CDs, which were used as hedging instruments as we put on an interest rate collar to mitigate interest rate risk. These are 3-month CDs, which will be renewed every quarter at market rates over the next 2 years. The cap rate on the collar is 4.5% with a floor rate of 1.88%. The swaps have a duration of 2 years at inception. While average DDA balances declined $10.6 million from the prior quarter, DDA still comprised 23% of total deposits. Interest-bearing deposit costs remained stable at 3.29%, down 47 basis points from the same period last year. Total deposit costs increased slightly by 7 basis points, primarily due to the decrease in DDA balances and the higher proportion of interest-bearing deposits. While this mix shift puts some pressure on the cost of funds, we anticipate improvement in our funding base in the fourth quarter as more liabilities reprice with rate cuts. Despite the temporary shift, we remain optimistic about deposit growth and continue to execute our business plan in niche verticals to support sustainable growth in core operating accounts and low-cost deposits. So with that, let's move on to the loan book. On a linked quarter basis, average loans grew by $41.6 million or 8% annualized. Compared to the third quarter of 2024, we grew $220.8 million or 11.8%. Both growth metrics are within our stated guidance. Alongside this growth, loan yield decreased 2 basis points to 6.21% and was negatively impacted by the payoff of consumer yacht loans during the quarter. Excluding the effect of the consumer yacht loan payoffs, the yield would have been 6.25%. On a point-to-point basis, the loan book increased $19 million. As you can see from Page 9, our new loan production was lower than our last 4 quarters, but with a strong pipeline and the summer sluggishness behind us, we look to get on our normal run rate in Q4. New loan production had a weighted average coupon of 6.43%, 22 basis points higher than the portfolio's average yield. On Page 10 is a snapshot of our business verticals. 2 are loan-oriented and 3 are deposit-oriented, namely Association Banking, Private Client Group and Correspondent Banking. All business verticals are led by very seasoned experienced bankers and are pivotal to our branch-light model. As Lou mentioned, they are highly scalable. And in the past year, we have added new production personnel to further support growth. Moving on to Page 11. Net interest income increased by $240,000 or 4.5% annualized compared to the prior quarter and was up $3.2 million or 17.5% year-over-year. Our net interest margin for the quarter was 3.14% and was affected by the higher cash balances, the issuance of $40 million of sub debt at 7.625%, delayed loan production and increased funding costs driven by lower DDA balances. Additionally, we received prepayments on yacht loans, which negatively impacted loan yields and the NIM for the quarter. However, looking ahead, we expect improvement in the NIM as we put excess cash to work in loan volume late in the quarter, added to our securities portfolio and cut deposit rates in September. In fact, the NIM for the month of September was 3.27%. All these items are good tailwinds heading into Q4. With that, let's move on to the ALM model on the next page. In the past several quarters, the strategy has been to prepare for a lower rate environment. And according to our ALM model, the balance sheet is liability sensitive and well positioned for the current rate environment. With rate cuts expected in the short term, we anticipate this will benefit our funding costs and overall margin and the effect of these rate cuts will be seen more predominantly in the fourth quarter. For instance, the ALM model contains a deposit beta assumption of 60%, but we have outperformed this beta over time. With the September rate cut, we achieved a 70% beta on our $1.2 billion money market book, which translates into an $840 million repricing fully at 100% or 25 basis points. On the flip side, we have $2.131 billion in our loan book and 62% or $1.3 billion is variable rate or hybrid in nature. 40% of that book or $620 million will reprice in the next year. In short, our liability sensitivity will be dependent on our ability to reprice our money market book faster than our loan book reprices. With that, let's take a look at our securities portfolio. Total holdings stood at $480 million at quarter end with 67% classified as available for sale and 33% as held to maturity. The portfolio yield has improved compared to the previous year, reaching 3.03%. This represents an increase of 42 basis points compared to the same period last year. A significant portion of this yield enhancement is due to our net purchase of $76 million in bonds during the first 9 months of the year, which carry a yield of 6% and an average duration of 4 years. The modified duration is 5.1 and the average life is 6.4 years, reflecting our strategy to purchase longer duration bonds in anticipation of lower interest rates. 79% of the portfolio is invested in agency, mortgage-backed securities, boosting liquidity. Looking ahead, we expect to receive $14.4 million in cash flows from the portfolio for the remainder of 2025 at current rates and approximately $76.4 million in 2026 with a runoff rate of about 3%. These cash flows provide us with significant optionality. They can be reinvested at higher yields, whether in loans or other investments or used to let go of more expensive funding sources. In this way, our investment portfolio should be viewed as a strategic tool for the upcoming quarters, supporting both margin improvement and balance sheet flexibility as we navigate the evolving rate environment. So with that, let me turn it over to Bill to discuss asset quality. William Turner: Thank you, Rob, and good morning, everyone. As you can see from Page 14, the first graph shows the allowance for credit losses is at $25 million at the third quarter end and at an adequate 1.17% of the portfolio. We made a $31,000 provision to the ACL that was driven mostly by the $18 million in net loan growth with no new classified loans and no loan losses in the third quarter. No significant losses are expected in the fourth quarter. The remaining graphs on Page 14 show the nonperforming loans as of quarter end steady at $1.3 million and remained at 0.06% of the portfolio and are well covered by the allowance. No losses are expected from these nonperforming loans. Classified loans also decreased during the quarter to $4.7 million or 0.22% of the portfolio and represent less than 2% of capital. No losses are expected from the classified loans. The bank continues to have no other real estate. On Page 15, the first graph shows the diversified loan portfolio mix at third quarter end. The loan portfolio increased $18 million on a net basis in the second quarter to $2.1 billion. Commercial real estate represents 57% of the portfolio or $1.2 billion segmented between retail, multifamily and owner-occupied. The second graph is a breakout of the commercial real estate portfolios for nonowner-occupied and owner-occupied loans, which also demonstrates their collateral diversification. The table to the right of the graph shows the weighted average loan to values for the commercial real estate portfolio at less than 60% and debt service coverage ratios are adequate for each portfolio segment. The quality and payment performances are good for all segments of the loan portfolio with the past due ratio at 0.38% and nonperforming loans at 0.06% remain below peer banks. Overall, the quality of the loan portfolio is good. Now let me turn it back over to Rob. Robert Anderson: Thank you, Bill. Noninterest income continues to improve with a variety of different revenue streams. Both wire and swap fees increased over the prior quarter. And as mentioned in previous calls, all loans are booked with prepayment penalties. So in the event of an early payoff, we receive compensation. These fees are booked under the other line item and service fees. Noninterest income was 14.8% of total revenue and 0.52% to average assets. Let's take a look at expenses. Our total expense base was $13 million, and while up from the prior quarter, contained $188,000 in onetime expenses. This includes legal fees for the S-3 filing and the administration expense related to the interest rate collar. Since the end of the first quarter, we have added 5 new sales associates with 3 of the 5 in deposit aggregating business verticals. The efficiency ratio was 52.28% and noninterest expense to average assets was stable at 1.85% and consistent with recent quarters. Looking forward, we expect the quarterly expense base to be at this level and gradually increasing due to additional new hires and potentially adding to the incentive accrual with improved company performance. Let's go to capital. In August, the company issued the $40 million in subordinated notes and used most of the proceeds to buy back 2 million shares or approximately 10% of the company. The impact of these 2 transactions can be seen on all capital levels. In fact, all capital levels remain comfortably above well-capitalized regulatory guidelines. And last, I'll note the ending share count for the quarter was 18.1 million. So with that, let me turn it back to Lou for some closing comments. Luis de la Aguilera: Thanks, Rob. Before we open the call for questions, I want to take a moment to put our results in the context of the broader environment here in Florida because the strength of the state's economy continues to be a key driver of our success. Florida remains one of the most vibrant and resilient economies in the nation. In 2025, real GDP growth is tracking around 2.4%, outpacing national averages and underscoring the state's enduring fundamentals. Population growth remains strong with over 23 million residents and continued positive net migration that fuels housing, business formation and consumer spending. Business confidence across Florida also remains high. From Miami to Tampa to Orlando, the economic landscape is driven by diversification in financial services, trade, health care and technology, which continues to create opportunities across our client base. The moderate normalization we have seen in interest rates and inflation trends has also contributed to a more stable, predictable operating environment. For USCB, this economic background aligns perfectly with our strategy. South Florida's growth in middle market business, real estate development and professional services continues to generate high-quality loan and deposit opportunities. Our ability to serve these sectors with a personal relationship-driven approach positions us exceptionally well within this expanding marketplace. In short, Florida's strength is USCB strength. The combination of a resilient economy, disciplined execution and a focus on long-term relationships allow us to continue growing at a steady, sustainable pace while delivering strong results to our shareholders. Thank you again for your time and your confidence in USCB Financial Holdings. So operator, we are now ready to open the line for questions. Operator: [Operator Instructions] The first question comes from Woody Lay with KBW. Wood Lay: Just a question on the yacht payoffs you saw in the quarter. Could you just -- and sorry if I missed it in the opening comments, but could you just quantify the amount of payoffs you saw in that division in the quarter, and when in the quarter they occurred? Robert Anderson: Yes, I'll take that one, Woody. It was a little over $10 million, and that happened in August, and that impacted our loan yields in August and our margin in August. Wood Lay: Got it. Okay. And then it looks like a majority of the loan production came in September. That will obviously be a strength for the NIM next quarter. But just looking into that production, is it a sign of sustained loan momentum entering the fourth quarter? Or was it September just a strong month? Luis de la Aguilera: No, I believe it is. Historically, we always see a seasonal dip in Q3 as vacation time, school stop, school starts. We had the same situation last year and the previous year. And you're right, September was a record-setting month for the year. As we look forward, the go-forward pipeline is absolutely in line with what we've seen over the last 5 quarters. And I just attended with Rob and Bill a pipeline meeting a couple of days ago. We have enough dry powder, I think, to have a very good fourth quarter. Wood Lay: Yes. And then what are you seeing on the loan competition side, especially on pricing? It looks like the yields on new production came down a little bit, but that was to be expected with the rate cut and that can be driven by mix shift. So any thoughts on how competition is impacting pricing? Luis de la Aguilera: Well, without a doubt, this is a very competitive market. There's no question about it. We price to relationship. We price deposits and an overall relationship. We are not a transactional lender. So every deal is priced based on opportunity and based on existing loan balances and deposit balances and overall relationship. We've been very active on the swap side as rates have gone down, there's been a lot of opportunity for that, and we continue seeing the same for the coming quarter. Robert Anderson: Yes. And even while it was down from the previous quarter at 6.43%, that's still 22 basis points above the portfolio average. I would say, I think our yacht loans are priced right around 6.25% right now. We're probably seeing the majority of our new loan production at 6% to 6.50%. Operator: 00:25:51 The next question comes from Feddie Strickland with Hovde. Feddie Strickland: Just wanted to start on the margin, digging a little deeper here. I appreciate the detail on that 3.27% and the discussion on yields and where yields are going. But given that we have a little bit of additional cost, I guess, coming in from the sub debt in the fourth quarter, does the quarter still, I guess, end at that 3.27% -- I'm just trying to figure out if maybe more of that is coming from the cost side for you to kind of land at recovery in the margin there? Robert Anderson: Yes. On the margin, I mean, it came back to 3.14%. August was a month where we had a lot of cash sitting on the balance sheet because we were anticipating a strong pipeline, but all of the loan demand came in, in September. So -- and then we had payoffs on the yacht portfolio that exasperated that issue in August. But 3.27%, I think, is a good go-forward number for the fourth quarter. We had a rate cut in September. There's like a 97% probability in October. We've already done a round of rate cuts on our money market book. We've lowered CD rates. So I think 3.27% or slightly better for the fourth quarter is still a realistic number. Feddie Strickland: Appreciate that. And just wanted to dig in a little bit on the swap fees as well. Obviously, great to see those come up. Is that still a good new run rate going forward? I'm just trying to get a sense for kind of where we could have noninterest income. And within that same vein, what are you seeing on the SBA side, keeping in mind the government shutdown fees? Robert Anderson: Yes. In fact, I'll start with the SBA. We probably had $200,000 that got slow walked at the end of the quarter that will fall into the first quarter. But that's definitely impacting on the SBA side. But we're seeing a lot of activity on the wire fees, predominantly in our correspondent banking group and our Private Client Group. The swap fees specifically with rates being lower, there's a lot of activity on swaps, and I would anticipate a somewhat similar number, maybe between Q2 and Q3 could repeat again in the fourth quarter. So a lot of the loan volume right now, as Lou mentioned, we saw the pipeline. We see what's in there at either fixed rate, variable rate, what's on swaps, et cetera. So there's a fair amount of swap volume in there, too. Feddie Strickland: Perfect. If I could just squeeze one more in. I just wanted to ask about the opportunity set on the condo association banking business line? And just how much do you think you can grow that segment in terms of loans and deposits over the next couple of quarters? Luis de la Aguilera: We're very bullish about the association banking vertical. I think it's one of our greatest opportunities for scale. Just to put things in perspective, there's a 27,500 condominium associations in the state of Florida, 48% of that is in between Miami-Dade and Broward County. And of the overall condominium inventory, 60% of that falls between 30 to 40 years, and they're all subject to 30- and 40-year recertifications. So we, right now, in the current pipeline have more HOA business than we probably have seen in any one quarter. So we are very bullish on this area. It gives us great opportunities for low-cost deposits, shorter-term C&I lending. We hired about 2 quarters ago, a new production officer, which joined us from one of the largest management companies here. She's doing quite well, and we believe that this is an area that we could probably double the book of business in the next 18 months. Operator: The next question comes from Michael Rose with Raymond James. Michael Rose: Rob, maybe I just want to go back to the margin. I think you said that the September margin was 3.27%. I know you guys are liability sensitive and it looks like loan growth is going to reaccelerate. So is 3.27% kind of a good starting point to think about the fourth quarter? And then I would expect as we move through what appears to be, if I use the forward curve, a few more cuts from here, further expansion as we go ahead? Or at some point, do the forces of deposit competition and lower loan rates went over at some point? Robert Anderson: Yes. No, the September was -- on the margin, it was 3.27% and that -- and we had a full month of the sub debt costs embedded in that month. As Lou mentioned, we really had a record month in terms of loan volume. So we put on some securities. We put on loan volume in the month of September. And I would say that's a good starting point. We profile as liability sensitive. We have been aggressive on the rate cuts on our money market book. We've already cut some rates in anticipation of the October rate cut on what is it the 29th and next week, we'll get another update from the Fed, I believe. So I think we're well positioned for the next -- this rate environment and any further cuts. So we would expect expansion on the NIM. The other thing that we mentioned, too, is our securities portfolio. I mean that's still reflective of a COVID era yield. And I think there's a lot of opportunity on the securities portfolio to either rebalance that. There could be a securities trades in there as well. But we have $480 million yielding 3%, and we're earning just under 16% on our equity. If that securities portfolio moved up 100 bps, I mean, that would give us tremendous earnings power and expansion in our margin. So I think we have a lot of opportunity as we go into 2026 with the rate environment going down, a steeper yield curve and our ability to fix our securities portfolio over time. Michael Rose: That's very helpful, Rob. And then maybe just going back to expenses. I think you mentioned relative stability near term, but obviously balancing that with some investments as we move through next year. I know maybe a little bit early, but is rate of inflation, let's call it, 2%, 3% plus GDP plus or something like that a good way to think about expenses for you guys? Or is there going to be some more concentrated efforts to hire folks and maybe we could be thinking or contemplating something a little bit higher for next year? Robert Anderson: Yes. I mean, right now, our efficiency ratio is 52% in our expense to average assets. I always kind of use a benchmark around peers is if we're under 2, I think we're performing well. I think both metrics benchmark well. In terms of the pure number, we've added some sales-facing FTE. I think we've added 5 since the end of the first quarter, all in sales type roles. Lou mentioned the one in HOA. We've got one on the Private Client group. We have other business development and some business banking personnel as well. Sometimes those get a little costly with some upfront money to get that personnel. But I would anticipate the run rate of $13 million a quarter to be at that level to increase slightly throughout next year. But I would say low 50s in terms of efficiency ratio. And it could dip into the below 50. But I would say right now, I'd say low 50s in the near term, but the pure $13 million could inch up in the fourth quarter and then into next year as well. Michael Rose: Very helpful. And maybe if I could just sneak one last one in. Just going back to the comments that you made on the securities portfolio and where capital is at this point. Have you guys given any updated thoughts on any sort of potential restructuring would that make sense for you guys at this point, maybe not right now, just given the use of capital and cash for the repurchases. But would just be curious as to any thoughts you have. Robert Anderson: I mean that strategy is always on the table. We're looking at it every month in terms of the viability, in terms of payback and what that would be. Certainly, with rates coming down a bit, we'd like to see if we could get out of this without doing a restructure. But certainly, I think $480 million at 3%. If we could move that up significantly to even 100 basis points, that would give us tremendous earning power going forward. So I think that strategy is always on the table and should be. I think well-run companies look at it and can act on it from time to time. Right now, we used a lot of our excess capital or dry powder on the repurchase, which I thought was a unique opportunity to repurchase 10% of the company. We bought that back probably at 1.5 tangible book value, but on a forward earnings basis on 2026, it was probably relatively cheap compared to peers in terms of where we trade and how we perform on a performance basis. So I'd say it's clearly on the table. And whether or not we act upon it will depend upon interest rates, earn back, a lot of different factors. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aguilera for any closing remarks. Luis de la Aguilera: Thank you again to everyone joining us today. As we conclude the third quarter, I want to emphasize how proud we are of the consistency and strength demonstrated across all aspects of our business, our record earnings, loan and deposit growth, strong credit quality, our direct results of disciplined execution and a commitment to long-term strategic priorities. Looking ahead, we remain confident of our ability to sustain this momentum into 2026. The fundamentals of our business are solid. Our markets are vibrant. Our balance sheet is strong, and our team remains focused on building lasting relationships with our customers and communities. We continue to invest and capabilities that will enhance our growth and efficiency while maintaining prudent risk management and delivering value for our shareholders. As always, thanks to our employees for their hard work, to our customers for their trust and to our shareholders for their continued support. Thank you, and we will be talking at our next earnings call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to Kimberly-Clark de México Third Quarter 2025 Results. [Operator Instructions] Please note this call is being recorded, and I will be standing by. It is now my pleasure to turn the conference over to CEO, Pablo González. Please go ahead. Pablo Roberto González Guajardo: Hello, everyone. I hope you're doing well, and thanks for participating on the call. We'll go straight to results, and then we'll make some brief comments about the quarter and our expectations going forward. Xavier? Xavier Cortés Lascurain: Thank you. Good morning, everyone. Results for the quarter were better, with net sales growing and gross and operating profits recovering. During the quarter, our sales were MXN 13.4 billion, a 2% increase versus last year. Hard rolled sales impacted total volume, which was flat and price/mix was up 2%. Consumer Products grew 5%, 1% volume and 4% price/mix, while Away from Home remained flat. Exports were down 15%, impacted by a 32% decrease in hard rolled sales, while finished products grew 7%. Cost of goods sold increased 3%. Against last year, SAM, resins and virgin fibers were favorable. Recycled fibers were mixed, while fluff compared negatively. The FX was slightly lower, averaging 1% less. During the quarter, our cost of goods sold reflected the higher prices of raw materials from prior months and very significantly, the much higher FX, including the hedges as those trickled down the inventory layers. Our cost reduction program once again had very good results and yielded approximately MXN 500 million of savings in the quarter. These savings are mainly at the cost of goods sold level and are generated by sourcing, materials improvement and process efficiencies. Gross profit was flat and margin was 38.7% for the quarter. SG&A expenses were 4% higher year-over-year and as a percentage of sales, were up 30 basis points as we continue to invest behind our brands. Operating profit decreased 4% and the operating margin was 21.3%. We generated MXN 3.4 billion of EBITDA, a 3% decrease, but within our long-term margin range at 25%. As mentioned, the benefits of better raw material prices and a stronger peso take time to show up on the actual cost of goods sold, due not only to inventories, but also to contract transit time and particularly in this case, the currency hedges. Having said that, our gross margin did improve 50 basis points sequentially from the second quarter to the third quarter. That improvement does not go down to the operating profit or EBITDA level because the SG&A remained constant and was, therefore, higher as a percentage of sales because the third quarter sales are traditionally lower than the second quarter sales. Cost of financing was MXN 404 million in the third quarter compared to MXN 287 million in the same period last year. Net interest expense was higher at MXN 401 million versus MXN 290 million last year, despite our lower gross debt because we earned less on our cash investments. During the quarter, we had a MXN 3 million FX loss, which compares to a MXN 4 million gain last year. Net income for the quarter was MXN 1.7 billion with earnings per share of [ MXN 0.56. ] We maintain a very strong and healthy balance sheet. Cash position as of September 30 was MXN 11 billion. We have no debt maturing for the rest of the year and maturities for the coming years are very comfortable. Net debt-to-EBITDA ratio is 1x and EBITDA to net interest coverage is 10x. Over the last 12 months, we have repurchased close to 50 million shares, around 1.5% of shares outstanding, which brings the total payout to shareholders to approximately 7%. And with that, I turn it back to Pablo. Pablo Roberto González Guajardo: So we continue to operate against a soft consumer backdrop, but we managed to increase sales and post EBITDA margin within the target range. Growth in Consumer Products was significantly better supported by innovations and commercial initiatives, together with a strategic decision to reduce spending during the heavy summer promotional season to protect the value of our brands as well as reduce the negative price effects. Volume was slightly ahead of last year, an important improvement, but consumers remain stretched and cautious given the increased uncertainty, job growth deceleration, remittances slowdown and overall lack of economic growth. We see no significant catalyst for this to change in the short term and are strengthening strategies accordingly. Still more relevant and differentiated innovation, more effective engagement with consumers efficient execution hand-in-hand with our clients, and importantly, relentless focus on our most important opportunities by category, channel and brands will guide all our actions. In a market that's not growing much, gaining share and playing in areas where we haven't participated at least not aggressively, will be key to accelerate our growth. We look forward to sharing more details on the strategies as we get into 2026. The same holds true for Away from Home business, and we expect exports of finished products to continue to grow and accelerate in the coming years, behind a concerted effort with our partner, Kimberly-Clark Corporation. With respect to costs, we have yet to see the full effect of lower input prices on results and lower sequential volumes typical of the third quarter meant we had weaker operating leverage. Despite these headwinds, margins remain strong. As we get into the final stretch of the year and particularly into next year, we will see lower costs reflected in our numbers. We expect lower pulp prices, stable recycled fibers, lower resins and superabsorbent materials plus a stronger peso to be tailwinds going forward. In summary, our results continue to improve. And despite an expected continued weak consumer environment, we're executing strategies that will translate into stronger results in 2026 and the years to come. With that, let's turn to your questions. Operator: [Operator Instructions] We'll take our first question from Ben Theurer with Barclays. Benjamin Theurer: Congrats on the results despite the challenging environment. So I wanted to follow up a little bit on just the consumer sentiment and what you've been seeing across the different categories. So maybe help us understand and kind of like getting a bit closer into that 4% price/mix change. How are you able to kind of like implement that and at the same time, actually get about a 1% volume growth, just given the consumer is weak, but it felt like a very good execution on price mix with volume growth. So that would be my first question. Pablo Roberto González Guajardo: Sure, thanks for the question. Look, as I mentioned, we see a stretched consumer. And this is [ not news of ] uncertainty. And as I mentioned, job growth has decelerated, remittances have slowed down. I mean overall, the economy is pretty slow and consumers' sentiment is not at its best, if you will. So consumers are being very careful in how they are spending. We do see a fork, if you will, with consumers that continue to spend on premium products, but there are those who are trending down from value to economy products, not at a very marked rate, but there's certainly something happening there given the -- how the consumer is stretched. So the way we were able to put all of this together -- and let me say, by the way, the growth in our categories is pretty muted. Some of them, the categories that don't have such high penetration like kitchen towels and others are growing at higher rates. But even those the rates have slowed down a little bit. And the more, if you will, mature categories are flat or slightly growing when it comes to volume. So what we did is, one, Remember, we decided not to play as aggressively on the summer promotional season. Because what we were seeing over the past couple of years is that when you did that, the price would take a hit not only within the promotional season, but then beyond that, because consumers ended up with some inventory on their hands. So then it was a little harder to move volumes forth. So we were very careful on how we manage that, and I think we were successful in doing so. Plus the fact that we are through our revenue management -- revenue growth management capabilities found certain instances where we could adjust pricing and move forth. So that's how we were able to keep prices going and then volume really helped because of innovation and all of our commercial activities during the third quarter. So it was really a combination of executing on price and innovations that allowed us to put together both growth in price and for the first quarter in the year, growth in volume. Benjamin Theurer: Okay. And then just one quick follow-up. You've called out the softer hard roll sales volume. Was there a technical issue? Is it a demand issue on the export side? What's been driving that? Pablo Roberto González Guajardo: Really, I think what's happening there is that there's a lot of supply of hard rolls in the U.S., a combination of companies with excess capacity sending it to the U.S. and then maybe a little bit of companies buying before some of the tariffs came into effect. So there's paper out there that I think the system is going through. And hopefully, that will become more normalized, if you will, in the fourth quarter, certainly, I think by the first quarter of next year. But overall, just oversupply in the market of hard rolls in the U.S. Operator: We will move next with Bob Ford with Bank of America. Robert Ford: Pablo, I also was impressed by the growth in consumer given your intent to stay away from some of the summer promotions. Can you give some examples maybe of some of the more successful innovation and execution of efforts that are enabling you to improve pricing and take share? And with respect to the export mix between hard rolls and finished products, can you give us a sense both in volume and value in terms of the breakdown of those exports? And then how should we think about current capacity utilization rates for both pulp and finished product? Pablo Roberto González Guajardo: Thanks, Bob. Thanks for your question. Yes. Look, I mean, when it comes to innovation, as I mentioned earlier in the year, we have strong innovations for all of our categories throughout the year. And by the way, we have a very, very strong pipeline for the coming years. So we're very excited about that. And a couple of particular examples are on the diaper front, where we pretty much improved on every single tier of our offerings. And when you take a look at our shares, we're -- even though the categories, as I said, pretty flat, we're gaining share in pretty much all of the channels given the -- all of the channels and all of the tiers, given the innovations that we were able to put into the market. And again, those have to do with better observancy core, better fit, better stretch, better softness. So depending on the tier, again, we improved every single one of them, and that's a category where we see our shares improving nicely. Also, for example, in bathroom tissue in the premium tier, where we've introduced a couple of new features and new sub-brands under Kleenex, Cottonelle, and we're absolutely convinced we have the best product in market and products that can compete with products anywhere in the world. and they've been very, very well received by consumers. And as well, we also made some innovations to our economic product, particularly Vogue in the -- or [ Vogue ] in the wholesale channel, and we've been able to gain ground with that product consistently and significantly. So again, innovation at the core of everything we do and very, very excited with what we see for the coming years when it comes to innovation. With respect to the breakdown of our exports, I mean, hard roll sales represent 46% of the sales and finished product, 54%. And hard rolls, as I mentioned, hopefully, volumes will stabilize here in the coming quarters, and we expect that to continue to be -- hopefully, be a tailwind and if not, certainly not a headwind going forward. And on the finished product, we're excited. I mean we've had a couple of meetings with our partner, and we're looking at opportunities in the coming years to further integrate our supply chain. We've done a good job here in the past couple of years, but many more things that we can do, and we're working very closely together to make that happen, and we're excited with the opportunities we see for it. And as we move and are able to turn more of our capacity into finished product, then certainly, our hard roll sales will decline accordingly because, as you know, what we do is our excess capacity is what we turn into hard rolled sales and sell outside. So as this plans with our partner materialize, a little by little, we'll start to see lower hard roll sales, but finished product sales increase hopefully significantly. Robert Ford: And that was actually the idea behind the question on capacity utilization is we agree. We see this massive opportunity in exports of finished product. And as a result, we're a little curious in terms of where you are right now in terms of capacity utilization, both for pulp? And then how should we think about where you are today on finished product and we can make some estimates in terms of what you need to add. Pablo Roberto González Guajardo: Yes. And it's a great question, Bob, and we -- let me put it this way. We have enough capacity to grow on finished products aggressively together with our partner in the coming years. And not only what we're producing right now, but we're putting plans together so that we can get more throughput through our equipment or through our machines. So we will be able to support growth with them. And I think we will still continue to be able to put a decent amount of hard roll sales out there in the U.S. So I think the combination over the coming years will certainly be a support our growth and support our margins going forward. Operator: Our next question comes from Alejandro Fuchs with Itau. Alejandro Fuchs: I have 2 very quick ones. Pablo, maybe I want to see if you can discuss a little bit about competition, right? How do you see competition today in Mexico, given the increase in price and sales mix, are maybe the competitors following? Are they being more aggressive promotionally? And if you can also discuss maybe your expectations into next year, hopefully, with a better consumer environment in the country. Maybe you can talk us about what do you expect going forward? Pablo Roberto González Guajardo: Sure, Alejandro. Look, when it comes to competition, I mean, you know our categories have always been very competitive. And we maybe are seeing a little bit more from some participants, not all when it comes to their promotional aggressiveness. I wouldn't say it's something that it's radically different, but a little bit more as, again, the pie is not growing, some are losing share. So they're trying to recoup some of that and are being a little bit more aggressive on it. But not -- again, not something that it's too surprising or too different from other instances. And the fact also that our retailers are, one, continuing to keep inventories and overall working capital under control, they're putting a lot of pressure on that. And two, trying to keep prices, it seems to me a little bit more consistent. I mean that helps in terms of the aggressiveness of promotions not being even more so that it could have been in other instances when the economy is not growing. So a little bit more, but really nothing marked, if you will. Coming into next year, I mean, we hope that a lot of the -- or at least some of the uncertainty that is hanging over the economy can be resolved or at least we get a clear direction as to where it's going. Certainly, the uncertainty that's coming from the USMCA revision or renegotiation and what will happen with that. I mean, you've heard -- we've heard that in a couple of weeks, we'll be hearing from our government as to some of the agreements they've come to with the U.S. administration. So hopefully, that will start to settle down, and we'll know a little bit better where it heads. Hopefully, as we get into the first -- or the workings of the judicial reform, we start to see how it how it works, and we start to see some decisions that support, again, giving more certainty to investment. And again, just hopefully, some of this uncertainties start to play out and we start to get a better sense of what's going on. We know then what to expect. And if that happens, I think the economy will be able to start growing again at a faster clip, maybe come back to what we were doing before all of this uncertainty, about a 1.5%, 2% rate, which at this stands would be pretty good. Not what we need certainly as a country. I mean, we really should be working hard to take all of the obstacles away from investments so that we can start growing at 3% or higher rates, but that's going to take some time and uncertainty is key for that certainty. So that will hopefully play out by '27, but at least by '26, if we can get some uncertainty out, we'll see greater economic growth and then we might see a consumer that feels a little bit better about things and then domestic consumption can start to pick up again. That's our expectation. But let's see how quickly we can -- how quickly it unravels and happens. Operator: Our next question comes from Renata Cabral with Citibank. Renata Fonseca Cabral Sturani: Congrats on the results. So my first question is still about the consumption environment, but specifically to understand if consumers are making the trade downs and if you see a bigger penetration of private label in the categories that the company has? And the second question is related to cost. In the initial remarks, I understood that the company expects that the raw material prices should maintain for the upcoming months. I would like just to confirm if that's the view. And for the fourth quarter, if the company has any hedges or the effects? Pablo Roberto González Guajardo: I hope I can answer your questions. You were not coming through too clearly, but if I don't, please let me know. Again, when it comes to consumers, we're seeing a divergence. Those that buy premium products continue to do so. Those consumers that are used to buy either value or economy products, we see a little bit of trade down to the economy segment. not a big trade down, but a little bit of trade down given how stretched they are. And tied to that, we are also seeing growth in penetration of private labels in the country. And it's a combination of the economic situation and retailers being a little bit more aggressive when it comes to pushing their private label. When it comes to costs, again, we already have seen in our purchases lower costs of most of our raw materials, excluding fluff. And that's just taking a little bit of time to reflect on our cost of goods sold, but we expect that to continue to -- start to happen certainly in the fourth quarter. And no doubt early in 2026. And our expectations for costs in the 2026 is that we will come in with, again, most of them on a downward trend and that will certainly be tailwinds for our cost together with the exchange rate, which will compare very favorably in the first half of the year. So that should be very, very helpful going forward. And when it comes to hedges, no, we have no more hedges during this quarter, and we don't expect to hedge going forward. Operator: We will move next with Antonio Hernandez with Actinver. Antonio Hernandez: Just following up on [ Renata's ] question, should we expect given that because of the tailwinds from FX and maybe raw materials and so on, that maybe EBITDA margin, at least in the short term has already hit rock bottom. Is that like you see basically upside on going forward? Pablo Roberto González Guajardo: Yes, absolutely. And it's interesting how you put it rock bottom when it's 25%, and it's still one of the best EBITDA margins out there for any Consumer Products company in the world. But yes, we probably have hit rock bottom. And going forward, we should expect better margins, no doubt. Antonio Hernandez: Exactly. Yes. I mean, rock bottom considering the 25% to 27%. Pablo Roberto González Guajardo: I understand. I just -- quite frankly, I just used it to make a point, sorry. Antonio Hernandez: Exactly. It's all relative in the end, but yes, pretty good margins. Just a quick follow-up. In terms of innovation and how you're also treating these consumers that are willing to buy these premium products. Maybe if you could provide any color on how much do they represent or innovation in terms of sales? Anything like that would be helpful. Pablo Roberto González Guajardo: Look, I think most of our growth really is coming from products that -- where we've innovated. And again, we're very, very excited with what we've done, but even more so with what we have coming. And early in 2026, we hope to share a little bit more of our strategies when it comes to areas -- main areas of focus and opportunities by category, channel and brands and also the -- what we see would be some of the very exciting innovations that we're going to be putting into the market. So let's hold on that until the first quarter of '26, and we'll be able to provide you more insight and details into what it's done and how we expect it to contribute to our growth going forward. Operator: [Operator Instructions] We will move next with Jeronimo de Guzman with INCA Investments. Jeronimo de Guzman: Start with a follow-up on the cost side. You mentioned that there's no hedges impacting the fourth quarter, but I just wanted to understand how much did the FX hedges impact the third quarter? Pablo Roberto González Guajardo: I would probably say they did impact about 50% of our purchases for the second quarter and for the first part of the third quarter. So assuming that what we saw on the third quarter was mostly based on those purchases. You could say that approximately 50% of our dollar-denominated purchases were impacted by those hedges in the quarter. I don't know if that made sense. Jeronimo de Guzman: But only half -- but only for half of the third quarter... Pablo Roberto González Guajardo: Yes, because of the -- no, I would say for the full quarter, about 50% of our U.S. dollar purchases, which are about 50% of our costs were hedged. Jeronimo de Guzman: Got it. Okay. And what was the average FX for those hedges? Pablo Roberto González Guajardo: [ 20 70 ] something. Jeronimo de Guzman: That will be a big improvement. And then just want to understand, given the much better cost outlook and the fact that these hedges are less of a headwind going forward or not a headwind going forward, how are you thinking about pricing going forward? Pablo Roberto González Guajardo: Look, we continue to take a very close look at each category and each tier and each channel to see where there are opportunities for pricing because, yes, we see tailwinds when it comes to costs of raw materials. We see headwinds in other costs, for example, on labor costs, which have been increasing in Mexico for quite some years. And when you compound their impact over the years, it's becoming a little bit more impactful, if you will, and some other issues. And plus we want to continue to generate important margins and profit so that we can further invest behind our brands. So pricing will not be as maybe in the past where you would just [indiscernible] we're going to increase 4% in the diaper category in March and period. It's going to be more of a strategic analysis, again by tier, by channel, et cetera, to determine where the opportunities are together with a very important push behind mix for our brands given the innovation we have. And so we will continue to look for opportunities to price and opportunities to improve our mix going forward. Jeronimo de Guzman: Okay. Yes, that's helpful. So the 4% that you had this quarter year-on-year, how much of that was mix versus actual price changes? Or was it just less promotions versus a year ago, I guess, which is kind of a... Pablo Roberto González Guajardo: It was about half and half. It was about 2% price, 2% mix. Jeronimo de Guzman: Okay. Got it. Great. And just one other question on the competitive environment. I wanted to get your sense on market share trends in general, kind of where -- in what areas are you seeing maybe more pressure on the market share side and where you're seeing more more of the market share gains that you're having? Pablo Roberto González Guajardo: Overall, I think we have a very stable market shares, maybe except on diapers, as I mentioned, we see that share growing. When you take a look at bathroom tissue, we're fairly stable. Napkins, we're growing share. kitchen towels, we're growing share. Wipes, we're growing a little bit on value, not on volume. But that's a category where we have lost a little bit of ground to not only private label, but a whole bunch of offerings coming from Asia and other parts of the world at very cheap prices. So we've got plans to attack there and recoup some of the share. And I would say about that, I mean, facial tissue is is flat at about 92%. I mean, our shares are pretty stable overall. Jeronimo de Guzman: Okay. Sorry, one more question on the new JV, the penetration, any updates on that? Pablo Roberto González Guajardo: On what, sorry? Jeronimo de Guzman: The new business, the pet, animal [indiscernible] Pablo Roberto González Guajardo: Pet business. No, thanks for the question. Yes, we continue to make inroads. I mean we're getting cataloged in more retail chains and improving our reach within them. So getting more SKUs in there and getting into more stores. And again, the consumer reaction so far has been very, very good. The retail reaction has also been good. So right on track where we wanted to be, and hopefully, that will accelerate in 2026. Again, this is a long-term play, but we should be this -- we absolutely should see this business accelerate in 2026. Operator: We will move next with [ Miguel Ulloa ] with BBVA. Miguel Ulloa Suárez: It could be regarding the CapEx for next year and any changes in the repurchase program. Pablo Roberto González Guajardo: Miguel, CapEx will remain very likely in the $120 million range. Could be a little bit more if some of the opportunities for exports capitalize, but nothing that would change significantly the capital allocation. For buybacks, this year, we will complete our EUR 1.5 billion program. Still too early to talk about next year. We will definitely have retained earnings from the net income this year to grow the dividend. And as usual, whatever we have left, we will devote to to buybacks. So that we'll have to see after we end the year. Miguel Ulloa Suárez: That's helpful. And just one, if I may, is regarding further investments or big investments in line for capacity in coming years? Pablo Roberto González Guajardo: Right now, it doesn't look like we need to do anything beyond that 120 average CapEx. Again, if we see more opportunity, we could see a couple of years of ramp-up. And even if at some point, we need a tissue capacity, which at this point, it doesn't look like, but hopefully, that changes, then we would see a couple of years of 150, maybe somewhere around that. Again, nothing that should change significantly the capital allocation. Operator: And this concludes our Q&A session. I will now turn the call over to Pablo González closing remarks. Pablo Roberto González Guajardo: Thank you. Nothing else to say just thanks for participating in the call. I hope you all have a terrific weekend. And since this is our last call before the year-end, I know it's early, but I hope you all have happy holidays and a terrific New Year's and look forward to talking to you early in 2026. Thank you. Operator: And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Thank you for standing by, and welcome to First Western Financial's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Tony Rossi. Please go ahead. Tony Rossi: Thank you, Latif. Good morning, everyone, and thank you for joining us today for First Western Financial's Third Quarter 2025 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; Julie Courkamp, Chief Operating Officer; and David Weber, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. And with that, I'd like to turn the call over to Scott. Scott? Scott Wylie: Thanks, Tony, and good morning, everybody. Starting on Slide 3. We executed well in the third quarter and saw positive trends in many areas of loan deposit growth, growth in our net interest income, well-managed expenses and generally stable asset quality. This resulted in an increase in our level of profitability and positive operating leverage. Market remains very competitive in terms of pricing on loans and deposits. We continue to successfully generate new loans and deposits by offering superior level of service, expertise and responsiveness rather than winning business by offering the highest rates on deposits or the lowest rates on loans as other banks are doing. We continue to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. However, as a result of the additions we made to our banking team over the past few years as well as generally healthy economic conditions in our markets, we had a solid level of loan production, which was well diversified across our markets and industries and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share, and we used our strong capital position to repurchase some of our shares during the third quarter, which was accretive to our tangible book value per share. Moving to Slide 4. We generated net income of $3.2 million or $0.32 per diluted share in the third quarter, which is higher than the prior quarter and a 45% increase from our EPS in the third quarter of last year. With our prudent balance sheet management, our tangible book value per share increased by 1.2% this quarter. I'll turn over the call to Julie for some additional discussion on our balance sheet and trust and investment management trends. Julie? Julie Courkamp: Thanks, Scott. Turning to Slide 5. We'll look at the trends in our loan portfolio. Our loans held for investment increased $50 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production. But with the higher level of productivity we are seeing from the additions to our banking team that we have made over the last several quarters, we are seeing a solid level of new loan production. While we are also seeing an increase in CRE loan demand that meet our underwriting and pricing criteria, new loan production was $146 million in the third quarter. The new loan production was well diversified with the largest increases coming in our residential and commercial real estate portfolios. And we are also getting deposit relationships with most of these new clients. We continue to be disciplined and are maintaining our pricing criteria, which resulted in the average rate on new loan production being 6.38% in the quarter. Moving to Slide 6. We can take a closer look at our deposit trends. Our total deposits increased $320 million from the end of the prior quarter. This was due to both new accounts and a buildup among existing client balances. We had an increase in noninterest-bearing deposits due to inflows we saw from title companies, driven by mortgage industry volume. Additionally, we had an increase in interest-bearing deposits as a result of the successful execution of our deposit gathering strategies. Now turning to trust and investment management on Slide 7. We had a $64 million decrease in our assets under management in the third quarter, primarily attributed to net withdrawals on low fee product categories, partially offset by improved market conditions on investment agency accounts. This resulted in increased $43 million or 2.7% during the quarter. Trust and investment management fees increased $100,000 from the prior quarter, primarily driven by the increase in investment agency AUM. Now I'll turn the call over to David for further discussion of our financials. David? David Weber: Thank you, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 8.7% from the prior quarter due to increases in both net interest income and noninterest income. Year-over-year, our gross revenue increased 15.5%. Now turning to Slide 9. We'll look at the trends in net interest income and margin. Our net interest income increased for the fourth consecutive quarter and increased 8.9% from the prior quarter, primarily due to an increase in our average interest-earning assets with the strong deposit growth we had contributing to our higher level of cash on the balance sheet. Our net interest income increased 25% relative to the third quarter of 2024. Our NIM decreased 13 basis points from the prior quarter to 2.54%. This was due to unfavorable mix shifts in both interest-earning assets and deposits as our deposit growth during the quarter was in higher cost money market accounts. The strong deposit growth during the quarter contributed to higher cash held on the balance sheet. As this liquidity is deployed into the loan portfolio during the fourth quarter, we expect to see NIM expansion. Now turning to Slide 10. Our noninterest income increased by more than $500,000 or 8.5%, which is 34% annualized from the prior quarter. This was primarily due to increases in all major fee categories, including trust and investment management fees, insurance fees and gain on sale of mortgage loans. The increase in gain on sale of mortgage loans was driven by a higher level of mortgage production and the increase in trust and investment management fees was driven by an increase in investment agency AUM as a result of improving market conditions. Now turning to Slide 11 and our expenses. Our noninterest expense increased by less than $1 million from the prior quarter. Most areas of noninterest expense were relatively consistent with the prior quarter as we continue to tightly manage expenses while also making investments in the business that we believe will positively impact our long-term performance. Turning to Slide 12. We'll look at our asset quality. As Scott indicated earlier, we saw generally stable trends in the loan portfolio in the third quarter with slight increases in NPLs and NPAs. This was primarily due to one loan that was downgraded during the quarter. And we had a minimal level of net charge-offs again this quarter. We had a slight increase in our allowance coverage from 75 basis points in the prior quarter to 81 basis points in the third quarter. Now I'll turn it back to Scott. Scott? Scott Wylie: Thanks, David. Turning to Slide 13, I'll wrap up with some comments about our outlook. Overall, we continue to see relatively healthy economic conditions in our markets, and we're seeing good opportunities to add both new clients and banking talent due to the ongoing disruption from M&A activity here in the Colorado market. Our loan deposit pipelines remain strong and should continue to result in solid balance sheet growth in the fourth quarter. In addition to balance sheet growth, we also expect to see positive trends in net interest margin, fee income and more operating leverage resulting from our disciplined expense control. Based on trends we're seeing in the portfolio and the feedback we're getting from our clients, we're not seeing anything to indicate that we'll experience any meaningful deterioration in asset quality. The positive trends we're seeing in a number of key areas are expected to continue, which we believe should result in steady improvement in our financial performance and further value being created for our shareholders going forward. So with that, we're happy to take your questions. Latif, if you could please open up the call. Operator: [Operator Instructions] Our first question comes from the line of Brett Rabatin of Hovde Group. Please go ahead, Brett. Brett Rabatin: I wanted to start with the deposits and the strong MMDA growth. And if I heard you correct, it sounds like that's a mix of internal efforts as well as maybe the mortgage department. Just any -- can you maybe go into a little more color there? And then are those levels sticky, the growth in the level? Scott Wylie: Well, I think we've talked about our efforts to grow deposits and the fact that, that would happen a little bit in a lumpy fashion wouldn't be a big surprise given our history here. We do see large deposits coming in and out. And in this case, I think the things that we saw that happened in Q3 are deposits that are going to stay here and give us a higher deposit base to grow from into Q4. Brett Rabatin: Okay. That's helpful. And then the NPA that you added during the quarter, any color on that credit? And then just was there part of the provision related to a specific reserve for that NPA? Scott Wylie: Yes. I think we have a number of credits that have performance issues over time, and this is one that is a C&I loan. We have been paying attention to it. We downgraded it in Q3, and we do have a specific provision for it. We expect it to be worked out and work through over time, the provision is more than adequate. Brett Rabatin: Okay. And then just maybe lastly, if I could ask on the margin. Julie, you indicated the margin would be up from here. Any magnitude that you could share in terms of what you think 4Q might look like, presuming we get a rate cut or 2? David Weber: Yes. I think we do have opportunity to see NIM expansion. If you look at the amount of liquidity that's sitting on the balance sheet, if we redeploy that into the loan portfolio at something like plus 200, I think that should drive NIM expansion there. We also certainly have the ability to continue to improve earning asset yields and lower our deposit costs. So I think we've got we've got a pretty nice path for NIM expansion in the fourth quarter. Brett Rabatin: Okay. David, any magnitude that you're thinking about in terms of basis points? David Weber: Yes. I'm thinking we can achieve something like 5 basis points of NIM expansion. Brett Rabatin: Okay. Okay. Great. Appreciate all the color. Operator: Our next question comes from the line of Matthew Clark of Piper Sandler. Matthew Clark: I wanted to start on the spot rate on deposits at the end of the quarter. David Weber: Yes. Matthew, it was 3.04%. Matthew Clark: Okay. And then any updated thoughts on the beta you're looking to achieve with additional Fed rate cuts through the cycle and whether or not that starts to decline over time? David Weber: Yes. It has been declining, and it will certainly continue. We achieved somewhere around a 63% beta on money market accounts in the third quarter. And I think that's reasonable for the fourth quarter expectation as well. Matthew Clark: Okay. And then the expense run rate going forward, I think some of the increase this quarter was related to incentive comp. But what are your thoughts on the run rate here in the fourth quarter? David Weber: Yes. The incentive comp can vary certainly with the financial performance. But I think something similar to third quarter as far as expenses is probably a reasonable estimate for fourth quarter. Matthew Clark: Okay. Great. And then last one for me, just on the wealth management business. AUM down a little bit. It looked like it was in the lower fee products, though may have been deliberate, not sure. But any update on the kind of renewed growth and profitability improvement strategy there? Scott Wylie: Yes. We've definitely been working on getting that going again, and we've replaced the team on the trust and in the planning side. We've got a new leader that joined us beginning in the second quarter for our planning team and definitely seeing some nice progress from them. As David noted, we saw AUM go down, which is not really something we manage for. We're really more concerned about the fee income, and we saw fee income grow in the agency accounts in Q3, which is what we want to see. So definitely nice progress from that new team with, I think, a lot more to come. And Matt, just a little bit more color on deposit pricing. With the increase in deposits, you're always going to see relatively expensive at first, and then it's going to moderate over time typically with these new relationships and additional deposits you bring in. Our average deposit costs last quarter peaked at 3.22% in August, and then we're down about 3.15% in September. And as David said, ended the quarter at 3.04%. So you're seeing a nice trend just within the quarter there. So hopefully, we can see that continue into Q4. Operator: Our next question comes from the line of Will Jones of KBW. William Jones: I wanted to circle back to the deposit growth. Obviously, a fairly banner quarter there for deposits, and it sounds like you expect maybe to see a little bit more balance sheet growth in the fourth quarter here. But should we, in any way, view this large influx of deposits as a way to prefund your expected growth for 2026, and maybe '26 then becomes more about just remixing the balance sheet? And then just, I guess, pairing within that, you obviously have a fair amount of liquidity from the deposit growth. How should we think about you guys being a little more opportunistic with securities purchases at this point? Scott Wylie: Well, I think that was a 3-part question. So let me see if I can get them all here. William Jones: Yes. I'm sorry about that through... Scott Wylie: Well, we appreciate the question. So I think you're right on with the idea that we were opportunistic in bringing deposits on. We have done a number of things over the last 12 months to get the team here focused on deposit growth. We know we can grow loans, and we wanted to see the loan-to-deposit ratio come more in line. And so the way you described that is reasonable. Although I would say it's not like a one-off thing that prefunds 2026 or something like that. I mean, I think this is an ongoing effort that goes throughout the product group throughout the -- our PTIM world, planning, trust and investment management world goes definitely through each one of our 19 locations. We require relationships with each loan, and that includes deposits. And so very much a focus of the company. I think that we're seeing a lot of market disruption out there. So on one hand, you've got this competitive environment for deposits, but you've also got people that don't want to be with really large out-of-state banks. And that disruption is continuing, I would say, increasing, and that creates opportunity for talent for people that we can bring centrally to support our teams. We can bring new people into our teams and then we're bringing in new clients. And so I think that's going to continue. I don't really see any reason to think that's going to abate. And at the same time, we've got this tiny low market share in most of our markets. We're kind of 1% or 2% in our bigger markets and less in the newer markets. So in strong and growing economy. So I think all those things set up for some nice continued asset growth into the fourth quarter and next year. William Jones: Okay. Helpful response. And just as I kind of like pair some of those comments, just into how the margin looks for 2026. As I kind of look back how you've transformed the margin this year, about 20 to 25 basis points of year-over-year expansion. Do you think that magnitude is repeatable again in 2026? Is the opportunity there from both a deposit pricing standpoint and loan growth standpoint to see that kind of magnitude again in 2026? Scott Wylie: Well, what I've been seeing is that we really got heavily impacted by that rapid run-up in short-term rates and the inverted yield curve and that we thought that, that would turn around and we'd see nice deposit betas as rates declined, which we have. And the fact that we've seen 22 basis point improvement from Q3 of last year to Q3 of this year, I think it's a nice start in that. We've moved out of the 2.30s into the 2.50s. And I continue to think that in normal environments, my banks, including this one, have produced 3.15%, 3.20%, 3.25% NIM for the way we do business. And that's where I think we're going. I don't think we're going to get there next quarter. I don't know if we can get there next year, but that, I think, is going to continue and the fact we've seen that amount of improvement here over the last 12 months in spite of the growth that we've seen on the balance sheet, I think, is really promising and bodes well for continued operating leverage into 2026. William Jones: Yes. Okay. Very helpful there. And then lastly for me, you touched a little bit on in some of your comments, just the organic opportunity that's arisen from some of the M&A disruption. But there has been a lot of deal announcements. There's been a lot of price discovery. So just curious how you think about your own scarcity value within that? And then maybe how you view yourself as a downstream buyer potentially of banks. Scott Wylie: Well, we believe that our path to -- we believe our job is to drive shareholder value. And we believe our path to creating shareholder value is creating operating leverage in our business here by growing revenues a lot faster than expenses. And that turns into improved efficiency ratio, improved bottom line. And we're not happy where the profitability is. We're not happy where the efficiency ratio is. But we've made a bunch of investments here over the last couple of years and changes that are now paying off, and we're seeing the green shoots of that, and that's going to drive continued organic growth and operating leverage for us. And now talked a couple of times about why we think that continues into '26 and beyond. So specifically, in terms of scarcity value, clearly, First Western is a unique franchise that both is becoming more unique in Colorado, but I would say also more unique as a successful wealth management business on a national basis. I mean I think the bank, in a lot of ways, most similar to us in terms of their balance sheet and AUM was FineMark in Florida, and the fact that they sold for 6.5x revenue and 92x trailing earnings to a really good buyer, I think, is an interesting data point for us. And I know others use other metrics on that, but I mean, I think that's what the data is. So yes, I think there is good scarcity value here. I think our clients, frankly, see that and they find us to be a desirable place to do business. I think other bankers around the country are seeing that, too. In terms of acquisitions, we would love to be buyers. We've done that over the years a lot, 13 times, and we just have to get our stock price back to something reasonable. And definitely, there's a lot of activity out there that we could benefit from if we can get our stock price back in line or when we get our stock price back in line. William Jones: Okay. I appreciate that. Appreciate that response. That's all for me. Operator: Our next question comes from the line of Bill Dezellem of Tieton Capital Management. Please go ahead, Bill. William Dezellem: First of all, Scott, it sounded like you may have had some additional comments that you were going to share to the last question. I'll let you do that if there's something more you want to add. Scott Wylie: No, I'll add a few comments at the end. Thank you, Bill. William Dezellem: All right. So continuing down the deconsolidation route, would you talk about what transactions have been most disruptive and possibly favorably impactful for First Western? Scott Wylie: Yes. I don't entirely understand it, Bill. So I can't really give you a really solid prediction of what's going to happen with all this. But I would tell you that when Guaranty Bank and CoBiz sold, I thought that was going to create a lot of opportunity because our type of clients definitely were at those 2 banks. And I thought with them being acquired by out-of-state banks, that was going to create a lot of opportunity for us. As it turned out, it didn't. And I think a lot of the reason for that is the bankers stayed in place for a while. And then when they did move, they were really bid up by other players. And so it got to be really expensive to bring those folks over. Now with the second-tier acquisitions that we're seeing, for example, with Citywide, which was a really great local family-owned and family-run bank, they sold to Heartland, I don't know, 5, 7 years ago, something like that. And then I think Heartland really had a strategy of trying to run these local banks as the way they had run historically. UMB buys Heartland, UMB is going to drive a UMB culture into what used to be Citywide. And so we've seen some good people and good opportunities come out of that. And so I think interestingly, it's sort of the second-tier acquisitions that really create more opportunities in some way. And then the FirstBank one in this market is just really interesting. Like FirstBank is a great retail bank and just really loved by Coloradans. So there's this emotional tie that I don't entirely understand. But definitely local people here, local business leaders, local entrepreneurs have strong relationships with that company. And it's just going to be a challenge for a big national player to keep that passion. And we'll see. I mean we've had lots of calls. We have clients that bank here and bank there. And you can be pretty sure that those folks are calling us to saying what additional capacity you guys have for us to stay with you guys. So I don't know how all that plays out, Bill. I do feel like we're seeing more benefits of the disruption in today's market than what we saw 5 or 7 years ago. And again, I'm not sure all the reasons why, but it's been really good for us so far. William Dezellem: So let me take that one step further. Do you sense that you have the opportunity to become the new bank that Coloradans love that others look at you and go, we don't even know why, but they sit on this pedestal. Scott Wylie: Well, I do know our clients love us. We're never going to be a retail bank the way FirstBank was. Like FirstBank, one of their strengths was they did one thing. And over the years, I've talked to people like John Ikard and other CEOs over there, and they're like, well, what do you think about the trust and investment management business? And I would tell them and they would say, well, that's fine, but we're never going to do that at FirstBank. So I mean they're just very focused on being a retail bank. And I think they did that better than anybody. And we're not ever going to do that. We're not going to open branches on every corner like they did and stuff like that. So I think we'll continue to be in First Western. I know that our folks are very committed to their markets and their communities. We talk here about taking care of our 4 key stakeholders, which are shareholders, associates, clients and communities. And so we try and do those things that are right for our people and create that emotional connection that you're talking about. And certainly, with our niche, that's something we would hope to expand and build on. William Dezellem: That's helpful. And then relative to Arizona specifically, are you seeing anything from a transaction standpoint that you see as benefiting your opportunity for bringing on new people there? Scott Wylie: Well, I don't think we've announced it yet. We have Julie, who is telling me. So I was thinking I was going to make some news here, Julie, but you're ahead of me. But we actually recruited one of the top folks out of First Republic to build our franchise in Arizona for us, and he had a garden leave period and all that stuff, but he's now joined us. And we are really optimistic about what we think the team there can do in the years to come. I think that, that Arizona market for us, if we had the same tiny market share that we had in Arizona that we have in Colorado, we would be -- what's the number, Julie, $4 billion, $6 billion, bigger or something like that. And so that's what we've charged the team there to come up with. I think we've got a leader in place that can do it. William Dezellem: Great. Congratulations on that. One additional question, please. The excess cash that you have on the balance sheet, how long are you thinking that it will take to redeploy that cash? Scott Wylie: Yes. Actually, that was one of the 3-part question that I missed on, David. And do you want to talk about what we've done already with investments and then what our thoughts are. David Weber: Yes. I mean, Bill, if you kind of look back at the history of our balance sheet, we certainly have our liquidity and capital really more earmarked towards the loan portfolio. And I think that continues. Now that being said, when there are opportunities from a bond perspective that we like, we will take advantage of them. So we did add about $50 million in the third quarter to the bond portfolio, and those were primarily floaters that got us a nice spread over interest-bearing cash, which still really remains highly liquid assets, government guaranteed bonds, agency GSEs, things like that. So I think the focus is still to deploy that liquidity into the loan portfolio. But as we see opportunities in the bond portfolio, we'll certainly assess those as they come up. William Dezellem: So 2 follow-on questions to that. Number one is that the $49 million available for sale that's now on the balance sheet that you're referring to. And then that redeploying of that, I mean, is this something that is a 2-, 3-quarter phenomenon given what you see with economic activity? Is it something you think by the end of the Q4 -- is it more like full year next year? I guess I'm looking for a bit more solid view of how you see loan demand relating to that excess cash -- excess liquidity, I should say. David Weber: Yes. Good question, Bill. We expect our loan demand trends to continue. We had a really strong second quarter in loan growth. We had a good quarter again in the third quarter as far as loan growth. And we -- given our loan pipelines and what we're seeing in our markets, we do expect those trends to continue. So I don't think it's a year down the road type of thing with those trends continuing as far as redeploying that liquidity. Scott Wylie: I would just add, Bill, that we have seen a modest growth rate in the balance sheet, right? Like I think that our expectation is that we can grow single digits, mid-single digits, maybe low double digits. We're not interested particularly in growing faster than that. And I think that you're going to see this growth continue at a moderate pace here into 2026 from everything we know. Not expecting to go out and lend all this money out next week. That is not in our game plan. Operator: I would now like to turn the conference back to Scott Wylie for closing remarks. Sir? Scott Wylie: Great. Thank you. We said for several quarters that we had success playing defense and that we were going to shift back on to offense in 2025. We had some pretty stiff headwinds there for a while with short rapid run-up 525 basis points in short-term rates. We had that inverted yield curve for an extended period. We have 3 of the 4 largest bank failures in U.S. history, including First Republic, which very much was seen as a successful player in our niche. But we said, we got through the defense, let's shift over to offense and really leverage the investments that we've made over the past couple of years in 5 key areas. We've replaced our technology infrastructure. We've moved to a completely cloud-based environment. We've installed middleware. We've rolled out a new digital platform. We're adding all kinds of new services and tools onto that tech platform that really, I think, help us be a leader from a tech standpoint. We've reorganized number two, our product teams, our loan deposit, investment management planning, trust, mortgage teams have all been strengthened and reorganized. We've expanded our PC local office teams. We've given them a new proprietary toolbox for growth and rolled that out here in the last quarter. We've reset and standardized our internal control processes for more efficiency and value add so that we're competing on value and not on price. And number five, we've rebuilt our credit and risk and support and marketing teams to support the First Western that we envision for the future. And that's all paid for and in our current expense structure. And so we were hoping to see some green shoots of progress in that this year, and that showed up in Q3. Our net interest income was up 35% Q-over-Q, quarter-over-quarter annualized. Our fees were up 31.6% quarter-over-quarter annualized in each of our key areas, David pointed that out, which I thought was a really great pointing in PTIM, in insurance, in banking, in mortgages, we saw nice growth. Our pre-provision net revenues were up almost 35% quarter-over-quarter annualized, and our efficiency ratio is trending down with operating leverage up. So thinking about 2026, we do our business planning in the fourth quarter. And so that's a big project that we're doing now with each department head in each office. And so we'll see how all that plays out. But if you just look at Q3 year-over-year trend lines, then our net interest income is up 25% year-over-year, and that was done with modest growth in the balance sheet plus NIM improvement, which drives nice operating leverage, which we saw. Our fees were up 21% from September of last year to September of this year. And our operating expenses were only up 4%, and that was mainly due to incentive comp that is driven off of revenue growth. So if we had higher expenses in Q4 because we're paying incentive growth because we're seeing good -- incentive comp because we're seeing good growth, and that's a good problem to have. So looking past this quarter, our intention is to get back to be a high financial performance like we were earlier in this decade. And we have a clear path to 1% ROAA and plenty of room beyond that. We were honored to be named one of just 16 KBW Bank Honor Roll members in 2025 for our performance over last year. We were just, I think, made as of Q3 now, Piper Sandler's list of the top 200 U.S.