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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: Welcome to Sdiptech Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Anders Mattson and CFO, Bengt Lejdstrom. Please go ahead. Anders Mattson: Hi, everybody, and welcome to our Q3 presentation and Q&A. I am Anders Mattson, CEO of Sdiptech, and I will be presenting the results together with CFO, Bengt Lejdstrom, here today. I will start with the highlights of the quarter before we go into the more general content with the financial results. So in the quarter, we have implemented and streamlined our portfolio and Sdiptech will become a more coherent and better aligned group going forward. Until today, we have consisted of 41 companies in our 4 business areas. We have historically been growing our adjusted EBITA at a good level, but we have, at the same time, been quite volatile. Our portfolio has partially been based on installation companies, companies with exposure to cyclical end markets like construction and quite a few companies with a margin around 10% in the group. And these companies were usually or most of them required before our strategic shift into. So if we look at the financials here for this total portfolio in Q3, we had approximately 19% in adjusted EBITA margin and 12% return on capital employed. If we look in the middle, so what have we done? We have assessed on our key strategic priorities. We prefer product-based companies. We like markets with strong underlying growth drivers. And we would like to see a clear niche, which is usually protected a good way and that's also the reason why we [Technical Difficulty] in many of our business units. So based on this assessment, we have made a decision to divest 11 companies from the group. We have already started the process of finding new homes to these companies, and we have good progress with several of divestments so far. As these 11 companies only stand for roughly 3% of the year-to-date adjusted EBITA, their P&L effect is minor. On the balance sheet, the result will be a write-down of SEK 500 million in goodwill and other intangible assets. And Bengt will come back to this later in the presentation. So if we look to the right here, from today and going forward, we will consist of 30 companies and a better aligned portfolio. We believe we will be able to more proactively drive organic growth with this portfolio. And from our point of view, it's also a better allocation of capital towards our strategic priorities going forward. Financially in the quarter, as I said, is a minor effect. Adjusted EBITA will be reduced by SEK 7 million from SEK 242 million to SEK 235 million. but our adjusted EBITA margin will go up from 19.4% to 21.3%. And return on capital employed will increase from 12% to roughly 13%. So in the presentation going forward now, I will present numbers according to the core portfolio. So summary of the quarter from a financial perspective, net sales increased with 9%. That was 4.5% organic growth and roughly 9% due to acquisition. We were glad to see solid demand from all our business areas. It was positive to see a slow recovery from some larger business units where orders have been pushed forward in the year from Q1 to Q2 and now in Q3, we finally got some sales realized. Adjusted EBITA increased with 9% at 2.4% organic and rough from acquisitions. The increase in sales made EBITA grow as well. So it's not only because of cost adjustment. And year-to-date, we are still behind last year's numbers, but positive with the organic growth in the quarter. We have also been able to maintain the margin of 21.3% in the quarter, which has been quite challenging due to tough market conditions, both on price and also actually to getting the customer to commit to the orders. We had a strong cash flow generation in the quarter as well of 94%, which resulted in SEK 255 million in cash. And that was primarily a result of improved inventory levels from a high level in the last quarter. If we're going into the net sales, the net sales increased with 9% to SEK 1,102 million. And as I said, there was a good demand, solid demand from all our business areas. And the 4.5% organic growth is something we are, of course, satisfied with in the quarter. As I also talked about previous quarters, we have experienced a slow first half of the year, especially from some larger business units in the group. So it's a positive sign that I mentioned as well that we have been able to deliver and recognize sales in the quarter. We have also had a strong contribution from acquisitions. And some of the acquisitions is influenced by strong growth drivers linked to security around data center as one example, and that is in our smallest business area, Safety & Security. In the graph to the right, we have separated the core portfolio since 2023. And from this date, you can see we have achieved a CAGR of 13% in sales growth. If we're looking at the sales split, the sales split of the portfolio looks now a little bit different. After the separation of the core, Sweden has decreased in size and now it's only between 5% and 6% in total sales from the portfolio. U.K. is still our biggest market. We believe we are successful in the U.K. We like the trend with the long-term investments in infrastructure assets. Other Europe is now roughly at 20%. This is a geographic area we foresee to continue to grow in. If you look to the right, turnover by type, proprietary products is the dominant type of revenue for us as a group. Installation has been reduced as a result of the core portfolio. The installation and service that you still hear -- you still see now is primarily on our own products. And we have several companies with a strong service offering that enables stability in the earnings. And that's usually both service on hardware, software and manual labor hours as well. But again, on our -- primarily on our own products then. Coming into the adjusted EBITA. Adjusted EBITA increased by 9% to SEK 235 million. That is, for us, a stable profit growth with 2.4% organic growth. We also had a strong contribution from acquisitions with 10%, and it's coming primarily from companies within Safety & Security and also from companies within Energy & Electrification. And again, that's the trend around security for data center that has been driven this acquisition quite good in the quarter. The margin at 21.3%, we have been able to maintain from last year. As I mentioned before, it's been a price pressure in the market. So being able to maintain this margin is a result of a good cost control, both from activities within purchasing, but also from overall overhead cost development. If we look at the diagram to the right, we see a stable and high level in adjusted EBITA in percentage since 2023. If you also then look at the CAGR, the CAGR of the EBITA is at 11%, and we know we can do better than this. But in this graph, it's affected by a slower pace of acquisitions since last 1.5 year and it's also a weaker, as we know, organic growth since the beginning of 2024. So looking at the development in our 4 business areas, I think it's important to mention that we believe our 4 business areas serves us well as a group. They are broad enough to enable good M&A opportunities within each and every business area. And they also align our focus to the markets with strong underlying growth drivers, which is very important for the long-term development for us as a group. In Q3, all 4 business areas had solid demand. It's also positive to see that our smallest business area, Safety & Security, had a strong development in the quarter. If you look at Supply Chain & Transportation, we have begun to recover in this one after a weaker first half of the year. Several customers in this business area postponed their orders, actually from Q2 during the summer into Q3 and some into Q4. But in Q3, we released some sales, and it was also a good scalability, which led to margin improvements in the business area. Safety & Security, as I already mentioned, had a strong quarter, and there was several smaller units benefiting from favorable market trends, the one I already mentioned around data center, but also around emission control, pollution control, which is a strong area for us. And the new acquired companies in this business area also affected positively. Within Energy & Electrification, performance was mixed. A few units were driven by continued strong demand from energy efficiency, while some units were still affected from some very tough comparison from last year. That was from Q1, Q2 and also now in Q3. In Water & Bioocconomy, several units performed well, although margins were impacted in this business area by some cost pressure. And we are working to -- but we also need to be balanced to foresee future opportunities and future growth in regards to our cost base. And with that said, I hand over to you, Bengt. Bengt Lejdstrom: Thank you, Anders. Yes. And let's have a little bit deeper look into the cash flow and cash conversion for the whole group. As Anders was mentioning, we had a very good cash conversion of 94%, much of that coming from the inventories that were built up during the summer for seasonal sales that have started now and will continue into Q4. Improved the whole situation with inventory levels. We also saw some lower tax payments compared to last year. So all in all, a good quarter. And as you can see there on the chart that typically, we are between 70% to 90% in cash conversion. That's from operations and from working capital ups and downs. And we're now on a last 12-month basis, right in the middle at 81%, comparable with last year's 83%. We also start to show in our reports now the free cash flow per share. We haven't reported that for a very long time, but we report it now. And we had a very good free cash flow. That means all cash coming in from the business and also after the working capital adjustments, but then deducting the amortization of different leasing contracts as well as deducting the capital expenditures for different type of investments in the companies. So really, the only thing not included is when we acquire companies or pay earn-out debts to already acquired companies. So that cash flow was very good. And apart from the good cash flow from the operations, we saw a lower CapEx level in this quarter as we have done also for the full year. We work very closely with the companies, of course, to decide what type of the investments they should do. And we do that by looking at a classical DuPont chart, you could say that we -- where we look at both their EBIT margins and their capital turnover and see what kind of return on capital employed they have and from that decide what's most prioritized. So yes. And also the free cash flow for the last 12 months, as you see here at the last bullet is also very strong coming then both from the operations and from lower capital expenditures. Looking then at some additional metrics. We have the profit after tax, of course, an important measure. And -- but this quarter, it's a bit affected quite heavily actually by this write-down of goodwill when -- and it's all of SEK 500 million, this write-down of goodwill and other immaterial assets. When we moved these companies that will be divested out of the business areas, we could then make a full impairment test of their values. As you know, we do our impairment tests on goodwill, et cetera, based on our business areas because they are our cash-generating units. And all our 4 business areas have been able to defend very well the values that are in there. There is no risk for write-downs of the business areas. But when we then subtract out these specific companies, we have enabled them to look at them individually and in fact did total write-down of SEK 0.5 million. But if we exclude that more bookkeeping exercise, it's not cash generating anything, not affecting the cash flow, then we see that the profit after tax was a little bit lower. The difference is mainly because of the currency effects. We had SEK 14 million of currency loss in the quarter. And as you could see and hear from Anders previously that it affects both top line and profit, of course, this 4%, 5% all in all FX effect. But in our finance net, it affects us with SEK 14 million in the quarter. And that also affects us on the last 12 months. Then total, the finance net is affected with SEK 50 million, most of that coming from currency effects. And as you saw on the chart on our distribution of sales that currency effect could, of course, be quite substantial as the Swedish currency becomes stronger as we have more than 90% of our revenues kicking in from other currencies. Then another measure then taking that profit after tax and take it per ordinary share after dilution, you see then a very hefty minus in the quarter, minus SEK 11.14 per share. But if we then exclude this write-down, it's 2 -- a little bit more than SEK 2 per share, and it's of the same reasons as I just explained. And that also goes for the last 12 months compared with last year. Then taking a look on the leverage. We saw a quite big increase in the financial debt leverage compared with last year and also compared with the year-end last year. And that's because we have paid out earn-out debts. These earn-outs have been provided for in the balance sheet ever since we acquired the companies. So the payout of earn-outs do not affect the net debt in total, the bottom line, but it affects the financial net debt. So that has -- we have paid out about SEK 150 million in the quarter and almost SEK 400 million in the year, year-to-date. So that's, of course, a lot of money going out, but it's going up and it's having performed very well since we acquired them. So it's a good thing to pay earn-outs. The total net debt compared with the adjusted EBITA has decreased since new year since we haven't made so much acquisitions, but it increased from last year September because we have acquired SEK 85 million of profit in the last 12 months. And of course, that affects the balance sheet and since the organic growth hasn't been top notch during that period. That affects the profit and results in an increased -- slightly increase in the net debt leverage. Then as the last financial metric here presented, we look at the return on capital employed, the ROCE. And as Anders mentioned, it was 12% now. It's counted as, of course, on the average capital employed for the last 4 months and then compared with the EBITA profit we have had. And that decreased because we have increased the capital employed from the acquisitions and the organic growth, as I said, has been -- last 12 months have been slightly negative. If we just look at the outgoing balance of capital employed after the write-downs of goodwills, we are at almost 13%. And if we only look at the core businesses, taking their capital employed and their profits, then we're at 13.5% now. So as we divest these companies one by one, then, of course, then the capital employed is reduced and this ROCE will increase slowly, but steadily. If we look upon the operational return on capital employed, that is the average from our operating units, we're at 51%, which is, of course, very good, we believe. Okay, with that, back to Anders. Anders Mattson: Okay. Thank you, Bengt. So coming into acquisitions, which is a very important aspect of our business model. Year-to-date, we have acquired SEK 40 million in EBITA, and we hope to close one small deal before year-end. We have some ongoing discussions that is quite far in the process. So that's the aim for the year. I think it's important to mention our guiding principles here in regards to M&A. Regarding the pipeline, we continue to build the pipeline to meet the customers and customers -- sorry, companies to come to the discussion about the final acquisitions, and we do that, and we have a strong, solid pipeline in place continuously building that one. In regard to valuation, we're disciplined here. We know that it's easy to go away in valuation. And we have -- during this quarter, we have stepped away from 2 deals that I was part of as well due to the valuation was going too high for us. And on the leverage side, as we have said, our aim is to reduce the leverage in the future. So of course, that together with our disciplined evaluation is affecting as well the numbers of acquisition and the number of EBIT we have done so far in the year. I can also add here that we have started to look into Germany. We did it already last quarter, but it's a good progress and a lot of exciting companies in that region for us now and also for the future, we believe. Okay. So last slide before we go into the Q&A, a little bit of the takeaways from the quarter from us. I think the solid underlying demand is positive. A majority of our companies had a stable demand in Q3. It is still uncertainty out there in the market. And the condition for many of the businesses in Q4 is unstable. We see that 2026 is a positive sign for us, but it's still uncertain. And that's what we see right now. And we don't want to say anything more about 2026 than that here today. On the second bullet here, on our strategic actions for the long-term value creation, we have taken some very important steps in the [ quarter line ], our portfolio. We have been talking about that for quite some time, and it's -- I think it's good for us for Sdiptech to finally have done this decision now going forward. Many of the companies, we will divest. We have ongoing discussions with and progress in a good way. We have not set any strict deadline when it needs to happen, the divestment. But both from our perspective, from the company's perspective, we would like to be efficient and fast in the process. So that's what we are driving at. We have -- during the autumn as well, we have looked into our strategy, and we have made some adjustments, and we will present that on a Capital Market Day in end of November. And on the last note then, the acquisition pipeline. It is a solid pipeline that we have. Discussions ongoing, but we keep a strong discipline in our valuation and also around our investment criteria, especially with our aim to decreasing the leverage over time in the future. So that was, I think, everything from us as a presenter, and I think we can open up for our Q&A session as well now. Operator: [Operator Instructions] The next question comes from Max Bacco from SEB. Max Bacco: Well done in the quarter. Three questions from my side, 3, 4 questions. Perhaps starting with the cash flow. As you said, very strong here in the quarter, partly due to lower tax, but also lower CapEx and then quite neutral impact from net working capital. So the first question on cash flow, I think you mentioned this, Bengt. But here in the end of 2025 in Q4, do you see potential for further support from net working capital in terms of the cash flow? Or yes, what's your thought on that, if you start with that one? Bengt Lejdstrom: Exactly. Now typically, Q4 could be quite good from a working capital perspective since we have some seasonal oriented comp. There's no moving equipment and heat work and so on. And they have been building stocks during the summer and starting now then to sell it and turn it into accounts receivables, of course, but then also get the cash in from those invoices. So -- last year, it was actually above 100%, the cash generation. So it's not that high this year, but still Q4 is typically good for net working capital. Max Bacco: Okay. Sounds promising. And then you actually touched upon this also during the presentation that in the quarter, CapEx was a bit lower and that you have a very strict process with the subsidiaries when deciding how to allocate capital. And perhaps thinking a bit more long term than just next quarter, but historically, Sdiptech has been at some 4% of sales in terms of CapEx. Do you see a potential to reduce that number going ahead and perhaps allocate more into acquisitions instead and deleveraging? What's your thought thoughts on that going forward? Bengt Lejdstrom: Yes. I mean it's typically perhaps difficult to say the exact number for the future. But I think if we have been sometimes around 4 and even above, I think we're more around of sales now in CapEx spending. So -- but as I said, it's always depending on the actual situation and what's most profitable for that company, for example. But yes -- but we have tightened up the process quite a bit. Anders Mattson: I can add to that as well, then. Yes, I think what Bengt said there, it's important for us to see the CapEx and the need for the total portfolio and to prioritize in the coming years in a better way. And that's something we have looked into ourselves in our strategic work as well. Max Bacco: Okay. Sounds good. And then changing topic. I mean as you have explained yourself, quite a lot of things going on right now in Sdiptech, I mean, everything from improvement measures in several core subsidiaries. You still have an active M&A pipeline, you have ambitions to divest several companies. And I guess you're preparing as well for Capital Markets Day here in the end of November. Just curious how you allocate responsibilities internally? And do you consider yourself to be able to execute on all parts without, I guess, losing momentum and/or sacrificing quality? What's your thoughts on that? Anders Mattson: Yes, I think from -- I agree, it's a lot of -- on the agenda, but I think we have structured it quite good. The M&A team is not responsible for the divestment. So they are focusing on building the pipeline and meeting and executing on the M&A side. We have other internal individuals responsible for the divestment. And it's going quite good actually with -- we are not going on big broad processes. We are identifying smart, we think, key potential buyers to the businesses, and we drive that process quite efficiently. And from the other perspective is that we are still working on establishing the new business area organization. In August, Daniel started as the new Head of Supply Chain & Transportation. And we are quite far in the process to recruit somebody in the U.K. as well for Energy & Electrification. And I think that will, of course, be very important going forward to have that stable organization in the business area side as well. But so far, it looks -- feels good on that side. Max Bacco: Okay. Perfect. And then one final question, turning a bit more short term again, Just if it's possible, if you could help us how we should think about Q4 here in the next quarter in terms of comparable numbers, both for core and noncore? I mean at first glance, it looks like that noncore or other operations seem to have a quite weak Q4 last year. I guess it's some seasonality into it as well, whereas core had a more -- it looks like more decent quarter Q4 last year. Did you share that view on things? Anders Mattson: Yes. Yes, I can -- definitely, it's correct. In our situation, we look at the divestment process. So it might be that some of the companies might be divested now during Q4. And then, of course, it's going to affect that comparable numbers then. From the core, I think Bengt was touching upon that as well, that it's important that our companies with a bigger seasonal effect deliver now. And it's a little bit -- as we said, it's a little bit unsecured at the moment. We have some more slight negative, so to say. But overall, it's a positive sign for the future. But it's -- right now for Q4, we have said not to guide anything more than this at the moment. Operator: The next question comes from Simon Jönsson from ABG Sundal Collier. Simon Jönsson: First, just I want to say, it's a nice addition with the free cash flow per share KPI. Things like that are appreciated. And then I also have a question, like Max, on the acquisition pace. You -- it sounds like you expect maybe one more smaller acquisition this year. And it sounds like you remain quite active in new deals. So I just wonder how you think about new acquisitions versus your preferred gearing levels sort of what you're comfortable with and where you think your limits might be in terms of gearing and how much you can do on the acquisition side in near term. So I guess that's maybe not Q4, but in coming quarters or so. Anything on that would be helpful how you're thinking? Anders Mattson: Yes. So I think on the first perspective of this, it's important to be active. We prefer to say no to deals than not having the deals to not sit at the table. So we are, yes, definitely building the pipeline and meeting the customer and trying to get to the deal, so to say. But regarding the exact numbers, we will touch upon that, and we have discussed that internally in regards to our Capital Markets Day that we will come up with targets, I think, around some potentially new financial targets there. But right now, we are at 3.2%, as Bengt showed you, but I think we would like to go down from there and not to go up. So that's the balance. We still would like to acquire those value companies that are out there when we can get them at a good valuation, but still ambition is to drive down leverage. But we don't want to make it too fast and not make any stupid decisions when we have the good targets out there. Simon Jönsson: All right. Good answer. Then I just have a follow-up on the margins on the segments, specifically on Water & Bio. You commented briefly on the margins in that segment were impacted by cost pressures. Could you maybe elaborate a bit more specifically due to the margin decline year-over-year and how we should expect that those pressures going forward? Anders Mattson: Yes, we have a company, which is having a lot of big workforce. So from a salary perspective, salary increased quite significantly in the beginning of the year in -- especially in the U.K. And we are having some longer contracts with insurance customers, which is very hard to adjust for those kind of compensation or salary conversations. So there's a tough year for that company specifically in the U.K. And then -- but that's really the majority. And then we have also in other companies, we have been taking some decision to build up a little bit more because it's -- we need that for -- to be able to deliver for a possible upside in the coming quarters. It looks good from a revenue side in projects and orders. Operator: The next question comes from Martin Wahlstrom from Redeye. Martin Wahlstrom: The first one is related to the dynamic you say, where you postpone orders from H1 to H2. Could you give any more color on the split between kind of what lands in Q3 and what lands in Q4? Anders Mattson: I think we have a good -- let's say, part of that was actually now coming into Q3. But yes, it's still -- some of those orders, it's -- I'm thinking specifically of the 3 companies in the group. They have been promised orders. It didn't come in Q3. So yes, potentially, it will come in Q4. The good thing when we have the U.K. companies that they have the budget year in actually end of March 2026. So it's still on the right side in the budget, so to say, for some other companies. But no, it's difficult to say that, specifically how much of it came in Q3 and how much is going to be realized in Q4. Q4 is more about what I think we answered before as well, the seasonality in some of the winter needs to come, and we need to be able to deliver for the season or in season as well. Martin Wahlstrom: I see, I see. And then one final question is related to if you could give some more color on the distribution in your acquisition pipeline when it comes to kind of the split between business areas and geographies going forward? Anders Mattson: So from business area perspective, it's, let's say, it's equally among the 4 business areas. We have had some good discussions within supply chain, but also in Safety & Security in the recent quarter. So I think that's good. It's important that we work with all 4 business areas in acquisitions. From geography, it's actually nothing special there. It's our main geographies. It's U.K., it's the Nordics, it's Italy as well. And then as I said as well, we are going into Germany, and we have some good discussions with German or Dutch as well companies. So the DACH countries. It's -- so that's new and fresh into the pipeline, but nothing more or more significant than other geographies at the moment. Operator: The next question comes from Linus Alentun from Nordea. Linus Alentun: Just a quick couple of questions here from me. Starting off in Water & Bio, what would you say is a normalized margin here once we see a rebound? Bengt Lejdstrom: Well, I could perhaps step in there. Anders Mattson: Yes. Bengt Lejdstrom: Yes, we have seen -- typically, they have been around 24%, 25%. And then as the companies we now count as the core companies in that business area. Now it was 21% in this quarter for the reasons that Anders mentioned. So we're working to get it up there again. So whether it will be 23% or 24%, 25%, that's, of course, still to be seen because there are many different unique situations to take care of. But at least we're working to improve from the current 21%, that much we can say. Linus Alentun: Okay. And on '26 here, you mentioned in the report that, that is when you see a broader recovery. What makes you confident in that? Is there anything -- any indicator you've seen turning more positive or... Anders Mattson: No, I think it's the discussion with the companies. We are in a budget process as well, and we've been asking -- or in our discussions with the companies, it is positive momentum for business areas or business units and orders and they are looking into projects for next year and new potential customers. So no, it's from that perspective, talking to the companies and seeing there what they see for the orders and for the potential in the coming year. Linus Alentun: Okay. Super. That's super clear. And just one last question here. If I remember correctly, you had some swaps here that are contributing negatively in the net financials. What's the time line? When will they stop affecting here? Bengt Lejdstrom: Yes, we have 2 types of hedging arrangements. One is for interest and those interest swaps are right now negative. They were positive before when the interest rates were higher. Right now, we pay an extra 0.2 or so percent on the debt. But they will be closed from end of next year. And so 1, 2 years, you could say. So it's not a very big downside, but still, we pay about 20 basis points more than we should because of those hedging. But they have been giving a good return because they were better before. The other side, we have hedging arrangements on currencies. And there, we tried to hedge our currency exposure in the balance sheet to some extent. And not -- we're still net asset positive, which means that when, for example, British pound sterling is weakening towards the SEK, all in all, we get then a cost in the P&L, but not as much as we would if we hadn't those FX swaps and hedges. Linus Alentun: Okay. Super. So 20 bps there. Operator: [Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions or closing comments. Bengt Lejdstrom: Yes. And I could kick off then with the questions. We have received 3 questions in the chat here. I think one we have already answered that was regarding the EBITA margin in the Water & Bioeconomy business area. And the second question was that some of the companies we are now intending to divest among the other companies. They have quite well-performing companies with good margins and product based to some extent. Why divesting such companies? Anders Mattson: Yes. I think I can add to that question is that -- so what I said, what we look for in the companies we would like to buy in our strategic priorities is around 3 things. We would like to have a strong promise that actually have their own products. They sell and they make service to them. We also want to have not cyclical end markets. It has been a challenge with some of the companies, which is very cyclical and working, trying to proactively work with organic growth is quite difficult if you don't have the mindset, that's what it is with those companies. And the third thing around the niche. If you have niche, you can protect it and you can drive growth from that niche. And all of these companies that we're giving examples of here, they have some aspect or they are not meeting that criteria. So it's been -- for us, been challenging, and we would like to allocate that money into more our prioritized businesses and future businesses. And we believe many of these businesses, as we said, it's not because they are performing financially bad, it's more that -- to allocate that capital to something that we believe in the future is better according to us. Bengt Lejdstrom: Thank you, Anders. And then the last written question, as I see, it's regarding the write-down if -- was that a one-off? Or could that potentially continue to be more write-downs Q4 and also next year? But what we have done now is to the best of our knowledge, as it's typically called and also to write down the value. So we don't foresee that we need to do any more write-downs. And of course, it's depending on how much money, high considerations we will get for the companies once we divest. But we believe at least that the value of these companies represent their market value and potential than consideration that we will get. So it shouldn't be any major at least. It could be -- go both ways. We could both have some profits or we could have some smaller losses when we divest, but it shouldn't really be any big numbers. But no write-down of goodwill as such because of any impairment. I think that was all of the written questions. So back to you, Anders. Anders Mattson: Yes. I think then thank you for the written question and asked question. And yes, thank you all for listening in, and we are looking forward. And hopefully, we will meet some of you at the Capital Markets Day in November, which will be held here in Stockholm, and we are looking forward to that. So with that, thank you, everybody, for today.
Operator: Welcome to Metropolitan Commercial Bank's Third Quarter 2025 Earnings Call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer; and Dan Dougherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. [Operator Instructions] During today's presentation, reference will be made to the company's earnings release and investor presentation, copies of which are available at mcbankny.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to the company's notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and investor presentation. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin. Mark DeFazio: Thank you. Good morning, and thank you all for joining our third quarter earnings call. In aggregate, MCB's results this quarter reflect how our strategic position fuels our performance, highlighted by strong balance sheet growth funded by core deposits. Importantly, our continued growth strategy is underpinned by our unwavering commitment to risk management in all of its forms. In the third quarter, loan growth was approximately $170 million or 2.6%. Year-to-date, we have grown the loan book by approximately $750 million or more than 12%. Total loan originations year-to-date were $1.4 billion. As well, core deposits were up approximately $280 million or 4.1% in the quarter. Year-to-date, we have grown deposits by over $1 billion or 18% and that's without the acquisition of any teams. Our strategic funding initiatives include the maintenance and development of existing deposit verticals as well as the identification and pursuit of new verticals. In addition, we are moving forward with new branch openings in strategic markets well known to MCB in Lakewood, New Jersey, Miami and West Palm Beach, Florida. The third quarter marked our eighth consecutive quarter of margin expansion. The net interest margin increased 5 basis points to 3.88%, up from 3.83% in the prior quarter. Our financial highlights of the third quarter include Board approved $50 million share repurchase program and the payment of our first common stock dividend. These actions reflect our unwavering commitment to provide our shareholders with a meaningful return of their investment. We will utilize these capital management tools with a level of discipline that is appropriate and necessary for a growth company such as us. We continue to move forward with our new franchise-wide technology stack. We anticipate full integration to be completed by the end of the first quarter. We are confident that these new technologies will support and scale with MCB's diversified and growing commercial bank for years to come. I am equally excited about the launch of MCB's AI strategy. The hiring of MCB's first AI Director last quarter was a great start. We will approach AI reasonably and we will align ourselves with the regulatory expectations and will identify and prioritize use cases that advance MCB's franchise value overall. Our asset quality remains very strong with no broad-based negative trends identified in any loan segment, geography or sector impacting our portfolio. We actively engage with our customers to gather insights on current and expected market stress. The feedback to date has not indicated any specific areas of concern. Importantly, our thorough analysis of the Medicaid and Medicare features of the recently passed "One Big Beautiful Bill," indicates that the proposed cutbacks will not affect our borrowers in any material way. Our third quarter provision expense was $23.9 million, $18.7 million of that provision is related to 3 out-of-state multifamily loans extended to a single borrower group in 2021 and '22. The specific reserve is a clear outlier considering that over 26-year operating history, we have experienced minimum actual credit losses. I will discuss the ongoing workout during Q&A. The balance of the provision of $5.2 million was driven by adverse movements in the forecasted macroeconomic factors underpinning our CECL model and, of course, the loan growth. As we look to the future, deposit -- despite recent market volatility, favorable tailwinds for banking industry are building, and we are well positioned to benefit from them. Loan growth remains solid, and we are diligently managing the expanding our deposit funding opportunities. We remain committed to managing asset quality and optimizing profitability while further solidifying our presence in New York and complementary markets. Our focus for 2025 and beyond is to capture additional market share through traditional channels and strategically position ourselves to seize opportunities that enhance shareholder value. At this time, I would like to extend my gratitude to all of our employees and the Board of Directors for their dedication and hard work, which drive our continued success. Lastly, I want to thank our clients for their engagement, loyalty and continued support. I will now turn over the call to our CFO, Dan Dougherty. Daniel Dougherty: Thanks, Mark. Good morning, everyone. MCB's strong performance in 2025 continued in the third quarter. I'll begin with a few comments on the balance sheet. As Mark said, we grew the loan book by approximately $170 million or 2.6% in the quarter. Year-to-date, we're up more than 12%. Importantly, our underwriting standards and loan pricing parameters have not all been altered to achieve our growth results and goals. Total originations and draws of approximately $583 million ready weighted average coupon net of fees of 7.27% in the quarter. The new volume origination mix was about 70% fixed and 30% float, which is in line with our current modeling assumptions. While the coupon delta between new volume originations and back book maturities has narrowed, it is noteworthy that we still have more than $1 billion of upcoming loan maturities with a WACC of about 4.65%, including $365 million that will run off -- roll off by the end of 2026. Our loan pipelines remain strong. We project between $100 million and $200 million of additional loan growth for the remainder of the year and our first quarter '26 pipeline is shaping up to deliver continued robust growth. Recent headlines have reached concerned about nondepository financial institution lending. Our NBFI book totals to about $350 million or about 5% of the loan portfolio. Our channel checks on this portfolio have not identified any credit issues or stress in the portfolio. All credits within that portfolio are currently rated pass. In the third quarter, we grew deposits by about $280 million or approximately 4%. Clearly, the depth and diversity of our deposit funding model is the strength of MCB. Quarter-over-quarter, the cost of interest-bearing deposits declined by 9 basis points. As you all know, late in the third quarter, the FOMC did reduce the target Fed funds rate by 25 basis points from 4.5% to 4.25%. As our balance sheet remains modestly liability sensitive and about 1/3 of our indexed deposits reprice on the first business day of the month following a rate change, the benefits of the mid-September reduction in short-term rates will become much more apparent in the fourth quarter. We have $1 billion of hedged indexed deposits, which display positive carry down to a Fed funds effective rate of approximately 3.5%. In our forecast model, we're using a generic funding rate of the Fed funds target rate minus 50 to 75 basis points. We repriced approximately 80% of our unhedged interest-bearing deposits by a full 25 basis points after the Fed rate move. As Mark mentioned, our net interest margin in the quarter was 3.88%, up 5 basis points from the prior quarter. For the fourth quarter, we expect modest further expansion of the NIM due to a decline in cost of funds supported by expected further monetary policy easing and continued repricing of the loan book. As well, supported by our continued deposit growth, the average balance of relatively expensive wholesale funding declined by about $275 million in the third quarter. Based on current trends, I expect that the fourth quarter NIM will be between 3.90% and 3.95% and that our annual NIM this year will be north of 3.80%. That forecast includes only 125 basis fourth quarter rate cut in December. As a reminder, each 25 basis point cut in the Fed funds target rate will, all else being equal, drive about 5 basis points of NIM expansion annually. Now let's move on to some high-level comments on our income statement. I'd like to start by emphasizing the continued earnings strength and momentum of the franchise. For the third quarter, net interest income was $77.3 million, up 5% on a linked-quarter basis and up more than 18% versus the same quarter last year. Diluted EPS for the third quarter reported at $0.67. On a normalized basis, adjusting primarily for the Q3 specific provisioning, I estimate diluted EPS would have been closer -- would have been approximately $1.95. And that estimate does not include the reversal of $675,000 or about $0.04 per share of interest income related to the new nonperforming loans. Our linked quarter noninterest income was $2.5 million. That's essentially unchanged from the prior period. Noninterest expense was approximately $45.8 million, up $2.7 million versus the prior quarter. The major movements in operating expenses quarter-over-quarter were as follows, an increase of about $1.4 million in comp and benefits, primarily related to growth in headcount, a $1.6 million increase in technology costs, the primary driver of this increase was a $900,000 increase related to the digital transformation project. In the aggregate, for the third quarter, digital project costs were about $2.5 million. Another OpEx item was an $890,000 increase in licensing. That's due primarily to increases in a deposit vertical that leverages third-party software. And then finally, we had a $1 million decline in the FDIC assessment. On a go-forward basis, the quarterly run rate for the FDIC assessment should begin at about $1.5 million per quarter. And of course, this expense will scale with risk-weighted asset growth through time. Fourth quarter operating expenses are expected to be approximately $46 million inclusive of $3 million in onetime digital project costs. Finally, the effective tax rate for the quarter was approximately 30% and as a housekeeping note, detailed guidance for next year will be provided after we report fourth quarter earnings in January. I'll now turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Gregory Zingone with Piper Sandler. Gregory Zingone: I'm stepping in from Mark this morning. Could we start -- if you can give some additional details on that one CRE multi-family relationship, metrics like debt service coverage, LTV, size and geography would be appreciated. Mark DeFazio: The geographies are Champagne, Illinois and a city in Ohio. These are basically vacant buildings that were going to be renovated and then stabilized. It's a complicated story around the situation of why they didn't finish -- why the renovations didn't get done and why the properties didn't get stabilized. But we're at a point now where we are working through a restructuring with the client and cautiously optimistic that a material part of this specific reserve will be reversed in either the fourth quarter or the first quarter of next year. Gregory Zingone: Awesome. Thanks. If there's any more detail you could provide on the $5.2 million provisioning. I know you said it was forecasting related to the CECL model. But is there any more detail you could share with us? Daniel Dougherty: That's really just a feature of the CECL process, Greg. We rely on a third-party vendor to provide the reasonable and supportable forecast for macroeconomic variables, Moody's who we use. And as it turns out, Mark Zandi's forecast was a little negative on the CRE price index and his -- the model -- our model is highly levered to that index. And so it's not aligned generally with our specific concerns, but those macroeconomic variables as forecasted by Moody's drive the result. So $5.2 million, probably $3.5 million of that is related to the macroeconomic variable forecast deterioration and then the other part is growth. Gregory Zingone: And one more question for me. What's the bank's policy and insider selling prior to earnings releases? Mark DeFazio: Well, obviously, when you're in a blackout period, it goes without saying you can't sell and the comment that you guys made last night in your flash note, you would have noticed that the insider training from offices are under a 10b-1-5 (sic) [10b5-1] agreement. So they've been in place for some time. So nobody does insider trading here and nobody would violate a blackout period. Daniel Dougherty: Let me further that. You may have noticed that we shifted our reporting date by a week. So the 10b5-1 plans are set up to trade on the 20th. And that's -- we shifted our reporting date for a couple of reasons. One was the Columbus Day holiday, but the bigger reason was that my financial reporting team is very much involved in the ongoing digital project and our loan servicing system dress rehearsal was last weekend. So they've been putting in a tremendous amount of work to support that process. And as such, we thought it was a reasonable to shift our reporting date by a week. And that's why the trade date was before the earnings release. But again, all insiders that are selling stock are subject to 10b5-1 plans or blackout periods as required by the SEC. Operator: Our next question comes from Feddie Strickland with Hovde. Feddie Strickland: It's great to hear when I see a recovery on that new NTA. I was just wondering if you could provide a little more color on how many other CRE loans or kind of what percentage of the book is out of market today? Daniel Dougherty: We're going to have to dig for that one, Feddie... Mark DeFazio: Hold on a second, Feddie. In our investor deck... Daniel Dougherty: I can tell you that we have no other -- beyond what was posted in the third quarter, no other immediate concerns about other CRE, whether in market or out of market at this juncture. We're just trying to dig out that number. Feddie Strickland: Actually, I think I found it. Mark DeFazio: Yes. Feddie, Page 14 of the investor deck, you have -- you'll see a whole slide there. So 19% is in Manhattan. And -- so if you look at a couple of the other borrows, so a good percentage of the portfolio is outside of the New York -- the Greater New York City area. If you go to Page 14 of the Investor deck. Feddie Strickland: And are those relationships kind of just -- it's the same borrowers that you know and work with in New York, but they're just doing some projects in other parts of the country? Mark DeFazio: Generally, that is always the case. We have followed -- there's been emerging markets over the last couple of decades, and we have followed New York owners and operators of not only commercial real estate, but of commercial businesses and in health care, expand their franchises outside of the New York area. Yes, you will never find MCB to show up on Main and Main somewhere and say we can be competitive. So we generally follow very good sponsors and who have the ability to expand outside of their original footprint. Feddie Strickland: Got it. Appreciate that. And just switching gears to deposits. It looks like you had pretty strong growth across pretty much all the verticals aside of retail. As we look forward there, can you talk about where you see the most opportunity? Is it still that kind of EB-5 title and escrow bucket? Or is it elsewhere? Mark DeFazio: I think it's spread fairly evenly. That's how we approach it. And that's one of the value propositions of continuing to be a core-funded institution. We have so many different deposit verticals. We don't have to rely on any one of them to drive 10%, 15% or even 20% balance sheet growth. So we're very fortunate to be able to spread that challenge out throughout all of these categories. And we're working on a number of other opportunities that we'll talk more about in early '26. So we expect all of them to continue to contribute. Feddie Strickland: Got it. And then just on the digital transformation side, I appreciate the color and what your expectations are there. Given that you expect it to wrap up in the first quarter of '26, should we expect a little bit of a ramp in the digital transformation expenses in the first quarter, just given I think you still have about $11 million or so left in the budget. And I think you said there's about $3 million coming next quarter. Daniel Dougherty: Yes. You got that right, $3 million in the fourth quarter, approximately $3 million. And then there will be a bit of a tail in the first quarter, but we're kind of managing through that number right now and have -- we'll have a lot more detail about that when we release the fourth quarter. But to put it to kind of pin in it, it's going to be less than $2 million. It should be, I think, well less than $2 million. Operator: Our next question comes from David Konrad with KBW. David Konrad: Just a follow-up question on the credit here. Maybe I missed this, but what was the size of the credit? I know CRE NPAs went up around $41 million quarter-over-quarter. Is that a good proxy for what this is? Mark DeFazio: There were 3 loans in particular. One was around $8 million, one was around $17 million. And I believe the third one -- the total was around $34 million. Daniel Dougherty: $34 million... David Konrad: Okay. So then, I mean, the allocated reserve is about 55% of that exposure. So pretty healthy provision. Mark DeFazio: Very conservative. David Konrad: Okay. And then maybe -- I mean, you talked about this qualitatively, but just maybe a little more details on trends on criticized and classifieds or past dues just outside of this relationship kind of the asset quality. Daniel Dougherty: Yes. If you kind of strike this particular credit migration, this out-of-state multi-family, we -- there are no other noticeable credit migration movements within our portfolio. Very, very much static quarter-over-quarter. David Konrad: So then it sounds like -- just my last question, it doesn't feel like this credit is going to deter any of your near-term growth strategies or anything? Mark DeFazio: No. And this is an outlier that we'll work through it, but we just felt it was prudent to take this specific reserve. Remember, it's not a charge-off. This is a specific reserve this quarter right. . Daniel Dougherty: No impact on go-forward with -- no impact on go-forward lending. As I mentioned, Q4 is looking good. We're going to grow -- continue to grow right into year-end. And we did a channel -- we've done channel checks in the pipeline and even first quarter next year is shaping up to look very strong as well. Operator: And we do have a follow-up from Feddie Strickland with Hovde. Feddie Strickland: Just one more follow-up, just as we're thinking about -- I appreciate the year-end margin guide. And just looking at your interest rate sensitivity disclosures and the likelihood of multiple cuts next year. I mean, is it feasible that we could see the margin really approach 4% here in 2026. If we get multiple cuts, do you think that, that's something that's possible? Daniel Dougherty: Very much so Feddie. Very much so. Yes. We continue to be liability sensitive slightly, modestly. My forecasting, yes, we here is 4% when I look at that. And I'm a bit less aggressive than the market in the outlook for cuts. But when we model in 1 this quarter and 3 next year, yes, indeed, we can get very close or above 4%. Mark DeFazio: And Feddie, that's the base case. We're working on -- working really hard here to replace GPG. As you know, we exited that business last year. And we're working on other deposit opportunities that will drive lower cost of funds, which we're trying to control margin expansion and not relying on the Fed exclusively. So we're expecting to see some expansion by our own efforts, not just through the Fed. Operator: This concludes the allotted time for questions. I would like to turn the call over to Mark DeFazio for any additional or closing remarks. Mark DeFazio: Just like to say thank you for taking the time out this morning and your continued support of MCB. Thank you. Have a nice day. Operator: This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your line at this time, and have a wonderful day.
Operator: Welcome to the Eastern Bankshares, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded for replay purposes. In connection with today's call, the company posted a presentation on its Investor Relations website, investor.easternbank.com which will be referenced during the call. Today's call will include forward-looking statements. The company cautions investors that any forward-looking statements involve risks and uncertainties and is not a guarantee of future performance. Actual results may materially differ from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described in the company's earnings press release and most recent 10-K filed with the SEC. Any forward-looking statements made represent management's views and estimates as of today, and the company undertakes no obligation to update these statements because of new information or future events. The company will also discuss both GAAP and certain non-GAAP financial result measures. For reconciliations, please refer to the company's earnings press release. I'd now like to turn the call over to Bob Rivers, Eastern Executive Chair and Chair of Board of Directors. Robert Rivers: Thank you, Joelle. Good morning, everyone, and thank you for joining our call. With me today is Eastern's CEO, Denis Sheahan; and our CFO, David Rosato. Eastern recently celebrated its fifth anniversary as a public company. Before Denis and David walked through our results, I wanted to take a moment to acknowledge this important milestone and share why I'm excited about our future. As shown on Slide 2, today, Eastern is a $25.5 billion organization with the fourth largest deposit market share in Greater Boston, and we are the largest independent bank headquartered in Massachusetts. Since our IPO, we have very intentionally expanded our footprint across attractive markets and build the scale we need to invest in the business while maintaining the understanding, accessibility and engagement that makes us our regions hometown bank. This strategy and most importantly, our people, our culture and our extensive community involvement are what enable us to expand and deepen customer relationships, attract top talent and capture growth opportunities. This has driven meaningful improvement in earnings, profitability and shareholder returns. One of the keys to our success has been our ability to stay true to who we are while growing and positioning Eastern for the future, that includes bringing in talented people to complement the many long-time Eastern employees who have contributed to our success. I'm so proud of what we've accomplished together. We are well positioned to serve our customers and communities with excellence, which underpins our ability to drive continued shareholder value. Now I'll turn it to Denis. Denis Sheahan: Thank you, Bob. As someone who's been in the Boston market for more than 3 decades, I can attest to how impressive the transformation of Eastern has been over the last 5 years. I'm incredibly proud to be part of this team and I share Bob's enthusiasm about the future and the opportunities ahead. Turning now to the quarter. We are very pleased to have received the required regulatory approvals for our merger with HarborOne which is on track for a November 1 close. This partnership strengthens Eastern's leading presence in Greater Boston and expands our branch footprint into Rhode Island, providing even more opportunities for organic growth. We're excited to bring together 2 banks that share a strong commitment to customers, community partners and employees. I want to thank the teams from both organizations for their outstanding efforts, and we look forward to welcoming our new customers and colleagues to Eastern as we build on the strong legacies of both institutions. We're also pleased to announce today the resumption of our share buyback program, which underscores our confidence in the future. Third quarter operating earnings of $74.1 million increased 44% from a year ago and generated solid returns. Operating return on assets of 1.16% was up 34 basis points from the prior year quarter and operating return on average tangible common equity increased 300 basis points to 11.7% over the same period. On a linked quarter basis, operating income was down from a very strong second quarter, which benefited from higher-than-expected net discount accretion due to early loan payoffs at fee income. Our ongoing strategic investments and hiring talent and commercial lending continued to deliver strong results. Over the past year, we have increased the number of relationship managers by approximately 10%. The Eastern has become an attractive destination for high-quality talent, particularly those with large bank experience. We have the size to matter competitively, yet are small enough for them to apply their trade and provide a sense of ownership in building a business. Our loan growth continues to reflect the impact of this strategy. Total loans grew 1.3% linked quarter and 4.1% year-to-date, driven primarily by strong commercial lending results. The commercial portfolio has grown just under 6% since the beginning of the year, and the pipeline remains solid ending the quarter at approximately $575 million. Wealth management is an important component of our long-term growth strategy, and the wealth demographic and our footprint provides significant opportunities. Beyond strong investment solutions and results, we provide comprehensive wealth services, including financial, tax and estate planning as well as private banking. Assets under management reached a record high of $9.2 billion in the third quarter driven by market appreciation and modest positive net flows. We've been pleased with the integration of the Eastern and Cambridge Trust wealth teams and the strong retention of clients and talent since the merger. We're also enhancing our internal distribution capabilities. Our retail branch network through training and greater awareness is becoming a meaningful driver of referrals. Notably, in the first half of this year, retail generated more funded wealth business than Eastern achieved in any prior full year. On the commercial side, the strengthening alignment between our wealth management and banking businesses is in the early stages, but beginning to produce results. There is still a lot more work ahead, but we are encouraged by the momentum of our wealth business, which was recently named the largest bank-owned independent adviser in Massachusetts for the second consecutive year. Finally, our capital position remains robust, and we continue to generate excess capital. Tangible book value per share at quarter end was $13.14, an increase of 5% from June 30 and up 10% from the beginning of the year. In addition to using capital for organic growth, we are committed to returning capital to shareholders through opportunistic share repurchases and consistent and sustainable dividend growth. As such, we are very pleased the Board authorized a new 5% share repurchase program of up to 11.9 million shares. David, I'll hand it over to you to review our third quarter financials. R. Rosato: Thanks, Denis, and good morning, everyone. I'll begin on Slides 4 and 5. We reported net income of $106.1 million or $0.53 per diluted share for the third quarter. Included in net income is a GAAP tax benefit related to losses from the investment portfolio repositioning completed in Q1 that accrues over the course of 2025. On an operating basis, earnings of $74.1 million or $0.37 per diluted share decreased from a very strong second quarter which benefited from higher-than-expected debt discount accretion and fee income. Compared to the prior year quarter, operating net income increased 44% reflecting margin expansion of 50 basis points and significant improvement in the efficiency ratio from 59.7% to 52.8% driven by higher revenues and thoughtful expense management. We are pleased with the continued strength of our profitability metrics. While operating ROA of 116 basis points and return on average tangible common equity of 11.7% were down from second quarter metrics, both meaningfully improved from a year ago when operating ROA was 82 basis points and operating return on average tangible common equity was 8.7%. We remain focused on driving sustainable growth and profitability and delivering top quartile financial performance. Moving to the margin on Slide 6. Net interest income and margin declined from the second quarter primarily due to higher deposit costs and lower net discount accretion. Net interest income of $200.2 million or $205.4 million on an FTE basis, decreased 1%. Included in net interest income with net discount accretion of $10 million compared to $16.5 million in the second quarter, which was higher than expected due to early loan payoffs. Excluding net discount accretion, net interest income would have increased approximately 3%. The margin of 3.47% was down 12 basis points from 3.59%. The yield on interest-earning assets decreased 6 basis points, while interest-bearing liability costs were up 7 basis points. Net discount accretion contributed 17 basis points to the margin compared to 29 basis points in the prior quarter. Excluding net discount accretion, the margin would have been flat quarter-over-quarter. Turning to Slide 7. Noninterest income of $41.3 million declined $1.6 million from the second quarter. On an operating basis, noninterest income of $39.7 million was down $2.5 million. The decrease was driven primarily by $1.9 million in lower income from investments held for employee retirement benefits compared to a very strong Q2. This decline was partially offset by $1 million in lower benefit costs reported in noninterest expense. In addition, miscellaneous income and fees were down $1.2 million due primarily to a loss on sale of commercial loans from our managed assets group and lower commercial loan and line fees. These headwinds and fee income were partially offset by deposit service charges and investment advisory fees, which both increased $300,000 in the quarter. Turning to Slide 8. We highlight wealth management, our primary fee business. Assets under management reached a record $9.2 billion, driven by market appreciation and modest positive net flows. Wealth management fees, which account for nearly half of total noninterest income were up $300,000 or 2% from Q2, primarily due to higher asset values. In addition, the prior quarter benefited from approximately $700,000 in seasonally higher tax preparation fees. Moving to Slide 9. Noninterest expense was $140.4 million, an increase of $3.5 million from the second quarter due to higher operating expenses and merger-related costs. Merger costs of $3.2 million were up $600,000 from the prior quarter. Operating noninterest expense was $137.2 million, up $2.8 million. The increase was primarily driven by $3.3 million in higher salaries and benefits, primarily due to higher performance-based incentives, one additional pay period in Q3 and seasonal staff. In addition, technology and data processing costs increased $1.4 million, and occupancy and equipment expenses were up $500,000. These increases were partially offset by a $2.3 million reduction in other operating expenses. Moving to the balance sheet, starting with deposits on Slide 10. Period-end deposits totaled $21.1 billion, a decrease of $104 million or less than 1% from Q2. A decline in checking balances was partially offset by higher balances in money market accounts and CDs. On an average basis, deposits were up 1.4%. We continue to benefit from a favorable deposit mix with nearly half of deposits and checking accounts, providing a stable and low-cost funding base. Importantly, we remain fully deposit funded with essentially no wholesale funding which further enhances our balance sheet strength. Total deposit costs of 155 basis points increased modestly from the second quarter as the cost of interest-bearing deposits increased 8 basis points primarily driven by money market accounts. We remain focused on growing deposits to support our funding strategy. As competition for deposits has become heightened in our region, we are disciplined in balancing the needs of our very strong deposit base with that of the margin. Looking ahead, as we thoughtfully integrate HarborOne deposits, we anticipate deposit costs to remain somewhat elevated. However, as the Fed eases, we will work deposit costs down and target deposit betas like our experience during the most recent tightening cycle or about 45% to 50%, with lags relative to Fed actions. Turning to Slide 11. Period-end loans increased $239 million or 1.3% linked quarter led by further strength in commercial. Continued momentum from Q2 and CRE drove balances higher by $133 million, while strong broad-based growth at C&I increased balances by $104 million. Consumer home equity lines continued a steady trajectory of quarterly growth, adding $45 million in outstandings. Commercial has delivered strong year-to-date performance with nearly $700 million of loan growth from year-end. This performance reflects the impact of our opportunistic hiring of growth-oriented talent, continued strength of Eastern's brand and our long-tenured relationship managers. Our combination of meaningful scale, which allows us to offer a broad suite of products and services and deep local expertise and presence is what differentiates us. Slide 12 is an overview of our high-quality investment portfolio. The portfolio yield was up 1 basis point to 3.03% from Q2. In addition, the AFS unrealized loss position continued to decline as it ended the quarter at $280 million after tax compared to $313 million at June 30 at $584 million at year-end. Turning to Slide 13. Capital levels remain robust as indicated by CET1 and TCE ratios of 14.7% and 11.4%, respectively. Consistent with our commitment of returning capital to shareholders, the Board authorized a new share repurchase program of up to 11.9 million shares or 5% of shares outstanding after completion of the HarborOne merger. The program expires on October 31, 2026. In addition, the Board approved a $0.13 dividend to be paid in December. As displayed on Slide 14, asset quality remains excellent, as evidenced by net charge-offs to average loans of 13 basis points and reflects the quality of our underwriting and proactive risk management approach address the issues quickly and previously. While nonperforming loans rose $14 million linked quarter to $69 million, the increase was driven primarily by a single mixed-use office loan which has been in managed assets for some time. A portion of this loan was charged off during the quarter and had been previously reserved. Importantly, we continue to believe the worst of the office loan problems is mostly behind us. We remain cautiously optimistic in our outlook on credit as overall trends continue to be positive. Reserve levels remain strong, as demonstrated by an allowance for loan losses of $233 million or 126 basis points of total loans. These metrics are consistent with $232 million or 127 basis points at the end of Q2. Criticized and classified loans of $495 million or 3.82% of total loans increased modestly from $459 million or 3.6% at the end of Q2. Finally, we booked a provision of $7.1 million, down from $7.6 million in the prior quarter. On Slides 15 and 16, we provide details on total CRE and CRE investment -- investor office exposures. Total commercial real estate loans are $7.4 billion. Our exposure is largely within local markets we know well and is diversified by sector. The large concentration is the multifamily at $2.7 billion, which is a strong asset class in Greater Boston due to ongoing housing shortages. We have no multifamily nonperforming loans, and we have had no charge-offs in this portfolio for well over the past decade. We remain focused on investor office loans. The portfolio of $813 million or 4% of our total loan book decreased $15 million linked quarter. Criticized and classified loans of $138 million were about 17% of total investor office loans compared to $118 million or 14% of total investor loans at the end of Q2. In addition, our reserve level of 5.1% remains conservative. As disclosed last quarter, the investor office loan portfolio includes our relatively limited exposure to the lab life science sector, consisting of 4 loans totaling $99 million or less than 1% of total loans. None of these loans were originated as speculative construction transactions. All loans are accruing, and we continue to monitor these loans as part of our ongoing review of the office portfolio. Before turning it back to Denis, I wanted to give a brief update on the HarborOne merger, which is expected to close November 1. We are reiterating the key assumptions we announced earlier this year and are on track to deliver on our estimated cost savings, onetime charges and gross credit market. We will disclose updated interest rate marks on our fourth quarter call in January. As a reminder, the original announcement assumed 80% stock consideration, the midpoint of the range. Based on the performance of our stock, our current estimate assumes 85% stock consideration. Furthermore, we continue to plan for the sale of HarborOne securities portfolio, the deleveraging of HarborOne's securities portfolio with proceeds intend to pay down FHLB borrowings. HarborOne's period-end loans and deposits at September 30 were $4.763 billion and $4.433 billion, respectively. And it didn't, if approved, we intend to early adopt the changes to the CECL accounting standard designed to remove the current double counting of expected credit losses. I'd now like to turn it back over to Denis. Denis Sheahan: Thanks, David. We are pleased with this quarter's results and are excited about closing the HarborOne merger. We're the leading local bank in Massachusetts, and this merger strengthens our presence south of Boston and into new markets in Rhode Island, providing opportunities for organic growth for many years to come. The continued improvement in our profitability will allow us to return meaningful amounts of capital and enhance shareholder value. This concludes the presentation. I will now open the call for questions. Operator: [Operator Instructions] Your first question comes from Damon DelMonte with KBW. Damon Del Monte: First question, just with regards to -- I know it's a tricky quarter because you have HarborOne closing next week and we're in the middle of the fourth quarter here. But David, as we kind of think about the margin, obviously, a bunch of noise on the fair value accretion side of things. But if you look at the core margin, as you noted, it's flat quarter-over-quarter. Do you think that kind of -- can hold steady here in the fourth quarter and then kind of grind higher into '26? Or do you think that the competitive pressures on deposits will probably weigh on that a little bit? R. Rosato: Let's talk about both sides of that, Damon, and good morning. So the core eastern margin, there's 2 key drivers, right? There's accretion income, which unfortunately, in Q3 was down $6.5 million. That's the wildcard here. The average run rate is, call it, $11 million to $12 million. So last quarter, we were above trend. This quarter, we were a little below trend. And you saw that ripple through asset yields, that's the wildcard. On the other side, on the deposit side, the competition has heated up here. We've talked -- I think we talked about this last quarter as well in retail and government banking. I think that pressure remains in Q4. So that leads me to roughly flat deposit costs with a little bit of a wildcard on the asset side. The -- from a -- and then just as a reminder, we'll have 2 months of HarborOne in our Q4 numbers. Our thinking is that the original margin expansion and numbers that we put out back in April for the combined institution are still good numbers. Damon Del Monte: Okay. Great. And then how about as far as just like on the expense side, it was higher this quarter, you had some elevated comp and benefit type costs and stuff. Again, kind of looking at the core Eastern expenses, do you think that kind of stays at a similar level here going into fourth quarter? Or could it tick even higher just given year-end accrual true-ups and things of that nature? R. Rosato: I think we were a little inflated on the comp line this quarter. I think that will tend to settle down in Q4. There's been a little uptick in tech expense. That is -- will probably be consistent. So I'm not overly concerned about our expense base at this point. And with telegraph roughly flat in Q4 overall to down a touch. Damon Del Monte: Okay. Great. And then with the deal closing here next week, kind of just curious on your updated thoughts on appetite for additional deals over the coming months or in 2026. Is that something you guys are considering? Or I think messaging has also been more about a focus towards organic growth. So just kind of wondering how you balance those 2 avenues. Denis Sheahan: Damon, it's Denis here. And that sort of remains consistent. Look, our focus right now is clearly on continuing to build on the good organic growth that we've had in recent quarters on the important integration of the HarborOne merger. We feel good about that opportunity and are looking forward, as I said in my comments earlier, to working with our new customers, our new colleagues at HarborOne but as you can well imagine, there's a lot of work to do there on that integration. We have no plans in terms of additional mergers in the near term. But that said, we think if a merger opportunity were to arise, it's in our shareholders' best interest for us to evaluate the opportunity. It doesn't mean we would execute but certainly, it's lower on our list of priorities when we think about capital allocation. But as Bob indicated with his opening statements, and you look at the progress at Eastern Bank since we had our IPO, the performance improvement is very material and significant and the opportunity of the new markets that those mergers provided are a meaningful contributor to our operating performance so we think it's -- if the opportunity arises, it's in our best -- shareholders' best interest to consider it, but it's not our focus today. R. Rosato: I would just add to that. It's clear when you think about deployment of capital from our perspective, nothing has changed. It's organic growth. It's now we're excited that with the Board's approval of the share repurchase, so we can be back in the market. It's supported the dividend. And then by far, #4 is anything around M&A. Damon Del Monte: Got it. Okay. Great. And then just lastly, David, real quick. You had mentioned before, like last quarter about the possibility of another restructuring, but it would kind of depend on market conditions and kind of how you felt the best use of capital once HarborOne has closed. Any updated thoughts on that if you're considering that still? Or is it the focus more on organic growth and buybacks only? R. Rosato: It's really -- we're really not focused at all on any type of further portfolio restructuring of Eastern Bank. It is organic growth, where -- which we've had a very good track record of success year-to-date. As Denis referenced, the pipeline is robust, and our brand is resonating in the market. So it's that, it's being back in the market for buybacks. And it's not no contemplation at all right now of any type of further portfolio restructuring. Operator: Your next question comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: David, you had mentioned in your comments earlier on the Wealth Management business. I think there was $550 million increase in AUM this quarter. A lot of that was market driven. Could you break out for us how much of the $550 million was market-driven versus flows? R. Rosato: Yes, it was predominantly market-driven good equity and fixed income markets. The net flows in the quarter were a little over $50 million positive. Mark Fitzgibbon: Okay. Great. And then secondly, are there plans within the wealth management business to hire more people or to acquire other RIAs or wealth businesses? Denis Sheahan: Mark, this is Denis. So yes, we are looking for talent, and we have brought on some existing talent in the wealth area. We're active and engaged in opportunities to bring in talent, whether it be in business development or portfolio relationship management. So hopefully, you'll hear more from us about that in the coming quarters. And in terms of M&A in the RIA space, no, we're not interested in that to any degree. It's challenging for those opportunities to work from a variety of perspectives. One being culture and integration and another being the financially challenging to make them work. So we're not interested at this point in any kind of M&A there. Mark Fitzgibbon: Okay. And then Denis, I guess I'm curious, and I know it's a little awkward, but any comments on the slide presentation that Holdco put out earlier this week. I guess I'm curious do you agree with it? Do you plan to implement any of the things that they've proposed and do you plan to meet with them? Denis Sheahan: Well, Mark, as you know, we're very open to engaging with our shareholders. We do a lot of investor conferences and investor road shows, et cetera, and we're happy to engage with any of our investors and we've -- what we believe is a shared goal, we and our investors of driving the performance of the company even higher than we've already done and to build long-term value creation for our shareholders. So we welcome that dialogue from whomever. But I would say most importantly, I really want to turn our focus to the future and think about -- we're excited about the future of the company. We feel very well positioned here today and even more so with the combination with HarborOne to execute the strategy that we've built to really drive that top quartile financial performance, that's the mantra at the company. That's what we're aiming for. That's our aspiration. And that's what we're really, really focused on. And we think that's going to deliver very, very attractive shareholder returns. So that's our focus. I'm not going to comment on anything in any particular disclosure that someone has made. But rest assured, that this team is focused on driving performance, and that's what gets us up every day. That's what gets us excited. And as I said, we're going to continue to focus on that. Operator: Your next question comes from Laurie Hunsicker with Seaport Research. Laura Havener Hunsicker: Just wanted to go over to Slide 16, your office exposure here. And I just want to make sure I'm reading this right. It looks like your office nonperformers jump linked quarter. But I guess what's also new is you've got $19 million now in nonaccruals maturing in the first quarter there at '26. And so I'm just wondering how we should think about that with respect to the provision just since that's new, can you help us understand that a little bit? Denis Sheahan: Sure, Laurie. So it's one loan that -- just with a little background, that loan was originated in 2016. It's been -- so pre-COVID, we've been watching it since COVID, so for quite a few years here. This is consistent with what we've said all along, there will be a couple of loans in the portfolio that we'll have to deal with. In the grand scheme of things, small numbers, this loan, we started building reserves that will mature next year. That's why it hit the schedule. We will have it probably full resolution, probably not in Q4 but into Q1. It's on our books at what we believe will be the final resolution economics. So there's real -- it is one loan, but there's really no story there or anything different worth mentioning about that loan or about the rest of the portfolio. Laura Havener Hunsicker: Okay. And then just with respect to that loan, I mean, can you share with us occupancy or anything around that? Or if you expect to extend or just how you think about it. Denis Sheahan: I will share one fact. It's 85% occupied. Laura Havener Hunsicker: That's great. That's helpful. Okay. And then spot margin, do you have an update on that for September? Denis Sheahan: Did you say spot margin? Laura Havener Hunsicker: Yes. Do you have a September spot margin? R. Rosato: Yes. So it was 3.48%. So 1 basis point higher than the quarter. Operator: Your next question comes from Janet Lee with TD Cowen. Sun Young Lee: Apologies if I missed it in the prepared remarks earlier, but if I were to interpret your comments around NIM, so basically, as we look into 2026, although maybe deposit costs were a little bit more elevated this quarter because of competition as rates come down, you're able to still sustain your NIM? Or is that the way -- where is that the right way to think about this? R. Rosato: Yes, generally true statement. What I was trying to elaborate on a little bit from Damon's question, is 2 drivers, right? There's the accretion income, which bounces around last quarter is a little above trend. This quarter is a little bit below trend. Hard to predict, as we all know. On the deposit side, we've -- in Q3, we were -- there was one Fed move so far. We were slow in our repricing down. So less than our historical long-term beta of 45% to 50% competition in our market remains intense or heavy. We're 5 days away from seems to be a foregone conclusion the Fed's going to move again followed by another move in December. So we will be pricing down as we get covered from the Fed. Our message is, in the near term, a little slow, a little slower to maintain and eventually grow market share, but longer term through this full cycle we should expect us to achieve our full betas. Sun Young Lee: Got it. That's helpful. And a follow-up on higher -- bigger picture. So Denis, it's been a little over a year since you joined Eastern from Cambridge. So I believe you have assessed Eastern franchise or the business overall. So given its historical roots as a mutual conversion and given a lot of the M&As that you guys have done, I mean growth has been slow or slower versus, I guess, stand-alone Cambridge or Eastern. As you look at Eastern's franchise, like what parts of the business are perhaps underutilized? Or where do you see the most upside to growth or increase in profitability? I get that you guys are seeing acceleration in C&I opportunities, but are there other parts of the business where you think could be improved? Denis Sheahan: Janet, thanks for your question. So I would reflect on it this way. We have seen very significant increase in the company's profitability. That's really riding on the back of the strategy that the team before David and I had, very significant, and it positions us well. In terms of continuing to grow profitability, I think of it about the areas that you hear us emphasizing in our comments, the commercial lending team, it was, frankly, one of the things that attracted me when I was thinking about merging Cambridge into Eastern is the journey that Eastern has gone on for several years, including as a mutual and when it converted to build out that commercial banking division. The talent on the team is terrific. They can execute. They're excited about the growth that we're -- we have and that we're continuing to embark on. So I think the Commercial Banking division is certainly one. Second, and this isn't necessarily an order of priority. All our businesses are important, but wealth management. The market in Massachusetts and New England broadly, from a demographic perspective, we don't have significant population growth, but what we do have is a very good wealth and household income demographic. So our ability to lean into that business, further, over the years, it takes time. I've seen this in my past and how you build out a wealth management business successfully. I think we will significantly improve our performance. It's low capital intensive, very beneficial to ROA. And we have a good -- a really strong capability in that area. I think about our retail and deposit franchise. We have new leadership in that area, a terrific team, and I feel very good about our prospects in that area of the company as well. So that's a lot, Janet, but we're fortunate to have a lot. And it comes down to the talent on the team and our ability to execute in the market, including our newer markets. When I think about our markets, you have to really -- the merger integrations well done take years. If I go back to the Century merger, in my view, is not fully integrated. Have we maximized the potential of our opportunity in this old Century markets, in the old Cambridge markets and the soon-to-be HarborOne markets? Absolutely not. So I think there's a lot of opportunity ahead. The management team is excited. We're pumped. So that's how I would answer your question, Janet. Operator: There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks. Robert Rivers: Well, thanks again, everyone, for joining us this morning. Best wishes for a very happy and healthy holidays, and we look forward to talking with you again in the new year. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Anders Edholm: Good morning, and welcome to this presentation of SCA's 2025 Third Quarter Results. With me here today, I have President and CEO, Ulf Larsson; and CFO, Andreas Ewertz, to go through the results and take your questions. Over to you, Ulf. Ulf Larsson: Thank you, Anders. And also from my side, a good morning. Happy to present results for the third quarter '25. So -- and when I summarize the quarter, we can state that SCA continued to deliver a solid result in a rather challenging environment. Our high degree of self-sufficiency in strategic areas continued to be an important factor to mitigate higher costs, not the least related to wood raw materials. Our EBITDA reached SEK 1.64 billion and by that, an EBITDA margin of 33% for the third quarter. In Q3 '25, we had substantially lower prices in the Pulp segment in comparison with the same period last year. Our planned maintenance stops in pulp and containerboard were also considerably more extensive compared to the same quarter last year. Delivery volumes in the Containerboard segment increased this year compared with the same quarter last year, driven by the continued ramp-up of our Obbola containerboard mill. The uncertain market situation, mainly dominated by changing tariffs continues to affect market conditions. The forest industry in general is momentarily challenged by a weaker -- with a market with soft underlying demand in many product areas. Turning over to some financial KPIs for the third quarter '25. As already mentioned, our EBITDA reached SEK 1.64 billion in the quarter, which corresponds to a 33% EBITDA margin and a 22% EBIT margin. Our industrial return on capital employed came out just over 6%, counted for the last 12 months. And the leverage was at 1.7x with our -- while our net debt to equity reached 11.2%. I will now make some comments for each segment, starting with Forest. Higher harvesting levels from our own forest have not the least contributed to stable supply of wood raw materials to our industries during this period. We have seen a continuous long-term trend of increasing prices for both pulpwood and sawlogs as can be seen in the graph on the bottom left. Regarding pulpwood, we have now passed the peak, I guess, and the prices have started to come down during this quarter. Demand for sawlogs continues to be high, especially for spruce logs. When one compares Q3 '25 with Q3 '24, sales were up 14%, while EBITDA was up 17%, mainly due to higher prices for wood raw materials. Turning over to Wood. In general, we still have a slow underlying market for solid wood products. As said before, we have noted signs of improvement in the repair and remodeling segment this year in comparison with the last year, but the uncertainty in general economic development continues to affect the market recovery negatively. Stock levels remain on the high side among producers for pine, but are on normal levels for spruce. Stock levels at customers continue to be on the low side. The volumes in both production and deliveries were good for SCA during the quarter, resulting in a close to unchanged stock level of sawn goods. The price for solid wood products decreased by 5% in the third quarter of '25 in comparison with the second quarter of '25. This development is in line with what I said when I presented the report for the second quarter. As expected, the cost for sawlogs has increased from the second to the third quarter, and we also expect them to continue to increase going into the fourth quarter. Sales were in line with the same quarter last year. EBITDA margin decreased from 19% to 15% due to higher raw material costs and a negative currency effect. Today's stock level of solid wood products in Sweden and Finland is described at the top left on this slide and is shown in relation to the average for the last 5 years. As mentioned earlier, we note that the inventory level is on the high side, especially for pine, while the SCA level is rather normal. As can be seen in the diagram to the bottom left, the Swedish and Finnish sawmills production has been on a normal level during the first 8 months of '25. In the diagram to the top right, we can note that the price decreased during the third quarter. The decrease in pine has been larger in comparison with the spruce products. Going into the next quarter, I estimate that prices on average again will decrease by up to 5%, somewhat more for pine and somewhat less for spruce. And this is driven by the momentarily high availability of pine products. In the construction sector, we can conclude that start of new buildings continues to be low. As said before, uncertainties are still present, but we see improved consumption in the repair and remodeling sector. The level of duties now put in place on wood products from Canada delivered to U.S., about 45% in comparison to the level for wood products from European Union, delivered to the U.S. about 10% has strengthened the competitiveness for EU producers in comparison with Canadian producers. And I guess it's likely that the price level in U.S. will increase when stock levels are coming down from today's high levels. So over to pulp. When comparing Q3 '25 with Q3 '24, sales were down 21%, mainly due to lower prices, a lower delivery volume and a negative currency effect. EBITDA was down 57%, compared to last year, mainly due to lower prices, a negative currency effect and higher cost for wood raw materials. The cost for the planned maintenance stop was SEK 83 million this quarter compared to SEK 35 million in Q3 '24. Global demand for pulp was at a healthy level during the first quarter of '25. During the second quarter, the market changed with reduced demand and prices came under pressure, much due to uncertainty related to U.S. tariffs. During the third quarter, prices on NBSK pulp were stable at low levels. On the demand side, we saw increased activity in China during the quarter. The weakening of the U.S. dollar in relation to the Swedish krona, which started already in Q1, continued to have a negative impact on the pricing in SEK also in Q3. Tariffs on NBSK pulp from the European Union to the U.S. were removed during the third quarter, and this allows us to maintain a competitive offering in the U.S. Looking at CTMP, prices have been unchanged in Asia at low levels and have decreased slowly in Europe during the third quarter. Inventories of softwood and CTMP have been increasing in July and August, as you can see in the diagram and are now on the high level. Hardwood inventories on the contrary were stable during the third quarter. Moving over to Containerboard. Sales were up 10% in Q3 in comparison with the same period last year, driven by higher delivery volumes and higher prices, somewhat mitigated by a negative currency effect. EBITDA was down by 39%, very much driven by long planned maintenance stop with a cost of SEK 204 million versus SEK 87 million in Q3 2024. Higher costs for wood raw materials and a negative currency effect also had an impact. We have seen a softer box demand during the last quarter, but still with a positive development on a year-to-date basis. The retail business remains on a positive driver. On the other side, we continue to see a weak European manufacturing industry, which, for the moment, drives the demand in a negative direction. After a stable first half of the year of European demand of containerboard has started to decrease in Q3, due to the current turbulent macro environment, it's difficult to have a view on the long-term demand. In Q3, we have seen additional supply coming on stream with the vast majority coming in testliner. We do not expect further capacity increases in Q4, except from the ramp-up effect of newly started machines. Kraftliner inventories remain above average level in Q3, as you can see in the graph. During Q3, the availability of OCC has been good, driven by the lower demand in the quarter, which in its turn has led to decreasing prices of OCC. Moving into Q4, we see the availability of OCC to be stable and expect prices to be more or less unchanged. Prices for brown kraftliner in Central Europe has during Q3 decreased with EUR 20 per tonne, driven mainly by slow demand and reduced prices of OCC. White kraftliner has remained stable. Finally, I will say some words about renewable energy. In this area, we have had a weaker quarter compared to the same period last year, mainly due to lower prices in wind power and solid biofuels. Continued improvements in ramping up Gothenburg biorefinery are partly compensating for this. The market for solid biofuels in Northern Sweden continues to be weak due to warm weather and low electricity prices. This factor increases our export share and by that, reduced margin. For liquid biofuels, we have seen higher margins compared to previous quarters. The main reasons are tighter supply due to maintenance stops in biorefineries, European countries implementing RED III and better control mechanism within the EU regarding imported feedstock. We expect market volatility in renewable fuels to remain high as Europe ramps up the blending mandates both from -- both in HVO and SAF. Electricity prices were low during the quarter, which impacted on our wind business negatively, but it is good, of course, for SCA as a net buyer of electricity. SCA's land lease business is stable at 9.7 terawatt hours, which is equal to 20% of installed capacity of wind power in Sweden. Installed capacity on our land is expected to reach 10.5 terawatt hours by the end of the year. And by that, I hand over to you, Andreas. Andreas Ewertz: Thank you, Ulf, and good morning, everybody. I'll start off with the income statement for the third quarter. Net sales decreased 5% to SEK 5 billion, driven by negative currency effects and lower prices, which was partly offset by higher delivery volumes. EBITDA decreased 18% to SEK 1.6 billion, driven by negative currency effects, lower prices and higher costs for planned maintenance stops. EBIT decreased to SEK 1.1 billion and financial items totaled minus SEK 103 million. With an effective tax rate of just below 20%, bringing net profit to SEK 0.8 billion or SEK 1.19 per share. On the next slide, we have the financial development by segment and starting with the Forest segment to the left. Net sales decreased to SEK 2.4 billion, driven by lower delivery volumes compared to the previous quarter due to several planned maintenance stop at SCA's industries. EBITDA decreased to SEK 912 million due to seasonally lower harvest from SCA's own forest. In wood, prices decreased compared to previous quarter, while the cost for sawlogs continued to increase. Net sales decreased to SEK 1.5 billion, driven by lower delivery volumes and lower prices compared to the previous quarter. EBITDA decreased to SEK 232 million, corresponding to a margin of 15%. In pulp, net sales decreased to SEK 1.65 billion, driven by lower delivery volumes and lower prices. EBITDA decreased to SEK 242 million, corresponding to a margin of 15%. Higher costs for planned maintenance stops and lower prices were offset by lower costs. We had lower energy and raw material costs in the quarter, and Q3 is also a low-cost quarter for indirect costs in all segments, which had a positive impact. In Containerboard, net sales decreased to SEK 1.8 billion and EBITDA decreased to SEK 194 million, corresponding to a margin of 11%. Result was negatively impacted by planned maintenance stops in both Munksund and Obbola of SEK 204 million. The market for renewable energy continued to be weak. EBITDA decreased compared to previous quarter and amounted to SEK 79 million, corresponding to a margin of 21%. The decrease was mainly driven by lower deliveries of solid biofuels. On the next slide, we have the sales bridge between Q3 last year and Q3 this year. Prices decreased 2%, driven by lower pulp prices. Volumes increased 1%, driven by higher volumes in containerboard, which was also offset by lower volumes in pulp. And lastly, currency had a negative impact of 4%, bringing net sales to SEK 5 billion. Moving on to EBITDA bridge and starting to the left. Price/mix had a negative impact of SEK 99 million and higher volumes had a positive impact of SEK 14 million. Higher costs for mainly wood raw materials had a negative impact of SEK 57 million, which was mitigated by our highest degree of self-sufficiency. We had a positive impact from energy of SEK 37 million and a negative impact of currency of SEK 169 million. This was impacted by higher costs for planned maintenance stops. And in total, EBITDA decreased to SEK 1.6 billion, corresponding to a margin of 33%. Looking at the cash flow. Operating cash flow increased to SEK 1.1 billion for the quarter, and SEK 2.5 billion for the first 9 months. And as you know, other operating cash flow relates mostly to working capital currency hedges and should be seen together with changes in working capital. Looking at the balance sheet. The value of the forest asset totaled SEK 108 billion. Working capital decreased compared to previous quarter and totaled SEK 5.6 billion. Capital employed totaled SEK 160 billion and net debt decreased compared to the previous quarter to SEK 11.7 billion. And we have now almost finalized our large ongoing investment projects. Equity totaled SEK 104 billion and net debt to equity was 11%. Thank you. With that, I'll hand back to you, Ulf. Ulf Larsson: So thank you, Andreas. And well, just to summarize, I mean, as I said, we have continued to deliver a solid result in a rather challenging environment. . I guess the market has bottomed in more or less all areas except from solid wood products. On the other side, we will see a cost pressure coming in our solid wood business, wider price for pulpwood has now stabilized and are on its way down, I would say. In pulp and kraftliner, I guess, the market is going sideways now, and we are 100% focused on what we can have an impact on ourselves, which is meaning that we are focusing on the ramp-up of our big projects. And they are going very well -- did go very well during the third quarter. So by that, I think that we open up for some questions. Operator: [Operator Instructions] And we will now take our first question from Ioannis Masvoulas of Morgan Stanley. Ioannis Masvoulas: I've got 3 questions, if I may. I'll take them one at a time. First on pulpwood costs. Given the small decline that you show in your slide deck for Q3 and the typical lag in your business, what should we expect for cost development in your industries in Q4 this year and also Q1 2026? Ulf Larsson: You asked about pulpwood. And as I said, I mean, we see that now that prices for pulpwood is coming down in the market. But as you say, we have a lagging effect. And I could say that we have -- it's around 6 months or less. Andreas? Andreas Ewertz: Yes. So in the fourth quarter, I mean, fairly flat, maybe we're talking about 1% decline in pulpwood prices. So fairly flat, while the cost for sawlogs will continue to increase a bit into Q4. Ulf Larsson: And in the beginning of next year? Andreas Ewertz: Then I think that pulpwood will slowly continue to decrease. But as I said, I would say, it's around 6 months of lag effect in the terms of sawlogs. I think they will start to peak also around maybe Q1, Q1 next year. Ioannis Masvoulas: And then going back to pulp, looking at NBSK inventories on days of supply were pretty much at the top of the historical range, do you see the recent temporary curtailments among your peers to help rebalance the market in the short term? Or do we need to see more aggressive supply response? Ulf Larsson: It's hard to say, I mean, maybe I didn't say that, but I mean we are still at a very high operating rate in NBSK, and we should because we have a very low cash cost, of course. But on the other hand, we see announcements now from many areas where they have started to take curtailments. I guess also in the statistics that you see now, we haven't included the typical longer maintenance stops that we have had now during the autumn. So I guess that the inventory will come down. And as always, it's a question, it's a supply-demand issue. And I guess we will see a better balance, but I mean, underlying, we have to wait for an increase in consumption before we can say that we have a stronger market. Ioannis Masvoulas: Understood. And then just last question for me on the FX hedging. Looking at your disclosure, you seem to have brought down your USD hedge ratios for the next 4 quarters. Is that a conscious decision to avoid locking in an unfavorable FX rate? And could these ratios come down further in the coming quarters if spot FX rates persist? Andreas Ewertz: We use statistical model for our hedge strategy. So we have -- for the next 6 months, we hedge around 50% to 85% of our net exposure and then it goes down. But then it depends on statistically how favorable the currency is. So we use model and for the U.S. dollar currently in the low range of that while for euro, we are on the normal range. Operator: And we'll now take our next question from Linus Larsson of SEB. Linus Larsson: Couple of questions on use of funds. It seems to me that you have a very strong balance sheet. Cash flow is robust through the cycle. You're running at high operating rates, like you say, your competitiveness is strong. How do you look at buybacks in this context, given where your share price is trading and given your investment plans for the time being? Ulf Larsson: If we start with the investment plan, as I said, we are just now 100% focused on ramping up what we have started, and we feel that we are doing that in a good way. As I've also said, I mean, just now, we sit on our hands. We will not start up new big projects. And I guess, as all other companies, we also try to -- yes, not do too many current investments because we have an uncertain market coming going forward, I mean, that's the position we have just now. And the question about buybacks, I mean, that is more question for the Board, honestly. So let's see. We are now focused on ramping up what we have started. And by that, as you said, we expect that we will increase our cash flow capacity substantially. Linus Larsson: Yes. Yes. No, that's great. But I mean, principally, how does the Board look at buybacks? Is there like a principal view on whether or not buybacks is part of the toolbox? Ulf Larsson: Again, that's a question for the Board. But as far as I understand, we have no principles in this matter. I think we have done since the split 2017, I mean, we have invested 20% of the net sales in the company every year. For us, that's a lot of money. For all companies, it's a lot of money. So we are more focused just now to realize the cash flow that we suppose -- that we will have from these ongoing investments, so that's our focus now. Linus Larsson: Yes. No, that's clear. And just to finish off that, what's your CapEx guidance for 2025 and 2026, respectively? Andreas Ewertz: If you look at CapEx for '25, I think that current CapEx will be around SEK 1.5 billion. We might have some spillover to next year, so SEK 1.4 billion, SEK 1.5 billion. And then in terms of strategic CapEx, also depending on timing of some payment, but around SEK 1.3 billion, SEK 1.4 billion. So maybe SEK 2.8 billion in total for current and strategic, but it depends on certain timing of certain payments. For next year, strategic CapEx will go down. We have some payments left in the ramp-ups, but strategic CapEx will come down. And then I would guess that current will be slightly higher than this year since we have some spillover from this year to next year. Linus Larsson: But how much will the strategic CapEx go down? Is it SEK 0.5 billion or SEK 1 billion or around the backlog? Andreas Ewertz: It depends on some timing, but I would guess we have a couple of hundred millions left on our current projects. Operator: And we'll now take our next question from Charlie Muir-Sands of BNP Paribas. Charlie Muir-Sands: I wanted to start on the round wood market. So you mentioned obviously log prices are high and if anything, still slightly moving up due to high demand. But equally, it sounds like the wood products market in general is still quite soft. So I'm just trying to understand, is this a demand that's for other uses? Or are you basically saying this is more of a supply issue for the market? And if so, is this just of a hangover from the spark beetle delivery from prior years? Or is there any other reason why we could expect some better balance coming back on the supply side soon? And then just on the pulpwood cost side, very helpful the detail you've given so far. But just in terms of the timing effects, the changes in pricing of pulpwood hit the forestry and then the industrial segment at the same time? Or is there a phasing effect whereby the P&L benefit on forest is reduced before the cost tailwind on the industrial segments come through or anything like that to be aware of. Andreas Ewertz: Yes. So if you look at the pricing, I mean we base our internal prices of what the Forest division pays for its sourcing and a lot to buy on stumpage. So you buy the right to harvest. And then, I mean, you optimize the harvesting to try to have some larger areas to have efficient harvesting. So it can be vary. I mean, some of these -- what the harvest is couple of months. You bought it for some might be 3 months ago or 6 months ago. And then that average price is what the industry gets to pay. But the pricing is -- when the prices goes down, the industry will get a lower price, but then, of course, our Forest division will earn less money on their own harvest. But one day, what they source externally that they get paid for. And then the second question -- the first question was around the demand for sawlogs. Ulf Larsson: The coming demand. I mean, as we see just now, we have, as you saw on the graph in Sweden and Finland, the production is still on a normal level, even if we know that the price -- log prices are very, very high. And profitability in the business is, in general, rather low. We feel rather confident with the profitability we have in our own Wood division. But I mean we -- up until today, we haven't seen any signs of decreasing log prices actually. Andreas Ewertz: And also -- it's also difference between pine and spruce sawlog. On spruce sawlog, you have much lower supply compared to pine sawlog, sort of pricing and demand difference there. Charlie Muir-Sands: And then just on the wood products side, you mentioned the relative competitive advantage for EU exporters to the U.S. now versus Canadian. Can you just talk about the relative profitability of your U.S. business compared with your European business today? How big an opportunity might this be? Ulf Larsson: Yes. First, if we take the tariffs, I mean, as I said, the tariff just now going from Europe over to U.S. is 10%, and coming from Canada over to U.S., then the tariff is 45%. As it is just now, in U.S., the stock level is on the very high side. So, so far, we haven't seen any impact on the, let's say, the local price in U.S. But I guess when the inventory level is coming down, then, of course, customers, they have to start to buy and then they can buy some volume from Europe and they have to buy some volume from Canada. But then I guess that prices can in a short while, increased quite dramatically. We don't have a big volume for U.S. We do, let's say, 80,000 cubic meter per year. But again, it's a global market. So if we start to see better trade in U.S., I mean, that will, of course, have also an impact on the European market and also the Asian market and so on and so on. So we have to wait and see. But I mean, as it is just now, I guess, it's more a question of time. We will have a slow fourth quarter, as we always have. And I guess it will be rather slow also in the first quarter. But then I guess, in the beginning of the second quarter next year, then we might start to see something. Charlie Muir-Sands: But Canadian volumes can't get displaced into other parts of the world or even coming into Europe to offset that benefit? Ulf Larsson: Yes, not really. I mean, of course, you will see some Canadian volumes in China and you might -- I don't think you will see too much of it in Europe. Again, it's -- you have the distribution cost and many of those sawmills, they are located inland. And so it's also a question of distribution, inland distribution cost within in Canada so I guess if this remains, which you never know, I mean, then you probably will see further closures and capacity reductions. And honestly, I don't know really how the U.S. -- I mean, we know that U.S., they need a lot of solid wood products coming into U.S. So I guess it might be so that we see some further changes going forward now. Also when it comes to tariffs and things like that. So I mean, it's -- but all these -- I think we had a question before. But I mean, tariffs, we are not directly too much impacted by tariffs. We can handle that in a good way. But I guess that this discussion has created uncertainty globally. And that's the reason also why we have a rather slow demand in Asia in more or less all product areas. And so I mean that is the -- I guess the worst thing with tariffs is it is creating some kind of uncertainty in all areas and globally. Operator: We'll now take our next question from Robin Santavirta of DNB. Robin Santavirta: Thank you very much. Firstly, I have a question related to the Containerboard business. Looking at the delivery volumes now this year, they have been quite steady, but it seems still Obbola is not running at full capacity. And now you had the log maintenance shut. So could you give some guidelines on volume outlook for that segment in Q4 and early 2026? Should we expect a bit of a step change or more of a slow gradual ramp-up during the end of the year and next year? Ulf Larsson: When it comes to Obbola, we have said that Obbola will produce 600,000 tonnes this year, and they will do so if nothing expected will happen in the fourth quarter. Then it is a tough market in kraftliner. So we have seen during the third quarter, increasing inventories in kraftliner. And so that's the case. And as you said, we also had a rather long maintenance stop in Q3. So that also had an impact on deliveries. But production-wise, Obbola will reach 600,000 tonnes next -- this year. And then the plan is to reach 700,000 tonnes next year. Robin Santavirta: Okay. Okay. Can I ask about this EU deforestation regulation? How do you view that? Will that have any kind of impact for your businesses in Europe either way, what is your view? Ulf Larsson: I mean, it has also created a lot of uncertainty. But I guess for us, we can manage EUDR, but of course, it would be an administrative burden, which we don't like. But we can handle it. Robin Santavirta: But what about your competitors? Could it be a setup where some pulp had been imported from some countries or some paperboard that has been imported from Asia or Americas, they could end up in a bit of difficulty to do so in the future? Or will this impact trade flow at all in your view? Ulf Larsson: Yes, it's very hard to predict. I mean, we have been working quite hard to find out a system which will not create a lot of administration. And I mean, typically, we are for free trade. I think that's good. And I think that EU in the long run, they will benefit from a free trade. We don't know what -- how this will be implemented in the trade up till today. So again, this is also another thing that really creates uncertainty. But the honest answer is we don't know how that will -- this will play out. The only thing we can do is to focus on our own ability to meet the requirements that might come. Robin Santavirta: Yes, for sure, for sure. Follow-up question related to the pulp market. What is going on in the softwood pulp market? There's a lot of curtailments now during early autumn. Certainly, Finland, some in Sweden as well, I understand some in Canada as well. And historically, when you do that, you tighten up the market quite quickly. Now we're not seeing that. Is this a bit of a substitution into hardwood pulp? Is it some Chinese volumes that -- I mean, historically, they do not produce a lot of softwood pulp. Now I understand there is some production going on in China as well. So why is not the market tightening despite the quite significant production curtailments in the Northern Hemisphere? Ulf Larsson: I guess the first thing is that the underlying demand is weak. So that's the first explanation. The second thing is substitution. I don't think that we will see more of substitution today than we did last year. I mean, it's not as easy as that. And we have always had a delta between hardwood and softwood prices. So I mean, if possible, I guess, it would have already been done. So I haven't heard anything -- no structural changes in that area. What we know is that a lot of capacity in pulp is -- will be built up in China. And that, of course, sooner or later, that will -- might have an impact. As it is just now, we are more considered about the CTMP volumes. And as we have understood, I mean, the board market is very weak. And while companies in Asia while they closed down the converting and stop producing boards, I mean, they still produce CTMP, and that will, of course, give a surplus in the market. Then also, I guess, that the statistics that we also saw on our side was from August, Andreas, and I guess we will see some other figures now coming into September, October and so on. We also have had a lot of big maintenance stops in pulp. But you're right. I mean, we also hear that companies, they are taking curtailments now. So far, no big changes. But I mean -- and the prices maybe -- I guess that the price has already bottomed because at this level, we see that curtailments are taken instead of continuing to produce and of course, creating a negative cash flow. So we have reached the bottom. I guess we will see some result of actions taken now later this year. But again, the fundamental challenge is the underlying demand that must come back. Robin Santavirta: Thank you very much. Operator: And we'll now move on to our next question from Oskar Lindstrom of Danske Bank. Oskar Lindström: Three questions for me, if I may. The first one is just on the lower wood cost. You mentioned this in the Pulp division sequentially, but not in containerboard, sorry, not lower pulp costs, lower wood costs, having a positive impact on pulp, but it didn't seem to have it on Containerboard. What's the reason for that? Should I go on with the other questions? Andreas Ewertz: No, we take 1 at a time. So I mean, we have maybe 1% lower pulpwood prices in both Containerboard and in Pulp. In Pulp, we had a better yield in the quarters, we had lower consumption of both energy and wood and they generally have low cost quarter. But I would say it's more on the consumption side that we have lower cost on pulp in this quarter. Oskar Lindström: And in Containerboard, was it just the maintenance stop that sort of... Andreas Ewertz: The Containerboard, we had large maintenance stop both in Munksund and Obbola, the cost around SEK 20 million. So that quarter was impacted by that stop. Oskar Lindström: Right. Moving on to cash flow. You say that you will increase your cash flow significantly in 2026, and I presume beyond as well, while CapEx looks as if it's going to come down quite a bit. If we only look at the ramp-up of Obbola, can you say anything about what kind of contribution you expect from that 2026 versus 2025? If you reach the 100,000 tonnes, could you put a monetary value on that? Andreas Ewertz: Currently, I would say it's hard to put the money on the excess volume because you said that currently have a weaker market, and that means that the extra volumes you would place on -- you have a worst customer mix and country mix on those extra volumes that will, of course, depend on how the market develops. If you have a stronger market, I mean, those volumes would be placed in customers in Europe and places nearby. And that will have a larger impact. But if you have a weak market, of course, then we'll have to put it further away. So it depends on how the market develops. Ulf Larsson: And also to add, I mean, if you have -- yes, maybe that was exactly what you said. I mean, if you have an additional volume already this year, if you go from a little bit over 400 up to 600, I mean that puts a pressure in a tough market that puts a pressure on the market side, of course. So I mean you also have a -- you have ramp-up production-wise, but you also have a ramp-up in the market. So of course, we have to find markets overseas not at least as it is just now. Oskar Lindström: Of course. And my third question is, I mean, we've seen other companies in your sector announcing cost savings and even structural changes as a consequence of the tough market, which both they and you seem to feel is not about to change anytime soon. I mean, do you see any need for you to take actions if demand does not improve, either cost-saving actions or structural changes? Ulf Larsson: I mean, if we go back to 2017, as I said, we have been invested 20% of the net sales more or less every year. And by that, we have also top-class sites as it is just now. We have also, during this period, closed down our publication paper business. and we are focused on pulp, containerboard and also solid wood products and to some extent, also renewable energy. And step by step, I mean, as soon as we see that we can reduce the manning or if we can do something else to improve our cost position, we will do that. So for me, it's -- I don't like those programs because that means that you haven't done your work -- your ongoing work, so to say. Andreas Ewertz: For the last one and half year we had a program to reduce our personnel at our pulp division with around 80 people and has gradually begun to give an effect. Ulf Larsson: And we reduced the manning by 800 people when we closed down the publication paper business. So I mean, if you have structural changes, then, of course, you have to follow up with personnel reductions, but otherwise, that is something that you have to do. That's the everyday work. Oskar Lindström: My final question is on CapEx, which you talked a little bit about here. You say that you expect next year for current CapEx to be -- I can't remember the exact wording, but slightly higher. And then how much higher is that? And then you said the strategic CapEx will be a couple of hundred million. How many couples of hundreds of millions are we talking about? Is it possible for you to be a little bit more precise? I'm just wondering. Andreas Ewertz: It depends, of course, on what overspill we have to next year, and then it depends. I mean, we have our base CapEx for next year. And then we have some potential projects, and it depends on which of them we go through with which timing, but if we go around 1.5 this year, then you're talking maybe SEK 100 million, SEK 200 million more next year on current CapEx. But again, it depends on what projects we do. And also on the strategic side, it will -- I mean, it will be between 0 and SEK 1 billion but it depends on the timing of our strategic CapEx. For example, we have 1 payment that would either go at the end of this year or the early next year, which is around SEK 150 million, and we have a couple of hundred millions next year. So it depends. But just to give a rough figure. Ulf Larsson: But CapEx will come down. Andreas Ewertz: Yes, CapEx will come down, yes. Oskar Lindström: Thank you very much. Those are my questions. Operator: And we'll now take our next question from Martin Melbye of ABG. Martin Melbye: Given tariffs and new volumes to place, could you give some hints on prices for Pulp and Containerboard at volumes heading into Q4 quarter-over-quarter? Ulf Larsson: I mean, we don't know. That's the honest answer. But as I said, we -- I guess, we are in Pulp at the bottom level just now. I mean, as we -- as I said before, I mean, we have seen substantial curtailments taken now. And so I guess, Pulp prices will -- if they -- the only way from this point, I guess, is upwards. When will that come? Well, remains to see, I guess. I think for Containerboard, we have more capacity has come on stream during the third quarter. No additional capacity will come on stream, but we will see some ramp-ups. I guess we will see some closures in testliner going forward. The balance for kraftliner is much better, of course. I mean, the only additional volume coming in now is our own from the ramp-up in Obbola. On the other side, the inventory level is on the high side coming down a little bit now when we had the new statistics. So it's always -- it's a question of supply-demand balance, of course. But my best guess is sideways, maybe we will start to see upward trend in Pulp and maybe sideways in Containerboard. And as I already said, I guess, we will see somewhat decrease in prices in solid wood products, I guess, another 5% in the fourth quarter and then the first quarter is always -- it's tricky to increase prices in the first quarter. If something is happening now in U.S., that might have a faster impact on the pricing for solid wood products. But otherwise, I think we have to wait for the second quarter next year. Andreas Ewertz: And in terms of volumes, forest, you harvest a bit more from our own forest in the fourth quarter. In solid wood products, I sort of mentioned, you seasonally weaker quarter compared to the summer months so they have lower delivery volumes. In Containerboard, it will be slightly higher since we had a big maintenance stop in the third quarter, which we won't have in the fourth. And in Pulp, I would say it's slightly up or flat. Operator: Thank you. And we'll now take our next question from Cole Hathorn of Jefferies. Please go ahead. Cole Hathorn: I'd just like to ask what do you see would be the positive catalyst for each of your segments and like to take it in turn. But maybe starting on Pulp. What do you think is truly needed exit the demand? Do you think it's going to be capacity closure potentially something out of Canada considering they've got elevated wood costs and you see a sawmill go down and then pulpwood closure that tightens the market. Wood product, is it ultimately just a demand that's needed rather than any form of supply response? And Containerboard, I'm just wondering what are you looking for in the market for kraftliner. Is it -- do we need to rely on the recycled closures and to follow that? Or are you seeing the ability to kind of keep this premium versus recycled considering the less imports from the U.S. and much better supply-demand balance in... Ulf Larsson: If we start with pulp, I guess, it's again, it's about demand. The tissue business is rather slow, of course, it might be impacted by closures also, again, it's a supply-demand issue. And it might be so that just my speculation, but I mean, if we will have a tough -- if tariffs will remain in Canada for solid wood products that will have a negative impact on the raw material supply to the pulp mills that might have an impact over time, of course. Otherwise, it's demand and mainly then in the tissue segment. In wood, as already said, I mean, we are in the slower season just now in Q4 and Q1. I guess that sooner or later, Americans, they have -- they must start to buy solid wood products. And if the tariff level from Canada over to U.S. will remain of 45%, that definitely will mean that we will see increasing prices in solid wood products even if you're not a big supplier to U.S., which we are not, but still, that will have an impact on the global trade rather immediately, I would say. And then we know that it can start to move quite fast. But I guess if you look at the inventory level in U.S., we have to wait for at least a quarter before we can see something. In Containerboard, I mean, we look at the box consumption, and we feel that we have a slow demand from the industry while I mean, in other businesses for food and yes, maybe trade and that part -- that is going quite in a normal pace. So -- but the industry for us, I mean, heavy-duty spare parts and things like that where we typically can find a premium for kraftliner. My -- I don't know, but my guess is also that we will see closures in testliner, I guess that the main part of testliner produces just now, they don't make money. And I guess we have a chicken race on the testliner side as this just now. The balance both for Containerboard, kraftliner and also for NBSK, it's much, much better than for recycled-based production. Cole Hathorn: And then maybe just following up on capital allocation. You were clear that you're ramping up your projects, your past peak CapEx. And beyond that, you've got flexibility for consider capital returns via dividends and buybacks. But you didn't mention anything on M&A, and I'm just wondering how you think about that? And what are your criteria there? Would you consider anything in Central Eastern Europe if a very low-cost asset came available? Are you staying with your production base in Sweden? Just like your thoughts. Ulf Larsson: I mean, typically, we are a company based on organic growth. And typically, we are a company focused on Sweden where we have our own forest. We don't like to stay in countries where we can see a higher risk really. So I guess we are -- but on the other hand, you shall never say no. But typically, we are based on -- and focused on organic growth as it is. Andreas Ewertz: And as Ulf mentioned before, currently, I mean, we're focusing on our ramp-up of our current project before we add some too much complexity. Operator: And we will now move on to our next question from Andrew Jones of UBS. Andrew Jones: Can you hear me okay? Andreas Ewertz: Now, we hear you. Andrew Jones: Sorry, apologies, I missed the start of the call. So if you've mentioned this, my apologies. But on the actual solid wood products, what usually give a bit of the sort of guidance range in terms of pricing? I mean, how do you look at pricing going into the fourth quarter on -- in the Wood division? And then also, I think on the last quarter, you sort of gave us like a percentage changes you expect in the Forest division in both logs and then pulp. What sort of percentage changes are you sort of thinking about in the Forest for those 2 categories? Ulf Larsson: The first one, yes, we did mention that one. And as I said, I mean, we lost 5% in terms of price from -- in the third quarter in comparison with the second quarter. And I guess that we will lose another 5% in the fourth quarter. And that is mainly a seasonal effect as the demand always -- we always have a slower demand in the fourth quarter and in the first quarter. Forest, Andreas, you can... Andreas Ewertz: Yes. So Forest, pulpwood, I mean, they have peaked. We saw a very slight decrease here in the third quarter, maybe 1%, and we expect fairly flat, maybe 1% down in Q4 because of this lag effect. In terms of sawlogs, they will continue to increase a bit in the fourth quarter, maybe 5% compared to Q3, but that's also because you saw that the logs were quite flat within Q2 and Q3. But that's more of a mix effect. We had lower dimension on the logs, which have a lower prices. So we didn't get that so underlying, the prices increased also in Q2 to Q3. But since we had that mix, we didn't see that increase. But now we'll get that in Q4 so maybe 5% up. Andrew Jones: So it sounds like a pretty tough quarter, fourth quarter if you're sort of saying price is 5% down, log import prices 5% up. And you're probably seeing some seasonal volume weakness, I guess, maybe and it's about 5% last year. So anything to mitigate or offset those moving parts? Andreas Ewertz: Yes. So but on the solid wood products, I mean, as Ulf said, the prices will go down 5% and also the log will continue to increase a bit, but of course, continuing to focus on cost and what we can affect. Andrew Jones: Okay. And just 1 question just about the structural change. On kraftliner, I mean, you've kind of talked about the market being more balanced in kraftliner, obviously compared to testliner, but I mean, how -- why can the actual premium kraftliner and testliner fee in the medium term given the sort of substitution potential, I'm curious like to see whether that premium can be maintained in the near-ish term. Ulf Larsson: It's hard to say. I mean, the delta just now is EUR 280 or something like that. So that is a rather wide gap. And I guess if customers -- if they can substitute, they will substitute. And we see the same trend in -- we have the same question always in softwood and hardwood pulp. But the same answer, I mean, if customers, if they can substitute, they will do it because if something is cheaper, of course, they will use that instead. So I guess my perspective is more that I think we will at least remain on rather high delta between testliner and test recycled products and base products and virgin-based products as virgin fiber will be a scare resource going forward. So strategically, I guess, we will widen this gap, which we have also seen in the past years. So I think that will remain, honestly. And also, when you look at the capacity increase. I mean, the absolute main part capacity is coming in the recycled business. But in order to get raw material to the recycled business, you must have some virgin-based production. Operator: And we'll now take our next question from Pallav Mittal of Barclays. Pallav Mittal: Pallav Mittal on behalf of Gaurav Jain. So a few questions. Firstly, you and your peers have all highlighted good availability of pulpwood because of which we are now seeing this decline in pricing. And now given demand is weak and there are a number of production curtailments, how do you think these pulpwood costs could change if you start seeing some sort of improvement in demand? Ulf Larsson: Then, of course, it might be so that you have bottleneck again in raw material supply. So again, to have a stable long-term increase in the market, then the consumption must come up, the demand must come up. So that's the simple answer. And I mean, then it might be so that if -- when sawlog prices, if they come down, but pulpwood prices, when they come down, then it might be so that you see additional capacity coming on stream. And by that, of course, the supply will increase for a while. And if then the demand is not picking up, then, of course, you will have a pressure in the market again. So it is as easy as that. It's always a question about supply-demand. Andreas Ewertz: And your question on -- I mean, of course, if demand for the finished product goes up and the production goes up, that will, of course, increase the demand for wood raw material, which is already has been tight. Pallav Mittal: Sure. And then if I can ask something on CTMP. So you did mention that CTMP prices have declined in Europe, and now we are seeing new capacity in China as well. But does that impact your CTMP ramp-up? Ulf Larsson: I mean, as it is just now, we have a rather profitable business within Europe in CTMP. But as you say, I mean, we have very -- the margin is not too big in Asia. So yes, in that perspective, we are maybe in -- it's always a marginal calculation. So if we have days with high electricity price or if not now, but before when we saw that we had scarce situation when it comes to pulpwood. I mean then we -- of course, the first production site, we took containers in was in Ortviken and CTMP. So as it is just now, we are a little bit more focused on fine-tuning, I mean, also try to validate products for the European market and so on. So it is very small or from time to time, negative market going from Sweden over to Asia in CTMP as it is just now. Operator: Thank you. That was our last question. I will now hand it back to the host for closing remarks. Ulf Larsson: Thank you, and that concludes our presentation of the third quarter results. We'll come back in January for our full year report. Thank you for watching, and thank you for listening.