-listed banks in size. And then we just saw our schedule for the Hovde Conference down in Florida in a couple of weeks. And the organizers there asked us to add some time slots because of high demand. So I think there's good momentum here. We're really optimistic about how we can finish the year and continue to deliver shareholder value into 2026. Thanks, everybody, for your support, and thanks for dialing in today. We really appreciate it. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Jane Morgan: Good morning, and welcome to the Amaero Investor Webinar. I'm Jane Morgan, Investor and Media Relations Manager. And today, I have the pleasure of speaking with Hank Holland, our Chairman and CEO, who's going to be providing a company update. As usual, we will be taking questions throughout the presentation. So please use the Q&A function, which can be found at the bottom of your screen. Hank, I'll hand to you. Hank Holland: Thank you, Jane. Good morning, everyone. As you're aware, Amaero lodged its quarterly financial results yesterday. I'd like to highlight some of the information from the results. And then as always, we'll be happy to take questions as follows. It was quite a transition for Amaero. We reported revenue of AUD 4.7 million, an increase of 445% over the same period a year ago. This included AUD 4.1 million of powder revenue and about AUD 600,000 of revenue from PM-HIP manufacturing of large near net shape parts. During the quarter, we increased atomization by 240% over the prior quarter. Again, that is in the September quarter, we increased atomization by 240% over the June quarter. Notwithstanding the significant step function and increased manufacturing, we could not manufacture enough product to fill all of our orders. And thus, we carried it into the current quarter approximately AUD 0.5 million of order backlog. All of those powder orders have now been shipped that carried over into this current quarter. We ended the quarter with AUD 9.9 -- I'm sorry, excuse me, we used cash in operations of AUD 9.9 million during the course of the quarter. This included AUD 4.7 million of bar stock inventory purchases. We've been very mindful of the last 12 months to carry buffer stock, thus mitigating the risk of any trade disruptions or tariff risk, somewhat timely given the tip that arose about a week ago with the threatened heightened tariffs with China. We are in very good position as far as inventory in stock. We have 20 tons of titanium bar that arrive this week. We have another 20 tons -- another 40 tons actually that will ship before the end of the month. The threatened tariff was to take place in November. So again, we are in very good shape as far as buffer stock of inventory. We ended the quarter with AUD 50.9 million of cash. Moreover, 3 days into the quarter on October 3, we received USD 5.7 million or about AUD 8.8 million from EXIM Bank draw. This was from CapEx spent in the prior quarter. So as of October 3, we had a cash balance of roughly AUD 59.7 million after drawing on EXIM Bank. We've got about another USD 7 million or about AUD 10.8 million left to draw on the EXIM Bank loan, and we will draw that over the course of this fiscal year. Moving on, one of the real focuses this year, really, there will be 2 primary focuses: one, to continue scaling manufacturing production, our throughput and the other will be continue to scale our commercial contracts. Anyone that has been involved in manufacturing, scaling manufacturing is not easy. When you go from development to production, it's a very different process. In anticipation of this, in May of this year, we brought in a gentleman that I've known for many years, Eric Olson. Eric headed up manufacturing consulting at Accenture for 3 decades. I met him at a former portfolio company. We had a SWAT team in for about 6 weeks. They reviewed all of our processes, met with our entire staff, all of our quality controls, all of our safety controls, and they put forth a plan in anticipation of not only scaling from fiscal year '25 to fiscal year '26, but scaling from atomizer, which we had before all the way up to 4 atomizers, which is our plan. They had no shortage of input and recommended changes over time. In fact, there's about 42 items that they identified in our processes and our people and our staffing and various protocols, much of which has already been implemented and some more of which will be implemented in the coming months and/or years as we begin to further scale and automate, for example, the way that we handle and move powder within the facility to do so in a way that is more expedient, but also less risk of contamination and safer. As part of the changes they recommended, our operations over the prior 2 years had really been focused on building our facility and commissioning the equipment. Obviously, now we've transitioned a very different type of operations, which are centered around manufacturing. As part of this, we brought on a new VP of Manufacturing Operations, who is essentially now running our operations, Mark Struss. I'll talk a bit more about Mark later. Mark comes with 25 years of manufacturing experience, including in the auto industry, a much more complex manufacturing process or series of processes than we have here. But again, he has been very instrumental in helping us think about how we begin to scale, how we begin to change these processes. I'll come back to this in the last point here in a minute, but we've gone through a real step function in operations. To that point, we have ordered additional equipment, much of which was ordered earlier this calendar year, some of which arrived in the first quarter of the fiscal year, more of which will arrive in the current quarter and next quarter that will again continue to scale the processes beyond atomization. We have a 5-step process, the first step of which is atomization but a series of processes that follow and this capital equipment will help us further scale those processes. Over the prior quarter, and again, I repeat, over the prior quarter, we had a subsequent or sequential increase in powder shipments of 153% in a single quarter. We shipped about 5 tons of product in the fourth quarter of fiscal year '25. We shipped over 12 tons of product in the first quarter of fiscal year '26. We had a 240% increase in atomization from about 8 tons in the fourth quarter, the June quarter to 27 tons in the September quarter. We were operating in June one 8-hour shift, 5 days a week on a single EIGA. We finished September operating two 10-hour shifts a day, 6 days a week on 2 atomizers. So again, significant scaling over the course of the quarter. In anticipation and recognizing the transition period of which Amaero is in, my wife and my family and myself relocated to Chattanooga during the course of last quarter. We're thrilled to be here for 3 years. I've been traveling back and forth and with a new baby at home, did not want to continue to be away from the family and moreover, have very long days here. I get to the office about 6:30 in the morning. We have a 7:00 a.m. production meeting. It's a little bit after 8:00 p.m. now, which would be a typical day. So again, it gives me a chance to be here all day, every day and be less away from family as I travel. So thrilled to do so, work alongside a great group of colleagues. And one of the things I've always said is people around here can attest, I want to ask anyone to work harder than I work and that being said, there's plenty of people here working just as hard as I am, and it's a heck of a team. Some significant improvements during the course of the quarter from a qualification standpoint as well as ongoing material improvements. As you might recall, with Castheon and ADDMAN, we signed a 5-year preferred supplier agreement in April of 2024. We then qualified C103 in September of '24. This was a very big deal. The founder of Castheon, Dr. Youping Gao is the foremost expert in printing C103 and refractory alloys. ADDMAN owned by one of the leading private equity firms in the industrial space in the U.S. has been very active in additive manufacturing as well. And so qualifying with Castheon and Dr. Youping Gao is a very big deal. We then immediately did some additional work on refining chemistries and we announced in December of '24 that we have made some slight tweaks to C103 chemistry that had shown some improvements. And then we've been continuing since then to make some other refinements. We have completed that. Thrilled to say that we have qualified with ADDMAN on top of the qualifications that we've done before. We've achieved performance specifications that are rock-like. Much of additive manufacturing material is subpar to rock material properties. The prior supplier that Castheon had achieved rock-like material properties, and it was important that we achieve consistent properties with other supplier, and we've now done so. So another significant advancement both in our qualification standards as well as our relationship with Castheon and ADDMAN. We will continue to advance, particularly as it relates to propulsion systems and thermal protection systems. These important systems on hypersonics and space applications, and we'll work closely with Castheon and ADDMAN going forward. Also during the course of the quarter, as you know, we achieved qualification, which was a predicate condition with Velo3D. We achieved that with Auburn University's National Center of Additive Manufacturing Excellence. I'll announce later one of the interesting things, Dr. Jonathan Peck, who had been a senior technician at Castheon, very few people, again, understand and know how to print C103. He had left Castheon and gone to Auburn. That is who we worked with at Auburn. I'm pleased to say that Dr. Jonathan Peck will be joining Amaero at the end of this month and again, one of the important technical hires that we have made. During the course of the quarter, as everyone is aware, we completed a AUD 50 million Placement that was very well supported, strong institutional support and participation. We also had an SPP. The SPP was AUD 3 million, and I would say modestly supported AUD 470,000, same terms and same issue price as the Placement. The Board considered this very seriously and that we were fully funded before -- but the Board felt it was important given that we were 2 years into commercial engagement, go ahead and pull forward some growth initiatives that had been planned for fiscal year '27 and beyond as well as to make investment in Argon recycling that will further improve our cost -- unit cost advantage that we have over competitors and further uniquely position us not only as the largest capacity U.S. domestic producer of spherical refractory and titanium alloy powders, but also the lowest cost. Some important hires that we made during the course of the quarter. Brett Paduch, our Chief Financial Officer, has been fantastic, brings a great audit background in accounting as well as FP&A experience. Mark Struss, I mentioned before, essentially assuming leadership in the manufacturing operations. Dr. Jonathan Peck, I mentioned, has joined us as VP of Technology Development was at Castheon and then Auburn. And then Dr. Arun has been an amazing force at Amaero. He's been promoted yet again. This is actually a second promotion, and he is leading all of our applied research as well as process development and working hand-in-hand with Mark Struss as we continue to refine and develop our operating systems. Also during the course of the quarter, we gave updated financial guidance. Pleased to report for fiscal year '26, we anticipate revenue of AUD 30 million to AUD 35 million and we expect roughly 40% of that would be achieved during the first half of the fiscal year, roughly 60% of that to be achieved in the second half of the fiscal year. On the commercial side, we made progress on a number of fronts. As everyone is aware, we announced a 5-year exclusive supplier and development agreement with Titomic, ASX-listed company for refractory and titanium alloy spherical powders. One of the things that perhaps isn't as well appreciated in the ASX market is spherical powders are very different than angular powders, also very different gas atomized powder than, say, HDH powders. Also reactive or titanium alloys very different than nonreactive, such as nickels and so forth. And so Amaero plays a unique role in the supply chain and particularly when you're qualifying in parts. What Titomic was finding is that the defense primes came to them for development and production parts, mission-critical aerospace and defense applications, the defense primes required it be spherical powder. So they give very specific material specifications. And in some cases, will also define how the powder is manufactured. This is more true, for example, in medical applications, where it is most often plasma atomization or gas atomized powder. We've already begun working with Titomic on a project, and I would expect you'll hear more about that in the coming months. But again, important opportunity for us, I believe, for Titomic as well in the refractory space, in particular, and really scaling their expertise in cold spray applications. Knust-Godwin, we did not announce this as a stand-alone announcement in the course of the quarter. As people will know that have followed this company closely, we tend to be somewhat guarded with not announcing things unless we feel it has a very material immediate financial impact. That being said, Knust-Godwin is an important relationship for us. Knust-Godwin is located near Houston. They're a very pivotal integrated additive manufacturing and advanced manufacturing firm, primarily focused on the oil and gas industry, but increasingly focused on other areas, including aerospace. We work with them on the PM-HIP side of our business, and now we'll be working more closely with them on the titanium side of their printing business. They also use largely Velo3D machines. And obviously, with our partnership with Velo3D, it ties in here nicely with Knust-Godwin as well. During the quarter, we announced about a year ago, we received a contract a little bit over [ $1 million ] with the U.S. Defense Prime Contractor and that we expected to complete First Article parts. Those parts have now been completed. We said we expect to do that in September or October. We will continue to do some testing with our customer over the balance of this calendar year, expect to hopefully finish that by the end of December. And then that will be -- the acceptance of those First Article parts will be a very important milestone as we move forward to advance other development opportunities, but even more importantly, production part contracts with this customer. It also further validates PM-HIP manufacturing as a mature, what in the U.S. we call technical readiness level or TRL level, a mature and scalable alternative to large castings and large forgings, which is very important, particularly in the maritime industrial base, the submarine industrial base, but also in the oil and gas industry. And then finally, we announced in the quarter a development collaboration with a Boeing company. This also, I think, is a very important example of the benefits as well as the immediate insertion of PM-HIP. We are -- we've not disclosed the nature of the part that we're working on with Boeing, but it is a structural part in a next-generation aerospace application. And I would expect you'll hear more from us as well as Boeing as this collaboration advances. I thought it might be helpful to give investors just a representative list of some opportunities that we're advancing. We won't come out and essentially announce these or announce the counterparties until we have binding contracts. That's just our practice. But we are continuing to advance development and production opportunities that support the U.S. Navy and the maritime industrial base. We're continuing to advance C103 powder opportunities, specifically within Missile Systems. Tungsten powder opportunities for the munitions complex. Munitions, as those you might know, is a very significant opportunity given our depleted stocks. And tungsten, very, very important. Tungsten, as you might know, has got a characteristic as a heavy alloy it penetrates, but also it sharpens as it penetrates. And so it's a very important material that is used in munitions. Very few people and very few technologies. Tungsten has a very, very high melting temperature, and thus very few technologies can atomize tungsten. Zirconium opportunities, which are important for nuclear power as well as nuclear propulsion systems. Refractory powder opportunities for cold spray applications, as I mentioned with Titomic. I have been advancing a strategic supplier agreement with a large integrated additive manufacturer, continued to advance a strategic supplier agreement with a large multinational medical device company, investment tooling for a semiconductor large company in the U.S., production contracts for oil and gas, actually companies plural. We're working on an upcycling/recycling opportunity that takes titanium coarse powder and the stubs from our bar to upcycle and recycle that. Atomization and testing of development refractory alloy powders as a more cost-effective alternative to C103 for applications that aren't so mission-critical that they would insist on C103. And then finally, integration and/or co-location of adjacency manufacturing and processing capabilities. This is particularly important to the U.S. Navy. Part of the challenge that we have right now is parts on average are taking about 28 months to manufacture. And yet much of that time has been queued up as these parts travel all over the country for various processing. And so to the extent we could co-locate some of those adjacency processing, it would enable us to shorten the time of production as well as mitigate the risk and improve the resiliency of our production supply chains in the U.S. Jane, I hope that is helpful and would be more than happy to take any questions. Jane Morgan: Wonderful. Thank you so much for that, Hank. And if you could please send through your questions using the Q&A screen that would be great. We've had a few come through already. So let me jump into it. This one came through an e-mail actually, in fact. So one of Amaero's competitive advantages has been stated that the company can produce a far greater percentage of the high-value aerospace grade powder versus the low-value sort of off-spec powder than competitors. So from Amaero's production results so far, is the company achieving the advertised figures across the range of metals? And did this affect Amaero's ability to produce enough finished powder to fill orders this quarter? Hank Holland: Great. So kind of 3 questions in there. First, for those that may not be as familiar, the whole idea of yield. So when we start with the bar, we atomize that entire bar and we had a distribution of powder. And different applications use different particle size distribution. So we might have powder from essentially 0 micron to 400 micron. But in the case of laser powder fusion, which is the most valuable cut of powder, it will tend to be about 15 to 53 microns. Now what the question is referring to is the prior generation of EIGA technology got about a 25% or 30% yield of that 15 to 53 most valuable cut. Plasma atomization, again, a proven and very, very well-accepted form of atomization gets somewhere around a 30% to 35% yield. EIGA premium, the new generation of the technology that we're using is getting a 50% and 50% plus yield. And yes, we are -- we'll continue to improve our yield as we continue to dial in our manufacturing, but all the results that we're seeing today are consistent with what we would have expected. By the way, the other thing that I would say is there's other forms of atomization where you start with scrap and whether what's called HDH, which is a chemical process or other ways that you're making powder. And they might stipulate they've got a higher percentage yield than, say, that 50%. But that's implicit on starting with the correct size powder. That is if you want 15 to 53, you've got to start with 15 to 53 feedstock, right? So again, we're talking about 50% of the entire bar, right? So the EIGA premium has got the highest yield from a bar standpoint of any technology. It also uses half the Argon gas. And so again, our significant unit cost advantage that we drive. Jane Morgan: Wonderful. Thank you. So next one is, in the quarterly, you mentioned that you shipped to Velo3D 500 kilograms of C103 and 500 kilograms of Ti64. So were these included in the revenue performance for the quarter? Hank Holland: Yes. So over the course of the quarter, we had a pretty balanced distribution of revenue. In the course of the quarter, as you mentioned, we shipped C103 to Velo3D. We also had shipments of tungsten, TGM, I'm missing another alloy or two. But anyway, we had -- so we had C103, we had development refractory. We had what we call other refractory and then we had Ti64. So a broad portfolio of powders that were shipped during the quarter. And then as you know, of the AUD 4.7 million of revenue, about AUD 600,000 of that was PM-HIP. We actually had a couple of PM-HIP projects that got pushed into this quarter as part of that AUD 500,000. That AUD 500,000 back order was about half powder and about half PM-HIP, the powder of which that backlog has already shipped so far this quarter. So it was a nice balanced quarter as far as where the revenue came from. What I would say going forward, including the current quarter that we're in, I think that you'll see a consistent increase in the kgs that we ship. So the amount of powder that we ship, though it will be somewhat lumpy in revenue and there will be quarters, for example, we don't ship C103, right? Obviously, C103 has a price 20x higher than Ti64. So where we don't ship C103, that can impact the revenue. But I think you'll see a consistent increase in kgs that we're shipping quarter-to-quarter. Jane Morgan: Wonderful. And so next one is, you mentioned delivery of First Article parts to a defense contractor in September, October 2025. Have these been delivered? And if so, what is the process to progress from First Article to purchase orders or ongoing contracts? Hank Holland: Yes. So the First Article parts have been completed. They are back at our facility. Our customer has seen these parts. We will do some further testing with our customer on these parts through the end of the year. We hope to have it finished -- our customer hopes to have it finished before the end of the calendar year. And that will be a very, very important milestone. We understand from our customer, and I think it is fair to represent that in the area of PM-HIP, Amaero, and I really credit Eric Bono, Fred Yolton, Dr. Aman, we have absolutely have leading pioneering experience in this area and we hear this back from our customers as well. We are addressing some of the most difficult manufacturing challenges as far as parts that are not only bottleneck in the forging ecosystem, but are very difficult to make even with the forging and machining capabilities that we have today. So we feel very good, as does our customer about where we are. And the importance of having these First Article parts accepted is what is in the wings after this to follow is more development opportunities, but even more importantly, immediate production opportunities. And I think that, too, speaks to the technical readiness level and the maturity of PM-HIP as a manufacturing technology. Jane Morgan: Yes, absolutely. I think -- and this one has come through a few times actually, Hank. So what impact is the U.S. government's budget shutdown having on that sort of defense and aerospace contracts? Hank Holland: Yes. It's a very good question, and there's not an easy answer. So for those in Australia that might not be as familiar with the U.S. budget process, our federal budget fiscal year begins October 1 and goes through the end of September. So October 1 of this month, we began our fiscal year '26 budget. As you might recall, last year, a continuing resolution was passed through the end of fiscal year '25. So that expired September 30. And historically, what you would then do is you would pass a new continuing resolution that would be a short GAAP measure until the fiscal year '26 budget is passed, which typically has happened in December, if you look historically. Instead, the House and the Senate could not reach terms on passing a continuing resolution. The continuing resolution we had expired at the end of September. And today, we have no continuing resolution and no pass budget, thus, our government in the U.S. is closed down. Essential services continue to operate, but we are already hearing from customers. And when you -- even when you're in a CR, you can't have new starts or restarts, but this is not even a CR, right? You're just closed, if you will. And so we have not yet seen an impact on our business. We've not yet seen an impact on the immediate quarter or the immediate pipeline. But if this was to go on much longer, I believe this is already the second longest shutdown that we've had in U.S. history. I believe 42 days or 40 days thereabout is the longest. And here we are 23 days into it. If it goes on longer, a, it's not good for our country. It's certainly not good for our readiness as a country, and it will begin to have an impact at some point. So I wish I could give a more definitive answer. Stay tuned. Hopefully, we will -- it's not a great way to run a country. It's certainly not a great way to fund a Department of War. And hopefully, we'll get this resolved shortly. Jane Morgan: Yes. So great. So another one that's come through. So what progress are you making with nondefense, non-aerospace customers who need to buy U.S. sourced materials? You've previously spoken about potential customers in the medical center. Is there any progress happening there? Hank Holland: So one of the areas that we got lucky, if you will, was when we first invested in Amaer 3.5 years ago, a big part of our premise was anticipating that the U.S. would reshore defense industrial base. And obviously, we've seen that in spades. What we didn't anticipate was an administration would take policy actions such as the Trump administration is now to so resolutely reshape international trade policy. And obviously, in the U.S., we've done this with tariffs, and we've done this with other non-tariff trade policies. And what this has created is significant, and I say significant movement of particularly U.S.-based companies that are multinational that had offshored their manufacturing really from the early 90s onward. Obviously, much of that had gone to China and other lower production cost areas. And those companies that their end market is back in the U.S. So take a company such as Stryker, I think I've mentioned this before, 75% of their knees and hips, their orthopedics by value that they sell, they sell in the U.S. But today, 100% of those are manufactured in Ireland and 100% of their powder is sourced in Europe and Canada, right? So you're seeing a lot of companies like that now begin to reshore and better align the manufacturing footprint with their end markets. So a significant part of the opportunity that we're seeing in addition to the defense industrial base are these commercial markets. It's also important for us because we've got to work on immediate now opportunities and then be planting seeds for longer qualification period opportunities. For example, if you're going to qualify powder for a jet engine part, it could be 2 to 3 years before you qualify that material. If you're going to qualify an orthopedic for a medical device, it could be 12 to 24 months before you qualify that material. So we've got to find some now opportunities and then be planting the seed for these longer term, and that's the way we're approaching this. So when I say we're making progress, which I think we are, think of that as we've planted those seeds, we've commenced those commercial engagements, we provided them powder, and we're trying to advance that towards qualification internally. Jane Morgan: Thank you, Hank. Lots coming through, so bear with me. Okay. So is EIGA #3 still on track to arrive in calendar year '26? And are you confident you will have enough orders building to sort of fully utilize the 3 EIGAs into calendar year '27? Hank Holland: Yes. So our strategy has always been not to fully utilize. And this is part of what gives us the opportunity to go after some of these very large commercial accounts. If we were at full capacity utilization, imagine you're a 1 million square foot office building downtown Sydney and you've got a 95% occupancy rate, well, you can't attract a very large single tenant, right? So our strategy has been to be on our front foot making these investments and to operate in the early years at about 50% capacity utilization and thus have room that we could accelerate production further if we can land some of these large commercial accounts. And by the way, in our current plan, we don't assume any of that happens. We assume that we methodically absorb that capacity utilization over a 4-year period of time, right, between now through FY '30. If we do land some of these accounts, it will accelerate that. So that's the first part of the question. As far as timing, what we've announced is the first atomizer we commissioned in June of '24, and that's essentially dedicated to refractory. The second atomizer we commissioned in June of '25. That is in a separate production room much larger that has capacity for 5 EIGAs dedicated titanium. The third atomizer in total, the second one, which will be dedicated titanium is scheduled to ship from Germany in January and to be commissioned by June of '26, so next year. And then with the recent capital raise, we announced that we will go ahead and order a fourth EIGA. We expect to order that before the end of the calendar year, and then that one commissioned 1 year later than the third one. So we'll have a cadence of June '24, June '25, June '26 and June '27, commissioning the 4 EIGAs. Jane Morgan: Thank you. A bit of a different one here. So has Amaero considered atomization of low alpha, high-purity aluminum, which is used in the casing of silicon computer chips and currently produced by some of the largest Japanese manufacturers to obviously supply the next generation of semiconductor fabs being built in the U.S.? Hank Holland: Yes, it is a great question. And part of what I love about having so many great partners right here that are smarter than I am on various issues. If Eric Bono was on the phone, he would have an immediate a very thorough answer to that. I don't have an answer to that question. We are working right now with some semiconductor companies, both on the capital equipment side, which is really a PM-HIP opportunity, but also on advanced materials side. So there is interesting work being done there. I do not know specific to that material. If Jane, if you want to forward me the e-mail, I'd be happy to get to Eric Bono and we'd be happy to respond. Jane Morgan: Absolutely. Okay. Next one. Sorry, there are a lot coming through and a few double ups here. But okay, so looking at the quarterly, as production scales into the December quarter, will there be additional working capital requirements to further build input inventories? Hank Holland: So I'm not sure if the question means more than we have anticipated or simply working capital scales. Certainly, as we scale the business, working capital scales, right? So if you think about as you have more production, you need more feedstock, you carry more inventory. So absolutely, one of the things that we follow very closely is work in progress. And candidly, the immediate priority is scaling production. You kind of take this in sequential steps, if you will. As you scale production, then you'll want to circle back on optimization and you'll be then focused on, okay, we want to do certain things such as further enhance yield to the question earlier about getting to 50%, we actually think we can get materially higher than 50%. In doing so, you reduce your cost per kg. And there's other things that we can do to further reduce the cost per kg. So it becomes a bit of a circular process. But yes, naturally, as you scale the business, the working capital required for the business will also scale, and that is in our model and very much accounted for in the capital that we have on hand. Jane Morgan: Thank you, Hank. Sorry, that's come through. So let me just double check that there's nothing that's sort of been already covered. Look, I think that does cover most of the questions that have come through. I mean, finally, what kind of 3 key messages would you like investors to take away from today's webinar? Hank Holland: Look, I think what's most important for this year, and again, this will be a transitional and transformative year for the company as we transition into commercialization, and we begin to significantly scale production. So what am I paying the most attention to? What are we collectively in leadership, scaling production and scaling commercial contracts, right? That is going to be our focus over the course of this year and candidly, into fiscal year '27. So we hope to have more commercial announcements. Obviously, we had a cadence of long-term agreements and strategic announcements. We hope to have more of those. We certainly hope to have some progress with the U.S. Defense Prime that we've been working with. You can't really control when these things happen. And candidly, when you're working with the U.S. Navy, they don't really care about this quarter. They care about getting it right for a generation of our sailors, right? Getting it right for our next generation of submarine. And so on one hand, most important to us is to be a great partner and do great work. We want these things to happen as quickly as they can. A, it's not within our control; and b, candidly, it's not what's most important. What's most important is for this business to be successful long term. So I would say those would be the key takeaways. Follow our progress in scaling production, follow our progress on additional commercial contracts and scaling our revenue. Jane Morgan: Thank you, Hank. Well, that does look like we've answered all the questions for today. Should we miss anything, please feel free to reach out by the contact details on the bottom of our ASX releases. But thank you all for joining us. Hank Holland: Thank you very much, Jane. Thank you, everyone.
Jane Morgan: Good morning, and welcome to the Amaero Investor Webinar. I'm Jane Morgan, Investor and Media Relations Manager. And today, I have the pleasure of speaking with Hank Holland, our Chairman and CEO, who's going to be providing a company update. As usual, we will be taking questions throughout the presentation. So please use the Q&A function, which can be found at the bottom of your screen. Hank, I'll hand to you. Hank Holland: Thank you, Jane. Good morning, everyone. As you're aware, Amaero lodged its quarterly financial results yesterday. I'd like to highlight some of the information from the results. And then as always, we'll be happy to take questions as follows. It was quite a transition for Amaero. We reported revenue of AUD 4.7 million, an increase of 445% over the same period a year ago. This included AUD 4.1 million of powder revenue and about AUD 600,000 of revenue from PM-HIP manufacturing of large near net shape parts. During the quarter, we increased atomization by 240% over the prior quarter. Again, that is in the September quarter, we increased atomization by 240% over the June quarter. Notwithstanding the significant step function and increased manufacturing, we could not manufacture enough product to fill all of our orders. And thus, we carried it into the current quarter approximately AUD 0.5 million of order backlog. All of those powder orders have now been shipped that carried over into this current quarter. We ended the quarter with AUD 9.9 -- I'm sorry, excuse me, we used cash in operations of AUD 9.9 million during the course of the quarter. This included AUD 4.7 million of bar stock inventory purchases. We've been very mindful of the last 12 months to carry buffer stock, thus mitigating the risk of any trade disruptions or tariff risk, somewhat timely given the tip that arose about a week ago with the threatened heightened tariffs with China. We are in very good position as far as inventory in stock. We have 20 tons of titanium bar that arrive this week. We have another 20 tons -- another 40 tons actually that will ship before the end of the month. The threatened tariff was to take place in November. So again, we are in very good shape as far as buffer stock of inventory. We ended the quarter with AUD 50.9 million of cash. Moreover, 3 days into the quarter on October 3, we received USD 5.7 million or about AUD 8.8 million from EXIM Bank draw. This was from CapEx spent in the prior quarter. So as of October 3, we had a cash balance of roughly AUD 59.7 million after drawing on EXIM Bank. We've got about another USD 7 million or about AUD 10.8 million left to draw on the EXIM Bank loan, and we will draw that over the course of this fiscal year. Moving on, one of the real focuses this year, really, there will be 2 primary focuses: one, to continue scaling manufacturing production, our throughput and the other will be continue to scale our commercial contracts. Anyone that has been involved in manufacturing, scaling manufacturing is not easy. When you go from development to production, it's a very different process. In anticipation of this, in May of this year, we brought in a gentleman that I've known for many years, Eric Olson. Eric headed up manufacturing consulting at Accenture for 3 decades. I met him at a former portfolio company. We had a SWAT team in for about 6 weeks. They reviewed all of our processes, met with our entire staff, all of our quality controls, all of our safety controls, and they put forth a plan in anticipation of not only scaling from fiscal year '25 to fiscal year '26, but scaling from atomizer, which we had before all the way up to 4 atomizers, which is our plan. They had no shortage of input and recommended changes over time. In fact, there's about 42 items that they identified in our processes and our people and our staffing and various protocols, much of which has already been implemented and some more of which will be implemented in the coming months and/or years as we begin to further scale and automate, for example, the way that we handle and move powder within the facility to do so in a way that is more expedient, but also less risk of contamination and safer. As part of the changes they recommended, our operations over the prior 2 years had really been focused on building our facility and commissioning the equipment. Obviously, now we've transitioned a very different type of operations, which are centered around manufacturing. As part of this, we brought on a new VP of Manufacturing Operations, who is essentially now running our operations, Mark Struss. I'll talk a bit more about Mark later. Mark comes with 25 years of manufacturing experience, including in the auto industry, a much more complex manufacturing process or series of processes than we have here. But again, he has been very instrumental in helping us think about how we begin to scale, how we begin to change these processes. I'll come back to this in the last point here in a minute, but we've gone through a real step function in operations. To that point, we have ordered additional equipment, much of which was ordered earlier this calendar year, some of which arrived in the first quarter of the fiscal year, more of which will arrive in the current quarter and next quarter that will again continue to scale the processes beyond atomization. We have a 5-step process, the first step of which is atomization but a series of processes that follow and this capital equipment will help us further scale those processes. Over the prior quarter, and again, I repeat, over the prior quarter, we had a subsequent or sequential increase in powder shipments of 153% in a single quarter. We shipped about 5 tons of product in the fourth quarter of fiscal year '25. We shipped over 12 tons of product in the first quarter of fiscal year '26. We had a 240% increase in atomization from about 8 tons in the fourth quarter, the June quarter to 27 tons in the September quarter. We were operating in June one 8-hour shift, 5 days a week on a single EIGA. We finished September operating two 10-hour shifts a day, 6 days a week on 2 atomizers. So again, significant scaling over the course of the quarter. In anticipation and recognizing the transition period of which Amaero is in, my wife and my family and myself relocated to Chattanooga during the course of last quarter. We're thrilled to be here for 3 years. I've been traveling back and forth and with a new baby at home, did not want to continue to be away from the family and moreover, have very long days here. I get to the office about 6:30 in the morning. We have a 7:00 a.m. production meeting. It's a little bit after 8:00 p.m. now, which would be a typical day. So again, it gives me a chance to be here all day, every day and be less away from family as I travel. So thrilled to do so, work alongside a great group of colleagues. And one of the things I've always said is people around here can attest, I want to ask anyone to work harder than I work and that being said, there's plenty of people here working just as hard as I am, and it's a heck of a team. Some significant improvements during the course of the quarter from a qualification standpoint as well as ongoing material improvements. As you might recall, with Castheon and ADDMAN, we signed a 5-year preferred supplier agreement in April of 2024. We then qualified C103 in September of '24. This was a very big deal. The founder of Castheon, Dr. Youping Gao is the foremost expert in printing C103 and refractory alloys. ADDMAN owned by one of the leading private equity firms in the industrial space in the U.S. has been very active in additive manufacturing as well. And so qualifying with Castheon and Dr. Youping Gao is a very big deal. We then immediately did some additional work on refining chemistries and we announced in December of '24 that we have made some slight tweaks to C103 chemistry that had shown some improvements. And then we've been continuing since then to make some other refinements. We have completed that. Thrilled to say that we have qualified with ADDMAN on top of the qualifications that we've done before. We've achieved performance specifications that are rock-like. Much of additive manufacturing material is subpar to rock material properties. The prior supplier that Castheon had achieved rock-like material properties, and it was important that we achieve consistent properties with other supplier, and we've now done so. So another significant advancement both in our qualification standards as well as our relationship with Castheon and ADDMAN. We will continue to advance, particularly as it relates to propulsion systems and thermal protection systems. These important systems on hypersonics and space applications, and we'll work closely with Castheon and ADDMAN going forward. Also during the course of the quarter, as you know, we achieved qualification, which was a predicate condition with Velo3D. We achieved that with Auburn University's National Center of Additive Manufacturing Excellence. I'll announce later one of the interesting things, Dr. Jonathan Peck, who had been a senior technician at Castheon, very few people, again, understand and know how to print C103. He had left Castheon and gone to Auburn. That is who we worked with at Auburn. I'm pleased to say that Dr. Jonathan Peck will be joining Amaero at the end of this month and again, one of the important technical hires that we have made. During the course of the quarter, as everyone is aware, we completed a AUD 50 million Placement that was very well supported, strong institutional support and participation. We also had an SPP. The SPP was AUD 3 million, and I would say modestly supported AUD 470,000, same terms and same issue price as the Placement. The Board considered this very seriously and that we were fully funded before -- but the Board felt it was important given that we were 2 years into commercial engagement, go ahead and pull forward some growth initiatives that had been planned for fiscal year '27 and beyond as well as to make investment in Argon recycling that will further improve our cost -- unit cost advantage that we have over competitors and further uniquely position us not only as the largest capacity U.S. domestic producer of spherical refractory and titanium alloy powders, but also the lowest cost. Some important hires that we made during the course of the quarter. Brett Paduch, our Chief Financial Officer, has been fantastic, brings a great audit background in accounting as well as FP&A experience. Mark Struss, I mentioned before, essentially assuming leadership in the manufacturing operations. Dr. Jonathan Peck, I mentioned, has joined us as VP of Technology Development was at Castheon and then Auburn. And then Dr. Arun has been an amazing force at Amaero. He's been promoted yet again. This is actually a second promotion, and he is leading all of our applied research as well as process development and working hand-in-hand with Mark Struss as we continue to refine and develop our operating systems. Also during the course of the quarter, we gave updated financial guidance. Pleased to report for fiscal year '26, we anticipate revenue of AUD 30 million to AUD 35 million and we expect roughly 40% of that would be achieved during the first half of the fiscal year, roughly 60% of that to be achieved in the second half of the fiscal year. On the commercial side, we made progress on a number of fronts. As everyone is aware, we announced a 5-year exclusive supplier and development agreement with Titomic, ASX-listed company for refractory and titanium alloy spherical powders. One of the things that perhaps isn't as well appreciated in the ASX market is spherical powders are very different than angular powders, also very different gas atomized powder than, say, HDH powders. Also reactive or titanium alloys very different than nonreactive, such as nickels and so forth. And so Amaero plays a unique role in the supply chain and particularly when you're qualifying in parts. What Titomic was finding is that the defense primes came to them for development and production parts, mission-critical aerospace and defense applications, the defense primes required it be spherical powder. So they give very specific material specifications. And in some cases, will also define how the powder is manufactured. This is more true, for example, in medical applications, where it is most often plasma atomization or gas atomized powder. We've already begun working with Titomic on a project, and I would expect you'll hear more about that in the coming months. But again, important opportunity for us, I believe, for Titomic as well in the refractory space, in particular, and really scaling their expertise in cold spray applications. Knust-Godwin, we did not announce this as a stand-alone announcement in the course of the quarter. As people will know that have followed this company closely, we tend to be somewhat guarded with not announcing things unless we feel it has a very material immediate financial impact. That being said, Knust-Godwin is an important relationship for us. Knust-Godwin is located near Houston. They're a very pivotal integrated additive manufacturing and advanced manufacturing firm, primarily focused on the oil and gas industry, but increasingly focused on other areas, including aerospace. We work with them on the PM-HIP side of our business, and now we'll be working more closely with them on the titanium side of their printing business. They also use largely Velo3D machines. And obviously, with our partnership with Velo3D, it ties in here nicely with Knust-Godwin as well. During the quarter, we announced about a year ago, we received a contract a little bit over [ $1 million ] with the U.S. Defense Prime Contractor and that we expected to complete First Article parts. Those parts have now been completed. We said we expect to do that in September or October. We will continue to do some testing with our customer over the balance of this calendar year, expect to hopefully finish that by the end of December. And then that will be -- the acceptance of those First Article parts will be a very important milestone as we move forward to advance other development opportunities, but even more importantly, production part contracts with this customer. It also further validates PM-HIP manufacturing as a mature, what in the U.S. we call technical readiness level or TRL level, a mature and scalable alternative to large castings and large forgings, which is very important, particularly in the maritime industrial base, the submarine industrial base, but also in the oil and gas industry. And then finally, we announced in the quarter a development collaboration with a Boeing company. This also, I think, is a very important example of the benefits as well as the immediate insertion of PM-HIP. We are -- we've not disclosed the nature of the part that we're working on with Boeing, but it is a structural part in a next-generation aerospace application. And I would expect you'll hear more from us as well as Boeing as this collaboration advances. I thought it might be helpful to give investors just a representative list of some opportunities that we're advancing. We won't come out and essentially announce these or announce the counterparties until we have binding contracts. That's just our practice. But we are continuing to advance development and production opportunities that support the U.S. Navy and the maritime industrial base. We're continuing to advance C103 powder opportunities, specifically within Missile Systems. Tungsten powder opportunities for the munitions complex. Munitions, as those you might know, is a very significant opportunity given our depleted stocks. And tungsten, very, very important. Tungsten, as you might know, has got a characteristic as a heavy alloy it penetrates, but also it sharpens as it penetrates. And so it's a very important material that is used in munitions. Very few people and very few technologies. Tungsten has a very, very high melting temperature, and thus very few technologies can atomize tungsten. Zirconium opportunities, which are important for nuclear power as well as nuclear propulsion systems. Refractory powder opportunities for cold spray applications, as I mentioned with Titomic. I have been advancing a strategic supplier agreement with a large integrated additive manufacturer, continued to advance a strategic supplier agreement with a large multinational medical device company, investment tooling for a semiconductor large company in the U.S., production contracts for oil and gas, actually companies plural. We're working on an upcycling/recycling opportunity that takes titanium coarse powder and the stubs from our bar to upcycle and recycle that. Atomization and testing of development refractory alloy powders as a more cost-effective alternative to C103 for applications that aren't so mission-critical that they would insist on C103. And then finally, integration and/or co-location of adjacency manufacturing and processing capabilities. This is particularly important to the U.S. Navy. Part of the challenge that we have right now is parts on average are taking about 28 months to manufacture. And yet much of that time has been queued up as these parts travel all over the country for various processing. And so to the extent we could co-locate some of those adjacency processing, it would enable us to shorten the time of production as well as mitigate the risk and improve the resiliency of our production supply chains in the U.S. Jane, I hope that is helpful and would be more than happy to take any questions. Jane Morgan: Wonderful. Thank you so much for that, Hank. And if you could please send through your questions using the Q&A screen that would be great. We've had a few come through already. So let me jump into it. This one came through an e-mail actually, in fact. So one of Amaero's competitive advantages has been stated that the company can produce a far greater percentage of the high-value aerospace grade powder versus the low-value sort of off-spec powder than competitors. So from Amaero's production results so far, is the company achieving the advertised figures across the range of metals? And did this affect Amaero's ability to produce enough finished powder to fill orders this quarter? Hank Holland: Great. So kind of 3 questions in there. First, for those that may not be as familiar, the whole idea of yield. So when we start with the bar, we atomize that entire bar and we had a distribution of powder. And different applications use different particle size distribution. So we might have powder from essentially 0 micron to 400 micron. But in the case of laser powder fusion, which is the most valuable cut of powder, it will tend to be about 15 to 53 microns. Now what the question is referring to is the prior generation of EIGA technology got about a 25% or 30% yield of that 15 to 53 most valuable cut. Plasma atomization, again, a proven and very, very well-accepted form of atomization gets somewhere around a 30% to 35% yield. EIGA premium, the new generation of the technology that we're using is getting a 50% and 50% plus yield. And yes, we are -- we'll continue to improve our yield as we continue to dial in our manufacturing, but all the results that we're seeing today are consistent with what we would have expected. By the way, the other thing that I would say is there's other forms of atomization where you start with scrap and whether what's called HDH, which is a chemical process or other ways that you're making powder. And they might stipulate they've got a higher percentage yield than, say, that 50%. But that's implicit on starting with the correct size powder. That is if you want 15 to 53, you've got to start with 15 to 53 feedstock, right? So again, we're talking about 50% of the entire bar, right? So the EIGA premium has got the highest yield from a bar standpoint of any technology. It also uses half the Argon gas. And so again, our significant unit cost advantage that we drive. Jane Morgan: Wonderful. Thank you. So next one is, in the quarterly, you mentioned that you shipped to Velo3D 500 kilograms of C103 and 500 kilograms of Ti64. So were these included in the revenue performance for the quarter? Hank Holland: Yes. So over the course of the quarter, we had a pretty balanced distribution of revenue. In the course of the quarter, as you mentioned, we shipped C103 to Velo3D. We also had shipments of tungsten, TGM, I'm missing another alloy or two. But anyway, we had -- so we had C103, we had development refractory. We had what we call other refractory and then we had Ti64. So a broad portfolio of powders that were shipped during the quarter. And then as you know, of the AUD 4.7 million of revenue, about AUD 600,000 of that was PM-HIP. We actually had a couple of PM-HIP projects that got pushed into this quarter as part of that AUD 500,000. That AUD 500,000 back order was about half powder and about half PM-HIP, the powder of which that backlog has already shipped so far this quarter. So it was a nice balanced quarter as far as where the revenue came from. What I would say going forward, including the current quarter that we're in, I think that you'll see a consistent increase in the kgs that we ship. So the amount of powder that we ship, though it will be somewhat lumpy in revenue and there will be quarters, for example, we don't ship C103, right? Obviously, C103 has a price 20x higher than Ti64. So where we don't ship C103, that can impact the revenue. But I think you'll see a consistent increase in kgs that we're shipping quarter-to-quarter. Jane Morgan: Wonderful. And so next one is, you mentioned delivery of First Article parts to a defense contractor in September, October 2025. Have these been delivered? And if so, what is the process to progress from First Article to purchase orders or ongoing contracts? Hank Holland: Yes. So the First Article parts have been completed. They are back at our facility. Our customer has seen these parts. We will do some further testing with our customer on these parts through the end of the year. We hope to have it finished -- our customer hopes to have it finished before the end of the calendar year. And that will be a very, very important milestone. We understand from our customer, and I think it is fair to represent that in the area of PM-HIP, Amaero, and I really credit Eric Bono, Fred Yolton, Dr. Aman, we have absolutely have leading pioneering experience in this area and we hear this back from our customers as well. We are addressing some of the most difficult manufacturing challenges as far as parts that are not only bottleneck in the forging ecosystem, but are very difficult to make even with the forging and machining capabilities that we have today. So we feel very good, as does our customer about where we are. And the importance of having these First Article parts accepted is what is in the wings after this to follow is more development opportunities, but even more importantly, immediate production opportunities. And I think that, too, speaks to the technical readiness level and the maturity of PM-HIP as a manufacturing technology. Jane Morgan: Yes, absolutely. I think -- and this one has come through a few times actually, Hank. So what impact is the U.S. government's budget shutdown having on that sort of defense and aerospace contracts? Hank Holland: Yes. It's a very good question, and there's not an easy answer. So for those in Australia that might not be as familiar with the U.S. budget process, our federal budget fiscal year begins October 1 and goes through the end of September. So October 1 of this month, we began our fiscal year '26 budget. As you might recall, last year, a continuing resolution was passed through the end of fiscal year '25. So that expired September 30. And historically, what you would then do is you would pass a new continuing resolution that would be a short GAAP measure until the fiscal year '26 budget is passed, which typically has happened in December, if you look historically. Instead, the House and the Senate could not reach terms on passing a continuing resolution. The continuing resolution we had expired at the end of September. And today, we have no continuing resolution and no pass budget, thus, our government in the U.S. is closed down. Essential services continue to operate, but we are already hearing from customers. And when you -- even when you're in a CR, you can't have new starts or restarts, but this is not even a CR, right? You're just closed, if you will. And so we have not yet seen an impact on our business. We've not yet seen an impact on the immediate quarter or the immediate pipeline. But if this was to go on much longer, I believe this is already the second longest shutdown that we've had in U.S. history. I believe 42 days or 40 days thereabout is the longest. And here we are 23 days into it. If it goes on longer, a, it's not good for our country. It's certainly not good for our readiness as a country, and it will begin to have an impact at some point. So I wish I could give a more definitive answer. Stay tuned. Hopefully, we will -- it's not a great way to run a country. It's certainly not a great way to fund a Department of War. And hopefully, we'll get this resolved shortly. Jane Morgan: Yes. So great. So another one that's come through. So what progress are you making with nondefense, non-aerospace customers who need to buy U.S. sourced materials? You've previously spoken about potential customers in the medical center. Is there any progress happening there? Hank Holland: So one of the areas that we got lucky, if you will, was when we first invested in Amaer 3.5 years ago, a big part of our premise was anticipating that the U.S. would reshore defense industrial base. And obviously, we've seen that in spades. What we didn't anticipate was an administration would take policy actions such as the Trump administration is now to so resolutely reshape international trade policy. And obviously, in the U.S., we've done this with tariffs, and we've done this with other non-tariff trade policies. And what this has created is significant, and I say significant movement of particularly U.S.-based companies that are multinational that had offshored their manufacturing really from the early 90s onward. Obviously, much of that had gone to China and other lower production cost areas. And those companies that their end market is back in the U.S. So take a company such as Stryker, I think I've mentioned this before, 75% of their knees and hips, their orthopedics by value that they sell, they sell in the U.S. But today, 100% of those are manufactured in Ireland and 100% of their powder is sourced in Europe and Canada, right? So you're seeing a lot of companies like that now begin to reshore and better align the manufacturing footprint with their end markets. So a significant part of the opportunity that we're seeing in addition to the defense industrial base are these commercial markets. It's also important for us because we've got to work on immediate now opportunities and then be planting seeds for longer qualification period opportunities. For example, if you're going to qualify powder for a jet engine part, it could be 2 to 3 years before you qualify that material. If you're going to qualify an orthopedic for a medical device, it could be 12 to 24 months before you qualify that material. So we've got to find some now opportunities and then be planting the seed for these longer term, and that's the way we're approaching this. So when I say we're making progress, which I think we are, think of that as we've planted those seeds, we've commenced those commercial engagements, we provided them powder, and we're trying to advance that towards qualification internally. Jane Morgan: Thank you, Hank. Lots coming through, so bear with me. Okay. So is EIGA #3 still on track to arrive in calendar year '26? And are you confident you will have enough orders building to sort of fully utilize the 3 EIGAs into calendar year '27? Hank Holland: Yes. So our strategy has always been not to fully utilize. And this is part of what gives us the opportunity to go after some of these very large commercial accounts. If we were at full capacity utilization, imagine you're a 1 million square foot office building downtown Sydney and you've got a 95% occupancy rate, well, you can't attract a very large single tenant, right? So our strategy has been to be on our front foot making these investments and to operate in the early years at about 50% capacity utilization and thus have room that we could accelerate production further if we can land some of these large commercial accounts. And by the way, in our current plan, we don't assume any of that happens. We assume that we methodically absorb that capacity utilization over a 4-year period of time, right, between now through FY '30. If we do land some of these accounts, it will accelerate that. So that's the first part of the question. As far as timing, what we've announced is the first atomizer we commissioned in June of '24, and that's essentially dedicated to refractory. The second atomizer we commissioned in June of '25. That is in a separate production room much larger that has capacity for 5 EIGAs dedicated titanium. The third atomizer in total, the second one, which will be dedicated titanium is scheduled to ship from Germany in January and to be commissioned by June of '26, so next year. And then with the recent capital raise, we announced that we will go ahead and order a fourth EIGA. We expect to order that before the end of the calendar year, and then that one commissioned 1 year later than the third one. So we'll have a cadence of June '24, June '25, June '26 and June '27, commissioning the 4 EIGAs. Jane Morgan: Thank you. A bit of a different one here. So has Amaero considered atomization of low alpha, high-purity aluminum, which is used in the casing of silicon computer chips and currently produced by some of the largest Japanese manufacturers to obviously supply the next generation of semiconductor fabs being built in the U.S.? Hank Holland: Yes, it is a great question. And part of what I love about having so many great partners right here that are smarter than I am on various issues. If Eric Bono was on the phone, he would have an immediate a very thorough answer to that. I don't have an answer to that question. We are working right now with some semiconductor companies, both on the capital equipment side, which is really a PM-HIP opportunity, but also on advanced materials side. So there is interesting work being done there. I do not know specific to that material. If Jane, if you want to forward me the e-mail, I'd be happy to get to Eric Bono and we'd be happy to respond. Jane Morgan: Absolutely. Okay. Next one. Sorry, there are a lot coming through and a few double ups here. But okay, so looking at the quarterly, as production scales into the December quarter, will there be additional working capital requirements to further build input inventories? Hank Holland: So I'm not sure if the question means more than we have anticipated or simply working capital scales. Certainly, as we scale the business, working capital scales, right? So if you think about as you have more production, you need more feedstock, you carry more inventory. So absolutely, one of the things that we follow very closely is work in progress. And candidly, the immediate priority is scaling production. You kind of take this in sequential steps, if you will. As you scale production, then you'll want to circle back on optimization and you'll be then focused on, okay, we want to do certain things such as further enhance yield to the question earlier about getting to 50%, we actually think we can get materially higher than 50%. In doing so, you reduce your cost per kg. And there's other things that we can do to further reduce the cost per kg. So it becomes a bit of a circular process. But yes, naturally, as you scale the business, the working capital required for the business will also scale, and that is in our model and very much accounted for in the capital that we have on hand. Jane Morgan: Thank you, Hank. Sorry, that's come through. So let me just double check that there's nothing that's sort of been already covered. Look, I think that does cover most of the questions that have come through. I mean, finally, what kind of 3 key messages would you like investors to take away from today's webinar? Hank Holland: Look, I think what's most important for this year, and again, this will be a transitional and transformative year for the company as we transition into commercialization, and we begin to significantly scale production. So what am I paying the most attention to? What are we collectively in leadership, scaling production and scaling commercial contracts, right? That is going to be our focus over the course of this year and candidly, into fiscal year '27. So we hope to have more commercial announcements. Obviously, we had a cadence of long-term agreements and strategic announcements. We hope to have more of those. We certainly hope to have some progress with the U.S. Defense Prime that we've been working with. You can't really control when these things happen. And candidly, when you're working with the U.S. Navy, they don't really care about this quarter. They care about getting it right for a generation of our sailors, right? Getting it right for our next generation of submarine. And so on one hand, most important to us is to be a great partner and do great work. We want these things to happen as quickly as they can. A, it's not within our control; and b, candidly, it's not what's most important. What's most important is for this business to be successful long term. So I would say those would be the key takeaways. Follow our progress in scaling production, follow our progress on additional commercial contracts and scaling our revenue. Jane Morgan: Thank you, Hank. Well, that does look like we've answered all the questions for today. Should we miss anything, please feel free to reach out by the contact details on the bottom of our ASX releases. But thank you all for joining us. Hank Holland: Thank you very much, Jane. Thank you, everyone.