Operator: Thank you for standing by, and welcome to the First Hawaiian, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kevin Haseyama, Investor Relations Manager. Please go ahead, sir. Kevin Haseyama: Thank you, Jonathan, and thank you, everyone, for joining us as we review our financial results for the third quarter of 2025. With me today are Bob Harrison, Chairman, President and CEO; Jamie Moses, CFO; and Lee Nakamura, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section. During today's call, we will be making forward-looking statements, so please refer to our Slide 1 for our safe harbor statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. And now I'll turn the call over to Bob. Robert Harrison: Hello, everyone. Thank you, and thanks for joining us today, and I'll start by giving a quick overview of the local economy. The state unemployment rate continued to drift lower and was at 2.7% in August compared to the national unemployment rate of 4.3%. Through August, total visitor arrivals were up 0.7% compared to last year as strength in the U.S. Mainland arrivals more than offset weaknesses in Japanese and Canadian arrivals. Year-to-date, visitor spending was $4.6 billion, up 4.5% compared to the same period of last year. The housing market remains stable. The median single-family sales price on Oahu was $1.2 million in September, up 3.8% from last year. The median condo sales price on Oahu for September was $509,000, down 1.7% from the prior year. Before we move on, I wanted to discuss the federal government shutdown, and it's too early to measure the full impact on the Hawaii economy, but with a large civilian federal workforce, we expect that many families will begin to face financial hardship. Through the Hawaii Bankers Association, all the local banks have asked affected families to contact their local bank to discuss available relief measures. Turning to Slide 2. We had another strong quarter as net income increased compared to the second quarter. The improvement relative to the prior quarter was driven by higher net interest and noninterest income, partially offset by a higher effective tax rate. As you might recall, our second quarter results included the impact from a change in California tax law, which resulted in a net benefit of $5.1 million last quarter. The effective tax rate in the third quarter returned to a more normalized 23.2%. Turning to Slide 3. The balance sheet remains solid as we continue to be well capitalized with ample liquidity. We held the investment portfolio relatively flat and loans declined by $223 million. Average deposits were higher during the quarter, and we saw a surge at the end of the quarter due to inflows in public operating accounts, and Jamie will cover this in more detail in a little bit. We also repaid the $250 million FHLB advance that matured in September. And during the quarter, we repurchased about 965,000 shares at a total cost of $24 million. We have $26 million of remaining authorization under the approved 2025 stock repurchase plan. Turning to Slide 4. Total loans declined by about $223 million in the quarter. The decline was primarily in C&I. Dealer flooring balances fell by $146 million and paydown on lines of credit by several Hawaii corporate borrowers added about $130 million to the decline in the C&I balances. We're seeing strong originations so far in the fourth quarter and expect to end the year about flat to year-end 2024. Now I'll turn it over to Jamie. James Moses: Thanks, Bob. Turning to Slide 5. Total deposits increased about $500 million in the third quarter. Commercial deposits increased $135 million and were partially offset by a $43 million decline in retail deposits in the quarter. The decline in retail deposits seems to be largely due to seasonality, where we have seen a pattern of declining balances in the third quarter, followed by growth in the fourth quarter. Total public deposits increased by $406 million, and all of that growth was in operating accounts. There was no change in the balance of public time deposits. In the fourth quarter, we expect seasonal increases in both retail and commercial deposits, while seeing outflows in public deposits. The total cost of deposits fell by 1 basis point and the ratio of noninterest-bearing deposits to total deposits was a strong 33%. On Slide 6, net interest income was $169.3 million, $5.7 million higher than the prior quarter. The NIM in the second -- third quarter was 3.19%, up 8 basis points compared to the prior quarter. The increase in the margin was primarily driven by higher asset yields as well as some nonrecurring items such as loan fees. The run rate NIM for the month of September was 3.16%, and we continue to expect positive NIM momentum in the fourth quarter, and our current thinking is that the margin will advance a few basis points from the September NIM. This guidance reflects the impact of our fourth quarter loan and deposit outlook and additional 25 basis point rate cuts in both October and December. Turning to Slide 7. Noninterest income was $57.1 million in the quarter. Noninterest income benefited from higher BOLI income due to favorable market movements and swap income. We continue to expect the normalized run rate of noninterest income will be about $54 million per quarter. There were no unusual expense items in the third quarter. And based on our year-to-date expenses, we now expect that full year expenses will come in below our most recent outlook of $506 million. And now I'll turn it over to Lee. Lea Nakamura: Thank you, Jamie. Moving to Slide 8. The bank continued to maintain its strong credit performance and healthy credit metrics in the third quarter. Credit risk remains low, stable and well within our expectations. We are not observing any broad signs of weakness across either the consumer or commercial books. Classified assets increased $30.1 million due primarily to a single borrower, who is a long-time customer that we know well and are continuing to work closely with. Quarter-to-date net charge-offs were $4.2 million or 12 basis points of total loans and leases. Year-to-date net charge-offs were $11.3 million. Our annualized year-to-date net charge-off rate was 11 basis points or 1 basis point higher than in the second quarter. NPAs and 90-day past due loans were 26 basis points at the end of the third quarter, up 3 basis points from the prior quarter, resulting from a slight increase in nonaccruals. Moving to Slide 9. We show our third quarter allowance for credit losses broken out by disclosure segment. The bank recorded a $4.5 million provision in the third quarter. The asset ACL decreased by $2.6 million to $165.30 million with coverage remaining at 117 basis points of total loans and leases. We believe that we continue to be conservatively reserved and prepared for a wide range of outcomes. And now we would be very happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of David Feaster from Raymond James. David Feaster: I wanted to talk on just kind of the growth outlook. I mean, obviously, we've had some dealer floor plan with a headwind, some just natural declines in C&I. I was hoping you could first maybe touch on kind of how the pipeline is shaping up, demand that you're seeing and other opportunities that you'd be interested in helping accelerate organic growth, whether it's -- is there any appetite for full purchases or C&Is? Just kind of curious kind of your thoughts on, again, what are you seeing now in the pipeline and demand and organic growth and other opportunities to accelerate that? Robert Harrison: David, this is Bob. I'll maybe start off, hand off to Jamie. So yes, the third quarter was a little unusual in that we saw some pretty significant paydowns in dealer floor plan. Part of that was one of our customers sold several franchises. So that impacted that negatively. But overall, we're still very bullish in that business. We're seeing very strong production in the pipeline. There are some of that's already closed for the fourth quarter. Some of that's C&I, a lot of that is CRE. So we think we're going to have a very strong fourth quarter. And as we look to the future, we have considered pool purchases, but maybe I'll ask Jamie to just comment on that. James Moses: Yes. Thanks, Bob. I think we're looking at just in totality, as Bob said, I think we're looking at being able to get back to flat at the end of '25, roughly to where we were at the end of '24, which speaks to the strength of the pipeline that we see today. But to the broader question of pools and purchases, I think we always look at things. And to the extent that we feel like we have some level of expertise or knowledge in particular areas, we look maybe to carve out things that we have expertise in. So for example, maybe like a residential pool of Hawaii loans, right, might be something where we would think the long and hard about purchasing or if there are opportunities around properties in Hawaii that we might look at as well. So for the most part, we see where that we want to grow loans, but we're really looking for areas where we have some sort of expertise or niche knowledge around in order to be able to do that. David Feaster: Okay. That's helpful. And then maybe just -- I mean, the core deposit growth was tremendous. I was hoping you could maybe touch on a bit. You talked on some continued growth in core deposits. Obviously, there's some seasonality that you alluded to. But could you talk about where you're having success driving core deposit growth? And then just, again, the good and the bad of that is we built liquidity. Like how do you think about deploying some of that liquidity in the coming months? James Moses: Yes. Thanks, Dave. So I guess we're going to expect that our deposit total balance is probably going to be like roughly flat at the end of the year to where we are today. And that mix is going to shift a little bit from -- we expect to see some of our public deposits kind of run out here in the fourth quarter, but sort of replaced by retail and commercial deposits. So where we're having success really is our retail teams and our commercial teams are really out there and really talking to our customers and doing a really good job of maintaining, strengthening relationships in the community. And I think we're really trying to focus on that relationship activity. And so we've had a lot of success with that, and that's due to the efforts of our retail and commercial teams primarily out here on the ground. Robert Harrison: And to add to Jamie's answer, as far as the liquidity that we have, we have been -- we are no longer letting the investment portfolio run down. So we're holding that flat. So we have kind of restarted some purchases after a number of years of letting it run down. So we're keeping that relatively flat with similar duration and very similar categories of securities that we're looking at to purchase. David Feaster: Okay. That's helpful. And then maybe just last 1 for me. I appreciate the margin commentary I mean, look, you're naturally rate sensitive just given the strength of your core deposit base and the floating rate nature of some of your loans. Just kind of curious I mean there's a lot of moving parts in here, right? You got liquidity deployment and all -- there's a lot of moving parts. But I'm just kind of curious, first, how do you think about managing deposit costs as the Fed cuts? And then just given the tailwinds from back book repricing, remixing and some of the liquidity deployment that we're talking about, do you think that we can see the margin continue to expand even with Fed cuts next year? James Moses: I think Dave, that depends kind of on the timing and the magnitude of those cuts. I think that would -- that is ultimately by the end of the year, it could be a challenge to see NIM expansion at the end of the year. But for now, I think, for now... Robert Harrison: End of the year and then 2026. James Moses: That's right. Yes. But for now, what we see is that we have sufficient loan growth and sufficient loan growth just sort of cover this, right? So we're still -- we're looking at -- we're looking at $1 billion of cash flows over the next 12 months. At like -- we'll call that like a 125 basis point spread right now to loans that we're putting back on the books. And we have a 200 to 250 basis point spread on the investment portfolio, right now that we're sort of -- that we're keeping flat. So there are a lot of underlying dynamics. And of course, those spreads will decrease, right, the more the Fed decreases as well. But I think the trajectory for now looks like we can still support increasing expansion of the margin. But of course, there will be a natural spot. I think that's maybe like 1% or so from now. So 4 to 5 rate cuts, something like that. There'll be a natural floor to our ability to drive out further decreases in the deposit book. So good and bad news, right? We got a great deposit base, but it can only go so low, right? There's a floor on that. And so I think there is opportunity to continue to expand the NIM. And again, I think that is going to be largely dependent on our ability to generate loans. Operator: And our next question comes from the line of Charlie Driscoll from KBW. Charles Driscoll: This is Charlie on for Kelly Motta, if you could remind us of your capital priorities, how you're viewing the buyback? And from an a perspective, the environment is obviously heating up. Just remind us of your strategy on that front? Robert Harrison: Yes. Thanks, Charlie. So the capital priorities continue to be the same. We'd love to -- we're doing all the loans that fit our credit box and profile. We want to do all those that we can -- and we have a share buyback authority of $100 million. You see that we've done $74 million so far, and the rest of that is going to depend on, I'll call it, market conditions for sure. And I think the dividend is pretty good yields kind of a place. And also just in terms of the ratio of earnings that we pay out is relatively high. So probably not going to see an increase in the dividend or anything like that as part of that at the moment. Charles Driscoll: That's helpful. And then I guess, like circling back to the deposit rate conversation. The pricing has been rational and anticipating some cuts, like we've been hearing some changes in expectations from bank. Maybe just put some numbers around how you're thinking about betas on the way down? Robert Harrison: Yes. So Charlie, we tend to talk about it as beta on our rate-sensitive portfolio. So we continue to have roughly $4.5 billion rate-sensitive deposit portfolio. We've been very successful in -- with past rate cuts. We're talking maybe 90%, 95% betas on that portfolio relative to a Fed rate cut. We think that we're -- that drives a little bit lower and it gets successively lower for each rate cut that we have, but I think right now, I think about maybe like a 90% beta on the next rate cut, 88% on the next 1 after that, 85%, something like that. So we -- we still think we have a range there where we can drive deposit costs lower of course, when the Fed cuts rates as well. So it's a decreasing ability to do that for sure, but still relatively high at the moment. Charles Driscoll: Great. And then I guess, just like a little bit of detail with the margin expansion and the 50 bps of additional costs, are you assuming any loan purchases in that or... James Moses: No loan purchases in that. That's just what we're looking at in terms of looking at our pipelines and talking with the teams over the past month or so, we just expect to have really strong loan growth here in the fourth quarter. Operator: And our next question comes from the line of Anthony Elian from JPMorgan. Anthony Elian: Jamie, just a follow-up on NIM. Just a follow-up on NIM. Slide 5 to 6, you saw a really nice tailwind from loan repricing and looks like every 1 of your loan yields increased from the prior quarter. I'm just wondering how much of a tailwind is left from loan repricing, maybe in 4Q and beyond, just given the outlook for rate cuts on the forward curve? James Moses: Yes. So I think there's still a tailwind there. I guess I'll start with that. But then as we look out, we have $1 billion of fixed rate cash flows coming off of the portfolio over the next 12 months. And right now, we think that, that's repricing higher at like a 125 basis point spread at the moment. So there's still a pretty significant tailwind there. Now the 125 basis points, that's an average. And more the Fed cuts, the tighter that spread gets for sure. But there is still an ability to reprice those cash flows higher. On the investment portfolio, where we're seeing $500 million to $600 million of runoff over the next 12 months, we're getting like a 225 to 250 basis point spread on those purchases. So there's still a really significant sort of balance sheet role impact that we're seeing. That should be a tailwind not only in the fourth quarter, but into the first and second quarters as well. Now again, all of this is dependent upon being able to replace those cash flows with loan growth. And we think we can do that. but it will be dependent upon that sort of loan growth trajectory. And to the extent that we don't get the loan growth, we would consider other things we would consider maybe increasing the size of the investment portfolio. It's not our preferred option. But there are things that we would do to manage the balance sheet and to try to manage that NIM to continued expansion or at least sort of trying to keep it flat as we get those third and fourth and fifth anticipated rate cuts. Anthony Elian: Okay. And then my follow-up, I think you pointed to $54 million of fee income in 4Q. Just what are the areas or headwinds you expect to decline this quarter? Is it just the 2 items you call out on Slide 7. James Moses: Yes. I think that's right, Tony. Yes. It's not really headwinds. It's just we kind of got some good positive surprises here in the third quarter and wouldn't necessarily expect that to continue into the fourth. Robert Harrison: Yes. And to add to that, we have been kind of messaging more in the 51% to 52% range. And now just given the strength of the overall fee business, we're moving that up to 54% as kind of our expected run rate. Operator: And our next question comes from the line of Matthew Clark from Piper Sandler. Matthew Clark: Just to close out the NIM discussion, do you have the spot rate on deposits at the end of September? James Moses: That was 136 basis points end of September. Matthew Clark: Okay. And then the negative migration you saw in substandard this quarter. Can you just speak to what drove that increase? Lea Nakamura: So it's primarily that single loan to our long-time customers. And we're not really worried about loss or anything like that. We work closely with the customer. We just feel it's prudent to continue to update the ratings as we see the financials. Matthew Clark: Okay. I may have missed it, but the type of customer and the situation there? Robert Harrison: We didn't share that one, Matt. So we'd rather not. It's a small town. Matthew Clark: Understood. And then just on the capital question. I don't think you finished up on the M&A piece. But -- and again, I may have missed it, but just any updated comment on M&A discussions you might be having, whether or not things have changed materially since last quarter. Robert Harrison: No, unchanged. We're still open to talking to people and we certainly consider the right opportunity, but no change from previous guidance and discussion. Operator: [Operator Instructions] Our next question comes from the line of Timur Braziler from Wells Fargo. Timur Braziler: Jamie, your comment on total deposits, I want to make sure I heard that right. Is it flat for 4Q or flat for the year? James Moses: It's flat third quarter to fourth quarter. So we expect public to run out in the fourth quarter a little bit, while we increased retail and commercial. Timur Braziler: And then maybe back to Matt's last question. Just more specifically, Mainland M&A. It sounds like that's been something that's at least on the table more recently? Just is that still the case? And maybe just remind us if that is the case, kind of what you'd be looking at as far as criteria goes? Robert Harrison: No change to what I said. Timur, I think the only thing would be it would only be mainland M&A for us because with our HHI market share here, there's nothing we'd be able to do in Hawaii. So but no change. We're certainly open to talking to people and would consider the right opportunity. Timur Braziler: Okay. That's a good point. And then, Bob, your starting comment on expecting many families will face potentially some real hard ships here from a prolonged government shutdown. I guess that comment and then looking at the last few UHERO report, which is calling for a mild recession over the course of the next year. I mean is that any different really from kind of the operating trends on the island over these last couple of years? Does that change the way that you guys are thinking about the local economy and, I guess, more pointed just how much of that is already factored in, in the reserving that you have, particularly on the consumer side. Robert Harrison: Yes. Maybe I'll start and ask Lee, if she has any additional comments. Really no change. We think that the local economy is resilient. I mean people are not the first time this has happened. It's been a little while since there's been a shutdown that's affected salaries and all that. But we just want to make sure, and that's why we want to do it with all the banks here. I want to make sure we're open and people know they can approach us if there's a need. But we've had just very few inquiries, Lee, maybe if you have any additional comments. Lea Nakamura: Not really. We haven't really seen any effects in the credit metrics yet. And -- but we're always cautious and we always take it into consideration, when we try to figure out what the right valuation is for the ACL. Robert Harrison: And on that, I mean, to speak to consumer credit metrics. Lee did mentioned it earlier, but the 2 that tend to pop up soonest is credit cards and indirect and they're doing quite well. So really no -- nothing observable at this point, Timur. Operator: And our next question comes from the line of Jared Shaw from Barclays. Jared David Shaw: Everybody. Following up on that, when you look at the impact of federal spending apart from military in Hawaii. Do you -- are you concerned at all that it could be impacted by reshifting of federal priorities? Or is it still pretty heavily defense focused. So while we're dealing with the shutdown now, you still feel that's not going to change the long-term contribution of federal government spending into Hawaii? Robert Harrison: Yes, Jared, this is Bob. Totally agree. The long-term trend is defense focused, and it's going to be very strong. I'm heading down to Guam for next week, and the spend there is phenomenal and the projects on deck here are very, very strong. So we're not expecting that our core federal employee workforce is pretty stable. The largest employer being the Pearl Harbor and naval shipyard, which is -- and has been identified as a key resource in the Navy. So really stable to improving, I guess, would be the long-term view. Jared David Shaw: Okay. And then in conversations with your floor plan dealers, what's their expectation for sort of auto sale volume going into the next year? Are they -- are they thinking that there's going to be a slowdown in purchase activity? And is that incrementally, I guess, better for you with floor plans if inventories stay around longer? Robert Harrison: Certainly, we have really great customers with strong credit, so we'd love to see higher balances with those same customers. The discussions haven't been as much around next year. It's really been more topical about tariffs and the impacts of tariffs and different manufacturers are picking up some of the impacts of those additional costs. Others, I think we'll start based on the conversations we're having, we'll start to soon start passing those through to customers. And so there's a fair amount of uncertainty still on the end impact of the tariffs that started at the beginning of this year and what consumers will do with potentially higher price points and how that will affect demand. If it slows down demand, maybe not in the next year, but even into the fourth quarter first and second quarters of 2026. That would definitely help us. Jared David Shaw: Okay. And then just finally for me. Have you seen any change in sort of pricing behavior from some of the change in ownership of other Hawaii competitors over the last year. It sounded like earlier in the year, there wasn't really any big change, but are you seeing any change in how they're approaching pricing in the markets? James Moses: Yes. We haven't seen any change in the market as far as competitive dynamics or pricing. Operator: And our next question comes from the line of Janet Lee from TD Securities. Sun Young Lee: Hello. Going back to M&A, just quickly, I know you guys touched upon it just a few times on this call. But can you remind us what is your stance -- what is your current stance on that M&A -- potential M&A opportunity if you are looking to -- you're considering opportunities? Like what would be -- what would make sense in the Mainland? Robert Harrison: Really nothing to add to our earlier comments, I guess the only thing would be in the Western states. It's not that we're going to go center or East. But it's just -- we're open to talking to people and we're considering the right opportunity and really nothing more to share than that at this time. Sun Young Lee: Okay. Got it. Fair. I think people are entertaining the idea of resi mortgage coming back if the rate comes down to the 5 handle, is was that something that would be helpful to your market or perhaps not because it's more of a supply issue. How should I think about the positive impact from that point on your resi? James Moses: Yes, Janet, it's a good question. I think that the lower the rates go, just the more activity you will see. You are correct that there is some sort of supply constraints around that for sure. But I think it will be helpful for balances. I think that there's -- that there should be some good opportunities there. So yes, I mean, I think, ultimately, for the mortgage business, in particular, if you -- if the rates go a little bit lower, we could see some increased activity in that area, and that should be constructive. Sun Young Lee: Got it. And apologies if this was already covered, but the paydown on $130 million of paydown on corporate lines, is that -- was that just seasonality that is coming back or just one-off? Or is it really a big quarter for paydowns? Robert Harrison: No, it wasn't necessarily seasonally. These were earlier draws for specific things, and now that that's done, they're getting repaid. It's it was odd in that several happened in the same quarter, but there is nothing unusual about the borrowing and repayment. It's just -- just all kind of lend -- the draws weren't in the same quarter, but the paydowns were. So that's why we didn't call it out on the way up, but we're calling it out when it got repaid. Operator: [Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kevin Haseyama for any further remarks. Kevin Haseyama: Thank you. We appreciate your interest in First Hawaiian, and please feel free to contact me if you have any additional questions. Thanks again for joining us, and have a good weekend. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Greetings, and welcome to the OMA Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Emmanuel Camacho, Investor Relations Officer for OMA. Thank you. You may begin. Emmanuel Camacho: Thank you, Melissa. Hello, everyone, and welcome to OMA's Third Quarter 2025 Earnings Conference Call. We're delighted to have you join us today as we discuss the company's performance and financial results for the past quarter. Joining us today are CEO, Ricardo Duenas; and CFO, Ruffo Pérez Pliego. Please be reminded that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our control. And now I'll turn the call over to Ricardo Duenas for his opening remarks. Ricardo Duenas: Thank you, Emmanuel. Good morning, everyone, and thank you for joining us today. This morning, Ruffo and I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. In the third quarter of this year, OMA's passenger traffic totaled 7.6 million passengers, an 8% increase year-over-year. Seat capacity increased by 11% during the quarter. On the domestic front, passenger traffic grew by 7%, driven primarily by the Monterrey Airport, which saw increases on routes to the metropolitan area of Mexico City, mainly to Toluca Airport, Bajio, Puerto Vallarta, Mérida and Querétaro. These routes collectively added over 300,000 passengers during the quarter, representing 68% of the total domestic passenger growth. International passenger traffic increased by 11%, mainly driven by Monterrey on the route to San Francisco, San Luis Potosi with higher traffic on the routes to Atlanta and Dallas and Tampico on the route to Dallas. Together, these routes added more than 47,000 passengers during the quarter, accounting for 46% of the total international passenger growth. Moving on to OMA's third quarter financial highlights. Aeronautical revenues increased 11% with aeronautical revenue per passenger rising 3% in the quarter. Commercial revenues grew by 7% compared to the third quarter of '24 and commercial revenue per passenger stood at MXN 60. Commercial revenue growth was mainly driven by parking, restaurants, VIP lounges and retail, mainly as a result of higher penetration and an increase in passenger traffic. Occupancy rate for commercial space stood at 96% at the end of the quarter. On the diversification front, revenues increased 8%, with Industrial Services contributing most of this growth, mainly because of additional square meters leased in our industrial park as compared to the third quarter of '24 and contractual increases to rents. OMA's third quarter adjusted EBITDA increased by 9% to MXN 2.7 billion with a margin of 74.8%. On the capital expenditures front, total investments in the quarter, including MDP investments, major maintenance and strategic investments were MXN 472 million. Finally, in relation to the negotiation process of our next Master Development Program discussion with the AFAC remain underway. We submitted our proposed Master Development Program for the '26-'30 period at the end of June, and the process remains on track. During the quarter, we continued addressing AFAC's technical observations and advancing the validation of investment projects in accordance with the schedule agreed with the authority. We continue to expect the final resolution and publication of results during December. Our expectations regarding the overall investment level remain at committed levels of MDP investment similar in real terms to the level of the previous '21-'25 MDP and maximum tariff increase in the low single digits. I would now like to turn the call over to Ruffo Pérez Pliego, who will discuss our financial highlights for the quarter. Ruffo Pérez del Castillo: Thank you, Ricardo, and good morning, everyone. I will briefly go over our financial results for the quarter, and then we will open the call for your questions. Aeronautical revenues increased 10.6% relative to 3Q '24, mainly due to the increase in passenger traffic as well as higher aeronautical yields. Non-aeronautical revenues increased 7.3%. Commercial revenues increased 7.0%. The line items with the highest growth were parking, restaurants, VIP lounges and retail. Parking grew by 9.4%, mainly as a result of higher passenger traffic. Restaurants and retail increased 9.8% and 8.2%, respectively, both driven by higher passenger traffic as well as the previously opened or replaced outlets. VIP lounges rose 9.9%, mainly due to higher market penetration, primarily in Monterrey as well as the increase in passenger traffic. Diversification activities increased 8.2%. Industrial Services, which relates to the operation of the industrial park contributed most to the growth in the quarter, increasing by 53%, resulting from higher square meters leased as compared to third quarter of '24 as well as contractual rent increases. Total aeronautical and non-aeronautical revenues grew 9.8% to MXN 3.5 billion in the quarter. Construction revenues amounted to MXN 382 million in the third quarter. The cost of airport services and G&A expense increased 14.4% versus 3Q '24, primarily due to the following line items: Payroll grew by 10.7%, mainly as a result of annual wage increases as well as higher headcount as compared to the third quarter of '24. Other costs and expenses increased by 22% due primarily to higher IT-related requirements and transportation services. Contracted services expense rose 16.4%, mainly due to higher cost of security and cleaning services following contract renewals in prior quarters, reflecting the inflationary pressures and tight labor market conditions in Mexico. Minor maintenance increased 19.8%, primarily due to timing effect of the works performed. Concession tax increased by 10.4% to MXN 290 million, in line with revenue growth. Major maintenance provision was MXN 28 million as compared to MXN 75 million in the same quarter of last year. OMA's third quarter adjusted EBITDA grew 9.0% to MXN 2.7 billion and adjusted EBITDA margin reached 74.8%. Our financing expense increased by 9.8% to MXN 299 million, mainly driven by higher interest expense as a result of higher average debt levels. Consolidated net income was MXN 1.5 billion in the quarter, an increase of 9.1% versus the same quarter of last year. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN 1.9 billion and investing and financing activities used cash for MXN 480 million and MXN 365 million, respectively. As a result, our cash position at the end of the quarter stood at MXN 4.4 billion. At the end of September, total debt amounted to MXN 13.6 billion, and we maintained a solid financial position, ending the quarter with a net debt to adjusted EBITDA ratio of 0.9x. This concludes our prepared remarks. Melissa, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Pablo Ricalde with Itaú. Pablo Ricalde Martinez: I have one question regarding your traffic expectations maybe for the fourth quarter and maybe your early thoughts on 2026, taking into account the World Cup. Ricardo Duenas: Yes. Thank you, Pablo. So we're looking for the rest of the year to finish in our traffic overall for the year between 7% and 8% growth. And our expectation at this point in time for next year, it's traffic to be in the low to mid-single digits for next year growth. Operator: [Operator Instructions] Our next question comes from the line of Enrique Cantu with GBM. Unknown Analyst: I have a quick question. Commercial revenue per pass declined this quarter, the first contraction since early 2023. Could you elaborate on the main drivers behind this softness? And how do you plan to reaccelerate this [ known ] area of growth? Ruffo Pérez del Castillo: Enrique, so yes, commercial revenue per passenger mainly reflects -- in the quarter reflects the impact of onetime revenues recorded in the previous year. And in the following quarters, we expect commercial revenues per passengers to gradually increase in line with inflation from current levels. Unknown Analyst: Okay. Perfect. And just another one, if I may. SG&A and utility costs rose this quarter, eroding margins despite strong top line growth. Do you view these cost pressures as temporary? Or should we expect a structurally higher cost base heading into 2026? Ricardo Duenas: Sorry, could you repeat that? Maybe you're too close to the microphone. Unknown Analyst: Yes, sorry. So it's regarding SG&A and utility costs. We saw that this quarter they erode margins. Do you view these cost pressures as temporary? Or should we expect this higher cost base heading into 2026? Ruffo Pérez del Castillo: So yes, as we mentioned, there are some specific line items that are facing some pressures like cleaning and security, where the total level of cost in the following quarters should be similar to the level of cost that we are facing right now. However, we do have started to analyze different alternatives to continue maintaining cost at check, and it's part of the history of the company to be very cost conscious, and we expect pressures not to be permanent. Operator: Our next question comes from the line of Gabriel Himelfarb with Scotiabank. Gabriel Himelfarb Mustri: A quick question on capital allocation. First, for the next MDP, I think you have mentioned that almost all the capital will go to Monterrey. It will be focused on, perhaps, increasing the capacity of the airport or developing more the commercial spaces, the commercial portion of the business? And my second question, are you seeking or have you considered expanding gap -- sorry, OMA's portfolio towards outside Mexico? Ricardo Duenas: Yes. Thank you, Gabriel. Regarding the last part, we're always looking for opportunities to expand internationally. At this point in time, we don't have a concrete transaction that we could share. In terms of the MDP, it's around half of the MDP will be allocated to Monterrey, given that half of the traffic is allocated in Monterrey. We're looking to expand in most of -- in capacity that will generate commercial opportunities as well. There's pavement, there's technology, there's environmental and sustainability projects as well. Operator: Thank you. There are no questions at this time. I'll turn the floor back to Mr. Duenas for any final comments. Ricardo Duenas: We would like to thank you, everyone, for participating in today's call. We appreciate your insightful questions, engagement and continued support. Ruffo, Emmanuel and I remain available should you have any further questions or require additional information. Thank you once again, and have a great day. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Welcome to the HEXPOL Q3 presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Klas Dahlberg and CFO, Peter Rosen. Please go ahead. Klas Dahlberg: Thank you, operator, and hello to you all, and thank you for joining this call, and welcome to the HEXPOL Q3 presentation. This is Klas Dahlberg speaking, and I'm here together with our CFO, Peter Rosen. If you please turn to Page 2. I will start with a business update. Peter will take you through the financials, and I will summarize the quarter. After that, we are happy to answer your questions. If we then go to Page 4, please. I will start by going through the Q3 performance. We see that most markets continue to be affected by the geopolitical uncertainty, but it's pleasing to see that the European market continues to be rather stable, while the North American market is still challenging. We had only minor direct impact from tariffs, whereas the indirect impact on end customers affected the overall demand, especially in North America. It's also pleasing to see that including acquisitions, volumes were actually higher than last year. And excluding acquisitions, they were in line with last year, but with an unfavorable mix. Looking at our main segments, we saw that the automotive end customer segment continued to be slow, primarily in North America. That was partly compensated for by increased demand in building and construction and also in wire and cable. Our most recent acquisition, Piedmont in the U.S. and Kabkom in Turkey contributed positively to the quarter. Sales prices as well as prices on major raw materials were stable, both versus last year but also sequentially. High uncertainty continues triggered by U.S. tariffs and U.S. trade policy, and that is impacting us indirectly, as mentioned before. In North America, that is the main reason why we could not grow the overall sales and results compared to last year. In the quarter, we delivered sales of close to SEK 4.7 billion with a negative FX effect of some SEK 300 million. Piedmont and Kabkom added some SEK 240 million in sales that was offset by lower organic sales in Rubber Compounding Americas. Compounding Europe showed rather stable organic sales. We reached an EBIT of SEK 688 million and a margin of 14.7%, impacted negatively by FX of some SEK 50 million and an unfavorable mix. The operative cash flow continued on a good level, and we reached SEK 740 million in the quarter. If you please turn to Page 5. If we look into the different business areas, starting with HEXPOL Compounding, the overall organic volumes were in line with last year. The lower sales were impacted by negative FX of some SEK 290 million, but also by the mix. The automotive end customer segment was down primarily in North America, but that was partly offset by increased demand in building and construction and wire and cable. The price on major raw materials were sequentially stable and also versus last year. And the lower operating margin was affected by an unfavorable mix. Rubber Compounding Americas is, as you know, an important part of the HEXPOL Group. And we are very happy to welcome Ken Bloom back to HEXPOL as the Interim President for Rubber Compounding Americas. Ken has a clear mission to take the next step capturing and growing that business. If we then jump to HEXPOL Engineered Products, if we exclude a negative currency impact of SEK 22 million, we actually had a small increase in sales compared to last year and also good development across all product areas, leading to a stable EBIT. We are firmly committed to sustainability and our focus continues. We are on a good path to deliver on the 75% CO2 reduction target that we set for the end of this year. We are also working on the sustainability strategy and the new targets will be completed during Q1 next year. M&A is, as you know, an important focus area for our growth plans. We have the financial resources to accelerate acquisitions. Short term, the geopolitical uncertainty impacts the M&A activity level. There is somewhat a wait-and-see mentality among some companies, and that is affecting that. And last but not least, on November 4, we will have our Capital Market Day in Stockholm, and then we will share more about our growth strategy. If we then turn to Page 6. It's time for the financial update, and Peter will start with the sales development in Q3. Peter Rosén: Thank you very much. So if I can ask you to turn to Page 7, we'll take a look at the sales development in the quarter. And as you've seen, we delivered sales of SEK 4.7 billion in the quarter, which is down 6% compared to the same quarter last year. And if we look on the drivers, we see that organic sales are down 4% in the quarter. And at the same time, the acquisitions of Piedmont and Kabkom added 5% in sales. And as Klas mentioned, there were large negative effects in the quarter, adding up to SEK 312 million. Coming back to the volumes, overall organic volumes were on the same level as last year, but sales were still down, affected by a less favorable mix. Looking at it from a geographical perspective, Europe showed stable sales in the quarter, while we saw a decrease in North America that also translates into the decrease on group level. From an end customer perspective, automotive showed soft demand, which was partly offset by increased demand primarily from building and construction, wire and cable, but also several smaller end customer segments that showed higher sales in the quarter. If I can ask you to turn to Page 8, just taking a look at the financial overview and the P&L. We delivered a profit of SEK 688 million. That includes a negative FX impact of just above SEK 50 million. EBIT margin of 14.7%, which is below what we did the same period last year. And the main reason for this is somewhat less profitable mix, but also OpEx in relation to the lower sales that we saw here in the quarter. Strong cash flow in the quarter with an EBIT of SEK 688 million, we delivered a cash flow of SEK 740 million in the quarter. If I can then ask you to turn to Page 9, taking a somewhat different view of the financial performance here in the quarter. We see that sales came in at SEK 4.7 billion with an operating profit at SEK 688 million below last year, as mentioned, and an operating margin of 14.7%, which is then below what we did last year. If I can ask you to turn to Page 10, looking at the drivers of the operating profit, we see that the lower EBIT is primarily driven by the lower sales, but also impacted by lower gross margin. The lower gross margin is affected by mix. OpEx is somewhat above last year levels, but that is driven by we've added Piedmont and Kabkom to the cost base compared to the same period last year. If I then ask you to move over to Page 11, starting to look at HEXPOL Compounding in the quarter, delivered sales of SEK 4.3 billion in the quarter, which is below what we did the same period last year. Negative FX has a sizable impact of almost SEK 300 million in the quarter. Recently acquired Kabkom and Piedmont added about SEK 230 million in sales, while as mentioned before, organic sales were down some. And these lower organic sales are seen in North America, while Europe showed sales on the same level as last year. And as mentioned, from an end customer perspective, the lower sales is seen with automotive customers, and this was partly offset by higher sales to end customers within building and construction, wire and cable and also some other smaller segments. Operating profit came in at SEK 624 million with a margin of 14.4% for the quarter. If I can ask you to turn to the next page, we take a look at Engineered Products, where adjusting for negative effects in the quarter, sales were up 3%, and this is driven by strong performance by the gaskets products. Operating profit at SEK 64 million with a good EBIT margin of 18.1%, both in line with last year levels. If I can ask you to turn to Page 13, taking a look at the working capital. You can see that we continue to manage working capital efficiently. Despite adding Piedmont and Kabkom, working capital is on the same level as last year, both in absolute terms and in relation to sales. And as mentioned also in last quarter, there are no changes to underlying payment terms. And if I can then ask you to turn to Page 14, taking a look at the cash flow. As mentioned, we delivered a strong cash flow in the quarter, SEK [ 640 ] million with smaller movements across the various items, but well above the EBIT that we delivered in the quarter. And then finally, when it comes to the financial part, if I can ask you to turn to Page 15, looking at the net debt standing at SEK 3.9 billion and a net debt-to-EBITDA ratio of 1.14 at the end of the quarter. This is higher than last year, but this is mainly driven by the acquisition of the minority share of almak as well as the acquisition of Kabkom that we've done this year. So all in all, after the third quarter, we continue to stand with a very strong financial position. And with that being said, I hand over to Klas. Klas Dahlberg: Thank you, Peter. Finally, then just to summarize the third quarter. Europe showed stable sales compared to last year. Engineered Products also showed stable sales with a good profitability. We saw lower demand in North America affected by the high uncertainty related to U.S. trade policy; however, we didn't really see a direct impact from tariffs in Q3. As mentioned, Ken Bloom is appointed as the Interim President for Rubber Compounding Americas. And we consolidated Kabkom as of the 1st of May. And as we've said many times now, wire and cable that they represent is a growing segment for us. We continue to focus on M&A, and we have a strong balance sheet allowing us to act. We continue to focus on sustainability with good progress, both when it comes to our internal targets, but also when it comes to our products. And on the 4th of November, we will have our Capital Markets Day in Stockholm. So by that, we conclude the presentation of the third quarter, and we open up for your questions, ladies and gentlemen. Operator: [Operator Instructions] The next question comes from Joen Sundmark from SEB. Joen Sundmark: So starting with a question on automotive. If I look at the S&P figures on light vehicle production in Q3, it looks like it has improved a bit compared to last year, yet you mentioned that the decline in automotive seems to be present for you guys in Q3. So do you expect that there is some kind of lagging effect here? Or is it rather your particular exposure that's impacting this? If you could shed some light on that, it would be very helpful. Klas Dahlberg: All right. So when it comes to automotive, we always look at the production. And as you say, there is, of course, a certain time difference, those figures compared to our figures. When it comes to the North American market in September, there was, from a sales point of view, an increase, and that was due to the fact they had a subsidy of EUR 7,500 per vehicle. So that triggered sales in that very month, let's say. But other than that, it's a rather slow market. Joen Sundmark: Okay. That's clear. And I know that you have a fairly short order book, but could you share some color on the current discussions on demand that you have with your customers out there and sort of what they foresee demand-wise? Klas Dahlberg: Well, as you say, we have a very short order book. And the trend we have seen is that it becomes even shorter. So we get very late orders from many of our customers. But yes, the overall situation, like I said, it's a rather uncertain situation. So we don't have good visibility when it comes to the order book. Joen Sundmark: Okay. Fair enough. And on the back of that sort of uncertainty in demand and as the margin trend have been quite negative now for a few quarters, do you see any signs of that shifting? Or how are your sort of current discussions going to address that and improve the margin profile going forward? Peter Rosén: Peter here. Just to be clear, we don't give guidance or earnings. That being said, there are a couple of things. One driver of the somewhat lower margin is the mix. And it's no secret that automotive is an important end customer segment for us. So we would prefer to see that automotive production goes up and we get some of those volumes back and which is, of course, something that we are working on. The other part is looking at our cost structures. And there are 2 things. One is looking at the manufacturing footprint. But in the short run, we haven't taken any new decisions on that. Then when it comes to the more -- the other cost side, we're looking both at manning indirect production to bring that down and allocate that according to the volumes coming in. And you will see in Q3 that the number of people were actually lower, about 60 people less this quarter compared to last quarter, Q2 this year. So we're looking at those costs as well to see what can be done to bring down the cost level and manage those. Operator: The next question comes from Henric Hintze from ABG Sundal Collier. Henric Hintze: This is Henric at ABG. So on -- I was wondering if you could give us an update on how you view the M&A landscape at the moment. For example, are potential buyers and sellers closer or further apart on pricing compared to earlier this year? Klas Dahlberg: As I mentioned in my report that what we see right now is some of the companies are also affected by this uncertainty in the market. And because of that, there is a certain wait and see at the moment. So it's not maybe so much about multiples and so on. It's more that if their total result goes down, they are a bit hesitant at the moment to, let's say, to close a deal, if I call it that. So that is what we see. But with that said, we still have quite a pipeline of companies of prospects, so to say. So that's what we're dealing with at the moment. Henric Hintze: All right. And continuing on capital allocation, if this wait-and-see attitude persists among sellers, would you consider buybacks or extra dividends if you're unable to find attractive M&A opportunities? Peter Rosén: Peter here. Priority #1 is to do the M&A, and it's a very high and very clear priority for us. That being said, a while back, the dividend policy was upgraded to be in the range of 40% to 60%. And I think that's where we are right now. So priority #1, M&A. And then we haven't increased dividend policy since I think about 2 years. So that's what we can say at this point. Operator: The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: Yes. It's Gustav here from Nordea. I thought maybe just to build on your comment there, Peter, on the cost side. As you said, you haven't really taken out anything recently. Is that more due to -- you want to wait and see where demand is heading due to the geopolitical uncertainty? Or do you feel that you do have a quite good balance where you are today and with enough overcapacity to be ready to deliver if demand returns? If you can elaborate a bit more on that. Peter Rosén: Yes, of course. First of all, I think just to point out, last -- Q4 last year, we decided to close one site in the U.S., and that project was finalized in second quarter. So I just want to say that to be clear that we've just finished one project to close a production facility. That being said, there's always a trade-off on do we want to close sites in relation to the expected volumes when they come back. Since we are a batch producer, and we also don't work with order stocks, we need to have a flexibility when it comes to production capacity because when customers come and ask for volumes, we need to have that capacity ready to produce. So we need to strike a balance between the cost and having the capacity to meet volumes when they come back. And I would say that's where we are right now. Gustav Berneblad: Okay. Perfect. And then if we move to Europe, I mean, it looks to be quite stable here year-over-year. Is it possible to give a bit more comments there? Is that stability, is that across all end markets? Or are you seeing sort of wire and cable drawing a heavier part here and being sort of a cushion, if you know what I mean? If you can just elaborate a bit there. Peter Rosén: In a sense, it's a similar pattern as we see on the group level just with smaller movements. So automotive, somewhat softer and building and construction, wire and cable and some of the other smaller end customer segment being somewhat positive. So in a sense, same pattern, but smaller movements compared to North America. Gustav Berneblad: That's very clear. And then just one last question there to build on Henric's here on the M&A side. Would you say that you're more open to close acquisitions in Asia today than you were a couple of years ago within compounding? Klas Dahlberg: So when it comes to Asia, that's too early for us to say. And I think that's also part of, as I mentioned, our Capital Market Day to come back to that subject, how -- what opportunities could be there for HEXPOL, let's say. We will come back to that, Gustav. Operator: The next question comes from Andres Castanos-Mollor from Berenberg. Andres Castanos-Mollor: Can you please comment on any impact of the bankruptcy of first branch group if it has had any impact at the [indiscernible] Group level at all? I assume it was a client. Is there any receivable at risk here? Or will you have any demand -- lack of demand, let's say, while the company solves its issues? Peter Rosén: We don't normally comment specific customers. But let's put it this, Andres. We don't expect any material impact at all from that customer. Andres Castanos-Mollor: Right. And also, I was thinking in the changes in the U.S.A., the footprint changes you've been doing there, a few plant closures, also replace the leadership of the business there. What are your priorities or objectives for the region with these changes? Peter Rosén: Sorry, Andres, I didn't hear the beginning of your question. You mentioned change footprint. Andres Castanos-Mollor: Yes, footprint changes. You have closed a few plants in the U.S.A. You have also replaced your leadership there. What are the objectives for the new interim leadership? Peter Rosén: If I'll start with the first one when it comes to the manufacturing footprint. The last 2 years, we've closed 2 sites, one in California. The reason for that was that we had 2 sites in California, and we could see that we could service the customers from one site. So that's an efficiency improvement that we closed that down, and we could maintain all those customers. The site that we decided to close last year was Kennedale, Texas, similar reason there. We saw that we could service those customers from other sites. So it was a redundant capacity that we had, and that's why we closed Kennedale. So both of those plant closures where we said that we could maintain the volumes, but we could service our customers from other existing sites. So that was to improve profitability. Klas Dahlberg: And if I may, Klas here, Andres, regarding leadership in North America, we saw a need for a change to better address the challenges we see and also to capture the opportunities in the North American market. And we think that Ken Bloom is the right person to do that. And he has experience also from HEXPOL. He knows the organization. So we are very positive about that change. Operator: The next question comes from Johan Dahl from Danske Bank. Johan Dahl: Just wanted to dig a bit deeper on the comments you made, Klas, regarding unchanged organic volumes in the quarter, if I got it correctly. I mean, excluding acquisitions, I guess you referred to unchanged volumes in the group. Does that mark a material improvement compared to what we've seen earlier in the year in your view, i.e., the year-on-year progression on volumes? Is that sort of significantly better than in Q3 compared to previous quarters this year? Peter Rosén: Johan, it's Peter here. Just to be clear, again, we're not going to give any guidance on coming quarters when it comes to volume or profitability, et cetera. That being said, if we look at the volume development, we've seen both in Q1 and Q2, we did discuss that we had lower organic volumes. This quarter, organic volumes are in line with last year -- Q3 last year. So in that sense, it's somewhat different compared to the first and second quarter this year. What that will mean -- Sorry, go ahead, Johan. Johan Dahl: Can you hear me? Peter Rosén: Yes. No, I can hear you again. Johan Dahl: That's good. No, it's just -- you have minus 4% on organic revenue growth, right? And you're saying raw material is flat pretty much and also volumes flat organically. It's a fairly massive shift in the top line if you have the average selling price per tonne going down 4%. So what I'm just wanted to pick your brains on is what's your sort of visibility in terms of how this develops going forward? Is it just a function of sort of small variations U.S. versus Europe and auto versus other segments? Or is there something else going on here? Are you selling significantly more bulk volumes, for example, commoditized products? Are you losing market share in that sense? Peter Rosén: No, you're right in your first reasoning. If we look at the 4% organic, volumes are -- organic volumes are basically flat compared to last year. If we are very specific, we're talking very, very low single-digit volume down, percentage. So a very, very small part of the 4%. Then if we look at the other part, it's not sales prices, but there is a mix effect, and it consists of 2 parts. One is a geographical shift. We do lose -- see lower volume and sales in our North American market. And price levels in North America are generally higher. So that has an impact. Then we also see that there is a, call it, a product mix shift, which is the basically automotive. Automotive, as we've said many times before, is a good end customer segment for us. So it's a combination, smaller combinations of those 3 items that make up the organic. So it's not a structural shift in that sense. No, it is not. Johan Dahl: It's just that it's a fairly big number for those sort of variations. But I totally hear your message there. And on to the topic, what you can do to affect this. Is this just a function of the way markets go? Or do you have any visibility, i.e., how you sell more advanced compounds, et cetera? Klas Dahlberg: You mean for the profitability, Johan? Johan Dahl: Well, I guess both in the end, both top line and profitability. I understand that if U.S. is weaker than U.S., it's going to impact your organic growth. But I'm just trying to understand how you structurally can sort of approach this issue to sort of possibly improve mix as we go forward. Klas Dahlberg: Yes. And again, as Peter is saying, I mean, automotive is an important part, and that has not been growing, as you know, and even shrinking as we can see in the S&P figures. And we have found a business, as you can see also in our report within building and construction, wire and cable is a segment that is also growing and where we have also been able to capture business. So I mean that's our day-to-day operation to find new ways because we can change the market conditions in that sense. We have to work on the things we can influence, of course. Operator: The next question comes from Carl Deijenberg from DNB Carnegie. Carl Deijenberg: I came a little bit late into the call, so apologies if this question was already brought up. But I have to ask again, I mean, when I look at the S&P production figures for the North American market for Q3, I think they indicate roughly plus 3% year-on-year. And you're talking about flat volumes, but of course, it sounds like some of the other segments are sort of offsetting with positive growth relative to automotive. And I think when I look at the production numbers for Q2 as well, it seems like there's been a little bit of a discrepancy on, let's say, the production numbers relative to your reported organic growth if I try to back it out on the automotive side. So yes, very simple question. Is there a simple answer to this question? Is the OEMs or your customers bringing this more in-house now when production levels are fairly low? Or is there something else? Peter Rosén: There are at least 2 things that separate the official S&P production numbers from the volumes that we look at. One is the timing. There's normally 20, 25-day timing difference from production of a car and material that we supply. So there's a timing difference. The other part is, which I think is fairly unique for this business is that a lot of our customers have their own compounding business. And we do see that when volumes are down in the market, they tend to bring it in-house. So when you see an S&P production number, that doesn't automatically mean that it's transferable or translatable to ours because we also have customers who sort of shrink the market where we can compete, what we normally call captive conversion or in-sourcing. And that also has... Carl Deijenberg: Yes. Understood. And I think that's fairly interesting. If you can talk a little bit more about that. I mean, what kind of, let's say, in-house levels are we at right now relative to, let's say, a pre-COVID scenario or something like that? I mean just understanding sort of the magnitude, which have fallen into this topic. Would it be possible to give a fairly -- yes, high-level view answer to that would be... Peter Rosén: High level. It's difficult to measure exactly because we don't have statistics where we see the exact movements in the total market and what goes in and out at customers. But our view is that we've probably hit the -- let's call it, maximum in-sourcing at this point. When we see volumes flowing back into the market where we can compete, that is difficult to put a timing on. But our view is -- our current view is that we'll probably hit maximum in-sourcing at this point. Carl Deijenberg: That's very much appreciated. And maybe just finally on that topic rounding it off. I mean, obviously, we don't know what '26, '27 is going to look like. But do you have any sense of what kind of production numbers you would have to see in the industry for that, let's say, in-sourcing to reverse back into your hands? What kind of demand levels? Is it growth of mid-single digits on the production numbers? Or -- because I guess that could be a fairly significant swing factor for you, if I just look at the numbers relative to the -- yes, what we've seen in the production numbers here. Peter Rosén: Very good question. I sort of wish we had an exact number to say that at this point, it will start to flow back. But we -- currently, we don't know. And that's also one of the things that brings uncertainty into future orders, as Klas mentioned in the beginning. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Klas Dahlberg: All right. Thank you, operator, and thank you all for participating in this call. And we hope to see you all at our Capital Market Day in Stockholm on the 4th of November. You are all very welcome to join us there. So thank you very much, and enjoy the weekend.
Operator: Greetings, and welcome to the OMA Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Emmanuel Camacho, Investor Relations Officer for OMA. Thank you. You may begin. Emmanuel Camacho: Thank you, Melissa. Hello, everyone, and welcome to OMA's Third Quarter 2025 Earnings Conference Call. We're delighted to have you join us today as we discuss the company's performance and financial results for the past quarter. Joining us today are CEO, Ricardo Duenas; and CFO, Ruffo Pérez Pliego. Please be reminded that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our control. And now I'll turn the call over to Ricardo Duenas for his opening remarks. Ricardo Duenas: Thank you, Emmanuel. Good morning, everyone, and thank you for joining us today. This morning, Ruffo and I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. In the third quarter of this year, OMA's passenger traffic totaled 7.6 million passengers, an 8% increase year-over-year. Seat capacity increased by 11% during the quarter. On the domestic front, passenger traffic grew by 7%, driven primarily by the Monterrey Airport, which saw increases on routes to the metropolitan area of Mexico City, mainly to Toluca Airport, Bajio, Puerto Vallarta, Mérida and Querétaro. These routes collectively added over 300,000 passengers during the quarter, representing 68% of the total domestic passenger growth. International passenger traffic increased by 11%, mainly driven by Monterrey on the route to San Francisco, San Luis Potosi with higher traffic on the routes to Atlanta and Dallas and Tampico on the route to Dallas. Together, these routes added more than 47,000 passengers during the quarter, accounting for 46% of the total international passenger growth. Moving on to OMA's third quarter financial highlights. Aeronautical revenues increased 11% with aeronautical revenue per passenger rising 3% in the quarter. Commercial revenues grew by 7% compared to the third quarter of '24 and commercial revenue per passenger stood at MXN 60. Commercial revenue growth was mainly driven by parking, restaurants, VIP lounges and retail, mainly as a result of higher penetration and an increase in passenger traffic. Occupancy rate for commercial space stood at 96% at the end of the quarter. On the diversification front, revenues increased 8%, with Industrial Services contributing most of this growth, mainly because of additional square meters leased in our industrial park as compared to the third quarter of '24 and contractual increases to rents. OMA's third quarter adjusted EBITDA increased by 9% to MXN 2.7 billion with a margin of 74.8%. On the capital expenditures front, total investments in the quarter, including MDP investments, major maintenance and strategic investments were MXN 472 million. Finally, in relation to the negotiation process of our next Master Development Program discussion with the AFAC remain underway. We submitted our proposed Master Development Program for the '26-'30 period at the end of June, and the process remains on track. During the quarter, we continued addressing AFAC's technical observations and advancing the validation of investment projects in accordance with the schedule agreed with the authority. We continue to expect the final resolution and publication of results during December. Our expectations regarding the overall investment level remain at committed levels of MDP investment similar in real terms to the level of the previous '21-'25 MDP and maximum tariff increase in the low single digits. I would now like to turn the call over to Ruffo Pérez Pliego, who will discuss our financial highlights for the quarter. Ruffo Pérez del Castillo: Thank you, Ricardo, and good morning, everyone. I will briefly go over our financial results for the quarter, and then we will open the call for your questions. Aeronautical revenues increased 10.6% relative to 3Q '24, mainly due to the increase in passenger traffic as well as higher aeronautical yields. Non-aeronautical revenues increased 7.3%. Commercial revenues increased 7.0%. The line items with the highest growth were parking, restaurants, VIP lounges and retail. Parking grew by 9.4%, mainly as a result of higher passenger traffic. Restaurants and retail increased 9.8% and 8.2%, respectively, both driven by higher passenger traffic as well as the previously opened or replaced outlets. VIP lounges rose 9.9%, mainly due to higher market penetration, primarily in Monterrey as well as the increase in passenger traffic. Diversification activities increased 8.2%. Industrial Services, which relates to the operation of the industrial park contributed most to the growth in the quarter, increasing by 53%, resulting from higher square meters leased as compared to third quarter of '24 as well as contractual rent increases. Total aeronautical and non-aeronautical revenues grew 9.8% to MXN 3.5 billion in the quarter. Construction revenues amounted to MXN 382 million in the third quarter. The cost of airport services and G&A expense increased 14.4% versus 3Q '24, primarily due to the following line items: Payroll grew by 10.7%, mainly as a result of annual wage increases as well as higher headcount as compared to the third quarter of '24. Other costs and expenses increased by 22% due primarily to higher IT-related requirements and transportation services. Contracted services expense rose 16.4%, mainly due to higher cost of security and cleaning services following contract renewals in prior quarters, reflecting the inflationary pressures and tight labor market conditions in Mexico. Minor maintenance increased 19.8%, primarily due to timing effect of the works performed. Concession tax increased by 10.4% to MXN 290 million, in line with revenue growth. Major maintenance provision was MXN 28 million as compared to MXN 75 million in the same quarter of last year. OMA's third quarter adjusted EBITDA grew 9.0% to MXN 2.7 billion and adjusted EBITDA margin reached 74.8%. Our financing expense increased by 9.8% to MXN 299 million, mainly driven by higher interest expense as a result of higher average debt levels. Consolidated net income was MXN 1.5 billion in the quarter, an increase of 9.1% versus the same quarter of last year. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN 1.9 billion and investing and financing activities used cash for MXN 480 million and MXN 365 million, respectively. As a result, our cash position at the end of the quarter stood at MXN 4.4 billion. At the end of September, total debt amounted to MXN 13.6 billion, and we maintained a solid financial position, ending the quarter with a net debt to adjusted EBITDA ratio of 0.9x. This concludes our prepared remarks. Melissa, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Pablo Ricalde with Itaú. Pablo Ricalde Martinez: I have one question regarding your traffic expectations maybe for the fourth quarter and maybe your early thoughts on 2026, taking into account the World Cup. Ricardo Duenas: Yes. Thank you, Pablo. So we're looking for the rest of the year to finish in our traffic overall for the year between 7% and 8% growth. And our expectation at this point in time for next year, it's traffic to be in the low to mid-single digits for next year growth. Operator: [Operator Instructions] Our next question comes from the line of Enrique Cantu with GBM. Unknown Analyst: I have a quick question. Commercial revenue per pass declined this quarter, the first contraction since early 2023. Could you elaborate on the main drivers behind this softness? And how do you plan to reaccelerate this [ known ] area of growth? Ruffo Pérez del Castillo: Enrique, so yes, commercial revenue per passenger mainly reflects -- in the quarter reflects the impact of onetime revenues recorded in the previous year. And in the following quarters, we expect commercial revenues per passengers to gradually increase in line with inflation from current levels. Unknown Analyst: Okay. Perfect. And just another one, if I may. SG&A and utility costs rose this quarter, eroding margins despite strong top line growth. Do you view these cost pressures as temporary? Or should we expect a structurally higher cost base heading into 2026? Ricardo Duenas: Sorry, could you repeat that? Maybe you're too close to the microphone. Unknown Analyst: Yes, sorry. So it's regarding SG&A and utility costs. We saw that this quarter they erode margins. Do you view these cost pressures as temporary? Or should we expect this higher cost base heading into 2026? Ruffo Pérez del Castillo: So yes, as we mentioned, there are some specific line items that are facing some pressures like cleaning and security, where the total level of cost in the following quarters should be similar to the level of cost that we are facing right now. However, we do have started to analyze different alternatives to continue maintaining cost at check, and it's part of the history of the company to be very cost conscious, and we expect pressures not to be permanent. Operator: Our next question comes from the line of Gabriel Himelfarb with Scotiabank. Gabriel Himelfarb Mustri: A quick question on capital allocation. First, for the next MDP, I think you have mentioned that almost all the capital will go to Monterrey. It will be focused on, perhaps, increasing the capacity of the airport or developing more the commercial spaces, the commercial portion of the business? And my second question, are you seeking or have you considered expanding gap -- sorry, OMA's portfolio towards outside Mexico? Ricardo Duenas: Yes. Thank you, Gabriel. Regarding the last part, we're always looking for opportunities to expand internationally. At this point in time, we don't have a concrete transaction that we could share. In terms of the MDP, it's around half of the MDP will be allocated to Monterrey, given that half of the traffic is allocated in Monterrey. We're looking to expand in most of -- in capacity that will generate commercial opportunities as well. There's pavement, there's technology, there's environmental and sustainability projects as well. Operator: Thank you. There are no questions at this time. I'll turn the floor back to Mr. Duenas for any final comments. Ricardo Duenas: We would like to thank you, everyone, for participating in today's call. We appreciate your insightful questions, engagement and continued support. Ruffo, Emmanuel and I remain available should you have any further questions or require additional information. Thank you once again, and have a great day. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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: Hello, and welcome to the HCA Healthcare Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir. Frank Morgan: Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and CFO, Mike Marks. Sam and Mike will provide some prepared remarks, and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we will reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. is included in today's release. This morning's call is being recorded, and a replay of the call is available later today. With that, I'll now turn the call over to Sam. Samuel Hazen: All right. Good morning and thank you for joining the call. As reflected in our earnings release for the third quarter, the company produced strong results when compared to last year with 42% growth in diluted earnings per share as adjusted. Revenue increased by 9.6%, which was driven by broad-based volume growth, improved payer mix, more utilization of complex services and additional revenue from Medicaid supplemental programs. We also translated this revenue growth into better margins with disciplined operations. As a result, you will see in this morning's release that we raised our guidance for the year to reflect this performance and our outlook for the fourth quarter. Our teams continue to execute our agenda at a high level across many operational measures, including quality and key stakeholder satisfaction. Outcomes were better year-over-year. I want to thank our 300,000 HCA colleagues who once again demonstrated excellence in what they do. As a team, we remain disciplined in our efforts to improve care for our patients by increasing access, investing in advanced digital tools and training our people. These investments allow us to enhance capacity, improve service offerings and gain efficiency. Making it easier for our -- for us to provide better services to our patients, physicians and the communities we serve. Typically, on our third-quarter earnings call, we provide some preliminary perspectives on the upcoming year. Before I get to these, I want to comment on the enhanced premium tax credits. We continue to advocate strongly for the extension of this program for the 24 million Americans who depend on it for health insurance coverage. Today, we believe there is greater recognition by legislators of the negative impact this issue will have on families, small businesses and individuals than earlier in the year. At this point, however, we still do not know how this policy will play out. Because of the fluid nature of the federal policy environment, we will limit our early thoughts for 2026 to our views on demand and the cost environment. We continue to see solid demand across our markets for health care services and believe volumes will be within our long-term 2% to 3% growth range. As it pertains to operating costs, we expect mostly stable trends consistent with the past couple of years. As usual, there are some pressures in certain areas, but we believe our resiliency plan should provide some relief. It is important to note that we are still early in next year's planning process, and these preliminary views may change before our fourth quarter's earnings call when we will provide you with our guidance for 2026. So let me close with this. As we work to complete another successful year for HCA Healthcare, we believe the company is well-positioned to sustain high levels of performance in the years to come. Organizationally, we have strengthened enterprise capabilities to execute at a higher level through our previously restructured management team and improved management systems. Competitively, our networks have enhanced service offerings for patients with more outpatient facilities, greater inpatient capacity and improved operations. And financially, because of the increased cash flow and stronger balance sheet, we have the resources to invest more in our strategic agenda. With that, I will turn the call over to Mike for more information on the quarter and our updated guidance. Mike Marks: Thank you, Sam, and good morning. The company produced solid results during the third quarter. The demand for health care services was strong in the third quarter with same facility equivalent admissions increasing 2.4% over the prior year. Our surgical volume growth also improved with the same-facility inpatient surgical volume of 1.4% and outpatient surgical volume up 1.1% in the third quarter over the prior year. Same facility ER visits increased 1.3% in the quarter over the prior year. Commercial and Medicare ER visits combined increased 4.1% in the third quarter of 2025 to prior year, whereas Medicaid and self-pay ER visits were both down to prior year. We have also seen a slow start to the respiratory season in 2025, which is impacting the year-over-year growth rate in our admissions and ER visits by an estimated 50 and 70 basis points, respectively. Our net revenue per equivalent admission growth in the quarter reflected strong payer mix, improved dispute resolution results, consistent case mix index and increased Medicaid state supplemental payment revenues. Regarding payer mix during the quarter, same-facility total commercial equivalent admissions increased 3.7% over prior year, with exchanges growing 8% and commercial, excluding exchanges, growing 2.4%. Medicare increased 3.4%, Medicaid increased 1.4% and self-pay declined 6%. Regarding Medicaid supplemental payment programs, as we've said in the past, these programs are complex, variable in timing and do not fully cover our cost to treat Medicaid patients. Considering these programs in isolation, the revenue growth from these programs drove about half of the overall increase in net revenue per equivalent admission in the third quarter compared to the prior year. And we saw an approximate $240 million increase in net benefit to adjusted EBITDA from these programs in the third quarter of 2025 over the prior year. This increase was largely driven by Tennessee program payments and the approvals of grandfathered applications in Kansas and Texas. We were pleased with our operating leverage and expense management in the quarter. The improvement in adjusted EBITDA margin was driven primarily by good performance in labor and supplies. As expected, we did see contract labor expenses flat in the prior year. Same-facility contract labor was basically flat in third quarter of 2025 to the prior year and represented 4.2% of total labor costs in the third quarter of 2025. The increase in other operating expenses as a percentage of revenue in the quarter was driven primarily by increased expenses related to Medicaid state supplemental payments and to a lesser extent, professional fees compared to the prior year. Our work progressed to both enhance and accelerate our resiliency program as we prepare for the future. Through these efforts, we continue to identify a robust set of opportunities across revenue and cost to improve efficiencies. The growth in our adjusted EBITDA in the third quarter reflects our strong operating performance and the increase in supplemental payments. We would also note the estimated $50 million impact from the hurricanes in the third quarter of 2024. Moving to capital allocation. We continue to execute our strategy of allocating capital for long-term value creation. Cash flow from operations was $4.4 billion in the quarter with $1.3 billion in capital expenditures, $2.5 billion in share repurchases and $166 million in dividends. Year-to-date, we've been able to defer approximately $1.3 billion in federal income tax payments to the fourth quarter due to the IRS providing relief to Tennessee taxpayers in the aftermath of severe weather in early April. Our debt to adjusted EBITDA leverage remained in the lower half of our stated guidance range, and we believe our balance sheet is strong and well-positioned for the future. So with that, let me speak to our 2025 guidance. As noted in our release this morning, we are updating the full year guidance as follows: we expect revenues to range between $75 billion and $76.5 billion. We expect net income attributable to HCA Healthcare to range between $6.50 billion and $6.72 billion. We expect adjusted EBITDA to range between $15.25 billion and $15.65 billion. We expect diluted earnings per share to range between $27 and $28. We expect capital spending to be approximately $5 billion. We now anticipate our supplemental payment full year net benefit to be $250 million to $350 million favorable comparing full-year 2025 versus 2024. This guidance update does not include any potential impact in 2025 from any additional approvals of grandfathered applications under the Act. And at the midpoint, this guidance assumes a $120 million decline in net benefit from Medicaid state supplemental payments in fourth quarter of 2025 versus the prior year due to onetime payments in the year. Consistent with our comments on the second quarter call, we believe our hurricane-impacted markets will produce approximately $100 million in adjusted EBITDA growth in full-year 2025 over 2024. Year-to-date, adjusted EBITDA in our hurricane markets is modestly below prior year, and we are anticipating all of this growth will occur in the fourth quarter. We are increasing our earnings guidance at the midpoint of adjusted EBITDA by $450 million. This represents an expected $250 million increase in net benefit from the state supplemental payment programs and $200 million increase from operational performance. With that, I will turn the call over to Frank for questions. Frank Morgan: Thank you, Mike. [Operator Instructions] [ Priela ], you may now give instructions to those who would like to ask a question. Operator: [Operator Instructions] Your first question comes from Ann Hynes with Mizuho Securities. Ann Hynes: Great. And thanks for all the detail on the DPP programs. Can you remind us -- I know there's other states that have preprints in for approval for grandfather programs. Can you remind us what states are still pending? And any quantification of what could be incremental would be great. Mike Marks: So as you think about kind of the states, there are several that have applied under the grandfathering programs, we've mentioned Florida before and certainly, that one is under review. There are a few others as well. I might mention Georgia and Virginia as well being in that list. We do not expect that CMS will be approving these additional grandfathering programs during the shutdown. I would say that we have reports that indicate though that the reviews between CMS and these states are active and those reviews continue during the shutdown. I might also mention that we were encouraged, coming up to the shutdown, that several states had approvals coming into the shutdown. So I think we're in a pretty good environment. We are, at this point, not going to size those potential applications until they get approved. But I did note in my comments, and I'll note again that the updated guidance that we gave you just now on this call does not include any potential impact from the applications that are still pending review with CMS. Operator: And your next question comes from the line of A.J. Rice with Credit Suisse. Albert J. Rice: Just to maybe ask on the public exchanges. So there's been some chatter and some of the managed care companies are talking about anticipating a potential step-up in volumes in the fourth quarter, elective procedures, because people are worried that they're going to lose coverage or their co-pays and deductibles will go up dramatically. I wonder if you're seeing an early scheduling for surgeries, for example, elective surgeries or anything else that would indicate that we might see that in the fourth quarter. And then if we do get disruption where people go off during the traditional open enrollment period, but then reset -- are able to reset because after open enrollment, special enrollment period is set up, would you be able -- if people show up in your emergency room, are you basically set up so you could get them re-signed up if that's a possibility under the special enrollment? Provisions if we get an extension, but it comes late. Mike Marks: So if you think about EPTCs and what happens with these exchanges, I would mention a couple of things. I mean, right now, we're really not sizing the potential impact given the fact that it's so fluid. There's going to be an enrollment period, as you know, that opens up here in a couple of weeks. When we get to the fourth quarter call, A.J., we'll have a lot more information. First about what is the deal potentially that comes out of this work in the government? Do they get extended? If they do get extended, what is the form of that extension? And then third, to your point, is timing. Do they -- do we end up with a special enrollment period at the end -- and so it's really difficult to size the potential impact of that until we get a little bit closer to the fourth quarter call, and that's when we'll intend to do that. We do have our financial counseling teams through our Parallon revenue cycle that helps our patients, both with things like Medicaid and with exchanges. It's the idea of them being able to do that on-site is not something that we can do, but we certainly can connect them to the appropriate resources to help them navigate that. And I think we've mentioned this in previous calls. We have structured our efforts here as we've gone through the balance of this year into next year to really beef up our resources with Parallon and broadly as a company to help patients navigate coverage, both on Medicaid and on the exchanges. And we feel really good about our preparation in that area, and we're going to try to help our patients navigate this season is very best that we can. Operator: And your next question comes from the line of Pito Chickering with Deutsche Bank. Pito Chickering: The quarter was a pretty strong beat even if we exclude the supplemental payments in the 3Q, but guidance didn't go up a whole lot past the beat you guys did this quarter, at least at the midpoint of the range. Can you give us any color on how we should think about the range of guidance implied on the fourth quarter, if we just steer towards one or the other? And also, if you can help provide a bridge from 3Q into 4Q as we think about the moving parts between hurricanes and supplemental payments. Mike Marks: When I think about fourth quarter growth rate, there's really 2 main considerations that I would think about and then the third being just operations. But the first would be the hurricane impact for sure. And then the second would be the decline in state supplemental payments that I noted in my comments when you compare fourth quarter of '25 to prior year. When we take those 2 factors into consideration, we believe the implied growth rate is still solid for fourth quarter in the kind of high single digits range, maybe 7% roughly. And then the other note I would give you, when you take those same considerations into account, our sequential growth from third quarter to fourth quarter is in line with our past trends. And so we feel that our guidance for fourth quarter is solid. I might also just note that our range in our guidance is intended to really cover a range of outcomes and including at the higher end of the range, even stronger performance as well. So that's how we're viewing the fourth quarter. Operator: And your next question comes from the line of Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: Just a quick follow-up on the SDP guidance. How much in there did you recognize in the fourth -- or in the third quarter and is included in guidance for Tennessee specifically? And did you include -- recognize anything in the quarter and in guidance related to Texas? I know that got approved later in the quarter. I just want to see if you're including anything in there. Mike Marks: Thanks, Ben. So Tennessee was the largest driver of our net benefit in third quarter. We did receive cash in the third quarter of 2025, and we began accruing this program. So that's the update on Tennessee. Texas, as you know, we did receive approval of the grandfathered application. As this approval was really an enhancement to an existing program, this was really accrued just in our normal manner for third quarter of 2025. I might note being, though, that this grandfathered application really only had 1 month of impact for third quarter. The third one that we mentioned on call is Kansas, where we also received approval of the grandfathered application, we received caps for this program in third quarter of 2025 as well. This is a calendar year program, so 9 months of impact recorded in third quarter of '25. And Ben, let me just mention, like always with these programs, we always talk about that they're complex and variable. There were another number of pluses and minuses that you see across our portfolio of programs. So these 3 states with those pluses and minuses of all the other programs really led to the aggregate of the $240 million net benefit. It's always important to keep that in mind. Operator: And your next question comes from the line of Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on the quarter. Mike, I appreciate you highlighting how you guys have done really well with expense management, labor and supplies. So just curious, as I think of supplies cost, you guys have done a great job over the last few years keeping that fairly steady. At what point do those contracts reset? And then maybe the follow-up question for me on cost too is, as we think about your efforts to mitigate Medicaid cuts from '28 forward, when do we start seeing those efforts come through the P&L? I mean I'm guessing a lot of that -- those initiatives will start way before '28. Mike Marks: On supplies, Brian, we have a robust ongoing effort with supplies that we've communicated multiple times in the past. I mean, certainly, to HealthTrust, a lot of effort in flight on our contract renewal cycles. We tend to run 2-year cycles, some contracts as many as 3. And so those renewals flow as follows. And we spend a lot of effort in those contract negotiations, and that's certainly one component of our supply expense annual trends. The second component would be mix of technology. And so as you're aware, every year, there's new technology coming in. And then there's management of technologies that goes through its maturation cycle that's a big part of our overall management routines. The third part of our resiliency plan is our efforts to manage utilization. And so we have a very active resiliency plan. Supplies is one of those areas that we are continuing to both enhance and accelerate our resiliency plans focused on appropriate management of supplies and the utilization of supplies throughout the platform. As I think about bridging into the future, the other component that we're keeping a close watch on our tariffs, where our HealthTrust team continues to work through a very diligent effort to manage the tariff risk. Both in terms of sourcing, the way that we negotiate with contracts, our vendor partners on contracts and then also in terms of moving products and moving choices of products across countries of origins. So a lot of work in flight with supplies that I think you've seen not only help us manage supplies over the last several years, but we believe will continue to give us a very strong platform moving forward and our ability to manage supplies. You asked about resiliency. And really, we've had a long-standing resiliency effort in the company. As we've noted on the last couple of calls and noted again today, our work to both enhance and accelerate our resiliency plans continue as we prepare for the future. These are widespread across both our corporate platforms and our field platforms. really proud of the entire team at HCA, helping us to find additional opportunities to drive efficiencies. We're doing this through benchmarking. We're doing this through a robust focus on digital tools. Sam talks often about digital transformation, and it certainly applies to our resiliency and efficiency efforts. It's a big part of what we're doing. And then third, we're focused on our shared service platforms and the strength that they give us and the ability to expand their influence across the company is helpful as we continue to move forward. So a lot of good work going on with resiliency. And as we get into our fourth quarter call, we will intend to provide additional comments about our resiliency effort when we give 2026 full year guidance as well. Samuel Hazen: And Mike, let me add to resiliency. I mean we think about resiliency holistically. There -- it's clearly a financial resiliency culture within HCA that Mike's alluded to, and it's not event-driven. It's really a part of our culture. It's embedded within the disciplined thinking, the disciplined resource allocation and the disciplined execution. But holistically, we also think about other aspects of resiliency across the organization. First is what we call organizational resiliency, and I alluded to this in the fact that we had restructured. We're now embarking upon a more aggressive effort to develop our people, enhance the capabilities of our C-suites across our facilities and so forth, prepare for succession planning, all these things that go into having a very durable organization. And we have great people in HCA. We want to make them greater through our development programs. And we've asked our human resources department to invest even more in ramping up capabilities there. The second aspect of resiliency that's beyond financial, it's something I'll call network resiliency. Our organization within sort of the marketplace is also advancing resiliency with respect to adding more outpatient facilities, improving throughput within our facilities, investing in very targeted ways to improve our overall competitive positioning and then just operating at an even more excellent level when it comes to quality, engagement, efficiency, patient satisfaction, all these important fundamentals that help us endure through whatever cycles we have. And so our resiliency agenda is broad. It's across these 3 dimensions, and it puts us in a very strong position, we believe, to navigate tailwinds, push through headwinds, compete on the ground and produce solid outcomes. And we've got a pattern of doing that, and we're enhancing that now with technology. We're enhancing it with new capabilities within our shared service platform, as Mike alluded to, and we're further enhancing it with development of our people. Operator: And your next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: I was wondering how you guys are thinking about capital deployment for next year. Obviously, you have the capacity to increase buybacks or the dividend or whatnot. But I know you evaluate every year. So I just wanted to take your temperature on preliminary thoughts. And then I think what I mean is like where do you think you will be spending differently versus prior years? Samuel Hazen: So, this is Sam. We're not ready to give you our financial plan for 2026 yet. I think it's a reasonable assumption to assume that our plan is going to be somewhat consistent with the methodologies we've used in the past. And so we need to get through the planning process that we're in now, see how some of the federal policies land. And from there, we will refine and define our capital allocation plan for 2026. But just as much as the culture of HCA is around resiliency and cost discipline and so forth, we have the same culture around capital allocation and finding the most productive ways to allocate it to benefit our networks and benefit our patients, but also benefit our shareholders. And that thinking will permeate our plan in 2026, just as it's done this year and in past years. Operator: And your next question comes from the line of Justin Lake with Wolfe Research. Justin Lake: A couple of things here. First, I think you mentioned payment dispute resolution is one of the drivers of revenue growth, pricing growth in the quarter. How much of a benefit there? And then another question on DPP. It sounds like your DPP number for 2025 benefit will be somewhere in the -- if I'm right, the $2.3 billion, $2.4 billion range billion this year. Is that the right number? And before any of these additional state approvals come through, what's the right run rate that we should think about going into 2026 when we normalize for stuff that might have been out of period? Mike Marks: So let me walk through NRA real quick, and then we'll talk a little bit about supplementals. When I think about our net revenue per equivalent admission growth, in the third quarter to prior year, first thing, and I mentioned this in them comments, Justin, but the first thing is about half of the growth was related to state supplemental payment increases in revenue. And so that's a piece. I also mentioned and it's the next biggest driver is payer mix. I mean, as we noted, with very strong payer mix in the quarter, and that's the next biggest driver for sure in our overall growth in net revenue per unit. Case mix index was pretty consistent. It was just up a tick, about 30 basis points to prior year. And then we're -- as we've noted in past calls, we continue to work on our dispute resolution activities, and they did provide some support in the quarter. And so those combined really drove the net revenue per unit growth I think on -- as I think about for the year and the state supplemental payments at this point, just keep in mind that we noted that we expect -- and part of what drove the earnings guidance is the net benefit from state supplemental payment programs, we're going to be about $250 million better for the quarter. And so you would just apply that now if you just think about kind of the walk up on state supplemental payment programs and you apply that to our full-year guidance, I think that gives you a sense that now we're expecting it to be $250 million to $350 million, favorable full-year '25 to full-year '24. And that gives you a sense of our kind of our early thinking as we kind of finish guidance right here, this is where we think the year will come in at this point. I did note, and there's a lot of volatility here, that guidance update does not include any additional impact from any other state supplemental payment programs that may get approved by CMS in 2025 once the government reopens. So just keep that in mind as well. Operator: Your next question comes from the line of Andrew Mok with Barclays. Andrew Mok: Last quarter, you called out a few underperforming regions outside the hurricane markets. Can you give us an update on those markets and how addressable those issues are near term? Samuel Hazen: So we did mention that we had 2 of our 16 geographic divisions that had some challenges in the second quarter. One of those, I'm happy to say, has recovered. But within our portfolio, we're fortunate that we have a very diversified geographical base and a very diversified service base. And we've seen, again, very strong portfolio performance across the company in the third quarter. So one of the divisions recovered. The second one is still working its way through some of the challenges, and we're confident that we'll be where we need to be as we push into 2026. I think an important point here is the third quarter over the second quarter is always a challenging period. You got summer dynamics with vacations, physician movement during the summer months and so forth. And in this particular third quarter, we performed sequentially really well. And our core operations were managed very effectively from a cost standpoint. We saw a good mix of volume from the second quarter to the third quarter. So that's an encouraging seasonality aspect to this particular year versus some of the other years that we've seen. And I'm really proud of our teams and how they push through that. And again, with a large portfolio, you always have movements inside of it. But for the most part, none of them are material in and of themselves individually because we have other divisions that are outperforming our expectations and tend to provide cover for those that may have a struggle in the short term or what have you. Operator: And your next question comes from the line of Matthew Gillmor with KeyBanc. Matthew Gillmor: I thought I might ask about the growth in surgeries. There was a little bit of an improvement this quarter versus last quarter. Sam just mentioned some of the seasonal dynamics. Can you give us a sense for some of the service lines that are maybe doing a little bit better? Just anything to highlight there? Samuel Hazen: Well, when we look at our outpatient surgery, we had strong general surgery activity. Our urological service line was very strong on the outpatient side. On the inpatient side, our neurosciences surgical capabilities, our orthopedic surgical capabilities, cardiac, all of these were up and had very good performance on a year-over-year basis. So again, diversification is a powerful element for us. diversification amongst these service lines, different mills use for delivering care to our patients, all of it sort of works as a system to create again the enterprise performance that we're able to produce. But those are some of the categories that moved favorably. We had a couple that weren't as positive. Again, that's par for the course from one quarter to the other and not really indicative of anything structural. Our gynecology business on an outpatient in the third quarter was slightly down. So that's one item that was down, but it was covered by some of these other areas. And then within the inpatient side, our neurosurgery business was down modestly, and that impacted the inpatient business, but it was overcome by some of these other areas. Mike Marks: Matthew, I might also mention on outpatient surgery, that payer mix continues to be solid. Actually, Medicaid and self-pay volumes continue to be below prior year, which obviously implies that our commercial and Medicare business continues to be really strong. So we're seeing that in really good growth in overall net revenue in outpatient surgery and the translation to earnings. Samuel Hazen: One of the things we talked about at our investor conference back in November of '23 was what I term the staying power of HCA Healthcare. And that staying power is really connected to 3 points. One, the relevance of our systems within the communities that they serve. The second thing is the scale across the company when it comes to just the sheer size of HCA Healthcare. The third aspect to that is the diversification. And so you're hearing about how the diversification provides what I call staying power for our organization, allowing us to push forward with our agenda, produce solid returns on our capital and create better outcomes for our stakeholders. Operator: And your next question comes from the line of Scott Fidel with Goldman Sachs. Scott Fidel: I was hoping if you could maybe drill a bit more into the Medicare volumes in the quarter and break those down for us between Medicare Advantage and then fee-for-service, year-over-year and sequentially? And then just observations on case mix or acuity that you're seeing in the volume trends within those 2 categories of Medicare. Mike Marks: So Medicare Advantage was up 4.8% in the quarter over prior year. And then I think look what was traditional over there. [indiscernible] 90 bps, yes. Traditional was up 90 bps. Case Mix Index, the traditional Medicare case mix index was actually up a bit and Medicare Advantage was pretty flat to prior year. So those would be the 2 components of Medicare in the quarter. I think one of the things that we noted, and I'll go kind of more of a macro statement here is the improvement in our volume trends in third quarter to prior year versus second quarter to prior year. We saw that in Medicare. Medicare combined was up 3.4% on adjusted admissions. Medicaid was up 1.4% after being down for several quarters. And then as we noted, we saw good movement in our overall commercial business as well with self-pay being down 6%. So overall, really good operational growth, good demand growth across our payer categories, really with the one exception of being self-pay. Operator: And your next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: We've heard a lot of news on the pickup of hospital usage in AI, particularly in revenue cycle. Can you give us a sense on how your initiatives there are progressing and how much runway you see with the advances of technology in the future? Mike Marks: So you're right. I mean there's been a lot of commentary around this idea of utilization intensity and maybe coding intensity and the like. And I think it's important to note, we can't speak to all of the dynamics that the payers see across their various geographies and line of insurance. We've already noted from a pure volume perspective, what we're seeing volume-wise. I do think that both Medicare Advantage, the exchanges, you are seeing pretty good volumes this year, at least from HCA, and that's really the extent that we can speak to. As it relates to coding intensity, we think about that as case mix index. And from a case mix index perspective, it's pretty consistent with prior year and with trends. I think it was up 30 basis points in third quarter of '25 versus third quarter of '24 and actually down a little bit sequentially from second quarter. As we look at the individual lines of insurance, whether it's Medicare Advantage, Medicaid, exchanges and commercial, we're really not seeing any material changes in case mix index compared to the prior year at the detailed line level as well. It's always important to note, our coding practices remain consistent and accurate as verified by multiple layers of audits. Specifically related to AI, we do -- as Sam mentioned, we're deep into our efforts around digital transformation across our company, including in our revenue cycle. Our focus in terms of AI automation and our revenue cycle right now is really specifically focused on working to respond to the growing denial and underpayment activities from the payers. We have noted before, we are also both piloting and rolling out ambient AI documentation tools designed to help our physicians be more complete, more accurate and more timely in completing their clinical documentation. So that's a quick update of what we're seeing in the utilization space. Operator: And your next question comes from the line of Raj Kumar with Stephens Inc. Raj Kumar: Just kind of maybe focusing on the expense side and pro fees. Just maybe kind of any color on how that trended year-over-year? And as a sense, if we kind of bridge towards '26 and think about Valesco and how that's historically been a drag of $40 million to $50 million in the past for EBITDA on a quarterly basis, kind of how do you expect that to trend in 4Q and 2026? And what kind of opportunity is still there to maybe potentially achieve breakeven in '26? Mike Marks: So our same-facility professional fees increased 11% over the prior year in third quarter '25 versus third quarter '24. I'll note it's about a 1% sequential increase to second quarter of 2025. So professional fees continue to run hotter than just average inflationary levels across the rest of -- if you think about our cost structure, I might note that this is a bit more related to anesthesia and radiology this year. And so that's a bit of an update on pro fees. Professional fees on an as-reported basis still represent about 24% of total other operating expenses. Remember, Valesco was an acquisition. It's in part of our employee base. And so we don't really call that out separately other than just to say generally, and Sam might note additional commentary here, but we're pleased with our work around integrating Valesco and really making Valesco a strategic asset for the company as we're thinking about not only the ability to manage the cost structure of emergency physician management and hospital medicine. It also really helps us with our strategic work around things like case management, to improve our length of stay and the ability to manage our emergency rooms and drive really good emergency room efficiency. So the work around Valesco continues to mature and really proud of our operating and our physician management teams for the really good work around Valesco. Sam... Samuel Hazen: Yes. The only thing I would add there, Mike, is I would say, generally, we do expect continued financial improvement as we carry forward into 2026. We haven't finalized their budgets yet either. And so we don't have a number specific to that, but we are seeing progression -- favorable progression in the financial performance of Valesco. And beyond even operational improvements, as Mike was alluding to, we expect clinical improvement, patient engagement improvement and other clinical efficacy, if you will, from the opportunity that we have with Valesco being part of our organization now. So we're excited about what the prospects are. Operator: And your next question comes from the line of Ben Rossi with JPMorgan. Benjamin Rossi: Regarding maybe the capacity for incremental volumes, I appreciate your commentary regarding the stable operational backdrop and some of your existing efforts and patient throughput. I guess as we think about 4Q and the typical seasonal uptick in utilization, how would you characterize the incremental cost to manage additional throughput or free up additional capacity? And then are you seeing any variance across your markets and being able to ramp up this capacity in a cost-effective manner? Samuel Hazen: Well, the short answer is we don't see any significant capacity constraints at this particular point in time. If you recall from a couple of years ago, we had capacity constraints that were driven mostly by staffing and not having the workforce that we needed to take care of the patients who desired service in our facilities. We don't have that issue today. We've improved the net headcount of the company, and we believe we have good programmatic efforts in place today to put us in a position to carry forward the workforce necessary to meet the demand that we expect in the fourth quarter. And really on into next year, we're excited about some of the other operational initiatives that are being put forward with our emergency rooms. We have very specific surge planning that we're preparing for and learning from past years to improve our preparation and anticipation of demand surges in whatever periods we have. So we feel much better about our capacity on the labor side. We're also encouraged about the fact that we have more capital coming online in 2026 than we had this year. And that will add physical capacity and align with the workforce capacity that we're creating and put the company in an even better position to accommodate the demand that we anticipate. Mike Marks: I might add as well that the work that we've been putting forth to manage length of stay has also been very helpful. Third quarter showed really good performance around length of stay management. Those efforts continue not only into the fourth quarter, but into 2026. That also gives us the ability to make additional room for volume growth as we head into the future. So I really want to call out to our operating teams and our case management teams for really good work this year to help us prepare for volume growth in the future. Operator: Your next question comes from the line of Jason Cassorla with Guggenheim. Jason Cassorla: Just wanted to ask about the hurricane-impacted facilities. I know you left that the same in guidance. There's a big step-up in the fourth quarter. But how should we think about the ability to recover the remaining $150 million or so headwind versus the $250 million total headwind back in 2024? Would you expect to recover the majority of that remaining headwind next year? Or how do we think about growth off that? Mike Marks: Yes. So let me walk back to just quickly the way the hurricane markets has kind of transversed this year. As you may recall, as we started the year, we actually thought that our 2025 full-year EBITDA would be about flat with 2024. And '24 had this $250 million hit from the hurricanes. And really, that $250 million hit was a hit to our pre-storm run rate of earnings. So think about to '23. As we're now updating guidance, we're -- we believe that we'll recapture, call it, $100 million of that in 2025. The real impact here now is just the continued and lingering effects of that storm and mostly in our North Carolina markets. While volumes have recovered in North Carolina, the payer mix has deteriorated, and we're having to use a significant amount of premium labor to staff those facilities. And so that's the driver there. It's too early to give 2026 guidance. But just to give you a sense of kind of how it's moved through the first 3 quarters of the year, first quarter of 2025 was about flat to prior year. Second quarter was a bit negative, modestly negative in third quarter '25 to '24 combined for our hurricane markets on EBITDA was again about flat. So that's why we said in fourth quarter, we do expect that all plus of that $100 million improvement in year-over-year EBITDA will happen in the fourth quarter. We will give more guidance on our fourth quarter call when we give full-year 2026 guidance about the hurricane markets. But hopefully, that helps as it relates to the movement through the year. Operator: And your next question comes from the line of Stephen Baxter with Wells Fargo. Stephen Baxter: I appreciate the early commentary on 2026. I'm wondering if there's something that you can speak to that gives you confidence in achieving the long-term volume range at this point. I guess the question would really just be without exchange growth, you'd be below the range this year. So I'm sure you thought about that even with an extension, exchange volumes could potentially be flat to down next year. But wondering how you're thinking about what the other moving parts are, whether that could be more level -- more normal levels of Medicaid or self-pay growth in there, too. Samuel Hazen: I realize the past is not prologue here, but we've had 18 consecutive quarters of volume growth. So that gives us a pretty confident foundation that we can continue to navigate through different dynamics within our markets. As I mentioned, we have more capital coming online next year. We have more outpatient facilities. So our ambulatory outreach is growing. We're building new relationships with physicians. All of that's woven into our thinking around 2026 volume. We continue to believe that population is growing in many of our markets, as it has, and there's going to be this consistent level of demand. The exchange piece of it is a small component of the overall, again, diversification that we have as a company. And so when you add all that up, we feel pretty confident that the range will accommodate some of the movement within our overall demand equation. Operator: Your next question comes from the line of Craig Hettenbach with Morgan Stanley. Craig Hettenbach: On the $600 million to $800 million resiliency program you laid out a few years ago, can you just give us a sense on kind of how you're tracking to that? And then how you think about any additional levers to extend that further over time, whether that's technology or increased AI adoption? Mike Marks: Yes. So at our Investor Day back in 2023, we highlighted our resiliency plan, including that target of $600 million to $800 million. We've been working hard on that. And -- but the other thing that we highlighted, so yes, some of those dollars helped us in '24 and in '25 -- but as we've gone through really the last 12 to 18 months, we've been focused at both enhancing and accelerating our development of our resiliency program and our execution of our resiliency program. And that development piece is key. We think about this as a program. In other words, as we have work streams that we identify, we work those through, we pilot them, we execute on them and then we roll them out to scale. And then literally, every day, we're hunting for new ideas. And our teams are really attuned to this idea of the pipeline of resiliency and identifying new ideas. And as new ideas come into our resiliency work stream efforts, those ideas, again, are piloted. They are verified within our markets, and then we try to roll them out at scale. And so think about the resiliency program with all of our benchmarking work with all of our digital technology and development. We have a robust series of use cases that are in flight for AI, machine learning and automation. And then lastly, as I mentioned earlier, this notion of continuing to expand the impact of our shared service platforms, all of those combined really give us encouragement that we are preparing for the future and that this resiliency program is not a static, onetime event. It is a program that allows us to develop financial resiliency well into the future as well. Samuel Hazen: I think, Mike, some of that's reflected. I mean if you just look back in 2023, when we gave the update on the resiliency program and you look at the core operating margin of the company at that particular point in time versus what it is now, it's improved. And so we're experiencing some of that in the margin advancement that you're seeing in the results of the company. And we are continuing to, as Mike said, with technology, with best practices, with benchmarking, with finding other ways to deliver more efficient services. We see this as a growing agenda, not one that's static. Frank Morgan: Priela, let's take one more question. We're running up close to the end of the hour. Operator: Yes. Your last question comes from Joshua Raskin with Nephron Research. Joshua Raskin: I appreciate that. So I wanted to ask about cash flow conversion. We've seen the ratio of EBITDA that converts to free cash flow sort of move from the 30% range into the 40s. And I think this year, you're on track to almost 50%. So maybe talk about the factors that are driving that? Is that a shift to outpatient? Is there an impact from the strong pricing, including the sub payments? And I guess, most importantly, do you think that's sustainable over the next couple of years? Mike Marks: There's 3 or 4 things I would note that are driving our strong cash flow from operations as we think about it. One certainly is just we've had really solid adjusted EBITDA growth. And that strong operational performance that we continue to highlight as we think about the strength of our revenue cycle operations with Parallon, we turn that revenue into cash. And so that's a piece of that. And you're seeing that in kind of our working capital management plans. We have a pretty robust working capital management strategic plan that includes not only net days in ARR, but includes things like inventory levels, prepaid levels. And that work around working capital continues to assist us as we think about growing our cash flow. The other point, and I made this on the call, but it's important to note is that year-to-date, we have been able to defer $1.3 billion of estimated federal income tax payments to the fourth quarter. And so keep that in mind as well. But when I think about the long term, this idea of clearing out your revenue with cash and the strength of Parallon and our revenue cycle operations and the strength of the working capital management plans of the company, I think, puts us in good stead for continued strong management and performance around cash flow into the future. Operator: And that is all the time we have for questions. I would like to turn it back to Mr. Frank Morgan for some closing remarks. Frank Morgan: Priela, thank you for your help today, and certainly, good luck for the rest of the earnings season. If anybody has any questions, we're