Operator: Good day, and welcome to the Xtract One Technologies Fiscal 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations adviser. Please go ahead. Chris Witty: Thank you, and good morning, everyone. Welcome to Xtract One's Fiscal 2025 Fourth Quarter and Annual Conference Call. Joining me today is the company's CEO and Director, Peter Evans; and CFO, Karen Hersh. Today's earnings call will include a discussion about the state of the business, financial results and some of Xtract One's recent milestones, followed by a Q&A session. This call is being recorded and will be available on the company's website for replay purposes. Please see the presentation online that accompanies today's presentation. Before I begin, I would like to note that all dollars are Canadian unless otherwise specified and provide a brief disclaimer statement as shown on Slide 2. Today's call contains supplementary financial measures. These measures do not have any standardized meanings prescribed under IFRS and therefore, may not be comparable to similar measures presented by other reporting entities. These supplemental financial measures are defined within the company's filed management's discussion and analysis. Today's call may also include forward-looking statements that are subject to risks and uncertainties, which may cause actual results, performance or developments to differ materially from those contained in the statements and are not guarantees of future performance of the company. No assurance can be given that any of the events anticipated by the forward-looking statements will prove to have been correct. Also, some risks and uncertainties may be out of the control of the company. Today's call should be reviewed along with the company's annual consolidated financial statements, management's discussion and analysis and earnings press release issued October 23, 2025, available on the company's website and its SEDAR+ profile. And now it is my pleasure to introduce Peter Evans, Chief Executive Officer of Xtract One. Please go ahead, Peter. Peter Evans: Well, thank you, Chris, and welcome to all of our investors and analysts joining us today. We're going to start off by turning to Slide 4 and talk a little bit about the state of the business. I'm very pleased to say that we ended fiscal 2024 with a very strong Q4 that has positioned us well for the immediate and long-term future, particularly as our new Xtract One Gateway benefited from strong and accelerating demand across a wide variety of markets, most particularly education where we are rapidly cementing ourselves in a leadership position by offering the most efficient, most adaptable frictionless technology suitable for screening solutions in environments where the average individual has a much higher volume of personal items on them as they pass into a venue, items such as backpacks or laptops, tablets, metal water bottles and other items. We see this application not only for schools in the education market but also for places like convention centers, office buildings and hospitals, where we've seen a significant uptick in interest for our solutions. Following a record $16.1 million of total bookings during the fourth quarter, we began fiscal 2026 with a solid backlog, including pending installations of nearly $50 million. These are signed contracts soon to be installed. This is clearly the largest in our company's history and something we're very proud and pleased about. While revenue was negatively impacted by certain onetime events, which we'll talk about in a moment, these were customer-initiated delays and also times when we saw a customer doing a phased approach for some of our larger installations. We continue to work through these items with our customers and cannot be happier about where the company stands as we begin on the next stage of our journey as a company. I personally am looking forward to the coming year being one of higher revenue growth, significant conversion of the backlog into revenue and continuing improvement of our bottom line results as well as continued progress on our path to cash flow breakeven, a key objective for the company and myself and the other executives. Let's turn to Slide 5 for a moment. I'd like to provide some further commentary on the rollout of the Xtract One Gateway. The market continues to be very large and growing for this recently launched product. As evidenced by the number of announcements that we've made over the past few months, particularly in the education marketplace, including organizations and school districts like Manor Independent School District out of Texas, The Delmar School District in Delaware, Volusia County Schools in Florida and Mecklenburg in Virginia. It was a very, very active summer for us with several of these awards taking place just before the end of our fiscal year or just after the fiscal year and some additional contract wins that have continued to go and be booked soon after the end of the fiscal year. Many of these are not yet reflected in our backlog. That said, during the year and predominantly in the fourth quarter, the company signed contracts for Xtract One Gateway with multiple customers worth over $13.1 million serving a variety of markets, including education, some health care and some commercial enterprises. Since then, we've continued to win additional contracts and have now successfully begun commercial deployment of the Xtract One Gateway just subsequent to the fiscal year-end. And the initial feedback from those first customers has been extremely positive with many of them looking to expand. We see this as the tip of the iceberg for us in terms of overall demand as deployments, referenceability, client demonstrations and all further drive interest that we believe will continue to show growth and acceleration in 2026 and beyond. We have surpassed the original business plan that we built and that we envisioned for the first year of deployments for the Xtract One Gateway. And accordingly, we now have plans in place to double the manufacturing capacity very quickly for the Xtract One Gateway in fiscal 2026 in order to serve this inbound demand that we're seeing from organizations like schools and others. This is a nice sign of having a vision to deliver something different and actually delivering on that and the market responding incredibly positively. That positive market response has been in comparison to other solutions where essentially you need to introduce other technologies like x-ray machines and create an environment like a TSA screening activity in airport in order to have a comparison versus the Xtract One Gateway. It's for these reasons that the customers are so excited. As a reminder and a point often asked by investors, we would love to announce many, many more of these customer wins but due to competitive reasons or their preference of a particular entity or perhaps their nondisclosure agreements, we may not always be able to announce some of those new wins. This is why we promote and highlight that our backlog is a much better barometer and a good forward-looking indicator of the health of our business and the future success of our business. It's the best measure of our performance than the number of press releases that we put out. We continue to visit potential customers and host demonstrations on a weekly basis, multiple different demonstrations across the country every single week, and this is resulting in an expanding way of interested school boards and new previously untapped industries who are intrigued by our unique and groundbreaking capabilities. Our AI-enabled technology is truly the best-in-class at determining real threats in a world where the average individual is carrying a large number of large metallic items like laptops, phones, chromebooks, chargers, metal bottles and all sorts of other paraphernalia. I'd invite anyone on this call to think about your own experience when you have to divest of all those items versus the Xtract One Gateway where you just simply walk through with your rolling luggage, your backpack or whatever, and we can uniquely highlight that is a gun and that is a knife on the person and on the location. We continue to meet not only the school boards, but health care entities have now shown interest, warehousing and distribution companies who are looking to protect on both inbound and outbound. Commercial property organizations due to some of the unfortunate incidents such as what happened in New York a few months ago, has caused these marketplaces to open up to us. Other organizations like that similarly are looking to showcase our applications, which will then result in us securing new contracts. All of this does take time, particularly as the size of the orders grow. A typical school board is much larger or a school district is much larger than, say, a theater. And so the analysis that goes in takes some time for these organizations, but we're very pleased because that is increasing the size of our average order, and it's -- we're very pleased with the pace of introduction and even more excited by what the future holds for this solution. With rapid growth on the horizon, we're planning for the future and expect fiscal 2026 to be a year of significant change here at Xtract One on many aspects. Complementing this new and accretive growth that we're recognizing with the Xtract One Gateway, we continue to win new contracts for our SmartGateway at a strong, steady pace. The SmartGateway has proven itself to certain specific vertical markets and is performing extremely well. In the past few months, we've announced awards from organizations such as Temple University in Philadelphia, a global performing arts organization, San Mateo Medical Center in California and follow-on contracts, for example, with a multinational entertainment organization amongst others. These wins underscore the continued and strong demand for the SmartGateway product and its unique fit to serve those markets particularly well, particularly with this latter customer that I mentioned, where this entity, a known worldwide organization known for its theme parks and related properties chose to order additional SmartGateway units to accommodate expansion in its locations. With a planned spring 2026 deployment for a 3-year contract worth about USD 2.6 million in value, we'll increase the Xtract One's global footprint, particularly with SmartGateway and further support the entertainment organization's mission to deliver a safer guest experience at all of its venues. Both the SmartGateway and the One Gateway deliver specific capabilities that are key requirements for unique market segments and their needs. So this is not a one size fits all, it's a perfect fit for each segment. So each of those products is well positioned to serve their respective marketplaces, and we're very pleased with the response from those markets. This provides balance across our portfolio and more future business predictability as we have different kind of cycles of purchasing across different segments and of course, delivers a differentiated value that each customer acquires out of their screening solutions. Overall, as a business, we continue to grow the pipeline of opportunities. We have more than about USD 100 million currently in our qualified sales pipeline, customers that we're actively engaged in at various stages of selling cycle. And this is across both product lines. And this number continues to rise due to increasing threats, unfortunately, across the world and in geographies outside the United States as well as inside the United States. This improves our positioning and growing brand recognition of who we are and what our technology can actually accomplish. Given the current outlook for these and other opportunities, we're very optimistic about the quarters to come, and we believe the company is on a precipice of a step level change in terms of the volume and scale of our operations; therefore, why we continue to do things like I mentioned earlier, about doubling the capacity to manufacture the One Gateway. This obviously leads us to be very positive about the trend towards cash flow neutrality and we look forward to sharing those updates as we get further into fiscal 2026. I'd like to address some prior comments about revenue delays. We have experienced a handful of customer-initiated delays in their deployments of systems, which will cause onetime delays in our revenue recognition. Let me provide a few examples of these. We've signed a contract and there's a desire for an expanded contract with a major U.S. federal organization that due to federal government optimization activities that have taken place through 2025 has caused a lot of reorganizations of their organizational structure and how different people are responsible for different activities like IT infrastructure, budgets, financing and these sorts of things. While the contract is still valid and while that organization has a federal mandate that they will screen for weapons at all of their locations, they've had to pause as they've gone through these reorganization activities. So the requirement is still there and the order is still there and has not gone away, but we're working with that customer as new individuals come into play to start scheduling those deployments. Similarly, a very significant sports venue that we signed a contract with earlier has undertaken a new rebuild of their venue, and they have paused deployment of the systems until such time as they get closer to building occupancy. The good news here is that they have invited us to work closely with them and with the venues architects, for the best placement of the systems, where the conduits would go underground, how do they bring wiring in, how they bring power in and optimize the deployment of the systems into the venue design to ensure the maximum guest experience and deployment of our systems. So I'm pleased that we're working with them closely. I'd just like the building to be finished that much faster, so we can actually convert that order to revenue. On the other hand, we do have scenarios where we're very pleased where things are accelerating. We signed a contract with one of the top 5 major car manufacturers who wish to protect various venues. And they had delayed their deployments for sort of reasons. However, when we were starting to get a little bit frustrated with their delays, they called us up and said, we are ready to take shipment. And so we shipped those months -- those systems this past month after about a 12-month pause where they worked through some entrance redesign activities. So along the same lines, these orders have not gone away. Sometimes a customer needs to pause as they work through some internal activities. The summary here that like all our investors to take from this is the bookings backlog is solid, and we are still actively engaged with all of those customers as well as new customers. At this point, I'd like to turn it over to Karen, who can then provide a little more detailed discussion on our financial results, and then we'll move to Q&A. Karen, over to you. Karen Hersh: Thanks, Peter. I'm happy to review the financial highlights for what amounted to a very busy quarter, setting us up nicely for a strong fiscal 2026. Turning to Slide 7. Total revenue was approximately $3.3 million for the fourth quarter versus $5.6 million in the prior year period, reflecting certain customer-initiated delays, which Peter highlighted previously. We've been working with these customers and many of these installations have started to ramp up in Q4 and into fiscal 2026. We have also been instituting a phased deployment schedule for some of our larger, more complex installations. In particular, this is an approach that we use with school districts, delivering first for the high schools, then moving on to the middle schools and finally, elementary schools. While this approach may initially slow down our revenue in the short term, we believe that working with our customers to develop systematic deployment schedules and instituting rigorous training programs are positioning the company for long-term revenue generation and high customer satisfaction. Similar to previous quarters, revenue for the fourth quarter was spread across numerous customers and industries with the largest contributors being entertainment, education and health care. We've recently made many announcements about various new customer contracts and growing demand for Xtract One Gateway, which are expected to positively impact revenue in fiscal 2026. The mix of business will continue to fluctuate and diversify in the coming quarters given the order acceleration and interest in our products across an expanding array of industries, which I'll elaborate on in just a few minutes. We also remain committed to expanding our channel partner program, which is a valuable contributor to the company's growth. Channel partners accounted for approximately 52% of deployments for the entire fiscal year and this is expected to increase in fiscal 2026. Our gross profit margin was a record 71% for the fourth quarter versus 65% in the prior year period. Margins were also higher versus the third quarter of fiscal 2025 with the improvement both sequentially and year-over-year due to efficiencies achieved in our SmartGateway manufacturing and supply chain processes, as well as the use of advanced software tools like our view dashboard that allow for continuous and proactive monitoring of customer environments. We anticipate margins to be slightly negatively impacted in the near term by costs related to the initial production and installation of the Xtract One Gateway. However, we expect that this will improve over time with broader commercial deployment in fiscal 2026. Turning now to Slide 8. New bookings for the quarter were a record for the company at $16.1 million compared to the prior year quarter bookings of $5.6 million, of which approximately 74% were upfront contracts, meaning that the majority of these new contracts will translate to revenue relatively quickly. Bookings for the quarter were almost evenly split between direct sales and channel partners, as markets like education and health care are well suited for the channel. Total bookings for the year were $38.5 million, up from $29.8 million in the previous year. Anyone who's been following our story will know that our initial target markets were entertainment and sporting venues with a view of further expanding into other markets like schools and health care. Interestingly, in fiscal 2025, approximately 33% of our annual bookings were in the education sector, up from 14% in the previous year, primarily due to the recent launch of Xtract One Gateway. We are excited to see that several schools are now coming on board as evidenced by many of our recent customer announcements. Further, health care currently represents 17% of our bookings, and we expect this will grow in the coming year given the strong product market fit with our SmartGateway for these facilities. With the diversification of our gateway products, we expect our customer base will continue to expand into a multitude of industries in fiscal 2026. Moving on to Slide 9. Our contractual backlog and signed agreements pending installation rose to record levels as Peter previously mentioned. At the end of the quarter, our backlog collectively totaled $49.5 million as compared to $26.8 million last year, almost doubling the backlog year-over-year, which we consider to be an excellent indicator of future revenue. The backlog of $49.5 million at year-end was comprised of $15.5 million of contractual backlog with an additional impressive $34 million worth of signed agreements pending installation, the majority of which are expected to be installed within the next 12 months. Given our current total backlog of almost $50 million and a substantial pipeline of opportunities reflecting strong bid activity and expanding interest in both of our gateway products, we anticipate bookings to continue to increase, putting us on sound footing for fiscal 2026 and beyond. Now let's turn to Slide 10, which shows fourth quarter and full year operating costs year-over-year for each of our key expense categories. Sales and marketing expenses were $1.8 million in the quarter versus approximately $1.5 million in the prior year period, reflecting increased business development initiatives across a wider spectrum of industries while costs associated with R&D were $1.9 million in the quarter versus $2.3 million in the prior year period due to streamlined R&D activities. General and administrative expenses were approximately $2.2 million for the quarter in both years. Overall, operating costs were lower year-over-year even as we significantly grew our backlog and invested in the rollout of Xtract One Gateway. We have consistently managed our operating expenses while growing the company, demonstrating the scalability of our business model as we move forward on our path towards cash flow breakeven. Finally, on Slide 11, I'll discuss cash flow. During the quarter, the company had operating cash usage of $1 million compared with $1.7 million in the prior year period. And excluding changes in working capital, we spent approximately $2.7 million compared to last year's $1.3 million. For the year as a whole, we had operating cash usage of $6.5 million versus $8.1 million in fiscal 2024, primarily due to focused management of our working capital. During the quarter, we also completed a successful public offering of a bought deal, including the full exercise of the underwriter's overallotment option and raised just over $8 million to finance working capital requirements and for general corporate purposes. Our fourth quarter has been a busy but productive quarter. With the completion of our financing, the successful launch of Xtract One Gateway and the growth of our bookings and backlog, we are well positioned for growth in fiscal 2026. With that, Peter and I welcome any questions that investors may have at this time. Operator: [Operator Instructions] Our first question comes from Amr Ezzat from Ventum Capital. Amr Ezzat: Congrats on the very strong bookings number. I appreciate your comments on revenue recognition, and I think it's -- we all get excited with signed contracts that often forget that customers have challenges as well in taking delivery. I'm just wondering how do you feel this friction from the customer side is evolving relative to your comments last quarter and I mean, Q1, which ends next week. Are you guys seeing a bit of easing into Q2? Peter Evans: Yes. From my perspective, Amr, it's Peter here. We are seeing that easing. We do see that some of the contracts take longer to work their way through from trial to contract signing because they tend to be larger deals that we're dealing with because there's more, let's say, as an example, Fortune 500 companies that we're working with. And then those organizations might have multiple locations that they wish to deploy, multiple manufacturing plants, multiple high schools and middle schools. And they're not as interested in flash cutting, for example, 12 high schools and 20 middle schools all in one week. It's not the best approach. So we're seeing kind of these phased deployments. And we're actually starting to see things loosen up and accelerate now in terms of those deployments and in terms of that acceleration. So I'm feeling much better. We did have these onetime events, but we're starting to see that subside. Amr Ezzat: Fantastic. But if I'm sort of thinking about fiscal '26, is it fair to assume a stronger second half relative to the first half? Is that a fair assessment? Peter Evans: From my perspective, yes, primarily because we will be -- as we've seen so far, we're seeing some good momentum for the business and for One Gateway. We're also seeing steady, solid momentum for the SmartGateway, and those contracts will start converting over revenue as we work our way through fiscal 2026. Amr Ezzat: Okay. On the bookings, like, again, exceptional this quarter, and you did announce a flurry of wins post quarter end. I'm just confirming your bookings number probably doesn't capture a lot of these post-quarter wins that you guys announced. So we should be expecting another strong Q1 bookings print. Then maybe on the $16 million of bookings, if you could walk us through the split between verticals. I believe, Karen, you gave it for the full year. Peter Evans: Yes. So in general, we're continuing to see the momentum. And to your question about the flurry of announcements. Yes, where we can, as we said earlier, Amr, we are always interested in keeping our investor base aware of the activities in the company as much as we're allowed to do so by the customers. And where we can announce schools, hospitals, other locations, we will. But the announcements that have been made post Q4, in general, it's a safe bet to say that those are new deals that are occurring post the close of Q4. Some might have been from a Q4 time frame, but just due to timing of getting press releases approved, they might have rolled over into Q1. Amr Ezzat: Then, Karen, I'm not sure if you guys have the split handy for the quarter itself between the verticals? Karen Hersh: For Q4? Amr Ezzat: Yes, the bookings for Q4, the $16 million. Karen Hersh: For sure. So the general split by industry for Q4 was 60% for education in Q4 and entertainment was about 24%. So those were the 2 big ones and health care came in around 12% with the rest being some miscellaneous through other industries. So the overwhelming winner for Q4 was definitely education followed by entertainment. And those, I think you could evidence towards 2 of the larger press releases that we did, one for Volusia and the other for an entertainment organization. Those ones both fell within Q4, and so those represented a good portion of the bookings for that period. As Peter said, the deals tend to get larger that we've noticed, certainly with the Xtract One Gateway, and that's evidenced in Q4 where we're seeing a number of larger deals come through. Amr Ezzat: Fantastic. I was very pleasantly surprised with the gross margins coming in at 71%. Can you unpack what drove that? You spoke to, I believe, manufacturing efficiency. And I just wonder, is that a peak you feel? Then obviously, into Q1, what I understood from the comments is that we should expect some step back on One Gateway before margins scale again. I just want to confirm if I understood that correctly. Karen Hersh: I think you've understood it exactly correctly, which is we have said all along that we continue to bring efficiencies in terms of our [ BOM ], In terms of our support that we manage for our customers, and we've done numerous things to help improve those efficiencies over time. And so it's really nice for us to see that this has sort of translated into 71% margins, which are frankly quite impressive for our industry. You did pick up correctly on the comments about Q1. This is what happened to us with SmartGateway. You bring a new product to market. There's things to work out in terms of support. There's little adjustments that we want to make. We want our customers to be completely happy. And this tends to cause some degradation in the gross margin, at least temporarily until we work out those kinks. And so that's what we're anticipating for Q1 is a little bit of an adjustment as we get used to the Xtract One Gateway and bring it to market. And we're also continually already making changes to our [ BOM ] and making further efficiencies. It's going to take a few quarters to run through that cycle and get it really running the way that we -- similarly to our SmartGateway. Amr Ezzat: Fantastic. Then maybe one last one on OpEx. I think you spoke to what's driving that. But are we -- should we view this as a new run rate going into fiscal '26? Or maybe you could quantify how much of it has to do with the launch of One Gateway? Karen Hersh: Well, a lot of the One Gateway charges that were sort of one-off type of expenses, we did capitalize because we felt that there was a long-term future value of those. We'll start to amortize those costs in Q1 as we've brought the product to market. But similar to what we've said in the past, we believe that our operating structure is fairly stable. We have to continue to add to it to some degree to continue to address, for example, business development across more markets than we were initially targeting. And R&D is still going to continue to be a focus for us as we continue to innovate. We're not going to sit on our laurels. So R&D is going to continue to be a focus for us. But these changes are relatively small when you compare them to what we're expecting from a top line growth. So I think that scalability, which is really what you're talking about is, I think, going to continue on. And I think the changes that we have and the growth that we have in the operating base will be quite modest. Operator: Our next question comes from Scott Buck with H.C. Wainwright. Scott Buck: Peter, I was hoping, given the momentum you're seeing in education, if you could give us a bit of a reminder on how big the education opportunity here is in North America? And then maybe touch on some of the other higher growth segments of the business like health care as well. Peter Evans: Yes, absolutely, Scott. So simple math, Scott, there's 130,000 K-12 schools in the United States. That is a public K-12 that doesn't include private. And if you assume 1 to 2 systems per school, depending on the size of the school, depending on the number of entrances, maybe they've got entrance for bus drop-offs, another entrance for main entrants. And we see a variety. Some schools want as many as 3 systems. So you can argue that depending on the systems, the feature functionality and things like that for very simple round numbers, $100,000 to $200,000 a school for argument's sake. And those are just round numbers for simple math. So multiply that by 130,000 K-12 schools, you're in the range of $13 billion to, what, $25 billion or so for that marketplace. So I believe that between ourselves and our competitors, we've barely scratched the surface in terms of the numbers of schools and the numbers of opportunities. I think there are some things that take time to work through the schools, particularly budgets. Most of the schools have to fund these kinds of acquisitions of the systems through grant applications and grant funds, which is -- can be a bit of an arduous process. The money is there, though. Recently, Texas awarded several hundred million dollars for school safety and security, which has opened up, for example, the Texas marketplace. So the market is there. The market is large. The market is significant. It doesn't all happen overnight, though, depending on grant monies and these sorts of things. What we're pleased with, though, is for those schools like Volusia County that did extensive testing over a month-long period, and they were previously using one competitive solution and tested a second competitive solution versus us. It was very obvious what the best solution was for those schools. They could choose an x-ray machine and a screening solution and still have issues with alerts and weapons getting through or they can walk through the One Gateway with kids streaming in at 66 per minute. So we're very pleased with our position that innovation has delivered. We're very pleased to be serving that school industry, that $13 billion to $25 billion market. And all of our customers that we've deployed with so far are very happy and have become strong references for us. Does that answer your question, Scott? Scott Buck: Yes. No, that's perfect, Peter. I appreciate that. You mentioned one example there where you went in and displaced a competitor. Typically in the education space, is that more often than not you're displacing somebody else? Or are there a lot of greenfield opportunities in there as well? Peter Evans: I think we barely scratched penetration in the marketplace between ourselves and all the competitive opportunities. There are some schools you'll see -- I think there's higher penetration, quite frankly, Scott, of walk-through metal detectors that might have been deployed in some intercity locations 5 years ago. I think a place like downtown New York or Detroit or Chicago. But in terms of advanced screening solutions, in the case of this one place where we displaced a competitor, they're using that competitive solution for screening of football matches on Friday evening. And they had occasionally used it for screening students entering into the school. And I was very pleased to get a call from the Chief Security Officer one day where he said, well, I finally scrapped my last of product X and thrown in the dumpster after we've deployed now in 6 high schools with you. Scott Buck: Great. That's helpful, Peter. And then one last one. I want to ask about some of the commentary you had on channel partners and that becoming, I guess, a larger piece of revenue. Are you adding new channel partners at this point? Or are your partners just getting better at helping sell the product? Peter Evans: It's a little bit of both, Scott. We are adding new channel partners, but we're very selective of how we do this. Weapon screening solutions need to be deployed correctly. It is a people, process and technology question, not just dropping technology on the ground. People need to be trained correctly. You have to get the [ con ops ] and the flow right. Otherwise, it gets a little lumpy. And so we look to very good channel partners who can essentially replicate what we do with the high quality and the high touch and the high customer focus. So I'm less interested in having 500 partners versus having 5 really excellent partners. Now we have more than 5, okay? But as an example or an anecdote. And so we're continuously recruiting new partners, but being very selective about who they are. And then what we're finding is our existing partners, as they get their fourth, fifth, sixth deployment with their customers, they as a company are starting to replicate our level of knowledge and our level of engagement, and we're seeing the aperture of their pipeline expand also. So we've got growth with new partners. We've got growth with the existing partners become more fluent in the solution. Scott Buck: Okay. And just given the partnership network that you guys have built, we shouldn't expect any kind of deployment delays on your side, given any kind of capacity constraints at this point. Is that right? Peter Evans: Right now, we don't have any capacity constraints. But as I mentioned in my comments, because of the high demand for the One Gateway that's outstripped what we had our original business plan, we are already in the process of looking to double the capacity that we built into the manufacturing lines so that we can deal with that. So there may be some slight delays until we get that ramped up, but not something that we think is going to be meaningful or significant. Scott Buck: Good problems to have, right? Peter Evans: Yes. Operator: Our next question comes from [ John Hyde ] with Strategic Investing Channel. Unknown Analyst: Congrats on the bookings as the other analysts have said. My first question is around contract split between upfront and subscription. I know, Karen, you mentioned, I think it was 75% or so was upfront in these bookings. Can you give us maybe, let's say, like a split between what type of customers are choosing the different types of subscription versus upfront? Karen Hersh: Sure. It was -- 73% was upfront for Q4. And interestingly, for the full year, the upfront came in at 58% versus 42% for subscription. And so we look to that to see what's going on here. And I think you heard from Amr's question that we had a strong education quarter. And I think that was the main reason for the upfront. So what we're finding sometimes with schools or fairly often with schools is that they have grant money that comes in and they tend to work on an annual budget. And that lends itself well to the upfront contracts. So we often see upfront when we're dealing with schools. Similarly, when we deal with entertainment or stadiums, arenas, any sporting facilities, they tend to be very highly focused on their P&L, and they like to have security as a service. And so that lends itself extremely well to our subscription model, and that's what we often see when we're dealing with sports and entertainment. Health care, we find can go either way. They're often upfront, but at the same time, we do find some of our health care facilities do like to use a subscription model. I would say it's perhaps a little bit more leaning towards the upfront. But you're definitely seeing a preponderance of a market going towards one type of contract versus the other. But that being said, we always have exceptions. And from our standpoint, we're agnostic as to which one our customers choose. We just want to meet the customer with what suits them best for their needs, and that's why we offer that flexibility of both models, whereas some of our competitors in the market are much less flexible in terms of what they offer and they're often pushing customers into a subscription model when they are, in fact, better suited towards an upfront model. So I think that's the key takeaway from us, which is we're very happy to meet our customer from whichever model suits their purposes. Our margins are comparable on both scenarios. And therefore, we just do what's best for our customers. Unknown Analyst: Awesome. So -- and on kind of that topic, having a lot to offer for the customers. I know, Peter, you mentioned, and I think this kind of goes under the radar sometimes. I think you guys are really the only player in the space as far as advanced weapons detection that offers kind of 2 different tailored products, whereas I think your competitors mostly kind of just take their product and try to maybe add on a metal detector like you were saying. Is this something that is really kind of driving some of the advantage with having those 2 products? And if you can talk about maybe which particular customers really do appreciate that advantage? Peter Evans: Yes. So John, it's a great question. I guess the easiest way to describe it is there are -- for each market segment, there are certain critical key factors that they're looking for. And by having more flexibility in the portfolio, that allows us to be more aligned to what those customers' needs are. And I'll give you some examples in a moment versus kind of a one-size fits all. If all you've got is a square peg and you've got to push into a round hole, a hexagonal hole, a triangular hole of unique needs, you kind of have to hammer it in there, and it's not going to fit very, very well. In our case, think of it like we have got a solution with SmartGateway and what it does uniquely and the flexibility for various environments to address the needs of the square pegs and the hexagonal pegs and with the One Gateway, the round pegs. There are certain things that certain markets want. The #1 thing for schools is they want the kids just to flow in. They don't want them to have to divest their backpacks, their laptops, put them on an x-ray machine, walk on through all that sort of nonsense. We want the schools to be very welcoming and the One Gateway allows people to do that. In the case of hospitals, the bulk of the hospitals, the majority of them are very worried about edge weapons. And there's unfortunate incidents like what happened in Nova Scotia in January this year, where 3 nurses were stabbed and one needed life-saving surgery, and that was from a 2-inch blade. And so being able to detect those small edge weapons without alerting on 70% to 80% of the smartphones like other solutions would do, is a competitive advantage for the SmartGateway. And then that applies when you start to think about international markets where the preponderance of the issues are edge weapons, they are not firearms. And so for health care organizations or international markets, the ability to detect the smaller knives without the untenable numbers of alerts is critical. For other organizations like stadiums and arenas, there's all sorts of other capabilities in the SmartGateway, ease of portability. Let just tip it, roll it, drop it on the ground, turn it on and it works. And it's up and running, self-calibrating, self-managing. I don't have to worry about moving metal doors or rebar under the ground or all these other silly things that make it operationally complex for people. The arenas and stadiums have enough to worry about to get 17,000 excited Billy Joel fans in to go see Billy. And so making our systems very simple to use, particularly in an environment where you're using outsourced security guards who change over frequently. Now these are things that we've built into the platform in a manner that makes it very easy for arenas and stadiums and the SmartGateway perfect fits that, very easy for hospitals. I was at one hospital location where they were doing a demonstration and the vestibule between the 2 sets of sliding doors was about 6 foot by 7 foot, fairly small, and we fit into it perfectly where others couldn't. So the ability to fit and align to those different market needs for the different segments is what's giving us competitive advantage. Unknown Analyst: Awesome. One last question. I know you talked about the advantage with -- internationally with knives. I know that's a big thing, especially with the SmartGateway. With schools, though, I know a lot of the schools, obviously, in the U.S. have been picking up on these technologies and we kind of only expect it to continue. But internationally, are you guys seeing the same trend with schools wanting to add security systems like these? Or is it kind of particularly just certain markets like the U.S.? Peter Evans: I think the primary issue in the U.S. is with weapons and firearms. There isn't a week that goes by where we don't hear a story about some child bringing a gun to school. You don't have the same issues in outside of the U.S. because there's not same easy access to firearms. However, there are anecdotally certain locations like I believe in the south of France, they have now mandated that schools will start screening for weapons. So we are starting to see this coming a little bit at the forefront, usually driven by some sort of an event. I was in the U.K. a month ago, and there are certain school districts that are now starting to make it mandatory to start screening for weapons also, primarily driven by some sort of unfortunate event. What we see is in countries outside of the U.S., when there is an event, there's a much faster reaction and mandate to start driving weapon screening solutions. Operator: Our next question comes from, Jeffrey Bennett, a private investor. Jeffrey Bennett: I just wanted to get some visibility into Europe with Martyn's Law coming into effect. I know you just signed Carlisle Support Services and you've done some demos for the Premier Soccer League over there. What kind of revenues are you expecting out of that? I'll put on mute there. And for Karen, I wanted to know what kind of warrant conversions are currently taking place with your warrants? Peter Evans: So thank you for the question. The U.K. is a very strong and emerging market for us. We're very pleased with the engagements with assorted football clubs, theater organizations and other iconic venues. Obviously, we can't speak to them specifically because we're under a nondisclosure with those organizations, until such time as we've either signed a formal contract with them or until such time as we have got their agreement to actually put out a formal press release. So I can't name any specific names. I wish I could, but we can't right now. But the U.K. particularly is becoming a very nice market for us, and we're very pleased with the business acceleration that's occurring there right now. All I can really say is stay tuned, more announcements to come. Jeffrey Bennett: Karen, for the warrant conversions, what kind of conversions are you seeing? Karen Hersh: We have seen some conversions happening in September. We had [ $2.8 ] -- almost [ $2.9 million ] of warrants that were exercised. And this was primarily -- this was exclusively actually related to the financing that we just completed in June. So we've had some additional cash come into the organization from those conversions. And that extended into a little bit more going on in October. In total, [ $4 million ] warrants, give or take, have been exercised since year-end that has provided additional cash for the company. And I would note that there are a number of warrants that are still in the money and could potentially convert throughout the rest of the year. Operator: At this point, there are no further questions in the queue. I would like to turn the conference back over to Peter Evans, CEO, for any closing remarks. Peter Evans: Well, first off, thank you, everyone, for taking the time out of your very busy day to join us today for this presentation. We are very pleased with how we wrapped up the year strongly. There's a few bumps in the road last year, but those were quickly corrected, and we feel that we've got our momentum back, and we've got that strength back in everything that we're doing. 2026 is looking very, very good. I'm feeling very pleased about it right now. I couldn't be happier. I'm very thankful for our investors who continue to support the company. I'm unbelievably thankful to all the employees that we have in our company. We have got a fantastic group of individuals who are all very passionate about what we do. And most importantly, I'm very thankful to our customers who continue to support us, continue to renew with us and continue to go tell all of their friends about us and why they want to work with Xtract One. So with that in mind, I'd invite everyone to stay tuned. We are looking forward to our Q1 announcement coming up very soon, and we will continue the momentum and keeping everyone aware of what we're doing here at Xtract One. Thank you, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to today's Fibra Danhos' Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by should you need assistance. Now I'll turn the call over to your host, Rodrigo Martínez. Please go ahead. Rodrigo Chavez: Thank you very much, Alvis. Hello, everyone. I am Rodrigo Martinez, and I run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos' 2025 Third Quarter Conference Call. We issued our quarterly report yesterday. If you did not receive a copy, please do not hesitate and contact us. Please be aware that they are also available on our website and in Mexico Stock Exchange website. Before we begin the call today, I would like to remind you that forward-looking statements made during today's call do not account for future economic circumstances, industry conditions and company performance or financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in according to IFRS standards and are stated in nominal Mexican pesos, unless otherwise noted. Joining us today from Fibra Danhos in Mexico City is Mr. Jorge Serrano, CFO of Fibra Danhos; and Mr. Elias Mizrahi. Now I will turn the call to Jorge Serrano for opening remarks and financial and operating indicators. Jorge, please go ahead. Jorge Esponda: Good morning, everyone. Thanks for joining us today. Let me share some initial remarks on Fibra Danhos' third quarter results. It has been only 2 years since we announced our interest in industrial assets and Danhos is already a reference player in the CTT logistics corridors that services Mexico City. We have been recognized for our execution capabilities and high-quality construction standards. We have not only delivered our commitments on time and within budget, but we are also working in new opportunities that will translate into profitable growth. During the quarter, we signed build-to-suit lease agreements for more than 300,000 square meters on 3 additional industrial parks with best-in-class tenants that will generate cash flow by the end of next year. This is very relevant. Not only because it will translate into profitable adjusted risk returns, but also because it reinforces our strategy of diversification in industrial real estate and complements our traditional growth strategy on mixed uses and high-quality real estate developments. Our CapEx pipeline is additionally confirmed by Parque Oaxaca and Ritz-Carlton Cancún Punta Nizuc project, which are under construction and up and running. Sound financial results were supported by strong fundamentals. Total revenues of MXN 1.9 billion were 14% higher against last year, explained by increased occupation levels, positive lease spreads, higher overage, parking adjusted revenues and contribution of industrial assets. Total expenses increased 10%, keeping control on operating and maintenance expenses and dealing with labor-intensive services that have posted major increases. NOI reached MXN 1.5 billion, an increase of almost 15% year-on-year with a 78.6% margin that is 75 basis points higher than last year's. AFFO reached MXN 1.1 billion that accounted for MXN 0.69 per CBFI. Distribution was determined at the same level of MXN 0.45 per CBFI which amounts to MXN 722 million and represents a payout relative to AFFO of 66%. Retained cash flow, as you know, was used to finance our CapEx program, which was complemented with MXN 300 million of short-term debt. Balance sheet, however, remains strong with only 13% [indiscernible]. Our portfolio overall occupancy continued growing and reached 91%, with retail occupancy reaching 94%, office at 76% and industrial of 100%. Thanks. We may now turn to the Q&A session. Operator: [Operator Instructions] Our first question today comes from Alejandra Obregon of Morgan Stanley. Alejandra Obregon: The first one is on your CapEx and dividend payout. If you can perhaps provide some color on how to think of these 2 metrics in 2026 and 2027 as you move forward with Nizuc and Oaxaca. So that's the first question. And then the second one is in terms of your portfolio mix and perhaps if I'm allowed to think of it in a more long-term sort of way, maybe 3 or 5 years from here, how much do you expect industrial to represent of the mix in your portfolio and whether you see some recycling opportunities elsewhere. So how do you see your mix 3 or 5 years from here? That's the question. I'll stop here. Elías Mizrahi: Alejandra, this is Elias Mizrahi. Regarding distributions, so as you know, we've been investing very heavily on industrial assets. We're starting construction of Parque Oaxaca in the coming months. And obviously, we're also investing in the Nizuc project. So as long as we continue investing at this rhythm, we expect at least for 2026 for the dividend to remain the same. I think towards the end of next year, we'll probably have better color for 2027. But I think that this gives us the ability to reinvest our cash flows and give better returns for our long-term investors. Regarding the mix on our portfolio, I would say that we don't have a specific target on where we see or where we want to have the industrial assets as a percentage of our total portfolio. I think we're opportunistic. We will be looking at new development opportunities. And we're also investing in retail assets as well. So we don't expect only to grow in the industrial segment, but in all segments. So I think that more than targeting a mix, we'll be targeting solid projects with great risk-adjusted returns. Alejandra Obregon: Got it. And if I may follow up in terms of land and backlog, if you can talk about what you're seeing in the Mexico City and metropolitan area. Do you think there's more interest for you to continue growing here? And what -- and how does your land access look like from here? Elías Mizrahi: Yes. So first, I mean, we highlighted in our report and Jorge just mentioned the lease activity we had for the quarter. So we leased 300,000 square meters this quarter alone. We're very proud of that achievement. We already have 250,000 square meters operating and generating rent. And by year-end -- next year, we'll have more than 0.5 million square meters generating rent for the Fibra in basically 2 or 3 years since we basically announced the industrial component in our portfolio. So we continue to see strong demand. I think the market, as Jorge mentioned, welcomed Danhos, welcomed its development capacity and ability. And we're assembling land for future projects, which if we find the right land and the right opportunities, we will be able to develop them and continue growing. But we see the Mexico City market as strong and resilient for now. Operator: Our next question comes from Igor Machado of Goldman Sachs. Igor Machado: I have 2 questions here. And the first one is on the retail sales. So we saw some deceleration from department stores company. So any color that you could share with us like if you expect a retail deceleration for the next quarters, this would be helpful. And the second question is regarding the land for the industrial real estate assets. I'm just trying to better understand here who is selling the land and the terms of the selling. So that's it. Jorge Esponda: Igor, this is Jorge. Well, as you know, I mean, our retail portfolio has very positive occupation levels. I think we have a very strong tenant base. But it's true that we've seen some deceleration in the economy in consumption. However, we continue to have demand for our shopping centers. This is given the location we have. And that allows us to be quite defensive in a deceleration environment on the economy. So, so far, we're posting still very strong results in our retail portfolio. Operator: Our next question comes from [indiscernible] of JPMorgan. Unknown Analyst: Congrats on the results. My question is regarding any update on the office segment. Could you maybe walk us through how easy or hard it has been to renew the office properties? How sticky were these tenants with some minor decrease in the Toreo property? Elías Mizrahi: [indiscernible], I'm sorry, but there was some interference in the question. Can you repeat it, please? Unknown Analyst: Yes. My question was regarding the office segment. Maybe could you walk us through how easy or hard has it been to renew the office properties? And how sticky were these tenants? Elías Mizrahi: Yes. So at the beginning of the year, we had 2 major leases that -- actually this was pointed out, I think, in the fourth quarter of last year's or first quarter of this year's call. And both contracts were renewed. One was in Toreo, the other one was in Esmeralda. So in both cases, we were able to renew both big leases. And the smaller leases are also being renewed basically every quarter. So we're -- as we've mentioned, we're in the midst of keeping our tenants. Unknown Executive: [indiscernible] Elías Mizrahi: Yes. And leasing activity has picked up. In Urbitec, we leased this quarter 2,500 square meters. And also in [indiscernible] 3,500 square meters. So during the quarter, we leased approximately 7,000 square meters. Unknown Executive: [indiscernible] Operator: [Operator Instructions] Rodrigo, we have no questions at this time. I'll turn the program back over to you for any additional or closing comments. Rodrigo Chavez: Thank you very much, Alvis. Thank you, everyone, for joining us today. Please do not hesitate to contact us, Elias, Jorge or myself for any further questions. We are always available. We'll see you on our next conference call. Thank you very much. Operator: That concludes our meeting today. You may now disconnect.
Johan Andersson: Good morning, everyone, and welcome to the presentation of Saab's Q3 Report for 2025. My name is Johan Andersson, and I'm honored to have been appointed Head of Investor Relations here at Saab. With me here in Stockholm, I have our CEO, Micael Johansson; and Anna Wijkander, our CFO. Anna and Micael will present the report, and thereafter, we will start the Q&A session. And you can either ask your questions over the phone or you can enter them in the web interface, and I will read them out loud here in Stockholm. So with that quick intro, I will hand over to our CEO, Micael. Micael Johansson: Thank you so much, Johan, and thank you all for joining us this morning for the quarterly 3 report and the first 9 months. I want to welcome Johan as well as Head of Investor Relationship. So you're most welcome to the company. And I also want to thank Merton Kaplan for an excellent job during so many quarters and back old -- looking backwards. And then I wish him luck, of course, in his continued journey within Saab. Before I go into the highlights of this quarter, I just want to say a few words about the day we had Wednesday in Linköping, where we the had honor of receiving President Zelensky and his delegation and also our Prime Minister and his delegation to host them for this important statement and letter of intent that they signed in the direction of creating a strong air force in Ukraine going forward. This was, of course, a unique day and it was an important statement which we have been waiting for to now continue our journey in exploring scenarios and planning for how an establishment and delivery so quite a few aircraft will look like in Ukraine. And it also adds to our assessment of investments that we need to do looking into that. With all due respect, I mean, there's no contract yet. Still a lot of work to do. You heard the President Zelensky and also Prime Minister Kristersson talking about sort of the financing solution and what needs to be established there. And then, of course, there are a couple of other things. But we will start doing our work to sort of support this going forward. And it was great to see our employees in Linköping spontaneously applauding and sharing when President Zelensky stepped out of the car, and we're so much committed as a company to support Ukraine going forward. That was a unique and fantastic day. And now we will work hard to sort of make this happen as well, of course. So with that, I just want to go into a few highlights then of the quarter. It has been a strong demand in the market. We still have lots of geopolitical tensions, of course, around us and strong demand from many countries in all avenues of our portfolio and we develop contracts really well. We had a strong quarter when it comes to order intake, as we've seen. But it's also timing. It's sort of on the same level as the quarter last year. But in October, only after the closing of this quarter, we have SEK 16 billion in order intake. So we're looking toward a really strong year when it comes to contracts as well. We have a number of campaigns apart for our product sort of demand in the market that we are running, of course, both when it comes to the Gripen side, and we'll come back to that; and also GlobalEye, where a number of countries have a huge interest in our system. As you know, we've been selected by France, and now we're just waiting to sort of -- them to sign the contract in that country as quickly as possible. And then we have interest actually from NATO and from Germany and from Denmark, and a number of other countries is looking into our GlobalEye system. So there is still a need to continue to invest in capacity, which we're doing in a diligent way, I think. And looking at the execution this quarter, which has been solid in sort of a normally weaker quarter, but it's really been stronger this quarter. And as you've seen, I mean, the first 9 months is now an organic growth of 21%. So we've done really well also adding the third quarter to the first two ones here. And we will continue to look at our development of our profitability, which has also been good. But we'll also never trade off versus sort of investing in capacity to sort of meet the demand in the market, of course, but also being relevant when it comes to new technologies that we have to invest in going forward. All in all, it's been a strong quarter, and we have, as you've seen now, upgrading the outlook for '25. I will come back to that in the end. But we're now sort of raising our guidelines on top line to 20% to 24% from 16% to 20%. So back to the numbers. As I said, almost SEK 21 billion in order intake, a good increase in the medium-sized story. It looks a bit different between the quarters. And I think, as I said, we added SEK 16 billion only in October, which we have press released. So it looks really good going forward as well. We have a book-to-bill of 1.3x and a very strong organic growth in this quarter, the strongest quarter we've ever had on top line and also in absolute numbers when it comes to EBIT. So the margin is now 8.7% in the quarter but 9.3% looking at the first 9 months. Cash flow is on the same level. If you look at the first 9 months, sort of minus SEK 1 billion roughly. We have still the same view as last year. We will generate a positive cash flow. We have a number sort of important payments coming in now during the fourth quarter. So I'm confident that we will meet our guidelines on that as well. A few statements about the different business areas as usual. Yes, of course, a big interest in the Gripen conversion now. We have contracted Thailand during the quarter, the first 4. And they are looking into further contracts as well, of course. The batch 2 and batch 3 of their contract is being discussed already. And then, of course, we have been selected by Colombia and we are negotiating a contract there. We have no contract yet but we are moving ahead in a good pace in Colombia. And then, of course, the interest now from Ukraine is something we will sort of take into account and start planning for, as I mentioned. We have a good strong quarter from Aeronautics. They have gone 34% up sort of compared to the quarter last year. So they had really good project execution in the Gripen program mainly. But still, the profitability level is affected by ramp-up costs that we have mainly in the T-7, the trainer aircraft in the U.S. in West Lafayette. So that is still sort of a burden to Aeronautics, but they're moving in the right direction definitely. Dynamics, again, good growth. A quarter that is normally quite weak for Dynamics has been quite strong actually. If you look at the first 9 months of Dynamics, they have grown 34% or something, maybe even 36%, if I remember correctly now. It's an extremely strong year for Dynamics. They have had a number of medium-sized orders but also a large one from the Czech Republic when it comes to the medium, short-range air defense system RBS 70. So there is still a big demand in the market and we are investing heavily, as you know, to increase capacity in this area. I think we have only in the Karlskoga sort of 40 projects ongoing to expand everything and building factories in the U.S. and in India, as you know. And they have a huge backlog now of almost SEK 90 billion as we speak. Surveillance, also a very interesting portfolio. I said that the campaigns for the GlobalEye are a number of them now. So we are intensifying that, of course. I hope that we will see this GlobalEye system, which is the state-of-the-art system, most modern one, taking a bigger position also within the Alliance with multiple countries going for GlobalEye. So that's what we're working. And the first one that we were selected upon is, of course, France that you know all about. So there is not only on the GlobalEye side, but the surface side, the surface sensors, the sensor side of Surveillance is really strong and getting more and more contracts. And they deliver quite well as well, growing 8%. And honestly, the quarter 3 of Surveillance is the strongest ever top line-wise. So they are doing well also when it comes to project execution, and they have a huge potential going forward, I would say. I also want to mention that we are divesting TransponderTech, which is communication and automatic identification system type of entity, as we have also already press released. And we will close that deal now in quarter 4. Also a very big backlog on the Surveillance side, as you can see, SEK 55 billion. Saab Kockums also have a big interest in many segments. We're working campaigns now on the submarine side with Poland, and that we're putting a lot of effort into, of course. And it makes lots of sense to have Sweden and Poland work together to protect the Baltic Sea. But also on the surface side, we have the Swedish corvette/frigate program coming out, which is called Luleå class, which we are also seeing as a big potential going forward. But there are many other export contracts where we are involved. And we have also now invested but also got the contract to look to design and test a large underwater unmanned vehicle with the Swedish Navy, which is great to see that we're moving in that direction. Because also on the Navy side, it's not only in the air you will see collaborative combat entities working with manned entities. That will also happen on the surface and subsurface going forward. We also got a task, which is a fantastic honor, to lead the project within NATO when it comes to underwater battlespace project, connecting and creating interoperability between manned and unmanned systems. So that, we look forward to execute. And the growth is really good, 17% year-on-year when it comes to the quarter, and they are really moving in the right direction. And they have a substantial backlog. I need to mention, of course, that after the quarter in October, we got an additional contract, as you've seen, on the submarine side for SEK 9.6 billion, adding to the backlog now going forward. And then finally, when it comes to our business area, Combitech. We have, of course, a very well moving forward Combitech, our technical consultant entity. They are growing also rapidly year-on-year 17%. It's all about sort of employing new people, of course, and getting utilization into the operations that create these numbers. And I think we've employed 200 people up now only in this quarter from the Combitech side, and that adds to the growth, of course. We're doing well as a consulting company. We're absolutely in the right areas, in the right niches right now, cybersecurity, critical infrastructure, critical communication, creating security operation centers for many type of industries and also from the -- in the public side, the authorities. And everything connected to total defense in terms of resilience is something that sort of generates business now for Combitech going forward. So they had a good quarter as well, definitely, and they're growing quite a lot over the year as well. So I just want to say a few words about something that's been discussed every day, every week in terms of what's happening in Ukraine when it comes to drones and what kind of drone capability do we need going forward and counter-drone capability. And also the EU Commission have launched projects now during the last few weeks, which is sort of a drone wall, making sure that we have resilience versus big drone capabilities coming from the East. And I just want to mention that this is something we really are investing in, and we already have solutions in place. We don't talk so much about this, but we have already used these solutions in NATO missions in Poland. We call one system -- the way we approach this, I say, is to make sure that we are quite agnostic when it comes to what effectors or interceptors do we use. We can use everything from Bushmaster Gun to an electronic warfare type of effectors to nets or kamikaze drones or actually RBS 70, and we are now investing in a new missiles that you've heard about called Nimbrix, which is in a segment between the guns and the RBS 70. So that's sort of agnostic. We can sort of integrate the system that would manage different types of threats. And the Loke system is sort of a brand name of the system includes, of course, a sensor capability with the Giraffe 1X, which is excellent and the most state-of-the-art radar, that you'll find everything from micro drones to larger drones and cope with many threats at the same time, a commander control system, which is really compact and then an interceptor vehicle that would have sort of the chosen effector on it. That -- a counter UAS system already established in Sweden and used in NATO missions. The loitering munition side or actually having a known swarm technology capability. We have already released that we have something that is self-organized in terms of software and using AI to have swarm of drones during different types of missions. And I think we are focusing, among other things on not only surveillance but also loitering munition. That is important because of how you would manage an aggressor going forward, not only with support weapons that called Gustav and anti-tank weapons, but you can also use drones to accomplish part of the mission and work together with support missions. So we are involved in this area and ramping up our capabilities, and we already have existing systems. A couple of highlights from the sustainability area, a very important area to us. We have this quarter established a biogas facility in our site, which is the Barracuda entity in the Gamleby, which is doing camouflage and signature management. which reduces our energy dependence on fossil fuel, of course, dramatically. And if you compare year-to-year in the first 9 months to last year, we have reduced 4% on the CO2 emissions. And we are on a good track now to support our SBTi targets, where we have said we will be 42% down 2030. And if you look at the base year compared to where we are now, we are 33% down. We have a good progress on operational health and safety. We really make sure that we have a safe operational environment within the company, and we measure this all the time. And we must report every incident to mitigate everything that could happen. And another thing is, of course, diversity and inclusion. We are happy to see that we are now moving up when it comes to our female employees in the company, now at 27%. That is a very good step, and we want to go further also, of course, when it comes to female managers. But we are moving in the right direction. And since we have employed 2,700 people net up during the first 9 months, 34% of that employment is actually female. So we're going in the right direction. I'm really happy to see this. So last but not least, I already said that at my first slide that we have -- because of the good progress this year, the first 9 months, organic growth of 21% and also good visibility, of course, into the backlog which is now over SEK 200 billion, and we know what we need to deliver the remaining part of the year, we have now said that we will take this step from 16% to 20% growth rate to 20% to 24% instead. So that's our new guidance. And we still retain the other portion, saying that EBIT will grow more than the organic sales growth. And we will generate a positive cash flow and we are confident doing that going forward. I just want to thank all our employees for doing a fantastic job during the first 9 months and supporting this growth and the commitment to creating societies and having people in societies safe is a strong sort of purpose of the company, which is supported by our employees. I'm really pleased to see that. With that, I think if I have not forgotten anything, I will hand over to Anna, our CFO. Anna Wijkander: Thank you, Micael, and good morning, everyone. Yes, as you have heard, we are delivering a strong third quarter especially from a sales growth and EBIT growth perspective. So I think now it's time to dig more into the financial numbers. And we start with the order backlog. We left the third quarter with a strong backlog, increasing it to SEK 202 billion. In particular, it was the medium-sized orders that increased during this quarter. They more than doubled actually this quarter. So we booked SEK 21 billion. And we have, since the quarter closed -- we booked additional SEK 16 billion in order intake. So the start of Q4 looks promising. 