around today. Give us a call. Thank you. Operator: Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Welcome to the HEXPOL Q3 presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Klas Dahlberg and CFO, Peter Rosen. Please go ahead. Klas Dahlberg: Thank you, operator, and hello to you all, and thank you for joining this call, and welcome to the HEXPOL Q3 presentation. This is Klas Dahlberg speaking, and I'm here together with our CFO, Peter Rosen. If you please turn to Page 2. I will start with a business update. Peter will take you through the financials, and I will summarize the quarter. After that, we are happy to answer your questions. If we then go to Page 4, please. I will start by going through the Q3 performance. We see that most markets continue to be affected by the geopolitical uncertainty, but it's pleasing to see that the European market continues to be rather stable, while the North American market is still challenging. We had only minor direct impact from tariffs, whereas the indirect impact on end customers affected the overall demand, especially in North America. It's also pleasing to see that including acquisitions, volumes were actually higher than last year. And excluding acquisitions, they were in line with last year, but with an unfavorable mix. Looking at our main segments, we saw that the automotive end customer segment continued to be slow, primarily in North America. That was partly compensated for by increased demand in building and construction and also in wire and cable. Our most recent acquisition, Piedmont in the U.S. and Kabkom in Turkey contributed positively to the quarter. Sales prices as well as prices on major raw materials were stable, both versus last year but also sequentially. High uncertainty continues triggered by U.S. tariffs and U.S. trade policy, and that is impacting us indirectly, as mentioned before. In North America, that is the main reason why we could not grow the overall sales and results compared to last year. In the quarter, we delivered sales of close to SEK 4.7 billion with a negative FX effect of some SEK 300 million. Piedmont and Kabkom added some SEK 240 million in sales that was offset by lower organic sales in Rubber Compounding Americas. Compounding Europe showed rather stable organic sales. We reached an EBIT of SEK 688 million and a margin of 14.7%, impacted negatively by FX of some SEK 50 million and an unfavorable mix. The operative cash flow continued on a good level, and we reached SEK 740 million in the quarter. If you please turn to Page 5. If we look into the different business areas, starting with HEXPOL Compounding, the overall organic volumes were in line with last year. The lower sales were impacted by negative FX of some SEK 290 million, but also by the mix. The automotive end customer segment was down primarily in North America, but that was partly offset by increased demand in building and construction and wire and cable. The price on major raw materials were sequentially stable and also versus last year. And the lower operating margin was affected by an unfavorable mix. Rubber Compounding Americas is, as you know, an important part of the HEXPOL Group. And we are very happy to welcome Ken Bloom back to HEXPOL as the Interim President for Rubber Compounding Americas. Ken has a clear mission to take the next step capturing and growing that business. If we then jump to HEXPOL Engineered Products, if we exclude a negative currency impact of SEK 22 million, we actually had a small increase in sales compared to last year and also good development across all product areas, leading to a stable EBIT. We are firmly committed to sustainability and our focus continues. We are on a good path to deliver on the 75% CO2 reduction target that we set for the end of this year. We are also working on the sustainability strategy and the new targets will be completed during Q1 next year. M&A is, as you know, an important focus area for our growth plans. We have the financial resources to accelerate acquisitions. Short term, the geopolitical uncertainty impacts the M&A activity level. There is somewhat a wait-and-see mentality among some companies, and that is affecting that. And last but not least, on November 4, we will have our Capital Market Day in Stockholm, and then we will share more about our growth strategy. If we then turn to Page 6. It's time for the financial update, and Peter will start with the sales development in Q3. Peter Rosén: Thank you very much. So if I can ask you to turn to Page 7, we'll take a look at the sales development in the quarter. And as you've seen, we delivered sales of SEK 4.7 billion in the quarter, which is down 6% compared to the same quarter last year. And if we look on the drivers, we see that organic sales are down 4% in the quarter. And at the same time, the acquisitions of Piedmont and Kabkom added 5% in sales. And as Klas mentioned, there were large negative effects in the quarter, adding up to SEK 312 million. Coming back to the volumes, overall organic volumes were on the same level as last year, but sales were still down, affected by a less favorable mix. Looking at it from a geographical perspective, Europe showed stable sales in the quarter, while we saw a decrease in North America that also translates into the decrease on group level. From an end customer perspective, automotive showed soft demand, which was partly offset by increased demand primarily from building and construction, wire and cable, but also several smaller end customer segments that showed higher sales in the quarter. If I can ask you to turn to Page 8, just taking a look at the financial overview and the P&L. We delivered a profit of SEK 688 million. That includes a negative FX impact of just above SEK 50 million. EBIT margin of 14.7%, which is below what we did the same period last year. And the main reason for this is somewhat less profitable mix, but also OpEx in relation to the lower sales that we saw here in the quarter. Strong cash flow in the quarter with an EBIT of SEK 688 million, we delivered a cash flow of SEK 740 million in the quarter. If I can then ask you to turn to Page 9, taking a somewhat different view of the financial performance here in the quarter. We see that sales came in at SEK 4.7 billion with an operating profit at SEK 688 million below last year, as mentioned, and an operating margin of 14.7%, which is then below what we did last year. If I can ask you to turn to Page 10, looking at the drivers of the operating profit, we see that the lower EBIT is primarily driven by the lower sales, but also impacted by lower gross margin. The lower gross margin is affected by mix. OpEx is somewhat above last year levels, but that is driven by we've added Piedmont and Kabkom to the cost base compared to the same period last year. If I then ask you to move over to Page 11, starting to look at HEXPOL Compounding in the quarter, delivered sales of SEK 4.3 billion in the quarter, which is below what we did the same period last year. Negative FX has a sizable impact of almost SEK 300 million in the quarter. Recently acquired Kabkom and Piedmont added about SEK 230 million in sales, while as mentioned before, organic sales were down some. And these lower organic sales are seen in North America, while Europe showed sales on the same level as last year. And as mentioned, from an end customer perspective, the lower sales is seen with automotive customers, and this was partly offset by higher sales to end customers within building and construction, wire and cable and also some other smaller segments. Operating profit came in at SEK 624 million with a margin of 14.4% for the quarter. If I can ask you to turn to the next page, we take a look at Engineered Products, where adjusting for negative effects in the quarter, sales were up 3%, and this is driven by strong performance by the gaskets products. Operating profit at SEK 64 million with a good EBIT margin of 18.1%, both in line with last year levels. If I can ask you to turn to Page 13, taking a look at the working capital. You can see that we continue to manage working capital efficiently. Despite adding Piedmont and Kabkom, working capital is on the same level as last year, both in absolute terms and in relation to sales. And as mentioned also in last quarter, there are no changes to underlying payment terms. And if I can then ask you to turn to Page 14, taking a look at the cash flow. As mentioned, we delivered a strong cash flow in the quarter, SEK [ 640 ] million with smaller movements across the various items, but well above the EBIT that we delivered in the quarter. And then finally, when it comes to the financial part, if I can ask you to turn to Page 15, looking at the net debt standing at SEK 3.9 billion and a net debt-to-EBITDA ratio of 1.14 at the end of the quarter. This is higher than last year, but this is mainly driven by the acquisition of the minority share of almak as well as the acquisition of Kabkom that we've done this year. So all in all, after the third quarter, we continue to stand with a very strong financial position. And with that being said, I hand over to Klas. Klas Dahlberg: Thank you, Peter. Finally, then just to summarize the third quarter. Europe showed stable sales compared to last year. Engineered Products also showed stable sales with a good profitability. We saw lower demand in North America affected by the high uncertainty related to U.S. trade policy; however, we didn't really see a direct impact from tariffs in Q3. As mentioned, Ken Bloom is appointed as the Interim President for Rubber Compounding Americas. And we consolidated Kabkom as of the 1st of May. And as we've said many times now, wire and cable that they represent is a growing segment for us. We continue to focus on M&A, and we have a strong balance sheet allowing us to act. We continue to focus on sustainability with good progress, both when it comes to our internal targets, but also when it comes to our products. And on the 4th of November, we will have our Capital Markets Day in Stockholm. So by that, we conclude the presentation of the third quarter, and we open up for your questions, ladies and gentlemen. Operator: [Operator Instructions] The next question comes from Joen Sundmark from SEB. Joen Sundmark: So starting with a question on automotive. If I look at the S&P figures on light vehicle production in Q3, it looks like it has improved a bit compared to last year, yet you mentioned that the decline in automotive seems to be present for you guys in Q3. So do you expect that there is some kind of lagging effect here? Or is it rather your particular exposure that's impacting this? If you could shed some light on that, it would be very helpful. Klas Dahlberg: All right. So when it comes to automotive, we always look at the production. And as you say, there is, of course, a certain time difference, those figures compared to our figures. When it comes to the North American market in September, there was, from a sales point of view, an increase, and that was due to the fact they had a subsidy of EUR 7,500 per vehicle. So that triggered sales in that very month, let's say. But other than that, it's a rather slow market. Joen Sundmark: Okay. That's clear. And I know that you have a fairly short order book, but could you share some color on the current discussions on demand that you have with your customers out there and sort of what they foresee demand-wise? Klas Dahlberg: Well, as you say, we have a very short order book. And the trend we have seen is that it becomes even shorter. So we get very late orders from many of our customers. But yes, the overall situation, like I said, it's a rather uncertain situation. So we don't have good visibility when it comes to the order book. Joen Sundmark: Okay. Fair enough. And on the back of that sort of uncertainty in demand and as the margin trend have been quite negative now for a few quarters, do you see any signs of that shifting? Or how are your sort of current discussions going to address that and improve the margin profile going forward? Peter Rosén: Peter here. Just to be clear, we don't give guidance or earnings. That being said, there are a couple of things. One driver of the somewhat lower margin is the mix. And it's no secret that automotive is an important end customer segment for us. So we would prefer to see that automotive production goes up and we get some of those volumes back and which is, of course, something that we are working on. The other part is looking at our cost structures. And there are 2 things. One is looking at the manufacturing footprint. But in the short run, we haven't taken any new decisions on that. Then when it comes to the more -- the other cost side, we're looking both at manning indirect production to bring that down and allocate that according to the volumes coming in. And you will see in Q3 that the number of people were actually lower, about 60 people less this quarter compared to last quarter, Q2 this year. So we're looking at those costs as well to see what can be done to bring down the cost level and manage those. Operator: The next question comes from Henric Hintze from ABG Sundal Collier. Henric Hintze: This is Henric at ABG. So on -- I was wondering if you could give us an update on how you view the M&A landscape at the moment. For example, are potential buyers and sellers closer or further apart on pricing compared to earlier this year? Klas Dahlberg: As I mentioned in my report that what we see right now is some of the companies are also affected by this uncertainty in the market. And because of that, there is a certain wait and see at the moment. So it's not maybe so much about multiples and so on. It's more that if their total result goes down, they are a bit hesitant at the moment to, let's say, to close a deal, if I call it that. So that is what we see. But with that said, we still have quite a pipeline of companies of prospects, so to say. So that's what we're dealing with at the moment. Henric Hintze: All right. And continuing on capital allocation, if this wait-and-see attitude persists among sellers, would you consider buybacks or extra dividends if you're unable to find attractive M&A opportunities? Peter Rosén: Peter here. Priority #1 is to do the M&A, and it's a very high and very clear priority for us. That being said, a while back, the dividend policy was upgraded to be in the range of 40% to 60%. And I think that's where we are right now. So priority #1, M&A. And then we haven't increased dividend policy since I think about 2 years. So that's what we can say at this point. Operator: The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: Yes. It's Gustav here from Nordea. I thought maybe just to build on your comment there, Peter, on the cost side. As you said, you haven't really taken out anything recently. Is that more due to -- you want to wait and see where demand is heading due to the geopolitical uncertainty? Or do you feel that you do have a quite good balance where you are today and with enough overcapacity to be ready to deliver if demand returns? If you can elaborate a bit more on that. Peter Rosén: Yes, of course. First of all, I think just to point out, last -- Q4 last year, we decided to close one site in the U.S., and that project was finalized in second quarter. So I just want to say that to be clear that we've just finished one project to close a production facility. That being said, there's always a trade-off on do we want to close sites in relation to the expected volumes when they come back. Since we are a batch producer, and we also don't work with order stocks, we need to have a flexibility when it comes to production capacity because when customers come and ask for volumes, we need to have that capacity ready to produce. So we need to strike a balance between the cost and having the capacity to meet volumes when they come back. And I would say that's where we are right now. Gustav Berneblad: Okay. Perfect. And then if we move to Europe, I mean, it looks to be quite stable here year-over-year. Is it possible to give a bit more comments there? Is that stability, is that across all end markets? Or are you seeing sort of wire and cable drawing a heavier part here and being sort of a cushion, if you know what I mean? If you can just elaborate a bit there. Peter Rosén: In a sense, it's a similar pattern as we see on the group level just with smaller movements. So automotive, somewhat softer and building and construction, wire and cable and some of the other smaller end customer segment being somewhat positive. So in a sense, same pattern, but smaller movements compared to North America. Gustav Berneblad: That's very clear. And then just one last question there to build on Henric's here on the M&A side. Would you say that you're more open to close acquisitions in Asia today than you were a couple of years ago within compounding? Klas Dahlberg: So when it comes to Asia, that's too early for us to say. And I think that's also part of, as I mentioned, our Capital Market Day to come back to that subject, how -- what opportunities could be there for HEXPOL, let's say. We will come back to that, Gustav. Operator: The next question comes from Andres Castanos-Mollor from Berenberg. Andres Castanos-Mollor: Can you please comment on any impact of the bankruptcy of first branch group if it has had any impact at the [indiscernible] Group level at all? I assume it was a client. Is there any receivable at risk here? Or will you have any demand -- lack of demand, let's say, while the company solves its issues? Peter Rosén: We don't normally comment specific customers. But let's put it this, Andres. We don't expect any material impact at all from that customer. Andres Castanos-Mollor: Right. And also, I was thinking in the changes in the U.S.A., the footprint changes you've been doing there, a few plant closures, also replace the leadership of the business there. What are your priorities or objectives for the region with these changes? Peter Rosén: Sorry, Andres, I didn't hear the beginning of your question. You mentioned change footprint. Andres Castanos-Mollor: Yes, footprint changes. You have closed a few plants in the U.S.A. You have also replaced your leadership there. What are the objectives for the new interim leadership? Peter Rosén: If I'll start with the first one when it comes to the manufacturing footprint. The last 2 years, we've closed 2 sites, one in California. The reason for that was that we had 2 sites in California, and we could see that we could service the customers from one site. So that's an efficiency improvement that we closed that down, and we could maintain all those customers. The site that we decided to close last year was Kennedale, Texas, similar reason there. We saw that we could service those customers from other sites. So it was a redundant capacity that we had, and that's why we closed Kennedale. So both of those plant closures where we said that we could maintain the volumes, but we could service our customers from other existing sites. So that was to improve profitability. Klas Dahlberg: And if I may, Klas here, Andres, regarding leadership in North America, we saw a need for a change to better address the challenges we see and also to capture the opportunities in the North American market. And we think that Ken Bloom is the right person to do that. And he has experience also from HEXPOL. He knows the organization. So we are very positive about that change. Operator: The next question comes from Johan Dahl from Danske Bank. Johan Dahl: Just wanted to dig a bit deeper on the comments you made, Klas, regarding unchanged organic volumes in the quarter, if I got it correctly. I mean, excluding acquisitions, I guess you referred to unchanged volumes in the group. Does that mark a material improvement compared to what we've seen earlier in the year in your view, i.e., the year-on-year progression on volumes? Is that sort of significantly better than in Q3 compared to previous quarters this year? Peter Rosén: Johan, it's Peter here. Just to be clear, again, we're not going to give any guidance on coming quarters when it comes to volume or profitability, et cetera. That being said, if we look at the volume development, we've seen both in Q1 and Q2, we did discuss that we had lower organic volumes. This quarter, organic volumes are in line with last year -- Q3 last year. So in that sense, it's somewhat different compared to the first and second quarter this year. What that will mean -- Sorry, go ahead, Johan. Johan Dahl: Can you hear me? Peter Rosén: Yes. No, I can hear you again. Johan Dahl: That's good. No, it's just -- you have minus 4% on organic revenue growth, right? And you're saying raw material is flat pretty much and also volumes flat organically. It's a fairly massive shift in the top line if you have the average selling price per tonne going down 4%. So what I'm just wanted to pick your brains on is what's your sort of visibility in terms of how this develops going forward? Is it just a function of sort of small variations U.S. versus Europe and auto versus other segments? Or is there something else going on here? Are you selling significantly more bulk volumes, for example, commoditized products? Are you losing market share in that sense? Peter Rosén: No, you're right in your first reasoning. If we look at the 4% organic, volumes are -- organic volumes are basically flat compared to last year. If we are very specific, we're talking very, very low single-digit volume down, percentage. So a very, very small part of the 4%. Then if we look at the other part, it's not sales prices, but there is a mix effect, and it consists of 2 parts. One is a geographical shift. We do lose -- see lower volume and sales in our North American market. And price levels in North America are generally higher. So that has an impact. Then we also see that there is a, call it, a product mix shift, which is the basically automotive. Automotive, as we've said many times before, is a good end customer segment for us. So it's a combination, smaller combinations of those 3 items that make up the organic. So it's not a structural shift in that sense. No, it is not. Johan Dahl: It's just that it's a fairly big number for those sort of variations. But I totally hear your message there. And on to the topic, what you can do to affect this. Is this just a function of the way markets go? Or do you have any visibility, i.e., how you sell more advanced compounds, et cetera? Klas Dahlberg: You mean for the profitability, Johan? Johan Dahl: Well, I guess both in the end, both top line and profitability. I understand that if U.S. is weaker than U.S., it's going to impact your organic growth. But I'm just trying to understand how you structurally can sort of approach this issue to sort of possibly improve mix as we go forward. Klas Dahlberg: Yes. And again, as Peter is saying, I mean, automotive is an important part, and that has not been growing, as you know, and even shrinking as we can see in the S&P figures. And we have found a business, as you can see also in our report within building and construction, wire and cable is a segment that is also growing and where we have also been able to capture business. So I mean that's our day-to-day operation to find new ways because we can change the market conditions in that sense. We have to work on the things we can influence, of course. Operator: The next question comes from Carl Deijenberg from DNB Carnegie. Carl Deijenberg: I came a little bit late into the call, so apologies if this question was already brought up. But I have to ask again, I mean, when I look at the S&P production figures for the North American market for Q3, I think they indicate roughly plus 3% year-on-year. And you're talking about flat volumes, but of course, it sounds like some of the other segments are sort of offsetting with positive growth relative to automotive. And I think when I look at the production numbers for Q2 as well, it seems like there's been a little bit of a discrepancy on, let's say, the production numbers relative to your reported organic growth if I try to back it out on the automotive side. So yes, very simple question. Is there a simple answer to this question? Is the OEMs or your customers bringing this more in-house now when production levels are fairly low? Or is there something else? Peter Rosén: There are at least 2 things that separate the official S&P production numbers from the volumes that we look at. One is the timing. There's normally 20, 25-day timing difference from production of a car and material that we supply. So there's a timing difference. The other part is, which I think is fairly unique for this business is that a lot of our customers have their own compounding business. And we do see that when volumes are down in the market, they tend to bring it in-house. So when you see an S&P production number, that doesn't automatically mean that it's transferable or translatable to ours because we also have customers who sort of shrink the market where we can compete, what we normally call captive conversion or in-sourcing. And that also has... Carl Deijenberg: Yes. Understood. And I think that's fairly interesting. If you can talk a little bit more about that. I mean, what kind of, let's say, in-house levels are we at right now relative to, let's say, a pre-COVID scenario or something like that? I mean just understanding sort of the magnitude, which have fallen into this topic. Would it be possible to give a fairly -- yes, high-level view answer to that would be... Peter Rosén: High level. It's difficult to measure exactly because we don't have statistics where we see the exact movements in the total market and what goes in and out at customers. But our view is that we've probably hit the -- let's call it, maximum in-sourcing at this point. When we see volumes flowing back into the market where we can compete, that is difficult to put a timing on. But our view is -- our current view is that we'll probably hit maximum in-sourcing at this point. Carl Deijenberg: That's very much appreciated. And maybe just finally on that topic rounding it off. I mean, obviously, we don't know what '26, '27 is going to look like. But do you have any sense of what kind of production numbers you would have to see in the industry for that, let's say, in-sourcing to reverse back into your hands? What kind of demand levels? Is it growth of mid-single digits on the production numbers? Or -- because I guess that could be a fairly significant swing factor for you, if I just look at the numbers relative to the -- yes, what we've seen in the production numbers here. Peter Rosén: Very good question. I sort of wish we had an exact number to say that at this point, it will start to flow back. But we -- currently, we don't know. And that's also one of the things that brings uncertainty into future orders, as Klas mentioned in the beginning. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Klas Dahlberg: All right. Thank you, operator, and thank you all for participating in this call. And we hope to see you all at our Capital Market Day in Stockholm on the 4th of November. You are all very welcome to join us there. So thank you very much, and enjoy the weekend.
Operator: Good morning. My name is Didi, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of the Virtus website, www.virtus.com. This call is being recorded and will be available for replay on the Virtus website. [Operator Instructions] I will now turn the conference to your host, Sean Rourke. Sean Rourke: Thanks, Didi, and good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the third quarter of 2025. Our speakers today are George Aylward, President and CEO; and Mike Angerthal, Chief Financial Officer. Following their prepared remarks, we'll have a Q&A period. Before we begin, please note the disclosures on Page 2 of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such, are subject to known and unknown risks and uncertainties, including those factors set forth in today's news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in these statements. In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with them. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on our website. Now I'd like to turn the call over to George. George? George Aylward: Thank you, Sean, and good morning, everyone. I'll start with an overview of the results we reported this morning, and then I'll turn it over to Mike to give a little more detail. We delivered solid financial results in the third quarter, supported by higher average assets under management and favorable market momentum. We did, however, have net outflows as our quality-oriented strategies continue to face headwinds in a market environment that has largely favored momentum. Our focus remains on our initiatives to increase our retail separate account offerings, expand the availability of ETFs in key channels and grow the wealth management business. Key highlights of the quarter included higher earnings per share and operating margin, strong growth in ETF assets with our highest level of quarterly sales and net flows, positive net flows in both fixed income and alternative strategies, an increase in our quarterly dividend for the eighth consecutive year, and we completed a debt refinancing, providing significant liquidity and flexibility to invest in the business and return capital to shareholders. Our exchange-traded fund business was a particular highlight this quarter. ETF assets reached $4.7 billion, up 79% over the prior year with a strong organic growth rate over the period. In the third quarter, ETF sales and flows reached their highest quarterly level at $0.9 billion each, benefiting from strong investment performance and demand for some of our strategies. As of September 30, 77% of ETF AUM were beating benchmarks over the 3-year period and 85% were outperforming peers over the same period. We continue to focus on broadening access to our ETFs in key distribution channels and introducing compelling new offerings. We currently have 21 ETFs across a variety of strategies, and we have several actively managed funds in filing that we anticipate will launch over the next few quarters, including several growth equity-oriented ETFs from Silvant, a real estate income ETF managed by Duff & Phelps, a multi-managed fixed income ETF collaboration between [indiscernible] and Sykes and a set of building block ETFs from Virtus Systematic. And these follow the introduction of a global macro ETF from AlphaSimplex during the third quarter. On the inorganic side, I would reiterate my comments from our last call that the environment remains very favorable with attractive opportunities to add compelling new capabilities or increase scale. As always, however, we take a highly disciplined approach to inorganic growth and we will act only when an opportunity is both financially and strategically compelling. I would note that in the quarter, we did have $1 million of discrete business initiative expenses that were related to inorganic activity. Turning to investment performance. While recent equity performance reflects our quality orientation in a market that has favorable momentum, we are pleased with the performance we have generated over market cycles. Over the 10-year period, 70% of our equity assets and 77% of our fixed income assets beat their benchmark. For just mutual funds, 70% of equity funds and 80% of fixed income funds outperformed the peer median. I would also note that 25 of our retail funds are rated 4 and 5-star funds and 84% of our rated retail fund assets were in 3, 4 or 5-star funds. Turning now to review of the results. Total assets under management were $169 billion at September 30, modestly below the prior quarter level as favorable market performance was offset by net outflows. Total sales of $6.3 billion increased 12% from $5.6 billion in the second quarter with higher sales of fixed income and alternative strategies. On a product basis, we saw higher sales in institutional and ETFs. Total net outflows for the quarter of $3.9 billion were unchanged sequentially in spite of our highest level of ETF flows and positive flows in fixed income and alternative strategies, which were more than offset by outflows in quality equity strategies. Looking at flows across asset classes, the equity net outflows largely reflect our weighting towards quality-oriented strategies. And while quality has historically outperformed over longer market cycles, it tends to underperform momentum in risk-on environments, which has been particularly stark over the past 2 years. Fixed income net flows were positive for the quarter and the trailing 12 months, supported by very strong investment performance, both for the shorter and longer-term periods. For the quarter, we saw positive net flows in our fixed income strategies across several products, including ETFs, institutional and retail separate accounts. Net flows of alternative strategies were also positive, primarily in ETFs. In terms of what we're seeing in October, flows across products and asset classes are trending similarly. ETF sales and net flows remain strong, but U.S. retail mutual fund headwinds continue. In institutional, trends are also similar to the third quarter with known redemptions exceeding known wins and with the wins across a range of strategies, including such things as emerging market debt and global and domestic REIT. Turning now to our financial results. The sequential improvement reflected growth in average assets under management and stable operating expenses. The operating margin was up 170 basis points to 33% or 33.4% without discrete items with an incremental margin that continues to be above 50%. Earnings per share as adjusted of $6.69 increased from $6.25 in the second quarter. Relative to the prior year period, earnings per share as adjusted decreased 3% on lower average assets. In terms of our balance sheet and capital, given the nearing maturity of our previous credit agreement, we refinanced with a new $400 million term loan and $250 million revolving credit facility, increasing our financial flexibility and extending our debt maturity profile with attractive terms. On a net basis, this added $158 million of cash to our balance sheet at the end of September. We also raised a quarterly dividend, representing the eighth consecutive annual increase. Regarding share repurchases, we were not in the market in the third quarter given other considerations and priorities. As a reminder, we bought back $50 million of our shares in the first half of the year, which was higher than our full year of repurchases in each of the prior 2 years. Buybacks remain an important component of our capital management strategy. And given our strong liquidity position, we intend to continue to balance return of capital to shareholders with investments in the business, including inorganic opportunities. With that, I'll turn the call over to Mike. Mike? Michael Angerthal: Thank you, George. Good to be with you all this morning. Starting with our results on Slide 7, assets under management. Our total assets under management at September 30 were $169.3 billion, and average assets increased 2% to $170.3 billion. Our AUM represented a broad range of products and asset classes. By product, institutional is our largest category at 33% of AUM. Retail separate accounts, including wealth management at 28% and U.S. retail mutual funds at 27%. The remaining 12% comprises closed-end funds, global funds and ETFs. Within open-end funds, ETF assets under management grew to $4.7 billion, up by $1 billion sequentially on continued strong net flows and have increased 79% over the prior year. We are also diversified within asset classes in equities between international and domestic and within domestic, well represented among mid, small and large-cap strategies. And fixed income is well diversified across duration, credit quality and geography. Turning to Slide 8, asset flows. Sales grew 12% to $6.3 billion with higher sales of both fixed income and alternative strategies. Reviewing by product, institutional sales of $2 billion compared with $1.3 billion last quarter, driven by fixed income and multi-asset strategies and included the issuance of a new $0.4 billion CLO. Retail separate account sales were $1.4 billion, essentially unchanged from the prior quarter. Open-end fund sales of $2.8 billion were consistent with the prior quarter as strong growth in ETF sales were offset by lower sales of U.S. retail funds. ETF sales were $0.9 billion, more than double the prior quarter level. Total net outflows were $3.9 billion, consistent with the prior quarter. Reviewing by product. Institutional net outflows of $1.5 billion improved from $2.2 billion due to the increase in inflows into fixed income strategies. As always, institutional flows will fluctuate depending on the timing of client actions. Retail separate accounts had net outflows of $1.2 billion, driven by small and SMID-cap strategies, while large cap and fixed income generated positive net flows. We also continue to see positive net flows in our style-agnostic, high conviction, large-cap growth offerings. For open-end funds, net outflows of $1.1 billion compared with $1 billion in the prior quarter and were driven by equity strategies within U.S. retail funds, which more than offset positive net flows in ETFs. ETFs continued to generate strong double-digit organic growth rate with $0.9 billion of positive net flows. Turning to Slide 9. Investment management fees as adjusted of $176.6 million increased 3%, reflecting a consistent average fee rate and an increase in average assets under management. The average fee rate, excluding performance fees, was 41.1 basis points, unchanged from the prior quarter. Looking ahead, we believe this fee rate is reasonable for the fourth quarter modeling purposes. And as always, the fee rate will be impacted by markets and the mix of assets. Slide 10 shows the 5-quarter trend in employment expenses. Total employment expenses as adjusted of $98.7 million increased slightly due to higher variable incentive compensation. As a percentage of revenues, employment expenses as adjusted declined by 70 basis points to 50.2%. Looking ahead, it is reasonable to anticipate employment expenses as a percentage of revenues will remain within our recent 49% to 51% range. Turning to Slide 11. Other operating expenses as adjusted were $31.1 million, down from $32 million due to lower rent expense from office consolidation and the prior quarter impact of the annual equity grants to the Board of Directors, partially offset by $1 million of discrete business initiative expenses. As a percentage of revenue, other operating expenses were 15.8%, down from 16.7%. For modeling purposes, our range of $30 million to $32 million per quarter remains appropriate. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $65 million increased 9% sequentially due to higher revenues and relatively stable operating expenses. The operating margin as adjusted of 33% increased 170 basis points from the second quarter. Excluding the discrete business initiative expenses, the operating margin was 33.4%. With respect to nonoperating items, interest and dividend income of $4.1 million declined sequentially due to elevated CLO interest income in the prior quarter. Looking ahead to the fourth quarter, it would be reasonable to anticipate a higher level of interest income given increased cash balances at the end of the quarter as a result of the recent debt refinancing, offset partially by lower CLO interest income. Interest expense was $4.8 million in the third quarter. It would be reasonable to assume that will increase in the fourth quarter given the higher debt level. Noncontrolling interest, which reflects minority interest in one of our managers were modestly lower, primarily due to the increase in our ownership late in the quarter. A reasonable run rate for the fourth quarter is approximately $2 million. Net income as adjusted of $6.69 per diluted share, which included $0.11 of discrete expenses, increased 7% from $6.25 in the second quarter. In terms of GAAP results, net income per share of $4.65 decreased from $6.12 per share in the second quarter due to $1.54 of unrealized losses on investments, partially offset by $0.42 of fair value adjustments to minority interests. Slide 13 shows the trend of our capital liquidity and select balance sheet items. On September 26, we completed the refinancing of our credit agreement, increasing the company's financial flexibility and extending the maturity profile. The new $400 million term loan has a 7-year maturity and the revolver provides $250 million of capacity through 2030, each bearing interest at SOFR plus 225 basis points. Cash and equivalents at September 30 were $371 million. In addition, we had $300 million of other investments, including seed capital to support growth initiatives. During the third quarter, we raised our quarterly common dividend by 7% to $2.40 per share. Other uses of capital during the quarter included $29.7 million to sponsor the new CLO as well as $14.8 million for a planned increase in equity of our majority-owned affiliate. The last of the scheduled equity purchases of the affiliate will be approximately $7 million in the fourth quarter. At September 30, gross debt to EBITDA was 1.3x, up from 0.7x at June 30 due to the upsizing of our credit facility. And we ended the quarter with $29 million of net debt or 0.1x EBITDA, which declined from 0.2x at June 30. Our strong levels of liquidity, including the undrawn revolver and modest net leverage provide meaningful financial flexibility to continue to invest in the business and return capital. And with that, let me turn the call back over to George. George? George Aylward: Thank you, Mike. So we'll now take your questions. Didi, would you open up the lines, please? Operator: [Operator Instructions] And our first question comes from Ben Budish of Barclays. Benjamin Budish: Maybe just first on the ETF side, you've noticed -- noted that that's an area of strength. Could you just maybe unpack for us a little bit, what are the key strategies that are attracting the most interest? Is it the wrapper itself? Is it the particular strategies that are offered in that wrapper, the franchises? And how do you think about that in terms of what informs the future pipeline? You mentioned a couple of things upcoming. But as you think about the next couple of years, how are you thinking what might make sense either to launch or to kind of rewrap? How you're thinking about all that? George Aylward: Sure. Yes. So I think in terms of what's driving, I think it's both components. So I think the ETF wrapper itself is highly preferred by a large number of investors and financial advisers. Transparency benefits, tax efficiency. So I think in certain instances for specific strategies, it's become a vehicle of choice. In terms of what strategies people are accessing. So for us, our ETF business is a newer business, and we've been building out track records in many of our strategies. And currently, we've seen growth occurring in several of them, particularly those that I think we noted in the alt space or that have certain kinds of return patterns that are being found to be very attractive. So I commented a little bit on some of our pipeline because we really do see a lot of opportunities for very specific types of strategies in the ETF wrapper that increasingly will be utilized in portfolios. I also made comments for us, getting availability for ETFs is a big focus. A lot of times with newer ETFs, it's harder to get access in certain of the subchannels. So as we grow them, and so including in this quarter, we had one that we got to a level of access and that drove some of our flows this quarter. So that continues to be a priority for us. And then just separately, I would note for the ETF share class relief, we are one of the firms that do have filings in process related to that as well. Benjamin Budish: Very helpful. Maybe just following up in terms of growth priorities. You mentioned inorganic opportunities in your kind of brief comments about uses of capital. Just any update on pipeline potential timing? And are there any changes in the environment that make things more or less feasible? You talked about sort of growth versus momentum. Does that sort of inform the types of assets you're interested in acquiring? Just any update there would be helpful as well. George Aylward: Yes. But on the last point in terms of the quality versus momentum, and again, having been in a period where for the last 2 years, quality has significantly underperformed the momentum. That is a current event. So in terms of a long-term M&A strategy, that might not necessarily have a huge impact on it, though it would influence it. We look forward to the reversion for quality coming back into favor, which is generally when quality-oriented strategies have their best performance. So unless momentum continues to lead the markets for the next multiple years, will have a headwind. But when it inverts, we will be well positioned to take care of that. In terms of inorganic, again, I repeated some of the comments from last quarter, which is that the activity remains very active and that there is a lot of opportunities in terms of things that could potentially make sense. We really focus in on a very disciplined and focused approach on what really makes sense in terms of either adding another differentiated high-performing traditional capability or private market expansion or something that would allow us to have access to more clients outside the U.S. Those are the 3 areas I believe we previously have commented on. And we do think all of those could potentially be interesting opportunities for us. We have nothing specific to announce at this time on anything that we're doing. But again, it continues to be a very active area for us. Operator: And our next question comes from Crispin Love of Piper Sandler. Crispin Love: First, just looking big picture at net flows, they've been pretty elevated for 4 consecutive quarters net outflows. When you look forward, do you see any key levers to be able to improve those flows to get to more neutral, at least less negative outside of just quality coming more into favor versus momentum? George Aylward: Yes. Well, I mean, a couple of things. So we did have positive flows in fixed income strategies in the quarter. We had positive flows in alternative strategies. We have positive flows in our ETF. And in multi-asset, I think we were kind of breakeven. So a lot of our flows are really around our overweight to quality-oriented equity strategies. Actually, our equity strategies that are not highly correlated to quality actually are in positive flows. So it's just the significant overweight that we have to those types of strategies is the reason that it's overshadowed any of the other areas that have been positive. So what we're focusing in on primarily now while the cycle is still negative towards us is to grow those things that don't have that same correlation. So as I commented on some of our more style agnostic or momentum-oriented equity strategies actually were in positive flows, and we're actually seeing activity there. But they're just such a smaller part of our business they're not going to overshadow the quality and the momentum. But in terms of the quality momentum, and again, this has really been -- and we highlighted how bad of a 2-year period this has been to give some examples. So for the S&P MidCap Quality Index, it trailed the S&P MidCap momentum by about 32%, which is really kind of ranks in the 93rd percentile of the data that goes all the way back to 1992 and actually, it's the worst level since October of 2000. And similarly, on the small cap, the Morningstar U.S. Small Cap quality trailed the Morningstar U.S. Small Cap momentum by about 82%, and that's the worst level going back to 2008. So it really has been an unusually stark underperformance of quality versus momentum for a longer period of time. And I think as I just commented previously, historically, as they invert is usually when quality has some of its strongest outperformance, right? So in some of these strategies and some of these strategies I've personally been watching for over 20 years, they can generally have some of their best performance and then following that some of their best flows after that inversion. So we don't fundamentally believe that lower quality, less profitable, highly shorted companies are going to continue to always lead the market. And then lastly, when we sell our strategies, we sell them how they'll fit into a portfolio, right? So generally, people aren't just buying one equity manager hoping for the highest return. So really, where we're positioning those capabilities is really that someone should have a portion of their equity allocation not only in just the pure indexes, which is really a small number of names leading those indices, but to also then have certain allocations to either quality or other types of capabilities in the event that the markets inflect. And so I think increasingly, as people will look at do they need to have some protection in case there is that flip, that will be an area that we would be able to take advantage of. Crispin Love: Great. I appreciate all the color there. And then just second question for me on other OpEx. You had the office space consolidation. Is this something that you've been thinking about for several quarters? And then shouldn't that drive down the run rate for OpEx going forward? Or are there offsets in there as well? And then also, if you can just detail what the $1 million of discrete business initiative expenses were in the quarter? Michael Angerthal: Sure, Crispin. I'll jump in. It's Mike. So with respect to the office consolidation, this is the quarter that you actually see it in the run rate. Those are some actions that we have taken starting late last year and earlier this year that have now been reflected in the run rate. So we talked about the $30 million to $32 million range ex the discrete items sort of coming in at the low end of that range given the benefit of that office consolidation. So we provided the transparency around the discrete items. As George alluded to, they're generally related to at elevated levels based on some of the inorganic activity that we have been focused on. So we thought providing that transparency would be helpful in the analysis of other operating. So again, it is specific to some of those activities and at levels higher than what we would anticipate a more normalized level. Operator: And our next question comes from Bill Katz of TD Cowen. William Katz: Okay. Just sticking on the discrete spend here. Is that now over? Or should we anticipate that, that will persist? And then relatedly, are you back in the market for buyback at present? George Aylward: Yes. So on the first part of the question, again, in the prepared comments, we're clear that we're still being very active, and there's still a lot of opportunities for us. So we'll sort of stand by that and sort of saying we are still being very active in evaluating potential opportunities. And as it relates, we don't have anything specific to discuss or announce at this point, but that continues to be an area where we are being very active. And on buybacks, nothing specific to say other than we continue to view that as a core element of our capital strategy. Halfway through the year, we had done $50 million, which has gotten us to the highest level of over 2 years. So that will continue to be something that we will always evaluate. But as always, we have to balance it with other factors and other considerations for that. So nothing specific on what that might be in the short term other than to say we still view return of capital as a critical part of our capital strategy. William Katz: Okay. And just as a follow-up, just going back to your commentary that the fourth quarter, the institutional trends are still looking like they were in prior quarter. Can you unpack that a little bit, where you're seeing strength, where you're seeing the weakness? And underneath that, I was sort of wondering if you could just talk about what you're just sort of seeing generally in terms of allocations. And I'm curious specifically about the demand for liquid alts. George Aylward: Yes. And actually, 2 of the areas that actually I was actually very happy to see is, I mentioned emerging market debt, right, which is an area that had previously maybe not been as much in favor as some of us believe it should have been. So I think I commented on opportunities that we've seen in emerging market debt as well as global REIT as well as domestic REIT. So those are really nice to see there. I think generally, in the institutional, which for us, we have a nice non-U.S. institutional business. And I believe both of the ones I referenced are non-U.S. You kind of have a slightly different investor profile there. So that's why sometimes we can see interest in strategies that may not be as in favor in the U.S. retail market, even the U.S. institutional market, but have some opportunities there. So I mean, those are the 2 that I would highlight, but I think there's a variety of managers. Mike, I don't know if there's anything else you'd add to that. Michael Angerthal: No, I think you covered it. We -- the pipeline is across managers and across geographies, including from our European and Middle Eastern teams. Operator: And our next question comes from Michael Cyprys of Morgan Stanley. Michael Cyprys: Just want to ask about ETFs. I was hoping maybe you could speak to how broadly distributed your ETFs are today across the wires, IBDs, RIAs, et cetera, how that is compared to where you'd like that to be? Talk about some of the steps you're taking to expand your distribution presence for your ETFs, including in models? And if you could maybe just update us on how models are contributing, if at all, today. George Aylward: Yes. No, it's a great question, and that's specific to the comments we made and where we're focusing and one of the main areas of focus is increasing the availability of our ETFs in certain channels. Because as you're kind of intimating, getting access is not the same in every channel, right, the wires versus the RIAs as well as getting access into some of the big model providers and professional ETF buyers. So for us, we're focused on all of those areas where we are not where we want to be. We think we have a great opportunity, particularly if we can get some of our ETFs up to a certain level of scale, which will matter in some of the channels, say, like the wirehouses where you need a certain period of time and you need a certain asset level to have access. We always have focused in on some of the model providers and the professional buyers. But again, I still think that's a huge opportunity for us. I mean one of the reasons that we're focused on both sides of increasing the distribution as well as increasing the offerings because we just really see that there is just a great opportunity set for us and some of the areas that we kind of focus in on as we move forward. So our hope is that the growth will come from getting a lot more of the assets that we currently don't have that we do want and -- but then expanding those offerings to provide more building blocks for ETF models as well as for individual investors. And I think as I commented on a previous call, another area that we focus in on is our own models and using our ETFs for solution-oriented, outcome-oriented types of capabilities, which we have seeded and designed several things along that way. So that's why it's just been a big area for focus for us. And I think as you've seen, almost all of our product development has either been on the ETF side or the global fund side as well as -- and I don't want to leave retail separate accounts out because retail separate accounts, our focus there has really been on expanding the offerings. We have a strong placement in retail separate accounts on the equity side, and we have been just expanding the number of fixed income offerings and have put together several structures to allow us to take advantage of that. So that's another area that we would like to see some additional growth because we think we have a good opportunity set. Michael Cyprys: Great. And then just a follow-up question on inorganic activity. I was hoping maybe you could elaborate on the types and size of properties that you're evaluating. Talk about your process of how you're going about sifting and sorting through these properties and remind us of your criteria and hurdle rates. Does the transaction need to be accretive day 1 or within the first 12 months? How are you thinking about that? George Aylward: Yes. So when we speak about inorganic, we're covering the whole continuum of those things which are really -- could add meaningful scale, those things that can add capabilities that are quite additive to our current set of offerings, and that would also include expanding us from the public market offerings into the private markets. When we talk about inorganic, we also, because of our flexible model, that could include things like joint ventures or other types of structures. So we kind of leave ourselves open to a variety of different opportunity set and kind of evaluate -- primarily what we're trying to evaluate is the best strategic fit, the financial benefit and really the long-term value creation. So we'll include a lot of factors, which will include things like accretion, but we'll also include factors like what impact we'll have in our growth rates, et cetera. So I don't have specific hurdles that I would provide, but we do go through a filter of various elements as we determine between 2 alternatives or 3 alternatives, what we would prioritize. The good news is, again, with our current level of net debt being de minimis and our cash flow still generating, we do have flexibility to evaluate different types of opportunities. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward. George Aylward: Great. Now thank you, and I want to thank everyone today for joining us. And obviously, as always, if you have any other questions, please reach out. And thank you very much. Operator: That concludes today's call. Thank you for participating, and you may now disconnect.