73% of our orders in the backlog are international, and its Dynamics and Surveillance that is the majority of the order backlog, 71%. If you look at to the left in the graph, you can also see that we are increasing our deliveries from the backlog for the fourth quarter with 35% compared to the last year. And we can also see that we're increasing the deliveries from backlog the year 1 and 2, that is '26 and '27 compared to last year. So that really shows that we have -- we are in a growth journey and that we are also expanding our production capacity to deliver on our commitments. Let's turn into some more comments on the drivers of our sales and profitability then. And yes, as you have heard us saying, this was our highest sales and EBIT ever in a third quarter. And we have strong sales growth, 17% reported or 18% organic for the group. And the EBIT grew 16% in the quarter. What's also good to see is that the gross margin is increasing in all business areas in the quarter due to high project activities. And looking in then to more in each business area, Aeronautics, 34% growth this quarter, driven very much from the Gripen deliveries and high activities in the business areas. Also, we see improvements in the commercial business in the sales growth. However, the EBIT is still impacted by the startup costs that we have in the T-7 factory as well as a bit higher marketing cost for all the Gripen campaigns, and also we're starting to do amortization on a capitalized R&D that's impacting the EBIT. Dynamics, again, continued the strong growth from Q2. It grow 12% this quarter and also delivered a higher EBIT margin, 19.3% in the quarter. And that is a result also of project execution, several deliveries, a mix situation. You know in Dynamics, we had a lot of delivery projects. And in this quarter, lots of deliveries from ground combat that is impacting the margin in a positive way. Also, Surveillance grew 8% in the quarter. Good project execution and EBIT level at the same level almost as last year. Here, it's very much deliveries from also the Giraffe 1X radar production that's impacting in a positive way, but also good project execution in the business area. However, on Surveillance, we can mention that there are still negative impact from the Civil business impacting their margins. Kockums, also a high activity level and a very significant growth in their EBIT margin year-over-year. That is very much driven this quarter from both high project execution and, in particular, in their export business. To mention also Combitech, they grow 17% in the quarter. High utilization, high activity, and as we heard, that they are in -- working very much in an area which is growing as well. And their EBIT margin was on par with their EBIT margin last year if we deduct the divestment that we made in the Norwegian operation last year. And from a group perspective, mentioning also that on a corporate level, we have some corporate costs that are SEK 200 million approximately higher this quarter, and that is something that we expect to continue. It was driven very much of these share-based incentive program but also somewhat higher costs for IT and security as we're growing the company. The financial summary then. I think I mentioned all items above EBIT. So I think focus more here on the financial net that turned negative this quarter. And the reason for that is mainly because of the revaluation of shares in a financial investment of around SEK 50 million that impacted the financial net, and we had also a lower result from currency hedges related to the tender portfolio if we compare it to last year. This revaluation that I talked about impacting also the tax rate this year. So compared to last year, it's a bit higher. And then all in all, the group net income is in line with last year and as well as the EPS. Let's zoom out then to 9 months and look how it looks for us after 9 months has passed. On a group level, the sales increased 20% or organic 21% related to effect on currencies. All our business areas have double-digit growth year-to-date. So that's very positive to see. Also our gross margin is improving 70 basis points, and it's all business areas that are contributing to this gross margin increase, but in particular, its Dynamics and Surveillance where we see the improvements. So after 9 months, our EBIT is up 30% and we delivered a margin of 9.3%. Year-to-date, the financial net is positive. And here, it's supported by the appreciation from currency hedges related to our tender portfolio. And following that, we also have a lower tax rate decrease due to lower share of taxable income from foreign operations. So net income and EPS improvement driven by the EBIT growth and also the improvement then in the financial net. Next, our cash flow. I think we can say that we have a strong cash flow from operations despite increased working capital that is driven by our business growth. After 9 months, we have generated SEK 7.3 billion in cash from operations. That's SEK 1.9 billion more than last year. Also in line with our sales growth, we are building working capital, and we're doing that in line roughly with the same amount as we did last year. So if you look at the operational cash flow and deduct the change in working capital, we actually have a positive cash flow of SEK 3.9 billion after 9 months. But as you know, we need to do our investments. That's something that we have communicated earlier in the Capital Markets Day and continue to communicate. It's important for our growth. And we have increased our investments. SEK 4.9 billion is the amount now. That's SEK 1.7 billion more than last year. And so we end up with a negative cash flow year-to-date. But we expect the operational cash flow to be positive this year since we are expecting several large customer payments by the end of the year. Finally, on this slide, I just want to mention also that it's very positive to see that we are improving our return on capital employed, it's now almost 15%, and that's driven both by our profitability but also by increased return on capital turnover. Finally, our balance sheet. We have a strong financial position and a solid balance sheet. Our net debt-to-EBITDA is on a healthy level, 0.1x. This quarter, we have a net debt of SEK 700 million, and that was mainly due to that we have a new -- the lease of our newly opened office in Solna here in Sweden, and that's impacting around SEK 1.3 billion in the third quarter. We have cash and liquid investments of SEK 12.2 billion. And during the quarter, we had issued total bonds of SEK 2 billion additionally. Additional to that, we have an unutilized revolving credit of SEK 6 billion. So all in all, that puts us in a strong position to capitalize on future growth opportunities both through increased investments and also enable us to do potential acquisitions. So in summary, I think a strong quarter both in sales and EBIT across the business. The group has a solid financial position and we have a strong order backlog to deliver on. So with that, I hand over to you, Johan, to open the Q&A. Johan Andersson: Thank you very much, Anna and Micael, for a great presentation. So let's start the Q&A session. And we will start with the questions from the phone conference. [Operator Instructions] So please, operator, do we have any questions from the telephone conference? Operator: [Operator Instructions] The first question comes from Daniel Djurberg with Handelsbanken. Daniel Djurberg: Then I will go to Aeronautics, I think. You had a good quarter, nice growth. A little bit lower EBIT margin versus last year's quarter, [ 30 basis point ] I believe. But it's still the -- as you mentioned, the T-7A program lingering. Can you both give us an update on this in terms of both the cost or margin impact and also how -- for how long we should expect this to linger and if it will increase in size or the opposite. Micael Johansson: Thank you. No, I think when you look at Aeronautics, I would say that a normal Aeronautics with a reasonable scale of Gripen contracts and what have you should be sort of in -- I don't guide, but we talked about this before, sort of high single-digit numbers. So the effect is still there from T-7, absolutely. We've turned around the commercial business in a good way. We're not sort of adding lots of profitability really yet, but it's still okay. So I would say still a couple of years, it don't -- it won't go in the wrong direction, it will go in the right direction. But before it's actually a good addition to our Aeronautics business, it will be sort of 3 years ahead from now, roughly, I would say. But it will go in the right direction over time, of course. Operator: The next question comes from Ian Douglas-Pennant with UBS. Ian Douglas-Pennant: So I've got several questions but I'll limit myself to one on Gripen, please. Could you expand on the comments that we've read, I think, in the press this morning that you could expand Gripen capacity very rapidly if required? I wonder if you can just educate us on this group as to what we said there and how quickly that could happen. And in order for that to happen, do you need to see deposits coming in before you consider making those investments? Or would you consider investing elsewhere? Micael Johansson: Well, as I've said, I mean, we still need sort of set a scenario, that is, if we now get sort of the financing in place, if the politicians sort that and you get support refinancing Ukraine to go into contract on the Gripen E and expanding the production will be important. The way I see it is that, and I've said that this morning that right now, we are looking at expanding production with investments that we've taken to somewhere between 20 and 30 aircraft a year. And of course, as you know, with the numbers that was stated in the Wednesday's meetings, that sort of would add a lot to that. So that we're looking into that now, how quickly can we take another step because this investment we're talking about is sort of look to be implemented sort of next year and the year after that, roughly get to that level, and then you can take another step, of course. It will be adding more to the Linköping production lines if we do that, and that's sort of a few years ahead. But it would also mean that we would sort of expand our hub in Brazil. And we are initiating, as we speak, other sort of partnership discussions in countries that would have an interest for the Gripen, of course. So this will mean that we would need another hub beyond sort of the hub we have in Brazil and expanding in Linköping as well. Well, we said that, okay, if Ukraine push the button, we would deliver the first one in 3 years' time, and that is sort of what we commit to. And then it depends on what is the stretch of the delivery schedule with Ukraine and when we have to have this capacity in place. Normally, it takes like 2 to 3 years to get sort of improved capacity in place, I would say. That's sort of the view I have on how quickly we can do this. But there is absolutely an opportunity to implement this. Will we -- yes, I would like to see sort of a more solidified financing solution in place before we take the big step to start sort of adding huge sort of investment to this. But since we're already moving in the investment direction, we can add a little bit more maybe at risk to actually make sure that we keep the lead times. That's the way I see it without quantifying exactly. Operator: The next question comes from Aymeric Poulain with Kepler Cheuvreux. Aymeric Poulain: Clearly, the demand outlook is great. And it's the third year you're going to be growing at 20% or 25%. So the question is, do you expect that rate to be maintained? Or are the supply chain challenges, especially regarding the staffing or specific material that are starting to emerge given the very strong demand situation? Micael Johansson: Well, it's a bit sort of premature to sort of talk about sort of the next years beyond, I would say, this year right now. You know we've committed to a midterm target of 18% CAGR over the time period of '23 to '27. We will come back and refresh -- revisit that, not refresh it, in the year report quarter, I would say, in February next year. And then we will have a new view from our perspective on how quickly we can continue to grow. So that's where we are right now. If you look at what is the pain points, what's the limiting factors to grow, you are touching upon the right things. We need to bring with us the supply chain and maybe sometimes invest in supply chain. But they have to invest also. To find a whole ecosystem supporting us is absolutely necessary. And there are a few pain points there but manageable, I would say, going forward. And then I am assuming long term, of course, that we will resolve the rare earth elements discussions we have with China and also start to invest to have sovereign capacity on that side. But then we're talking years ahead because that will affect every industry, I would say, if that is not sorted. But yes, that's the way I see it. Johan Andersson: Excellent. Thank you. Let's take a couple of quick ones from the web. One is, what's the difference between Gripen and E and F? And when can we see the first Gripen F? Micael Johansson: Okay. Yes. We are maybe a bit of nerds using all these acronyms. But as you know, we have the Charlie, Delta version in operations right now. And yes, we have delivered an Echo version as well. The C is -- the E is a single-seat version. The F is a dual-seat version. And we will deliver this dual-seat version to Brazil in '27. So that's where the first aircraft is being manufactured right now. This has been a design that's been done together with the Brazilian industry and Brazil and that is in line with the plan that we have. Sweden has not contracted any dual-seat versions of the Gripen F. I hope I was not too complicated here. It's simple, actually. Single seated version, dual-seated version. Johan Andersson: I think it was pretty clear. Another one. You talked a lot about your drone capabilities in your strategy there. How much are you doing and developing by yourself? And how are you looking and doing things with partners? How do you think strategically there what's important? Micael Johansson: That's a really good question. I think from a software-defined perspective, we're doing everything ourselves and then, of course, when it comes to sensors and effectors, we have also things in-house. Then we are looking into how can you scale something quickly either yourself, lots of 3D printing or storing, parts that you can actually assemble quickly and how many partners do we need there. So I think on that side, when it comes to platforms, there will be more partnerships. But it's a bit different depending on what kind of drone you're talking about, of course. Johan Andersson: Good. Excellent. And we had a quick one for Anna. Do you expect your backlog to continue to increase going forward? Anna Wijkander: With our growth that we're foreseeing, I think that is something that we can assume that today's backlog will increase going forward. Yes. Operator: The next question from the phone comes from Björn Enarson with Danske Bank. Björn Enarson: Yes. On Dynamics and the super solid backlog and -- but the mix is very, very important. Can you give us some color on how you look upon the mix situation in the backlog? As profitability can swing quite a lot. We have seen that over the years depending on what Dynamics you have. Micael Johansson: In the Dynamics area, you mean. Björn Enarson: Exactly. Micael Johansson: Well, I think I won't go into exact details on the mix as such, but of course, it's quite dominated today by support weapons and missiles. Both have a substantial backlog in that and both will add good profitability numbers. I will sort of -- we have always talked about what's the ambition level in terms of sustained EBIT level on Dynamics side. And I've always said that depending exactly on the question you asked, the mix between the different portfolio entities in Dynamics, but it should be always sort of in the mid-double digit numbers, around 15%. Now we've had good quarters now. So we are above that. And of course, that's very nice to see. But it will always be on that level, so to say. But I won't go into exactly a part of the SEK 87 billion, what's what there. But the main parts are absolutely support weapons and missile capability, and you can probably sort of draw that conclusion from contracts that we have received. Anna Wijkander: And it varies, of course, between different contracts, also within the same business unit within a Dynamics. So it differs. So that could also impact. But I think it's a good, as you say, Micael, in the mid-teens mid-15s, what you say... Micael Johansson: Mid-double digit numbers, the number between 10 and 20, not sort of between 10 and 100. Operator: The next question from the phone comes from Carlos Iranzo Peris with Bank of America. Carlos Peris: I just want to ask on the GlobalEye because it looks that it's having a strong commercial momentum recently. So can you help us to understand how big the GlobalEye opportunities could be for you midterm? Micael Johansson: Well, I mean, this is one of the mega deals that always will take sort of a Prime Minister or a Defense Minister to decide in the end. But I mean, we have campaigns ongoing. As you know, France have selected and they will start with 2. We have 3 in production for Sweden. There is an interest for a number of aircraft when it comes to Germany and NATO. We have a couple of interest also in the Middle East. So it adds up to a number of platforms with a strong potential. But I would hesitate to sort of bring too much of mega deals into our growth. And this is not part of our growth this year or sort of a big portion of our business plan going forward. We look upon mega deals in a careful way. They are adding substantially when they happen. But it has to be continuous growth anyway. So I just want to say that, yes, there are many platforms that could come into play, but I wouldn't sort of jump into conclusions because they are megadeals campaigns. And political decisions will also be involved in that. But I look very positively upon sort of the future of GlobalEye. That's what I can say. And I mentioned a few countries now that have an interest. Operator: The next question comes from Tom Guinchard with Pareto. Tom Guinchard: A question on the risk guidance here. Any changes in delivery pace across the different business areas? Or what's changed since your last guidance? If you could break that down, please. Micael Johansson: Well, I think everyone is actually picking up nicely when it comes to expediting deliveries and pushing sort of things from the backlog into sales. And also some of it is connected to that we get our capacities coming into place. And also seeing, yes, that we have added 2,700 people to the company net up this year adds lots of push into this. And we are sort of optimizing our way of working and automating production. So it's a number of things that comes together that sort of had lacked visibility in the beginning of the year. But now we are more confident that we have actually succeeded in many things that we put ourselves forward to do. So it's actually in all areas. And of course, I mean, Dynamics is growing dramatically. You see 36% growth over the first 9 months. So it's an engine in this. But also the other business areas are growing, and there's lots of potential in Surveillance, and Aeronautics have now really stepped up in terms of growth. So I wouldn't sort of point something specific, but you can see from the numbers 9 months now what's driving this and what comes into play first. Operator: The next question comes from Sasha Tusa with Agency Partners. Sash Tusa: It's Sash Tusa here. I've got a couple of questions. First is just to R&D. On a 9-month basis, it's doubled over the last 4 years. Going forward, if you have investments, particularly in counter-UAS, do you expect continued growth in R&D? Or is there just going to be a shift in the mix probably towards the counter-UAS area and away from other areas? I wonder if you could just give some color on how the R&D is expected to develop. Micael Johansson: No. What I can say is I want to grow the R&D investments as much as I can but still keeping to the guidelines that we have, the trade-off between sort of here and now, top line growth, increasing our profitability but still having the strength to grow our investments in R&D. And we need to do that when it comes to AI, autonomous systems in all domains and also, of course, in the way we develop software. We have established a common tech organization that is pushing sort of software out on the business unit in a different way with sort of solidified architectures and stuff. So we need to continue to invest, make no mistake. So if we continue to grow, it will not only be a mix and shift in that, so to say. We have to do a number of things going forward in all core areas both when it comes to sort of autonomous systems in the air, which we call collaborative combat aircraft, the unmanned underwater vehicles. We have, as you know, a collaboration with General Atomics to do an autonomous sort of airborne early warning capability. So there are a number of things that we have to do and which I look forward to do. So it will continue to grow. But I won't quantify it how much. It is always this trade-off between the different pieces I mentioned. Anna Wijkander: Just maybe I can add. We have also some capitalized R&D that we have started to depreciate now that is also impacting. And that's something positive because we are delivering in our projects and, therefore, we can -- we depreciated the capitalized R&D. So that's also going to increase during the year. Operator: Excellent. Thank you. The next question -- sorry, did you have a follow-up there? Sash Tusa: Yes, please. That's helpful. Yes, I just wondered if you could elaborate on the Luleå frigate program, which seems to be in a degree of flux. You clearly said that it's now more of a frigate than a corvette. Corvette was probably a bit of a euphemism anyway. But could you just give us some color on where that program is? And in particular, the reported bid by France to export frigates directly to Sweden, possibly as part of the offset for the GlobalEye program, how do you see that developing? Micael Johansson: I think it's a question you should ask to Swedish customer mainly. And I want to underline it's probably -- I mean, it's probably corvette, of course. I mean, maybe it's my ignorance. But listen, we have put forward a very strong offer together with Babcock, our main partner here. And I hope that, that will prevail and be the selected thing. Yes, the Swedish customer has opened up, as I know, for other sort of proposals. And it's up to them now to select. But I still think we and Babcock have the strongest proposal. Now it's up to the Swedish Navy, Swedish FMV, the defense material organization to make a selection. And exactly when that is going to be done, I'm not sure. But time is of essence, of course, since they want the frigates to be operational sort of '29, '30 something. Operator: The next question comes from Marie-Ange Riggio with Morgan Stanley. Marie-Ange Riggio: The question that I have is on your current capacity expansion. Clearly, we see that 25 is quite a record level for you. you announced some capacity expansion at your last CMD mainly for Dynamics and Surveillance. I'm just wondering, given the level of backlog that you have today and the demand that you are seeing in the coming years, are you already increasing further the capacity compared to the guidance or like compared to the indication that you gave at your CMD? Or you are still expecting basically the orders before like moving forward from those targets? Micael Johansson: I would say for the year, we are in line with what we talked about at the CMD. It's not sort of a walk in the park to get everything executed. So that is really sort of a high ambition to invest all that money into capacity increases that we talked about. And we're looking into what do we need to do next year, of course. And we'll come back to that next year. But we will continue to invest in capacity increases, obviously, because of the demand in the market. But what are we doing right now is supporting what we talked about in the support area going from sort of below 100,000 units to somewhere in between 400,000 and 500,000 units when we get all the capacity in play. And I look forward to getting the factory in Grayling, Michigan up and running in the end of next year and also then India, of course, to add to this. So we'll come back on that, but we will see more -- again, we stick to our guidelines. But we will not compromise, making sure that we have the capacity to support the demand in the market and not compromise to make sure that we invest in the right technologies to be relevant all the years to come. And this is the sort of the puzzle that we work with all the time to make that sort of really efficient going forward. But we will need more capacity investments, absolutely. But we'll keep to the CMD statements that we had. Marie-Ange Riggio: If I may, on that, I mean, are you afraid about the lead times for your policy? Because like -- are you afraid basically that the lead time about increasing the capacity can limit further growth going forward given the fact that, I mean, it will take time. If I'm correct, you have drone combat where you can increase the capacity pretty quickly. But for the rest, I think that takes a bit more time. So that's why I was saying like if you are trying to be ahead of the curve in terms of adding capacity because clearly, the backlog would support further growth or not. Can you probably just remind us a bit the lead time for any other projects that is not ground combat if you increase the capacity? Micael Johansson: If you talk about the lead times to get increased capacity into play when it comes to ground combat, it's like roughly 2 years. So we started early, fortunately. But there are different movements. As I said, there are 40 building projects ongoing in the Karlskoga area only. So they are not in the same sort of schedule as we speak, all of them. But it's roughly to get to full-fledged sort of big step-up on the capacity of support weapons, I would sort of simplify it to say it's roughly 2 years. Johan Andersson: Excellent. Thank you very much for the questions. I think we need to move on to some of your colleagues. But just take one question from the web here. Micael, in your CEO statement, you write right that Colombia has selected the Gripen and that you are in negotiations. Do you dare to set a time frame here? Or how should we view that? Micael Johansson: As I said before, I hope to conclude that during this year. That's sort of what I've said before. I'll stick to that. I won't give a week or a month or so, but we've been doing good progress and I'm pleased to see that. So I hope we will conclude this year. Johan Andersson: Good. Another one is on your drone capabilities. Should we start to see that, that also can be some larger orders here? Or will it be more of test and trials and so forth? Or in the future, would you see that this can also grow to more products and bigger-sized orders? Micael Johansson: No, I anticipate that to happen because I think also looking at what capabilities the commission has stated as flagship projects, if you want to implement that, of course, you need plenty of counter-UAS systems. And if you want to have another capability sort of more aggressively, you also need quantities. But we're not really there yet, but we're seeing contracts coming now. So I think that's an avenue that will grow, absolutely. But exactly how and when it's -- I can't say. But we're in that race. Johan Andersson: Good. Okay. I think we have a number of more questions over the telephone conference so let's spend the last 5 minutes there. Please, operator, next question. Operator: The next question comes from Renato Rios with Inderes. Renato Rios: This is Renato of Inderes. Congratulations on very good results today. Great work. It's similar to the question that was just asked regarding drones and AI. Looking ahead to, say, 2026 to 2030 or even beyond, how do you see drones technology and AI-driven unpowered products and systems moving from development to sort of recurring revenue and contracts? How significant a share do you think this could become in the medium to long term? And would be interesting to hear your view on the revenue mix, how it could look like across the ground, air and marine domains and the largest product categories. Micael Johansson: Good questions. I think looking into the crystal ball and trying to understand how quickly AI and autonomous capabilities will take an operational role and great quantity is really a difficult one, I must say. It's all connected to also the end user, how quickly are they prepared to change a bit of their concepts of operations from doing what they're doing now to using these capabilities in a new way. I mean, it's different looking at Ukraine, which are moving really quickly ahead with short iteration cycles, upgrading the drone capability on a weekly, daily basis, very decentralized to keep trying winning the war. And they take a bit of a risk, of course. It's different in an environment where you change the CONOPS of a defense force or an army to do things. It will take a little bit of time, I think, but it will definitely prevail and be there going forward. Technology was developed much quicker than I think we understand. And how much you can do on an autonomous basis and how much support you will have from AI agents, agentive AI going forward will be tremendous. But to quantify the share is -- I can't do that today. I have to make sure that we are part of that journey and that we invest in that going forward. Between the domains, I think the land domain will continue to grow and will be substantial if you look at the company from our side. Maritime and air is a bit sort of dependent on the mega deals, of course, a bit different in that domain. But then it will be a sustained business, of course, in the background as well. So I think land domain is more sort of sensors and products and weapons will continue to grow. And also, we hopefully will continue to grow a lot in the air domains as well. But that will be a bit dependent on the mega deals, honestly. Johan Andersson: Excellent. Operator, do we have a final question from the telephone conference? Operator: Yes and It comes from Afonso Osorio with Barclays. Afonso Osorio: I just wanted to come back to this Gripen deal with Ukraine. I mean the 100 to 150 jets is a massive potential order here. So firstly, what will be the total length of these contracts, assuming the delivery starts 3 years from now, as you just said? And then what would be the profitability of that contract compared to the other contracts you have within the Gripen family? Micael Johansson: Good questions that I'm sure you understand I can't sort of nail that down completely. But I mean, I've said before, I mean, that size of the contract would of course create scale and improve the profitability of the Aeronautics domain. Then it depends on many other things, what kind of availability do they need, what kind of flexibility and agility do they need, ground support equipments, training and all of that in terms of the whole contract. But you can sort of look at Brazil and then you do your mathematics on what sort of 100 or 150 contract. It's in that ballpark, but it depends on the number of things that we haven't nailed down yet to look at the size of the contract. But everything that adds that scale to the operation would, of course, add profitability. That's for sure. But I won't sort of say how much today. That's not sort of possible. We will start working this now and look what the expectations are from Ukraine comes to schedule, delivery rates and when the first aircraft needs to arrive and then offer them something that needs to be discussed. And apart from that, all these things around financing must come into play as well. So we will work that diligently, of course, no question about it. And I look forward to it. Can I say one thing before we end, which I forgot actually. You've seen probably the press release that I just want to say that we have now appointed a new position in our corporate management, strategy and technology. And it is Marcus Wandt, who is a great technology guy and a visionary guy, a good leader that will take that role. And we do this because there are cross-company initiatives that we have to have a thorough discussion about in corporate management and all the initiatives that comes from me or NATO, of course, as well. But technology is moving so fast. So we need to be sure that we have the right discussion in corporate management. So I look forward to welcome Marcus Wandt 1st of November to my corporate management. Johan Andersson: Thank you very much, Micael. And with that, good ending. We finalized this call for the third quarter, and very much look forward to the Q4 call that we will have then in beginning of February. So thank you again very much for listening in and also joining over the web. And if you have any further questions, do not hesitate to reach out to us at the Investor Relations department. And have a really, really nice day. Thank you. Micael Johansson: Thank you. Anna Wijkander: Thank you.
Operator: Good day, and welcome to the Third Quarter 2025 Comfort Systems USA Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Julie Shaeff, Chief Accounting Officer. Please go ahead. Julie Shaeff: Thanks, Michelle. Good morning. Welcome to Comfort Systems USA's Third Quarter 2025 Earnings Call. Our comments today as well as our press releases contain forward-looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based upon the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K and Form 10-Q as well as in our press release covering these earnings. A slide presentation is provided as a companion to our remarks and is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks. Brian Lane: All right. Thanks, Julie. Good morning, and thank you for joining us on the call today. Our amazing teams across the country continue to deliver excellent results for our customers, and they have delivered financial results that far exceed even our recent outcomes. We earned $8.25 per share this quarter, which is double what we earned in the same quarter last year. Our mechanical business had a sharp increase in profitability, and our electrical segment was higher as well. We also had favorable developments in some late-stage projects that contributed to our great results. Construction is driving most of our results, but service revenue and profit also grew by double-digit percentages. Our bookings were strong, and our backlog at the end of the quarter grew to a new high of $9.4 billion. As a result of exceptional demand for our services, we achieved a second consecutive same-store backlog increase of more than $1 billion despite significant third quarter burn. We continue to book work with good margins and good working conditions for our valuable people. We entered the fourth quarter of 2025 with $3.7 billion more in backlog than last year at this time. I'm happy to announce the acquisition of 2 companies on October 1. FZ Electrical, a contractor with strong industrial capabilities located in Grand Rapids, Michigan; and Meisner Electric, a contractor based in Boca Raton, Florida, with strong capabilities in health care and other attractive markets. We are thrilled to have these 2 companies join the Comfort Systems USA family of companies, and we welcome them. Today, we increased our quarterly dividend by 20% to $0.60 per share, and we have actively purchased shares during 2025. With solid bookings and great demand, we expect continuing growth and strong results in 2025 and 2026. Trent will discuss our operations and outlook in a few minutes, and I will make closing comments after our Q&A. But first, I will turn the call over to Bill to review our financial performance. Bill? William George: Thanks, Brian. Our third quarter results were remarkable in every way with 33% same-store revenue growth, sharply higher margins, EPS up by over 100% from the prior year and a surge of over $500 million in quarterly free cash flow. We achieved more than $400 million in quarterly EBITDA for the first time ever, and that's a 74% increase over the same quarter 1 year ago. So we'll start with revenue. Revenue for the third quarter of 2025 was $2.5 billion, an increase of $639 million or 35% compared to last year. Electric segment revenue grew by 71% and mechanical revenue increased by 26%. Through 9 months, same-store revenue increased 23% and currently, our best estimate is that fourth quarter same-store revenue will grow in the high-teen range as compared to the same quarter last year. For full year 2026, we expect same-store revenue growth to continue most likely by a percentage in the low to mid-teens and weighed more heavily to the first half of the year. Gross profit was $608 million for the third quarter of 2025, $226 million higher than 1 year ago. Our gross profit percentage grew to a remarkable 24.8% this quarter compared to 21.1% for the third quarter of 2024. Quarterly gross profit percentage in our mechanical segment increased significantly to 24.3% this year compared to 20.3% last year. Margins in our electrical segment also grew to 26.2% as compared to 23.9% in the third quarter of 2024. Great ongoing execution augmented by favorable developments in certain late-stage projects drove us to higher margins in both segments. Our largest single discrete project development was recognizing $16 million of previously deferred revenue on a project as a customer emerged from bankruptcy. We currently expect that 2026 profit margins are likely to continue in the strong ranges that we have achieved and averaged over recent quarters. SG&A expense for the quarter was $230 million or 9.4% of revenue compared to $180 million or 9.9% of revenue in the third quarter of 2024. SG&A increased mainly from ongoing investments in people to support our higher activity levels. Our operating income increased by just over 86% from last year from $203 million in the third quarter of 2024 to $379 million for the third quarter of 2025. Our operating income percentage surged to 5.5% this quarter from 11.2% in the prior year. Our year-to-date tax rate was 20.9%. Our effective tax rate in the first quarter was lower due to interest we received on a delayed refund relating to our 2022 federal tax return. We expect our tax rate to continue to be around 23% for the rest of 2025 and into 2026. After considering all these factors, net income for the third quarter of 2025 was $292 million or $8.25 per share as compared to net income for the third quarter of 2024 of $146 million or $4.09 per share. Thanks to great execution by our people, EBITDA increased by 74% to $414 million this quarter from a strong $238 million in the third quarter of 2024. Our trailing 12-month EBITDA is now $1.25 billion. Free cash flow for the third quarter of 2025 was $519 million, and year-to-date, our free cash flow is $632 million. We purchased additional shares this quarter. And year-to-date, we have spent around $125 million, buying approximately 345,000 shares at an average price of $363.13 per share. At the end of September, our net cash position was $725 million. As Brian mentioned, we acquired 2 fantastic companies on October 1, Feyen Zylstra and Meisner Electric. We funded approximately $170 million in purchase consideration in the first -- fourth quarter, and these acquisitions are expected to provide over $200 million in incremental annual revenue and $15 million to $20 million of annual EBITDA. In August, we finalized an amendment to our senior credit facility that increased our borrowing capacity from $850 million to $1.1 billion on very favorable terms. The new maturity date is October 2030. Our balance sheet and cash flow have put us in a great position to continue to invest, grow and reward our shareholders. That's all I got. Trent? Trent McKenna: Thanks, Bill. I'm going to discuss our operations and outlook. Our backlog at the end of the third quarter was a record $9.4 billion, a large sequential and large year-over-year increase. Since last year at this time, our backlog has increased by $3.7 billion or 65% and $3.5 billion of the increase was same-store. On a sequential basis, backlog increased by $1.3 billion or 15%, all of which was same-store. Third quarter bookings were especially strong in the technology sector, both in our traditional construction business as well as the modular part of our business. We are entering the final quarter of 2025 with same-store backlog 62% higher than at this time last year, and our project pipelines remain at historically high levels. Industrial customers accounted for 65% of total revenue in the first 9 months of 2025, and they are major drivers of pipeline and backlog. Technology, which is included in Industrial, was 42% of our revenue, a substantial increase from 32% in the prior year. While our manufacturing revenues declined on a percentage basis, we continue to see good demand for manufacturing, but in many cases, data center opportunities are more compelling. Institutional markets, which include education, health care and government remain strong and represent 22% of our revenue. The commercial sector provided about 13% of revenue. Most of our service revenue is for commercial customers. Construction accounted for 86% of our revenue with projects for new buildings representing 61% and existing building construction 25%. We include modular in new building construction and year-to-date, modular was 17% of our revenue. We remain on track to have 3 million square feet of space in our modular businesses by early 2026, and we will prudently consider additional investments next year based on the strong demand we are seeing in modular. Service revenue was up 11%, but with faster growth in construction, it is now 14% of total revenue. Service profitability was strong this quarter, and service continues to be a growing and reliable source of profit and cash flow. I cannot say enough about the amazing team of craft professionals that we have working hard for our customers every single day. Thanks to the teams that are working across the country, we are optimistic about our future. I want to close by joining Brian and Bill in thanking our over 21,000 employees for their hard work and dedication. I will now turn it back over to Michelle for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Adam Thalhimer with Thompson, Davis. Adam Thalhimer: Congrats on another wave of record results. I wanted to ask high level on the technology side. Does the bidding activity match the bookings and the revenue growth that you saw in Q3? Brian Lane: Yes, Adam, the opportunities, the pipeline is still robust, matching quarter 3. There's still more opportunities that then probably can be handled out there in the market at the moment. So we've seen no let up at all in the opportunities. Adam Thalhimer: And then I'm curious on capital allocation. Your free cash flow -- your net cash, I think, broke out to an all-time record in Q3. Just curious how you're thinking about that and if just accumulating cash from here wouldn't be the worst thing in the world? William George: Well, that's never the worst thing in the world. There are worse alternatives to accumulating cash. But we haven't changed our capital allocation thinking since 2007. We will -- to the extent we can find opportunities that we have conviction around, we will deploy most of our cash doing acquisitions. We will continually buy back our shares using a portion of our free cash flow, and we get aggressive on that when we feel like the stock has dipped to -- relative to our prospects. So for example, when it dipped earlier this year, we spent $100 million in a couple of weeks buying shares. And then we -- one point you might be making is there's so much cash now. Is it realistic for us to deploy it into acquisitions? And I think the answer is we've faced that problem on a couple of stair steps in our cash over the last few years. So far, our reputation as an acquirer and our commitment to great outcomes for the people we buy have allowed us to find good opportunities to deploy our cash. One thing people might not think about is we are growing, but the companies we're buying are growing as well. There's a certain amount of scaling going on. So I meet with companies regularly that are having -- that have results that are twice as big as they were 2 or 3 years ago. And so in a sense, the reality is the opportunity set that's facing a company with a great, deep, well-established workforce of pipe fitters or electricians is amazing. These companies are worth more today than they were 5 years ago just because of actually what's going on because of the investments they've been making in the meanwhile. And we're optimistic. We're going to just try to keep doing what we've been doing. And if we wake up with the problem of we just can't keep up with the cash, then we'll find ways to reward our shareholders in other ways. Operator: Our next question comes from Sangita Jain with KeyBanc Capital Markets. Sangita Jain: So a couple that I have. One is on the cash flow in third quarter, your free cash flow was especially strong. So I'm just trying to think how we should think about it for the whole year and if there were any material advance payments included in 3Q that we should be aware of? William George: So for one thing, there wasn't an extraordinary event like there has been a few times over the last few years where we get way ahead due to some specific event or we have a turnaround where that event is sort of recalibrated. I will say that you can always expect our cash flow to be roughly equal to our net income. We are a cash business. We pay our taxes in cash. So when you see a quarter where we have cash flow above our net income, at some point, we're going to give that back. When it's below our net income, then we have cash we'll collect in the future. Through 6 months, we were behind our net income. There were some specific reasons for that, that we've discussed. In the third quarter, we had a big catch-up. We're getting fantastic payment terms. As we can negotiate good pricing and good conditions for our workers, we can also negotiate good payment terms. So we just had a great cash flow quarter, but nothing fundamental has changed. We're going to cash flow our net income. Sangita Jain: Got it. And then if I can ask one on backlog growth. Obviously, your backlog suggests that you're booking out further than a year. Can you speak a little bit to that? And if it's primarily on the modular side or also on the traditional construction side? If it's just data center or also life sciences pharma work that you feel like you're booking out earlier and earlier? Trent McKenna: So when -- our bookings for the quarter, right, we were broadly across all of our businesses. And there were some -- the bookings that we had in modular, those are going to -- those are pushed out farther. So those aren't going to be exactly relevant to what I'm about to say. But for the rest of our bookings, all of those bookings are going to start sometime within the next year. They might be longer-term projects because of the size of the projects, but they are all projects that are slated to begin in 2026. So when we talk about bookings out further out, that's more of the modular side of the business. Operator: Our next question comes from Julio Romero with Sidoti & Company. Julio Romero: Just following up on the last question about the order acceleration. Historically, you guys are very prudent at kind of not taking on additional backlog and not getting out over your skis. I know, Trent, you mentioned a piece of the backlog growth was modular orders that were further out. But just help us think about the step-up in orders here for the last several quarters. Part of it is booking yourselves further out, but some of it is also, I guess, securing enough pricing in your bid margins to compensate for that additional risk of additional orders? Brian Lane: Yes. So Julio, we still have the same philosophy we've always had. We'll take on work we know we can do that we can handle with the skilled workforce that we have. So we look at each opportunity, particularly on the lodger side, make sure the timing is right, work for us that we can achieve a good product for our customers. So if you look at the timing of what we're winning, when it's coming in and can we handle it, we feel very comfortable with the workload that we have today. Trent McKenna: And I want to add too, Julio, the collaboration between our companies is really permitting a lot of this additional booking that you're seeing. It's the companies working together to share workforces so that they can tackle projects that would otherwise have been kind of outside of their ability scope previously. Brian Lane: And Julio, one thing that we do have going for us is that we have folks that will travel and you see some of this work, maybe get all the West Texas, Abilene, Amarillo that we can handle because we have people that will travel to these sites. Julio Romero: That's very helpful. And then I know a big emphasis is being selective with regards to the specific partners you work with. And I think you guys mentioned earlier, your partners are getting bigger. They're taking on additional work. But just throwing that question back at you guys, has the pool of partners that you work with increased? Or is this just more a function of you doing more with your existing partners? William George: So what Trent was referring to was our companies working together. We do work sometimes with -- we worked with some companies. We worked with a company we bought, called Ivey, before we bought them. We have selected situations like that. But I think overwhelmingly, we're really talking about companies that are Comfort Systems USA companies that are 50 or 100 or 10 or 50 miles from each other. Brian Lane: And it's really a great point for people to come and join us. They have opportunity to work with a lot of other companies in the same industry. under the same overall structure that we have. Julio Romero: Yes. And I'm sorry to rephrase my question, I meant when I said has the pool of partners increased, I meant has the pool of kind of the customers that you typically have worked with increased? Or are you doing more with existing customers? William George: I would say there aren't many people in the United States we haven't done work for in the past. If they've done work in the past, we've probably done it. So that's kind of a hard question to answer, but it's mostly -- there is a definite preference for people who we have a history of succeeding together with. We have rough projects, we don't want to do work with those people anymore. We want to do work with the people that we have great projects with over and over. Brian, did you -- I mean... Operator: Our next question comes from Brent Thielman with D.A. Davidson & Company. Brent Thielman: Congrats again, another great quarter. I guess, Brian, Trent or Bill, one of the questions that seems to come up often is just your ability to sustain the growth you're seeing outside of modular, just given sort of the industry labor constraints out there. You've grown same-store, call it, 20% or more for what looks to be a fourth year in a row here. And I know there's a lot of factors to the growth over the last few years. But maybe you could talk about just sort of how critical have your sort of internal recruiting, hiring efforts been in recent years in support of that growth versus job values getting bigger? And then also, I guess, is there any sort of slowdown or change you've seen in terms of your ability to bring in people to support the growth, I guess, outside of acquisitions? Brian Lane: Yes. So I'll go first, Brent. First and foremost, this is a good place to work, right? We treat people fair in what respect. We pay them well, and there's a good benefit package. So we're constantly recruiting. But as you can tell by our numbers, we're up over 21,000 access to another probably 35,000, 34,000 contract labors that we have. So all in all, we're constantly recruiting, but we do get people to come here and work. We also have a lot of work, which makes us a good place to work as well. So how much can we grow? We continue to train. We're improving productivity constantly. We're trying to pick the right jobs that we're good at planning them using BIM, prefab and modular help us. But the enhancement that we are achieving with the skilled workforce is the best I've ever seen in my career today. Brent Thielman: Okay. All right. And then the 3 million square footage of space in modular that, I guess, becomes available early 2026, I think you said Trent. Is that capacity or space already effectively sold out? Or do you expect it to be soon? Trent McKenna: Yes. The answer is yes. Brent Thielman: Okay. Just one last technicality, if I could. The $15.5 million write-up that you called out, I think, in the filing, is that all reflected in the mechanical segment? Or I'm just trying to level set what kind of normalized margin looks like. William George: So that happens to be in the electrical segment. But one of the things we were basically saying is we always get these questions, did you have anything special in the quarter? Did you have jobs that closed out especially well? We have a lot of jobs now. So we almost always do. But at this point, we did have some special closeouts this quarter that were particularly helpful. That was the biggest one. So in MD&A, you're required to give an example. We gave the biggest single example, but they happened in both electrical and mechanical. We're late in some jobs. The jobs are going well. The systems are being turned on and they work well. We're able to relieve contingency. So we did -- this would have been a great quarter without those. This would have been a record quarter even without some of those pickups. Some of those pickups pushed our results a little further, and we wanted to just let people know that. Brent Thielman: Okay. Sorry. And Bill, theoretically, you have these every quarter. It just varies. So even if we compare year-on-year, you might have had them last year? William George: But the last 3 or 4 quarters, we were frequently asked, did you have any special closeout? And we said nothing out of the usual. This time, we're saying we kind of had some a little more than we would -- we might normally count on having. So I would say we do have -- we had some really good stuff happened this quarter. Operator: Our next question comes from Josh Chan with UBS. Joshua Chan: Congrats on a really great quarter. I wanted to ask about the backlog question, but especially within the last 6 months because obviously, you've had a strong demand environment, you have labor constraint, you have labor sharing for a while now. But really over the last 2 quarters, you had these 2 consecutive $1 billion step-up in the backlog. And I was just wondering if anything is different in this last 6 months versus the longer period, I guess. William George: It's an interesting way you asked that question. Every quarter is different from every other quarter, right? We had some big bookings. Sometimes they're in pharma, sometimes they're -- it's never exactly the same because this is lumpy stuff, as we've said. We had a lot of really, really good opportunities get to the point where they were documented and could go into backlog this quarter. Year-to-date, it's the companies you guys know of and think about. There were some interesting ones this quarter. It's work we know are really companies that are doing work they've done over and over. So we feel great about it. But there's just such a good market. There's such a good opportunity. Our customers, they want us to commit early, so they commit early. It's just a fantastic market, and we have just unbelievably good companies. Joshua Chan: Yes. That makes a lot of sense. I appreciate the color there. And then on modular capacity, if you were to expand kind of incrementally from here, would there be a preference to serving existing customer or I guess, demand for that? Or would there be a preference to kind of grow with other types of customers within modular? William George: I would say we always have a preference towards meeting the needs of the people who have been great partners for us over years. And in the case of one of the ones you would be referring to more than a decade. So we'll always have a preference towards great customers as opposed to new customers. Having said that, we are -- we talk to new customers. We have opportunities. As you know, we added a customer. But if you were asking me the question, would our guys rather do work with people who they have a great relationship with or find out how good somebody else is, they'll take the sure thing. Operator: Our next question comes from Tim Mulrooney with William Blair. Timothy Mulrooney: I hate to go back to this backlog question and beat it to death, but I'm newer to the company here. So I just want to make sure I understand how this works. How much of your backlog, excluding that modular piece, would you expect to start at some point over the next 12 months? I'm just trying to understand how much of this backlog is actually being pushed out versus just elongated due to the larger projects? William George: So I'm really glad you asked. The majority of the backlog numerically is jobs that have already started. It's the work left to finish on jobs that have already started. When Trent says everything is going to start within a year, he means all the new bookings. We don't have new bookings. Really many of the new bookings have already started at some level in the sense that we're doing preliminary work, underground work. We have engineering we're billing for. But it is -- this is really a -- because the definition of backlog in sort of what's called a remaining performance obligation under GAAP is so strict. You really don't put something into the reported backlog number until you have a price, a scope and a legally binding obligation that can be audited. We are -- almost any project that we put into our backlog, it was awarded to us a quarter, 2 quarters, 3 quarters ago. We received a phone call saying, this is your work, long before it shows up in backlog. So I hope that helps because it's not like -- we're not like a manufacturing company that's selling stuff we're going to start producing far in the future. You can't really price the building until it's been designed. You can't really design a building until you're about to start it. So... Timothy Mulrooney: Yes. No, that's really helpful, Bill. I guess, a more firm picture for a more firm backlog. That's helpful. So my other question just really quick is actually something I don't hear discussed a lot on these calls, but I'm curious to learn more is that service revenue piece. I mean it's up 11%. You said it's like 14% to 15% of your revenue. It's not insignificant. I don't hear it talked about a lot. What's driving that strength in the revenue growth there, and it sounds like -- and in the profitability? And is there some sort of conversion like when your new construction is stronger that brings along some service? Or are those pretty much not correlated? Just any color on that piece of the business. Trent McKenna: So the service business continues to be strong. There's a lot of investment in sales force collaboration, making sure that we're going after the right parts of that market. Across the board, we're just seeing broad strength in that business, and it's execution driven. We have a lot of people -- the service business, it's really -- it's a day-to-day kind of bunt single doubles business. It's not like the construction business where you add a lot to your backlog at once. It's small maintenance contracts, pull-through work that comes from that. To your point, it's converting new work to service contracts over time. So it is the kind of business that just by its nature, doesn't grow quite as episodically as the construction business. But what you've got is you've got some real strength in that from the teams out in the field that are making it happen. Operator: Our next question comes from Brian Brophy with Stifel. Brian Brophy: Congrats on a nice quarter. Just wanted to follow up on some of this headcount discussion. I think the over 21,000 employees implies a little bit over 15% headcount growth since the end of 2024. It obviously seems to be an important enabler of some of the organic growth we've seen here this quarter. Just could you help us understand how sustainable that pace of hiring could be, assuming demand remains healthy here? William George: That number does include some acquisitions. So -- but I would say the majority of that was 15 points were added by our companies. And we don't -- we would never tell you, oh, we can regularly add 12% to our workforce of craft workers. We had a really good 9 months. We're confident we can -- we have -- on any given day, we have apprenticeship programs going on that we really are trying to get as many people as we can legally put into them involved in. There are like state-mandated ratios where you can only have a certain number of apprentices per journey persons. So we're trying to grow as fast as we can. I think high single digits is what we've accomplished over a long period of time. We're pretty proud of that, by the way, because that means you're creating or you're helping people create themselves as electricians and pipe fitters and that's good for them. That's good for us. That's good for the U.S. Brian Brophy: Okay. Yes, that's helpful. And then wondering if you could give an update on some of the automation investments you've made on the modular side. And just to what extent you're seeing some productivity benefits? Any color you can provide there would be interesting. William George: You want to -- Okay. Well, so more and more robots, right? So as we get more and more buildings implemented, we see the bills go by for robots we're buying. We've added turn tables. It's what Trent was saying, it's singles and doubles, but yes, no, there's a lot of automation going in. There's improvements in welding proficiency that's driven by better software, really AI-enabled software. There's just a million little things. I mean... Brian Lane: I'll also tell you, Brian, in terms of the history of construction, the amount of innovation and technology that's being developed and applied today leaps and bounds over what it's ever been. And it's going to be a huge help into helping us build stuff as we go forward safer, more productively and the quality is getting better every day. So... Trent McKenna: Yes. And one of the benefits Comfort Systems has is we have 48 different test beds where we can try new things and then move them throughout the enterprise if they work. And so it's a really excellent way to be able to test and innovate and then be able to do it in a controlled way and then move it out if it's effective in one operating unit, then it will be effective across. And it's a way for us to be able to innovate inside of a construction environment without significant risk. So it's a real benefit to our structure. Brian Brophy: Yes, that's really helpful. Last one for me. Pharma was mentioned very briefly. Just would you give us an update on kind of what you're seeing on the project pipeline side, particularly some of the onshoring opportunities that may be coming. Obviously, we've had a little bit more tariff discussion on pharma products. I'm just curious if you've seen any movement in that market. William George: Our biggest single booking, I think, in the last couple of quarters was in pharma, but the majority of our bookings today are in technology. It's not because there aren't pharma opportunities. It's because technology is competing for our resources and they're making a compelling case for our resources. I will also say, if you talk to -- we have a very, very strong pharma group of people that have done work in pharma for decades in the Mid-Atlantic. I've spent time with some of them recently. They say that there is a lot of planning going on projects with code names for construction along the Eastern Seaboard. But in our case, that would be the Mid-Atlantic area and especially the research triangle, the area around the research triangle. So there's a lot of work coming. Pharma has very, very long lead times. They they think and plan for years. So unless something like -- there are exceptions to that. GLP-1 boom, they're just building it as fast as they can. The COVID vaccines and all sorts of things that were needed for the COVID vaccines, very, very fast. But normal regular day-to-day pharma stuff, it develops over a long period of time. And that pipeline, the people, the smartest people in our company who know about it, say it's very, very good. Now the time may come when it's available to us, and that's not what we choose to do, right? But I think that the opportunity is out there. Operator: Our next question is a follow-up from Sangita Jain with KeyBanc Capital Markets. Sangita Jain: I just had a follow-up on -- as you see large data centers starting to get commissioned, I'm wondering if there's a change in the type of electrical or mechanical scope that you may be seeing because we're hearing that developers are now looking at DC power instead of AC power. And I wonder if that impacts you or if it just kind of stays outside the wall. William George: So we don't -- for us, electrons going through a wire, you just can't even imagine how generic that is to an electrician. He couldn't care if those electrons are -- he doesn't care if it's going to make pills or it's going to make data. So you'd be -- you just need electricians. That's a great thing about our positioning. Whatever you -- if you need to do something, you need us. And I haven't heard anybody saying that it's materially changing. The one thing you do hear is scale, like the amount of copper, the amount of switchgear, the density of cooling, just the sheer scale, people -- even very, very seasoned people are amazed by that in our organization. But as far as like those kind of tweaks, I'm not hearing anything. Trent? Trent McKenna: No. Operator: There are no further questions at this time. I'd like to turn the call back over to Brian Lane for closing remarks. Brian Lane: Okay. I just want to reiterate my gratitude for the amazing dedication and excellence of the teams we have across our nation, serving our customers every day. Demand is strong, and our people are rising to the challenge of addressing the unprecedented need for their unique skills. As Trent mentioned, we feel that conditions are good for us to continue to perform. And as Bill indicated, we have the resources and the commitment to lean into delivering for our employees, our customers and for you, our shareholders. As we embark upon the holidays that are coming up, we won't have another call. I wish everyone the best for the rest of the year and enjoy your time with your families as the holidays come upon us. Thank you for your confidence. Have a great weekend. Operator: Thank you for your participation. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, and welcome to the Healthpeak Properties, Inc. Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead. Andrew Johns: Welcome. Today's conference call contains certain forward-looking statements. Although we believe expectations reflected in any forward-looking statements are based on reasonable assumptions. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. Discussion of risks and risk factors is included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on this call. In an exhibit of the 8-K referred to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with regulatory requirements. The exhibit is also available on our website at healthpeak.com. I'll now turn the call over to our President, Chief Executive Officer, Scott Brinker. Scott Brinker: Thank you, Andrew, and welcome to Healthpeak's third quarter 2025 earnings call. Joining me for prepared remarks is our CFO, Kelvin Moses. The past 60 days or so signal a turning point in our business. Leading indicators in life science are turning positive and private market values for outpatient medical are strengthening. As a premier scaled owner in both businesses, we see significant value and upside when we look at our stock price today. Two years ago, against the backdrop of raging inflation, the outpatient sector was out of favor in both the public and private markets. We saw a sector with good fundamentals that we're getting even better and seized an opportunity to grow our portfolio by $5 billion in a strategic merger with Physicians Realty Trust. In doing so, we established the best portfolio and platform in the outpatient sector. The merger also accelerated the strategic goal I described 3 years ago to get closer to our real estate and our tenants. We've now internalized property management on 39 million square feet with line of sight on another 3 million square feet. We now own the tenant relationship and the local market knowledge. The internalization also allows us to deploy technology at the property level quickly and at scale. With the addition of JT, Mark and team, we deepened our relationships across the outpatient ecosystem, creating proprietary growth opportunities, including accretive new development projects. Flash forward to today, as inflation has come down, there's a deep pool of buyers for outpatient medical. It's a great time for us to sell less core real estate and to recap some assets. We're in various stages of negotiation and execution on transactions that have the potential to generate proceeds of $1 billion or more. We see an exciting window to recycle outpatient sale proceeds into higher-return lab opportunities where the leading indicators are starting to turn positive. Increased M&A less regulatory noise, lower interest rates, positive data readouts, solid FDA approvals and priority reviews and recent biotech outperformance in the stock market. The real estate market will obviously lag, but the building blocks for a recovery in demand are encouraging. Our leasing pipeline today is roughly 2x the pipeline at the start of the year. We're also seeing some vacant development projects across the sector get absorbed by alternative uses, which will help accelerate a return to more balanced supply and demand. Important to note that purpose-built lab buildings are highly flexible and can support many alternative uses. I'll repeat that our occupancy will decline for the next few months due to expirations and terminations, but we're now gaining more confidence that will be the bottom on occupancy. At that point, we'll have more than 2 million square feet of available space in good submarkets to lease up and recapture NOI. We recently welcomed Denis Sullivan to our team. He will play a pivotal role in our life science business and investment strategy. Denis spent 14 years at BioMed, including time as CFO and CIO. We have exceptional local market leaders in the Bay Area with Natalia De Michele, with dentists in San Diego and with Claire Brown in Boston, all rolling up to Scott Bowen, our segment leader. We believe we have the footprint, people and balance sheet to capture market share as the sector recovers. Our CCRC business is performing at a high level. Six years ago, we bought out the 51% interest in the portfolio held by our joint venture partner, and we installed a new operator. Since then, NOI is up more than 50%, including double-digit growth this year. We believe then and now that the entry fee product is very attractive to seniors on fixed incomes, we are looking for a lower monthly rent payment. The continuum of care we offer is viewed favorably by seniors and their families because it creates peace of mind they won't need to move again in the future. And that's very important at that stage of life. Sequential occupancy in the portfolio was up 70 basis points, and we expect continued growth in the fourth quarter. I'll wrap up with our technology initiatives, which are already paying off with efficiency gains. Our G&A this year is projected at $90 million, which is less overhead than we had 5 years ago, despite significant inflation across the economy and closing a $5 billion merger. But the cost efficiencies are only part of the story. We intend to create a tech-enabled platform to streamline our operations, differentiate our property management and leasing platforms and expand tenant services to drive new revenue opportunities. We'll have more details to share in the coming quarters. Let me turn it to Kelvin. Kelvin Moses: Thank you, Scott. I'll expand a little bit on the technology initiatives that Scott just mentioned. We're advancing our strategic plan to strengthen our capabilities as an AI-enabled real estate owner with a leading investment management platform designed to meet our clients' needs across geographies and asset types. Operationally, internalizing property management now gives us end-to-end control of our workflows and establishes a consistent foundation to deploy technology across the property. Technology adoption of real estate has historically lagged other industries, and we see advantages to moving now. We're focusing our initial efforts where data and automation can offer more time in the field, and that starts with improving property operations, facilities engineering and accounting. We've partnered with a leading enterprise technology firm to help us drive this shift. Our automation initiatives are building a stronger foundation for our data architecture that will enhance connectivity across internal systems and reduce manual work. Our approach allows us to make measured investments and preserve long-term flexibility as commercial tools evolve. These fresh perspectives from outside of traditional real estate will also help us innovate faster. We see every part of our business as an opportunity. Now moving into the third quarter results. Financial and operating performance was in line with our forecast. We reported FFO as adjusted of $0.46 per share, AFFO of $0.42 per share and year-to-date portfolio same-store growth of 3.8%. Starting with CCRC. Our portfolio delivered another strong quarter, driven by continued pricing power modest expense growth and 150 basis points of year-over-year occupancy gains. Cash NOI increased by 9.4% for the quarter. We remain focused on these key indicators of performance as each flow through to NOI and ultimately, earnings growth for the platform. Our product offering and value proposition continues to resonate with consumers, and we remain well positioned to benefit from healthy demographic trends that support long-term growth. Moving to outpatient medical. Fundamental supporting leasing demand for outpatient continues to be favorable. During the quarter, we executed 1.2 million square feet of leases achieved 3% escalators or above on executions and positive cash re-leasing spreads of 5.4%, with TIs also below historical averages. Year-to-date leasing volumes totaled 3.2 million square feet, and we ended the quarter with total occupancy up 10 basis points at 91%. New leasing comprised of 270,000 square feet with Q3 representing the highest quarter of new leasing starts in the combined company's history. TIs on renewals were only $1.41 per square foot per year and year-to-date leasing commissions were approximately $0.87 per square foot per year. Additionally, we executed another 123,000 square feet of leases in October, and we have another 895,000 square feet under LOI. We are pleased to recognize our property management team whose sector-leading Kingsley client satisfaction results reinforce the consistent strength of our tenant retention and help ensure efficient operations for our clients. Thank you to the entire property management team across the organization for their collective efforts. The combination of consistent operating performance, favorable sector fundamentals and deep tenant relationships positions the portfolio for sustained growth and continued excellence in execution. And turning to Lab. During the quarter, we executed 339,000 square feet of leases, of which 45% were new. And on renewals, we achieved a positive 5% re-leasing spread. Year-to-date leasing volumes totaled 1.1 million square feet, and we ended the quarter with total occupancy of 81%. We continue to see escalators on executed leases between 3% and 3.5%, which supports sustainable long-term growth. Tenant improvement allowances on renewals declined to $1.30 per square foot per year, while corresponding rents rose to $65 per square foot given space condition. For new leases, TIs averaged approximately $15.73 per square foot per year, which when excluding two development leases was approximately $5.50 per square foot per year. In October month-to-date, we executed 22,000 square feet of leases and have an additional 291,000 square feet under LOI. Forward-looking indicators of demand continue to improve. Since Q1, the pipeline has doubled to 1.8 million square feet, about half are evaluating our current unleased availabilities. Each of our core markets is experiencing a similar uptick in demand. We have a healthy mix of discovery stage, clinical stage and commercial face tenants and some incremental demand from tech and AI-based companies. We're encouraged by the strengthening demand profile as we move toward in occupancy bottom and ultimate recovery. The decline in occupancy we experienced in 2025 will flow through to earnings in 2026. Recent leasing, together with the conversion of our active pipeline is expected to contribute to occupancy and earnings starting in late 2026 and thereafter. Moving on to the balance sheet. In August, we issued $500 million of senior unsecured notes at 4.75%. We achieved a spread of 92 basis points with no new issue concession. This execution represents one of the tightest investment-grade REIT 7-year spreads year-to-date. We ended the third quarter at 5.3x net debt to adjusted EBITDA and $2.7 billion of liquidity. We continue to prioritize balance sheet management and disciplined capital allocation to maintain maximum flexibility to pursue strategic investments and fund portfolio growth. Now turning to guidance. We are reaffirming our FFO as adjusted and same-store expectations within our original guidance range. We continue to outperform in CCRC in outpatient medical at or above the high end of our initial segment guidance. In addition, we reduced our interest expense and G&A guidance by a total of $10 million. This reflects better-than-anticipated pricing on our senior notes issuances, technology-enabled productivity gains, and additional synergies related to the merger, as well as timing of certain investments and higher disposition. Moving to sources and uses. Year-to-date, we've completed $158 million of asset sales and loan repayments. We have an additional $204 million of dispositions under a purchase and sale agreement as we take advantage of a strong private market in outpatients. These transactions could close in the fourth quarter or early 2026. And with that, operator, we can move into questions. Operator: [Operator Instructions] Your first question comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Just going to the lab leasing pipeline. It sounds like you said it's doubled since the beginning of the year. I was just hoping we could just double-click sort of what's changed? What's the mix of those tenants? And any sort of qualitative trends that you can highlight? Scott Brinker: Yes. It's a broad mix of tenants. It's Scott, from early stage to clinical stage to commercial stage. So the quantum has doubled, but equally important the mix of new and renewal is much more favorable. Year-to-date, it's been a lot of renewals, which is great. But obviously, it takes new leasing to drive occupancy and a good portion of that pipeline now is new leasing. And that's clearly being driven by the improved sentiment in the sector, improved capital raising. There's been a lot of good data in the sector, and that's being rewarded in the capital markets by the FDA and that virtuous cycle is starting to build, but all starting with great data as the science proves out. So we're encouraged. It's roughly 60 days of activity. Obviously, that needs to continue for that pipeline to turn into execution and then to refill the pipeline. But the trajectory, the momentum is very positive. Ronald Kamdem: Great. And then my follow-up is just on thinking about the capital recycling $1 billion out of potentially outpatient medical, just maybe can you talk a little bit more about sort of the buy side in terms of what potential opportunities you think out there, sort of any financial metrics we should be thinking about in terms of what you're going to be going into. Scott Brinker: Yes. Outpatient has been a great business for 20 years. It's one of the few subsectors in all of the real estate that's had positive NOI growth every year for 2 decades. Great financial crisis. Whatever is happening in the economy, it doesn't matter. That sector still has positive growth because it's a need-driven business, and there is a tremendous push to move things to an outpatient setting. That isn't changing. So we love the business. We think we have not only the biggest, but the best platform in the sector, the deepest relationships, which is key given most of the tenants or health systems. So that was one reason we did the merger 2 years ago. We love the outlook for the business. Scale does matter, especially in local markets, which we have. But not all of our portfolio is in concentrated core markets. We still have a few geographic outliers, and this is a great time in the cycle to take advantage of strong demand for the assets and sell some of those assets that are not as strategic for us, but can still draw great pricing from a pretty deep pool of buyers. It's mostly institutional for the types of assets we own, but it's broad-based and it's a deep pool and I think they're attracted to the strong fundamentals. And obviously, as inflation and interest rates have come down, that sector looks a lot more attractive. Maybe the growth of the economy is a little bit more questionable today and outpatient starts to look a lot more attractive in that environment. So I think all of those things are driving the demand. We have roughly $130 million undersigned contract at a really strong cap rate. We're working on a lot. We feel like it's an opportune time to take advantage of that buyer interest, especially in light of where the stock is trading in light of the outpatient development opportunities we have through our relationships and then the potential for opportunities in the Life Science business, but we have a great balance sheet already. We see a lot of advantages to having even more liquidity as we head into 2026, especially if we can get great pricing. Operator: Your next question comes from Nick Yulico with Scotiabank. Nicholas Yulico: In terms of the lab portfolio. I wanted to see if there was any way to get a feel for like where -- if your leased rate is higher than your occupied rates. I know you guys quote that 81% occupancy and lab in the South. You talked about some of the sort of leasing that happened and even in the works is addressing vacancy. So any feel for just like where the lease rate on assets would be versus in-place occupancy? Kelvin Moses: Yes. Nick, this is Kelvin. I would say that our total occupancy today in lab at 81% is largely in line with the occupied rate. We have certain instances where there are tenants that are probably in more space than they need. So the occupancy is a little bit lower physically. But generally speaking, the total occupancy is in line with the physical occupancy. Nicholas Yulico: Okay. And then just second question is on the impairment for the lab JV. Was that -- what triggered that this quarter and then was it also some sort of decision or functioning of how leasing is actually going for those assets? Kelvin Moses: Nick, it's Kelvin again. So typically, you'll see companies take impairments like this when they sell assets. These are assets that we have high confidence in, we'll continue to own long term but specifically for the unconsolidated JV accounting rules, there are rather specific requirements that you have to evaluate on a quarterly basis. Simplistically, if you have carrying values that fall below fair values for more than a temporary period of time you're required to take the charge. And this quarter, we determined that, that was the case. Specifically, the impairments, not cash, it doesn't impact FFO, but we thought it was prudent to do so this quarter given all the facts and circumstances around these ventures. Scott Brinker: Nick, I would just add, Scott and the team have done a great job leasing up the campus. We're at roughly 60% leased, it's 400,000 feet across seven buildings. The buildings that have been redeveloped are for the most part leased. And there's a couple of buildings that are yet to be redeveloped. We are waiting for leases to burn off and, and that work is now underway, and we're confident we'll be able to lease them up once they open. So it's not a matter of leasing. It's a matter of where the rents, where are the cap rates versus when we did that deal 3.5 years ago and obviously marked up the portfolio to the price that we got when we sold it. Operator: Your next question comes from Farrell Granath with Bank of America. Farrell Granath: I was curious if you could outline your kind of risk list and how that compares to the beginning of the year. And specifically, if you can touch on, if tenants have been adding in or are names finally dropping off as you've been seeing a shift in sentiment? Kelvin Moses: Farrell, this is Kelvin. I'll start. Maybe just to give context to our earlier points, we continue to be encouraged by the pipeline that's been building over the course of the last 60-plus days. And our existing tenant base continues to access the capital markets as it's opened back up, and we're seeing a number of folks that perhaps were a little bit more in focus before that are out of focus today given they're extending their cash runways and they're working towards their next clinical milestone. So the exposure in our portfolio has come down, I would say, pretty meaningfully over the last 60 days. So we still have tenants that we are actively monitoring. The quantum of that, I don't have an accurate number to give you, but I think, again, it's directionally has come down since the start of the year. Scott Brinker: Let me add. There's really two parts to your question that are relevant. There's the size of the watch list. That's part one. Kelvin just addressed that. But the equally important part, in our view, is do those companies have a good chance of raising money? Because there's always going to be tenants in the portfolio that have less than 12 months of cash that we're keeping a close eye on. And today, we feel a lot more confident that those companies can raise money. The challenge in the first 9 months of the year had been we have this group of companies that needs to raise capital. It's normal course business, and it was just a very, very difficult environment for them to raise it. So that second half of the question, I think, is equally important and that has improved pretty dramatically in the last 60 days, and obviously, we hope that continues. Farrell Granath: Great. And I also just wanted to touch on -- I've seen some recent headlines about the influx of demand for the AI companies, especially when it comes to lab spaces and those even converting back to an office. I was curious if you could just add a few comments on how that may impact the supply picture? And do you see stock participating in any of that conversion? Scott Brinker: Yes. Well, there's just pure AI tech companies, and certainly, that's helping the supply-demand dynamic in the Bay Area, in particular, but there's also AI-native biotech research, and that's been very much a positive for our portfolio. We've done a fair amount of leasing with companies that would fit that description, particularly in the Bay Area. In the last year, the pipeline includes them as well. And the notion that they only need office space is just not correct. Generally speaking, the 50-50 type mix of wet lab and office continues to hold for those companies as well. So we view it very positively. They're more likely to raise money. The companies that can attach that to their business profile right now. So we're taking advantage of that, but more generally and longer term, the ability of AI to improve the speed, efficiency, accuracy of drug research is pretty exciting in taking drugs from discovery to IND meaning clinical stage trials in 1 year instead of 5 to 7 years. I mean that has the potential to have enormous positive impact on the business. Operator: Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Good morning, everybody. Scott, I'm just curious, how should we think about the near-term earnings impact from recycling the outpatient medical proceeds from the strategic initiatives and then just that time line around the earnings ramp from reinvesting those proceeds given development does have kind of a little bit of a longer time line to it? And then maybe a sense of what the opportunistic lab investments you're considering today? Is it development? Is it sort of lease-up opportunities versus more stabilized deals? Scott Brinker: Yes. And the $1 billion that we've referred to, keep in mind, only $200 million of that is under contract. So hopefully, we move forward with the balance. It's really strong pricing. If that proceeds, keep in mind that pricing is going to be significantly better than our implied stock price. So I mean it has the potential, depending on use of proceeds to be immediately accretive. We're also looking at opportunities in outpatient development, as well as life science opportunistic investments that we think have the potential to have returns far in excess of the returns we'd be selling at. In terms of those outpatient sales. So one way or another, we're doing this with an expectation that it's going to create pretty meaningful accretion, whether it's day 1 or day 1 in the combination of year 2, 3. But obviously, that is the expectation and intention here. Austin Wurschmidt: That's helpful. And then can you just give a little bit more detail around the average size of tenants in the pipeline for lab, the lab leasing pipeline and whether you're seeing sort of any larger space requirements in the market today? I know previously, you had talked about kind of 30-plus thousand square feet was the sweet spot, but anything larger out there today? Kelvin Moses: Yes. Austin, it's Kelvin. I think that 30,000 square foot marker is still accurate in terms of the pipeline and the opportunities we're seeing. So with the 1.8 million square foot pipeline. There's a lot more activity from new potential clients that are exploring our assets. Scott Brinker: Austin, let me give you one additional piece of color on the acquisitions that we're looking at in life science as well as outpatient development. You can't really look at those just in isolation either. When you think about our investment model that's very much focused in both businesses on doing things in scale in local markets. There's really an ecosystem benefit as well. Like when we do a new development with a health system, that project is accretive, but it also deepens the relationship with that health system and draws or drives additional leasing with that tenant over time. And that's an important part of the consideration for us. That's obviously true in life science, where we've built a 12 million square foot portfolio that's essentially in 5 submarkets. And we want to continue to go deeper in those markets because we think there's great demand and tenant desire to be in those locations. And the more scale we have there, it's proven to have material advantages in terms of winning leasing deals. Austin Wurschmidt: What's sort of the average yield on the outpatient medical developments that you're evaluating today? Scott Brinker: 7-plus percent. Mostly highly produced and compare and contrast that with selling assets that are in 20, 25 years old that 100 basis points or more inside of that. So pretty compelling. Operator: Your next question comes from Seth Bergey with Citi Group. Seth Bergey: I guess my first question is kind of, of the $1 billion. How do you view that in terms of how much of that should we expect to be life science versus outpatient medical versus share repurchases? And then I guess on top of that, do you have like a target percentage of how much of the business you would like to be outpatient medical, life science and the CCRC? Scott Brinker: We do not have fixed allocations, and we're going to be opportunistic. So we're going to protect our balance sheet. Number one, it's a competitive advantage, gives us a lot of flexibility. And these sales will give us even more flexibility, but it could be any of those three that you mentioned in any combination. So no, we're not going to have a fixed allocation of what we're looking at will be opportunistic. Seth Bergey: Okay. And then just my second one, you talked about the strength of the outpatient medical business. what type of spread are you kind of looking for to compensate you just given -- you touched on the early shoots of the life science recovery, but mentioned that real estate is still expected to lag for a little bit. So just any color you can provide on what accretion kind of spread you're looking for there? Scott Brinker: Yes. Thanks, Seth. The underwritten returns on any life science distress. Obviously, each project is going to be unique in terms of size as well as the lease-up that needs to occur, but we'd be looking for certainly double-digit unlevered IRRs for those types of projects. So that would be the criteria there. For outpatient, I think I already covered it at 7-plus percent. So a nice spread to not only disposition cap rates, but also acquisition cap rates. So yes, that's how we're thinking about spreads or relative returns. And obviously, we have to keep in mind the implied cap rate of our stock price as we think about the assets that we're selling relative to buying back stock in an accretive way. So we're really looking at all three of those alternatives and all three of those metrics in terms of relative returns. Operator: Your next question comes from John Kilichowski with Wells Fargo. William John Kilichowski: Good morning. Maybe if we could start just talking about the Trump administration, we've had -- there's been tariffs on branded therapies, but there's also been a major surge in commitments by multinational pharma companies back in the U.S., especially as it relates to R&D. Can you talk to a lot of that's on the manufacturing side, but are you seeing some of that translate into lab space and then a leasing? Scott Brinker: Well, certainly, the regulatory chaos and uncertainty that existed in the first 6 to 8 months of 2025 had a big impact on sentiment in the sector. Obviously, investors making capital commitments are looking for certainty in terms of the environment that they're investing into, and we just didn't have that for the first half of the year. There's been a lot of positive news coming out of Washington and the FDA in terms of making that process more efficient. Our tenants are taking advantage of that. We've had 10 tenants in the portfolio that have received various forms of fast track or regulatory priority reviews, which is a huge positive coming out of this administration. But overall, I think you've seen a lot less negative headlines coming from D.C. on the biopharma sector, including some positives. Like the agreements with Pfizer and AstraZeneca, and that's been a big part of the change in sentiment. So yes, it's been very positive. William John Kilichowski: Got it. And then I know this may be a little early to ask, but I'll give it a shot. I don't know if we can discuss maybe the building blocks for '26 earnings here, especially as you have talked about a potential near-term bottoming in occupancy. Maybe what's realistic for occupancy gains next year, how you're thinking about pricing power? And then maybe on top of that, the addition of -- we've seen some G&A savings this year with your AI platform. What's the opportunity for that to generate even further savings in the next year? Scott Brinker: Yes. I mean, obviously, we'll wait until February to give guidance. But I mean the basic building blocks or 2/3 of the portfolio are doing really well with outpatient in CCRC, life science, obviously, the occupancy loss and there's a bit more to come, as we've described, we'll bleed into 2026. That will have an impact. We disclosed some purchase options and seller financing that will have an impact refinancing. I mean those are the basic building blocks. There's no new surprises there. But I'll just reiterate the obvious, but obviously, we'll give full guidance in February of '26. Operator: Your next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just wanted to see if you could maybe help investors and how you're thinking about how much dilution you're willing to take and how you're going to try to manage that. I mean, I think maybe there's a little bit of a concern that the MOBs, the $1 billion of dispositions will be plowed largely into lab opportunities that may have great growth long term, but maybe weigh on growth near term. So I guess how are you thinking about balancing some of that potential dilution with buybacks and/or other opportunities? Is it the intention that you're going to try to manage earnings somewhat, so to speak, as a result of that? Or how are you thinking about weighing those pros and cons? Scott Brinker: Yes. Well, we're not looking to manage earnings. I heard you say that. That certainly isn't anywhere on the priority list. We're looking to create value. I think when we did the merger 2 years ago, there were concerns, it's turned out to be a huge value creator for the company, not only the synergies, but the recognition of the strength of the outpatient business and the flexibility that, that's providing us right now. So that has turned out to be a huge positive in terms of the capital allocation around that transaction at a time when that sector was pretty out of favor in the public and private markets. Obviously, that dynamic is flipped very much in our favor 2 years later. And we see the building blocks of that dynamic changing for the life science business. It wasn't that long ago when certain investors couldn't get enough of the sector is one of the best performing subsectors in all our real estate for 10 years. Obviously, there's been too much supply. We've had some demand issues because of the regulatory environment. We, as we've described, see a lot of that starting to flip in our favor. It's not going to happen overnight, but we do see a window here to come in at a time when nobody else wants to invest. That's usually a pretty good time to do it. We have the balance sheet to do it, the platform to create value but it might end up being zero. We're very focused on basis and submarket and price and return opportunity, and I can't guarantee that we're going to find anything that meets our thresholds, but I'm optimistic that we will. There's a big opportunity set there, and it's an awfully good time to invest in our view. But again, at the right price and the right submarket. In terms of dilution, it's a $25 billion denominator. So even $1 billion is not a significant number in comparison to the entire company that I don't expect there to be meaningful dilution in any event, even if we plowed the entire thing in the vacant lab buildings, which is not our plan, by the way. Juan Sanabria: And then just a second question. For the balance of the year and maybe into the first quarter, you talked about maybe some slippage in occupancy from some known move-outs and maybe some of the watchlist tenants. Is there a way to put any brackets around how big the further slippage could be before that starts to recover? I think you mentioned in the second half of '26 before the earnings start to benefit from some of that occupancy coming back. But just like what's the risk from here to the trough, I guess, and the components there in? Kelvin Moses: Yes. No, this is Kelvin. I'll start. But again, we continue to be encouraged by the pipeline and the activity that we're seeing, but we recognize that there are still some headwinds within the portfolio that we have to work through we're gaining confidence with these leading indicators and the expirations and nonrenewals that we have for the balance of the year and going into 2026 with our general kind of 75% to 85% retention we'll likely have some occupancy slowdown over the next couple of quarters. And then from there, we'll be able to pick back up again. Occupancy could trend down somewhere in the high 70s before it starts to pick back up again. So I think we're going to be very mindful of the next few quarters in terms of where that goes, but that will be the inflection point that we believe we can start to grow back. Operator: Your next question comes from the line of Richard Anderson with Cantor Fitzgerald. Richard Anderson: So if I could just sort of get pacing or cadence of what you're seeing out of life science. You talked about occupancy bottoming turning on the distressed purchasing engine and then ultimately, pricing power. When do you -- if you had a hazard guess, when do you think those three important points in the life cycle going forward in life science are going to happen? Is the bottoming in early '26 event is the distressed purchasing sort of on top of that and pricing power, maybe 2027 time frame? Is that the way we should all be thinking about it? Scott Brinker: Rich, it's Scott here. And some of it is, I'd call opportunistic. It's not all distress, which is, vacant, empty building. There may be some of that. So that's an important distinction though. Some of it is just opportunistic and therefore a different profile than true distress. But it's not going to play out over a 3-month window. I think this is a 12- to 24-month window as the sector finds a bottom and truly starts the recovery. So it's not like this window is going away. If we do this earnings call in February, we haven't purchased anything yet. That's okay. It's not like the window is going to close next February. It's going to take a little bit of time for the sector to fully recover. I do think the core submarkets are going to come first. I think the big incumbent landlords, and there's only a couple are going to recover faster. Those things, I'm quite confident in. But maybe just to underscore the point that we made here that the sentiment, that the fundamentals are starting to turn in our favor during this conference call alone, we've had one tenant get acquired by Eli Lilly. That's now public. And we had another tenant report very favorable Phase III data, and I think their stock is up 60% or something. So to have -- the point is, we continue to get positive surprises after a couple of years of a lot of negative surprises. We've had a very different change in tone over the last 60 days, and that's continued here into the first 30 minutes of our earnings call. So that's great to see. Richard Anderson: Excellent. I love real-time stuff. And in terms of selling outpatient medical, I still call it MOBs, but that's me. You're not alone in this movement. We're hearing about others that are potentially going to be selling big chunks of MOBs. What would you call -- how would you characterize the buyer pool in terms of where all this might go? Is it going back in the hands of the systems or private equity? How would you describe your audience there? Scott Brinker: All of the above. There are some health systems looking to buy back certain assets. Private equity for sure, it's institutional, high-quality buyers big, sophisticated that are the counterparties at least on the projects we're working on. I can't comment on the others. Operator: Your next question comes from Michael Carroll with RBC Capital Markets. Michael Carroll: I want to circle back on the life science leasing pipeline, the 1.8 million square feet. I mean can you talk about the timing of, of where those transactions are within that pipeline? I mean, how close are they to be signed? And when they sign, how long does it take from them to actually commence? Scott Brinker: Yes, well, the LOI is obviously closest to assign lease execution, and that's approaching 300,000 feet. So the odds of those getting done are obviously pretty high. The phase behind that are what we call proposals. So we're actively negotiating terms, that's roughly half of the pipeline. So those are pretty far along. And then there's tours where you're starting to talk deal terms, they're looking at the space and space planning and all those things, and that's a pretty material part of the balance, and then there's just the inquiries kind of the early stage stuff. So I'd say it's weighted towards kind of the second half of the process between an inquiry and a signed lease. Michael Carroll: And then once they get signed, like how should we think about the commencement timing? I'm assuming, obviously, if it's a new lease or on a development or redevelopment, the commencement is probably, what, 12 months out? And the renewals is pretty immediate. So maybe can you talk about what is the split between new and renewals and the timing of those potential commencements if they do sign? Kelvin Moses: Yes. Michael, it's Kelvin. The -- I'll start with the last question, but the flip between new and renewal is roughly 50-50, I would say. We actually are seeing an uptick in new potential clients that are entering our pipeline as well, a good positive. Generally speaking, from a timing standpoint, the second-generation spaces that we have available to lease are actually in quite good condition. So it's really dependent on the space in terms of how long it will take to get a tenant in there and to commence the lease. You'll see in our executions from this quarter that -- we had limited TIs and continued strength in our leasing volumes. And a lot of that had to do with the quality of the space that we had available to lease. So it's really dependent on the space. We have some spaces that we're getting back that we'll invest capital into and reposition. So some of those could be on that longer 12-month time line that you highlighted, but we could see some commencements happen sooner than that. Operator: Your next question comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess -- I guess, Kelvin or Scott, do you mind just sort of stepping back and giving us a little bit more detail or clarity on sort of this whole occupancy bottoming the risk near term into 4Q, but then really how much of the signed but not commenced leases you have to offset some of this? Because I was just really confused, it sounded like you said occupancy and lease is the same. But maybe if you could just break up like leaving aside the development lease up just the core portfolio. How much of a benefit is there from the losses you see versus the signed but not commenced leases? Kelvin Moses: Yes. And maybe, Vik, just to kind of keep it at the higher level at this point. We do see these leading indicators as favorable signs of the execution opportunities that we have within our portfolio and where occupancy is trending over the next few months or a couple of quarters is somewhere in the high 70s. And that will give us a base to build back from. I think that's important to know. And as we talked about with respect to the pipeline, depending on the quality of the space and the execution time line of the team, we might be able to offset some of those near-term headwinds that we know are coming with some execution. So there's a lot of moving parts there, but I think that's generally good guidance. Vikram Malhotra: Sorry, just to clarify on that, I believe, like, if you just look at the core, the 93.2%, there's some slippage from nonrenewal potential tenant, et cetera, based on kind of our conversation but then there is a benefit from signed but not commenced. So can we -- are you able to just give us a little bit more color on how those two things interact just for the same-store pool? Kelvin Moses: Yes. So maybe just for the fourth quarter, we have about 300,000 square feet of expirations and you'll notice in the footnote in the supplemental, we're putting 186,000 square feet of that into redevelopment. We'll largely offset the redev component of that with new commencements and then we'll have a portion of the expirations that will vacate. So that's kind of the Q4 component. Within that, there could be some additional reduction in occupancy as a result of early terminations or proactive downsizing of tenants that we're negotiating space needs and space planning. So hopefully, that gives you a little bit more context. Vikram Malhotra: Yes. I'll follow up. Just the -- occasion, or if you could expand. I mean, I guess, Scott, you mentioned a lot of interesting events during the call in terms of Eli Lilly and fundraising and stuff. But just -- in the process of bottoming, assuming we have more M&A, maybe using the Eli Lilly as an example, like what does that mean for base needs in your mind? Like is the company that's being acquired your tenant? Do they keep the space? Is there a risk of them downsizing or maybe even expanding. Maybe just give us a sense of like what the M&A piece needs for the tenant for your portfolio? Scott Brinker: Yes, I just saw the headline. So we haven't talked to the company yet. Each situation is different. There are times when the big pharma is buying a platform and they're looking to use that team and science to build a new business opportunity, and that tends to lead to demand for real space or more space, and there's times when they're just buying a drug, in which case, they probably don't need the space anymore. And we've had, I don't know, 100 M&As in the course of the company's history. And it's about half and half in terms of the impact. Obviously, it's a credit upgrade either way. That's a fairly long-term lease, if I remember correctly on a campus that's really full, and we've got some growing tenants. So who knows it may end up being a positive in a lot of ways. But I think the important point is that M&A is just such a huge impact on the ecosystem and recycling capital, creating great exits for those existing investors to plow back into new companies. And the M&A year-to-date is something like 3x 2024, and it continues to grow. So that's just a huge benefit to the entire ecosystem that should drive more demand. Operator: Your next question comes from Wes Golladay with Baird. Wesley Golladay: For the potential acquisition opportunities, do you see a bigger opportunity set for the outpatient medical developments or the opportunistic lab properties? Scott Brinker: Yes. Opportunistic lab is exactly that, opportunistic, and those tend to be big projects. So they're chunky. So they can be big numbers or they could be zero. Our outpatient development is pretty normal course business. There's a number of health systems that we're quite close with and development partners that we work with I'd say that's more of a normal course, steady-state business, a couple of hundred million dollars a year that fit our criteria, which basically means pre-leased with good yields and good health systems in core markets. that's going to be less chunky and more just recurring normal course business. Wesley Golladay: Okay. And then on the last quarter, you talked about the potential change for the inpatient only rule. Are you seeing any uptick in leasing demand or development opportunities from this? Scott Brinker: Yes, the comment period closed. We haven't seen the final rule yet. So nothing has happened there in terms of the inpatient-only rule. But I also said at the time that the market forces are moving more of those services to an outpatient setting regardless of what CMS does. The CMS rule would just accelerate that process, but it's happening either way the payers prefer it, the health system usually prefer it. And certainly, the patients prefer it, which is a pretty important voter in the process. So it's happening either way. It's just a matter of how quickly. Operator: Your next question comes from Mike Mueller with JPMorgan. Michael Mueller: I guess this is kind of a hypothetical question. But if your implied cap was 100, 125, 150 basis points lower, do you think you'd still be looking to monetize parts of the outpatient medical portfolio today? Scott Brinker: The asset sales, we're getting out of noncore markets or noncore health system relationships at great pricing. Yes, we're also looking at some recaps today of core real estate where we're going to retain a meaningful economic interest, maintain the relationship, maintain the footprint, those we would not do if the stock price was more favorable. Michael Mueller: Got it. And I guess my second question, I think you answered part of it. I was going to ask the specific attributes of what you're specifically looking to sell. It sounds like it's -- what age and secondary markets or noncore markets? Scott Brinker: It's mostly market profile. When you look at our outpatient footprint, although it's a national portfolio, we've got 10 to 12 markets that comprise 2/3 or more of our footprint. We love those markets. We have great health system relationships. Critical mass in a growing demographic market that we find attractive. We're looking to do more in those areas. Dallas is an example, Denver, Nashville, other examples you see us do development there as well. So the profile of what we're selling tends to be in markets where we don't have that big critical mass or maybe we don't have the strongest health system relationship. Those tend to be the, the assets that we're looking to monetize and it's a good time in the cycle to do that. Operator: Your next question comes from Michael Stroyeck with Green Street. Michael Stroyeck: I appreciate that the step down in retention and outpatient was largely due to the CommonSpirit leases no longer being included. What have retention rates in recent quarters been if you do back out CommonSpirit. And has there been any sort of decline in retention as the company has pushed pricing maybe a bit harder relative to the sector's history? Scott Brinker: Michael, no, we've been in the 75% to 85% range across the portfolio. We did have a couple of big nonrenewals this quarter that we've known were coming for a long time, just legacy Healthpeak assets that we've owned for years and years and years. But the leasing has been really phenomenal. So like step back for a minute and look at the actual leasing volume we've had among our highest quarters in the history of the combined companies and the economics on the leasing are extremely attractive. We're getting better escalators, renewal spreads that are as strong as we've ever had, very little TI, the term of the leases is long. So same-store investors like it. It's an easy number. It's one number. It's not the most important number. The economics in the cash flow are really driven by the things I just mentioned. And those numbers continue to be very, very favorable. So Mark and the team are really doing a great job on leasing, and we expect that to continue given the fundamentals. Michael Stroyeck: Got it. Understood. Has there been any sort of spread in pricing power between, call it, your health system and nonhealth system tenants? Scott Brinker: There's definitely a distribution in terms of re-leasing spreads and some are 10-plus percent. Others are slightly negative. I'd say it's less focused on whether it's a health system or not and more focused on the quality of the building, the uses that are inside that space that tends to drive that dynamic more than whether it's a health system tenant or not. Operator: Your next question comes from Jon Petersen with Jefferies. Jonathan Petersen: Maybe just one for the sake of time here. So since we're talking about selling properties, I know at times in the past, you suggested that the CCRC portfolio might be something that could be sold at some point. So I'm just curious for an update on how you're thinking about that portfolio as a long-term hold on your balance sheet. Scott Brinker: Yes. We're happy we own it. We're happy we own 100% of it rather than 49% of it. LCS has done an incredible job. We've got a dedicated team, it's worked side-by-side with them to drive value. They're doing an incredible job. Obviously, the fundamentals are good. We have to put some money into the buildings that should pay dividends for years to come. Those buildings look great. Residents demand them. So we've never seen growth out of that business like we have over the last 6 years, even including the downturn. Our compounded growth rates around 9%, including the downturn. I'll just repeat that. It's an incredible performance by that portfolio that we think will continue. So yes, we're happy to hold it for the foreseeable future. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks. Scott Brinker: Thanks for your time today, everybody. Hope you have a great earnings season and hope to see you soon. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Audra, and I will be your conference . At this time, I would like to welcome everyone to the Stellar Bank Third Quarter Earnings Call. Today's conference is being recorded. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the conference over to Courtney Theriot, Chief Accounting Officer. Please go ahead. Courtney Theriot: Thank you, operator, and thank you to all who have joined our call today. Good morning. Our team would like to welcome you to our earnings call for the third quarter of 2025. This morning, the earnings call will be led by our CEO, Bob Franklin; and CFO, Paul Egge. Also in attendance today are Steve Retzloff, Executive Chairman of the company; Ray Vitulli, President of the company and CEO of the bank, and Joe West, Senior Executive Vice President and Chief Credit Officer of the bank. Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking statements as defined in the Private Securities presentation Reform Act of 1995 as amended. We intend all such statements to be covered by the safe harbor provisions for forward-looking statements contained in the act. Also note that if we give guidance about future results, that guidance is only a reflection of management's beliefs at the time the statement is made, and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statements, except as may be required by law. Please see the last page of the text in this morning's earnings release, which is available on our website at ir.stellar.com. For additional information about the risk factors associated with forward-looking statements. At the conclusion of our remarks, we'll open the line and allow time for questions. I will now turn the call over to our CEO, Bob Franklin. Robert Franklin: Thank you, Courtney, good morning, and welcome to the Stellar Bancorp's Third Quarter Earnings Call. I'm pleased to report that we delivered solid results, including increasing our net interest income and our net interest margin. Our balance sheet expansion was driven primarily by deposit growth, reflecting our bankers' emphasis on getting the full client relationship. Credit quality has found its way back into the headlines. While we experienced some charge-offs in the quarter, they were spread over several small credits, most of which were already identified and appropriately reserved. We feel comfortable at our present level of reserve based on our portfolio and the markets that we serve. We have little exposure to nonoriginated credits and only have 3 shared national credits, all with long-standing and additional business ties to the bank. Overall, credit trends remain favorable and our market's stable. Paul will provide more detail on our expenses during the quarter, including some onetime expenses and some increased advertising spend. As we continue to strengthen our capital position, we have repurchased shares, and we have paid down $30 million of our subordinated debt just after quarter end. Our well-capitalized position gives us valuable flexibility and we remain committed to deploying capital in ways to enhance our shareholder value. We are focused on growing our company. We believe that if we continue to be disciplined in building quality assets protecting margins and focusing on full balance relationships, we will drive long-term value for our shareholders. Now I'll turn the call over to Paul Egge, our CFO, for more content. Paul Egge: Thanks, Bob, and good morning, everybody. We are pleased to report third quarter 2025 net income of $25.7 million or $0.50 per diluted share as compared to net income of $26.4 million or $0.51 per share in the second quarter. These -- represent an annualized ROAA of 0.97% and an annualized ROATCE of 11.45%. Key highlights of our third quarter performance were improvements in our net interest income and margin on incrementally larger interest-earning assets. Our balance sheet growth was driven by strong deposit growth, and we feel great about our liquidity, capital and overall balance sheet positioning. So during the third quarter, net interest income was $100.6 million, representing an increase from the $98.3 million booked in the second quarter, largely due to higher earning assets and net interest margin for the quarter. This translated into the net interest margin of 4.2% relative to 4.18% posted in the second quarter. Purchase accounting accretion in the third quarter was $4.8 million, down from $5.3 million in the second quarter. So if you were to exclude purchase accounting accretion, tax equivalent net interest income increased by slightly more to $95.9 million from $93.1 million in the prior quarter, and that change in net interest margin, excluding purchase accounting accretion, was also greater going from 3.95% in the prior quarter to 4% in the third quarter. We're really proud to get NIM excluding purchase accounting accretion back to a 4% level, and we continue to feel good about our ability to defend and perhaps incrementally improve on our top-tier margin profile by focusing on staying true to our core relationship banking model. Walking further down the income statement, we booked a provision for loan losses of $305,000 in the third quarter, which was driven primarily by an increase in our allowance for unfunded commitments and growth in that category. While we did experience $3.3 million in net charge-offs in the third quarter relating to over 10 relationships, most of these were previously identified and already specifically reserved for, therefore, not impacting our quarterly provision. For a year-to-date perspective, our net charge-offs totaled $3.7 million or approximately 7 basis points annualized. Our allowance for credit losses on loans ended the quarter at $78.9 million or 1.1% of loans, which is down slightly from $83.2 million or 1.14% of loans at the end of the second quarter. Moving on to noninterest income. We earned $5 million in the third quarter versus $5.8 million in the second quarter of 2025. This third quarter decrease was mostly due to approximately $445,000 of write-downs on foreclosed assets and other -- lower other noninterest income during the quarter. On to noninterest expense. Our expense increased to $73.1 million from $70 million in the second quarter, primarily due to an increase in salaries and benefits into a lesser extent, increases in professional fees and advertising. Salary benefits expense included severance expenses reported relating to 2 upcoming branch closures in the fourth quarter, which totaled about $0.5 million as well as elevated medical insurance expenses relative to prior quarters. We view our third quarter expenses as an outlier, and we expect fourth quarter expenses to be closer to our run rate for the first half of the year. So all of this drove solid bottom line results of $25.7 million in net income, which continues to fuel our track record of internal capital generation and our very strong capital position. Total risk-based capital was 16.33% at the end of the third quarter relative to 15.98% at the end of the second quarter. Year-over-year tangible book value per share increased 9.3% from $19.28 to $21.08 per share and that is after the effect of dividends and meaningful share repurchases. I should note that our share repurchases in the third quarter was lighter than prior quarters, totaling just under $5 million relative to a total of approximately $64 million in share repurchases year-to-date. In closing, we really like where we sit, both financially and strategically. Even more so, since recent M&A disruption in Texas accentuates our key differentiation among the only truly focused franchises with scale in a competitive landscape comprised of increasingly larger out-of-state competitors. We've built a strong balance sheet that can support quality growth and with growth, we're positioned to deliver positive operating leverage through adding scale to the Stellar Bank platform, while maintaining the financial flexibility to be opportunistic. Thank you, and I will now pass the call back over to Bob. Robert Franklin: Thank you, Paul. And operator, we're ready for questions. Operator: [Operator Instructions] We'll take our first question from David Feaster at Raymond James. David Feaster: I just wanted to start on -- let's start on the growth side. I know somewhat of the decline is strategic, and we've talked about that given your focus on a balanced approach. But I just wanted to get a sense on, first off, what's driving the payoffs and pay downs. How much of that is competition versus just asset sales and those kinds of things? And then just how do you think about the growth outlook as we look forward? I mean, Texas is a very competitive market on 1 hand. And that's -- maybe that could be a headwind. But at the same time, you talked about the disruption and that creates a ton of opportunities, just given the strength of your franchise and your relationships. Just wanted to kind of taking that all together, like how do you think about growth? And just any insights you can provide on that? Ramon Vitulli: Sure, David. yes. So I'll start maybe a little bit with what's impacting the growth when we talk about the payoffs, like you asked the color around that. So payoffs this last quarter were about $50 million more than the previous quarter. So we talked about a run rate of around $300 million of payoffs. They were $330 million in last quarter. Year-to-date, about 44% of our payoffs are related to sale of collateral sale of business. About 25% is kind of in that competitive area of refinance elsewhere. So -- and those are the things that we take a look at around 1, and as Bob already mentioned, us remaining disciplined around full relationships. So some of that, it will go away. But on that refinance elsewhere, if we put our best foot forward to try to keep some of that, but that's some of what we're faced with. On the other component of that in the waterfall is, we call it -- we've talked about it before, but what we call our carry, which is our advances versus our paydowns and scheduled payments. And as Paul mentioned, we had a reserve related to unfunded that continues to grow, but we're still not seeing the lift from that. So compared to the previous quarter, that was almost another $50 million of increase in the payments and paydowns exceeding the advances. So I mean that's an area where we think we will get a lift as we continue to originate loans. We're really pleased with the originations last -- third quarter, we originated almost $500 million of loans compared to $640 million the previous quarter. But the real thing that I think we want to make sure we communicate is just overall year-to-date or compared to last year, first 3 quarters, we're up 62% of loan originations and the mix that we like with a little bit more C&I in that mix. So things are headed in the right direction. We just have to continue to convert on our pipeline. And pipeline remains healthy. I think a little bit of the originations that were down compared to the previous quarter were really due to -- in some cases, it's competitive, obviously, but also just some things that are going to get pushed into the fourth quarter. But the pipeline remains healthy, and we're really pleased with where we stand there. David Feaster: That's great. Maybe touching on the credit side a little bit. Concerns are -- they've gotten heightened in the industry right now. I guess, first, I was hoping you could maybe touch on -- what are you seeing on the credit front? Is there anything that you're seeing broadly that's causing you any concern? And then secondarily, I was just hoping you could maybe touch a bit on your approach to credit. Collateral management, stress testing and ongoing monitor. It seems like some of those are what maybe the investors are concerned about in the industry. So just was hoping you could elaborate maybe a little bit on your process and your approach to managing credit. Paul Egge: Yes. I think -- the best way to manage credit is when they come in through the front door, David. I mean so that's how we manage that most of the time. However, we do stress testing. We do all the things that folks do to monitor portfolios. And we're moving our portfolio from what those 2 smaller community banks into a larger community bank. And it has a different look. I think you see that on our balance sheet as we've gone from where we used to run our banks that say 90% to 100% loan to deposits, we're now down about in the low 80s, we feel comfortable there. We're able to make money there. We're changing the mix of debt. To try to have a little more emphasis on stickier C&I credits. Now -- we do -- we are very careful about how we approach C&I and how that's getting monitored and what we do to make sure that we have solid results around C&I. But we also continue to do real estate loans, and those things have been good to us over the years. We're in a market that continues to grow. And so real estate continues to be a good active place for us to put money. So we're -- I think we would be more concerned, if we are in a less dynamic market, but we're in a very dynamic market all the things that are affecting the world, for that matter, of tariffs and the various things that are happening today, I think, are being absorbed pretty well in Houston and Dallas and the markets that we're in [indiscernible]. So we feel supported by our markets and I think it's about decision-making with them, and that's kind of how we approach it. David Feaster: Okay. That's helpful. And then just wanted to maybe switch gears to the deposit side. I mean your growth was really strong this quarter, cost decline. Just wanted to get a sense of some of the drivers behind that how much of that is new clients versus increasing liquidity or relationships with existing clients? And then just, again, with the liquidity build, I mean, even after paying down borrowings and buy a little bit of security. Just kind of curious what your plans are for some of that excess liquidity going forward? Ramon Vitulli: David, I'll touch -- well, let me touch a quick. On the deposit growth piece. So really pleased there, as we've already mentioned. So of our new deposits that were onboarded in the quarter 51% were to new customers that have not been here before. And we've seen that kind of hover in that 40% to 50% all year, which we really like. And we think that's really a reflection of continued brand awareness of Stellar, our bankers that are really having good success with market share gains. We've had improvement in our Net Promoter Score, really getting into like a best-in-class area there and customer satisfaction is all heading in the right direction. I think that just points to the fact that we continue to bring new customers to the bank as well as this expansion of our existing customer base, which represents that other 50%. But -- so really, the growth is really around those new accounts and the deposits associated in that, that are well exceeding in dollar amount the closed accounts and our carry was nice and gave us a little lift. Robert Franklin: Yes, David, we just feel very strongly that low-cost deposits is something that everyone is going to be fighting over, and it's something we put a big emphasis on in any relationship that we have. And so we're going to continue to do that. I think we've seen some success as we did this quarter. And hopefully, we'll continue to see that as we keep the push on that going forward. We are building some liquidity. And I think deploying that, both in loans and securities is something that we intend to do in the future. But we want to grow the loan portfolio. We want to -- that's where we grow customers and that's how we continue to grow the bank. And it's important to us to continue on that block. A lot of turmoil in our markets, a lot of M&A going on, a lot of -- so it's given us opportunity for customers. It's given us opportunity for new employees and people to join our company, which is great. I think it's -- but it's also had some negatives to it and that you have new players in that want to buy the market, and you're seeing some interesting things around not only pricing, but covenant packages and sort of credit light. And we're not going to join that party. That 1 doesn't fit us and if we have to retreat a little bit we'll do it. But we've been operating in a competitive market for a long time. We feel like we know how to do that. We'll get our share. And if we continue to do the right things, which I think we are, from a customer acquisition standpoint, we'll continue -- we will grow the bank. So that's kind of how we're approaching it. Operator: We'll move next to Stephen Scouten at Piper Sandler. Stephen Scouten: Just following up on the deposits quickly. You've tended to have some seasonal strength in the fourth quarter. Is that something you would expect here this coming quarter as well? Paul Egge: We talk about that all the time because we do have seasonal strength of some of our government banking deposits. And in fact, last year, we had about a $200 million deposits that came in, in the last day of 2024. It's kind of hard to predict as it relates to that. We'll keep you guys abreast, if there's anything that majorly kind of create a meaningful deviation from norm as we did, I think, last year. And [indiscernible] checked how much represents what we would call seasonal excess. So we'll note that when we report the third quarter -- fourth quarter, I should say, if and when some of that tax revenue seasonality comes in before year-end. A lot of it really hits in January and February, and it's kind of gone by March. But sometimes in last year was a great example, where sometimes it comes in right before the end of the year. Robert Franklin: But that's not reflected in this quarter's deposit growth. It doesn't happen until late in the fourth quarter in most government deposit. Paul Egge: Precisely. Stephen Scouten: Perfect. Great. That's great color. -- when you were talking a little bit about the expense ratio, saying it looked like this was maybe a bit of an outlier this quarter and can get back to that $70 million level. What makes this quarter more of an outlier. I know there was the severance payment in there in salaries. But what makes this an outlier? And do you think that kind of $70 million range is the level you can hang around in '26? Or should we see just some kind of general inflation build from here? Paul Egge: I'll say to be more specific. I said that we'll see fourth quarter earnings closer to our first quarter -- or first half run rate than what we posted in the third quarter. So it might not be just as great as the $70 million per quarter we were posting in the first half of the year, but definitely closer to that than the $73 million we posted in the third quarter. Separately, we will see some inflation. I mean as you guys know, we've been focused on holding the line, where we can and really being focused on just that. We feel great about how we've been able to kind of stop the creep in expenses, particularly as it relates to a lot of what we had to build in crossing over the $10 billion threshold. We're in optimization mode on a go forward, and we've been really pleased at how we've been able to do just that, while remixing kind of with attrition and things along those lines in our human capital base. So we feel really good about where we sit. And the goal is to continue optimizing and holding the line as much as we can going into 2026 and beyond. Operator: Next, we'll move to Will Jones at KBW. William Jones: So Paul, maybe just sticking with you and moving to the margin discussion. I mean, if you exclude purchase accounting, we've kind of hit that 4% and those on that felt like kind of the overarching near-term target for you guys. And I go back to your comments on the call about feeling good about the ability just to defend that level, if not even improve from here, but as we think about this next period of Fed easing, will that ability to defend will that really be more of just some tailwinds from fixture pricing? Or do you intend to be relatively aggressive lowering deposit costs from here? Paul Egge: We're going to be focused on lowering deposit costs, where we can that predominantly is going to be on more of your specials and exception level pricing. That's where we've got some index pricing for certain deposit products that we're going to get immediate benefit from when rates change. So we feel really good about kind of the initial repricing dynamics. And then separately, there is some tail trends that are helping us in how our securities and loans reprice. So we're still in a kind of a pretty good backdrop to defend that margin. As the deck get reshuffled at every rate cut, there could be some timing distinctions. But we feel like we've got the benefits are likely to sufficiently mitigate the drawbacks of how those reprices go on. So we're feeling good about the pending. Actually, we're pleasantly surprised to have gotten the 4% NIM, excluding purchase accounting accretion as fast as we did. We certainly did not promise that to the market and do not expect it necessarily to materialize as quick, but we're really pleased that we were able to do that, notwithstanding being a little less loaned up than what our budget and forecast are in our plans to drive loan growth really, are. William Jones: Yes. I mean well done there. And could you just remind us, is there a kind of a terminal interest-bearing deposit beta that you guys are trying to manage to through this cycle? Maybe just as you look at what you were able to accomplish on the uprate cycle? Paul Egge: We don't necessarily think of it in terminal basis, we're trying to gain as much ground as we can where we can. So just like on the upswing, where we didn't -- we weren't as mean, as aggressive and necessarily moving a lot of our kind of base sheet rates. And we're more focused on, okay, how do we manage this exception population and what -- in this index population, how do you really manage your most price-sensitive customers on the deposit side and we're going to continue to do that on the way down. And it's a nuanced approach. We feel like we're approaching it with more discipline than we really ever have in having a game plan for every rate cut and being ready to manage all those conversations and really get the highest beta out of our most -- out of our largest absolute value exception customers. And that's all a reasonable ask and so far has functioned pretty well in the September rate cut. So we'll follow the same game plan as we go forward. William Jones: Yes. Okay. And then maybe to follow-up, when we talked about deposits and the growth that's happened there and kind of the excess liquidity that you have as a result, if we do continue to find the paydown bug a little bit and to the extent loans don't really ramp up in growth meaningfully in the near term. Could you look to be a little more opportunistic adding to the bond book from here? Paul Egge: It's definitely an option. And it's something that we talk about every day, really what is the right size of the bond book, how do we manage our balance sheet best. We feel awesome about the fact that we're building an even more fortress-like balance sheet with strong capital, strong liquidity and a really nice foundation to grow upon. So we think that flexibility can allow us to be opportunistic, when more meaningful loan growth presents itself or when other strategic opportunities can present themselves. So we are very pleased to be having a very healthy and strong balance sheet. Operator: [Operator Instructions] We'll go next to Matt Olney at Stephens. Matt Olney: I want to circle back on the loan growth discussion. And we talked about the elevated pay off few months ago. I'm just curious, when do you expect this to slow? I mean we're seeing rates move lower in the fourth quarter and expectation that continues now for a little bit more. I would think that would just create more payoffs, not less. But just curious what your expectations are as when we could see this pressure ease up? Ramon Vitulli: Matt. So 1 of the things that we will get a lift we will get a lift from our advances exceeding our paydowns and payments. And that's -- when we go back and look at our history of when we were getting a lift, it patterns kind of that it matches up with our loan originations. So as I said, we -- loan originations were up 62%, but we will get some lift there, whether that's -- we may be a couple of quarters away from that, helping us and not taking away from loan growth. So that's kind of in the good news category, I think we're going to have to manage through the fact that we've got the way the portfolio the nature of the portfolio of this $350 million of payoffs that we have, and we'll do our best to try to limit that through some of those loans that refinancing elsewhere to put our best foot forward. But the real story is going to be on that side is going to be the funded portion of the new loans that we originate. So our -- again, our pipeline is healthy. If we're in this like last quarter, $600 million of origination, that's getting us closer to where that will give the fundings even with the payoffs to get us -- as you know, last quarter, we had a slight gain or slight increase in net funded loan balances. So it's just -- it's a matter of delivering on that pipeline and continuing on the path that we've seen in the last couple of quarters and really year-to-date, we said before that we thought growth would manifest in the second half of the year. Of course, we still have the fourth quarter. But going into '26, we feel good that we will pivot to that. Matt Olney: Okay. Appreciate that, Ray. And also want to get the updated thoughts around M&A. We're definitely seeing more M&A deal announcements in your backyard. Just curious about the conversations you're having with strategic partners and expectations for finding a partner for Stellar Bank? Robert Franklin: Yes, Matt, we continue to own conversations. We've talked to a lot of folks. I think you've seen some transactions that we have some interest in and some not. But I think the thing to remember and the thing that we want everyone to understand is that we're very protective of the balance sheet that we've built and the deposit base that we've built. And as we look at partners out there and how they've structured their funding, it would be -- it would not behoove us to join somebody that takes away from the funding base that we have just to be larger. So I think what we want to do is make sure that we find the right partners that think about the world the same way we do and find themselves in a similar fashion. So -- we continue to have conversations. I think there's a possibility that we could be active in this space, but we're going to be careful about how we approach it. Matt Olney: Okay. Thanks for the commentary and I agree, it's a high-class problem to have protecting the balance sheet. And just lastly for me, I guess, over to Paul. Paul, I heard you mention the purchase accounting accretion in the prepared remarks, looking for the updated fair value mark on that portfolio? Paul Egge: I believe that $58.1 million of what's left of the loan discount. Operator: And that concludes our Q&A session. I will now turn the conference back over to Bob Franklin for closing remarks. Robert Franklin: Thank you very much for joining our call today. And with that, we are adjourned. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Cenk Gur: Dear friends, this is Kaan speaking. Thank you for joining our third quarter earnings call. I'm speaking to you from Copenhagen. While I am on the road, I wanted to take a moment to connect with all of you and share my perspective on the current operating environment and how we are positioning ourselves for the period ahead. After my remarks, I will leave the floor to Turker, Ebru and Gulce and our IR team, who will go through the detailed financial results and handle the Q&A. Although I'm not able to stay for the entire call, I'm looking forward to catching up again soon. Before we dive into the numbers, I want to take a moment to talk about the broader macro environment, particularly what we are seeing in Turkiye. As you all know, the strong monetary tightening in April postponed the anticipated margin expansion. Following today's 100 bps rate cuts, we expect the policy easing to continue in measured steps. On the growth side, following a solid pace in Q2, economic activity shows sign of moderation in Q3. We envisage another period of mild economic growth this year around 3.5%. Current account balance remains supportive for exchange rate stability. Looking forward, achieving lasting this inflation will be key to sustaining healthy growth across the real and financial sectors. Monetary measures have successfully restored financial stability and the Central Bank restarted reserve accumulation in May. Gross reserve have surpassed its mid-March level by reaching $189 billion, while net reserves have steadily improved to around $57 billion. Domestic residents still favor Turkish lira assets and deposit dollarization remains weak. A fixed deposit share in the banking system has been stable around 40% levels on the back of the macro prudential measures, keeping Turkish lira deposit rates higher than the policy rate. Foreign capital flows have been on the rise since May. Without a doubt, global conditions generate a conducive environment for the continuance of the existing exchange rate regime and support financial market stability. Let's move on to our bank. Let me start with our overall performance. During the quarter, we delivered healthy loan growth accompanied by across-the-board market share gains, particularly in our core customer segments. This growth was quality driven, fully aligned with our disciplined and selective lending strategy as well as the regulatory requirements. On the funding side, our dedication continued on expanding and deepening customer relationship. This translated into market share gains in low-cost deposits and a strong performance in demand deposits, further enhancing the stability and efficiency of our funding base. This balanced development on both sides of the balance sheet supported a solid increase in net interest income, while our fee income also maintained its strong momentum. At the same time, we remain fully focused on asset quality and risk management. Our prudent underwriting standards, proactive monitoring and well-diversified portfolio continue to support the resilience of our asset base. As a result, we maintained strong solvency comfortably above regulatory threshold. This solid foundation positioned us well to capture growth opportunities ahead while continuing to safeguard the strength and stability of our franchise. We are executing today with discipline while transforming for tomorrow through a clear long-term vision. We have a strong proven business model, which we continue to enhance and adapt as customer needs evolve. Our business models brings together digital excellence, strong customer engagement and strategic investment in technology and our people, all shaping the future of sustainable growth and lasting value for all stakeholders. Let's move to our 3-year strategic plan, where we regularly share transparent updates on our progress each quarter. Execution remains strong with the majority of our 3-year strategic objectives already delivered or well within reach. Our only shortfall remains in Turkish lira time deposit market share, which is a reflection of our funding optimization efforts and the impact of a regulation-driven low level of Turkish lira LDR. Our dedication for customer growth remains fully in place through both customer acquisition and deepening relationship. Backed by a well-structured balance sheet, this forms a scalable, resilient earnings platform with strong momentum and long-term growth potential. Let me leave you with 3 takeaways. First one is we continue to grow selectively and with discipline. Secondly, we manage risk proactively. And lastly, we remain focused on sustainable core revenues that will drive real return on equity in the upcoming periods. I'm very proud of our teams. Their hard work and dedication truly drive our success. A sincere thank you to all people for their commitments. And dear friends, the partners, thank you for your continued trust and support. I look forward to seeing you all again soon, bye for now, Turker and Ebru. Over to you. Kamile Ebru GÜVENIR: Thank you so much, Kaan Bey. We will start now with the first slide on the NII and the revenues. Our net income in the 9 months was up by 17% year-on-year to TRY 38.908 billion, resulting in an ROE of 20.4% and ROA of 1.8%. During the same period, we had solid revenue growth, up 48% year-on-year to TRY 155.970 billion, led by robust fee generation and renewed NII momentum during third quarter. To put in numbers, our quarterly swap adjusted NII improved notably by 48% [ quarter-on-quarter ], supported by disciplined balance sheet management, while strategic investments, deepening client relationships and strong cross-sell execution continue to fuel fee growth. Together, these drivers further strengthened our recurring revenue base and the solid NII recovery this quarter underscores how we're leveraging our strong solvency position to deliver profitable growth and our balance sheet flexibility. Strong growth alongside robust solvency highlights our agility and risk reward discipline. As we move ahead, our sustainable growth mindset, solid balance sheet and analytical capabilities will drive margins further. Moving on to the balance sheet. We achieved a 28% year-to-date growth in TL loans, well on track to meet our full year loan growth guidance of over 30% shared at the start of the year. On a quarterly basis, our TL loan growth of 13% led to across-the-board market share gains, while risk discipline remained intact. Please also note that our robust growth achieved is in full alignment with the loan growth regulations. During third quarter, we captured 90 basis points of market share in business banking loans among private banks, illustrating our targeted focus on segments with growth potential. Building on our leadership in consumer lending, we expanded our presence further, capturing 30 basis points additional share among private banks. This demonstrates our readiness to capture new opportunities while managing risk. On the FX book side, we grew by 4.1% quarter-on-quarter and 5.1% year-to-date, capturing 30 basis points market share gain among private banks during the quarter. The increase was mainly driven by government-backed infrastructure projects, multinationals and blue-chip corporates, reflecting a prudent, quality-focused growth strategy, fully aligned with regulations. Please also note that we have a solid pipeline, indicating upside potential to our mid-single-digit foreign currency loan growth guidance for the full year. Moving on to the securities. Our security portfolio composition demonstrates our balanced approach with a focus on yield maximization, 69% of our securities are TL, while we have selectively increased our positioning in the foreign currency side through proactive Eurobond investments. This is underlined by a robust 21% year-to-date growth in our foreign currency securities in dollar terms. We are well positioned with long duration, comparatively higher yielding TL fixed rate securities, which will support book value growth going forward. To put in numbers, 65% of our TL fixed rate securities are classified under fair value through other comprehensive income. Our TLREF index bond portfolio offers decent spread. While our CPI linkers offer positive real rate and its share in total has actually declined since 2022 by 33 percentage points. Our active yield-focused management of the securities portfolio has supported timely adjustments to market dynamics and will underpin margin resilience in the periods ahead. Moving on to the funding side. We effectively utilized our flexible balance sheet and strong deposit franchise while optimizing our funding costs. At the same time, we successfully strengthened our TL deposit base, capturing notable market share gains in both demand deposits and widespread consumer-only segments. Our TL demand deposit market share among private banks increased quarter-on-quarter by 190 basis points, reaching a robust 18.6% as of third quarter. Accordingly, TL demand deposit share in total TL deposits advanced by 300 basis points year-to-date to 16%. Share of total demand deposits in total deposits also excelled by around 500 basis points to 33% during the same period. Meanwhile, our strong customer engagement helped us achieve a 40 basis point market share gain in the sub TRY 1 million TL time deposits, reaching 16.5% in third quarter. On top of our strong and widespread deposit base, our low TL LDR, which, as you can see, was partially utilized for growth opportunities during the quarter, is still offering substantial room for funding cost optimization in the coming period. Moving on to P&L. NIM recovery resumed in third quarter as expected, following the temporary margin pressure in second quarter due to the pause and the reversal of the rate cut cycle. Our swap adjusted net interest margin expanded by 73 basis points quarter-on-quarter, supported by both improved funding dynamics and well-positioned loan portfolio. Please note that our CPI normalized quarterly NIM improvement was also strong at 50 basis points after adjusting for the impact of CPI linker valuation change based on the revised October to October CPI estimation of 32.5%. It is worth to note that our weekly NIM trend towards the end of the quarter indicates ongoing progress in margin improvement for the fourth quarter. Our unwavering focus on profitable growth and effective funding strategies will remain key drivers supporting NIM evolution. On the other hand, the disinflationary phase and the magnitude of the upcoming rate cuts will continue to influence the extent of the quarterly NIM improvement. As a reference, the underlying year-end policy rate assumption of our revised guidance in July was at 36%, whereas the current expectations actually point to a tighter environment. Moving on to the fee slide. Our net fees advanced by 67% year-on-year, reflecting innovation, strong customer engagement and diversified offerings. Our diversified fee base remains a key strength with solid contributions from every business line. To name some of them, first, net payment systems fees advanced by 76% year-on-year, reflecting effective customer engagement and targeted campaigns. Second, net bancassurance fees surged by 77% year-on-year, backed by our advanced digital solutions actually, which are covering around 80% of our sales. Third, net money market transfer fees rose by 58% year-on-year, reflecting higher transaction volumes and digital channel migration of transactions. Our strong market positioning in key business lines ensures a diversified and resilient fee base throughout the rate cut cycle, offsetting the cyclical impact of interest rate-driven payment system fees. While the banking sector fees benefited from the rate environment, our market share gain among private banks reflects the bank's inherent strength in fee generation and ongoing focus on sustainable growth. I am very pleased to share that the fee growth once again outpaced OpEx, lifting our fee to OpEx ratio to 104% as of 9 months. Accordingly, our fee to OpEx ratio showed an 18 percentage point increase year-to-date, underlining our continued execution on customer-driven revenue growth and disciplined cost control. On that note, let's move on to the OpEx. The year-on-year increase in operating expenses was limited to 35% in 9 months, underscoring our strong cost control and operational efficiency. This realization is still evolving below our revised guidance of around 40% for the full year. Moving on to asset quality. Retail-led NPL inflows continue to be persistent trend across the sector. During this period, our disciplined risk management framework has enabled us to optimize the loan portfolio while preserving sound asset quality. This was supported by excellence in advanced analytical capabilities across the retail segments, automated and AI-based credit decision models, diligent tracking and individual assessment of our corporate and commercial loan portfolio as well as our prudent provisioning. Our NPL ratio remained at 3.5%, fully in line with our full year guidance. Meanwhile, the share of Stage 2 plus Stage 3 loans representing potentially problematic exposures remains low at 9% of our gross loan portfolio. Please also note that the restructured loans represent only 3.2% of the total loan portfolio. In 9 months, our total provisions reached almost TRY 68 billion, reflecting our continuous provision reserve buildup. Meanwhile, our coverage ratio for Stage 2 and Stage 3 loans stands strong at 34.3%, mirroring disciplined risk management practices. Excluding currency impact, our net cost of credit increased to 230 basis points on a cumulative basis, mainly driven by ongoing retail-led inflows and also further strengthening of our already strong coverage ratios. Hence, our full year cost of credit may slightly exceed the upper end of our guidance range of 150 to 200 basis points by the year-end. Our total capital, Tier 1 and core equity Tier 1 ratios without forbearances remain robust at 17.2%, 13.6% and 12.4%, proof of resilience alongside solid growth. As for the sensitivity, as we share every single quarter, 10% depreciation in TL results around 29 bps decrease in our capital ratios, while the impact diminishes for higher amounts of change. And 100 basis points increase in TL interest rate results in 9 basis point decline in our solvency ratios, again, demonstrating a limited sensitivity and the strength of our capital buffers and also declining as the interest rates go higher. So solid capital strength anchors resilience and long-term profitable growth. This slide highlights the snapshot of our 9 months financial performance. As a final note, across the board, strong loan growth, improving NII performance, along with robust fee income generation led to strengthened core revenue momentum. That said, the ongoing disinflation process and the magnitude of the rate cuts will determine the extent of the NIM improvement. Going forward, customer-centric growth will remain our main engine of sustainable profitability, supported by robust fees, disciplined operations and prudent risk management. Before moving on to the Q&A, I'd like to share a few highlights regarding our nonfinancial performance. As highlighted in our ESG video, we sustained a strong momentum, advancing our 2025 sustainable action plan with measurable results. We are on track with our long-term sustainability goals and notably have reached 74% of our sustainable finance targets as of third quarter. We are proud to pioneer a tailored banking program via Akbank's women platform, offering integrated financial and social benefits to women customers. We strengthened our internal engagement through the climate ambassador program in the third quarter, empowering Akbankers to foster a green future. With our consistent performance in climate strategy, governance and social impact, we maintained our leadership position, sustaining a AA score in MSCI, which was just updated this month. All these efforts reflect our continued commitment to building a low-carbon and inclusive economy in line with our long-term objectives. This concludes our presentation. Kamile Ebru GÜVENIR: And we are now moving on to the Q&A session. Please raise your hand or type your question in the Q&A box. And for those of us joining by telephone please send your questions by email to investor.relations@akbank.com. And as I see, there are a few hands up already. And the first question comes from Mehmet Sevim. Mehmet Sevim: I just had one question on the trajectory of margins. And maybe starting with the 3Q performance, which looks really strong and with the 73 basis point expansion this quarter, I just wanted to understand if this was completely in line with your expectation going into the third quarter? Were there any aspects that surprised you, such as loan or deposit pricing, behavior of households or corporates or anything in this quarter? And then secondly, just going into the fourth quarter, you already indicated the NIM trajectory from here depends on the policy rate understandably. But with what we know today, where do you see the exit NIM? And how should we think about it into the early quarters of 2025 -- 2026, apologies? Türker Tunali: This is Turker. Thank you very much for joining the call. Let me start with the third quarter and then move on to the fourth quarter of '26 to share some thoughts on '26. Actually, as you have rightly mentioned, so there was a strong recovery in our quarter NIM in the third quarter, mainly coming from the deposit cost easing. That was actually in line with our expectations. But having said that, actually, when we dive into deep, as you may recall, by the end of June, we had this like easing on the upper bands of policy of Central Bank funding decrease. So there was an indirect rate cut. And on top of it, we had another rate cut in July. We were successfully able -- like we were able to reflect these rate cuts into our deposit pricing as a result of which our core spread from second quarter into third quarter has improved by roughly 3 percentage points. But after the latest rate cut in September, as you may have followed from like market data, like second half of September, I am referring to. This deposit rate -- deposit cost easing has stopped somehow, maybe due to the ratio requirement of the Central Bank. But at the end of the day, that latest rate cut was not reflected into like deposit pricing. Now we are at the beginning of the fourth quarter. Let's wait and see actually how the -- like the coming weeks will evolve. Also not to forget like a partly a week ago, we had this monthly reporting period, and maybe that was one of the reasons of this pricing behavior in the market. So we will be observing how the upcoming days will evolve also after this -- after today's rate cut. So it will definitely impact our net interest margin in the fourth quarter. But having said that, I can say like the net interest margin starting into the fourth quarter is surely above the third quarter figure, but the magnitude of the improvement will be important since after today's announcement of Central Bank, probably last rate cuts will be also a bit more moderate. Therefore, actually, it puts some pressure on our full year NIM guidance in the range of 3% to 3.5%. So it's very likely that we may like stay behind this. But definitely, this rate cut cycle will further help us to improve our net interest margin also in the upcoming year as well. Maybe in the past, we were talking with some net interest margin peaks in '26. But probably like as of today, what we are like forecasting, this rate cut cycle will be more like gradual in '26. Therefore, we may see a gradual net interest margin improvement throughout the year rather than seeing a peak in the first quarter or in the second quarter. So that's what we are currently observing. But at the same time, so to offset some of this net interest margin maybe gap, our growth has exceeded our expectation. And it's very likely that we will be beating our full year loan growth guidance by the end of the year. So just recall, so mid-single digits for FX and 30% for TL loan growth, we will be probably ending year above this level, which is also currently increasing our Turkish lira LDR. So we are like in a way, operate in a more optimized manner. And also, we are funding roughly 20%, 25% of our TL balance sheet via wholesale funding, where we are fully benefiting from the rate cut cycle, albeit it is a bit maybe more moderate, but that's how it is at the moment. Kamile Ebru GÜVENIR: The next question comes from David Taranto. David Taranto: I have 3 questions, please. The first one is about this year. The 25% ROE target appears quite ambitious considering the 20% ROE achieved in the first 9 months of this year. Could you please elaborate on how you see the full year ROE outlook evolving following the third quarter results? Second question is a follow-up on NIM. In the last quarterly presentation, you mentioned expectations for NIM to reach 5.5% in the fourth quarter of this year and towards 6% in the first half of next year. And given the changes in the macro outlook, do you still see this trajectory as achievable? To my understanding, you now see the peak NIM at a lower level, but you do not expect an immediate normalization. You see it hovering around those levels for some time. Third one is about the fee. The fee income continues to show strong momentum. The year-on-year growth accelerated this quarter despite regulatory changes on the debit cards. When do you anticipate this growth to begin decelerating? And what factors would likely to drive that shift? And perhaps I could squeeze one more. The percentage of Stage 2 loans remain below the sector average, but there has been a large increase in restructured loans in this quarter. Are these driven by unsecured retail loans or business loans? And could you please elaborate a bit on your strategy here? Türker Tunali: David, let me start with the ROE. So definitely, so this gap on the -- potential gap on the net interest margin guidance side may put some limitation to like achieve this 25% ROE guidance. So probably we are going to end the year in between the existing level and 25% guidance. Definitely, the NIM improvements going forward will impact the level of ROE improvements in the fourth quarter. With regard to our like previous talks and the previous earnings call, so definitely, this delay in the rate cut cycle, just recall, when we made this guidance revision, we were anticipating policy rate to come down to 36% by the end of the year. But nowadays, we are more like 38% level. So at this 2% deviation. So will definitely also impact our exit NIM. But surely, exit NIM will be like much higher than the third quarter NIM, but maybe not at this 5%, 5.5% levels. And the improvement trend, as I answered Mehmet's question, probably the NIM improvements will be like more like in a step form like with gradual improvement. But definitely, like next year's NIM will be significantly higher than this year's NIM. That was your second question. And third question, fee income. Yes, our third quarter fee income performance wise was quite strong. That was also driven by our growth trend in the third quarter. It has also positively impacted our fee income growth. And currently, our year-on-year fee income growth is above our guidance, and we are expecting to end the year again at similar levels between the existing level and the full year guidance. And this latest regulatory change on the debit card side will impact fourth quarter, but its magnitude is more moderate. So it's not that significant. Probably into next year and maybe also into fourth quarter and into next year, the Central Bank's decision with regard to interchange commission caps will be important as we -- as you know, it hasn't been touched so far, which was also one of the reasons why this year's fee income growth was also way above the initial guidance of 40%. But assuming with the upcoming rate cut cycle and with some also central banks starting to reflect these rate cuts into interchange commissions, we may expect some moderation, but the aim of Akbank will be again to continue with this enhanced fee income generation capacity also as a result of our customer acquisition efforts. So definitely, we will be aiming to preserve this superior fee to OpEx ratio. We may see some moderation there, but our ambition will be always to stay at this 100% levels. Finally, with regard to stage -- not Stage 2, but yes, Stage 2 was almost the same at the same level, but the ratio of restructured loans increased from 2.6% to 3.2%, so only 0.6% increase. And just recall, by the end of the second quarter at Akbank, we had the lowest restructured loans, not only in nominal terms, but also as a percentage of total loan book. And this slight increase was mainly driven by the restructuring scheme of BRSA. As you may recall, that restructuring scheme was also -- was made available for credit card customers with not -- without overdue status, but having rolling over some of their debt. So we had to respond to them when the customer was coming with some restructuring demand. That's the main reason. But just to recall, 3.2% like probably will be, again, like a quite low figure when we see the sector figures in the coming weeks. And as Ebru has mentioned, we continue to further improve our provisioning charge. Therefore, our cost of risk is currently slightly higher than the full year guidance, and we may end the year slightly higher than the guidance, but it's like bottom line impact is not that material compared to the NIM impact. But I think so, it's a more prudent approach. I hope I was able to answer your questions? David Taranto: Yes, all good. Thank you. Kamile Ebru GÜVENIR: The next question comes from Konstantin Rozantsev. Konstantin, we cannot hear you. Okay. I guess I'm just looking into the written questions. They're mainly regarding NIM and cost of risk, and we've answered both of them. I don't know if there are any further questions. Another -- Konstantin is now again coming in. I guess this is a different Konstantin. Konstantin, please go ahead and ask a question. Konstantin Rozantsev: Could you please confirm, if you can hear me? Kamile Ebru GÜVENIR: Yes, we can hear you now. Konstantin Rozantsev: I had 2 questions, which I wanted to ask. The first one is on the retail FX deposits. So I see in the sector data that in the recent weeks, there has been some increase in the stock of retail FX deposits even on parity adjusted basis. So could you please confirm why is it happening? Well, is it completely explained by the fact that there are these KKMs, which are maturing and which have been moved into FX deposits? Or is there also some elements that regular lira deposits are being moved into FX deposits as well? So that's the first question. Second question, could you please comment if you have done any stress test on the loan quality in different macroeconomic scenarios. And if yes, then what do the results of the stress tests suggest? Do you have some specific examples in mind and some particular scenarios in mind saying that these scenarios lead to the high pressure or like large pressure on the loan quality. So could you please quantify these scenarios if you did this stress test? Türker Tunali: Konstantin, this is Turker. With regard to your first question, this FX deposit increase, as you mentioned, is mainly due to the parity change. Currently, gold deposits make up a significant part of FX deposits in the system. So therefore, actually, the gold price change has -- is impacting the level of FX deposits. But other than that, when I really look at our own portfolio, the strong TL deposit base is there and the shift from TL into FX is not material. Surely, with the phasing out of the KKM scheme, the remaining small part of KKM modelers are switching to FX. But it was in a way, FX indexed deposits. But other than that, there is no behavior change in the customers. With regard to the stress, surely, we are always monitoring our portfolio like in different ways. We are applying different stress scenarios into our capital. But in all these stress tests, we preserve our strong capital. But other than that, there isn't really currently any specific sector or area where we feel concerned. And when you look at our loan portfolio breakdown, there [ isn't ] a sector concentration. And it is really like in every sector, there are like customers with a better asset -- with a stronger financial performance and maybe a weaker financial performance. And according to that, we are continuously changing our lending criteria in terms of collateral version, in terms of duration. So that's how it's. Konstantin Rozantsev: Okay. And sorry, just a third quick question. Do you have any number in mind for cost of risk for next year, 2026 in the base scenario? Türker Tunali: Actually, currently, we are in our budgeting process, and we will be sharing our guidance by the end of -- probably by the end of January. But maybe as a reference point, probably it will evolve at similar levels like in '25. Kamile Ebru GÜVENIR: Okay. At this moment, I do not see any further hands up for questions. So I guess we're coming towards the end. There are no written questions that are different to the questions that have been actually asked. So this concludes our earnings webcast. Thank you all for joining us today. Please do not hesitate to contact our team if you have any further questions, we're always glad to help. And we also look forward to staying in touch in the upcoming conferences. We'll be in Dubai for the Jefferies Conference. We will be in London for the Goldman Sachs Conference, and we'll be actually in Prague for the WOOD's Conference. So if you're attending, we look forward to seeing you there, and bye for now.
Operator: Hello, and welcome to the Flagstar Bank NA Third Quarter 2020 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. You may begin. Salvatore DiMartino: Thank you, Sarah, and good morning, everyone. Welcome to Flagstar Bank's Third Quarter 2025 Earnings Call. This morning, our Chairman, President and CEO, Joseph Otting; along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith, who will discuss our results for the quarter and the outlook. During this call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the Investor Relations section of our company website at irflagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please refer to the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us. When discussing our results, we will reference certain non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for a reconciliation of these non-GAAP measures. And with that, I would now like to turn it to Mr. Otting. Joseph? Joseph Otting: Thank you, Sal, and good morning, everybody, and welcome to our first quarterly earnings as Flagstar NA. We are very pleased with the operating results this quarter. Our third quarter performance provides further tangible evidence that are successfully executing on all our strategic priorities. Our operating results improved significantly throughout the year and during the quarter as many of our key metrics continue to trend positively. From an earnings perspective, our adjusted net loss of $0.07 per diluted share narrowed substantially compared to the second quarter, while our pre-provision net revenue continues to trend higher, putting us on a path to profitability. In addition to the improvement in earnings, we had several other positives during the quarter, highlighted by this was a breakout quarter in our C&I business as we originated $1.7 million in new loan outstandings and realized overall net loan growth of $448 million in the C&I portfolio. Our net interest margin expanded for the third consecutive quarter, up 10 basis points to 1.91% compared to the second quarter. And our operating expenses remained well controlled and were down year-over-year $800 million on an annualized basis, significantly ahead of our plan. Criticized and classified assets continued to decline, down $600 million or 5% on a linked quarter basis and $2.8 billion or 20% year-to-date, while nonaccrual loans were relatively stable. We had another strong quarter of multifamily and CRA payoffs of $1.3 billion, and this has continued the trend over the last couple of quarters where we've been above our forecast on real estate payoffs. And our provision for loan losses decreased 41%, while our net charge-offs declined 38%. Now turning to Slide 3 of the presentation. We have highlighted the key management areas that we have focused on and how we have performed in each category. First, to improve our earnings, we have reported smaller net loss every quarter for the past year due to a combination of factors, including margin expansion and cost reductions. Lee has a slide later on that he'll cover this in detail, but the trend line on this lines up very well with what we've communicated about a return to profitability for the company. Second, we continue to implement our commercial lending and private banking strategy, which I will discuss in more detail shortly. And third, we proactively managed our multi-family and commercial real estate portfolio to continue to reduce our CRE concentration. And fourth, our credit quality profile, which has resulted in net charge-offs as we are starting to see signs of stabilization in the loan portfolio. The next several slides highlight the tremendous progress we've made in our C&I business. Starting on Slide 4, this was a breakout quarter for our C&I lending. Our strategy in the C&I space really began after the June 2024 strategy as we hired Rich Repetto to come in and lead our commercial, private banking and commercial banking strategy. This strategy focuses on 2 primary businesses, specialized industries and corporate and regional commercial banking. Both of those gained momentum in the third quarter, driving C&I loan growth up nearly $450 million or 3% versus the second quarter. This was the first positive growth quarter since early last year. Our 2 strategic focus areas led the growth with total loan growth of $1.1 billion, up 28% compared to the prior quarter. On the next slide, you will see the positive trends in new commitments and new loan originations over the past 5 quarters. Compared to the second quarter, new commitments increased 26% to $2.4 billion, while originations grew 41% to $1.7 billion. More importantly, you can see that the contribution to this growth was from our 2 strategic focus areas was quite impressive. Specialized Industries and corporate and regional commercial banking experienced a 57% or almost a $750 million increase in commitments to $2.1 billion versus the prior quarter. Originations in these 2 areas increased 73% or nearly $600 million to $1.4 billion. Both areas have seen a consistent upward trend since the third quarter of last year, reflecting steady pipeline growth and a high success rate in converting opportunities. Just as important as our C&I pipeline, which currently stands at $1.8 billion on commitments, up 51% compared to the $1.2 billion at this time last quarter, providing strong momentum for the fourth quarter C&I loan growth. Also important is the number of new relationships we've added. Year-to-date, we've added 99 relationships to the bank, including 41 just in the third quarter. I believe these 2 data points reflect the industries we chose to focus on and the talented individuals we brought into the company, most who are mid-career bankers with 25 to 35 years of experience in their respective industries and have impressive Rolodexes. So far in 2025, we have doubled the number of relationship bankers and support staff in our 2 main focus areas to 124 and plan to add another 20 in the fourth quarter. Turning to Slide 6. This provides an overview of our specialized industry business and the growth trends both in commitments and originations over the past 5 quarters. You can see they had strong growth in both commitments and originations during the third quarter. Slide 7 provides a similar overview of the corporate and regional banking business. This business also had a very strong quarter in both total commitments and originations. We believe it has reached an inflection point after successfully building out 4 new segments and reinvigorating legacy businesses, showing that our relationship-based strategy is yielding positive results. We expect to see further growth in the C&I business as existing bankers continue to deepen their banking relationship and the addition of new bankers. Additionally, we see potential opportunities from recent merger activity. Many of these are right in our core markets to selectively add talented bankers as well as winning new business relationships. The next slide lays out the road map we employed to solidifying the balance sheet and reposition the bank for growth. This is a little bit of a down history lane, but we have increased our CET1 capital ratio by nearly 350 basis points, ranking us among the highest, best capitalized regional bank amongst our peers. We also fortified our ECL through a rigorous credit review process where we reviewed virtually every single multi-family and commercial real estate loan. We significantly enhanced our liquidity position and we reduced our reliance on wholesale funding, including flub advances and brokered deposits nearly $20 billion year-over-year, lowering our cost of funds and boosting our net interest margin. And in addition to what the items are identified on this slide, there could be many more. Obviously, our expenses, our deposit costs and our risk governance are other areas that we're heavily focused on. Now turning to Slide 9. You can see the impact on our adjusted EPS from the balance sheet improvements I just talked about on the previous slide. Our adjusted diluted loss per share has consistently and significantly narrowed over the past 5 quarters, including a 50% quarter-over-quarter reduction in the third quarter loss to $0.07. Now with that, I'd like to turn it over to Lee to review our financials. Lee Smith: Thank you, Joseph, and good morning, everyone. During the third quarter, we continued to execute on our strategic vision to make Flagstar 1 of the best-performing regional banks in the country. We achieved net interest margin expansion of 10 basis points quarter-over-quarter, paid off another $2 billion of high-cost brokered deposits as we further reduced our funding costs and continued to demonstrate excellent cost controls, continuing the surgical approach to cost optimization of the last 9 months. Our unadjusted pre-provision net revenue improved by $14 million quarter-over-quarter, while our adjusted pre-provision net revenues improved $6 million versus the second quarter. On the credit side, multi-family and CRE payoffs were again elevated at $1.3 billion, of which 42% was substandard. And criticized and classified loans declined about $600 million or 5% during the quarter and 19% or $2.8 billion on a year-to-date basis. Net charge-offs decreased $44 million and the provision decreased $24 million, both compared to the second quarter. And we ended Q3 with a CET1 capital ratio of 12.45%. As Joseph previously mentioned, we had net C&I loan growth during Q3 of approximately $450 million following the origination of $2.4 billion of new C&I commitments, of which $1.7 billion was funded. We're very pleased with the performance of our C&I businesses. We've surpassed our target of $1.5 billion of funded C&I loans per quarter and believe we can fund $1.75 billion to $2 billion per quarter going forward assuming no change in market conditions. We will also start originating new CRE loans in the fourth quarter that are of high credit quality and geographically diverse. We've also started to experience growth in our health investment residential portfolio, which increased $100 million on a net basis. We're doing exactly what we said we would do, and I want to complement the entire Flagstar team on another successful quarter. Now turning to the slides and specifically Slide 10. This morning, we reported a net loss attributable to common stockholders of $0.11 per diluted share. We had the following notable items in the third quarter. First, we had a $21 million fair value gain on a legacy investment in Figure Technologies following its September IPO. Second, we recorded a $14 million increase in litigation reserves related to the settlement of 2 legacy cyber matters dating back to 2021 and 2022, 1 of which involved a third-party vendor. And third, we had $8 million in severance costs related to FTE reductions. Therefore, on an adjusted basis, after also excluding merger expenses, we reported a net loss of $0.07 per diluted share, significantly better than last quarter and in line with consensus. On Slide 11, we provide our updated forecast through 2027. We tweaked our 2025 noninterest income assumptions resulting in full year 2025 adjusted diluted EPS and in a range of minus $0.36 to minus $0.41 per diluted share. Our guidance for both 2026 and 2027 remains unchanged. One of the highlights this quarter was the double-digit increase in net interest margin. Slide 12 shows the trends in our NIM over the past several quarters which expanded 10 basis points quarter-over-quarter to 1.91% and has now increased for 3 consecutive quarters. In September, our NIM was 1.94% compared to 1.91% for the third quarter, and we expect to see margin improvement going forward, driven by a lower cost of funds as we manage our cost of funding lower lower-yielding multifamily loans paying off a path or if they remain with Flagstar resetting at higher rates, ongoing growth in the C&I and other portfolios and a reduction in nonaccrual loans. Turning to Slide 13. Another highlight this quarter was the decline in noninterest expenses. Our noninterest expenses remained well controlled as they declined another $3 million in the third quarter and are down 30% year-over-year or approximately $800 million on an annualized basis. Slide 14 shows the growth in our capital over the past 5 quarters and the strength of our CET1 ratio. At 12.45%, our CET1 ratio ranks amongst the best relative to our regional bank peers. We will continue to prioritize reinvesting our capital into growing the C&I and other portfolios as we remain focused on diversifying the balance sheet and growing earnings. Slide 15 is our deposit overview. Similar to last quarter, we further deleveraged the balance sheet by paying down $2 billion of brokered deposits at a weighted average cost of 5.08%. Going back to the third quarter of 2024, we have now paid down almost $20 billion of flub advances and brokered deposits. In addition, approximately $5.6 billion of retail CDs matured during the quarter at a weighted average cost of 4.50%. We retained approximately 85% of these CDs and they moved into other CD products that were approximately 30 to 35 basis points lower than the maturing product. In the fourth quarter, we have another $5.4 billion in retail CDs maturing with a weighted average cost of 4.30%. These deleveraging actions, CD maturities and other deposit management strategies have allowed us to reduce deposit costs by 13 basis points quarter-over-quarter and liability costs by 10 basis points. We also saw an increase in interest-bearing deposits of $1.5 billion as a result of increased commercial, private bank and mortgage escrow balances. We continue to actively manage our cost of deposits and are targeting a 55% to 60% deposit beta on all interest-bearing deposits with the Fed rate cuts. Slide 16 shows our multi-family and CRE par payoffs for the quarter, we continued to witness significant par payoffs of approximately $1.3 billion, of which 42% or about $540 million were rated substandard. Approximately $195 million of this quarter's payoffs were multi-family greater than 50% rent regulated. We continue to witness strong market interest for these loans from other banks and from the GSEs. The par payoffs are also leading to a substantial reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have declined $9.5 billion or 20% since year-end 2023 to about $38 billion, aiding our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 C&I and 1/3 consumer. In addition, the payoffs have led to a 95 percentage point decline in the CRE concentration ratio to 407% since year-end 2023. The next slide is an overview of our multi-family portfolio, which has declined 13% or $4.3 billion on a year-over-year basis. Our reserve coverage on the overall multi-family portfolio of 1.83% remains strong and is the highest relative to other multifamily focused lenders in the Northeast. Furthermore, the reserve coverage on those multifamily loans where 50% or more of the units are regulated is 3.05%. Currently, we have about $14.3 billion of multi-family loans that are either resetting or contractually maturing between now and year-end '27, with a weighted average coupon of less than 3.70%. If these loans pay off, we will reinvest the proceeds in our C&I or other portfolios or pay down wholesale borrowings. And if they stay with Flagstar, the reset rate is significantly higher than the existing rate, which provides a NIM benefit. On Slide 18, we've once again provided significant additional information on our New York City multi-family loans where 50% or more units are rent regulated. This tranche of the multi-family portfolio totals $9.6 billion compared to $10 billion last quarter with an occupancy rate of 99% and a current LTV ratio of 70%. Approximately 55% or $5.3 billion of the $9.6 billion are pass rated and the remaining 45% or $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $2 billion are nonaccrual and have already been charged off to 90% of appraisal value, meaning $370 million or 16% has been charged off against these nonaccrual loans. Furthermore, we also have an additional $40 million or 2% of ACL reserves against this nonaccrual population. Of the remaining $2.3 billion that are special mention and substandard loans between reserves and charge-offs, we have 7% or $165 million of loan loss coverage. We believe we're adequately reserved for charged these loans off to the appropriate levels and with excess capital of $1.7 billion before tax we think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 19 details the ACL coverage by category. The ACL declined $34 million compared to the second quarter to $1.128 billion, a result of lower HFI loan balances and stabilization in property values and borrower financials. The overall ACL coverage ratio, including unfunded commitments was 1.80%, broadly in line with last quarter at 1.81%. On Slide 20, we provide additional details around our asset quality trends. Criticized and classified loans continued to decline, down approximately $600 million compared to the second quarter. On a year-to-date basis, we have made tremendous progress in reducing these loans as they are down $2.8 billion or 19% since the beginning of the year. Our net charge-offs decreased $44 million or 38% compared to the prior quarter to $73 million, and the net charge-off ratio improved 26 basis points to 0.46%. Nonaccrual loans, including those held for sale, were $3.2 billion, relatively stable compared to the prior quarter. I would add that approximately 41% or $1.3 billion of nonaccrual loans are performing. The 1 borrower we moved to nonaccrual status in the first quarter who subsequently filed for bankruptcy remains in the bankruptcy process, but there is an auction in progress that we hope conclude sometime in early 2026, which will allow us to resolve our position sometime during the first half of next year. With respect to the 30- to 89-day delinquencies at quarter end, approximately $274 million of the $535 million were driven by 1 borrower who typically pay subsequent to month end and has done so again. As of October 20, $166 million of their delinquent loans have been brought current. More importantly, after quarter end, we sold approximately $254 million of these borrowers' loans above our book value, thereby reducing our exposure to this borrower. Finally, we continue to review the 2024 annual financial statements for all borrowers. And today, we've completed the review on the majority of them. I'm pleased to report that the vast majority have stayed consistent compared to the prior year, indicating an overall stable trend for our borrowers. We continue to deliver on our strategic plan and are excited about the journey we are on and the value we will create over the next 2 years. With that, I will now turn the call back to Joseph. Joseph Otting: Thanks, Lee. Before moving to Q&A, I'm also happy to share that last Friday, we closed on our holding company reorganization after receiving all necessary regulatory and shareholder approvals. As a result of this reorganization, Flagstar Financial, Inc. was ultimately merged with Flagstar Bank NA, with Flagstar Bank NA as the surviving entity. As I mentioned on last quarter's call, this reorganization simplifies our corporate structure, reduces our regulatory burden and lowers operating expenses by approximately $15 million. As always, we remain extremely focused on executing our strategic plan, including transforming Flagstar into a top-performing regional bank, creating a more customer-centric relationship-based culture and effectively managing risk to drive long-term value. Now we would be happy to answer your questions. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Manan Gosalia of Morgan Stanley. Manan Gosalia: So I wanted to focus on the NII guide for the year. If I take the guide for the full year, relative to the progress year-to-date, it implies that NII should be up about 5% to 15% Q-on-Q next quarter. You're making good progress on the C&I loan growth side, NIM has been rising consistently and you should benefit from additional rate cuts from here. But at the same time, earning assets have also been shrinking as you pay down some of those broker deposits. So can you talk about how we should think of each of these spots next quarter and into the first half of next year? Lee Smith: Yes, absolutely, Manan. So first of all, what I would say is in terms of the balance sheet, you'll have noticed that it only declined $500 million in despite us paying off another $2 billion of brokered deposits. And so we think at the end of this year, Q4 will probably be the low point. So the balance sheet will be -- and this is total assets $90 billion to $91 billion. And then we expect the balance sheet to start to grow as we move through 2026. So I think that kind of level sets everything first and foremost. We do expect to see continued NIM expansion as we move forward. And we have multiple levers to do that, as you know. So I mentioned in my prepared remarks, as the multi-family loans continue to pay off or as they continue to hit their reset dates, they have a weighted average coupon that is less than 3.7%. So if they stay with Flagstar, with our sort of pricing reset is 5-year flub plus 300 or prime plus 2.75, and we're staying sort of firm to that. So we get a benefit if they reset and stay with Black Star. If they pay off then we're taking those proceeds and investing them into the C&I growth, or we use them to pay down high-cost either broker deposits or we can pay down flub advances. So that's sort of 1 area. We continue to show excellent growth on the C&I side. What we didn't mention is of the new loan originations in the third quarter, the average spread to sofa on all of those was 242 basis points. So a very, very healthy spread on the new C&I loans that we're bringing on to the balance sheet. And we -- you heard Joseph talk about the pipeline. We think that we continue those growth trajectories going forward. We're also going to start originating new CRE loans going forward. And this won't be rent-regulated New York City loans, we're looking for high quality, geographically diversified CRE loans in other parts of that footprint, the Midwest, California, South Florida, and we're starting to see the mortgage health investment portfolio increase, and we think that will increase further in a lower rate environment. I think we've done a tremendous job managing the cost of our fundings down through paying off those high-cost brokered deposits and flub advances, but we've also reduced core deposit costs without Fed cuts. And with Fed cuts, I mentioned, we expect a 55 to 60 beta, and so that's a focus area on the liability side. And then finally, as we reduce our nonaccrual loans, and we do expect to see a reduction in the fourth quarter, that will also help our NIM. So I know that was a long answer, Manan, but there are a lot of moving parts, as you can see. Manan Gosalia: That was great. That was the detail of that. was looking for. Maybe just a follow-up to your comments on the C&I side. I mean, the originations were clearly really strong this quarter. Can you talk about is this a new -- is this a good run rate for the next few quarters? Should it accelerate from here? And maybe talk about how you're managing risk as you do this because it's a rapid build-out and there is some macro uncertainty out there. Joseph Otting: Yes, sure. Thank you. So actually, our viewpoint is that we will continue to see additional growth beyond what we saw this quarter. We do see somewhere between $1.7 billion billion to $2.2 billion is kind of our run rate going forward per quarter. And I'll recall that a number of the people who have joined the company haven't been here for much over 3 or 6 months. And so most of these people are really getting settled into the bank and generating opportunities for the company. So we kind of think we're an engine that's firing on 3 of the 6 cylinders today and have really an opportunity to get really the whole franchise performing at a higher level in the next couple of quarters. That's in addition to we will add 20 people in the fourth quarter, and we'll add probably somewhere around 100 people in 2026. So we'll continue to add. The strategy there really is to -- we highlighted in the slides, we have a specialized industry strategy where we have 12 verticals. Virtually all the people who are leading those verticals and the people that have joined us are 20- to 35-year bankers. So they come to our company with lots of depth and knowledge in those particular verticals from an expertise perspective. And then from a risk underwriting perspective, we have the line unit embedded in the line is what we call the first line of defense and there are credit products people who sit in the first line who will underwrite and do the due diligence on the company independent of the relationship managers. And then those credits that are recommended based from the first line of defense to the actual credit approvals in the bank. That is a separate function that reports up to our Chief Credit Officer, and then who actually directly reports to me. So we think there are good checks and balances in our process to make sure that we're adhering to our credit standards without significant deviations from underwriting policies. Lee Smith: And Manan, 1 thing I would add, again, just looking at Q3, if you look at the average loan size of the new originations, it was just over $30 million. So as we've said before, we are not taking outsized positions in any 1 name or industry. We're diversified in terms of the size of the positions we're taking. We've said before, our sweet spot is maybe $50 million to $75 million. But in Q3, the average new loan commitment size was a little over $30 million, and that gives us comfort as well. Joseph Otting: And I will leave at a good point. On Slide 4, it does highlight the other businesses like Flagstar Financial and leasing and the MSR lending and a couple of others where actually, we thought the exposures to a number of individual borrowers were too high. And so we brought down in those portfolios significant amounts of high individual company exposure, and that's resulted in some of the declines year-to-date in those portfolios. We do think that will start to stabilize now as we've made our way through those portfolios in 2025. Manan Gosalia: That's great. And just a clarification, the $1.7 billion to $2.2 billion that you mentioned, that's originations, correct? Joseph Otting: That is correct. Operator: The next question comes from Dave Rochester with Cantor. Unknown Analyst: On the $1.7 billion to $2.2 billion that you just talked about in C&I production, when do you think you ultimately hit that? Is that a 1Q timing on that or further into next year? And then given that and the restart of the CRE originations and what you're doing on the resi production front, at what point do you expect total loans will start to grow again next year. And then with the 100 people or so that you're planning on hiring for next year, are there any new verticals contemplated in that? Lee Smith: Yes, so I'll take the first part of your question. So as I mentioned to Manan, we think the low point for the balance sheet will be the fourth quarter and will be sort of between $90 billion and $91 billion. And our expectation is we'll see -- we'll start to see a little bit of balance sheet growth in Q1 of 2026, not a lot, but a little bit. And then it will really start to sort of trend upwards in Q2, Q3 and Q4 of next year. So that's kind of how we think about the balance sheet growth and the inflection point. Unknown Analyst: Got it. So you're also thinking not just assets, but total loans actually stabilizes next quarter. Or no, that's the [indiscernible] and then you go from there stabilization. Lee Smith: That's right. That's exactly right. Yes. Joseph Otting: And then regarding your question on the $2.4 billion and the $1.7 billion, we do expect growth on those numbers both this quarter and going forward. So I mean that number clearly can get north of $2 billion on a pretty consistent basis. Unknown Analyst: That's great. And then just on the elimination of the holding company, I know that, that exempts you from annual stress tests whenever you cross over $100 billion or whatever that threshold is at that point. Any other regulatory relief you get from that as well? I know you save on the cost front, but anything else that you'd point to? Joseph Otting: Yes. I mean in a lot of instances, you have examinations that cover the same thing from the OCC to the Fed. So you eliminate that, you also eliminate a lot of staff interaction with the Fed. So there's also caution you can't exactly quantify but frees up resources in time. So we obviously think it's the right thing to do. And for us, we do not do today nor do -- plan to do non-admitted activities. So it was a logical step for us as an organization. Operator: The next question comes from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: So I guess, maybe a question around, from an expense standpoint. So you talked about all the hiring over the coming year. When you look at the adjusted expenses, about $450 million in your outlook for next year. It seems like expenses are kind of flatlining at this run rate. Just talk to us in terms of incrementally like what's the cost save opportunity left within the expense base to invest and like the puts and takes around why they could be higher versus lower than what you have forecasted? Lee Smith: Yes. No problem at all, Ebrahim. First of all, again, I want to take the opportunity to complement the entire Flagstar team because as both Joseph and I noted. If you look at the Q3 '24 run rate and the Q3 '25 run rate, that's an $800 million reduction in noninterest expense. And that's a lot of work. It's blood, sweat and tears. But the team has just done an unbelievable job taking that amount of expenses out. As we look forward, you're exactly right. If you look at our sort of existing or current run rate, it's right around $450 million a quarter, which if you look at our guidance, is the top end of the 2026 expense guidance [indiscernible] $1.8 billion. And as we think about further opportunities moving forward, I think they're in 3 sort of areas. One, we think we can continue to reduce FDIC expenses. There's a lot of components to that. We've done a nice job of optimizing the liquidity component with reducing wholesale borrowings and broker deposits, and we'll continue to do that. But there are other measures that come into play as it relates to profitability, asset quality, regulatory relationship. And so we think that on an ongoing basis, we can continue to drive those FDIC expenses down. We also believe we can continue to drive the vendor costs lower. I think we've done a nice job looking at vendor costs over the last 9 months, but I think there's more we can accomplish. And then I think we've got some pretty significant technology projects that are in the works that will be coming to fruition as we move into 2016 and beyond, and that's going to allow us to drive more efficiencies and cost reductions out as well. Joseph Otting: Just to note to Lee's question or comment about technology, we talked about -- we had 6 data centers in the company, 2 for each legacy organization. During last quarter, we reduced that down to 4, and we will ultimately get down to 2 sites. So if you think about running 6 data centers, legacy somewhat outdated old technology and moving towards a new platform that allows us to take out significant costs in that process. Ebrahim Poonawala: Got it. Got it. That's helpful. And I guess maybe just a separate question around all things sort of noninterest-bearing deposits, the balances, seems like they might be stabilizing, and I get it takes time for loan relationships to transfer into core deposits coming on. Just -- but give us a sense of NIB deposit growth from here and just either from a dollar balance or from a percentage of overall mix, how you see that trending? And what's the time line you think between lending relationships coming over from the bankers you brought on to that translating into core depot growth? Lee Smith: Yes, yes. So it does take a little bit of time, and we're seeing some traction. But obviously, as we move forward, we think we'll see a lot more traction. And so as we think of the noninterest-bearing deposit growth, I think it really comes from 3 areas, and you've touched on one. As we bring on all of these new C&I relationships, we certainly want to leverage those relationships to bring on more deposits, including operating accounts ultimately and those noninterest-bearing deposits. We also see growth on the noninterest-bearing deposit side coming from our private bank. As we mentioned on the last call, we've hired Mark [indiscernible] to run the private bank. He has done a nice job of reorganizing the private bank and making sure that all the right product sets are in place. So we look like a real sort of private wealth bank. And so we think that we'll be able to leverage the private bank and those products to drive noninterest-bearing deposits as we move forward. And then obviously, our 360 bank branches, they play an important role in continuing to grow noninterest-bearing deposits with our existing customer base and bringing in new customers as well. So that's how we see the noninterest bearing deposit growth, where it's coming from. Operator: The next question comes from Jared Shaw with Barclays. Jared David Shaw: Maybe starting on the credit side. Should we think that as we move forward and as you see the runoff in multi-family and CRE, maybe the loans that don't run off tend to have the weaker characteristics. So should we expect to see maybe a continued growth in CRE NPLs, but not corresponding growth in provision like we saw this quarter that you feel like those marks are adequate and sufficient? Alessandro DiNello: Yes. I think this -- first of all, we had a really strong reduction of nonperforming loans in the second quarter. This was a little bit more of a flat and we were working, as Lee referenced, on a large portfolio sale. But in the fourth quarter, we currently have -- we have line of sight on reductions of about $400 million of nonperforming loans. That could be as high as $500 million in the fourth quarter. We've also really like dedicated a team now that's focused on our nonperforming loans where they are still paying and that represents roughly 42% to 43% of our nonperforming loans. So we have a high percentage of the nonperforming loans that continue to pay and per the terms and conditions of the note, it's just our analysis of their cash flows that come off of those single source or repayment properties are insufficient. So those borrowers are drawing on cash flow or liquidity to continue to maintain those loans current. So we're really focused, and we do see a downward trend in those NPAs. Just our classifieds were down, our NPAs were virtually flat this quarter, but we do see a trend line of those going down. Lee Smith: Yes. And again, Jared, as you know, when we did the credit review in '24, we were deliberately punitive on ourselves. And the other point I would add to what Joseph mentioned, and I mentioned this in my prepared remarks, you've got 1 borrower that is in bankruptcy that is $500 million of those nonaccrual loans. And as I said, that's moving into an auction process. And so once that moves through the process and concludes, we feel that we'd be able to deal with a large chunk of those nonaccruals in the early part of 2026. That's in addition to the $400 million pipeline that Joseph mentioned. Jared David Shaw: Okay. Okay. Great. So that's -- those are 2 separate components. That's good color. And then as we look at guidance and your comments around assets being the low point in the fourth quarter, what's your -- what should we be thinking about in terms of either total asset growth or total loan growth as we look out for year-end '26 and '27 to tie in to that guidance? Lee Smith: Yes. No problem. So as I mentioned, at the end of '25, we think the balance sheet will be sort of $90 billion to $91 billion. We think that at the end of '26, our balance sheet will be around high $96 billion to sort of high $97 billion, right around that range. And then in '27, we think we get it to about $108 billion, $108 billion, $109 billion. Operator: The next question comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: I wondered if you could share with us of the $1.7 billion of C&I originations you had in the third quarter, what percentage was participations? And also curious if you had any tricolor or first brand exposure because I did see a little uptick in nonaccruals in the C&I bucket? Joseph Otting: Yes, that was 1 credit. But yes, we're running -- 50% to 60% of our loans are participations. But the difference, I would say, Mark, is the people that are joining the company that are bringing those opportunities, they have direct relationships with management. We have not purchased participations where we are not directly interacting with the management of the company, which is a little bit different than basically have a trading desk and somebody buying loan participations. These are all active relationships that have been ongoing in any of those in our document, we require the relationship manager to do a relationship model of what we expect to get in both fee income and deposits by coming into that relationship. So we have a pretty high standard of what our expectations are, if we're going to get involved in a credit. Lee Smith: Just to confirm, we had no exposure to first brands or Tricolor or any of the other names that have been mentioned this quarter and obviously, we're pleased about that. We've looked at that. We do have a very, very small MDF book. A big portion of that is our MSR lending. So we feel good about that and no exposure to any of the names that have been disclosed previously. Mark Fitzgibbon: Okay. And then just 1 separate question. What is -- I guess I'm curious, what does the note sale market look like today on sort of modestly challenged New York multifamily loans? Is there much depth to that? And where can kind of notes be sold today? Can you give us any kind of sense on that? Lee Smith: I mean, I would -- the way I look at it is, if you -- the noise that has been sort of emerging over the last 3 or 4 months regarding New York City rent regulated, we still had $1.3 billion of par payoffs in Q3, 42% of which was substandard. So rather than looking at no payoffs, I think there's still a lot of demand for this asset class from other lenders and the GSEs as I pointed out earlier. And I think that's good. And I think in a declining interest rate environment, I think you're probably going to see -- for us, you're going to see more par payoffs as well as we move forward. So that's just going to help us get to that diversified balance sheet of 1/3, 1/3, 1/3, even more quickly. Operator: The next question comes from Bernard Von Gizycki with Deutsche Bank. Bernard Von Gizycki: Lee, in your prepared remarks, I believe you mentioned that $195 million of the par payoffs of the $1.3 million were regulated over 50%. And I think that total portfolio declined almost $1 billion. Just wondering, were there any asset sales in that particular portfolio? And any updates you can provide on how we should think about the size of this book going forward in the next 6, 12 months? Lee Smith: Yes. Well, I think number one, I think you'll continue to see decline, mainly as a result of the par payoffs that we're seeing each quarter. Joseph mentioned, from a nonaccrual point of view, we do have an active pipeline that is $400 million that we have a line of sight into and hope to close in the fourth quarter. And so that's how I sort of look at the sort of movement in that rent regulated book going forward. And again, the reason we disclose these numbers, Bernie, is we're not seeing any adverse selection. We're seeing par payoffs across the board in every CRE asset class, whether they be market, rent-regulated less than 50% or rent regulated more than 50%. So -- and that is our expectation going forward. We'll continue to see the par payoffs and reductions across all of those multifamily asset classes. Bernard Von Gizycki: Okay. And then maybe tying the payoffs with loan yields. I know they increased 3 basis points second quarter. We've seen that tick up. But just given the paydowns of the nonaccruals that mix shift from multifamily to C&I and now the growth in C&I that should be coming through nicely over the next several quarters, why not -- are you expecting a higher change in the yields? Or are these par payoffs that are coming at higher yields, holding that back a bit? Just want to get a little bit of sense of the expansion on loan yields from here. Lee Smith: Yes. The par payoffs, it's not every -- the par payoffs are not everything below 3.7%. Some are loans that have already reset. So if you look at the blended weighted average coupon of the $1.3 billion that paid off in Q3, it was 5.7%. So it's a blend of low coupon, but also loans that have already reset. And so that's the phenomenon that you're talking about or you see. Joseph Otting: And some of the some of the payoffs also were coming out of some of the legacy C&I businesses, where we're reducing the exposures down in those credits where they're in the LIBOR plus, on average, [ 240 ] range. So some of those payoffs that does have some impact on that. Operator: The next question comes from David Chiaverini with Jefferies. David Chiaverini: So your paydown activity has been very strong past couple of quarters. Any line of sight -- you mentioned about the $400 million in NPLs for the fourth quarter. Any line of sight on total paydown activity anticipated for the fourth quarter? And how much of that could be substandard? Joseph Otting: I think we have expectations for a similar range of $1 billion to $1.3 billion in the fourth quarter. So I would say that's been somewhat unabated, so to speak, of especially in the market of the regulated New York multi-family. Surprisingly, as Lee commented, that continues to be a robust refinance out by the agencies and a couple of the large banks who continue to add to their portfolios. So we don't see any material change. We had originally modeled at the start of the year, somewhere between $700 million and $800 million a quarter, and that just continued to accelerate in the second quarter. Obviously, the third quarter was the strongest at $1.5 billion. But I think those numbers paying somewhere in that range of $1 billion to $1.5 billion in the fourth quarter. David Chiaverini: Great. And then could you refresh us with thoughts on Mamdani and the impact his potential election win could have on provisioning looking out to next year? Joseph