Operator: Thank you for standing by, and welcome to the First Financial Bancorp Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I'd now like to turn the call over to Scott Crawley. You may begin. Scott Crawley: Thank you, Rob. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter and year-to-date financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the third quarter 2025 earnings release as well as our SEC filings for a full discussion of the company's risk factors. The information we will provide today is accurate as of September 30, 2025, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn it over to Archie Brown. Archie Brown: Thanks, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the third quarter. The third quarter of '25 was another outstanding quarter for First Financial. Adjusted net income was $72.6 million and adjusted earnings per share were $0.76, which resulted in an adjusted return on assets of 1.55% and an adjusted return on tangible common equity of 19.3%. We achieved record revenue in the third quarter, driven by a robust net interest margin and record noninterest income. We have successfully maintained asset yields while moderating our funding costs, which combined to result in an industry-leading net interest margin. In addition, our diverse income streams remained a positive differentiator for us with our adjusted noninterest income representing 31% of total net revenue for the quarter. Expenses continue to be well managed. Excluding incentives tied to strong performance and the record fee income, total noninterest expenses were flat compared to the second quarter. Our workforce efficiency efforts continued during the period. And to date, we've successfully reduced our full-time equivalents by approximately 200 or 9% since we began the initiative 2 years ago. We expect further efficiencies subsequent to the integration of our pending acquisitions. Loan balances declined modestly during the quarter, falling short of our expectations. Lower production in our specialty businesses along with a greater percentage of construction originations, which fund over time drove the modest decline. Loan pipelines are very healthy as we enter the fourth quarter, and we expect to return to mid-single-digit loan growth to close out the year. Asset quality metrics were stable for the third quarter. Nonperforming assets were flat as a percent of assets and annualized net charge-offs were 18 basis points, which was a slight improvement from the linked quarter. We're very happy that our strong earnings led to continued growth in tangible book value per share and tangible common equity during the quarter. Tangible book value per share of $16.19 increased 5% from the linked quarter and 14% from a year ago, while tangible common equity increased 47 basis points from June 30 to 8.87% at the end of September. I'll now turn the call over to Jamie to discuss these results in greater detail. And after Jamie is done, I'll wrap up with some additional forward-looking commentary and closing remarks. Jamie? James Anderson: Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The third quarter was another exceptional quarter with outstanding earnings, robust net interest margin and record fee income. Our net interest margin remains very strong at 4.02%. Asset yields declined slightly while we managed deposit costs to a modest increase. Loan balances declined slightly during the quarter as production slowed in our specialty lending areas and slower funding construction originations increased as a percentage of the portfolio. Average deposit balances increased $157 million due to higher broker deposits and money markets, offset by a seasonal decline in public funds. We maintained 21% of our total balances in noninterest-bearing accounts and remain focused on growing lower-cost deposit balances. Turning to the income statement. Third quarter fee income was another record, led by our leasing and foreign exchange businesses. Additionally, we had higher syndication fees and income on other investments. Noninterest expenses increased from the linked quarter due to an increase in incentive compensation, which is tied to fee income. Our efficiency efforts continue to impact our results positively and remain ongoing. Our ACL coverage increased slightly during the quarter to 1.38% of total loans. We recorded $9.1 million of provision expense during the period, which was driven by net charge-offs. Overall, asset quality trends were in line with expectations with lower net charge-offs and nonperforming asset balances remaining flat. Net charge-offs were 18 basis points on an annualized basis, while NPAs and classified assets were both relatively flat for the period. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value increased $0.79 to $16.19, while our tangible common equity ratio increased 47 basis points to 8.87%. Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $72.6 million or $0.76 per share for the quarter. Noninterest income was adjusted for a small loss on the sale of investment securities, while noninterest expense adjustments exclude the impact of acquisition and efficiency costs, tax credit investment write-downs and other expenses not expected to recur. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.55%, a return on average common equity of 19% and a pretax pre-provision ROA of 2.15%. Turning to Slides 9 and 10. Net interest margin decreased 3 basis points from the linked quarter to 4.02%. Asset yields declined 2 basis points from the prior quarter, while total funding costs increased 1 basis point. Slide 12 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances decreased $72 million during the period. As you can see on the right, the decline was driven by decreases in the Oak Street, ICRE and C&I portfolios, which outpaced growth in Summit and consumer. Slide 14 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $157 million during the quarter, driven primarily by a $166 million increase in brokered CDs and a $106 million increase in money market accounts. These increases were offset by a seasonal decline in public funds. Slide 16 highlights our noninterest income for the quarter. Total fee income increased to $73.6 million during the quarter, which was the highest quarter in the history of the company. Bannockburn and Summit both had solid quarters. Additionally, other noninterest income increased $2.8 million for the quarter due to higher syndication fees and elevated income on other investments. Noninterest expense for the quarter is outlined on Slide 17. Core expenses increased $5.7 million during the period. This was driven by higher incentive compensation related to fee income and the overall strong performance by the company. Turning now to Slides 18 and 19. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $180 million and $9.1 million of total provision expense during the period. This resulted in an ACL that was 1.38% of total loans, which was a 4 basis point increase from the second quarter. Provision expense was primarily driven by net charge-offs, which were 18 basis points for the period. Additionally, our NPAs to total assets held steady at 41 basis points and classified asset balances totaled 1.18% of total assets. We continue to believe that we have modeled conservatively to build a reserve that reflects the losses we expect from our portfolio. We anticipate our ACL coverage will remain relatively flat in future periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slides 20 and 21, capital ratios remain in excess of regulatory minimums and internal targets. During the third quarter, tangible book value increased to $16.19, while the TCE ratio increased 47 basis points to 8.87%. Our total shareholder return remains strong with 33% of our earnings returned to our shareholders during the period through the common dividend. We maintain our commitment to provide an attractive return to our shareholders, and we continue to evaluate capital actions that support that commitment. I'll now turn it back over to Archie for some comments on our outlook. Archie? Archie Brown: Thank you, Jamie. Before we conclude our prepared remarks, I want to comment on our outlook for the fourth quarter, which can be found on Slide 22. As we close the year, we expect origination volumes to increase, which should accelerate our growth. Specific to the fourth quarter, excluding Westfield, we expect loan growth to be in the mid-single digits on an annualized basis. We expect core deposit balances to increase and combined with seasonal public fund inflows to result in strong deposit growth. Our net interest margin remains among the highest in the peer group, and we expect it to be in a range between 3.92% and 3.97% over the next quarter, assuming a 25 basis point rate cut in both October and December. This includes a modest bump in margin from the addition of Westfield in early November. We expect our fourth quarter credit cost to approximate third quarter levels and ACL coverage to remain stable as a percent of loans. We're estimating fee income to be between $77 million and $79 million, which includes $18 million to $20 million for foreign exchange and $21 million to $23 million for the leasing business revenue. This range includes the expected impact from Westfield. Noninterest expense is expected to be between $142 million and $144 million and reflect our continued focus on expense management. This range includes the impact from Westfield, which is expected to approximately -- to be approximately $8 million for the month of November and December. While we remain confident that we will realize our modeled cost savings, we expect the majority of those savings to materialize in the middle of 2026 once Westfield has been fully integrated. With respect to our pending acquisitions, we have received formal regulatory approval for the Westfield transaction and anticipate closing in early November. Our initial preparations for the BankFinancial close are underway, and we are more excited than ever to expand our reach into the Chicago market. We have filed the necessary applications and expect to receive approval from the regulators in coming months, eyeing a close during the first quarter of 2026. We're very excited to have the Westfield and BankFinancial associates join our team. In summary, we're very proud of our financial performance through the first 9 months of the year, which resulted in industry-leading profitability. We expect to have another strong quarter to close 2025 and build positive momentum as we head into 2026. With that, we'll now open up the call for questions. Rob? Operator: Your first question today comes from the line of Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on a topic that's of interest today, NDFI loan exposure. I think if I look at your reg filings from last quarter, it's a little over $450 million or 4% of loans. I know that it's not huge, but can you just kind of walk us through that book and let us know whether that exposure falls into any of the known commercial verticals that you already have today? Archie Brown: Yes. Brendan, we'll have Bill Harrod cover that. All right. Great. We've got, as of the end of the quarter, about $434 million in the NDFI portfolio. It's a diversified, conservatively managed and anchored in high investment grade tier with currently no adversely rated credit. The bulk of the portfolio is made up of traditional REITs of about $304 million across 46 notes, averaging about $7 million, consisting of a variety of public traded or privately held entities with investment grade or equivalent. We do have a securitization book within that portfolio of $73 million across 7 relationships with loans structured using S&P methodology to high investment-grade ratings. And we monitor those on a monthly basis with borrowing bases and independent third-party exams on a routine basis. And that makes up the bulk of what we have in that NDFI portfolio. Brendan Nosal: Awesome. That's really helpful color. Maybe turning to the net interest margin. I totally get the guide for next quarter, no surprise given recent and forthcoming rate cuts. I'm just kind of curious, so if we get those 2 cuts in the fourth quarter, how should we think about margin early in next year? I think in the past, you said that each cut is 5 to 6 basis points of near-term pressure before it grinds back up on lag funding costs. So any color there would be helpful. James Anderson: Yes, Brendan, this is Jamie. So on the margin, and again, so the other thing you have to keep in mind is we have Westfield coming into the mix. So that's going to create a little bit of noise, and it actually helps us going forward here, mitigate a little bit of our asset sensitivity. So -- but if you look at kind of the legacy, the legacy company and the margin, the way that it reacts to those 25 basis point cuts, like I said, and you mentioned it as well, we get about 5 basis points of margin pressure for each of those 25 basis point cuts. And the way -- the timing of that, the way that will kind of fold in is that you get a little bit more pain immediately from the cut. And then as deposit costs catch up, we start to actually move that back up. So -- but really 5 basis points of pressure. So if you think about our margin right now in that 4% range, if we get those 2, then we kind of start the year in that [ 3.90-ish ] range. But then when you factor in Westfield and with the purchase accounting and how that will work, we get a little bit of improvement in the margin from them. So it starts to help mitigate some of that pressure if we have those expected rate cuts here at the end of the year. Operator: Your next question comes from the line of [ Mark Shootley ] from KBW. Unknown Analyst: Maybe one more on the margin. I'm trying to think about on the asset side, loan yields were strong and actually ticked up in the quarter. So I was just curious like what new loan originations are coming on today with you guys sort of returning to growth and what you're expecting for the total sort of portfolio yield in the near term? Archie Brown: Yes, Mark, this is Archie. I'll start, and Jamie, you can kind of comment on me if you want to amplify. But the rate cut certainly that we had affects origination yields as well. And so we were probably before the cut around 7% on origination yields, and it's closer, I guess, high 6s. So you said 6.80%, 6.90% and it's going to come in closer to the mid-6s you look at the month of September, it was probably right around 6.50%, maybe 6.50% and change. So we'd say sort of right now in that range, maybe drop down a little bit more with some more rate cuts because, again, a lot of we do is commercial oriented tied to variable rates. James Anderson: Yes. And Mark, I mean, like we've talked about in previous quarters, if you -- again, looking at the legacy First Financial portfolio, absent Westfield, we still have about 60% of our loan book that moves on the short end. So obviously, those cuts will impact the yield on the loan side. Unknown Analyst: Yes, that makes sense. And then maybe just on the growth -- so you mentioned the pipelines are strong, and I was just curious like what specific verticals or markets you expect to drive that growth over the next couple of quarters? Archie Brown: Yes, Mark, this is Archie again. Yes, maybe talk about loan growth kind of overall. Our production, if you just look at total commitments, Q3 was on par with Q2. So pretty strong. I would argue it's the strongest of the year in both cases. But we saw the actual fundings from that drop compared to what we saw in prior quarter. So lower fundings, primarily construction related. And then we did see a dip in line utilization on the commercial side that accounted for a little bit of the -- little bit of lower overall growth in the quarter. As we look in Q4, strong commercial is the biggest driver. We've got different verticals within commercial, but strong commercial is the big driver. Summit funding, this is always their peak quarter for production. So that will be another big driver. Commercial real estate will have a little bit of growth is what we're projecting in Q4. And probably the only vertical that has a little bit of pressure is in our Oak Street Group. Just it looks like they've got a lot more payoff pressure that we're expecting here in Q4. But the combination of it all gets you to the number that we're projecting of 5% annualized growth. Operator: [Operator Instructions] your next question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe just one on the fees and expenses. So the 4Q guide pulling out Westfield just for a second was higher than what we were looking for and certainly what the 3Q number was. Just curious if there's something seasonal, unusual, unique in the fourth quarter? Or maybe if you can kind of give us some indication of what the run rates would look like going into '26. James Anderson: Yes, Danny, it's Jamie. Really, the big impact from the third quarter to the fourth quarter in that -- like again, I think you're looking at just ex-Westfield kind of the legacy First Financial numbers is really coming from Bannockburn. The forecast that we're getting from them for the fourth quarter is a little higher even than what we had in the strong third quarter. A little bit of bump as well as the Summit related to the operating leases. And then our wealth department, especially on the M&A and the investment banking side, up just a little bit from that division that we have there. So it's really those 3 areas, primarily though, driven by Bannockburn. And like we have talked before, Dan, I mean, they can -- that can bounce around a little bit. So I mean, to kind of talk about that long, long term, we look at that business kind of year-over-year now is growing in that -- generally in that 10% range. Archie Brown: Yes. And Dan, those are all commission-based kind of businesses. So when they do well, you're going to see more commission paid out, which drives the salary costs. James Anderson: Yes. Daniel Tamayo: That's great. That's very helpful. And my other question, I guess, on the credit side. So a good quarter from a credit perspective, guiding to similar credit costs. Just curious how long you think those play out? I think in the past, we've talked about a little bit higher run rate on the charge-off side. Any read-throughs in the near term past the fourth quarter on credit? Archie Brown: Yes, Dan, this is Archie. I don't -- I mean, I think it's kind of steady as we go. We've, I think, been saying all year, 25 to 30 basis points, kind of mid-20s seems to be the run rate for us in the current environment. And I think over a period of quarters, that's what we would expect. Daniel Tamayo: Understood. Okay. And then lastly, on the capital front, so you got the 2 deals closing here in the near term, take a little bit of a hit to capital. But curious, you'll still have pretty strong CET1. How you're thinking about buybacks? You probably think the stock is a little undervalued right now. Once we get past the deals, like if there's a bogey you're looking at on the capital side or any color there would be great. James Anderson: Yes, Dan, this is Jamie. So yes, I think you said it well. What we'll do here over the next really probably 2 to 3 quarters is let the deals flow in and kind of see where we're shaking out in terms of capital ratios at that point. I mean we are building TCE relatively and tangible book value relatively quickly at this point. And we will take -- so the TCE takes about 120 basis point hit in the -- once we close the Westfield deal just because of the all-cash nature of it. And then -- so we'll let the next 2 or 3 quarters kind of play out and then see where we are and see where we're trading in terms of multiple at that point. If we're trading anywhere in that 150% of tangible book value or below, we would potentially look at buybacks at that point. Operator: Your next question comes from the line of Terry McEvoy from Stephens. Terence McEvoy: From talking to some of the other banks that are in your metro markets in your footprint, kind of surprised with the deposit competition a bit stronger than I would have guessed. And your cost of funds up a few basis points quarter-over-quarter. So can you maybe just talk about deposit competition? And you didn't have loan growth this quarter. Next quarter, you're guiding towards that. Does that kind of drive those deposit costs higher as you look to fund that growth? Archie Brown: Yes, Terry, this is Archie. I'll start. It was modestly up for the quarter. I mean I would argue it is flattish. And with the rate cut that occurred, we did take some, I think, decisive actions on the deposit side that went into effect really this quarter. So now we have more -- of course, more short-term rate cuts coming. But we would expect a reduction in our deposit cost going forward in Q4. I mean it was pretty -- did a pretty aggressive cut. And yes, I mean, the market is competitive, but if you look at our current loan-to-deposit ratio, and we felt even with some loan growth, we felt we could take a little bit more aggressive actions. And we'll look to do more here with more Fed cuts. And then I think one of the things we like about BankFinancial, again, one, they have lower deposit and funding costs than we do. And that market from what we can see, still has a little more rational pricing than what we're seeing here kind of in Southwest Ohio. James Anderson: Yes. The other thing, Terry, to keep in mind, I mean, we do have the a little bit higher -- some loan growth in the fourth quarter and then going forward. But we don't think that puts a lot of pressure on our deposit costs because of the liquidity that we get coming in -- especially in the BankFinancial deal. If it closes in the first part of '26. So they already have a relatively low loan-to-deposit ratio, and then we're selling the multifamily portfolio, which will then create even more liquidity for us to utilize for loan growth or to pay off borrowings or to reinvest. Terence McEvoy: That's great. And nice to see the FX trading and the 4Q guide higher at $18 million to $20 million. I just want to make sure that run rate looking out into '26, do you think that is more consistent of next year? Or is this more of just a couple of strong quarters and next year we will go back to some of your prior comments on the outlook for that revenue line? Archie Brown: Well, certainly, Q4 would be a peak for them, Terry, if they hit the numbers that are being projected. And as Jamie said, it sort of bounces around. We look at it more on kind of an annual kind of 4-quarter basis rolling even. They will -- we've owned them now for quite a while. And what we've observed is they grow, they may flatten out a little bit, then they hit another growth spurt. But if you think 5% to 10% kind of growth rate I think you're in the ballpark for what we would expect them to do. James Anderson: Yes, Terry, this is Jamie. As we get into -- as we look out kind of into '26, I mean, that will -- I wouldn't annualize this fourth quarter number that we're talking about. So I would look more into '26 at like a $65 million to $70 million type of a run rate for them. Operator: Your next question comes from the line of Jon Arfstrom from RBC. Jon Arfstrom: Jamie, in your prepared comments, you touched on the workforce efficiency efforts. And can you talk a little bit about where you are in that journey? And then when you look at the 2 acquisitions, what kind of opportunities do you see there? Because it seems like you're going to apply this framework over the top of those 2 deals. Archie Brown: Yes, Jon, this is Archie. I'll start. We're probably 90% of the way through the company, the First Financial legacy company now. So there's a little bit left in some areas, but it's probably going to be a couple of quarters more to get a little bit of opportunity out of those areas. So as I think we alluded to in our comments that we think the opportunity to continue to get efficiency comes from the 2 acquisitions. And I think in the Westfield case, we had said around 40% expense reduction from the combination. And we're -- I think we're well on our way to achieve that, maybe slightly exceed it. BankFinancial was maybe just a little bit less because there's bigger branch count. But what we had modeled, again, we're well on our way to exceed that. And that includes us in both those markets, adding back roles to drive more revenue. Some of the businesses we have that maybe those banks didn't have, we're adding the appropriate people to help us grow in those markets. And even with that, we would still achieve the expense that we've -- reductions that we modeled in those deals. Jon Arfstrom: Yes. Okay. That makes sense. Yes, some good opportunities there, obviously, for production. And Terry took a couple of my questions on deposits. But Jamie, can you just remind us of the typical seasonal flows on deposits that you see in the fourth quarter? James Anderson: Yes. So we -- just -- yes, to remind you and everybody else, we get a seasonal bump in public funds, mainly from Indiana, where property taxes reduced. So we get those in May and November. And so typically, we will get, call it, around $150 million to $200 million kind of extra of deposits in those quarters on average. And then they -- a little bit more skewed, I would say, to the second quarter, but call it, $150 million to $200 million in both of those quarters, and then they run out in the subsequent quarter and kind of go back down to the base level. But that's pretty much like clockwork. I mean it happens pretty much every quarter. And then so that's what you saw here in the third quarter where those public funds running down by $100 million to $150 million. And then we just replaced those with -- sometimes we just replace those with brokered CDs or borrowings. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Archie Brown for closing comments. Archie Brown: Thank you, Rob. I want to thank everybody for joining us today. We really feel great about the quarter we had and are excited about fourth quarter and the momentum we're building for 2026 with the pending acquisitions. We look forward to talking to you again in a quarter. Have a great day and weekend. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Van: Thank you for standing by. My name is Van, and I will be your conference operator today. At this time, I would like to welcome everyone to Nikolay Bancshares Inc. Merger Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Mike Daniels, Co-Founder, Chairman, President, and CEO. Please go ahead. Mike Daniels: Thank you, and good morning to everyone for joining us today to discuss Nikolay Bancshares' acquisition of MidWestOne Financial Group, Inc. My name is Mike Daniels, I'm Co-Founder, Chairman, President, and CEO. Also joining me on today's call from Nikolay are Phil Moore, our Chief Financial Officer, and Brad Hutchins, Executive Vice President, Chief Credit and Risk Manager. In addition, Charles N. Reeves, CEO, and Barry S. Ray, CFO of MidWestOne Financial Group, Inc. are on the call with us. After market closed yesterday, we issued a joint press release announcing Nikolay's agreement to acquire MidWestOne Financial Group, Inc. We've also provided an investor presentation that can be accessed either on the Investor Relations section of our website or as part of our 8-K filing on this announcement. I would like to start off by saying how excited I am to announce this partnership with MidWestOne Financial Group, Inc. As you know, MidWestOne Financial Group, Inc. is a strong, growing, and well-run community bank headquartered in Iowa City, Iowa, with 57 locations throughout Eastern and Central Iowa, the Twin Cities, parts of Wisconsin, and Denver. As of 09/30/2025, it had $6.2 billion in assets and adds over $3.4 billion in assets under management to the combined franchise. Page seven of the investor presentation provides an overview of MidWestOne Financial Group, Inc. and the markets it serves. Before we discuss the details of the transaction, I want to take a step back to where Nikolay was after our last acquisition in mid-2022. We had then completed three acquisitions in eighteen months and had doubled the size of our balance sheet. Shortly thereafter, interest rates began to increase sharply and quickly, and within six months, everyone was questioning the viability of community banking following a few high-profile regional bank failures. This period shined a light on unrealized losses in the vast majority of banks' investment portfolios. While this period impacted Nikolay as well, we were one of the very first banks to reposition our balance sheet. In 2023, we recognized then that to get back to the business of being who Nikolay truly was—a growing, highly profitable community bank—we needed to act quickly, which we did by selling $500 million of U.S. Treasuries. That action, coupled with paying down higher-cost funding, positioned Nikolay in the best way possible. At the time, I said that this move was consistent with Nikolay's long-term thinking mindset and that it should quickly get us back to our position of producing top quartile shareholder profitability metrics. I even spoke to The Wall Street Journal about this. While we did not know this at the time, we ended up being right. The repositioning resulted in ten straight quarters of improving or holding our net interest margin and ten quarters producing an ROAA and ROATCE that placed us in the top quartile, if not top decile, of publicly traded community banks. Also, during this period, we took a pause from M&A to integrate our past acquisitions and prepare for the next challenge of crossing the $10 billion in assets threshold. Granted, the market helped with that pause as bankers were trying to understand how to deal with unrealized losses as well as the volatility in the markets. However, knowing our balance sheet was rock solid and we were on an upward trajectory, we were able to integrate these banks into our culture as well as make a number of investments to prepare us for the next acquisition that would likely bring us over the $10 billion mark. During this period, a number of you would ask us about our M&A strategy, knowing it wasn't a matter of if but when. We were consistent in our message that we wanted to be very intentional about the next bank we partnered with. We were not looking to acquire to just get bigger, but we wanted to find a bank that also made Nikolay better while also providing us with the needed scale to offset some of the costs and revenue hurdles that came with passing the $10 billion mark. At the same time, we didn't want to use our currency just because we could, as many investment bankers reminded us. Investors have long rewarded Nikolay with a well-earned premium valuation compared to many of our peers. This premium is a result of top quartile to top decile profitability, consistent asset quality, and a core funded and transparent balance sheet. Our shareholders earned this premium, and we were not going to just give it away for the sake of doing the deal. I am pleased to say that our collective patience has paid off, and we are thrilled to partner with the team at MidWestOne Financial Group, Inc. I got to know Charles N. Reeves shortly after he became CEO three years ago. We have stayed in contact since then, often seeing each other at conferences and events. As many of you know, MidWestOne Financial Group, Inc. had many of the same challenges that banks around the country had, and that they had a robust investment portfolio that had significant unrealized losses, which was dragging on margins, profitability, and ultimately their stock valuation. I applaud MidWestOne Financial Group, Inc.'s Board of Directors, Charles N. Reeves, Len D. Devaisher, Barry S. Ray, and the entire MidWestOne Financial Group, Inc. team for steering the company through this period and making a difficult decision a year ago to raise the necessary equity to then reposition the balance sheet. You saw over the past several quarters, this action vastly improved MidWestOne Financial Group, Inc.'s profitability, and we believe they are in the upward swing going forward. What you have now are two banks with very complementary and transparent balance sheets that, when combined, will be positioned to be one of the largest and most profitable community banks headquartered in the Upper Midwest. Page 12 of the investor deck shows our loan and deposit portfolios side by side. You will notice very little difference between the two. What you see combined is a diversified loan portfolio and a core funded deposit base. The combined loan-to-deposit ratio of 85% allows us to continue to focus on organic growth while we integrate the two banks and cultures. It also positions us well for future M&A going forward. As you can also see from the investor presentation, the deal is financially attractive to both shareholders of Nikolay and MidWestOne Financial Group, Inc. From Nikolay's standpoint, the pricing aligns with past acquisitions we have completed. It offers full-year fully phased-in EPS accretion of approximately 35% to 40% and is only slightly dilutive to our tangible book value per share, resulting in a negligible earn-back period. Additionally, the pro forma company is expected to produce peer-leading profitability metrics, as you can see on page 10. While there is significant accretion math in those figures, I expect the combined core profitability of the company to keep us well within the top quartile of publicly traded banks we've been accustomed to being part of on a quarterly basis. While our 2026 expectations do not account for the impact of Durbin, which is estimated at roughly $8.5 million, future expectations only assume 25% cost savings, a number that we think is conservative by industry standards. Likewise, we do not model any revenue synergies yet have identified several, including throughout wealth, commercial, and ag. MidWestOne Financial Group, Inc. will double our branch footprint and bring us in Eastern and Central Iowa. The markets of Iowa City, Dubuque, and Muscatine are all markets where we have a number one or number two deposit share position. They are very similar to our current markets like Green Bay, Eau Claire, Appleton, and Marquette, Michigan. They are all vibrant markets with growth potential, but also markets where we can easily matter in something that is at the foundation of why we exist. Now, some of you may question the position in the Twin Cities, as to date we have largely avoided larger metropolitan markets. However, we have always stated we wanted to be in markets where we can matter, and that we struggled to enter larger metro markets without a sizable acquisition that will allow us to matter. Well, MidWestOne Financial Group, Inc. does that in the Twin Cities. With over $1.2 billion in loans and deposits and 15 branches, we have the perfect opportunity to matter in the Twin Cities. Now, there is plenty of room for growth in that market, and M&A may play a part in that growth. But in the short term, we are excited to introduce the Twin Cities to community banking the Nikolay Way. Denver also presents an opportunity and remains one of the fastest-growing markets in our footprint. Mattering in Denver will require additional scale, it is something we have talked with the MidWestOne Financial Group, Inc. team about and are excited to evaluate going forward. Let me highlight our diligence, as Page 13 of the investor deck has much more details about that process. As we have been in one-off negotiations with MidWestOne Financial Group, Inc. for the past couple of months, we have been able to complete a comprehensive and exhaustive due diligence process. Specifically, as it relates to our credit diligence, we reviewed in excess of 70% of the commercial and ag credits, including over 95% of criticized and watch balances. As a reminder, we do all our own credit diligence during this process, and as such, we do tend to be tougher graders on credits we didn't originate. Lastly, I want to touch on our integration plan, as it will deviate from what we have done in past acquisitions. In the past, we closed and converted all systems the same weekend. This allowed us to achieve cost savings much quicker as well as begin the cultural integration from the start. Given the timing and size of this merger, we expect to follow the script of most other companies. At this point, we are targeting a legal closing in 2026, followed by a systems conversion during the summer or early fall. As a result, we have only modeled 50% of the cost savings in 2026. In closing, I want to emphasize how excited I am by this partnership. I have gotten to know Charles N. Reeves, Len D. Devaisher, Barry S. Ray, and several other members of the MidWestOne Financial Group, Inc. team and Board over the past months. From the start, our discussions have been collaborative and transparent, and both sides have kept employees, customers, and shareholders in mind with their actions. There are many cultural similarities between us that allow me to believe Nikolay Bank's shared success model, which is built on the mutual benefit of its three core groups—customers, employees, and shareholders—will continue going forward. I'd now like to turn it over to Phil Moore, our CFO, to share some thoughts on the deal metrics. Phil? Phil Moore: Thank you, Mike. I echo your sentiment and excitement for this merger. Let me highlight a few of the financial metrics of the transaction as well as the forecasted financial results based on current analyst estimates. The transaction structure can be found on Page six of the investor presentation. MidWestOne Financial Group, Inc. shareholders will receive 0.3175 shares of Nikolay for each share of MidWestOne Financial Group, Inc. in this all-stock transaction. Based on Nikolay's Wednesday's closing price of $130.31, the implied per share purchase price is $41.37 for a total transaction value of approximately $864 million when you include MidWestOne Financial Group, Inc.'s outstanding shares and restricted stock that will fully vest. The purchase price is approximately 166% of tangible book value and 11.5 times MidWestOne Financial Group, Inc.'s consensus estimated earnings per share for 2026. And while the one-day stock premium appears high by comparable standards, I should point out that the pay-to-trade ratio of roughly 0.71 is among the lowest of transactions this size over the past several years and is also consistent with the handful of past transactions reflecting Nikolay's premium valued currency. We believe the pro forma financial metrics are compelling to our existing shareholders. As noted on Page nine of the investor deck, on a pro forma basis for 2026, we are modeling fully phased-in EPS accretion of 37%. There is very minimal dilution to our tangible book value, and as such, the earn-back period is largely negligible. This includes all merger-related charges. Clearly, the pro forma earnings include significant accretion from the interest rate marks that will be amortized over the next few years. However, we still anticipate core EPS accretion in the high single digits, which excludes the accretion math. On a pro forma basis as it stands today, Nikolay shareholders will own approximately 70% of the combined company, with MidWestOne Financial Group, Inc. shareholders owning the remaining 30%. We expect the combined company to have a higher percentage of institutional ownership and believe all shareholders will benefit from greater liquidity in our stock going forward. Let me quickly address some of the significant financial modeling assumptions that you'll find on Page 16. We are modeling approximately $38 million of pre-tax cost savings, or roughly 25% of MidWestOne Financial Group, Inc.'s core non-interest expenses, with 50% of that being realized in 2026 given the likely later integration date. We are expecting deal-related costs of approximately $60 million on a pretax basis, which include many larger ticket items, like change of control contracts, contract cancellation costs, and professional fees. We expect to take a 1.65% all-in credit mark on MidWestOne Financial Group, Inc.'s loan portfolio and exclude the CECL double count that was eliminated by FASB earlier this year. Our other fair value marks include a $125 million interest rate mark to the loan portfolio that we will accrete back into earnings over 2.25 years, $73 million in unrealized available-for-sale investment loss portfolio already accounted for in equity to be accreted over 3.5 years, and approximately $9 million in interest rate marks on funding liability amortized over the remaining lives of those instruments. Finally, as Mike mentioned, we estimate an $8.5 million negative impact to our interchange income going forward beginning in 2027 as a result of crossing the $10 billion threshold. Approximately 80% of additional expenses associated with crossing the $10 billion threshold are already included in our core expense run as we've been preparing for this transition. So we don't believe we have any remaining significant investments to prepare to make that hurdle. Finally, let me address capital. Our pro forma CET1 ratio is forecast to be 10.5%, with a TCE ratio of 8.4% at close. Our strong earnings on a standalone and pro forma basis allow Nikolay to grow its capital quickly, so there will not be any need to raise subordinated debt or equity as part of this transaction. However, we are evaluating our options given the excess liquidity the combined company will likely have and may use that to pay down some higher funding costs, thus shrinking the balance sheet and nominally boosting our capital ratios. With that, now let me turn it over to Charles N. Reeves for some remarks. Charles N. Reeves: Thank you, Phil and Mike. First, I want to thank and express my extreme gratitude to our MidWestOne Financial Group, Inc. team for their commitment to our customers, to one another, and to getting better these last few years. We transformed our organization for the good while maintaining our award-winning culture. And on behalf of our team, we are extremely excited to be joining Nikolay Bank. As Mike mentioned, we've known one another for three years, and we and our organizations share similar mindsets and values. We both have an extreme focus on team and customer as we create shared success. And we both absolutely abhor mediocrity. It's rare to have two organizations, both in an upward performance trajectory, come together. Well, that's what we have here today. We cannot wait to help build the combined Nikolay into the best midsized bank in the Upper Midwest. We look forward to making that a reality for our team, our customers, and the communities that MidWestOne Financial Group, Inc. has served so well for decades. Mike Daniels: Thank you, Charles N. Reeves. As you can tell, we are all thrilled about this combination and what the future holds. We pride ourselves in our long track record of seamless and timely closings and integration and fully expect the same experience with MidWestOne Financial Group, Inc. Our plan is to continue to remain opportunistic yet disciplined when it comes to future M&A. Both legacy Nikolay and MidWestOne Financial Group, Inc. shareholders can rest assured that we don't take your investment in our company for granted. Our combined Board and management team remain committed to keeping Nikolay who it always has been—a strong, growing community bank that matters to its employees, customers, and shareholders. That concludes our prepared remarks. Now we welcome your questions at this time. Van: Your first question comes from the line of Brendan Jeffrey Nosal from Hovde Group LLC. Please go ahead. Brendan Jeffrey Nosal: Hey, good morning everybody. Hope you're doing well. Maybe just to start off here, Mike, one for you. I think over the years, I've probably lost the count of the number of times you've said the words, lead local to me and how Nikolay asked the are in your communities. It sounds like for the Twin Cities, there's a definitive commitment there. Denver sounds like it's a little bit more up in the air. Maybe just unpack your thoughts on Denver a little bit. And how you evaluate the potential investment needed there versus maybe stepping back from that market? Mike Daniels: I think it's the second inning of a baseball game. We look forward to looking at it. Don't really have a lot to unpack there yet. But what I can tell you is consistency matters. And lead local matters and mattering matters. And look forward to looking at all of that, but I don't have by any means at this time, set a set direction or expectation other than what has been the consistent team, as you mentioned, to our history. Brendan Jeffrey Nosal: Okay. That's fair. Maybe turning to a little more conceptually, just the idea of culture. I think this is the first time you've done a deal where you had to hop on a plane to visit the markets that you're acquiring and getting into. Do you guys go about maintaining your culture let alone export it to some extent to places like Iowa City, Des Moines, and the Twin Cities just given that increased distance? Mike Daniels: It's five hours and fifteen minutes by car to Iowa City. It's about three point five hours to Minneapolis. Maybe four by car, but yes, can get there via airplane too. I think as in every deal, right, I it's a long way to Sault Ste. Marie, Michigan and Traverse City, there was a big bond in the way. When we did that. So it's intentionality and transparency in all we do in our communication. Right? And it's at every level of the organization. It's a commitment as to why we show up across the footprint. Wherever that footprint is, every day to matter to customers, matter to community, matter to one another and create that shared success which are belief has been, if we do that, do that exceptionally well, we'll produce top quartile, if not top decile shareholder results and performance. We've proven that thesis over the over our history and continue to do it again. It requires intentionality, right? But more than words, it has to be seen in our actions. But as with anything we've done, that is as big as the systems part a critical piece of the integration. Having people understand what that means and living that I think the two cultures align in certain ways, but never our two cultures exactly the same. But I think we have a really good start basis to start from and how they approach relationship banking and mattering in the markets in which they operate. Okay. All right. Thanks. Brendan Jeffrey Nosal: I'm going to sneak one more in there. Just to Nikolay, your own results for the quarter, which were quite strong. I think margin expansion was a big driver of this quarter's strength. Can you just offer a little color on how you expect your core margin to behave over the next few quarters? With coming rate cuts in store before you layer on the impacts of MidWestOne Financial Group, Inc.? Mike Daniels: Sure. Think when we talked at the end of the second quarter, my thought would be be we expected doing our back book repricing and our deposit deposit positioning, to continue to go up. I didn't see 14 basis points for the quarter, but we had we had really nice deposit growth back end repricing was solid that got us there. There's no real there's no real additional accretion from anything in there that that's a pretty solid quarter number. With a couple of rate cuts, And I would hoping to stay flat. We might get a give a bip or two back here at year end. And then it'd be shampoo effect, Brendan, where I think the typical margin movement we have seen over the last couple of years depending on the deposit outflow in the first quarter, and what that looks like. Year over year. This year, it wasn't as bad. So our margin was stronger and held in there. But I don't expect I definitely don't expect us to give a lot of ground back. New asset generation remains solid. But I definitely think a win for us is to try to deliver a fairly flat margin in the fourth quarter. Brendan Jeffrey Nosal: Okay. Fantastic. I appreciate you guys taking the questions. Van: Our next question comes from the line of Terence James McEvoy from Stephens. Please go ahead. Terence James McEvoy: First off, Mike, congrats to you and your team and same to you, Charles N. Reeves. And thanks for addressing the questions on culture, that topic. Definitely came through your earnings release last night. Couple of questions, maybe first one on the MOFG side, there's been an upgrade of talent within commercial banking, private banking and I'm sure others. Could you just talk about retention of some of those new hires? Then MidWestOne Financial Group, Inc. has also invested in digital. Any of those tech or digital upgrades kind of complement Nikolay going forward? And then the last one there, any lines of business kind of especially lending businesses come to mind? Any of those maybe don't complement Nikolay on a pro forma basis? Mike Daniels: Yes. I mean, I'll jump on that in Charles N. Reeves can jump in. I think retention of people is key. The lack of overlap definitely helps in that matter. So I would expect us to I don't know if you're here and on the revenue side, given the opportunity on what this combination provides, why you wouldn't want to be a part of it. But we're very focused on that, both on Nikolay and MidWestOne Financial Group, Inc. side. Talent is the key. That's the first one. The second one, I think the technology improvements they've made are areas that we are we're just looking at. So the ability to look at those and see how those marry up are part of the integration process and plan. The teams have already started looking at I mean, there are more like vendors that unlike vendors. And providers in this deal that that are being looked at and examined. So I don't think there's a lot of upheaval or disruption there. It feels good. What was the fourth one? What was the third one, Terry? Yes. Terence James McEvoy: Business ones. Mike Daniels: I mean, I think both companies are fairly chocolate and vanilla, right? I mean, we do common things uncommonly well across our footprint. So there's no national real national line of business that that either of us do. We do things that matter in the markets we serve and take advantage of the opportunities in those markets to bring a relationship banking focus. So I don't expect any major any major changes there. I think the approach to C&I lending and relationship banking regardless of the asset classes, first and foremost. Right? And you've heard me say it, all of you have heard me say it time and time again, it's not about the loan, it's about the relationship. We don't make loans. We invest in relationships regardless of the asset class. Or what we do. And I expect that message to carry the day and carry through in the combined company. I don't know, Charles N. Reeves, if you want to jump in and add anything to those. Charles N. Reeves: Yes. You articulated well, Mike. Terence James McEvoy: Okay. Thanks, Mike. And maybe a quick one for Phil. When I pulled the call reports, see $25 million of pre-tax interchange revenue over the last year and that's at both banks. Just so I'm clear, $8.5 million of pretax Durbin impact a, that's both companies and that's the non-credit card interchange revenue part that I'm unable as an outsider to separate? Phil Moore: That is correct, Terry. That is the reason that your number may have thought differently at first, but that is correct. Terence James McEvoy: Okay, perfect. Thanks for taking my question. Back into the math there. Phil Moore: Perfect. I'll do just that. Thanks. Thanks for taking my questions. Van: Good to talk to you. Our next question comes from the line of Nathan James Race from Piper Sandler. Please go ahead. Nathan James Race: Hey, guys. Good morning. Thanks for taking the questions and congrats on the deal as well. Mike, going back to your comments around the Twin Cities, obviously, MidWestOne Financial Group, Inc. has invested in some production talent, given some of the M&A related disruption within that market recently. Curious to what extent you can accelerate some opportunities to gain market share in the Twin Cities by deploying the model that's obviously been really successful in Green Bay over the last two point five decades or so at your franchise. And just how you see the overall kind of organic growth of the company trending on a combined basis? Mike Daniels: Yes. I think I look forward to that and think that's the opportunity, right? But as I said, earlier, in the context of how we do it and how we look at the world relationship. Relationship based, what's the opportunity, what's the depth of relationship, how can we matter. I think that we can and will. I think the talent that MidWestOne Financial Group, Inc. has been able to add across its footprint things that way. So I look I look forward to that. Okay. I look forward to hearing from them and the teams as they pull it together to say, this is what we think we can do. As you know, the primary and driving focus from a commercial standpoint is always on C&I. If it's CRE, it has to be relationship based. Transactions don't work. Not a fan of them. We never have been. But where there's a relationship, we want to matter and will. So I think the two aligned nicely and look forward to what we can do across the footprint. Right? Not just there. Throughout Iowa, Denver, and the Minnesota marketplace. Got you. Then Well, as long as continue to do what we do in Wisconsin, and Michigan. Understood. Makes sense. And then is there any anticipation that some of the cost saves from the integration could be reinvested in some production hires, whether it's in the Twin Cities, Denver, and some of the Iowa MSAs that you'll be adding? Or do you feel pretty good about some of the production capabilities that are coming over? From MOFG. I feel really good where we are. Right? I think I think we're positioned well. I think we I think I mean, we did want to come in with some big hairy cost save number that made the deal look we did things in typical Nikolay fashion as real as they can be transparent. But I feel good about talent across the footprint and the leadership. Delivering that talent and have high expectations as I do for for our legacy legacy revenue and relationship people. Got you. And if I could just sneak one last one in. Obviously, it's a pretty big integration here. Adding one of the biggest retail franchises that you have in your previous deals. And the Nikolay brand probably isn't too well known across Iowa. So just curious if there's any changes or differences in kind of your integration playbook as you look forward in terms of how to integrate MOFG and just ensure kind of seamless retention across the deposit franchise in Iowa? Mike Daniels: Yes. I think as with everything, I think that's people focused, that's people delivery. Right? There's not a lot of overlap. But the matter to customer, to community, matter to one another and share success environment, they only works if it's real and it's got to be real on the street. So the introduction and retention about shared success has got to be delivered by the folks in the markets. I know you've heard me say there's not much I can do from Green Bay, Wisconsin. To make us matter in the footprint if our people don't believe that they matter. That they can't prove that out in the relationships and in the communities. I think it's very solid across the Nikolay legacy footprint as well as the MOFG footprint. And I fully expect that's a challenge to the people. I expect them to carry the day on the relationship because that's what matters. Okay, great. I appreciate all the color. Congrats again guys. Thank you. Van: Thanks, Dave. Thanks, Dave. Dave. Our last question comes from the line of Damon Paul DelMonte from KBW. Please go ahead. Damon Paul DelMonte: Hey, good morning guys and congrats on a very exciting announcement both organizations. Just wondering, Mike, are there any like products or services, either on the Nikolay side or the MidWestOne Financial Group, Inc. side where you see opportunity to leverage the expertise from one side or the other to create greater synergies? Mike Daniels: I mean, the revenue enhancement, the largest opportunity might be on across the wealth book. And across the customer base. We do as you know, employee benefits are part of our makeup. And across the MidWestOne Financial Group, Inc. platform, they don't have that offering. We look forward to bringing that to the customer base, the C&I customer base and enhancing that rollout. That's a $9 million under management I think there's tremendous amount of upside. But I think both companies do common things uncommonly well, right? I mean, it's relationship banking and relationship focus at its finest. How can we matter across the whole wealth of revenue lines to each customer and at each community. So I don't know that there's any special, special sauce other than what both companies do really well. And then show up, get after it matter in their markets and deliver top notch relationship based service with the customer always the focus and mattering in the markets. And the customers understand that and look at it in the same lens of shared success that business is personal. It is personal to our customers. We know that, so it's personal to us. Damon Paul DelMonte: Got it. Okay. And then could you just go back to your comments from a previous question on the Denver part of the footprint. Were you saying that you're evaluating the strategy there? It's like you're going to maybe look to invest more way of like de novo or potentially future M&A? Or is this an area that you may ultimately decide is not the best fit for the footprint? I didn't quite hear what was said there. Mike Daniels: That's exactly what I said. All of those things, right? I mean, what I said maybe in a convoluted way is I don't know, and I look forward to looking at it. I think it's an exciting market. And we just got to look at how it fits in, right? I mean, probably the biggest thing that can't get lost everyone gets all excited is first and foremost, relative to the and communities showing up and getting after it mattering, But secondly, I mean, what it means to the shareholders, we are always going to look at this from the lens of the shareholder, right? I mean, it's I sound lost on you, Damon, that we're still a founder driven organization and it's still you know, 95% of my of my of my family's worth and wealth. So everything we do and every way we look at it, on both sides is through the lens of the shareholder. And what is the best course of action and I think some of that's part of the reason we don't let median slip in our conversations. Right? We expect top quartile, top decile, and we expect to deliver that as a result of the reason and why we show up every day and what we do. And the reason isn't to produce the shareholder results. That's our responsibility. Reasons to matter in the markets and as a result of the depth of that, we will deliver those top quartile, if not decile results to the shareholders. Because it matters and we understand that. So we'll always take a look we'll always look at every opportunity in the in in the lens of the three circles. And as you know, we want those circles to have as much overlap as possible. But it's not bigger. Bigger isn't better. Better is better. And we'll always look at what better means. Damon Paul DelMonte: Got it. Okay. And then just lastly, just from a modeling standpoint, believe the slide deck to the illustrative example there was a three thirty one. Is that that's reasonable for us to assume in our our models when we go to layer in the transaction? Mike Daniels: It is she. Yeah. Her Rezak's telling me yes. Damon Paul DelMonte: Okay. Got to be right then. Okay, great. That's all that I had. Thank very much for Mike Daniels: I mean, we're going we're kind of vague there, but I mean, know us. We're going to do things in Nikolay Way and try to get this thing to and roll and to the extent we can and but we also understand we're not in control of everything, but I mean, the goal is that, Damon, is to get it closed by then. Damon Paul DelMonte: Okay, great. Okay, that's all that I had. Thanks a lot. Appreciate it. Van: I will now turn the call back over to Mike for closing remarks. Mike Daniels: Thank you. I appreciate everyone who attended the call today and can't tell you how we look forward to bringing these two companies together in the success that I think it provides across our footprint. As I just finished saying, be focused on the three circles of customers, employees, and shareholders and the overlap in the shared success environment. It sounds simple, yet it takes focus and commitment to make happen. And and and I think our track record speaks well for what we've been able to do. But our expectation at the end of the day is this combined entity will be a top quartile, it's not just out performing company delivering exceptional shareholder returns. Hopefully, you've seen it if you've been a Nikolay shareholder. Over the past ten quarters as to where we're headed. There is absolutely that expectation that, that will happen here again. We don't take the work involved for granted. We take the cultural integration or the systems integration for granted. But we will get after it and we appreciate your investment. We take it seriously. And if there's ever any questions or additional follow-up, please reach out. On behalf of Charles N. Reeves, Barry S. Ray, and their entire organization, as well as Nikolay, thank you for being part of the call and we look forward to talking to you more. Van: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Kiira Fröberg: Good morning, everyone, and welcome to Kemira's Q3 Earnings Webcast. My name is Kiira Fröberg, and I'm the Head of Investor Relations at Kemira. We reported our Q3 interim report today and maintained good profitability in the weakened market environment. Here with me today, I have our President and CEO, Antti Salminen; and our CFO, Petri Castren. Antti will start by covering our group level performance and our progress on the strategy as well as the outlook. After that, Petri will discuss the business unit performance, and will also share some more details on the financials. In the end of the presentation, before the Q&A, Antti will also give a short introduction to our new CFO, Tuomas Mäkipeska. But now, Antti, please, the stage is yours. Antti Salminen: Thank you, Kiira, and good morning, and welcome on my behalf as well. So happy to report here on our strong profitability in the weakened market environment. And market indeed has been quite subdue for a long time already. We saw that first already in the beginning of the year or at the end of the previous year, hitting the performance of our Packaging & Hygiene Solutions business unit as that is the one that gets most directly the impact from the weakened market as the consumers are not consuming, trade is not flowing globally. So less packaging material is consumed, thus less Kemira chemicals go into the production of packaging material. Then in the Q2, we mentioned that we clearly see now the impact of the weaker economy trickling up the value chain to the pulp producers, our customers in that area. And now it's visible in the Q3 clearly. We have seen a lot of prolonged maintenance break and curtailments in that industry. So that is hitting the Fiber Essentials unit. And we've also now started to see the kind of a prolonged slow global economy impacting the overall industrial activity. Lower run rates at any industrial segment, especially here in Europe, which is then translated into less water consumption by industry, and thus, less consumption of our water treatment chemicals in the industrial side of our Water business. So all this has led to the situation where basically now the revenues declined 5% year-on-year, 3% in terms of organic development decline. So you see that there's quite a significant amount of foreign exchange rate impact there as we have significant business in U.S. And this decline, as mentioned now in Q3, was hitting all of three of our business units. Nevertheless, we keep the outlook unchanged as we changed the outlook in the Q2. But the good news is that profitability is good in Q3. So we maintained the 20% operative EBITDA performance, which I think kind of comparing to the chemical industry in Europe, comparing to the -- looking at the environment that we operate in and the decline -- top line is a good performance, and I'm really thankful for the whole organization for pulling it together. We maintained high profitability in the backbone of our business, i.e., Water Solutions unit, but we managed to improve also the profitability in the Packaging & Hygiene Solutions. Impact coming both from favorable product mix, but also from the cost management program or profitability improvement program that we launched in the springtime for the Packaging & Hygiene Solutions. Now even if the markets are soft, we continue to invest into our strategy execution. So we have a clear growth strategy, and the megatrends that are supporting the strategy stay intact. So longer-term viability and growth potential of the fiber economy and the need for clean water are there. So thus, we continue to invest into the execution of strategy. We also continue to have a strong balance sheet, which enables that. And I will talk later a little bit more about a couple of key steps in terms of continuing the strategy execution. But as mentioned, the revenues were weak in Q3. The U.S. dollar had a significant impact, but overall, the demand also was weaker. We retained our market position in all the business units. So basically, this is overall a decline in demand that is impacting the top line here. Year-on-year, we saw decline in volumes, as I mentioned, but prices remain stable. So that is the kind of good news and showing again our pricing power there. Sequentially, sales volumes actually increased from Q2. That is mainly driven by the Water Solutions unit, and Petri will talk more about it later. We saw some decline in sales prices from Q2 to Q3. Then looking at the profitability, which I mentioned, it is fair to say is on a good level. So the 20% operative EBITDA margin, we actually are very close to '24 EBITDA margin levels, which were the all-time high for Kemira. So really good performance in terms of profitability. Profitability remained strong in Water Solutions, especially the urban air side of the Water Solutions, which is the resilient, steady profitable backbone of our business. But we, as mentioned, managed to improve in Packaging & Hygiene Solutions quite significantly. The profitability of Fiber Essentials unit declined as a consequence of the clearly declining volumes from the market. This kind of a weakness of the market and the weaker demand, of course, puts a lot of pressure on us. So we need to continue to focus on profitability improvement, the operational excellence, cost containment so that we can continue to operate on this good healthy profitability level. Those actions we have defined. We have started as we communicated in spring from the Packaging & Hygiene Solutions. So we have a clear program there which aims to impact both the top line and bottom line items, and we are progressing really well with that program. And some of the impacts of it are visible in the good result of the Packaging & Hygiene Solutions, which also was helped by the favorable product mix in this quarter. Now we are stepping into next phase in that profitability improvement program. So we are starting to -- as of today to assess the operating model that we have in Packaging & Hygiene Solutions. And the aim there is to differentiate the service levels so that we can better serve the global and regional key customers that we have, introduce faster new innovations to the marketplace and provide better service for our key customers and at the same time, optimize the cost to serve levels for the more transactional customer base. So that program will start and the impacts of that will be visible in '27. So no impacts expected for the last quarter of this year. The earnings per share came out at EUR 0.38 per share. Now as I mentioned, we continue to invest into our strategy execution. The megatrends are there, and we are in a really good position to also maybe capitalize on a bit weaker market environment because a big part of our strategy is based on M&A-driven inorganic growth. There's a couple of key cornerstones for our strategy, and I will touch three of them here when I talk about the strategy execution. So first of all, our aim is to grow significantly in the Water business. And there are two subdomains which are really important for this. Micropollutant removal, PFAS, pharmaceutical residuals and so forth, microplastics. This is a fast-growing subsegment of the water market, which is just developing as we speak. And we have a clear strategy of how do we enter that part of the market. The other part which we have been relatively weak historically is the industrial water services, and that is also a subsegment of water market that is growing much faster than the base business. And we have taken now clear steps regarding entering both of these lucrative growth market areas. And then I will talk a little bit about our kind of progress with the renewable chemistry, which is another key area of our strategy execution. Now during Q3, we announced the investment into our site in Helsingborg, Sweden for reactivation facility for activated carbon. That is the first reactivation facility in Nordics, serving the whole Nordic market and helping us to enter via the activated carbon service into this micropollutant removal, because activated carbon is the kind of a well-tested predominant method for capturing micropollutants and PFAS from wastewaters, but especially from the raw waters for drinking water production. And that's kind of a key part of our entry to there. But we need to amend that with other more specific innovative technologies. So there, our partnership with CuspAI, Cambridge U.K.