Otting: Yes. So his -- one of his stated items was that he would freeze the rent regulated rate increases for 4 years. The first impact of that is the decision would be made mid-next year by the commission on those freezes. So it's probably a little bit delayed. But the way we look at it is we go through that entire portfolio, we received 97% of the financials on that portfolio. And we go through property by property analysis, both of the cash flows and then if the cash flows are insufficient, we do an appraisal on the properties. So we feel like we have a pretty good handle on. It would take -- this year, as Lee commented, we're pretty much through that portfolio. We did not see material changes to it. And that's because I think the really big items that impacted those properties, which was -- a lot of insurance was up 30%, 40%, 50% they had increased labor rates, increased HVAC, we did not see that carry through for continued increases into this year. So I think the way you model that out as you just make the assumption they're going to be flat revenues, and you really need just to understand the expense side because that will make the difference whether these properties are positive on a cash flow basis. Lee Smith: I think a couple of other things I would just add to what Joseph said, I mean rent increases for the next 12 months have just gone into effect. So the 3% for 1 year, 4.50% for 2 years. that runs through September of 2026. But I think what will have a bigger impact on these owners are reductions in interest rates. I think that's going to be a big advantage for them. And again, we said this previously, a lot of these owners have benefited from the 1031 tax rules. So they have low tax basis in these properties as well. Operator: The next question comes from Chris McGratty with KBW. Christopher McGratty: The margin improvement on Slide 11 over the next 2 years roughly 90 to 100 basis points. How much of it is the resolution of credit? Like how much is the margin being suppressed from nonaccruals right now, give a ballpark? Lee Smith: Well, not an example -- but what I would say just to sort of level set is if you sort of -- those nonaccrual loans are obviously doing nothing from an earnings or a capital point of view because they're 150% risk weighted. So you get a release of capital as we reduce them. Even if we put them into a 100% risk-weighted assets, you're going to free up those 50 basis points. But they're not doing anything from an earnings point of view. So if we were to reduce $1 of nonaccruals, even if we were just to put it in cash, you're going to earn, let's just say, 4% on that. And so if we can then use that to invest in C&I and the spreads, as I mentioned earlier, we've got SOFR plus 242 basis points, that will lead to an even bigger improvement. So reducing those nonaccruals is a key part of the strategy. What I would say to you is as we look at 2026, we think we can reduce those nonaccruals by up to $1 billion and $500 million of that, as I say, is tied up in the 1 borrower that's in bankruptcy, and we hope to resolve that in the first part of '26. And then we think we can do another $500 million on top of that throughout the remainder of the year. So that's obviously going to have a big impact on the NIM improvement. But along with all the other points that I pointed out at the beginning of the Q&A, I mean, it's not just nonaccruals. It's the continued resetting of those low coupon multifamily loans. It's growing the C&I book. It's growing other portfolios on the balance sheet. We're starting to originate new CRE loans the mortgage and residential book securities portfolio is an opportunity and then also managing our core deposits and paying off wholesale borrowings. So it all plays a part in that NIM expansion. Christopher McGratty: That's helpful. And then, Joseph, for you, the last 1.5 years have been really about optimizing the balance sheet, capital, liquidity and you're on a great track with expenses, too. What's the conversation going to be like a year from now? Like is it going to shift -- I assume it's going to shift in terms of strategic uses of capital. But any thoughts on capital between growth, buybacks, other strategic options? Joseph Otting: Chris, we really haven't spent time at the Board in discussing that. I think as we get into 2026 and we show significant progress against the nonperforming loans in the overall portfolio, and we get assessment -- a better assessment of how much growth we can create through our business activities, I think that will give the Board the opportunity to sit down midyear and make that assessment of what to do if there is excess capital. But this is a very friendly -- shareholder-friendly board, very focused on earnings and growing the bank and using capital in the most efficient manner. Christopher McGratty: Perfect. And then, Lee, if I could, on the earning asset, the asset discussion. What's the embedded thoughts on the cash levels and the security balances in the next 1 to 2 years? Lee Smith: Yes. So what I would say, Chris, is you're probably going to see an increase in securities in the fourth quarter. We have some excess cash. And I think you'll see our securities balances increase about $1 billion in the fourth quarter of this year. Then I think we probably hold that level of securities as we move through 2026. So -- and then I would imagine that cash is probably in the sort of $7 billion to $8 billion range as we move through 2026. Christopher McGratty: Okay. So to get to those asset totals, its contingent really on the loan growth, continuing the momentum Got it. Lee Smith: That's exactly what's driving the growth on the balance sheet, correct? Operator: The next question comes from Christopher Marinac with Janney. Christopher Marinac: Lee and Joseph, I just want to circle back on deposits from the commercial C&I growth that you obviously had a great quarter. Are there any goals on deposits these next several quarters? I'm thinking more next year than next quarter, but just curious to flesh that out further. Joseph Otting: Yes. So we kind of have -- coming out of the C&I group is roughly about $6 billion of new deposits that will be originated both from the lending relationships, and we also have established a deposit-only group to focus on certain sectors, title, HOA, escrow, some of the conventional insurance industry. We have a group that really focuses on those high deposit categories. So we feel pretty good that we're going to start to see some real strong momentum in the deposit side. Lee Smith: Yes. And I would just add, as well as the $6 billion that Joseph mentioned, we do have sort of $2.5 billion that's tied to the CRE book. And so as we start originating new CRE loans, again, our strategy is about relationship banking. It's not us just giving the balance sheet away. We want to establish much deeper relationships, whether that be through deposits or being able to create fee income opportunities. And so that's the model that we're deploying across all businesses within the bank, not just the C&I piece, but with the private bank and the loans that they're originating, particularly the mortgages. Christopher Marinac: Great. And this is a component again of how an interest margin steps up in the next several quarters, and this is, I guess, a key piece. Lee Smith: Correct because we would expect a lot of these deposits to be noninterest-bearing or low interest deposits because they are tied to the loan. Operator: The next question comes from Anthony Elian with JPMorgan. Anthony Elian: The reduction in nonaccruals you expect in 4Q and through '26, is all of that occurring organically outside of the 1 in auction? Or does that include any asset sales as well? Joseph Otting: Most of it will be organic. Anthony Elian: Okay. And that includes... Go ahead. Go ahead, Lee. Lee Smith: Yes. It's organic, but we deploy a number of strategies. Joseph mentioned but there's work out, some could be through sales. So it's organic, but it's us working the various options and strategies that we can deploy against that nonaccrual book. Joseph Otting: Yes. Our approach in what I think we found is you can sell those pools, you, in today's market, take a sizable discount to move that. And who we sell those to are going to do the same things that we would do, which is pick up the phone and see if we can work something out with the borrower. I'll remind you, in a lot of instances, low 40% of those borrowers have never missed a payment with us. So in their mind, they're performing at the terms and conditions of the loan. So we also have a pretty good track record that when we've sold assets or negotiated our way out of those loans, we've generally had a slight gain on the resolutions of those credits, which I think reflects that for the most part, we have those loans marked pretty close to where we're exiting the transactions. Anthony Elian: And then on credit quality more broadly. I know you mentioned in the prepared remarks you don't have exposure to tricolor or any of the other names that have come up, but I'm curious if you've done any reviews on procedures or policies, particularly on the asset-based lending vertical within specialized industries after the recent credit events that have surfaced over the past several weeks. Lee Smith: Yes. Great question. We have. Obviously, we made sure all -- like I said earlier, all the names that have been in the press recently, we have no exposure. We reviewed our NDFI book, which is about $2.3 billion, $1.1 billion of that is MSR lending, and we lend to the biggest mortgage REITs and originators in the country. We feel good about that. And then on the sort of lender finance side, we're at about $1 billion of commitments, $600 million of which is drawn, and we went through that book, and we feel very good about it as well. So yes, we did a detailed review just given recent events in other parts of the industry. Operator: The next question comes from Matthew Breese with Stephens Inc. Matthew Breese: I wanted to go back to the NIM. What percentage of loans today are pure floating rate? And then second, if you have it, what was the spot cost of deposits either today or at quarter end? Lee Smith: Yes. So the vast -- I would say that when you look at our balance sheet today, the C&I loans are floating. You've got -- I mean, the residential loans that we have are typically 5- or 7- or 10-year arms. So they flow, but only after sort of 5, 7 or 10 years. So you've got a little bit of floating there. So those are kind of the -- obviously, you got cash, you got some of the securities as well. So that's what I would sort of say as it relates to the asset side of the balance sheet. As it relates to our spot rate, we were at -- and I'm just looking at our daily report. So we were at [ $2.82 ] a couple of days ago, Matt. Matthew Breese: Great. I appreciate that. And then the second one, within the updated guidance, there was a change in the tangible book value outlook. It now includes the warrants. What drove that change? And could you help us out with the average diluted versus common share outstanding expectations for the fourth quarter and early 2026? I also think there was some thinking, and I was curious on this as well that you'll be profitable in the fourth quarter. I was curious if that holds up as well? Lee Smith: So that is what's driving it. It's the warrants. So the warrants kick in, in Q4, the share count goes from about 416 million to 480 million and then that carries through in '26 and '27. We've also adjusted the total book value on the guidance slide for the warrants as well. So that's what you see, Matt, exactly right. Matthew Breese: And that will impact average diluted as well as common shares outstanding? Lee Smith: Yes, that's correct. Matthew Breese: Okay. And then on profitability, is the expectation still that you'll be profitable in 4Q? Lee Smith: We expect to be, but there's a lot of moving parts. And I think, again, I'll just point to the progress that we've made quarter-over-quarter for the last few quarters. Operator: The next question comes from David Smith with Truth Securities. David Smith: Technical 1 on capital. After the holdco got consolidated down to the bank, I think there were some preferreds that got moved down. Is there any difference in how those are going to qualify for Tier 1 treatment now? Lee Smith: No. No change at all in how they will qualify. Operator: The next question comes from Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: On the CRE pricing, you mentioned earlier, Lee, is that market or acceptable pricing on renewals? Just curious if you're losing deals on pricing? Or is that not really the case? Lee Smith: So I would say, and this is why we're seeing a significant amount of par payoffs that borrowers are able to get better deals at other institutions or the agency. So we've been very rigid in not moving off the 5-year flub plus 300 or prime plus 375. The reason being, as you know, we are overly concentrated in CRE, and we are looking to reduce that concentration. And so I think the reason that you've seen the heightened payoffs that we've experienced is we're being very rigid and sticking to that sort of knitting. And I think other lenders are leaning into the space and those borrowers are able to get better deals than what I just mentioned, and that's what's driving the par payoffs. And we're okay with that because, again, we're trying to reduce our exposure to CRE and multifamily and get to that diversified balance sheet structure. Jon Arfstrom: Okay. Good. I appreciate that. And then, Joseph, for you, maybe kind of a simple question. But when I look at the credit stats, they're kind of flat to down. And I know it's not linear, but in your mind, is there anything new in the legacy credit book relative to a quarter ago? Or is it basically you know where the issues are and it's just timing for these numbers to fall? Joseph Otting: Yes. There's nothing new. We obviously went through the entire multi-family portfolio again. And we laid out on Slide 18, really where the perceived risk is in the bank, which is in that greater than 50% regulated. So I think this is more -- the train is on the tracks. It's our responsibility to clean up the credit problems, and I think we're on a really structured path to get that done. Operator: This concludes the question-and-answer session. I'll turn the call to Mr. Otting for closing remarks. Joseph Otting: Well, thank you, everybody, and I'd like to personally thank our Board and especially our Lead Director, Secretary Steven Mnuchin. The work and commitment has been really important. And the leadership team at the bank has really valued the Board I think maybe over the last 12 to 15 months, we probably set a record for Board and committee meetings and in a bank. And it really shows in the results. I'd also like to thank the executive leadership team of the bank and the women and men of the company. We really are focused on building a great company. And I thank you for all your work, dedication to the bank and very much important to our customers. And then as a final note, I'd like to thank the Federal Reserve and especially Mona Johnson and her team. While we no longer be regulated by the Fed, she was a source of knowledge and assistance as we navigated our challenges. So thank very much appreciate Mona and the Fed team who helped us. So thank you again for taking the time to join us this morning and your interest in Flagstar Bank. Operator: This concludes today's call. Thank you for joining. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to Booz Allen Hamilton's earnings call covering Second Quarter Fiscal Year 2026 Results. [Operator Instructions] I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg. Dustin Darensbourg: Thank you. Good morning, and thank you for joining us for Booz Allen's Second Quarter Fiscal Year 2026 Earnings Call. We hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. With me today to talk about our business and financial results are Horacio Rozanski, our Chairman, Chief Executive Officer and President; Matt Calderone, Executive Vice President and Chief Financial Officer; and Kristine Martin Anderson, Executive Vice President and Chief Operating Officer. As shown on the disclaimer on Slide 3, please note that we may make forward-looking statements on today's call which involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our second quarter fiscal year 2026 earnings release and slides. Numbers presented may be rounded and as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on Slide 4. Horacio Rozanski: Thank you, Dustin. Welcome, everyone, and thank you for joining today's call. This morning, Kristine, Matt and I will share our financial results for the second quarter of fiscal year 2026. The headline for our call today is that the reacceleration of our business will take longer than we expected when we spoke last quarter. As a result, we are lowering top and bottom line guidance for the year. As I will describe in a moment, this is based on continuing friction in the overall procurement environment and fundamentally different dynamics within our civil and national security portfolios. By national security, I mean the combination of our increasingly integrated defense and intel businesses. At the same time, and despite these near-term headwinds, we continue to see strong performance in our most exciting growth vectors. This success fuels our optimism for the medium term. In a few moments, Matt will take you through our quarterly results in depth and cover how they differ from our original expectations. Before that, I would like to describe the market and how it impacts our business differentially, where we see growth coming from in the near and medium term and the actions we are taking to compete and win in the current environment and to set us up for long-term strategic and financial success. Beginning with the market. This is the most bifurcated environment I have seen in my decades with Booz Allen. Our civil and national security portfolios are experiencing completely different dynamics, and we believe both face different prospects over the coming quarters. Our civil business is operating in the most challenging market in a generation. Over the past 9 months, the pace of change in civil agencies focus on funding has moved at extraordinary speed. As we shared in May, this resulted in run rate cuts in some of our large technology contracts. Since then, the business base has stabilized and we have seen some growth in pockets. However, the procurement environment and our near-term pipeline in civil have not recovered. Our second quarter is typically the most active as it coincides with the end of the government's fiscal year. This year, we saw no major procurement actions nor plus ups or cuts on any existing contracts. And we also did not see nearly the typical pace of tactical selling. Given this environment, we expect our return to growth in civil to be delayed by several quarters. When exactly that happens, will depend on how funding and contract activity evolves. For our part, across all levels of government, we're discussing potential opportunities that align to the administration's highest priorities, from critical minerals to border security. These are excellent and very promising conversations. There are also several large RFPs in our growing medium-term business pipeline including new work and recompetes. Looking ahead, our focus in the civil business is to maximize our AI capabilities and commercial technology partnerships to revolutionize delivery and reignite growth. The dynamics across our defense and intelligence markets, broadly speaking, our national security portfolio, are fundamentally different from civil and are much stronger. There remains some friction in the funding process, characterized by shorter funding increments and slower ramp-ups in new contract wins. Despite this friction, the pace of awards in international security portfolio has been encouraging. Of our $7.2 billion of gross bookings in the quarter about 90% were in national security. This includes the almost $1.2 billion [indiscernible] task order, where Booz Allen will help the Air Force Research Laboratory to increase for fighting lethality through adoption of advanced technologies. We also won 3 other notable awards valued at over $800 million each, including a competitive takeaway win with the United States Army National Guard, Intelligence and Security Directorate and 2 wins at the Defense Intelligence Agency, where we will modernize military intelligence and deliver new AI/ML capabilities in global no fail missions. Booz Allen continues to win in national security because we bring our unparalleled technology and our depth of mission expertise to the fight. Looking more broadly across our national security work, our leading positions in cyber, AI and war fighting tech are highly relevant to the Trump administration's technology and mission priorities. Our cyber business is increasingly differentiated. Our Thunder Dome product is becoming the standard for Zero Trust. We met all the government's milestones 2 years ahead of schedule. And just last month, it won the 2025 Cybersecurity Breakthrough Award. We also continue to be the largest provider of AI to the federal government as [ Deltek ] recently reaffirmed. And cyber, AI, a new hardware and software [indiscernible] converge, we are building the tech that makes Booz Allen unbeatable at the edge. Some of you actually had the opportunity to see our edge technology at AUSA and our recent investor event. From our modular detachment kit or MDK, to attack [indiscernible] solution, and our exquisite tactical gear, we are combining our own tech with the best commercial products to empower and protect our nation's war fighters. As we look at this year and beyond, we continue to see top line growth in our national security portfolio and the potential for expanded margins as the transition to fixed price and outcome-based products and solutions takes hold. Now reaggregating our portfolio and looking across the entire company, we did not see the normalization of the procurement and funding environment that we originally assumed. I am disappointed in our results this quarter and that we are lowering guidance across all key metrics. Simply put, the strength in our national security portfolio cannot offset the current year decline in our Civil business. This has led us to reassess our market assumptions and to take bold and significant action immediately. We are well prepared to operate in a highly fluid and dynamic environment for the foreseeable future. There are significant opportunities ahead. For example, in the funding of priorities from the One Big Beautiful Bill, the prioritization of AI adoption across all aspects of the federal government and the increased pace of converting contracts to [indiscernible]. But there are also headwinds like the government shutdown, the decrease in the acquisition workforce and the continued reevaluation of civil agency priorities. Booz Allen's goal is to remain focused and nimble in this environment so we can accelerate into the more clear and proving growth vectors in our portfolio, areas where we have clear technology and mission leadership. And to do so, our strategy is threefold. First, we are reducing costs by accelerating the use of AI in our internal operations and simplifying our operating model. We're also making the difficult decision to reduce layers and numbers in our senior ranks. These actions will allow us to continue to invest in our priority growth areas and accelerate decision-making. Matt will describe the impact and timing of this program shortly. Second, we are focusing our investments by doubling down on our strengths. This means flowing investment and talent to a few key areas where we are currently experiencing strong growth and that we believe can be accelerated further. Our primary areas of focus for the near term include cyber, both in the government and commercial markets; artificial intelligence, including growing areas like Agentic, physical and adversarial AI; war fighting tech, especially in edge technologies and mission systems; critical national security programs, specifically scaling our work in ongoing missions supporting the war fighter both at home and abroad; tech ecosystem partnerships, including existing partnerships like NVIDIA, AWS and Shield AI, our own venture portfolio; and new concepts and ideas with the best companies in Silicon Valley. And of course, continued emphasis on new tech from Quantum to AI-native 6G. Booz Allen will lead in the next waves of technology as well. And third, as the administration accelerates the transition to outcome-based contracting and commercial solutions, Booz Allen is leading the way. We are working with our customers to convert existing contracts and procure new work using these models. We are working diligently to productize more of our including our breakthrough ground systems and fire control solutions proposed for Golden Dome. These approaches will provide greater cost savings and certainty for our customers and provide us with margin expansion opportunities as we gain greater flexibility in how we deliver. I believe that these steps, taken in combination, we'll expand our market leadership in key areas, accelerate the implementation of VoLT and importantly, strengthen our financial performance. In short, we are making bold moves in the areas we can control. Every period of adversity has made us stronger, and this one is no exception. We are transforming ourselves at breakneck speed. And I am deeply committed to ensuring Booz Allen is an essential player in driving America's technological superiority. Thus, I remain very optimistic about the future of our company. And with that, Matt, over to you. Matthew Calderone: Good morning, and thank you for joining us today. As Horacio noted, our business performance remains bifurcated. Our second quarter performance and revised guidance for the full fiscal year reflect this dynamic. In large portions of our business, we have real momentum, and we have a number of reasons for optimism about our medium-term financial performance. Most important, significant portions of our business are growing, and are positioned for continued growth. We anticipate that for the full fiscal year, our national security portfolio, inclusive of our Defense and Intelligence businesses will grow revenue in the mid-single-digit range. We won $7.2 billion of new work in the quarter, including 4 programs of over $800 million in our national security portfolio. We continue to build the technology that our nation needs and are rapidly expanding the network of commercial tech partners with whom we innovate. We have the ability to adjust our cost structure to meet near-term demand patterns, ensure we are cost competitive and create capacity to invest for the future. And finally, our balance sheet remains strong, and we continue to generate significant cash flow. This is a real strategic and financial asset. That said, we clearly experienced more disruption in the first half of our fiscal year than we anticipated, particularly in our civil portfolio. This is due to a number of factors. First, with the amount of change we are seeing in government, procurement cycles are stretching. New initiatives are seeing longer lead times and funding is coming in smaller increments. While the pace of contract funding improved over the course of our second quarter, it still lagged the prior year by 3%. And as a result, our funded backlog was down 6% year-over-year. Second, while our civil business has stabilized, and we have not experienced any negative contract actions beyond those discussed in the first quarter, there has been a substantial gap in procurements in the broader civilian space. We expect to see pricing pressures on large procurements, including a few notable recompetes. As a result, we now anticipate that our Civil business revenue will decline in the low 20% range for the year. Third, as stated previously, our Civil business has a proportionally larger share of fixed-price contracts and therefore, has historically generated higher profit margins than Booz Allen on the whole. Thus, our overall mix shift away from Civil is putting downward pressure on our margins in the near to medium term. And finally, the duration of the government shutdown has introduced an additional layer of friction into the system. We expect this will have a modest negative impact on our revenue and profitability for the full fiscal year. Echoing Horacio's earlier remarks, we previously stated that our FY '26 guidance was predicated on a normalization of the funding environment, particularly in our second quarter. While funding did pick up over the course of the quarter. In fact, September funding was consistent with the year prior. The overall pace of funding was meaningfully slower than the prior years. As a result, our business did not reaccelerate as we had forecast, and we now anticipate that our return to growth in the business overall, will require a few quarters. Due to these factors, we have revised our fiscal year 2026 guidance down across all key metrics. In our revised outlook, we assume that current funding and procurement trends persist through fiscal year-end, and therefore, they're on contract and new award growth relative to bookings will remain slower than in years past. Make no mistake, this is not the year that Booz Allen wanted to deliver, and we are taking significant actions in response. As Horacio stated, our focus going forward will be on 3 areas: doubling down on areas of our business where we see significant growth potential, working with our customers to convert how the solutions we build are bought in a more commercially oriented outcomes-based approach and restructuring our business to take out a net incremental $150 million of cost on an annualized basis. We have identified where this cost will come from and have already begun to take action. This will provide a modest benefit to our bottom line financial results this fiscal year. The full impact will be felt next fiscal year. We expect that these actions will support our margins returning closer to historical levels in fiscal year 2027, while having a modestly negative impact to revenue on our cost-plus contracts. Critically, these actions will also create room for continued investment in core technology and talent, allow us to be more competitive and increase our speed and agility to match the pace of the market. These are meaningful actions and are taking real effort. Some have long been in the works, some are painful, but necessary in a time of rapid change. Collectively, they support our VoLT strategy and our long-term vision for Booz Allen. And ultimately, they will position Booz Allen for an exciting new wave of growth and to deliver superior value for our shareholders. With that context, let's take a deeper dive into our second quarter results. For the quarter, gross revenue was $2.9 billion, an 8% decline over the prior year period, roughly a 9% decline on a revenue ex billable basis. Adjusting for the onetime reduction to our provision for claim costs in the second quarter last year, gross revenue was down about 5% year-over-year. Inside of these overall numbers, our market performance was not uniform. Our national security portfolio of defense and intelligence programs continues to grow. For the quarter, this portfolio was up 5% year-over-year, exclusive of the discrete items from the prior fiscal year. And we anticipate this portfolio will grow in mid-single digit range for the full fiscal year. In contrast, revenue in our Civil business was down 22% year-over-year, exclusive of the prior year discrete item. We anticipate that our Civil business revenue will decline in the low 20% range for the full fiscal year. Moving to demand. We had a solid sales quarter, both in volume and in quality, particularly in the context of a complex macro environment. Gross bookings totaled $7.2 billion in the quarter, including 4 awards in our national security portfolio with a value of greater than $800 million. These were partially offset by 2 distinct items: one, a typical in nature and the other consistent with seasonal patterns. In the quarter, we recorded about $1.1 billion in contract ceiling reductions, the majority of which pertained to fiscal year 2028 and beyond. These stemmed from our engagement with the new administration to identify out-year cost reduction opportunities, particularly as we shift to more outcome-based contracting. We believe this is a nonrecurring event, and it has had minimal impact on our run rate on these contracts. Second, about $1.3 billion of backlog expired during the quarter. This reflects the routine expiration of contract ceilings and is in line with historic Q2 levels. As a result, our net bookings for the second quarter were $4.8 billion. This translated to a quarterly book-to-bill ratio of 1.7x and a trailing 12-month book-to-bill of 1.1x. Excluding the out-year ceiling removal, book-to-bill was slightly greater than 2.0x for the quarter and 1.2x for the trailing 12 months. Total backlog at the end of the quarter reached $40 billion, up 3% year-over-year. Funded backlog grew about 34% sequentially to roughly $5 billion but was down 6% year-over-year. At the end of the second quarter, our qualified pipeline for the remainder of FY '26 stood at nearly $25 billion. This is roughly on par with the prior 2 fiscal years. In summary, we continue to see solid demand signals in a market that is bifurcated in the short term. We remain confident that as the macro environment stabilizes and we lean into our proven growth vectors, Booz Allen will be well positioned to return to growth. Pivoting now to headcount. Booz Allen ended the first half with roughly 33,000 employees. Our customer-facing staff was down about 3% sequentially in the quarter and is now down 10% year-over-year. These declines largely reflect lingering effects from contract run rate reductions in our civil business as well as deliberate actions to improve utilization of existing staff. We are running the business efficiently. Our customer-facing staff utilization in the second quarter was meaningfully above the prior year period. Operationally, we continue to align our workforce with our key growth vectors, including accelerating hiring in critical mission and technology areas. We continue to hire aggressively in meaningful portions of our business to support new wins and other growth opportunities. I will now turn to profitability. During the second quarter, we delivered $324 million in adjusted EBITDA, down 11% from the prior year period. This translated to an adjusted EBITDA margin of 11.2%, 40 basis points lower than the same period a year ago. Through the first half of the fiscal year, our adjusted EBITDA margin was 10.9%. We expect margins to decline in the second half of the year due to 3 factors: the timing of contract write-ups and award fees, seasonal spending patterns, and continued mix shift away from [indiscernible]. This will be offset to some degree by the part year impact of our cost restructuring actions as well as our shift to outcome-based sales. Moving down the P&L. Second quarter net income was $175 million, down 55% year-over-year. Adjusted net income was $183 million, down 21% versus the prior year. Diluted earnings per share was down 53% year-over-year to $1.42 per share, and adjusted diluted earnings per share decreased 18% year-over-year to $1.49 per share. The year-over-year declines in diluted earnings per share and ADEPS were driven by 4 factors: lower overall profitability with an unrealized investment gain and tax planning initiatives that benefited the prior year quarter and higher interest expense. These were partially offset by a reduction in share count compared to the prior year period. Transitioning now to the balance sheet. Our balance sheet remains strong and allows us to be proactive and opportunistic in how we allocate capital to create shareholder value. We ended the second quarter with $816 million of cash on hand, net debt of $3.1 billion and a net leverage ratio of 2.5x adjusted EBITDA for the trailing 12 months. Free cash flow for the quarter was $395 million, the result of $421 million of cash from operations plus $26 million of CapEx. Turning to capital deployment. In the quarter, we deployed a total of $279 million to generate value for shareholders. This included $208 million in share repurchases at an average price of $107.15 per share. We repurchased nearly 2% of outstanding shares in the quarter, $68 million in quarterly dividends and $3 million in strategic investments made through Booz Allen ventures. Today, we are pleased to announce that our Board of Directors has approved a quarterly dividend of $0.55 per share, which will be payable on December 2 to stockholders of record as of November 14. Our Board has also approved an increase of $500 million to our share repurchase authorization, bringing our available capacity to approximately $880 million as of September 30. Finally, please turn to Slide 7 for our forward outlook. As we have discussed, our original FY '26 guidance is predicated on a normalization of the funding environment. While funding and awards picked up over the course of the quarter, this pace remained meaningfully slower than in prior years. As a result, our top line and bottom line performance for the second quarter was below our forecast and we are reducing our fiscal year 2026 guidance across all key metrics. We now expect to deliver revenue between $11.3 billion and $11.5 billion. We now expect adjusted EBITDA margins in the mid-10% range. This translates to an adjusted EBITDA dollar range of between $1.19 billion and $1.22 billion. We now expect ADEPS of between $5.45 and $5.65 per share. Lastly, we expect free cash flow to be between $850 million and $950 million. As we forecast our growth cadence for the second half, we now assume that current funding trends will persist through fiscal year-end, and therefore, the on contract and new award growth relative to bookings will remain slower than in years past. Also, at the midpoint, our revised guidance range incorporates the loss of approximately $30 million in revenue and $15 million in profit related to the government shutdown. These estimates assume the shutdown extends through October 31. Although not contemplated in our guidance, if the shutdown does continue for the month of November, we estimate the impact would be roughly within the same range, assuming no material changes in government scope or Booz Allen policy. So to sum up, our market remains bifurcated and funding levels have not normalized as we had hoped. We are disappointed in our results this quarter and that we are lowering guidance across the board. We are winning significant new programs particularly in our national security portfolio, where we are pleased with our growth trajectory. We are taking significant actions immediately to adjust our cost structure and prepare us to reaccelerate growth and profitability. We are doubling down on the key growth sectors where we have real traction in the near term, primarily our differentiated positions in cyber, artificial intelligence, war fighter tech, and critical national security programs. Our focus is on positioning Booz Allen to accelerate performance into next fiscal year and beyond, and we are confident that we will be able to do so. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Louie DiPalma with William Blair. Louie Dipalma: given the shutdown in your high exposure to the federal civilian agency. Many investors were anticipating a guidance reduction. Horacio and Matt, you both used the term bifurcation several times and you also mentioned how funding in the month of September was actually consistent with last year's September. I'm drilling into that, are you receiving signs and indications that the funding environment for the defense and intel business is actually improving and getting back to normal? Or is this funding environment expected to be strained for your defense and intel business even after the government restarts and the shutdown? Horacio Rozanski: Louis, why don't I start? Thank you for the question. I think the notion of bifurcation is an important one as we look at the business, as we understand the business, I hope you will understand it as well. As I said in the prepared remarks, we see our Civil business operating in the most challenging market in the generation. To give you a sense of what Matt described as a gap in funding, we saw essentially every procurement slide to the right in lockstep and that's not something I have ever seen before. And as we look forward, we're not trying to predict the future as much as react and anticipate what's right in front of us. And so that's how we're thinking about it. By contrast, in our national security business, it's a much stronger environment. There's still friction though. The government shutdown certainly backs things up. If we end up in the continuing resolution environment, how the CR is written will have an impact on this. But as we think about it, we have these very significant wins. We're very happy to share with you this morning about we are not anticipating a very fast ramp-up on those wins. We're anticipating the ramp-up on those, in fact, to be below historical levels. It will ramp up but simply more slowly. And I think that's everything that we are talking to about this morning is predicated on the notion that there's -- that this friction is going to continue, not impede our growth, but continue. Now having said that, I think the key for us, as we're trying to describe this morning is to stay very nimble and to stay very focused. Staying nimble means not trying to predict long term but really trying to anticipate the short -- medium term and react as quickly as we can. Part of the cost actions that Matt described to you are a part of that in both to secure our financials and give us more capacity to both invest and react to pricing more nimbly but also to streamline our operating model so we can make the issues faster and move faster. And the second part is to be very focused. I am personally very excited about what I'm seeing in our cyber business, both in government and commercial our AI capabilities are in greater and greater demand. I think you saw, and hopefully, we're impressed by the war fighting tech day that we hosted last week, which is really becoming a crown jewel in our portfolio, some of this critical national security contracts -- or we support such important missions and do such great work there. And then the partnerships with the tech ecosystem which are really both giving us access to new opportunities that are more commercially focused and enhancing our go-to-market and our capabilities because we can move faster when we build on top of their tech. So when we take it all, obviously, we're not pleased with the results or the near-term guidance lowering, but that's how we see the environment. Louie Dipalma: And for the rest of the year for the civilian guidance of, I think, negative 21%. What is assumed year -- what is assumed there in terms of the government shutdown and further cuts to existing programs? Are you assuming that other programs are throttled or what is baked in the assumptions because investors are -- they want to know whether there's going to be another cut to the federal civilian business and if this is going to be in a perpetual cycle. So what gives you confidence that this is the last guidance reduction for the [indiscernible] civilian business? Matthew Calderone: Yes, I'll start, and then Kristine may want to provide some color as to what's happening in the Civil business. As we said in the prepared remarks, we didn't actually see any actions positive or negative in civil last quarter. So we didn't see any additional cuts. We also didn't see any plus-ups or new awards and new procurements and what have you. So if you look at our civil portfolio, outside of a number of large programs that we've talked about, that portfolio is going to be essentially flat, both at the top and the bottom for the year. I think which just sort of indicates sort of the state of where we are in many of those agencies. But those large programs matter, and that's why we're guiding down to in the low 20% range at the top. So we aren't anticipating any further cuts. We are anticipating a very competitive procurement environment with some pricing pressure, particularly on the large program side. We also are having great conversations with folks in the administration about some of our key priorities. So we've used the word stabilized in civil, and that's what it feels like, but stabilized after a fairly significant run rate on our pretty large programs in an environment where things just aren't moving very quickly. But Kristine, I'm sure you want to chime in there. Kristine Anderson: Thanks, Matt. Yes, the business is stable, as Matt said. The environment itself still continues to be very slow with very few new large bids and not much ramp-up in funding. But I think that reflects the administration's rethinking how they want to prosecute some of those missions. And the work that we do in civil is impressive technically, and it is aligned to the administrative priorities. For example, we have one of the largest Agentic AI software implementations in the world and it's in civil and we're leading in Agentic AI. And we do expect work to grow there again. And we are having lots of productive conversations with the administration leaders on some of -- some new approaches to the core missions where we're bringing commercial solutions and combining it with our IP and IC, their outcome-based commercial offerings that we're talking through. But again, it's just hard to predict exactly when those will launch -- and so as Matt said, we're just assuming the status where we are now continues through the rest of the year, but we do see growth over the medium term. Louie Dipalma: Thanks, Kristine. So was there stabilization in the Civil business from the -- in the September quarter relative to the June quarter? Kristine Anderson: I'd say, yes. Yes, it's been pretty steady since the reductions that we had a while back in the year. Matthew Calderone: Yes. But stable, it means we didn't -- again, there were no new decrements, but we also didn't see some of the on-contract growth in plus ups and typical velocity of tactical selling in Q2 that we would -- that we'd anticipated. Horacio Rozanski: Yes. Louie, when we talk about bifurcation, another way to think about it is if there's upside and downside in -- across all of our business, there always is. I would say, as we sit here right now, maybe a little more downside potential in the civil business, a little more upside potential in the national security business. But as I said before, I mean, the things change very quickly. And we could -- what we're trying to do is, like I said, it's flow of resources, flow investment to where we see the opportunities and not be married to a particular outlook, but rather just ensure that when there is an opportunity to grow, we double down on it. Operator: Our next question come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe 2 questions. The first one, a bit shorter term and bigger picture for this next one. So first, I guess, I think you guys have previously talked about the civil portfolio being 13% margins or so, which implies defense and intel is in the 8% to 10% range. Is that still the right way to think about the profitability for [indiscernible] customers? Matthew Calderone: Yes, that's in range, Sheila. We never quantified it that way, but we've talked about how Civil has a significantly higher proportion of fixed-price contracts. So that's roughly in range. Sheila Kahyaoglu: Okay. Got it. And then maybe a bigger picture question, Horacio, for you. How do we think about the business model for Booz longer term, just given pendulums clearly shift and maybe 3 years from now, it will shift back where we're scrubbing our models for national security exposure and saying Civil will grow again double digits? So how do you think about aligning the sales force and the workforce and your management team as you restructure the business a bit? Horacio Rozanski: One of the hallmarks of our operating model is the notion that we operate in a single P&L, and that gives us the ability to respond to the market across any arbitrary lines really fast. We always have. We -- every time, as you point out, an administration transitions, they refocus their priorities. As I said before, this is perhaps one of the most significant or the most significant refocusing that I've seen. But we're going to continue to make sure that we are taking advantage of our broad footprint to go where the opportunities are. The other piece of it is I do believe that because of the way technology has evolved more broadly, this idea of injecting commercial technology into missions, moving to outcome-based as opposed to input base models, and those big trends are going to continue well into the future. They were somewhat underway before. I think there's an accelerant right now as the Trump administration doubles down on a lot of this. But I don't see us going back. And so that's why we've invested so much time, so much effort and resources on building partnerships from the very largest tech companies to small startups with promising technology and everything in between. I think our position in this tech ecosystem I think gives us a long-term edge that we're just beginning to see realized just beginning to exploit. There's a couple of opportunities right here right now that we are chasing. One in civil and a couple of national security, that would be impossible without the strong partnership that we have with some of these companies. And the more people see Booz Allen as somebody who builds tech but also leverages tech that others build to create the right answer, I think the more power we're going to have in the market. Operator: [Operator Instructions] It comes from the line of Colin Canfield with Cantor Fitzgerald. Colin Canfield: So it sounds like the [indiscernible] reduction, Matt suggests there may be a little bit of downside in terms of the cost plus nature of the business. So as we do the building blocks on '27, if we assume Civil's down another, call it, 10% and Defense and Intelligence is accelerated to call it mid-single digit. We think the building blocks probably suggest something like 0% to 2% organic that should notionally accelerate and '28 off of that base. So, a, does that math make sense at a high level; b, fundamentally can you grow next year; and then, c, if not, when do you expect this business to return to growth? Matthew Calderone: Yes. Thanks, Colin. Look, I think a couple of things. One, as we talked about, we had a lot of momentum in our national security portfolio. Two, the Civil business is stable, right? And unfortunately, we saw a significant decline in the first half of this year. But obviously, our comps will get proportionately easier given where we are. I'm not going to get into next year. We got a lot of medium-term optimism. There are some significant building blocks. As Horacio said, the nature of this market is such where things are happening fast. And we've got some exciting opportunities in the fire. So I would not necessarily straight line the math exactly how you did, Colin, but I'm sure we have in this conversation over the next couple of quarters. Horacio Rozanski: The only thing I would add to that is, as we described the growth vectors that we're talking to you about, clearly, the national security market is more robust. And so we'll see those growth vectors play more strongly there. But the number of things we're talking about around cyber, around AI, around some of the tech that we're developing that is highly applicable to border security, to large event security to the upcoming World Cup and so forth, we are looking for opportunities to leverage and grow in the parts of our civil business that are most aligned with the administration's priorities and we're -- we will continue to do that pretty aggressively. Matthew Calderone: Colin, if I could just jump back in here. Two other thoughts for you. One is we are seeing an increasing pace of contract conversion to outcomes based. While small, the portion of our -- our natural security portfolio at fixed price did increase quarter-over-quarter, and that's certainly the direction of travel and in part because of that, but also other dynamics. I do think going forward, our growth will be not as linearly connected to head count growth for a handful of reasons. If I can just give you a couple. The vast majority of our FTE loss this year was in Civil, and that's where we have more of our fixed price contracts. And that revenue is not as "headcount" dependent. Second, we're driving up utilization. And then third, the mix shift that I just described. So I understand we've had a fairly stable business model and that's relatively easy to model for you externally. Those dynamics are changing, consistent with the kind of pace of change that Horacio was talking about, and we'll continue to engage with you over the coming quarters. Colin Canfield: Got it. Got it. So margin trough this year gets better over time and then growth is [indiscernible] is kind of my takeaway. I appreciate that the businesses have managed on a quarter-to-quarter basis, but putting an investor hat on for a bit. As we think about the next quarter, what would you fundamentally tell an investor that wanted to go short again next quarter? And then kind of why are the reasons would you expect that to be a bad idea? Matthew Calderone: [indiscernible] business is giving investment advice Collin. Operator: Our next question is from Mariana Perez Mora with Bank of America. Mariana Perez Mora: When you guys think about the new guidance, I'd appreciate some color around like how much is already in backlog, how much you have to go and like win and is still depending on like some contracts that could be delayed? Like could you give us some kind of like measure of how strong is that backlog coverage and also the pipeline and like if you have like any amount of like how that pipeline appears to a year ago or something? Matthew Calderone: Yes. Mariana, I think we're in the main anticipating that the current sort of burn rates and trends largely persist, that head count remains essentially flat obviously absent the cost reduction initiative that we described. And it's not really based on any significant new wins. But that does require some on-contract growth, do wins to ramp up and a handful of other factors. So we've -- in this current guidance, attempted -- there's not any material things that need to happen for us to land in this range, but it is a volatile situation. Mariana Perez Mora: And you mentioned on contract growth. How is your conversation with your customers right now about like certainty about like them needing that kind of growth or still like there is a lot of uncertainty if that's going to happen or where it's going to trend? Horacio Rozanski: I mean I'll start and I'm sure my colleagues are going to want to add. But we're having very productive conversations, especially in the national security side and especially in these growth vector areas that are talking about. So if you take cyber, for example, we expect ThunderDome, as an example, to continue to grow ThunderDome become really both a standard and a product that everybody wants, and we expect to see some level of growth there. A number of other areas in the national security space are -- we are seeing significant pickup. As Matt pointed out, we have not made any heroic assumptions about that happening in the back half of the year in recognition of the fact that our there is friction in the environment that we're still in the middle of a shutdown and all of that, and we've tried to incorporate that into the way that we're thinking -- on the one hand, on the other hand, we are as aggressive as we've ever been in terms of trying to accelerate past that. So that's sort of the thought process right now. Kristine Anderson: I would add that the administration really wants to push speed in some areas. So those conversations are extremely productive. And so that continues as well. Mariana Perez Mora: So you mentioned cyber, and the expectations were for that portfolio to actually grow like at speed. How large is that right now? And what do you expect for that portfolio? Again, like the near term has been volatile, but in the next like 2 to 3 years? Horacio Rozanski: I am as bullish about our cyber business as I've ever been for a couple of reasons. First of all, we do occupy a unique position in cyber in the national security space, that is both well recognized internally in the government, and it's a real strength of ours. Second, I always talk about convergence. If you think about what's happening in terms of AI and Agentic and how it affects cyber, 3 ways just to name a couple, right? I mean the attack surface has grown because the AI models themselves have grown -- are now becoming in their own attack surface. Second, adversaries are using cyber much more effectively by leveraging AI into it, and therefore, defense needs to move in that direction. And third, we are seeing across the board, interest in us bringing these capabilities, including in our commercial customers that are both under siege by a number of cyber actors and see us and what we do as being a key player in helping them move past that. So I think, unfortunately, cyber risks are everywhere, cyber risks continue to grow. And Booz Allen, I believe, has, in essence, the most powerful -- one of the most powerful cyber businesses in the world. Operator: Our next question comes from Gavin Parsons with UBS. Gavin Parsons: I just wanted to unpack the disconnect between awards and funding a little further, if we could. Is total backlog still a good leading indicator of demand and growth? Horacio Rozanski: Yes. Long term, but I think, obviously, short-term funded backlog matters, right? And our funded backlog -- our funding was down in Q1, 9% year-over-year, in Q2, 3% year-over-year, which nets out to 6% for the first half. So I think it shows the direction of travel, the funding environment has improved, but in no way normalized over the first half. Now there's a lot of noise in there, particularly in the current environment, as Kristine said, we're seeing shorter funding come in shorter increments. It's a little more episodic. So it's not a linear relationship as it used to be. But obviously, 4 words of scale, that's going to drive growth. I think one is a pure recompete, one was a recompete with increased ceiling, one was a new award and one was a takeaway. So again, we are less comfortable that it's going to ramp as quickly as we've seen in the past, and we built that into our guidance, but backlog absolutely matters. Operator: And our last question comes from the line of Tobey Sommer with Truist. Tobey Sommer: Could you discuss your process for determining how much growth investment to allocate and how you balance that against where you were targeting near-term profitability and head count cuts that's sort of a tight rope and there's tension there? And maybe you could discuss how you arrived at your decisions? Horacio Rozanski: I guess I'll start. Look, I mean, as somebody pointed out earlier, we do not manage this company for the quarter. We managed the company for the medium and long term. And we are making the investments that we believe are both prudent in terms of long -- short-term profitability, but important and exciting in terms of long-term growth at both the top and the bottom line. And look, that's always been the case. It is the case now. We're undertaking a difficult decision of doing some significant cost reduction in some ways to ensure that we can both deliver in the short term, really more focused on our FY '27, given where we are in the year, but also so that we have the capacity to stay nimble and invest in the areas where we see the most opportunity. And I think that, that is what's exciting about Booz Allen Hamilton. I mean I can talk to you about things that are growing now. I can talk to you about things that are -- we believe have significant growth potential in the short term, and I can talk to you about the things we are doing like Quantum and like AI-based 6G that I believe will fuel growth in sort of in the third horizon. And so that needs to continue, while at the same time, recognizing that we have work to do in order to drive the short-term financials to where we want it to be. Matthew Calderone: [indiscernible] I mean, we're an interesting spot because obviously, we're disappointed with our performance and our guidance. And as I look inside of our portfolio, there are actually more demand and more opportunities to invest to drive medium- and long-term growth than I remember in a long time because as Kristine and Horacio said, it's an incredibly dynamic environment. This administration wants change. We're seeing significant opportunities, not just in the U.S. government, but even in commercial and with similar allies. And so part of the internal dialogue and part of the reason we're taking these painful actions to free up $150 million worth of cost is precisely because we see these investment opportunities. So we're prioritizing the growth vectors that we've all described, but there's real opportunity here. And that's, in many ways, more of a driver of us taking these cost actions than hitting short-term set of financial results. Tobey Sommer: If I could ask another question on SIML. Amita once in a generation change to the top line and demand. Do you assume that the margin holds because it's relatively unusual for significant sort of TAM changes not to be accompanied by margin compression? Kristine Anderson: Yes, that's a great question. I mean, overall, yes, but there is competition for price that we're expecting because there'll be fewer bids, there will be more bidders, there will be much more aggressive pricing. But that's at the same time that we are able to use a lot more technology to innovate how we deliver, which would still preserve margin. Operator: Thank you. And this concludes our Q&A session for today. I will pass the call back to Horacio Rozanski for concluding comments. Horacio Rozanski: Thank you, everyone, for joining us today. I hope this discussion gave you a deeper understanding of the factors that underlie our performance, how we see the market, how quickly we are responding and our reasons for optimism about the future of Booz Allen, which include both our leading position in advanced technologies by how we apply them to critical missions in a way that we build things that work, our agility, our willingness to move fast and our capacity to invest and accelerate our growth vectors. And really, most importantly, the people of Booz Allen and the quality of our team, which continues to be extraordinary and it's a source of optimism for all of us. And so together, we are moving forward, and we want to accelerate both our mission impact and our financial performance, and we are focused on doing so. Thank you again, and have a great day. Operator: And thank you. And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the WSFS Financial Corporation Third Quarter Earnings Call. [Operator Instructions] I'd now like to turn the call over to your host today to Mr. David Burg, Chief Financial Officer. Sir, you may begin. David Burg: Great. Thank you very much, and good afternoon, everyone, and thank you for joining our third quarter 2025 earnings call. Our earnings release and earnings release supplement, which we will refer to on today's call, can be found in the Investor Relations section of our company website. With me on this call are Rodger Levenson, Chairman, President and CEO; and Art Bacci, Chief Operating Officer. Prior to reviewing our financial results, I would like to read our safe harbor statement. Our discussion today will include information about our management's view of future expectations, plans and prospects that constitute forward-looking statements. Actual results may differ materially from historical results or those indicated by these forward-looking statements due to risks and uncertainties, including, but not limited to, the risk factors included in the annual report on Form 10-K and our most recent quarterly reports on Form 10-Q as well as other documents we periodically file with the SEC. All comments made during today's call are subject to the safe harbor statement. I will now turn to our financial results. During the third quarter, WSFS continued to demonstrate the strength of our franchise and diverse business model. The company delivered a core EPS of $1.40, core return on assets of 1.48% and core return on tangible common equity of 18.7%, which are all up versus the second quarter. On a year-over-year basis, core net income increased 21%, core PPNR grew 6% and core earnings per share increased 30%. In addition, our tangible book value per share increased by 12%. Net interest margin expanded 2 basis points to 3.91% quarter-over-quarter. This reflects a reduction in total funding cost of 2 basis points with a deposit beta of 37%. Given the September rate cut, our exit beta for September is 43%, which reflects the repricing actions taken after the rate cut. Net interest margin for the quarter benefited from an interest recovery from a previously nonperforming loan, which added about 4 basis points. Core fee revenue was flat quarter-over-quarter as our results were impacted by 2 previously announced strategic exits in Wealth and Trust as well as the Spring EQ earn-out from last quarter. Excluding these items, core fee revenue grew 5% quarter-over-quarter, primarily driven by Capital Markets and Cash Connect. Our Wealth and Trust business continues to perform very well and grew 13% year-over-year. Total client deposits increased 1% linked quarter, driven by commercial business. On a year-over-year basis, client deposits grew 5%, driven by growth across consumer, commercial, wealth and trust. Importantly, noninterest deposits grew 12% year-over-year and continue to represent over 30% of our total client deposits. Loans were down 1% linked quarter, driven by the previously announced sale of the Upstart loan portfolio and continued runoff in our Spring EQ portfolio. Excluding these items, loans were generally flat this quarter, but we saw solid momentum in several areas. Our residential mortgage and WSFS originated consumer loan portfolios, both delivered strong growth with linked quarter increases of 5% and 3%, respectively. These results reflect the momentum of our home lending business as well as the learnings obtained from our partnership with Spring EQ. In commercial, new fundings this quarter were offset by lower line utilization and the payoff of problem loans, which supported improvements in our asset quality. Importantly, our commercial pipeline remains strong across both C&I and commercial real estate, increasing to approximately $300 million. We saw a meaningful improvement across our asset quality metrics during the quarter. Total net credit costs were $8.4 million this quarter, down $5.9 million compared to the prior quarter. Net charge-offs were 30 basis points for the quarter and 21 basis points when excluding NewLane. Importantly, we saw a decline in problem assets, delinquencies and nonperforming assets this quarter. NPAs declined by over 30% to 35 basis points, driven by 2 large payoffs with no additional losses, while delinquencies declined by 34%. In each of these areas, we are now at or below the lowest level in the past year. During the third quarter, WSFS returned $56.3 million of capital including buybacks of $46.8 million or 1.5% of our outstanding shares. Year-to-date, we have repurchased 5.8% of our outstanding shares. Despite these higher levels of repurchase, our capital position remains very strong with a CET1 of 14.39%, well in excess of our medium-term operating target of 12%. We intend to maintain an elevated level of buybacks in line with our previously communicated glide path towards our capital target of 12%. While retaining discretion to adjust the pace of these buybacks based on the macro environment, our business performance and potential investment opportunities. These results position us well to meet our previously announced full year outlook, even with an additional October rate cut, which was not previously included in our assumptions. While the half and timing of future rate cuts remains uncertain. It's important to note that the impact of additional rate cuts on our financial results will not be linear as we continue to manage our margins through deposit repricing our hedge program and securities portfolio strategy. As we have done in the past, we will provide a full year '26 outlook in January with the release of our fourth quarter 2025 financial results. We remain excited about the future and committed to continue to deliver high performance. Thank you, and we'll now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Russell Gunther from Stephens Inc. Russell Elliott Gunther: I wanted to start kind of with the bigger picture question, David, and you kind of touched on it towards the end of your prepared remarks. But that medium-term target on CET1 challenging to hit, given just how much money you guys make. So it would be helpful to get a sense just kind of big picture in your mind, what's your base case scenario to achieving that target? And sort of what does that assume for organic growth rates over the next couple of years, acquisitive growth, be it depositories or fee verticals? And then you mentioned potentially flexing the buyback at a more accelerated clip. Just your base case to get there would be helpful to start. David Burg: Yes. Yes, absolutely, Russell. So yes, look, as you've seen this year, we are buying back at a clip that's significantly ahead of both the last couple of years. We're buying back approximately 100% of our net income. Given some of the balance sheet dynamics, the sale of the Upstart portfolio, for example, the runoff in some of the partnership portfolios our RWA has not increased, and therefore, our capital levels, despite these buybacks, our capital levels are still very high and actually increased since the beginning of the year. So that's the dynamic. And as well as the profitability levels that you mentioned, we do generate a lot of capital. So I think that if you look forward, even with a robust growth rate on our balance sheet, we still have a lot of dry powder to execute the buybacks at or above the level of 100% of our net income for a couple of years, for 2 to 3 years. And so that's really the strategic intention that we have. And depending on what happens with the balance sheet, we may accelerate that path. So I can completely see us leaning in more and doing even in excess of our net income on the buyback side. And obviously, as you said, we look at -- we continuously evaluate different investment opportunities. The first priority and the preference is always to invest the capital in the business where those accretive opportunities exist. But after that, we would look to return. Russell Elliott Gunther: Okay. Got it. And then just second question for me. So asset quality resolution and trends were really constructive this quarter. You guys have a healthy reserve and we just talked about the healthy CET1 for that matter. So I guess how are you thinking about reserve levels here amid what is still a somewhat volatile macro? And then could you share particular sectors of your loan portfolio where you continue to keep closer incremental eye? David Burg: Yes. I think on asset quality, generally, as you've seen in our numbers, we have good momentum and good progress. I think -- I would say a couple of things. I think, first and foremost, with respect to asset quality, one of the things that we try to do, obviously, is disciplined originations. It starts there, and we try to have recourse for most of our lending, vast majority of it and those type of actions to make sure we have good underwriting. And then we also try to be proactive around engagement with clients should things -- should there be unexpected bumps and bruises. We try -- we have a very kind of long forward-looking pipeline. We stress our portfolio for higher rates and with our issues -- where we think there are issues at maturity, we try to engage very early and proactively with our clients. And that's been the key to working through our pipeline and some of the migration that you've seen and the favorable trends that you've seen. And so I think commercial is always going to be lumpy and there may be 1 or 2 uneven situations. But generally, we feel good about our portfolio, and we feel good about continuing to make progress on resolving and working through the remaining NPAs. The consumer asset quality has been very strong, both within our home lending business and within the Spring portfolio. So we feel good about the trends, and we feel good about continuing to make progress. In terms of our reserve, I would say that we -- it's -- when you look at the pure -- when you look at the pure macro data that goes into the model, it would suggest that we have the capacity to release some reserves. But we have conservatively made some qualitative offsets where we see still potential volatility in the macro economy to keep that reserve where it is. So I think that's purely a function of all the volatility that we see with rates, potential inflation, some of the labor weakness and us being an erring more on the conservative side. So hopefully, that covers the question, but please let me know if I missed something. Operator: Your next question comes from the line of Kelly Motta from KBW. Your next question comes from the line of Christopher Marinac from Janney Montgomery Scott. Christopher Marinac: I wanted to dig in further to the Wealth and Trust business lines and just understand a little bit more about the future growth in terms of new accounts being opened versus just doing more business with existing accounts. I know you called a little bit of that out on the Bryn Mawr Trust, but I wanted to do more on the other pieces. David Burg: Sure. Chris, thanks for the question. So as you know, our wealth business is a pretty diverse business. And there are really 3 business lines within that business. There's the institutional services, there's the Bryn Mawr Trust of Delaware and then the private wealth management. And also about 60% of the revenue in that business is really not AUM-based revenue, not tied to AUM, but really tied to new accounts and tied to transaction activity. And so we've seen the places where we've seen a lot of new activity growth, new clients, new accounts have been both on the institutional services side and the BMT of Delaware side. When you look at year-over-year, institutional services is up about 30% this quarter, when you -- and BMT of Delaware is up about 20% this quarter. And so we're seeing growth in new accounts and transactions with existing clients. We're seeing a lot of activity there. Arthur Bacci: Chris, this is Art. I would tell you on a few things. I mean, the institutional services team just came back from the ABS East conference in Miami this week, and they're jazzed. I mean our reputation and our quality of service is really being recognized in the marketplace. There's been comments about deterioration in service with some other trustees. And so we are continuing to see a very robust pipeline with new clients and actually becoming the preferred provider for many clients. On the BMT of Delaware side, similar thing. We've seen a recent bank acquisition that one of the subsidiaries was a Delaware Trust, and we're seeing clients starting to leave that and coming to us. We're seeing opportunities on the international side of that business. So that team is really continuing to look to grow its business. And then on the private wealth management side, we've kind of got past the Commonwealth divestiture, if you will. And the last 2 months have been net client cash flow positive, and we're starting to see very good referrals from commercial. We're also really honing in on COIs and really trying to focus on getting more business from some of our COIs. So I think all in all, we have a really positive outlook going into 2026 with our Wealth and Trust businesses. Christopher Marinac: Great. And I guess, just to extend one more thought. You have operating leverage on all ends of the company, but is the operating leverage greater in the wealth space where you can create more earnings from that versus the bank operation? David Burg: Yes. I think the -- one of the things that goes to the diversity of the business model, when you look at our profit margins in the wealth business, I would say they're higher than the traditional profit margins that you may see in other wealth businesses. And it's really -- it really goes to that model. We do have a lot of operating leverage and a lot of opportunity for scale there for sure, particularly institutional services in BMT of Delaware. So I definitely would echo that comment. Arthur Bacci: And I think you can see it in our deposit base that comes out of the trust business because that's large deposits. They're not using our branch network. They're not using ATMs. It's a very scalable business for us. Operator: Your next question comes from the line of Janet Lee from TD Bank. Sun Young Lee: On Cash Connect business, as rates -- if rates were to come down, I would expect the revenue to get compressed, but then I believe that the funding side of it could offset. In terms of the NII benefit coming from the Cash Connect, how do you guys forecast in terms of the potential financial benefit coming from Cash Connect increasing? Or is it more compressed? David Burg: Yes. Yes, Janet, Happy to answer that. So I would say a couple of things on Cash Connect. One, I think the way you described it is exactly right. The Cash Connect revenue, the pricing is tied to interest rates. And so as interest rates come down, we would expect a reduction in our fee revenue in Cash Connect, but that will be more than offset in a reduction in expenses. And so basically, from a profitability perspective, we do benefit from rates coming down. And you can think of it as roughly for every 25 basis points, about a $300,000 kind of pretax profitability benefit. So that's -- as we've seen that play out over the last couple of cuts. And as we have the cuts, September is really not in the numbers yet, but as we have September, potentially the cut next week in December, all of those will flow in into the beginning of next year. I would say that's one dynamic with Cash Connect and we'll drive towards increasing profitability. The other thing which is if you look at our segment reporting and Cash Connect, one of the things we've been talking about is increasing the profit margins in that business in general. And that's not just because of rates but also because of pricing leverage that we think we have in the market, given our market share, that's also on the expense and efficiency side. So there are a few different levers to that. And that's been playing out nicely so far. If you look at year-over-year, the profit margin in that business was about a little bit under 6%. And this year, we're over 10%. Last quarter, it's important to note that there was an insurance recovery last quarter, which -- so the margins look a bit elevated. But if you normalize for that, last quarter was about 8%. So we went from kind of 6% to 8% to 10% on that trajectory that we were looking for, and that's -- so we're executing against that strategy. Arthur Bacci: And Janet, just as a reminder, the way we account for the bailment business, the benefit that David is talking about won't necessarily flow through NII. It's a combination of fee income and noninterest expense. Sun Young Lee: And just on -- so you maintain your low single digit, all guidance including the low single-digit commercial loan growth for the year. So that includes the problem loan payoff that you experienced in the quarter? And also, could you help us size the -- or size the pace of the payoffs coming from the consumer partnership going forward? Should it decelerate from the current like $140 million levels? How should I think about the total impact of the payments and the trajectory there? David Burg: Yes, yes. So Janet, let me take the consumer first and then I'll circle back around to the commercial question. On the consumer side, we had 2 things happened this quarter, and it's important to separate them. One was we closed the sale of the Upstart portfolio. And that was about $85 million that came off our balance sheet at the beginning of the quarter. As you know, that was a nonstrategic portfolio that was in runoff it had some elevated net charge-offs. And so we made the strategic decision to exit that portfolio, and we're also able to release some reserves based on that transaction. So that's the Upstart portfolio. Beyond that, the remaining runoff that you see is really in the Spring EQ portfolio, and that runoff for the quarter was about $50 million. And so that's the pace more or less that we would expect comes somewhere in the $15 million to $17 million per month is what we would expect in that runoff of Spring EQ. So we expect that to continue. However, we -- one of the -- I think one of the areas where we've been leaning into and we think we have -- we've had good momentum and we think we have continued momentum is in our Home Lending business, which is our mortgage business and our WSFS originated consumer loans, which are primarily HELOC, lines of credit and installment loans. And we've had really annualized double-digit growth for a few quarters there. And that's really more than offsetting kind of the Spring EQ runoff that you see. So we think we have -- we think positively about that growth continuing. We think we have some differentiated origination capabilities in that mortgage business, we've been growing our origination officers. And so we feel good about leaning in to that area. So that's on the residential side, on the consumer side, rather. On the commercial side, this quarter, as you said, this quarter was really impacted by a couple of things. One was the work, the payoff of the problem loans which obviously is a good thing. We like to see that, and that supports our asset quality improvement. We also saw line utilization being down this quarter. That's kind of a bit of a volatile number. That moves up and down. There's some of the economic uncertainty plays into that. But generally, that's just a function of kind of business activity. But generally, if you kind of separate that. We feel -- we continue to feel good about our pipeline altogether across the board, including C&I. I would say we're focused on definitely making accretive and profitable originations. There's a lot of competition in C&I. We don't want to be the low -- we're not the low price point in the market. We want to be very thoughtful around profitability. We want to be very thoughtful about underwriting. But having said that, we feel very good about our pipeline. Our pipeline now is at a higher level than it's been in a number of quarters at about $300 million in total. So we feel good about our pipeline. And I would also add that we are continuing to win talent in the market, which gives us a lot of confidence. For example, we had -- we recently announced a new Philadelphia Market President who was the Market President for one of the major super regional banks in the area for Philadelphia. And so I think winning talent like that gives us confidence, and I think demonstrates the confidence that others have in the franchise as well. So yes, we feel good about -- it's hard to predict quarter-over-quarter, but we feel good about being able to grow that business and continue to lean in to C&I, and that's really the relationship engine that we want to anchor to. Operator: Your next question comes from the line of Kelly Motta from KBW. Kelly Motta: Sorry about the technical difficulties -- maybe just piggybacking where you left off last. You noted recruitment of [ Philadelphia ] Market President. Clearly, organic growth is a focus. Where -- are there other areas where you're looking to add talent where you think there's room to bolster up either in terms of product line, wealth or the core bank or parts of the geography that look like attractive growth opportunities and places where you could add some folks? David Burg: Yes. The answer is yes. So we're -- just like I mentioned, the commercial example. We have other relationship managers joining the commercial team. That continues to be an area that we're looking to continue to increase. And so that is an area of focus as well as the wealth business. That's been an area of focus all along. We've had some very successful lift-outs of teams in the last 12 to 18 months there that are really starting to bear fruit and play out the thesis, but that's another area where we're continuously looking at talent, both from a lift-out perspective as well as we look at potential RA acquisitions that we've done in the past. And so we continuously evaluate talent across our footprint. And we think we have a lot of opportunity there. And Art mentioned earlier the referrals, but that's something that we really think is -- there's a significant amount of opportunity in the referral pipelines across our businesses. That's between wealth and commercial, it's between small business. It's between our home lending business and each of those. So there's really a lot of untapped potential there as well. Kelly Motta: Got it. That's helpful. And then maybe turning back to the margin. I apologize if I missed this, but you guys have done a really great job managing the margin, keeping an overall relatively level -- high level of margin and neutralizing some asset sensitivity. You get a couple of cuts here again this quarter. Do you think you have enough flex in the deposit base to absorb some of that? Or could there be some near-term pressure in that margin ahead? David Burg: Yes, Kelly, happy to go and to work through that a little bit. So I think there's -- I'll give you a short-term answer and a longer-term answer. From a shorter-term answer, we do have sensitivity in our net interest margin, as you mentioned. I would characterize that as about 3 basis points per 25 basis point rate cut. So that's really the near-term impact. So when you think about the net interest margin this quarter, we were at 3.91%. We had the one interest recovery. If you kind of normalize for that, we're in the high 3.80% and so with a couple of a few rate cuts that go into the fourth quarter, we would tick down to maybe about 3.80% around kind of in that ballpark. But the, I would say, the longer-term answer is that we have a number of tools that we use to offset that sensitivity after the initial impact in. The best evidence that I can give you of that is if you look at what's happened over the last year, where we've had 125 basis points of rate cuts, but our margins are up year-over-year over 10 basis points. And so that sensitivity that I mentioned of about 3 basis points per cut, will go to 1 to 2 basis points as we are able to take the actions that we take. And those actions are -- one is the deposit repricing that you mentioned. We continue to -- our exit beta for the quarter, the cut obviously happened at the end of September. But if you look at the exit beta at the end of the month, it was about 43% in the low 40s. We're going to run a similar playbook for the other cuts, and we think that we can be kind of in that low 40% beta for each of the upcoming cuts. That's #1. Two is we have, as you know, the hedging program, where we have floor options that mitigate and neutralize some of the asset sensitivity. We have about $850 million of those that are in the money right now. And with the next rate cut, another $250 million would come in the money. And if we have 3 more cuts you would have the entire $1.5 billion program actually in the money. So that would neutralize essentially $1.5 billion of variable rate loans and essentially neutralize that to look like fixed. So that's something that we continue to deploy. We're going to continue to utilize that program. throughout '26. We're thoughtful about maturities there and making sure that, that full $1.5 billion is going to be deployed. And the third thing, I would say that the third tool -- actually, 2 more things. The third tool that we've been using is obviously new to the extent that we've been growing new deposits, and we're able to reinvest it and you think about a steeper yield curve going forward, and you were able to originate those deposits and the low-cost deposits that we've been able to have and then reinvest them at the higher yields. That, of course, takes some time to play out, but that's a big supporter of the net interest margin. And the last thing that I will call out is our securities portfolio. As you know, our securities portfolio yields south of 2.5%. And it rolls off -- we have about $500 million of cash flow every year that comes off that securities portfolio that then we reinvest either into loans or potentially other securities. We reinvested and we pick up a lot of yield. There's 4 to 5 basis points of annual yield pickup from that rollover. So the combination of all of those things, that's what allowed us to really mitigate the impact more than what the kind of the paper math would suggest, and we'll continue to lean in and deploy those tools. Kelly Motta: Great. I really appreciate all the color on that. That's really helpful and it will be helpful to go back to just one point of tying up loose ends of clarification. Just can you remind me how much floating rate loans you have and maybe index deposits just to help manage our margin with that component? David Burg: Yes. So our floating rate loans -- our floating rate loans are a little bit over 50%. And so our loan beta is about 50%. But when you incorporate the hedges, the loan beta drops to a little bit over 40% -- so -- and that's really -- and so when you think about our deposit beta in that range as well, that's really -- that's how we try to neutralize the portfolio. That's how we think about it. So -- and on the deposit side, we -- as you know, we have the CD book, which is the time maturities that -- most of that CD book is in kind of the 6 months with a little bit of 11 months. And so that kind of matures on its cycle. The other deposits are mostly non-indexed. We have about $700 million to $800 million of kind of indexed deposits. Operator: And with no further questions in queue, I would like to turn the conference back over to David Burg. David Burg: Okay. Thank you very much, everyone, for joining the call today. If you have any specific follow-up questions, please feel free to reach out to Investor Relations or me. Have a great day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, everyone, and welcome to Kimberly-Clark de México Third Quarter 2025 Results. [Operator Instructions] Please note this call is being recorded, and I will be standing by. It is now my pleasure to turn the conference over to CEO, Pablo González. Please go ahead. Pablo Roberto González Guajardo: Hello, everyone. I hope you're doing well, and thanks for participating on the call. We'll go straight to results, and then we'll make some brief comments about the quarter and our expectations going forward. Xavier? Xavier Cortés Lascurain: Thank you. Good morning, everyone. Results for the quarter were better, with net sales growing and gross and operating profits recovering. During the quarter, our sales were MXN 13.4 billion, a 2% increase versus last year. Hard rolled sales impacted total volume, which was flat and price/mix was up 2%. Consumer Products grew 5%, 1% volume and 4% price/mix, while Away from Home remained flat. Exports were down 15%, impacted by a 32% decrease in hard rolled sales, while finished products grew 7%. Cost of goods sold increased 3%. Against last year, SAM, resins and virgin fibers were favorable. Recycled fibers were mixed, while fluff compared negatively. The FX was slightly lower, averaging 1% less. During the quarter, our cost of goods sold reflected the higher prices of raw materials from prior months and very significantly, the much higher FX, including the hedges as those trickled down the inventory layers. Our cost reduction program once again had very good results and yielded approximately MXN 500 million of savings in the quarter. These savings are mainly at the cost of goods sold level and are generated by sourcing, materials improvement and process efficiencies. Gross profit was flat and margin was 38.7% for the quarter. SG&A expenses were 4% higher year-over-year and as a percentage of sales, were up 30 basis points as we continue to invest behind our brands. Operating profit decreased 4% and the operating margin was 21.3%. We generated MXN 3.4 billion of EBITDA, a 3% decrease, but within our long-term margin range at 25%. As mentioned, the benefits of better raw material prices and a stronger peso take time to show up on the actual cost of goods sold, due not only to inventories, but also to contract transit time and particularly in this case, the currency hedges. Having said that, our gross margin did improve 50 basis points sequentially from the second quarter to the third quarter. That improvement does not go down to the operating profit or EBITDA level because the SG&A remained constant and was, therefore, higher as a percentage of sales because the third quarter sales are traditionally lower than the second quarter sales. Cost of financing was MXN 404 million in the third quarter compared to MXN 287 million in the same period last year. Net interest expense was higher at MXN 401 million versus MXN 290 million last year, despite our lower gross debt because we earned less on our cash investments. During the quarter, we had a MXN 3 million FX loss, which compares to a MXN 4 million gain last year. Net income for the quarter was MXN 1.7 billion with earnings per share of [ MXN 0.56. ] We maintain a very strong and healthy balance sheet. Cash position as of September 30 was MXN 11 billion. We have no debt maturing for the rest of the year and maturities for the coming years are very comfortable. Net debt-to-EBITDA ratio is 1x and EBITDA to net interest coverage is 10x. Over the last 12 months, we have repurchased close to 50 million shares, around 1.5% of shares outstanding, which brings the total payout to shareholders to approximately 7%. And with that, I turn it back to Pablo. Pablo Roberto González Guajardo: So we continue to operate against a soft consumer backdrop, but we managed to increase sales and post EBITDA margin within the target range. Growth in Consumer Products was significantly better supported by innovations and commercial initiatives, together with a strategic decision to reduce spending during the heavy summer promotional season to protect the value of our brands as well as reduce the negative price effects. Volume was slightly ahead of last year, an important improvement, but consumers remain stretched and cautious given the increased uncertainty, job growth deceleration, remittances slowdown and overall lack of economic growth. We see no significant catalyst for this to change in the short term and are strengthening strategies accordingly. Still more relevant and differentiated innovation, more effective engagement with consumers efficient execution hand-in-hand with our clients, and importantly, relentless focus on our most important opportunities by category, channel and brands will guide all our actions. In a market that's not growing much, gaining share and playing in areas where we haven't participated at least not aggressively, will be key to accelerate our growth. We look forward to sharing more details on the strategies as we get into 2026. The same holds true for Away from Home business, and we expect exports of finished products to continue to grow and accelerate in the coming years, behind a concerted effort with our partner, Kimberly-Clark Corporation. With respect to costs, we have yet to see the full effect of lower input prices on results and lower sequential volumes typical of the third quarter meant we had weaker operating leverage. Despite these headwinds, margins remain strong. As we get into the final stretch of the year and particularly into next year, we will see lower costs reflected in our numbers. We expect lower pulp prices, stable recycled fibers, lower resins and superabsorbent materials plus a stronger peso to be tailwinds going forward. In summary, our results continue to improve. And despite an expected continued weak consumer environment, we're executing strategies that will translate into stronger results in 2026 and the years to come. With that, let's turn to your questions. Operator: [Operator Instructions] We'll take our first question from Ben Theurer with Barclays. Benjamin Theurer: Congrats on the results despite the challenging environment. So I wanted to follow up a little bit on just the consumer sentiment and what you've been seeing across the different categories. So maybe help us understand and kind of like getting a bit closer into that 4% price/mix change. How are you able to kind of like implement that and at the same time, actually get about a 1% volume growth, just given the consumer is weak, but it felt like a very good execution on price mix with volume growth. So that would be my first question. Pablo Roberto González Guajardo: Sure, thanks for the question. Look, as I mentioned, we see a stretched consumer. And this is [ not news of ] uncertainty. And as I mentioned, job growth has decelerated, remittances have slowed down. I mean overall, the economy is pretty slow and consumers' sentiment is not at its best, if you will. So consumers are being very careful in how they are spending. We do see a fork, if you will, with consumers that continue to spend on premium products, but there are those who are trending down from value to economy products, not at a very marked rate, but there's certainly something happening there given the -- how the consumer is stretched. So the way we were able to put all of this together -- and let me say, by the way, the growth in our categories is pretty muted. Some of them, the categories that don't have such high penetration like kitchen towels and others are growing at higher rates. But even those the rates have slowed down a little bit. And the more, if you will, mature categories are flat or slightly growing when it comes to volume. So what we did is, one, Remember, we decided not to play as aggressively on the summer promotional season. Because what we were seeing over the past couple of years is that when you did that, the price would take a hit not only within the promotional season, but then beyond that, because consumers ended up with some inventory on their hands. So then it was a little harder to move volumes forth. So we were very careful on how we manage that, and I think we were successful in doing so. Plus the fact that we are through our revenue management -- revenue growth management capabilities found certain instances where we could adjust pricing and move forth. So that's how we were able to keep prices going and then volume really helped because of innovation and all of our commercial activities during the third quarter. So it was really a combination of executing on price and innovations that allowed us to put together both growth in price and for the first quarter in the year, growth in volume. Benjamin Theurer: Okay. And then just one quick follow-up. You've called out the softer hard roll sales volume. Was there a technical issue? Is it a demand issue on the export side? What's been driving that? Pablo Roberto González Guajardo: Really, I think what's happening there is that there's a lot of supply of hard rolls in the U.S., a combination of companies with excess capacity sending it to the U.S. and then maybe a little bit of companies buying before some of the tariffs came into effect. So there's paper out there that I think the system is going through. And hopefully, that will become more normalized, if you will, in the fourth quarter, certainly, I think by the first quarter of next year. But overall, just oversupply in the market of hard rolls in the U.S. Operator: We will move next with Bob Ford with Bank of America. Robert Ford: Pablo, I also was impressed by the growth in consumer given your intent to stay away from some of the summer promotions. Can you give some examples maybe of some of the more successful innovation and execution of efforts that are enabling you to improve pricing and take share? And with respect to the export mix between hard rolls and finished products, can you give us a sense both in volume and value in terms of the breakdown of those exports? And then how should we think about current capacity utilization rates for both pulp and finished product? Pablo Roberto González Guajardo: Thanks, Bob. Thanks for your question. Yes. Look, I mean, when it comes to innovation, as I mentioned earlier in the year, we have strong innovations for all of our categories throughout the year. And by the way, we have a very, very strong pipeline for the coming years. So we're very excited about that. And a couple of particular examples are on the diaper front, where we pretty much improved on every single tier of our offerings. And when you take a look at our shares, we're -- even though the categories, as I said, pretty flat, we're gaining share in pretty much all of the channels given the -- all of the channels and all of the tiers, given the innovations that we were able to put into the market. And again, those have to do with better observancy core, better fit, better stretch, better softness. So depending on the tier, again, we improved every single one of them, and that's a category where we see our shares improving nicely. Also, for example, in bathroom tissue in the premium tier, where we've introduced a couple of new features and new sub-brands under Kleenex, Cottonelle, and we're absolutely convinced we have the best product in market and products that can compete with products anywhere in the world. and they've been very, very well received by consumers. And as well, we also made some innovations to our economic product, particularly Vogue in the -- or [ Vogue ] in the wholesale channel, and we've been able to gain ground with that product consistently and significantly. So again, innovation at the core of everything we do and very, very excited with what we see for the coming years when it comes to innovation. With respect to the breakdown of our exports, I mean, hard roll sales represent 46% of the sales and finished product, 54%. And hard rolls, as I mentioned, hopefully, volumes will stabilize here in the coming quarters, and we expect that to continue to be -- hopefully, be a tailwind and if not, certainly not a headwind going forward. And on the finished product, we're excited. I mean we've had a couple of meetings with our partner, and we're looking at opportunities in the coming years to further integrate our supply chain. We've done a good job here in the past couple of years, but many more things that we can do, and we're working very closely together to make that happen, and we're excited with the opportunities we see for it. And as we move and are able to turn more of our capacity into finished product, then certainly, our hard roll sales will decline accordingly because, as you know, what we do is our excess capacity is what we turn into hard rolled sales and sell outside. So as this plans with our partner materialize, a little by little, we'll start to see lower hard roll sales, but finished product sales increase hopefully significantly. Robert Ford: And that was actually the idea behind the question on capacity utilization is we agree. We see this massive opportunity in exports of finished product. And as a result, we're a little curious in terms of where you are right now in terms of capacity utilization, both for pulp? And then how should we think about where you are today on finished product and we can make some estimates in terms of what you need to add. Pablo Roberto González Guajardo: Yes. And it's a great question, Bob, and we -- let me put it this way. We have enough capacity to grow on finished products aggressively together with our partner in the coming years. And not only what we're producing right now, but we're putting plans together so that we can get more throughput through our equipment or through our machines. So we will be able to support growth with them. And I think we will still continue to be able to put a decent amount of hard roll sales out there in the U.S. So I think the combination over the coming years will certainly be a support our growth and support our margins going forward. Operator: Our next question comes from Alejandro Fuchs with Itau. Alejandro Fuchs: I have 2 very quick ones. Pablo, maybe I want to see if you can discuss a little bit about competition, right? How do you see competition today in Mexico, given the increase in price and sales mix, are maybe the competitors following? Are they being more aggressive promotionally? And if you can also discuss maybe your expectations into next year, hopefully, with a better consumer environment in the country. Maybe you can talk us about what do you expect going forward? Pablo Roberto González Guajardo: Sure, Alejandro. Look, when it comes to competition, I mean, you know our categories have always been very competitive. And we maybe are seeing a little bit more from some participants, not all when it comes to their promotional aggressiveness. I wouldn't say it's something that it's radically different, but a little bit more as, again, the pie is not growing, some are losing share. So they're trying to recoup some of that and are being a little bit more aggressive on it. But not -- again, not something that it's too surprising or too different from other instances. And the fact also that our retailers are, one, continuing to keep inventories and overall working capital under control, they're putting a lot of pressure on that. And two, trying to keep prices, it seems to me a little bit more consistent. I mean that helps in terms of the aggressiveness of promotions not being even more so that it could have been in other instances when the economy is not growing. So a little bit more, but really nothing marked, if you will. Coming into next year, I mean, we hope that a lot of the -- or at least some of the uncertainty that is hanging over the economy can be resolved or at least we get a clear direction as to where it's going. Certainly, the uncertainty that's coming from the USMCA revision or renegotiation and what will happen with that. I mean, you've heard -- we've heard that in a couple of weeks, we'll be hearing from our government as to some of the agreements they've come to with the U.S. administration. So hopefully, that will start to settle down, and we'll know a little bit better where it heads. Hopefully, as we get into the first -- or the workings of the judicial reform, we start to see how it how it works, and we start to see some decisions that support, again, giving more certainty to investment. And again, just hopefully, some of this uncertainties start to play out and we start to get a better sense of what's going on. We know then what to expect. And if that happens, I think the economy will be able to start growing again at a faster clip, maybe come back to what we were doing before all of this uncertainty, about a 1.5%, 2% rate, which at this stands would be pretty good. Not what we need certainly as a country. I mean, we really should be working hard to take all of the obstacles away from investments so that we can start growing at 3% or higher rates, but that's going to take some time and uncertainty is key for that certainty. So that will hopefully play out by '27, but at least by '26, if we can get some uncertainty out, we'll see greater economic growth and then we might see a consumer that feels a little bit better about things and then domestic consumption can start to pick up again. That's our expectation. But let's see how quickly we can -- how quickly it unravels and happens. Operator: Our next question comes from Renata Cabral with Citibank. Renata Fonseca Cabral Sturani: Congrats on the results. So my first question is still about the consumption environment, but specifically to understand if consumers are making the trade downs and if you see a bigger penetration of private label in the categories that the company has? And the second question is related to cost. In the initial remarks, I understood that the company expects that the raw material prices should maintain for the upcoming months. I would like just to confirm if that's the view. And for the fourth quarter, if the company has any hedges or the effects? Pablo Roberto González Guajardo: I hope I can answer your questions. You were not coming through too clearly, but if I don't, please let me know. Again, when it comes to consumers, we're seeing a divergence. Those that buy premium products continue to do so. Those consumers that are used to buy either value or economy products, we see a little bit of trade down to the economy segment. not a big trade down, but a little bit of trade down given how stretched they are. And tied to that, we are also seeing growth in penetration of private labels in the country. And it's a combination of the economic situation and retailers being a little bit more aggressive when it comes to pushing their private label. When it comes to costs, again, we already have seen in our purchases lower costs of most of our raw materials, excluding fluff. And that's just taking a little bit of time to reflect on our cost of goods sold, but we expect that to continue to -- start to happen certainly in the fourth quarter. And no doubt early in 2026. And our expectations for costs in the 2026 is that we will come in with, again, most of them on a downward trend and that will certainly be tailwinds for our cost together with the exchange rate, which will compare very favorably in the first half of the year. So that should be very, very helpful going forward. And when it comes to hedges, no, we have no more hedges during this quarter, and we don't expect to hedge going forward. Operator: We will move next with Antonio Hernandez with Actinver. Antonio Hernandez: Just following up on [ Renata's ] question, should we expect given that because of the tailwinds from FX and maybe raw materials and so on, that maybe EBITDA margin, at least in the short term has already hit rock bottom. Is that like you see basically upside on going forward? Pablo Roberto González Guajardo: Yes, absolutely. And it's interesting how you put it rock bottom when it's 25%, and it's still one of the best EBITDA margins out there for any Consumer Products company in the world. But yes, we probably have hit rock bottom. And going forward, we should expect better margins, no doubt. Antonio Hernandez: Exactly. Yes. I mean, rock bottom considering the 25% to 27%. Pablo Roberto González Guajardo: I understand. I just -- quite frankly, I just used it to make a point, sorry. Antonio Hernandez: Exactly. It's all relative in the end, but yes, pretty good margins. Just a quick follow-up. In terms of innovation and how you're also treating these consumers that are willing to buy these premium products. Maybe if you could provide any color on how much do they represent or innovation in terms of sales? Anything like that would be helpful. Pablo Roberto González Guajardo: Look, I think most of our growth really is coming from products that -- where we've innovated. And again, we're very, very excited with what we've done, but even more so with what we have coming. And early in 2026, we hope to share a little bit more of our strategies when it comes to areas -- main areas of focus and opportunities by category, channel and brands and also the -- what we see would be some of the very exciting innovations that we're going to be putting into the market. So let's hold on that until the first quarter of '26, and we'll be able to provide you more insight and details into what it's done and how we expect it to contribute to our growth going forward. Operator: [Operator Instructions] We will move next with Jeronimo de Guzman with INCA Investments. Jeronimo de Guzman: Start with a follow-up on the cost side. You mentioned that there's no hedges impacting the fourth quarter, but I just wanted to understand how much did the FX hedges impact the third quarter? Pablo Roberto González Guajardo: I would probably say they did impact about 50% of our purchases for the second quarter and for the first part of the third quarter. So assuming that what we saw on the third quarter was mostly based on those purchases. You could say that approximately 50% of our dollar-denominated purchases were impacted by those hedges in the quarter. I don't know if that made sense. Jeronimo de Guzman: But only half -- but only for half of the third quarter... Pablo Roberto González Guajardo: Yes, because of the -- no, I would say for the full quarter, about 50% of our U.S. dollar purchases, which are about 50% of our costs were hedged. Jeronimo de Guzman: Got it. Okay. And what was the average FX for those hedges? Pablo Roberto González Guajardo: [ 20 70 ] something. Jeronimo de Guzman: That will be a big improvement. And then just want to understand, given the much better cost outlook and the fact that these hedges are less of a headwind going forward or not a headwind going forward, how are you thinking about pricing going forward? Pablo Roberto González Guajardo: Look, we continue to take a very close look at each category and each tier and each channel to see where there are opportunities for pricing because, yes, we see tailwinds when it comes to costs of raw materials. We see headwinds in other costs, for example, on labor costs, which have been increasing in Mexico for quite some years. And when you compound their impact over the years, it's becoming a little bit more impactful, if you will, and some other issues. And plus we want to continue to generate important margins and profit so that we can further invest behind our brands. So pricing will not be as maybe in the past where you would just [indiscernible] we're going to increase 4% in the diaper category in March and period. It's going to be more of a strategic analysis, again by tier, by channel, et cetera, to determine where the opportunities are together with a very important push behind mix for our brands given the innovation we have. And so we will continue to look for opportunities to price and opportunities to improve our mix going forward. Jeronimo de Guzman: Okay. Yes, that's helpful. So the 4% that you had this quarter year-on-year, how much of that was mix versus actual price changes? Or was it just less promotions versus a year ago, I guess, which is kind of a... Pablo Roberto González Guajardo: It was about half and half. It was about 2% price, 2% mix. Jeronimo de Guzman: Okay. Got it. Great. And just one other question on the competitive environment. I wanted to get your sense on market share trends in general, kind of where -- in what areas are you seeing maybe more pressure on the market share side and where you're seeing more more of the market share gains that you're having? Pablo Roberto González Guajardo: Overall, I think we have a very stable market shares, maybe except on diapers, as I mentioned, we see that share growing. When you take a look at bathroom tissue, we're fairly stable. Napkins, we're growing share. kitchen towels, we're growing share. Wipes, we're growing a little bit on value, not on volume. But that's a category where we have lost a little bit of ground to not only private label, but a whole bunch of offerings coming from Asia and other parts of the world at very cheap prices. So we've got plans to attack there and recoup some of the share. And I would say about that, I mean, facial tissue is is flat at about 92%. I mean, our shares are pretty stable overall. Jeronimo de Guzman: Okay. Sorry, one more question on the new JV, the penetration, any updates on that? Pablo Roberto González Guajardo: On what, sorry? Jeronimo de Guzman: The new business, the pet, animal [indiscernible] Pablo Roberto González Guajardo: Pet business. No, thanks for the question. Yes, we continue to make inroads. I mean we're getting cataloged in more retail chains and improving our reach within them. So getting more SKUs in there and getting into more stores. And again, the consumer reaction so far has been very, very good. The retail reaction has also been good. So right on track where we wanted to be, and hopefully, that will accelerate in 2026. Again, this is a long-term play, but we should be this -- we absolutely should see this business accelerate in 2026. Operator: We will move next with [ Miguel Ulloa ] with BBVA. Miguel Ulloa Suárez: It could be regarding the CapEx for next year and any changes in the repurchase program. Pablo Roberto González Guajardo: Miguel, CapEx will remain very likely in the $120 million range. Could be a little bit more if some of the opportunities for exports capitalize, but nothing that would change significantly the capital allocation. For buybacks, this year, we will complete our EUR 1.5 billion program. Still too early to talk about next year. We will definitely have retained earnings from the net income this year to grow the dividend. And as usual, whatever we have left, we will devote to to buybacks. So that we'll have to see after we end the year. Miguel Ulloa Suárez: That's helpful. And just one, if I may, is regarding further investments or big investments in line for capacity in coming years? Pablo Roberto González Guajardo: Right now, it doesn't look like we need to do anything beyond that 120 average CapEx. Again, if we see more opportunity, we could see a couple of years of ramp-up. And even if at some point, we need a tissue capacity, which at this point, it doesn't look like, but hopefully, that changes, then we would see a couple of years of 150, maybe somewhere around that. Again, nothing that should change significantly the capital allocation. Operator: And this concludes our Q&A session. I will now turn the call over to Pablo González closing remarks. Pablo Roberto González Guajardo: Thank you. Nothing else to say just thanks for participating in the call. I hope you all have a terrific weekend. And since this is our last call before the year-end, I know it's early, but I hope you all have happy holidays and a terrific New Year's and look forward to talking to you early in 2026. Thank you. Operator: And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Primis Financial Corp. Third Quarter Earnings Call. [Operator Instructions] And I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. You may begin. Matthew Switzer: Good morning, and thank you for joining us for Primis Financial Corp.'s 2025 Third Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed with the non-GAAP measure is used, if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember. Dennis Zember: Thank you, Matt for that introduction, and thank you to everybody that's joined our conference call this morning. We believe our third quarter results reflect much of what we've been talking about in recent quarters, and we're excited to see the improvement and the lack of noise honestly in the current quarter. For the current quarter, we are reporting $6.8 million in net earnings and about $0.28 per share, which compares to core income of $2 million and $0.08 per share in the same quarter in '24. Our ROA and ROTCE in the current quarter improved to 70 basis points and 9.45%, respectively. We mentioned this in the press release, and I know Matt's going to give more current -- or more color. But our current profitability levels are higher than what we're reporting. When we adjust for some certain items that we know aren't permanent, we see a core ROA that's closer to 90 basis points and puts us right in line to be successful reaching the 1% ROA that we've been targeting. I know Matt is going to give more details on that. But from a high level, I want to recap some of the impactful things that happened this quarter and that give us the confidence that a 1% ROA is within reach. First, we're reporting our core margin in the quarter at 3.15%, which is up from 3.12% in the second quarter of this year, but up about 35 basis points compared to a year ago. At this point, we've replaced about half of the loans that we sold with the life premium business a year ago at yields that are at least 200 basis points higher. Importantly, we have -- importantly, we have the pipeline and the momentum to get the remaining portfolio replaced. And with current levels and margins that we see across our business, we expect that to add another 6 to 8 basis points of ROA and about -- excuse me, of margin and improved pretax earnings by about $1.6 million per quarter. We've also driven results on the deposit side. Compared to a year ago, we've grown noninterest-bearing checking accounts by about 16%, which has materially improved our deposit mix and taken our cost of deposits down by almost 20%. At the end of the quarter, alongside the rate cut by the FOMC, we were able to move lower again on the deposit side across our footprint -- across our business, both digital and in our core business. And thanks to our focus on core relationships, we've experienced very strong retention across the bank. Very little of this last move is reflected in our results due to the timing at the end of the quarter, but we expect this to be meaningfully positive to our margin and our results in the fourth quarter. When I look through the improvement in margin, I see new asset yields holding in strong, being funded incrementally at very attractive levels. Matt, I know it has more details on this. But in the current quarter, our new and renewed loans came in at about 7.16% compared to 7.57% in the second quarter of this year. New deposit business is a mix of us competing hard on new businesses, commercial businesses and driving down the overall cost with new checking accounts. New deposit business came in at around 2.51%. And so taken together, our new activity across the entire bank, all of our divisions produced spreads of about 4.65%. These kind of incremental margins on balance sheet growth is important because we're still relying on operating leverage to drive our results to where we know they should be. Our table in the press release reflects how steady we have been on operating expenses, showing that we came in at just $100,000 or so from our 5-quarter average. Looking ahead, we are confident that we can continue to hold growth in OpEx to a very minimal level, managing very tight in this environment and letting the investment that we've made in past quarters pay dividends with growth at the attractive levels we talked about. On our operating divisions, real quickly, I'm getting pretty excited about the investments we've made that are tied to residential mortgage. We've built our mortgage division from about $20 million a month of production to about $100 million to $120 million a month over the past few years. We've done this profitably too, slowly reinvesting enough of our earnings to build our production staff to what it is today. We've focused on culture and service as well as just products and pricing, and all of this work continues to pay dividends. In the third quarter, we had continued recruiting success that built annual production by about another $120 million or 10% of where we stood at the beginning of the quarter. Core results for the quarter showed pretax earnings of about $1.9 million, which is 58 basis points on closed volume and our strongest quarter yet. For core results in mortgage, we are excluding some legal fees associated with some recent hires that totaled about $900,000, and we expect this to moderate back to normal levels very rapidly. Mortgage warehouse continued to grow nicely and continued -- and shows real [ pace ] for the bank and for our earnings. To illustrate this, we had average balances in the quarter of about $210 million, but ending balances of about $327 million. Today, we have over $1 billion of uncommitted lines approved and in place and a pipeline of new opportunities working through the system of about $300 million. For the quarter, the warehouse group showed pretax earnings of about $1.6 million and moved their efficiency ratio down to about 27%. Long term and at scale, this business can be 2 to 3x its current size on our balance sheet with operating ratios that are accretive across the board and taken together with our mortgage company, we have the ideal -- we have ideal and sustainable exposure to residential mortgage that produces fee income and balance sheet growth that nicely augment what our core bank is doing. Panacea continues to gain steam and momentum. Loan balances moved higher in the current quarter to $530 million on average compared to $385 million in the same quarter a year ago. Deposits was really impressive, growing at a faster rate, ending at about $132 million in the current quarter, which is about 50% higher than they were a year ago. Importantly, Panacea's cost of deposits reflect a blend of technology, customer service and deep brand endorsement. For the current quarter, their cost of deposits came in at 1.37%, lower than our core banks and compares very nicely to 2.28% in the same quarter a year ago. I have -- obviously, I have a lot of conviction about the kind of value that we're creating here because the industry deeply values traditional community and commercial banking and honestly, rightfully so. And while Panacea and what we're doing here does have somewhat of a fintech flare to it, operating nationwide with deep embedded technology versus physical branches, it's producing dynamite credit results focused on C&I and owner-occupied CRE with excellent yields to one of the most, if not the most coveted customers out there. And it's funding the balance sheet at extremely attractive levels, lower than most established community banks. Strategies like this in the past didn't garner meaningful value because they focus on real easy credit and funded with flimsy or expensive solutions like CDs or institutional borrowings. But Tyler and his team is focused on relationships and technology and a customer experience that's proven to be more meaningful. And lastly, before I turn it to Matt for some more details, a few comments on credit. We noted in the last quarter that we've had a few downgrades that were centered on loans that weren't delinquent but did have weaker prospects and weaker guarantor support. Our negative exposure to 2 office real estate properties in the Northern Virginia market are reflected in our quality numbers, with both being in substandard and one being in nonaccrual. Both properties have improving NOI and strong leasing activity, but tenant improvements -- tenant improvements, leasing commissions and rent abatement have stressed the borrowers' cash levels and their ability to support the property. These properties are ideally situated outside of the district in very desirable locations. And it's important to note that the market here is stable to slightly improving compared to areas inside the District of Columbia. The remainder of our nonaccruals are centered in 2 loans. One is a $7.5 million loan to a private equity-backed company with proven value. Recent capital raises for the company indicate a strong enterprise value that puts us at about 35% loan-to-value. Matt's impairment testing on the company using pretty deeply discounted cash flows, continue to show no impairment on this loan. The other loan is a nationwide operating business with positive debt coverage, that's working several strategic opportunities to either be recapitalized or sold. On both of these loans, the banks working with the borrowers to exit the relationships through sales or refinance. And at this point, we don't believe there's additional losses or costs to be incurred. Outside of these properties, we really have virtually no exposure to office in any of our markets, but especially the D.C. metro area that is still not operating ideally. I don't want to minimize or gloss over any credit issue, but I don't believe we have exposures that should be causing problems or costs going forward. Okay. With that, Matt, I'll turn it to you. Matthew Switzer: Thank you, Dennis. As a reminder, a discussion of our financial results can be found in our press release and investor presentation located on our website and in our 8-K filed with the SEC. Beginning with the balance sheet. Gross loans held for investment increased almost 9% annualized from June 30 to September 30, including the Panacea loans reclassified to held for sale, gross loans would have increased approximately 15% annualized, led by growth in Panacea and mortgage warehouse. Importantly, average earning assets increased 10% annualized in the third quarter, positioning us to fully replace earning assets sold a year ago with the Life Premium Finance sale. Deposits were flat in Q3 due to limited runoff at the end of the quarter after the Fed rate cut, but we're still up 7% annualized using average balances for the quarter. Even more impressive noninterest-bearing deposits increased 10% annualized in the quarter, with a strong contribution from the core bank and mortgage warehouse. As Dennis discussed, our focus has been making sure we execute on the strategies that drive the ROA higher from here, which we've done. Our net interest margin in the third quarter was 3.18%, up from a reported 2.86% last quarter and 2.97% in the year ago period. We had limited impacts on net interest margin and margin -- this quarter from the consumer program and expect that to be the norm from here. The margin was impacted by interest reversals on loans moving to nonaccrual in the quarter and would have been 3.23% on an adjusted basis without those reversals. We're still booking new loans with yields near 7%, and we have a substantial amount of loans repricing later this year and next that will continue to move yields higher and help the margin. The core bank cost of deposits remains very attractive at 173 basis points in the quarter, down 6 basis points linked quarter. In addition, we used the Fed cut in late September as an opportunity to move digital rates down more aggressively by lowering rates of 35 basis points at that time, which should benefit us meaningfully in the fourth quarter. Our provision this quarter was a small release driven by growth in the loan portfolio tied to categories with lower reserve requirements, low core charge-off activity and the release of reserves for moving a portion of the Panacea loans to held for sale. Noninterest income was $12 million in the quarter versus $10.6 million in the second quarter when excluding PFH stock sale-related gains with increased mortgage revenue as the primary driver. Mortgage revenue and profitability bounced back in Q3 with pretax income of approximately $1.9 million versus $0.1 million in the second quarter and which had been impacted by cost tied to new teams onboarded at the end of March. To give you a sense of the scale we're building in mortgage, we funded 59% more loans in September of 2025 than we did in September of 2024. We also closed $26 million of construction of perm loans in the quarter, where we won't see material profitability at closing, but generate attractive gain on sale revenue in a couple of quarters. On the expense side, when you exclude mortgage and Panacea division volatility and nonrecurring items, our core expenses were $21.6 million versus $22.3 million in the second quarter. There are a handful of items described in the earnings release that are onetime in nature but don't rise to the definition of nonrecurring for reporting purposes and totaled approximately $1.8 million, including one more month of technology contract savings. Normalizing for these items, core noninterest expense was approximately $19.8 million, putting us only slightly higher than the year ago quarter. We are laser-focused on driving that number down further even in the face of inflationary pressures that would otherwise move it higher. In summary, as we detailed in the earnings release and investor presentation, our reported ROA was 70 basis points in the third quarter. Adjusting for the expense items we just highlighted, pretax earnings were close to $11 million, and ROA would have been approximately 90 basis points in Q3, with growth and repricing of earning assets, pretax earnings will grow to over $13 million in the near term, which equates to our 1% ROA goal with upside still from there. We're pleased that the third quarter showed meaningful progress on profitability with much fewer -- many fewer onetime items that have masked our core earnings power before. As I stated last quarter, we have substantial tailwinds from here that get us to strong profitability ratios without Herculean efforts just straightforward blocking and tackling. We recognize that one quarter is not considered a trend, but we firmly believe that we are seeing that trend play out and look forward to demonstrating our earnings power from here. With that, operator, we can now open the line for Q&A. Operator: [Operator Instructions] And our first question comes from the line of Russell Gunther with Stephens. Russell Elliott Gunther: I wanted to begin on loan growth, please. And it would be helpful to get your guys' thoughts on how you're thinking about overall growth for the fourth quarter, given maybe some potential mortgage warehouse seasonality, continued consumer runoff and then thinking ahead into '26 as well in terms of order of magnitude and mix. Dennis Zember: Russell, I'll start, and Matt can -- Matt can correct me, probably. I think on mortgage warehouse, we've got so much potential and so much still kind of maturing there that I think what's probably at scale, we would have more runoff in the fourth quarter. I don't know that we're going to have that same kind of runoff. I don't -- again, we only averaged $200 million or so, I think $210 million in the second quarter -- excuse me, third quarter. I think we can sustain those levels, maybe where we ended the quarter, we might not sustain that. Matt's probably got a little deeper understanding there. I think for Panacea, honestly, we could probably take the Panacea loans to whatever level we want the -- I think an annual production capacity there is probably about what their balance sheet is. We've got some other parties that are going to take some of that production. And Matt and I don't really want Panacea to take over the whole balance sheet. But I think we're ending at $550 million. I think we may sell a little bit of those loans in the fourth quarter to sort of get into some of the flow agreements with the larger bank, the third party. But I think for next year, $150 million or so, I think is definitely possible there. And on the core bank, I think we probably could squeeze out 7%, 8% growth there. I think for all of next year, if you're asking me, I think this point in time next year, we could be comfortably up, call it, 10% to 12%. Matt, what you -- what's your thoughts? Matthew Switzer: Yes, I agree with all that. I mean a lot of our growth this quarter was mortgage warehouse related. We would normally expect seasonality, but as Dennis mentioned, I mean, they're still on the growth path in terms of adding customers and loans. So even though utilization may drop some in the fourth quarter, the additional lines there they're bringing on is going to offset some of that growth. So they'll probably be up some on an average basis in the fourth quarter. Russell Elliott Gunther: Okay. That's great color, guys. And then my next question was in regard to Slide 11 of the deck, kind of 2 parts. One, the timing of when you'd expect to get to that 3.30% margin that you said is average earning asset driven. I think maybe just expand upon what you are referring to when you talk about continued shifts in deposit mix will then become focused. Dennis Zember: Go ahead, Matt. Matthew Switzer: Yes. I mean we'll -- I think we'll be closer to 3.30% margin as we exit this year, so probably first quarter next year. And then the deposit mix change is -- I mean, we've talked about this for a couple of quarters now. And I mean you can see it in the balance sheet results. We are 100% focused on increasing our proportion of noninterest-bearing deposits. We have, I wouldn't say a long-term goal, more of a medium-term goal to have that number closer to 20% of total deposits. It's about 20% in the core bank, but we wanted to be 20% for the entire institution. So '26, that is a focus of ours, just like it has been in '25, getting noninterest-bearing percentages up. So that's really the remixing we're talking about. Dennis Zember: Russell, I would add that if you look at the bank as a whole, we probably -- we have -- there's no probably -- we have more technology, and more strategies focused on driving low-cost deposits at a pretty fast clip than we do on the loan side. And we've got pretty notable loan strategies between warehouse and Panacea and the life business -- life premium business that we sold. But V1BE in and around our markets is driving massive pipelines and massive success. I mean, we've looked -- our peer group is up 5% in checking accounts and we're up 16%. And I'd attribute some of that to what we're getting in the lines of business as well as in the core footprint. So we really believe that our long-term value here of sort of being unique is centered more on the deposit side than the loan side. Right now, we're driving real success in the margin and with replacing the earning assets, as Matt showed you here in this graph. But I think as soon as we sort of tap out on replacing all those assets, the thing that will drive it is what Matt was saying, getting the deposit mix situated right, thanks to some of the technology that we got at play. Operator: [Operator Instructions] And our next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: I wanted to ask about deposits. And Dennis, the point you made on deposit costs incrementally with interest rates going down, does that get harder to do? Or does it get more easier or flexible for you to drive more deposits in at kind of the appropriate rate to push up margins? Dennis Zember: I guess it really could go either way. I think the -- you look at our universe or our competition, Chris, I mean, a lot of them are sort of looking at falling rates, the Fed cuts, they're looking at that to be -- I mean the whole industry honestly has been looking at that to be the sort of driver to get some of our margins back. So we suppose -- Matt and I both suppose that the competition is going to be using most of that to get the biggest beta possible. I think the fact that we're driving as many checking accounts into the bank lets us be sort of more aggressive on business money markets, business checking, consumer, even CDs and still sort of maintain a cost of deposits that's at or below our period. And I mean, we're more of a growth bank. So we have to sort of balance where we're bringing in or where we have things priced versus just straight for profitability. So that checking account growth is absolutely key to us keeping deposit flows at the right level. Matt, and I don't want to fund the balance sheet with brokered CDs and institutional borrowings like Federal Home Loan Bank. We want to be core funded. And we don't want that to eat into the margins or the operating leverage we want. The only thing we can do to stay competitive and we're very competitive is are those checking accounts. And as long as we're driving checking counts in a sort of better than 10%, I think we can be very competitive on the rate-oriented products, Chris, and still punch out good growth and good profitability. Christopher Marinac: Got it. That's helpful, Dennis. And I guess, just kind of another point because you've now been doing the digital bank process for several quarters, a couple of years now, are you finding evidence that these are more sticky customers, which is really differentiating Primis in the rest of the pack? Dennis Zember: 100%. And Matt can give you more color here, but I mean our average customer has over $50,000. The average customer, I think we're right, maybe a month from having average customers' deposit relationship for 2 years. Over 90% of our customers have either more than one deposit account with us or more than one product or they refer to a customer. Questionably these are stickier than what the industry believes. Chris, I would still caution you though, we -- these are not customers that are in the branch. These are customers using a digital experience that's by far better than what most banks are rolling out. Still, they're more rate sensitive than the traditional community bank so -- community bank customers. So we're not going to get ahead of ourselves and push -- try to push these rates down to Fed funds minus [ 150 ]. That's not going to be these customers. But we've moved rates 3 or 4 times now, Matt, can correct me. And we've got retention rates over 90%. Matt, help me make sure I'm right on most of that. Matthew Switzer: You're 100% right. And as I've mentioned in my remarks, Chris, we were aggressive after this last Fed cut because we were seeing still growth in balances without any advertising and based on our read of the deposit base, it looked like we were probably a little bit high relative to the rest of the market. So we actually had -- we cut rates a little bit more than the Fed cut in September, and we did see a little bit of runoff, but nowhere near the runoff you would have expected from a deposit base that was truly hot money based or rate sensitive. I mean there were some rate-sensitive customers in there, but frankly, no more than we would have in the core franchise. So we're pleasantly surprised with how sticky these deposits have been as we've lowered rates with the Fed and it's been a very valuable funding source for us. And as we talked about in previous quarters, allowed us to protect the core bank deposit base, which is still very low cost and very sticky. Dennis Zember: Chris, I'd add one more thing. Speaking on a panel a few weeks ago and people were asking about digital. And the industry -- and I mean, I'll be honest, I had this too. The industry believes that kind of digital customers that you never see or touch have some sort of hotness to them in their hot money. Honestly, every customer -- we have 20,000 customers, maybe 25,000 when you include all the lines of business, every single one of those customers has a banker. And every single banker's cell phone is in the hands of every single customer. We're available to them 24/7 is what we pitch. Our bankers and our call center. We offer premium banking products, we offer the full suite of banking products. I mean, yes, the digital products are deposit oriented. But if any of those customers needed anything, loans, deposits, loans, mortgages, HELOCs, anything, we are ready to do this. That's the reason, honestly, that they're sticky. I don't think that the industry is wrong about whether these customers are sticky or not or rate sensitive or not or how rate sensitive. I think we just sort of neutralize that by working hard to -- just to build relationships with these customers and sort of, I guess, I hate to say it, but sort of community bank style. And I think that's been successful. And really, we're proving it out with what Matt just said. Christopher Marinac: Understood. I had a asset quality question, which is the -- and thanks for the information you gave on a couple of loans. Do you see any of those things resolved in the next 2, 3, 4 quarters? And even though it's only a few basis points of margin difference, do you see any of that helping you in the next few quarters? Dennis Zember: The larger C&I -- the C&I property that's sort of the operating business. I think there's a chance that could be resolved -- sold, potentially the business sold or recapped in the fourth quarter, that would improve the margin, obviously, because that one is on nonaccrual and was for the whole quarter. The others are still sort of -- we're still sort of receiving payments and working with the borrowers. I think the real estate deals in Alexandria are not going to be resolved in the current quarter, although I think if you gave us probably a couple of quarters or maybe to the midpoint of next year, just given the leasing activity and Matt and I are personally involved in these loans and in the leasing activity and just to have very relevant right now data. I think by June of next year, given the leasing activity we're seeing, those properties could be strong enough to be and have strong enough debt coverage to at least not be on nonaccrual. Both of the properties right now are at 1x debt coverage on interest on P&I. One is above debt -- one is above 1, one is like [ 105 ] and the other is not. But the leasing activity on the one that's on nonaccrual, I think June of next year, we could have it above 1x debt coverage on a P&I basis. So I would tell you, really, we just got one that could be resolved in the current quarter and the others, I don't -- I mean I hate them being in nonaccrual and such [ and all ], but I believe we're in the best possible place we could be with those. Christopher Marinac: Great. That's good background. And then just last question, just to connect that what you said at the beginning of the call, but the expense number should continue to get better given the operating difference as you outlined in the release, and we'll just see that quarter-to-quarter. I suspect it's not just the fourth quarter phenomenon, but it will go over the next few quarters. Matthew Switzer: Yes. Yes. Operator: [Operator Instructions] And with no further questions, I will now turn the conference back over to Mr. Dennis Zember for closing remarks. Dennis Zember: Okay. Thank you, everybody that's joined our call. Matt and I are available if you have any further comments or questions. And if you don't, I hope everyone has a safe and happy weekend, and we'll talk to you soon. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.