-based AI start-up is of a key importance. So we started in June, a joint development project, to develop new-to-the-world type of absorbent materials, and we are progressing very well with the project. The aim is to come up with completely new solutions, very specific targeted solutions for PFAS capture. So these both are on the kind of micropollutant removal area of the water strategy. Then before I go to the industrial water services, our earlier announced joint venture with IFF, the world leader in the area supporting us with development of -- via enzymatic route with development of new-to-the-world bio-based polymers. So we announced this JV. We are currently working on the project. Engineering phase is ongoing. We are looking at different engineering options regarding the manufacturing site itself. There is some delay anyhow to the project. So unlike we earlier informed that the production would be up and running by the end of '27, it's rather on the side of '28 that we now plan to be up and running. That said, we have industrial level volumes available from our toller in Finland, and we are currently running several industrial scale test trials with our customers, both in Water Solutions area and in Packaging & Hygiene Solutions. And many of these application tests actually look very promising at the moment. So we are confident that when we actually have the new joint venture manufacturing facility up and running, we have a good existing customer base already for those solutions. And then as mentioned, the second area within the Water Solutions, which is one of our key growth drivers is the entry to the industrial water services. And we announced this morning that we closed the transaction on acquiring Water Engineering in United States of America. That's our first significant step into that area. Water Engineering is a water service specialist with expertise in boiler and cooling tower water treatment as well as wastewater treatment in industrial facilities. They're mostly focusing on food and beverage, manufacturing and health care industries. They're based out of Nebraska, and they have built a really strong presence in the middle states in U.S. grown quite quickly during the past years. And this provides us a good platform for future growth, both organically but also inorganically because their growth method has largely been a kind of programmatic bolt-on M&A path. And I think we can capitalize and continue on that path and continue growing that business. Business itself, as I said, the rationale of entering that is that it is faster-growing market than the base water treatment market, plus it is asset-light in terms of business model. So there's not a consequent significant CapEx going into maintenance and improvement and expansion of the production facilities. We can largely utilize also our existing product portfolio to serve these customers. So there's good cross-selling opportunities with this acquisition. The expected pro forma revenue of the company is north of USD 60 million. And the purchase price, as we have communicated, was roughly USD 150 million. So I warmly welcome all the new colleagues from the Water Engineering to the big global Kemira family. I think we will have a great future together. Now then to close this off, we have introduced a new slide here, which should be providing a bit more transparency and trackability in terms of our long-term financial targets. Now it is very clear that we are disappointed with the performance in terms of organic growth. So the aim is long term on average to grow more than 4% organically a year. Now clearly, the markets have proven to be much softer than we anticipated when we set out this target and communicated in the CMD a year ago. So -- but I still believe and we are confident that the long term, this growth potential is there as the megatrends are supporting and as we are entering these faster-growing new domains within the Water. So it will provide us acceleration. But clearly, the start on that journey has been slower than we anticipated. In terms of operative EBITDA, we are operating comfortably within the 18% to 21% EBITDA performance range that we communicated as a target. And also in terms of return on capital employed, we are above the 16% target that we set. That said, of course, the kind of a declining trend on both of these is not satisfactory, and we are having diligent actions and programs in place in terms of improving the profitability and making sure that we hit these long-term targets as we progress with our strategy execution. Now then the outlook for the rest of the year remains unchanged. So no reason to comment that further. And with this, I will then hand it over to Petri, who will comment in more detail the business units specific performance and some other financial ratios. Petri, floor is yours. Petri Castrén: Thank you, Antti. So I'll do, as Antti said, and I think I'll usually start with the sort of key points. And I think really our ability to support and defend the profitability as well as the PHS business unit profitability improvement are indeed the key points in this report. And as Antti said, clearly, the Water Engineering acquisition is an important step. So let's start. Top line is almost an -- development is almost an exact repeat from Q2, EUR 40 million decline, half of which is driven by FX changes. And again, mostly, it's the U.S. dollar that has continued to weaken year-on-year. Organic growth also 3%, exactly as it was negative in Q2. We have been able to maintain prices well, again, considering the weak market environment. Indeed, prices and actually variable costs have pretty much been stable throughout the year. So the change is, in essence, a 0. Also, what I think is important from the profitability point of view that in essence, we have been able to kill inflation. So the fixed cost change is 0. And again, we all know that there is a salary inflation ongoing. There's an inflation in many other areas. So this is part of the way how we have been able to defend profitability, and this is very good. Obviously, we cannot be happy about the top line development or the absolute level of profit generated. The net impact from the variable cost is really flat. And as you can see, almost last 4 quarters, it has been pretty much, much flat. So now the focus is really much more driving the volume compared to period between '21 and '23 when really a lot of our profitability was at how can we defend against the inflation, how we are coping with inflation and how we are passing the inflatory raw material costs to our customers. But now it's really about volumes. Again, I'll start the business unit comments with Water Solutions. So excluding the FX impact, there was a 2% decline against a pretty strong last comparison period. You noticed that in the comparison period, we had 5% organic growth. So it was a stronger comparison period. And regarding the water treatment markets, Antti already mentioned that the urban market continues to be really strong. And even in this -- while the business unit is declining, urban market is stable and it continues to grow. So the growth in Europe, EMEA is more than offsetting the small decline in Americas urban market. Then the weakness was on the industrial side. And there, like Antti was talking about, it's both the general industrial activity, the weakness in it, but it's also the fact that we have this one large tolling customer and their volumes were reduced compared to a year ago. Sequentially, from Q2 to Q3, both volumes and revenues increased despite a modest FX impact. Again, operative EBITDA, very strong at 23.1%, very close to last year's level. On Packaging & Hygiene Solutions. So challenging market continued to impact the unit. Antti already covered the sort of underlying or behind the factors impacting the business unit, but I think the key point is it wasn't actually getting any worse in Q3. So year-on-year volumes, essence, flat. And sequentially, they even increased modestly, very modestly. The market looked a bit more positive in Americas, and there was positive development in APAC as well. However, weakness continued in Europe, in EMEA, and you may have seen some of our customers' reports yesterday, which were sort of indicating that. Year-on-year, we saw some price decline, but sequentially, prices were flat. Profitability improved to 13.6%, which is actually quite a sequential improvement from below 10% in Q2. This was driven by cost containment topics like Antti was talking about. We also had a very good mix of product in Q3. So that helped there as well. And also, I'd like to remind that we did have an extended maintenance break in one of our key facilities in China in Q2, which depressed the Q2 results even more. Regionally, both Americas and EMEA are at 15% EBITDA or above. So it is the APAC that is still diluting the overall business unit margin. And we'll continue those profitability improvements. Antti talked about the business unit -- business model change that we will be implementing now. And again, this implementation will take well through to the next year. On Fiber side, market was weak. And we already -- we updated our business assumptions in Q2, and then we highlighted that we are seeing some additional weakness in the pulp industry. And indeed, this is what happened. So the market -- the softness was really driven by the Nordics softness here. So a lot of market-related downtime by our customers. Volumes declined year-on-year and sequentially, whereas prices were up year-on-year. However, on this area, we did see some pressure on variable cost as well. So that did not help the margin either. We do have some base chemicals in our product portfolio, caustic soda, sulfuric acid and some of the global market prices of these products were also declining during the quarter, and that depressed profitability more. Now I move to balance sheet. Again, not a whole lot of change in our balance sheet. Net debt at exactly year-end level and approximately at the same level as in June of '25. During the quarter, which is noteworthy is that we implemented or started our share buyback program, and we were able to buy back almost EUR 40 million worth of our shares during the quarter. As a reminder, this program, when it was approved and initiated, it's at a maximum of 5 million shares that we will buy back or EUR 100 million. And at the current level, which is, of course, limited by our daily liquidity, we will be hitting the end of the program around the year-end. So maybe in December, maybe some early days in December. So that's sort of at the current level, what it looks like. And Antti already showed the trend reports on return on capital and regarding our financial targets. So yes, the lower EBIT, which is the impact -- with the result of the weaker market is impacting our capital efficiency. Cash flow from operations, EUR 132 million, improvement from the year ago. We did have a net working capital decline. I think I mentioned in Q2 that we had a little bit of a buildup in net working capital. And this, indeed, we've been able to address that to a large extent during Q3. I'd like to remind that typically, our cash flow is more weighted towards the second half of the year, particularly towards the Q4, as you can see from the previous 3 years, which we have here on the quarterly breakdown. So I hope to -- expect to see that sort of a seasonal pattern this year as well. No change to our CapEx guidance. We expect our CapEx to increase over last year. So again, you do the math, you'll see that the CapEx will increase significantly from the quarterly run rate during Q4. With that, I'll stop my comments, and we'll turn to Antti. Antti will be able to announce my successor. So Antti, there you go. I'll stay here for the Q&A. Antti Salminen: Okay. So yes, indeed, a happy day for both of us probably that we have now been able to announce Petri's successor. Tuomas Mäkipeska will start latest some day in May as our CFO. Tuomas has a strong background, both in terms of business unit leadership and of CFO position. Now last position with YIT, the Finnish construction company. And before that at Lassila & Tikanoja, so brings us plenty of experience and good positive energy as well. So I warmly welcome Tuomas to Kemira Groups and look forward to working with him in the future. Kiira Fröberg: Thank you, Antti, and thank you, Petri as well. And now I think it's time for the Q&A, and you can ask your questions either through the telco or then you can send them to us through the webcast formula or chat function. So maybe we can start then to take the questions. So operator, please go ahead. Operator: [Operator Instructions] The next question comes from Martin Roediger from Kepler Cheuvreux. Martin Roediger: Three questions, and I would like to ask them one by one to make it easier for you. Antti, the first question is for you, it's about the strategy. After the acquisition of Water Engineering, will you continue with acquisitions with a similar size in the next couple of months? Reason I'm asking is that you target midsized deals with an enterprise value of EUR 200 million to EUR 250 million, which enables you to finance the deals from your cash flow, but Water Engineering is clearly below that price tag. Antti Salminen: Well, first of all, what I have communicated when I've indicated the size kind of we target mostly small and midsized targets because that's the kind of, I think, the most credible way to build the growth in M&A. And as you mentioned, so I just indicatively given that they have to be below EUR 250 million to qualify for this. EUR 150 million is below EUR 250 million, so it's in that range. And we have a strong pipeline of different targets, which we are working on. And yes, we will, of course, tell about them when the time comes. Martin Roediger: Okay. The second question is for Petri, regarding the Packaging & Hygiene Solutions business. You mentioned the reasons for the strong earnings increase year-over-year, sales mix and cost savings. Can you provide more color on that? How big were the cost savings in that segment? And where did the mix effect come from? Petri Castrén: Well, we don't specifically give out product line and product line profitability. So I think I'll shy away from giving exact guidance on that one. And I think it's also sort of what you compare against. So please don't compare to Q2 because Q2 top -- bottom was sort of a, I would say, it was arbitrary too low because the maintenance break in China actually impacted it quite a fair amount. But if we sort of say that last quarters of average is somewhere between 11% and 12% EBITDA, so from that, it's probably equal split between the three areas. So mix and some market recovery, particularly in North America, and then also cost saving actions. Martin Roediger: Okay. And the final question is about Fiber Essentials, which was below market expectation. I wonder, did you have also cost savings here? And related to the comparison to last year, was there any -- did you overearn last year so that we should be aware that last year's high margin in Fiber Essentials, especially for Q4 is not a good proxy for Q4 this year? Petri Castrén: I don't think that there was any sort of overearning in '24 in Fiber. There was overearning in particularly in the high electricity cost years and high caustic price years, '21, '22 and '23 but really not throughout the year. Now memory serves me badly in terms of individual quarters, but there tends to be a little bit of a seasonal pattern that electricity costs are higher during the winter months. And as you can see that there is a link of -- we benefit of this higher electricity costs. So we tend to have some seasonal pattern of Q4 being stronger in terms of profitability for our pricing of our electricity-dependent products, mostly sodium chlorate. So I think, Martin, I encourage you to rather look at sort of a trend lines and through the year and not individual quarters because each quarter, there can be some minor -- some sort of one-off impacts, whether it's product mix or some cost item came through that may impact the cost of -- margin of a business unit point or this way or that way. So rather encourage you to look at the trends because that's -- our customers are also, they are the same customers, and particularly in Fiber. So it's a very solid track record of maintaining customers. And so I encourage you to look over the longer period of time, not individual quarters. Antti Salminen: And if I may build on that a bit, so you referred to the kind of a shortfall of Fiber Essentials compared to the expectations. So maybe we were not clear enough in Q2 when we communicated the expectations to be lower because we already saw then the announcements from our key customers, especially in Nordics about taking downtime at their pulp mills. So that translated now to weaker performance in our Fiber Essentials clearly in Q3 as we expected already in Q2. Kiira Fröberg: Yes. Martin Roediger: But the downtimes are now over? Antti Salminen: Well, you should not talk to us about that, but rather look at our customers and what they announced. So I'll leave it to that. Petri Castrén: Yes. And sometimes we know a little bit more than our customers openly communicate. So that's why we need to be mindful that we respect and talk about our position only. Kiira Fröberg: Thank you, Martin. Let's now take next question, please. Operator: The next question comes from Anssi Raussi from SEB. Anssi Raussi: I continue on the Water Solutions segment. So seasonality there has changed a bit last year. So how should we think about it now going into the last quarter of the year? And also on Q4 last year as a comparison period, anything to highlight or worth of reminding there? Antti Salminen: Thank you. If I start from the seasonality. So I mean, if you look at the Water Solutions as such, I don't think there's any major change in the typical seasonality over the year. So basically, that remains. So fundamental phenomena that impact the demand of water chemicals is not changing. And thus, typically, the first and last quarter are the weakest and the mid-quarters are the strongest in that business. Now then if you remember what we have communicated, so now we have this one big tolling customer within the Water Solutions whose demand -- has quarter-to-quarter comparison quite significant impacts if they take less or more material than we have expected. And that can then distort the kind of reported typical seasonality pattern. But the underlying base water treatment business, the seasonality is as it is because even if the climate is changing, it has not changed that dramatically in that short period. Anssi Raussi: Okay. Got it. And maybe continuing on this Packaging & Hygiene segment and this change in product mix. So how would you describe the current mix in Q3, like you mentioned that it improved, but is it like normal now or maybe a bit too positive for your EBITDA? Or how should we think about that one? Antti Salminen: Yes. Well, again, and as Petri said earlier, so you should not really look at one individual quarter in isolation because there will always be fluctuation in terms of demand, but in terms of product mix as well. So certain product lines are more profitable than others for us, and there might be this fluctuation between the quarters. Now the third quarter happened to be very positive in terms of mix for us. And as order patterns kind of level out week by week, even if we would want to be, could not comment on what to expect for the Q4. Petri Castrén: Yes. So Anssi, maybe addressing your question a bit differently. So the profit improvement need is not over in PHS business unit at all. That's why we are doing the business model change there now. And this will actually take, like I said, well into next year as we are implementing it. So actually, it's a fairly fundamental change. So yes, we'll continue to drive that to get the business unit profitability sustainably to the level where it actually ought to be. So don't take that Q2 to Q3 improvement and put a linear stick on it and expect that to continue. Maybe that's another way of saying it bluntly. Kiira Fröberg: Thank you, Anssi. Let's now then take the next question, please. Operator: The next question comes from Andres Castanos-Mollor from Berenberg. Andres Castanos-Mollor: I was thinking, do you expect lower raw materials to have a positive effect in Q4 in your -- in the cost side for you? And I was wondering if you had seen already something in Q3, maybe potentially affecting being a positive factor in your Packaging & Hygiene Solutions result in Q3. Petri Castrén: Well, I showed the raw material development year-on-year, and it was sort of a boring flat line, so I didn't even talk about it all that much. So as a group, it looks pretty flat, but there are individual areas where we have cost pressures, and we have some cost pressures in some areas of our water services business, we have some areas in our fiber. I mentioned some -- and that was already visible in their sort of profit bridge as we talk about it. So consequently, there was perhaps a slight improvement on the variable cost environment in PHS. But again, these are fairly small changes. So I can't really -- I think really the focus is much more on what can we do and how can we drive more volume. Andres Castanos-Mollor: A follow-up, a different question, if I may. On Water Engineering, I wanted to ask about the rate of acquisitions they have been doing in the past. Can you comment on that? Can you kind of give us an idea of how much capital this platform could deploy going forward? Antti Salminen: We will not comment on how much capital, but just that you get the idea. So typically, they have done several a year of this kind of small acquisitions, and that's kind of what we plan to do. Of course, with our bigger muscle, we can also then look at bigger targets to add on to that platform, not only the small ones that they have been thus far doing. Petri Castrén: I think it's very logical to say when Antti described Water Engineering as a platform. So it is a platform to continue on this sort of smallish type of deals and maybe increase the size, which they have been really doing like EUR 10 million revenue type of deals or even smaller, some smaller. So maybe increase that a little bit so that for the same effort, you can get a bit more meaningful impact. But this platform wouldn't be something hugely bigger on top of this. That's not the idea. Kiira Fröberg: Thank you, Andres. Let's now take the next question, please. Operator: The next question comes from Joni Sandvall from Nordea. Joni Sandvall: A couple of questions also from my side. You mentioned the uncertainty in the industrial side of the solutions. So could you give any more color? Has this intensified during the Q3? Which sectors are most affected? And does this have any impact on your mix? Antti Salminen: Well, first of all, like if you look at the industrial side of the Water Solutions, so we are basically serving all the possible industries that you can think of that use water, which is basically all the industries. So in that sense, kind of pinpointing which industry is exactly more kind of in decline than some other, it's impossible. It's really, as I started my presentation with, it's the kind of overall kind of slowness of the global economy and then the less global trade that happens, which both are kind of not only now impacting then the Packaging & Hygiene Solutions, but really all the industries. Especially here in EMEA, we all see it all around us every day. And then when the industries run with lower utilization rates, they consume less water and that is impacted. And that impact typically is gradual because you have some industries doing a bit better than others, and they are offsetting each other. So typically, we don't see it in industrial water treatment if there's some short-term nods in the economy. But when it's this kind of a longer kind of degrade of the industrial activity, it then starts to be visible for the water treatment chemicals demand as well. And there's no particular step from Q2 to Q3. So you should really look at it kind of a longer-term continuum of what happens to the economy, especially here in Europe. Petri Castrén: Maybe it helps if I remind you that a lot of these industrial customers, we actually don't address direct, so we go through distributors. So these are, for us, smallish or the end customers would be so small for us that it don't make sense for us to cover them direct. We cover the urban customers, the municipal customers, we cover them all direct. But this is sort of an indirect channel. And like Antti said, that's why it gets a little bit diluted the impact of what happens at sort of in the economy. Joni Sandvall: Okay, that's clear. Maybe still digging into Packaging & Hygiene Solutions and the improvement, let's say, potential for '26. You mentioned that Americas and EMEA are in the -- at 15% or above level. So should we expect in '26 about to reach mid-teens levels on, let's say, run rate on profitability? Antti Salminen: Well, we are working as hard as we can to improve it as much as we can as quickly as we can. Petri Castrén: Yes. So clearly, we're not happy with and satisfied with the run rate of profitability in PHS through 2025. So yes, we want to improve that, and there are efforts ongoing towards that. So yes, I think it's going towards the mid-teens range. And when we will get there, let's -- we're not giving an exact quarterly guidance. It also depends what happens in the market, is there any recovery in '26? And if yes, when it will happen? Joni Sandvall: Yes. Okay. That's clear. Last question from me. Given the weak pulp and paper market that we are currently in, have you seen any increase on pressure on pricing from the companies? Antti Salminen: Well, it's obvious that this kind of a situation leads to more pressure. But our customers are quite really professional and well educated. And regardless of the cycle, they are tough negotiators. So we have all the time pressure on our prices. Of course, it is a bit more harsh in this kind of environment when you have seen all the savings programs of our customers. But as I mentioned, I think, in Q2 webcast as well, our approach has been to try to turn it around to kind of collaboration efforts where we look together how can we help them to save more so that it's not about the per tonne price of the chemicals, but our application and solution, which is helping them to consume less virgin raw materials, less energy and so forth. So it's also an opportunity, even if there is some more pressure on the pricing, but it's also an opportunity because we have some of these solutions. For instance, some of our digital services are exactly aimed for these kind of improvements in the customers' processes. And thus, I see it kind of both, of course, a pressure, but also a really good opportunity to help our customers. Kiira Fröberg: Thank you, Joni. Let's now then take the next question, please. Operator: The next question comes from Tomi Railo from DNB Carnegie. Tomi Railo: This is Tomi from DNB Carnegie. First question, Fiber. Do you expect or are you initiating any actions on the Fiber side now that you see the impacts of weaker demand there, something similar as in PH? Antti Salminen: We're, of course, all the time looking at the profitability of each of the business units. It's good to remember with the Fiber that it is slower turning both than for example, PHS, where basically we have relatively lean organization. It's not that easy to look at the kind of organizational model, and cost to serve is very low because we have this kind of a typically, tightly connected supply to our customers. So it's a slower turning ship, and you need to be more careful in analyzing what are the potential actions. And you need really kind of a prolonged downturn from the customer side in order to start some kind of a more radical actions on that business unit. But obviously, we are all the time looking at how can we manage in this environment with a good profitability. Tomi Railo: Just a follow-up. If it's slower, can it also be deeper? How do you see that kind of if it's slower, but does it kind of then also decline more relative to PH? Or how does it work if we were to assume longer, prolonged weakness? Antti Salminen: Yes, that's a really complex question. And of course, I mean, that you should, again, predominantly ask from our customers to understand kind of what is happening at the global pulp markets. But the global word is here actually very important. So the pulp markets are global and our customers are not only kind of playing on the geographies where they produce, but there's global trade flows. A lot depends on how China economy will develop and so forth. So it's kind of a complex question to answer and difficult to say whether it would be any deeper. Pulp and the packaging materials are in the same value chain ultimately. So basically, you can't really separate. The timing effect is different, but the value chain is the same. So really, I think it's an impossible question to answer as such. Tomi Railo: But in a sense, it's easier in PH side to do your self-help actions than it is at the Fiber side? Petri Castrén: Tomi, the cost structures are quite different, so because we have a few small number of customers on Fiber Essentials. So each customer buys a lot. So there's a very small sort of sales and application team, whereas in the Packaging & Hygiene Solutions, we have lot more customers. There's a lot more applications. There's a lot of application and salespeople. So the mix -- when you -- total fixed cost, sorry, the mix between manufacturing and what we call business overhead, where we lump both the sales and application and technical support people, it's totally different. So there's a fairly little of this business overhead in Fiber, whereas there's a lot more in PHS. And with that, of course, you can play with. And that's why we are implementing this business model change. So how we are supporting our customers with this team of not only the technical support people, the application people, the salespeople, but also the support organization that is managing the whole supply chain. Tomi Railo: Yes. Okay. Second question, just starting the fourth quarter, have you seen any kind of a change? Do we continue on a similar kind of situation as in the third quarter kind of up or down or any positives, any negatives, any further negatives or? Petri Castrén: Tomi, you know our practices. We never comment on the ongoing quarters, and you almost always try. Kiira Fröberg: Thank you, Tomi. Let's now then take the next question, please. Operator: The next question comes from Andrew Noël from chemicalESG. Andrew Noël: I've got two. I wanted to ask about PFAS and how you see that market developing. When I talk to some people, they seem to think that when it comes properly, it will come quickly and big, if you see what I mean. So I'm wondering about your investment plans. Say, Helsingborg is sort of EUR 10 million. Are you going to sort of invest heavily ahead of this? Or how do you see that PFAS market growing in terms of timing and whether you're going to sort of scale up, whether you can scale up? And what -- have you done a forecast on what perhaps you may need to invest to stay ahead of the market when it does sort of gather a bit more momentum? That's the first question. And just the second one on valuations in M&A. In some other -- not particularly in water perhaps, but some chemical distributors are talking about valuations coming down. And I just wondered, as owners are a bit worried about the outlook and so on, I just wondered what you are seeing in your particular sector. Antti Salminen: Thanks. So I will take the first question and let Petri comment on the second one. So the PFAS removal market indeed is a really interesting market, which is developing as we speak. And as it's a kind of a new market, there's a lot of unknowns. We have clearly stated that we will be playing in that market and are developing our approach there. It's also interesting from the perspective that there is not one dominant solution that will be used by our customers for removing of PFAS. So it will always be a combination of the good old warhorse, the activated carbon, which is not enough and which will not solve the problem. So other technologies are needed. Some of them are chemicals, some of them are nonchemical. And it's this combination within which we need to find our playing field, so which parts of that we play. And we have clearly started our approach by entering the activated carbon market. So we purchased a small facility in U.K. That's actually kind of we have filled it up very nicely, and it's working well as a first step. We have announced now the investment project in Helsingborg, Sweden for the reactivation. So those are all the small steps that we are taking into the market as it continues to develop. And we are also looking at bigger steps, but that all depends on how the market develops and what we can do there. But we are really kind of determined about that. But then also, as I said, I mean, this will not be enough. So we are working with different external partners and our own research and innovation area to develop new, more specific solutions, which will be complementing then the activated carbon on this fight. So we are serious about the market. Market will grow. And as you said, some are expecting it to explode, some are expecting it to have a kind of a more linear type of growth. Nobody knows today. We are taking our steps according to our strategy. We have, I think, a very clear plan, how do we enter it. And our benefit on that area will be that we are serving already all of these customers with our coagulant and polymer solutions. So basically, we have the supply chains ready and we are there with these customers. So whatever the new prevailing technologies will be, we are in a really good position to globalize them and capitalize on that market presence that we have. Petri Castrén: Andrew, that was a good question to ask Antti. And I think the valuation question is also a fair and good question. I think very few sellers would actually acknowledge that their expectations of multiples are coming down. But when you look at what's going on in the market, there is a number of private equity funds that own assets that they have -- they are holding towards their maturity. So clearly, there is still a discrepancy on valuations and maybe the seller expectations at times are still higher. I think in generally, at least I wouldn't say that they are going up anymore. So clearly, we've sort of maybe moderated from the zero cost financing that was available some couple of years ago in that sense. So perhaps you're right that there is an expectation and realization of some moderation on the valuations. And of course, this would be a development that we would welcome very much because some of the actions -- some of the things we've been sitting on the sidelines because we could not make the ends meet. Kiira Fröberg: Thank you. I think we start to actually run out of time here with our webcast. So we had a couple of questions through the webcast question formula. They were related to the Packaging & Hygiene Solutions profitability improvement program, and I think that they were covered in the other questions. So we don't need to take them now here. But I would like to thank all the participants for the active participation and good questions. And as a reminder, we will report our financial statements bulletin on February 12, and that's already next year, so '26. And I hope to see as many investors as possible on meetings during the next quarter. We will be actively on the road. And of course, have a great day, everyone, as well as a great weekend. Thank you so much. Petri Castrén: Thank you.
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Operator: Ladies and gentlemen, welcome to the Schindler Conference Call and Live Webcast on Q3 Results 2025. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Lars Brorson, Head of Investor Relations. Please go ahead. Lars Wauvert Brorson: Thank you, Valentina, and good morning, ladies and gentlemen. Welcome to our Q3 2025 results conference call. My name is Lars Brorson. I'm Head of Investor Relations at Schindler. I am here together with Paolo Compagna, our CEO; and Carla De Geyseleer, our CFO. As usual, Paolo will discuss the highlights of our quarterly results and our market outlook, and Carla will take us through the financials. After the presentation, we're happy to take your questions. We plan to close the call at 11:00 in an hour's time. With that, I hand over to Paolo. Paolo, please go ahead. Paolo Compagna: Good morning, everyone. I am pleased to be back to report on our performance in Q3. And as Lars said, let me start by giving you some highlights on Slide #3. Firstly, let me say that we continue to face some growth headwinds in major new installation markets around the world, particularly in China. I will share our order trends in more detail shortly. But before, let me remind what we discussed back in February. A key pillar to our strategy of profitable growth is the pricing discipline. And we demonstrated it again this quarter on a few major projects where the economics were just not consistent with our return expectations. That said, we see good growth momentum in many parts of our organization and particularly in modernization. Here, orders were up over 16% in the quarter despite the strong growth we had in Q3 last year, allowing us to show another quarter of order growth for the group. Second, revenue slowed in the quarter, down 0.5%, whilst our year-to-date revenue is up 0.8%. Also here, the headwind from China intensified in the quarter. But our backlog is growing, up 1.5 percentage points year-on-year in local currency, driven by our modernization business, and we are confident that continuing to expand our capacities, we will execute successfully on this backlog. So I expect us to deliver our full year '25 revenue guidance of a low single-digit growth. Although this is likely to be a very low single digit, similar to what we delivered in '24, as Carla will discuss. Third, we delivered another strong operating margin in Q3 at 13%, up 130 basis points from Q3 last year. And we are now able to revise our full year '25 margin guidance, which we see coming in at around 12.5%. That compares to 12% previously. Carla will provide the detail on that, but I'm very pleased to see that the efficiency initiatives launched over the last couple of years are yielding their results. Now beyond our financial performance, let me touch on some of the other highlights of the quarter. First, we are making very good progress on the rollout of our new U.S. mid-rise product. This product was launched in '24, and we have now successfully delivered and handed over the first units. And our order intake so far in '25 is exceeding our plans. You will remember that this product launch was about leveraging our standardized modular platform and enhancing our mid-rise offering in the commercial and high-end residential segment, a key pillar to our strategy in the U.S. market. Now we are starting to see the results in terms of share gain in the U.S. mid-rise market, which is really encouraging. On to modernization, where we continue to industrialize our operations and standardize our product portfolio. We are seeing very good traction with our standardized packages, which now make up close to 17% of our modernization business. And that is not only driving growth, but also enhancing our competitiveness and supporting our journey towards higher profitability in modernization going forward. Then on the topic of sustainability, I'm very pleased to announce that we are installing the industry's first ever low carbon emission steel elevator. The steel used in this elevator reduces carbon emissions up to 75% compared to conventional production and marks an important step towards our 2040 net zero target. And finally, I'm also proud that we have been recognized by Forbes again this year as being among the world's best employer. In the engineering and manufacturing sector, Schindler was ranked third globally. We have close to 70,000 employees and attracting and retaining talent is absolutely essential to our competitiveness and overall health of the company. Well, so you can imagine this recognition is important for us. Moving to our market outlook for '25 on Slide 4. We expect the service markets to continue to expand across all regions, with the lowest growth rate in the Americas and the highest in Asia Pacific, driven by India. The modernization markets continue to offer a clear growth opportunity across the world with mid- to high single-digit growth outside of China and growth well into double digits in China, with around 100,000 aging elevators approved this year for an upgrade within the government's equipment renewal program. To put the scale of this initiative in the perspective, just imagine replacing all elevators in Australia in a single year. In installation, we continue to expect the global market to decline by high single digits, mainly due to a low teens contraction in China, where home starts by floor area continue to fall by close to 20% year-on-year in the January to September period, following a 3 years of 20-plus percent declines. Home sales have dropped 5% overall with only the 4 Tier 1 cities showing a slight increase with all other cities facing steep declines. Across the EMEA region, in addition to good growth in countries such as Spain, now also the important German market appears to have found a bottom and is expected to gradually recover going forward. The so-called Bau-Turbo initiative to fast-track housing project recently approved by the German government should be seen as a positive development overall as it aims to simplify planning, shorten approval times to 3 months and allowing flexibility in building rules to tackle the housing shortage in the coming quarters and years. Asia Pacific, excluding China, is projected to grow by mid-single digits, led by India and Southeast Asia with conditions improving in Australia and the U.S. new installation market has shown remarkable strength, further increasing from a tough Q3 '24 comparison point. In addition, we saw better data coming from Brazil in Q3 '25. And we have, therefore, decided to revise our Americas new installation market outlook to stable from slight down previously. So how did we perform in this market environment in the third quarter of the year. Turning now to Slide 5. Starting with service. Our portfolio units continue to expand, showing the strongest growth in Asia Pacific, excluding China. In Americas, we saw a slight decrease as a result of our increased selectivity when it comes to recaptures that we decide to pursue as well as from softer conversions. As a reminder, we saw a decline in our NI orders in '23, and this still has an impact given to the normally longer lead times, especially in North America. On modernization, we have maintained the strong momentum seen in the previous quarters and saw a double-digit growth across all regions, except for Asia Pacific, excluding China, with fewer large projects booked in this particular quarter, Year-to-date, our MOD growth in the region remains in double digits. Finally, on new installation, our global order volumes decreased by double digits due to China, where, as mentioned back in July, we are responding to the prolonged weakness in the NI market by resetting and repositioning our China business towards future growth opportunities. Outside of China, our NI orders grew mid-single digit, driven by an upswing in orders in our Europe, South and South America zone. And it is worth flagging the comparison from quarter 3 last year, which was the best quarter in '24 for NI, particularly due to our strong performance in the Americas. But the U.S. continues to develop well. And as mentioned, we are pleased with the customer reception of our new mid-rise product. With that, let me turn over to Carla to walk us through our financial results in more details. Carla Geyseleer: Thank you very much, Paolo. Good morning, everybody. Pleased to take you through our financials related to quarter 3. So let me start with Slide 7. And as a simple summary of the quarter, we continue to see headwinds to our top line, but we are executing very well on the bottom line. So starting with the headwinds at the top line. So they are particularly severe in China, and we remain committed to our strategy of pricing discipline, as Paolo just mentioned. Now it's also important to note that FX headwinds are definitely not declining. We had a hit of over CHF 100 million this quarter to both the order intake and the revenue. I will elaborate on the top line trends shortly. Now before doing so, let me point 3 highlights for this quarter. Firstly, we had another very strong quarter in terms of operating margins, up 130 basis points for both reported and adjusted EBIT margin. So we continue to make very good progress operationally, and that is obviously translating into a margin expansion, which is coming in slightly better than expected, which is also why we are revising our full year margin guidance. Secondly, our operating cash flow improved both sequentially and compared to last year. And now looking at the operating cash flow year-to-date, we are also up versus '24. So just shy of CHF 1 billion for the first 3 quarters and setting us up for another strong year for cash conversion. Finally, our net profit continues to increase versus last year in both absolute and margin terms, despite the decline in financial income as well as FX headwinds and higher restructuring costs. Now moving to Slide 8 and taking a look at our top line development. Let me first say that we don't see any material shift in order trends overall, even though growth in Q3 came in somewhat lower than in our first half. Now large projects are lumpy, and we had fewer of them this quarter compared to the prior 2 quarters. And if you look at the underlying trends by region and segments, there are 2 things that stand out. First, the continued steep decline in China; second, the strength in modernization. So on China, here, our new installation orders declined by over 30% in value in quarter 3, driving the group new installation orders down mid-single digits in the quarter and more than offsetting the growth we saw in new installation orders outside of China. So even as China becomes or became a smaller part of the overall group orders, it continues to materially impact our growth profile, notably in new installations. However, organic growth was still positive in the quarter due to the growth in service and modernization. So in modernization, order intake was up 16.4% in quarter 3 and this on a tough comparison versus quarter 3 last year when we grew at 20%. And growth was broad-based with strong double-digit growth in Europe and Americas, whilst China had a standout quarter, up well over 50%. Year-to-date, China is up close to 40%. Now this strong order growth in modernization also presents some operational challenges for us in terms of scaling up our delivery capabilities. So the execution of our MOD backlog was not as efficient in quarter 3 as it could have been. So we recognize that, which meant that revenue growth came in at mid-single digits in the quarter, albeit on a tough comparison from last year when MOD revenue grew over 12%. I should say that the slightly longer backlog rotation times are also a reflection of the project mix in the backlog. That said, we expect MOD revenue growth to accelerate in the coming quarters from the level that we have seen now in quarter 3. But it is still the new installation, which is actually burdening our revenue growth, down 10% in Q3, driven by the steep decline in China, which was down over 20%. And with MOD and Service, both growing mid-single digits, that left the total group revenue down 0.5 percentage point in the quarter, but up 0.8% year-to-date. Now as of the quarter end, our backlog was up 1.5% in local currencies, driven by MOD, driven by Service, which had backlogs up mid-teens and mid-single digit, respectively. So our backlog in new installations declined by low single digit. Now in terms of backlog margin, this quarter was slightly down sequentially, but still clearly up year-on-year. And the weaker sequential development was entirely due to the tariffs being reflected in our U.S. backlog. So as our backlog gets repriced over time, you will see the offset to backlog margins. And importantly, excluding the tariff impact, backlog margins continue to improve also sequentially. Now moving on to Slide 9 and looking at our EBIT performance. As I shared already, it's a really strong development now to 13% reported margin in quarter 3 and 13.9% on an adjusted basis. Now the operational improvement of CHF 35 million this quarter primarily reflects the good progress in SG&A savings, but also next to that, the procurement savings continue to deliver. Price and mix were contributors, but less so than the efficiency savings this quarter. Our reported EBIT was burdened by CHF 25 million of adjustments in quarter 3, of which CHF 21 million of restructuring costs, translating to minus CHF 2 million in our Q3 EBIT bridge compared to last year and minus CHF 13 million in our year-to-date bridge compared to last year. Now taking a look at the net profit on Slide 10. Net profit grew to CHF 265 million in quarter 3 reflecting a 9.9% margin and to CHF 796 million year-to-date with a margin of 9.8% despite lower interest income, despite higher restructuring costs and despite onetime financial gains in last year. So we are very pleased with this result. Moving to the operating cash flow on the next slide. So our operating cash flow grew in the quarter as well as on a year-to-date basis. So operating cash flow reached now CHF 967 million for the first 3 quarters of the year, and that sets us on the path to deliver another strong performance in '25, even if we might not hit the exceptional level of last year. The improvement of the operational cash flow is coming from our operating earnings, supported by higher noncash impacts, offsetting a minor headwind of net working capital after the strong improvement in '24 and the missing positive net cash flow from financing income. So that brings me to the guidance for the remainder of the year. And as Paolo mentioned already, we are now specifying our full year EBIT reported margin guidance at 12.5%. So this compares to the previous 12%. And as Paolo and I have discussed, this revision comes primarily on the back of the efficiency initiatives that we have been executing and which are yielding savings slightly ahead of our expectations. We also now have an increased visibility on the impact of the tariffs this year, while the measures also taken to restructure our Chinese operations are partly offsetting the end market headwinds that we are facing here. Finally, the mix headwinds associated with growth in modernization in H2 are somewhat less than we expected in July at the time of our H1 results. And on mix, it is also important to recognize that we are benefiting from the continued outgrowth in our service business. And this revision to our full year '25 guidance also implies that we expect to see continued strong margin improvement year-on-year in the final quarter of the year. Now a small word on tariffs, which I think we have managed well so far in '25. So the U.S. tariff cost now reflected in our backlog. So I just mentioned, we will continue to work on this hard in the coming period to mitigate the impact, including making price adjustments to offset the impact. Now it's fair to say that the U.S. tariff environment remains very dynamic. So let me give 3 additional comments as we see the impact today. First of all, you will recall that with our H1 results in July, we provided you with an estimated annual gross tariff impact of approximately CHF 30 million. What happened since then? Since then, we have had the changes to the reciprocal tariffs, which has taken U.S. tariff levels on Switzerland to 39%. That takes our estimated impact to CHF 35 million from the initially CHF 30 million. So we also had the expansion of the Section 232 tariff list in mid-August, but that had no material impact on our estimate. Finally, we had the recent escalations by the U.S., including a possible 100% tariff on Chinese imports starting 1st of November. If this were to be implemented, that would take the annual gross tariff impact to CHF 72 million. Now we will come back in February with our full year '25 results and update you then on the '26 impact. But I expect us to make good progress on continuing to offset the tariff impact with our mitigating actions. Now with regards to the '25 revenue outlook, I confirm that we expect to deliver on our full year '25 revenue guidance of low single-digit growth, albeit this is likely to be very low single digit, so similar to '24. So in conclusion, let me take the opportunity to thank all our colleagues around the world for their efforts so far in '25, not at least our colleagues in the field who are operating in some exceptionally challenging circumstances in many places around the world. And it's a clear testimony of their contribution to our strong results in the third quarter of this year. And so with that, I hand back to Lars. Lars Wauvert Brorson: Thank you, Carla. With that, Paolo and Carla are now happy to take your questions. Can I ask you please to limit yourself to 2 questions only, given the limited time we have available. With that, operator, please. Operator: [Operator Instructions] The first question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I will have 2, but I'll ask them one at a time. The first one is regarding sort of your organic order growth rate today, quite a bit lower, I guess, than one of your peers yesterday. I understand from what you said sort of a much bigger drop in China from you. Can you talk to what extent that is just the regional or the product mix? Or it was more an intended effort to try to control your backlog margin or something else? I'll start there. Paolo Compagna: Daniela, Paolo here. Very clear, China order intake in the quarter is driven by 2 factors. One is obviously our clear dedication in pricing discipline that we watch out what we take into the books as part of our China program we discussed with you back in February. And the second one is also a quarter in which we still see a decline in the market, and we just follow here the trend. So this has impacted our Q3 numbers for the China order intake. Daniela Costa: And then just in terms of sort of the Americas service trend, which seems sort of weak and down. Can you elaborate a little bit? From one side, you're upgrading on the original equipment, but the delivery on the service side seems a little bit on the weak side. What's going on, on the service? Paolo Compagna: Yes. So let me elaborate on the topics. And our upgrade is on new installation going forward, we were not conservative. We were back in July looking at the market trends, and we saw some signs of cooling down in North and South America, which now for the reasons discussed, we say, well, market might stay stable, especially as in North America, we don't see yet a significant negative trend, which would require this adjustment downwards on new installation. But your question was about service, and let me elaborate on this one. Here, there is a mix of 2 factors and also a bit different between North and South America. What we see in Q3 in this quarter is a combination of 2 things. Number one, in the recaptures, we call it recoveries, these are the new service contracts we take on board. We moved to a more diligent way of assessing their economics. This led now in a comparison quarter-on-quarter, quarter to the quarter to a slightly negative trend. And the second one is that you might remember in '23, we were facing a couple of quarters with a slower NI new installation order intake. What we see now is the combination of the slower conversions, which means the contracts, right, which come into service after new installation is finished. And due to the lead time of the NI order backlog from '23, and it's the combination of these 2 factors leads to this mathematical slow Q3 in Service Americas. Operator: The next question comes from Andre Kukhnin from UBS. Andre Kukhnin: I've got 2 and one of them actually dovetails nicely with what Daniela asked about just now. So I'll start with that. I wanted to also ask about the dynamics between modernization and service growth in North America, but also in Europe, where you're seeing such a substantial divergence. And I presume at some point, this strong growth in modernization in all those projects that you execute on in MOD will help converting into service. Is that the case? And could you give us some idea on the kind of lead time on that? And maybe -- sorry to pile them on, but while we're on service, could you give us an idea of what the unit growth was for you globally in the quarter? Paolo Compagna: Thank you, Andre. Let me elaborate on both. Number one was about modernization, how it works into service. So here, obviously, yes, modernization captures as long as they are outside of our portfolio would obviously lead to portfolio gains. So here, the answer is yes, there will be a certain positive contribution to the portfolio, and that's clear one of our targets. This being said, the second part of the first question was about lead times. Here, I must say, a bit different geography by geography, but actually, overall trend is that the lead times on modernization are also going up. So it means the time to convert this modernization, I repeat outside of portfolio. So it's not that entire modernization would add portfolio, but the portion which adds portfolio might start to contribute between end of '26 and going forward. So there is a positive momentum. Yes, there is a time in between, yes, and we expect to contribute from Q4 next year going forward. The second question was about the growth in the portfolio, which we can share on a good low single-digit number. Andre Kukhnin: Great. And I appreciate it more than one question already. So I'll just ask a short one. On the tariffs and the backlog repricing, could you confirm that this is just purely mechanical that's kind of triggering the escalation clauses are already in contracts and it's just a matter of working through that? Or are there new renegotiations to be had with customers? Paolo Compagna: Yes, Andre. We have done, as we shared in July back a little program on it, which is showing good effect. But Carla, you might elaborate on that. Carla Geyseleer: Yes, yes. No, you're absolutely right. Andre, thanks for the question. Yes, I confirm it's rather a mechanical exercise that you need to work through. So because, of course, there is a pricing towards the customer, and there is also a piece in our supplier management side. Operator: The next question comes from Vivek Midha from Citi. Vivek Midha: I have 2 questions. My first is a follow-up around your comment around the margin drag from modernization growth not being as large as you thought. Is that because of that slower conversion of modernization growth that you highlighted, which potentially might then have more of an impact in 2026? Or is it also because of the improved modernization profitability as you've grown? Paolo Compagna: Well, it's a bit of a combination between margin and the rollout of the backlog, and I will leave Carla to come through the details. But actually, the margin within modernization are not deteriorating. The opposite is the case. So your observation, we are improving on modernization margins is right. And is this one of the reasons for having a slower conversion into operating revenue. It's not the case. But Carla, please, would you like to elaborate on this? Carla Geyseleer: Yes, I want to be clear. I mean -- so we have the strong growth in the order intake and a slower realization of the projects itself, but we don't have pressure on the MOD margin. So just to be very clear there. Vivek Midha: Totally understood. My next question is just looking at the headcount, the number of employees. It looks like it's gone down by over 1,000 relative to the second quarter. Is that the effect of your efforts to reposition in China? Or is there something else driving that reduction in the headcount? Paolo Compagna: That's a very good observation. Yes, we announced back in July that we are repositioning our -- especially new installation business in China. And what you see in the overall numbers is mostly that. That's true. Carla Geyseleer: Yes. But this comes on the combination. If you look at the year-on-year versus December, it comes on top of the initiative that we took to reduce our cost levels in the -- mainly in the back office in the indirect part of the headcount, and that is actually what you see coming through. So we are just executing on this. So it's a combination of the 2. Operator: The next question comes from James Moore from Rothschild & Co Redburn. James Moore: Could I ask one on service? I mean if we're talking about a sort of 5% constant currency growth for service, would it be possible to split that between maintenance and repair? Are they at a similar pace? And tied to that, if they're at a similar pace and we're at 5% maintenance growth, is that to say with your good low single-digit comment? 2.5% unit growth and 2.5% price. And I ask because I'd like to unpack that to another level, if I could. And behind the price piece, would it be possible to say how much of that is kind of a wage escalator pass-through versus any other form of premium over and above that, whether digital or other initiatives? And behind the unit growth, is that basically just the past orders coming through? Or have you got any conversion topics like is conversion getting better or worse? Or have you got any win-loss retention topics? And how do you think about maintenance growth going forward for the next couple of years? Paolo Compagna: Good question with some components into it. Let me combine them. So on the first part of your question, service, repair without going to the details of both as we never do. But it's obviously that both are growing together. So as repair, you can only execute on the portfolio you have and with the customers we are happy to serve. So there is obviously a certain correlation between the repair business expansion and the portfolio growth itself. So this is very fair to be assumed. Second part of the first question, are there components of digitalization, monetization of the digital business? Surely, yes. As we announced also previously, we continue our efforts in digitalizing for our customers our services. So we don't only digitalize for ourselves for the beauty of technology. We also have an increased and steadily increasing offering on digital services for our customers, which obviously, yes, starts to get some traction and contribute to this overall picture. So that's absolutely right. And your second question, how we expect this whole service/repair/digitalization business to move. Here, we expect, as mentioned before, that we see at least a steady continuation of this growth in which we absolutely intend to participate. James Moore: And can I just follow up on the NI margin, new equipment? My sense was you were doing better than others in China, and you had some topics in the West, which you're addressing with your standardization program. And we've seen some procurement savings, and I'm sure next year is more about efficiency savings and we're doing amazing things there. But are you seeing a scenario in which is the NI margin down year-on-year? And is it that the Chinese revenue decline is more than offsetting some of the organic actions on the other side or vice versa? Paolo Compagna: Your first assumption, I don't like to comment, as I don't have it. But in terms of margins in new installation, let me share in all clarity that our efforts in improving efficiency in the field, and we have talked about now the last couple of years and intensified last year and this year as now we see -- we start to see really traction in the field, this improvement of margins in new installation in the execution we see everywhere. So now to distinguish between China specific and rest of the world, I would say the improvement in the execution, I would say, is everywhere the same. And to assume that the picture has reverted between rest of the world and China, well, I would say China is more under pressure in terms of margins than the rest of the world. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: Just maybe start with a clarification on the full year guidance when it comes to revenues. I think now you're talking about very low single digit, which also means very low single digit for the Q4. How should we think about this? Is still these bottlenecks when it comes to modernization is still going to be there? And how should we also think about the service growth in Americas? You talked about recapture weak NI back in 2023. Does that still means that it's going to be a drag again in Q4 and potentially even 2026? Paolo Compagna: Let me start maybe with the second part on the service in the Americas. Obviously, right to observe that we are now on a level which we also compare to previous year growth rates, right? So is it expected to stay at that level? Maybe we will see not now in the next quarter, but we expect in the quarters to come to see growth again also -- more growth again also in service in Americas. When we get our backlog executed and as I was sharing before, we see certain delays in delivering on the project, which then it's a question of time, we will come back on that. So therefore, if you ask specific on Q4, we expect to be on that level. But going forward, we would also expect to see growth rates again also in Americas. Talking now the order -- revenue for the full year, we expect Q4 to be in line with our plans. So hence, if we see the year-to-date numbers in the Q3, we like to be super transparent in what would be the full year expectation. So we don't worsen it, but we also don't see room to get euphoric on additional revenues. To your observation, is it a timing issue? Is it projects and kind of delays? Yes. So why we still are quite confident for the future to come is that the backlog is promising. We are building up resources to execute on modernization. So your observation is absolutely spot on with the time, and we will see also this OR then picking up. Carla, anything you'd like to add? Carla Geyseleer: No, I think I confirm perfectly. I think we are complete. Rizk Maidi: And then the second one is really just to understand your cost efficiency. We're now getting towards year-end. Maybe if you could just please correct me if I'm missing anything. But my understanding is you're running with different programs. One of them is procurement. The other one is SG&A. There's an FTE sort of reduction or repositioning of your China business. Maybe can we talk about what has been achieved year-to-date? And what should -- how should we think about these -- each component heading into 2026? Carla Geyseleer: Yes. Thank you very much for the question. I will take it. So first of all, the plan has not changed. So we are still working on the same 4 building blocks that we have always been super transparent on. So first of all, starting with the procurement and the supply chain savings, that is the more mature one, and this is now the second year that it continues to fully deliver, and that is also the one with the biggest impact. Now what clearly scaled up during the first 3 quarters, that is the second initiative, the reduction of the SG&A cost. And of course, driving efficiency in the back office, that's what you see also coming through in the headcount reduction. So we started with that in quarter 4 last year, and that is now really delivering. And that will also, yes, I would say, continue to deliver, obviously, not with the same incremental savings, but we have not completely come to an end of that initiative. What is rather new, I would say, in the quarter 3, that is we have also been focusing on driving efficiency in the NI and the MOD business. And that is the third initiative where we see now in quarter 3, the first benefits coming through. So that is, in a nutshell, what you -- what is also flowing through to the bottom line. Now immediately making the step a bit to the period to come. So we definitely still have potential for these building blocks. And there will still be significant amounts coming through. However, the composition will change because, as I said, the procurement savings become more mature. So their relative weight will decline. And of course, also going forward with the SG&A. But then if we execute according to plan, the incremental savings coming from the efficiency in the NI and the MOD will further increase. And also on top of that, efficiency in our service business. So that is, in a nutshell, what is happening and what will -- or what is expected to happen going forward. What is also interesting to see is that we came now to a situation where the efficiencies are actually really offsetting the inflationary effects and becoming even more important than some of the pricing elements in some of the areas. And that was the whole initial target, why we have set up these 4 building plans. And that's why you see the nice uptick in the margins and in the profit. Does that answer your question? Rizk Maidi: Yes. Lars Wauvert Brorson: Thank you, Rizk. The next question, please, operator? Operator: The next question comes from Vlad Sergievskii from Barclays. Vladimir Sergievskiy: I'll ask 2 and start with modernization. You disclosed standardized MOD solution was 17% of total modernization orders now. Do you think there is a natural limit of how big standard solutions could be in the future compared to the total MOD market? And are those standardized solutions opening new market niches for you in any way? Are they addressing customers that would have perhaps otherwise not ordered at all or ordered it a bit late? Paolo Compagna: Yes. Vlad, to the first part, is there a limitation in the creation of standard solutions? Well, there will be a logical limitation one day as if you recognize that the installed base is a kind of 160 years of elevator technologies built many, many times in many countries by very local companies. So you've got 10,000s of different elevators to be modernized. So let's talk that. With that, you can imagine you cannot have a standard solution for 10,000s of different elevators around the globe. So you're going to fix it by group of similar technologies you can address. So to the first part of your question, is there a limitation? Yes. Are we already there? No. To the second part, -- does it open new opportunities? I personally believe, yes. Then when you get to a standard solution, which could offer to a customer to improve safety, quality and also maybe user experience by having affordable costs, I think there might be a group of customers who today can only go for a full replacement of the elevator, which comes with certain cost and also civil works around it. Now having this opportunity. So to the second question, I personally believe there might be a segment, is it incredibly big? I think it depends from country to country, coming back to my first part of the answer. Then in some countries, we have a bigger number of local products, as we call them, and we have some countries with less number of local products. So in those countries, this opportunity might be bigger. Vladimir Sergievskiy: Excellent. That's very clear. Second one is on the sales mix. Sales mix has been a tailwind to profitability for quite some years. Is there a chance that this tailwind eases or completely stops in '26 when MOD growth accelerates when perhaps new equipment decline slows and maybe grows outside of China and service keep growing as it does. Carla Geyseleer: Well, for sure, I mean, this mix will change. Will it go as fast as you point out? I don't think so. But we definitely -- yes, we definitely have that in our -- calculated that in our plans. So yes. Operator: The next question comes from Martin Flueckiger from Kepler Cheuvreux. Martin Flueckiger: I've got 2, and I'll take one at a time. First one is for Carla. Just coming back to your general comments regarding incremental cost savings from restructuring and operational efficiency going forward. I was wondering whether you'd quantify those for '25 and '26 to -- basically to understand whether there's been any changes? That's my first question. I'll come back to the second one. Carla Geyseleer: Well, as I said, there are no changes in the components that are driving this cost savings, but the relative weight of the components, that, of course, changes because, as I said, if you talk about procurement and supply chain, it's a very mature initiative. So your incremental obviously decreases. This year, we put a lot of focus on the SG&A savings. And together with that, we start up more and more the efficiency -- driving the efficiency in the new installation and in the MOD. But for -- going forward, we still have a significant incremental amount of potential sitting there, and we will work through that as we did over the last 2 years. Martin Flueckiger: Okay. And my second question is regarding the press reports with respect to TK Elevator being either up for sale or going for an IPO possibly. I was just wondering, thinking back, if I remember correctly, to 2020, I seem to remember press reports regarding Schindler's Board making statements about potentially suing KONE at the time if the deal had gone through, which, of course, it didn't. But I was just wondering if a major competitor were to take over TK Elevator, and I suppose Schindler is also interested. But just thinking if a major competitor were to get the bid, would Schindler's Board again consider legal actions? Paolo Compagna: Martin, let me take this one. Well, first of all, we don't intend to comment on competitors' decision about what they do in M&A. And in the same, as you know, we never disclose our M&As and what we do there. I must say what the reaction will be in the market, no one can predict. What will happen may be also difficult to predict. And with that, I must say, let's see what happens. With regard to ourselves, I mean, we always look at acquisitions which happens, and we look at our own opportunities in smaller and midsized and large acquisitions. So I would say there's no answer to your question in the form what will be a reaction. The market will show what happens. Operator: The next question comes from Walter Bamert from Zürcher Kantonalbank. Walter Bamert: Could you please comment which part of the 130 basis point margin improvement stems from the positive mix effect? Carla Geyseleer: Well, it is not the major part. So we will -- yes, we don't give the exact breakdown. But if you just -- I would say, yes, approximately, yes, up to 1/3, approximately is there [indiscernible] effect, yes. But we are very clear on that, and it's also part of our plans going forward if the mix effect changes. Walter Bamert: Perfect. And then nevertheless, coming back to the M&A question and that just generic, what's your assessment of the Asian market, which is still somewhat more fragmented? Do you think there is still room for globalization of those players? Or do you expect that the markets will remain fragmented somewhat? Paolo Compagna: Well, no one of us, Walter, has a glass sphere to look at for the future. If we would have then we would have to stop the call, go and make some decisions. But this being said, obviously, when you look into fragmented but interesting market, which you say -- if you say AP is it and it is, then one could assume things could happen in the next years to come. So this would be maybe my careful assumption. Then we talk about a still promising market, promising market for the future. And yes, as you rightly assess, there's a high fragmentation in that specific part of the world still. So therefore, one could assume there will be some movements, whatever type, difficult to say. When it happens, difficult to say. Could it happen? I would not exclude it, but it's a very personal assumption away from any detailed study. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: I'm wondering if we could go back to the order backlog and the revenue delivery in Q3. If I remember correctly, there was going to be a bit of legacy overhang on Q3 and Q4 deliveries and negative mix from Chinese exposure. Did Q3 progress as planned? Or were there delays to that mix or margin dilutive delivery set, I suppose? Paolo Compagna: To Q3 specifically, the revenue development might have been partially impacted by some projects which see a bit of a delayed execution. And obviously, when it comes to installation and larger modernization jobs, right? If you got a job which then is not completed for whatever reason and often, you know how it goes on construction side, then you might even see it in the books. This has, for sure, an impact in Q3. So therefore, I was mentioning before, in going forward, this will be flattening out by itself as the jobs will be completed, will be then built and then it moves on. So your assumption is right, I think, in saying in Q3, there is a certain impact by larger projects not completed. Yes. John-B Kim: Okay. And just as a quick follow-up to a comment you made about modular. In terms of supply chain, OpEx and perhaps CapEx, do you have what you need to deliver your backlog and modernization? Or is further investment needed from here you think? Paolo Compagna: So for now, we shared in February, you remember when we were sharing our dedication now to move on the modernization business with some of you, we were even discussing in detail what is behind. And one part was the development, production and rollout of those standardized, we call it packages, we call it kits, right? And here, the investment in supply chain, supplier base have been done. So is there any major investment, not specifically, but I like also in all transparency to share that we continue to invest and develop on our supply chain as obviously with the modernization piece growing and the new installation piece being where it is, it's a kind of logical consequence that you keep developing, we call it upgrading internally, the supply chain. And we work now with the internal program in upgrading our supply chain. We don't talk much about, but this takes place. Does it come with major investments? No. Is it partially in the one or the other supply chain. We have different in different continents. There will be some adjustments, but no major investments. And yes, what we deliver now, we are ready to deliver, and this work has been done. It was part of our program in the last 12 months backwards. Operator: The next question comes from Kulwinder Rajpal from AlphaValue. Kulwinder Rajpal: So just wanted to come back on MOD orders in China. So if I heard Carla correctly, she said 50% growth in Q3 and 40% year-to-date. So would it be fair to assume that this business faces tough comps as we go into 2026? So any commentary on growth in the MOD market in China in 2026 will be helpful. And just tied to it, is the share of standardized MOD higher in China compared to other geographies? Paolo Compagna: Let me take your question. So China MOD '26, well, modernization business in China is growing nicely, as shared before, and we don't see any change in trend at all. As I mentioned before, there are even some governmental programs, which are supposed to give some support, and we will also participate there. Allow me also here a very personal note. We have seen in the past also massive supportive programs in new installation in China, which afterwards came with a limited real impact. So now the modernization ones are out, but we are still to see what is the impact. This said, I must say that beside of this stimulus, the modernization business in China is going well and is supposed to continue going well. On the second part of your question, which is the percentage of the packages in China, here, we must say we have to see the market. So if I would say percentage-wise, in that specific market, you could say yes. However, it's logical that in more mature markets in which for longer decades, more products were installed, one could assume that the number of kits, so standard solution kits is higher than in a country in which growth for MOD, you can say more of a homogenic market in terms of technology, right, in terms of installed base. So therefore, is it strategically different? No, in number of pieces of solutions, yes. I hope this answers your question. It's a bit technical, but unfortunately, in that case, it's a technical background. Kulwinder Rajpal: Yes, absolutely. And then just to come back on wage inflation. So I wanted to understand the assumptions for your wage inflation in 2025 and 2026. Paolo Compagna: So it was a bit of disturbed connection here. I think it was about wage inflation. Kulwinder Rajpal: Yes, wage inflation, the assumptions in 2025? And how should we think about it in 2026? Carla Geyseleer: Well, I will say that. So thank you for the question. Wage inflation in '26, I think it will be on a level that is comparable with '25. So that is how we currently see it. Lars Wauvert Brorson: Thank you, Kulwinder. We'll take one last question, please. Operator: We now have a follow-up question from Rizk Maidi from Jefferies. Rizk Maidi: I'll be very brief. Just clarifying some of the points just on China new installations. Am I correct in thinking that the orders here are down 30%, where I think in the P&L, you talked about 20% decline. So perhaps a little bit more drag here going forward? And then more generally, we're now 4 years into this downturn, we thought pricing is not going to be as bad because local players, competitors, including yourself, are doing much lower margins in this downturn than in previous ones, but it feels like it's not getting any better. I'm just wondering who is actually taking on these badly priced sort of projects? And number two, how should we think about -- and also pricing pressure, how do you see it by geography? And how do you think -- how are you thinking about 2026 here? Paolo Compagna: Let me take this one, which is a complex follow-up question. So let me start with this decline in order intake, which I always have to remind might be different between units and value. Then in units, the market is down, as you assume, close to 30% and in value even above that. So for us. So therefore, your assumption is right. There's a bit of a mismatch between units and value, but in value, it has declined a lot. So part of your second question, who is taking on all these bad jobs? I cannot talk about who is taking bad big jobs. However, as we see it also in our numbers, the pricing in China was very tough in the last years, you are fully right. And by now, well, to be very optimistic about pricing in China is not us. So if you ask me how do we look going forward, we would hope to see a stabilization of the pricing. And if we get there, it's already an improvement then till now, pricing has shown to be very tough. So therefore, as soon as we get to stabilization of the pricing, one could say, well, from that point, we can start all to work on it. So -- and this is what we see for '26, right? So we don't expect any special magic. And Carla was referring to our plans for '26. And when we meet in February, you will look -- you know us, we are always very -- we try to be and are very down to earth in our plans. So on China, there's no euphoric assumption for what will happen in '26. I hope this answers your question. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Lars Brorson for any closing remarks. Lars Wauvert Brorson: Thank you, operator, and thank you all very much for attending the call today. Please feel free to reach out to me for any follow-ups you might have. The next scheduled event is the presentation of our full year results on the 11th of February 2026. You'll also find our reporting calendar for '26 at the back of our presentation today. With that, thank you all, and goodbye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good day, everyone, and thank you for joining us for today's ITW Third Quarter 2025 Earnings Webcast. [Operator Instructions] Also, please be aware that today's session is being recorded. It is now my pleasure to turn the floor over to our host, Erin Linnihan, Vice President of Investor Relations. Welcome. Erin Linnihan: Thank you, Jim. Good morning, and welcome to ITW's Third Quarter 2025 Conference Call. Today, I'm joined by our President and CEO, I'm joined by our President and CEO, Chris O'Herlihy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter financial results and provide an update on our outlook for full year 2025. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2024 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris? Christopher O'Herlihy: Thank you, Erin, and good morning, everyone. As detailed in our press release this morning, the ITW team continues to perform at a high level, successfully outpacing underlying end market demand and delivering solid operational and financial execution within a stable yet still challenging demand environment. For the third quarter, revenue increased 3%, excluding a 1% reduction related to our ongoing strategic product line simplification efforts. Organic growth was 1%, a solid performance relative to end markets that we estimate declined low single digits and a 1 percentage point improvement from our second quarter growth rate. Favorable foreign currency translation contributed 2% to revenue. Focusing on the bottom line, we achieved GAAP EPS of $2.81, grew operating income by 6% to a record $1.1 billion and significantly improved our operating margin by 90 basis points to 27.4%. We maintained excellent execution in controlling the controllables as enterprise initiatives contributed 140 basis points and effective pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margins in the quarter. Consistent with our long-term commitment to increasing annual cash returns to shareholders, on August 1, we announced our 62nd consecutive dividend increase, raising our dividend by 7%. Additionally, year-to-date, we have repurchased more than $1.1 billion of our outstanding shares. Furthermore, I'm encouraged by the significant progress on our next phase strategic growth priorities. We remain laser-focused on making above-market organic growth, powered by customer-backed innovation and defining ITW strength. The strategy is working, and we remain firmly on track to deliver on our 2030 performance goals, which include customer-backed innovation yield of 3% plus. As we stated before, ITW is built to outperform in challenging environments. As we look ahead to the balance of the year, we are narrowing our EPS guidance range, confident in our ability to continue leveraging the fundamental strength of the ITW business model, the inherent resilience of our diversified portfolio and the high-quality execution demonstrated every day by our colleagues worldwide. I will now turn the call over to Michael to discuss our third quarter performance and full year 2025 outlook in more detail. Michael? Michael Larsen: Thank you, Chris, and good morning, everyone. Leveraging the strength of the ITW business model and high-quality business portfolio, the ITW team delivered solid operational execution and financial performance in Q3. Starting with the top line, total revenue increased by more than 2%, driven in part by 1% organic growth, an improvement of 1 percentage point from Q2. Geographically, while North America organic revenue was flat and Europe was down 1%, Asia Pacific was a standout performer with a 7% increase, which included 10% growth in China. Consistent with ITW's Do What We Say execution, we continue to demonstrate strong performance on all controllable factors. Our enterprise initiatives were particularly effective this quarter, contributing 140 basis points to record operating margin of 27.4%, which expanded by 90 basis points year-over-year. Furthermore, our pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margin in Q3. Free cash flow grew 15% to more than $900 million with a conversion rate of 110%. GAAP EPS was $2.81 with an effective tax rate in the quarter of 21.8%. As detailed in the press release, the rate was driven by a benefit related to the filing of the 2024 U.S. tax return, partially offset by the settlement of a foreign tax audit. In summary, in what continues to be a pretty challenging demand environment, ITW delivered a strong combination of above-market growth with a revenue increase of 2% and solid operational execution, resulting in consistent improvement across all key performance metrics as evidenced by incremental margins of 65%, operating margins of more than 27% and GAAP EPS of $2.81, an increase of 6%, excluding a prior year divestiture gain. Turning to Slide 4 for a closer look at our sequential performance year-to-date on some key financial metrics. As you can see, ITW's organic growth rate, operating income, operating margins and GAAP EPS have all continued to improve in what has remained a mixed demand environment. Turning to our segment results and beginning with automotive OEM, which led the way on both organic growth and margin improvement this quarter. Revenue was up 7% and organic growth was up 5% with growth in all 3 key regions. Strategic PLS reduced revenue by over 1%. Regionally, North America grew 3%, Europe was up 2% and China was up 10%. The team in China continues to gain market share in the rapidly expanding EV market as customer back innovation efforts drive higher content per vehicle. In our full year guidance, we have incorporated the most recent automotive build forecasts, which are projecting a modest slowdown in the fourth quarter. For the full year, we continue to project that the automotive OEM segment will outperform relevant industry builds by 200 to 300 basis points as we consistently grow our content per vehicle. On the bottom line, strong performance again this quarter with operating margin improving 240 basis points to 21.8%, and we're well positioned to achieve our goal from Investor Day of low to mid-20s operating margin by 2026. Turning to Food Equipment on Slide 5. Revenue increased 3% with 1% organic growth. While equipment sales were down 1%, our service business grew by 3%. Regionally, North America grew by 2%, driven by 1% growth in equipment and 4% growth in service. Demand remained solid on the institutional side. International, however, was down 1%. Operating margins improved 80 basis points to 29.2%. For Test & Measurement and Electronics, revenue was flat this quarter as organic revenue saw a 1% decline. The demand for capital equipment in our Test and Measurement businesses remained choppy as revenues declined 1%. In addition, Electronics declined 2% as demand slowed in semiconductor-related markets. On a positive note, operating margin improved 260 basis points sequentially from Q2 to 25.4%. Excluding 50 basis points of restructuring impact in Q3, margins were 25.9% and both operating margins and revenues are projected to improve meaningfully in the fourth quarter. Moving to Slide 6. Welding was a bright spot, delivering 3% organic growth with a contribution of more than 3% from customer-back innovation. Equipment sales increased 6%, while consumables were down 2%. Industrial sales increased 3% in the quarter as North America was up 3% and international sales grew 4% with China up 13%. Operating margin of 32.6% was up 30 basis points as the Welding segment continued to demonstrate strong margin and profitability performance. In Polymers & Fluids, revenues declined 2%. Organic revenue declined 3%, which included a percentage point of headwind from PLS. Polymers declined 5% against a difficult comparison in the year ago quarter of plus 10%, while Fluids was flat in the quarter. The more consumer-oriented automotive aftermarket business was down 3%. But although the top line declined, the segment expanded margin by 60 basis points to 28.5%, supported by a strong contribution from enterprise initiatives. Moving on to Construction Products on Slide 7. Revenues were down only 1% as organic revenue declined 2% in the quarter, significantly better than last quarter's 7% organic decline. Revenue was also impacted by a 1% reduction from PLS. Regionally, revenue in North America declined 1%, Europe was down 3%, and Australia and New Zealand decreased 4%. Despite market headwinds, the segment improved operating margin by 140 basis points to 31.6%. For Specialty Products, revenue increased 3% with organic revenue up 2%. Revenue included a percentage point of headwind from PLS. By region, revenue in North America declined 1% against a difficult comparison in the year ago quarter of plus 8%, while international was up 7%, driven by consistent strength in our packaging and aerospace equipment businesses. Operating margin improved 120 basis points to 32.3%, supported by a strong contribution from enterprise initiatives. With that, let's move to Slide 8 for an update on our full year 2025 guidance. Starting with the top line, we remain well positioned to outperform our end markets in Q4, and we continue to project organic growth of 0% to 2% for the full year. Per our usual process, our guidance factors in current demand levels, the incremental pricing actions related to tariffs, the most recent auto build projections and typical seasonality. Total revenue is projected to be up 1% to 3%, reflecting current foreign exchange rates. On the bottom line, we're highly confident that the ITW team will continue to execute at a high level operationally on all the profitability drivers within our control. This includes our enterprise initiatives, which we now expect will contribute 125 basis points to full year operating margins, independent of volume. Additionally, we expect that tariff-related pricing and supply chain actions will more than offset tariff costs and favorably impact both EPS and margins. Our operating margin guidance of 26% to 27% remains unchanged. After raising GAAP EPS guidance by $0.10 last quarter, we are narrowing the range of our guidance to a new range of $10.40 to $10.50. Our EPS guidance range includes the benefit of a lower projected tax rate of approximately 23% for the full year and factors in that the top line is trending towards the lower end of our revenue guidance ranges. With those 2 elements effectively offsetting each other, we remain firmly on track to deliver on our EPS guidance, including the $10.45 midpoint, which, as a reminder, is $0.10 higher than our initial guidance midpoint in February. To wrap up, we remain highly confident that the inherent strength and resilience of the ITW business model, combined with our high-quality diversified portfolio and most importantly, our dedicated colleagues around the world, all put us in a strong position to effectively manage our way through a challenging macro environment. However, the demand picture evolves from here, we remain focused on delivering differentiated financial performance and steadfastly pursuing our long-term enterprise strategy, which is squarely centered around making above-market organic growth, a defining strength for ITW. With that, Erin, I'll turn it back to you. Erin Linnihan: Thank you, Michael. Jim, will you please open the call for Q&A? Operator: I'd be happy to. Thank you. [Operator Instructions] We'll hear first from the line of Jeff Sprague at Vertical Partners. Jeffrey Sprague: Maybe just 2 for me, hit 2 different businesses, if I could. First, just on construction. Clearly, you've been working the playbook. I mean one of the things that just jumps off the page to me is this is the 11th quarter in a row of organic revenue declines and the margins are still going up in the business. Maybe just anything in particular beyond kind of the normal 80/20 blocking and tackling that's behind that mix changes or other things? And just your confidence to be able to move those margins up further if and when the revenues do ever inflect positively. Christopher O'Herlihy: Sure. Yes. So Jeff, I think the margins in construction are squarely related to 2 things. Number one, I think the quality of the construction portfolio. As we often say, we tend to operate in businesses which -- there's a cyclicality and above that long term are fundamentally very healthy. And our strategy is always to try and operate in the most attractive parts of those markets. And that's what you're seeing in construction. We're in the most attractive parts of the market. We are executing very well from a business model perspective against those particular parts of the market. And that's ultimately what drives the margins. It's ultimately also what will drive the high-quality organic growth going forward. So very confident that not only will we grow in construction when markets recover, but grow at very high quality. Jeffrey Sprague: Great. And then maybe you could elaborate a little bit on, it sounds like you've got a fair amount of visibility on Test & Measurement improving in the fourth quarter. Maybe you could speak to that, anything in particular that you're seeing orders, end markets -- I'll leave it there, let you answer. Christopher O'Herlihy: Yes. So I think it's -- Test & Measurement had a normal cyclical improvement in Q4, which we expect to achieve again this year. Q3 was a little bit mixed, obviously. We saw continued slowdown on the CapEx side. Really, we would believe on the basis of the tariff uncertainty in Q2, ultimately having a spillover effect in terms of CapEx demand into Q3. So we expect that to improve a little bit. And then the other thing we saw in Q3, which should improve is we saw a little bit of a deceleration in semi, which only represents about 15% of the segment, but where we saw some real green shoots in Q2, we saw somewhat of a deceleration, still growth, but a deceleration in Q3, and we expect that to get a little better. Operator: Our next question will come from Andy Kaplowitz at Citi. Andrew Kaplowitz: Chris or Michael, you obviously didn't change your organic revenue growth guide for the year. I think last quarter, you talked about embedded in it was 2% to 3% organic growth for the second half, which means you still need a big uptick in Q4. I don't think comps get a lot easier for you in Q4 versus Q3. So it's just more pricing that's laddering in Q4? Because I think you just said, right, you're run rating as usual. Any other businesses get better in Q4 versus Q3? Michael Larsen: Well, I think what we are -- to give you a little bit of color on Q4, and you have to factor in what we said in the prepared remarks that we are trending towards the lower end of the organic growth guidance for the full year. We typically see a sequential improvement from Q3 to Q4 in that plus a couple of points of growth, primarily driven by the Test & Measurement business as Chris just mentioned, and offset by the typical seasonal decline that we're seeing in our construction business. So Q3 to Q4 revenue is up maybe 1 point or so. On the margin side, what we also typically see from Q3 to Q4 is a modest decline sequentially of about 50 basis points or so. So still in that 27% range and with a nice improvement on a year-over-year basis. And then the kind of the key driver of Q4 is then a more normal tax rate. So that's about a $0.10 headwind relative to Q3. So Q4 looks a lot like Q3 with the normal tax rate, and that's how you get to kind of the implied midpoint of our guidance here. Maybe just a comment or 2 on Q3. I think it was a little bit of an unusual quarter in the sense that we came into Q3 after a strong June. We had a strong July, perhaps related to some of the tariff announcement and related pricing actions. And then we saw a little bit of a slowdown in August -- actually pretty pronounced in August and then a more normal September, and really a mixed bag in the quarter with a stronger automotive performance, certainly, but also some of the green shoots we talked about last quarter in the order rates in places like Test & Measurement, and semi didn't really materialize for us. So I think at the end of the day, though, we're able to offset some of this choppiness, this macro softness with strong margin performance and as we typically do, we found a way to deliver a pretty solid quarter from a margin, earnings and free cash flow standpoint. Andrew Kaplowitz: Michael, helpful color. And speaking of that, I mean, you're well up already in your range in auto in terms of margin, almost 22% in the quarter. And auto markets, as you know, overall don't feel that great yet. So can you actually -- I know you did 5% organic growth, but can you actually push to the higher end of your low to mid-20s over the next couple of years? How should we think about that given you're kind of already there? Michael Larsen: Yes. I think we're pretty confident in the margin, the target we laid out kind of low to mid-20s by next year. I think there's still a lot of opportunity here from an enterprise initiative standpoint, primarily. You also see a pretty healthy dose of product line simplification again this quarter, which that's all short-term headwind to the top line, but really positions the remainder of the portfolio for growth and higher margin performance as we exit some of the slower growth and less profitable typically product lines. So the market builds will be what they are next -- in Q4, they will be a little bit lower probably than what we saw in Q3. So we won't have the same amount of operating leverage, but we'll still outperform as we have historically in the builds. And next year, you should expect kind of our typical 2 to 3 points above build. Whatever that build number is, obviously, as we sit here today, we don't know that. So... Christopher O'Herlihy: And Andy, just to add to that, the other big driver of margin improvement in auto is customer-backed innovation. We're getting a real nice healthy contribution from that this year. We expect that to continue and indeed accelerate over the next couple of years. And ITW innovation always comes at higher margin. Operator: Next, we'll hear from Jamie Cook at Truist Securities. Jamie Cook: The guidance relative to earlier in the year, I think earlier in the year, you assumed FX headwind of $0.30 that went positive or neutral last quarter. What's embedded in the guide? And you also have the benefits now from the lower tax rate. So I guess, Michael, I'm just trying to understand the puts and takes because it sounds like we have at least $0.40 of tailwind. You're lowering your organic growth to the -- sorry, your sales to the lower end, but it still seems like, I don't know, the guidance should be better, I guess, than what it is just based on those tailwinds. So if you can help me understand that, I guess. Michael Larsen: Yes. I think the short answer is that just given the choppy demand environment, we're maybe taking a more measured, a more cautious approach to our guidance here as we go into Q4. We're off to a solid start in October, but things can change quickly as we saw both -- as an example, the auto builds, the swing in auto builds, semi not really panning out. So I think we're just being a little bit more measured in our guidance here with 1 quarter to go. And as always, we have a path to do a little bit better than what we're laying out for you. You cut off initially, but I think you're talking about FX, what's embedded here is the current rates. As of today, and obviously, they can change a little bit, they are a little bit of a headwind -- tailwind now relative to a headwind earlier in the year, but we're talking pennies. So I think in Q3, FX was favorable $0.04. But then other things like restructuring were unfavorable by a couple of pennies. So there's some puts and takes there. And we've also embedded, obviously, as we said in the prepared remarks, the lower full year tax rate of 23%. And we expect a more typical 24% to 25% tax rate here for the fourth quarter. So hopefully, that's helpful. Operator: [Operator Instructions] We'll hear from Tami Zakaria at JPMorgan. Tami Zakaria: A medium- to long-term question for you. Given all the policy changes to incentivize bringing auto production back into the U.S., do you perceive this to be an opportunity down the line given your market share with the big 3? Or would onshoring not be a net gain because you already supply parts to manufacturing overseas? So how to think about that onshoring opportunity in auto? Christopher O'Herlihy: Yes. So Tami, I would say that largely, as we've said before, we're a producer we sell company. And so we've already -- we're positioned to supply our auto customers anywhere in the world wherever they are based on our current manufacturing setup. And that will continue. So business coming back to the U.S. would just mean more production for our U.S. factories, but they're already here. So we don't see -- I mean, there wouldn't be a huge net benefit that we can see based on the fact that we're a producer we sell a company. Tami Zakaria: Understood. And one question on PLS. I think it's about a 1% impact. Should we expect this to continue at that 1% range for the next few years? Or is this year more of a heavy lifting, so it might fade as we go into next year and beyond? Christopher O'Herlihy: Yes. So we haven't the planning process completed yet, Tami. But basically, what I would say is that for us, PLS is a bottom-up activity. It's driven by our businesses. It's very much an essential part of the ongoing kind of strategic review that we do and a critical part of 80/20 in our divisions. And obviously, deep into the company, we have this very tried and trusted methodology, requires a lot of discipline, but there's a lot of benefit that our divisions get from this. But the point is that there's -- it's bottom up. We don't have the numbers for 2026 yet. But whatever it is, it's something that makes sense in the context of -- it makes sense from a long-term growth perspective, in terms of it provides strategic clarity around where we want to focus, effective resource deployment on the back of that. And also from a margin improvement standpoint, obviously, there's some cost savings, which are a meaningful component of enterprise initiatives. A lot of these projects have a payback of less than a year. So we very much see PLS, whether it's 50 bps or 100 bps as an ongoing value-creating activity in our divisions. And like I say, we've got a lot of positive experience and expertise on this. But it's going to be a bottom-up number basically. Operator: We'll hear next from the line of Joe Ritchie at Goldman Sachs. Joseph Ritchie: I know that you'll typically like guide the trends, and -- but I guess as we're kind of thinking about 2026 and a potential initial framework with the moving pieces that you know today. Any color that you can kind of give us on how you're thinking about it, at least like this early on and what 2026 could look like? Michael Larsen: Yes. I mean I think as you say, Joe, we don't really give guidance until we've gone through our bottom-up planning process here and talk to the segments about their plans for 2026, and that doesn't happen until in November here. To give you a little bit of a way to think about this, maybe I think you should expect that per our usual process, our top line guidance will be based on run rates exiting Q4. We'd expect some continued progress on our strategic initiatives, including the contribution from customer-backed innovation. We'd expect some market share gains and the combination of those things leading to above-market organic growth again in 2026. And then the big question is really what will the market give us. On the things within our control, we'd expect to see continued margin improvement and a healthy contribution from enterprise initiatives. You should expect to see some strong incremental margins that are probably above our historical average. And I think those are kind of the big items. Then there'll be some puts and takes around price and FX and lower share count that may skew favorably. I'd expect a similar tax rate to this year. And then as usual, like I said, we'll update you in February, which -- and will include our usual kind of segment detail to help everybody kind of think through what the year might look like. Joseph Ritchie: Okay. Great. That's helpful, Michael. And then I guess just on capital deployment. I know you guys are doing the $1.5 billion buyback. It seems like you've got probably some room on your balance sheet if you wanted to lever up a little further and still stay investment grade. Like how are you guys thinking about the right leverage for you going forward? And put that in the context of potential M&A opportunities and what you guys are looking at across your different businesses? Michael Larsen: Yes. I mean I think we're sitting here at about 2x EBITDA leverage, which is right in line with what our long-term target has been. The buyback specifically is really the allocation of the surplus capital that we generate, which is a big number for ITW, about $1.5 billion, and that's what is being allocated to the share buyback program and leads to a reduction in the overall share count of about 2%. But all of that only happens after we have invested in these highly profitable core businesses for both organic growth and productivity. We're fortunate that only consumes 20% to 25% of our operating cash flow. The second priority here is an attractive dividend that grows in line with earnings over time. Chris talked about this being our 62nd year of consecutive dividend increases of 7%. And then when all said and done, we still have a lot of capacity on the balance sheet for any type of M&A opportunities. As you may know, we have the highest credit rating in the industrial space. We have arguably the strongest balance sheet. And so there's a lot of room here if the right opportunities were to present themselves. Operator: Next question today comes from Stephen Volkmann. Stephen Volkmann: So I'm curious whatever commentary you might wish to provide around what you're seeing on sort of price cost and obviously, it didn't impact you in the quarter. But are you seeing suppliers raising prices and you're kind of able to offset that however you choose? Or do you think maybe they're holding back and that's still to come? And then in that vein, just how do you ascertain that you will cover whatever costs? Will it be dollar for dollar or also on margin? Michael Larsen: Yes. I think, Stephen, the biggest driver of cost increases this year has been the tariff-related cost increases. And I think we've responded with both pricing actions that we've talked about and also supply chain actions. As you know, we are largely a produce where we sell company. I think the 93% or so of the company is produced where we sell. We had a little bit of exposure that we talked about earlier in the year. We've worked hard to mitigate that and put ourselves in a really good position. We've been able to, through those actions, offset the impact from tariffs this year. And in Q3, as we said in our prepared remarks, price/cost was positive both from a dollar-for-dollar earnings standpoint and also from a margin standpoint. So I feel like at this point, we're kind of back to a more normal environment. At this point, from a price/cost standpoint, we are not completely caught up yet, but we've got a quarter to go. And then for next year, who knows what the tariff environment might be for next year. But I think we feel very confident given our track record here in terms of being able to manage whatever those cost increases, whether they are typical inflationary increases or tariff increases might be as we head into next year. Stephen Volkmann: Super. Okay. And then just pivoting, China was obviously really good for you guys this quarter. I'm wondering if you might be able to drill in there a little bit and give us a sense of what's driving that? And I don't know, maybe some of the CBI initiatives or something. Michael Larsen: Yes. Do you want to go ahead, Chris? Christopher O'Herlihy: Yes. So basically, Stephen, what's driving China right now is auto in China, in particular, I think our penetration on EV in China, particularly with Chinese OEMs. We continue to make great progress on CBI and market penetration in China, particularly with Chinese OEMs. We continue to grow content per vehicle. As you know, China represents mid-60s in terms of percentage of worldwide EV builds. And we're growing nicely there, particularly with a strong position with Chinese OEMs. In addition, you mentioned CBI, I would say that China, even though it represents about 8% of our revenues, we certainly get a disproportionate amount of our patent activity from China in terms of the level of innovation activity that's going on. So yes, innovation in China, particularly in automotive is what's driving our progress there. And we're basically penetrating at a level well above the market. Michael Larsen: Yes. And maybe to put some quantification around it, if I just look at kind of year-to-date in China, as Chris said, the big driver is our automotive business, up 15%. That's our largest business in China, but also Test & Measurement, Electronics up in the mid-teens, Polymers & Fluids up 10%, welding up 20% plus. I mean, I think the fueled by CBI, certainly, in most cases here, I think the team is doing a really nice job overall, up 12% in China on a year-to-date basis. And pretty confident that the things, again, that are within our own control will continue to be -- have a positive contribution to the top and bottom line in Q4 and headed into next year. Operator: Next, we'll hear from the line of Julian Mitchell at Barclays. Julian Mitchell: Maybe just wanted to start with the operating margins. So I think you mentioned, Michael, that next year, you should be above the historical incremental. And I guess you have that sort of placeholder of 35% to 40% dating back to the Investor Day. So it's presumably in reference to that. But just wanted to understand as you look at next year on the margin side of things, is there a big kind of payback from the restructuring efforts that happened this year coming in? Price/cost maybe for this year as a whole is margin neutral and then that flips positive next year, maybe just any sort of fleshing out of the thoughts on some of those margin moving parts, please? Michael Larsen: Yes. I think, Julian, the biggest driver of margin performance for, I'm going to say, the last decade or so has been the enterprise initiatives. And we've consistently put up 100 basis points of margin improvement from our strategic sourcing efforts and from our 80/20 front-to-back efforts. And so we would expect that to continue to be the case next year. Whether that's exactly 100 basis points or not, we won't know until we've rolled out the plans, but that will far outweigh any contributions from price cost, for example. And then the other big element and which is a function of really what end market demand will do is if you look just at our performance year-to-date or in the third quarter, our incremental margins are significantly above kind of our historical 35% to 40%, including 65% in the third quarter. And you look at the margin performance this quarter in the automotive OEM business, where 5% organic growth translates into income growth of 20% plus. So it's just an illustration of we don't need a lot of growth to put up some really differentiated performance from a margin and profitability standpoint. So I can't tell you as we sit here today what the incrementals might be for next year on the organic growth. But I would tell you, I believe that they -- it will probably be above the historical range that we just referenced. Julian Mitchell: That's helpful. And then just maybe one for Chris. Looking at Slide 8 and that CBI contribution of sort of over 2 points to sales and the sort of partial offset from PLS headwinds that you discussed earlier on this call somewhat. And I realize this isn't how you look at it, and it's sort of really bottom-up driven. But if we're thinking about that spread of, say, CBI versus PLS enterprise-wide, is the assumption that, that should be more and more of a net positive as those CBI efforts that you talked about at the Investor Day a couple of years ago increasingly get traction? Just trying to understand how to think about the delta between those 2, understanding that they are independent bottom-up process. Christopher O'Herlihy: Yes. I'm not sure there's a huge amount of correlation between the 2, Julian. I mean, CBI is really referencing our efforts around improving the quality of execution on innovation, whereas PLS, we typically -- and our business is typically used for kind of product line pruning. I think the only correlation between the 2 is that they're both connected to differentiation. PLS results is as a result of where we feel we're on the same level of differentiation and we're product line pruning accordingly, whereas CBI, we're leaning in to basically create and develop more differentiated products. For sure, you're going to see an improvement in CBI over time. You've already seen that. The number has actually doubled since 2018, directionally in the 1% range. It was 2% last year, trending 2.3% to 2.5% this year, well on track to get to 3-plus by 2030. PLS is a circumstantial and ongoing review of our businesses by our businesses of their product lines and they react accordingly. And as I said earlier, we see this as there's a lot of value creation comes from PLS, but in a different way. So I'm not sure there's a huge amount of correlation between the 2. I kind of think of 2 kind of differently. Julian Mitchell: But the sort of net spread of them should be increasingly positive, I suppose. Christopher O'Herlihy: It should be -- no, absolutely. Driven by improvements in CBI. Correct, that's correct. Michael Larsen: I mean PLS, as Chris said, is an outcome of a process or 80/20 front-to-back process. We've talked about kind of in the long run, maintenance PLS being in that 50 basis points range. We have a little bit more this year. We've talked about specialty and kind of strategically repositioning that segment for faster organic growth. And then as Chris said, CBI will continue to improve from here. So that spread, to your point, will widen. But my thought for putting them right next to each other on Slide 8. They're completely independent of each other. And so I just want to make sure that's clear that there's no linkage between the 2. But mathematically, the spread will grow between the 2. And net-net will be a more positive contributor to organic -- above-market organic growth as we go forward. Operator: Our next question today will come from Joe O'Dea at Wells Fargo. Joseph O'Dea: Can you talk about the tariff impact a little bit? There were periods of time earlier this year where the math would have suggested something up to 2% kind of price requirement to offset. And it seems like we're in an environment now where the pricing required is probably less than 1%. But anyway, any thoughts around that? And then stepping back, it would seem like that's not necessarily a big hit to demand. And so the tariff kind of overhang would be more uncertainty related than magnitude of pricing required at this point related, but your thoughts on that? Michael Larsen: Yes. I think price cost from -- in terms of kind of combined with supply chain actions, our ability to offset tariffs, I think, is not really the main event at this point. I think we've demonstrated that we know how to do that, and we've further mitigated the risk of any tariff related specifically to China. So I think that part of the equation, we feel really good about. I think the impact on demand is probably something we talked about also on the last call that it may have led to a little bit of demand -- orders being frozen back in the April kind of Q2 time frame. And there's probably a little bit of overhang still from that. I mean I think we saw what's been a pretty choppy demand environment. As I said earlier, we had some positive order activity in June, July, then it slowed. April, May, kind of pretty choppy also. So I think the impact maybe from a demand standpoint, at least initially was maybe more significant. And who knows kind of where we go from here into next year. But I think it's largely behind us at this point, certainly from a cost standpoint and maybe from a demand standpoint, this is no longer -- tariffs are no longer the kind of the main event here. Joseph O'Dea: And so like what do you think the main event is in terms of seeing kind of an unlock of better demand, right? Because you're outgrowing markets, but that market growth rate, not kind of all that inspiring at this point. And so in sort of this protracted kind of challenged demand environment, if tariffs are kind of easing as a headwind, what do you think is the key to the unlock? Christopher O'Herlihy: Yes. So I think, Joe, we think we take a long-term view here. We believe fundamentally, we're in really good markets for the long term. We're obviously going through a period right now where there's quite a bit of contraction and uncertainty and so on and so forth in areas like construction. But our fundamental thesis is that we're in markets which we believe for the long term are attractive. We want to make sure we're in the best parts of those markets, and we believe that we are. We believe we can see quite clearly in areas like automotive and construction and historically in Welding and Food Equipment that we're outgrowing the markets at the point at which the cycle turns, we'll be really well positioned. And to Michael's earlier point, not just for growth, but for even higher quality of growth on the basis that our incrementals have strengthened from historical levels on the basis of portfolio pruning around sustainable differentiation, coupled with very high-quality execution on the business model. So we feel pretty good about the long term where we're just going through a period where we see some short-term demand issues. But we feel we've got a really good portfolio for long-term growth. Joseph O'Dea: Maybe just tying that into Test & Measurement and what you're seeing there. It seemed like in an environment, you're investing in CBI, like we hear a number of companies talking about innovation. It would seem like they need your equipment. Are you seeing this kind of build up in terms of what would have kept them on the sidelines, but if they want to invest in innovation, it would seem like they're going to need your help. Christopher O'Herlihy: Absolutely, that's correct. I mean Test & Measurement is a really fertile space for us in terms of long-term growth. There's lots of new materials being developed. There's increasing stringency in innovation standards and quality standards, all of which are requiring more and more exacting -- testing equipment. And that's where we play. So again, short-term issues here around CapEx environment and so on. So a little bit of compression in Q3 relating to some CapEx freezing in Q2. But for the long term, this is a really, really healthy environment for us -- will be a healthy environment for us on the basis of the quality of innovation in Test & Measurement and also the end markets they're lining up against like biomedical and so on, all of which have very strong fundamentals going forward. Operator: Next, we'll hear a question from the line of Nigel Coe at Wolfe Research. Nigel Coe: We covered a lot of ground here. Just want to go back to the comments around strong start to the quarter and then it sort of pared out. Do you think there's any unusual behavior with distributors around price increases or tariffs. Obviously, we had the big tariff event middle of the quarter. Anything you'd call out there, number one? And then number two, restructuring actions in the first half of the year, did we see the full benefit in 3Q? Or was there still some benefits to come through in 4Q? Michael Larsen: Yes. So let me start with kind of the cadence as we went through the quarter. And I'm not sure we have a great answer for you, Nigel. I mean I think like we said, June and July were really some of our better months with meaningful organic growth on a year-over-year basis, then a slowdown in August and a recovery in September. And if you look at net-net for Q3, we were actually pretty close to kind of typical run rates. But -- so the point I think we're trying to make, it's just a pretty choppy environment and things can change pretty quickly, but we're not really making any long-term forecast in terms of kind of what that may mean on a go-forward basis. Some of it may be related to the tariff announcements and the associated pricing, but really hard to tell. Restructuring for us, it's a little bit of a misnomer. I mean these are funds that are expenses that are funding our 80/20 front-to-back projects. And so there's no big restructuring initiative going on inside of ITW. Our spend this year will be similar to last year, in that $40 million range. We try to kind of level load things and do a similar amount every quarter. But it's really a function of the timing of tens of projects across the company and when the divisions want to execute on those projects. So those restructuring savings are -- these are projects with paybacks of less than a year. So it happens pretty quickly, but -- and it's part of what's funding the enterprise initiative savings that we're getting next year. But these are not big kind of restructuring -- traditional restructuring projects. These are all tied to 80/20 front-to-back as per usual. So... Nigel Coe: Yes. Okay. That's helpful. A quick one on Welding. We've seen, I think, now 2 quarters of nice inflection in growth on Equipment, but Consumables remains sort of step down in that low single-digit decline territory. Is that primarily a price differential between Equipment and Consumables or anything else you'd call out? Christopher O'Herlihy: Yes. So Nigel, I think it's mainly because the consumer is more of a discretionary purchase. I mean, Commercial or Consumables? Michael Larsen: Consumables, I think, right? Is that right? Nigel Coe: Consumables and Equipment driven up nicely. Michael Larsen: Yes. Yes. I think it's a little bit of a head scratcher, to be honest with you, Equipment up 6% and Consumables down 2%. Within that, there are -- some of the Welding -- some of the filler metals are actually showing positive growth. The other thing what we're seeing is a pickup on the industrial side. So these are typically large heavy equipment manufacturers. And then the commercial side or the consumer side is a little bit slower, where it's a little bit more of an exposed to the kind of consumer discretionary spending. So it's a little bit of a mixed picture. I think the real positive in Welding is this growth is fueled by CBI. And so it's not that the markets are picking up. It's really new products, primarily on the equipment side as well as both in North America and international with some really nice growth in our European and in our China business. So that's probably the best answer I can give you. Operator: Our next question will come from Avi Jaroslawicz at UBS. Avinatan Jaroslawicz: So I appreciate that you're saying that you're trending towards the lower end on the sales guidance. Can you just talk about some of the thinking for leaving that range unchanged and just kind of wider than you typically would for this time of year? I assume you're still thinking there could be some upside to get you to the midpoint or better for the year. And would that come from any particular segments or it sounds like more from demand than pricing. So just -- is that the right way to think about it? Michael Larsen: Yes. I mean I think typically, we update guidance kind of halfway through the year. And at this point, with a quarter to go, we're well within the ranges. And so we didn't see the need to kind of update the whole thing. And the decision was to narrow the range and to explain why we're not flowing through the benefit of the lower tax rate, which is really due to the fact that we're trending towards the lower end on the revenues. So that's our way of being as transparent as we can be around the guidance. I think the -- your question kind of Q3 versus Q4, I think we've kind of covered that. Again, the segment that typically shows the biggest pickup from Q3 to Q4 is our Test & Measurement business, and then that's partially offset by the Construction being down kind of typical seasonality. And when all is said and done, revenues from Q3 to Q4 should be up by 1 point or so. Certainly, we've also factored in, I should say, the lower auto build forecast there's been -- which is done by third-party kind of industry experts. And there's been some noise around some supplier issues for some of our customers, and all of that is included in our automotive projection here for the fourth quarter based on everything that we know as we sit here today. So hopefully, that answers your question. Operator: Our next question will come from Mig Dobre at Baird. Mircea Dobre: I also kind of want to go back to the PLS discussion. And I guess my question is this, when you sort of look at your comments for delivering above normal incremental margins, how reliant are you on PLS in order to be able to do that? How important is PLS in that algorithm? And I guess, given how high your margins are, and I'm kind of looking almost across the board in your businesses, you are pretty much outperforming anyone else out there that I'm looking at. Is there a point in time here where it's rational to sort of say, hey, look, maybe we can throttle back on PLS because we can actually deliver more earnings growth and more return for shareholders by just trying to accelerate organic growth rather than pruning the portfolio? Christopher O'Herlihy: Yes. So Mig, I think there is a relationship between PLS and incrementals and so on, but it's not the only factor. I mean PLS is an element of 80/20, it's not holistic 80/20. So I think the implementation of the business model, again, the quality of the portfolio is ultimately what drives the incrementals ultimately drives the margins. In terms of your comment on -- I guess, the comment on organic growth versus margin. And so from our standpoint, I mean, organic growth and operating margin and margin expansion kind of go hand in hand. And we talk about quality of growth. And I think we've demonstrated that for instance, coming out of the pandemic, we saw very healthy growth and margin expansion while over that period, we were investing in a very focused way in our businesses in innovation, strategic marketing, and that very much continues today. So really, it's about the quality of the organic growth, 35% incremental historically. We're now well above that, comfortably kind of into the 40s. And that's again at a time when we are very much investing in our businesses in a very focused way around innovation and strategic marketing and so on, and so for us, the math is pretty simple with margins at 26% and with growth in incremental margins at 35% plus or even 40-plus right now, it's the operating leverage that is really driving the margins forward from here. And as we look at 2030 and our 30% goal, that's a goal that's not going to be achieved through structural cost reduction. That's going to be achieved through continuous improvement in organic growth at high quality and high incremental margins. So we see the 2 as being correlated, I would say. Mircea Dobre: Understood. But in terms of maybe the framework for '26 asking the question that somebody else asked earlier, right, if CBI is contributing 2.3% to 2.5%, maybe you can rethink product line simplification to some extent and maybe the end markets get better. Again, from my perspective, being able to get your organic growth back to that 4%, 5-plus percent range is really the thing that at this point seems to be needle moving in terms of both maybe investor sentiment as well as overall earnings growth. So I'm curious if -- I understand it's early for 2026, curious though, if you think that it's plausible that we could be looking at that kind of growth as we think about next year? Michael Larsen: It's -- I think, Mig, we're probably, as we said earlier, running a little bit higher on PLS than kind of the normal maintenance run rate. We're doing that specifically in a business like Specialty Products, where we've talked about we're strategically repositioning that segment for growth. I will tell you that in other segments and industries that I know you follow like Food equipment and Welding, that number is significantly lower, maybe even 0 in some cases. So it's not an across the board. And it's also not a number that we want to or even could manage from the corporate -- from corporate. This is such an integral part of our 80/20 front-to-back process, it's a bottom-up number. And if we were to say -- and it's tempting, I know what -- I understand how you're thinking about it, it's tempting to say, okay, no more PLS. That also would say no more 80/20 front to back. And that is certainly not in anybody's long-term interest. I can promise you that. Operator: Ladies and gentlemen, that was the final question in our queue for today. We'd like to thank you all for your participation in today's session, and you may now disconnect your lines. Please have a good day.
Operator: Ladies and gentlemen, welcome to the Schindler Conference Call and Live Webcast on Q3 Results 2025. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Lars Brorson, Head of Investor Relations. Please go ahead. Lars Wauvert Brorson: Thank you, Valentina, and good morning, ladies and gentlemen. Welcome to our Q3 2025 results conference call. My name is Lars Brorson. I'm Head of Investor Relations at Schindler. I am here together with Paolo Compagna, our CEO; and Carla De Geyseleer, our CFO. As usual, Paolo will discuss the highlights of our quarterly results and our market outlook, and Carla will take us through the financials. After the presentation, we're happy to take your questions. We plan to close the call at 11:00 in an hour's time. With that, I hand over to Paolo. Paolo, please go ahead. Paolo Compagna: Good morning, everyone. I am pleased to be back to report on our performance in Q3. And as Lars said, let me start by giving you some highlights on Slide #3. Firstly, let me say that we continue to face some growth headwinds in major new installation markets around the world, particularly in China. I will share our order trends in more detail shortly. But before, let me remind what we discussed back in February. A key pillar to our strategy of profitable growth is the pricing discipline. And we demonstrated it again this quarter on a few major projects where the economics were just not consistent with our return expectations. That said, we see good growth momentum in many parts of our organization and particularly in modernization. Here, orders were up over 16% in the quarter despite the strong growth we had in Q3 last year, allowing us to show another quarter of order growth for the group. Second, revenue slowed in the quarter, down 0.5%, whilst our year-to-date revenue is up 0.8%. Also here, the headwind from China intensified in the quarter. But our backlog is growing, up 1.5 percentage points year-on-year in local currency, driven by our modernization business, and we are confident that continuing to expand our capacities, we will execute successfully on this backlog. So I expect us to deliver our full year '25 revenue guidance of a low single-digit growth. Although this is likely to be a very low single digit, similar to what we delivered in '24, as Carla will discuss. Third, we delivered another strong operating margin in Q3 at 13%, up 130 basis points from Q3 last year. And we are now able to revise our full year '25 margin guidance, which we see coming in at around 12.5%. That compares to 12% previously. Carla will provide the detail on that, but I'm very pleased to see that the efficiency initiatives launched over the last couple of years are yielding their results. Now beyond our financial performance, let me touch on some of the other highlights of the quarter. First, we are making very good progress on the rollout of our new U.S. mid-rise product. This product was launched in '24, and we have now successfully delivered and handed over the first units. And our order intake so far in '25 is exceeding our plans. You will remember that this product launch was about leveraging our standardized modular platform and enhancing our mid-rise offering in the commercial and high-end residential segment, a key pillar to our strategy in the U.S. market. Now we are starting to see the results in terms of share gain in the U.S. mid-rise market, which is really encouraging. On to modernization, where we continue to industrialize our operations and standardize our product portfolio. We are seeing very good traction with our standardized packages, which now make up close to 17% of our modernization business. And that is not only driving growth, but also enhancing our competitiveness and supporting our journey towards higher profitability in modernization going forward. Then on the topic of sustainability, I'm very pleased to announce that we are installing the industry's first ever low carbon emission steel elevator. The steel used in this elevator reduces carbon emissions up to 75% compared to conventional production and marks an important step towards our 2040 net zero target. And finally, I'm also proud that we have been recognized by Forbes again this year as being among the world's best employer. In the engineering and manufacturing sector, Schindler was ranked third globally. We have close to 70,000 employees and attracting and retaining talent is absolutely essential to our competitiveness and overall health of the company. Well, so you can imagine this recognition is important for us. Moving to our market outlook for '25 on Slide 4. We expect the service markets to continue to expand across all regions, with the lowest growth rate in the Americas and the highest in Asia Pacific, driven by India. The modernization markets continue to offer a clear growth opportunity across the world with mid- to high single-digit growth outside of China and growth well into double digits in China, with around 100,000 aging elevators approved this year for an upgrade within the government's equipment renewal program. To put the scale of this initiative in the perspective, just imagine replacing all elevators in Australia in a single year. In installation, we continue to expect the global market to decline by high single digits, mainly due to a low teens contraction in China, where home starts by floor area continue to fall by close to 20% year-on-year in the January to September period, following a 3 years of 20-plus percent declines. Home sales have dropped 5% overall with only the 4 Tier 1 cities showing a slight increase with all other cities facing steep declines. Across the EMEA region, in addition to good growth in countries such as Spain, now also the important German market appears to have found a bottom and is expected to gradually recover going forward. The so-called Bau-Turbo initiative to fast-track housing project recently approved by the German government should be seen as a positive development overall as it aims to simplify planning, shorten approval times to 3 months and allowing flexibility in building rules to tackle the housing shortage in the coming quarters and years. Asia Pacific, excluding China, is projected to grow by mid-single digits, led by India and Southeast Asia with conditions improving in Australia and the U.S. new installation market has shown remarkable strength, further increasing from a tough Q3 '24 comparison point. In addition, we saw better data coming from Brazil in Q3 '25. And we have, therefore, decided to revise our Americas new installation market outlook to stable from slight down previously. So how did we perform in this market environment in the third quarter of the year. Turning now to Slide 5. Starting with service. Our portfolio units continue to expand, showing the strongest growth in Asia Pacific, excluding China. In Americas, we saw a slight decrease as a result of our increased selectivity when it comes to recaptures that we decide to pursue as well as from softer conversions. As a reminder, we saw a decline in our NI orders in '23, and this still has an impact given to the normally longer lead times, especially in North America. On modernization, we have maintained the strong momentum seen in the previous quarters and saw a double-digit growth across all regions, except for Asia Pacific, excluding China, with fewer large projects booked in this particular quarter, Year-to-date, our MOD growth in the region remains in double digits. Finally, on new installation, our global order volumes decreased by double digits due to China, where, as mentioned back in July, we are responding to the prolonged weakness in the NI market by resetting and repositioning our China business towards future growth opportunities. Outside of China, our NI orders grew mid-single digit, driven by an upswing in orders in our Europe, South and South America zone. And it is worth flagging the comparison from quarter 3 last year, which was the best quarter in '24 for NI, particularly due to our strong performance in the Americas. But the U.S. continues to develop well. And as mentioned, we are pleased with the customer reception of our new mid-rise product. With that, let me turn over to Carla to walk us through our financial results in more details. Carla Geyseleer: Thank you very much, Paolo. Good morning, everybody. Pleased to take you through our financials related to quarter 3. So let me start with Slide 7. And as a simple summary of the quarter, we continue to see headwinds to our top line, but we are executing very well on the bottom line. So starting with the headwinds at the top line. So they are particularly severe in China, and we remain committed to our strategy of pricing discipline, as Paolo just mentioned. Now it's also important to note that FX headwinds are definitely not declining. We had a hit of over CHF 100 million this quarter to both the order intake and the revenue. I will elaborate on the top line trends shortly. Now before doing so, let me point 3 highlights for this quarter. Firstly, we had another very strong quarter in terms of operating margins, up 130 basis points for both reported and adjusted EBIT margin. So we continue to make very good progress operationally, and that is obviously translating into a margin expansion, which is coming in slightly better than expected, which is also why we are revising our full year margin guidance. Secondly, our operating cash flow improved both sequentially and compared to last year. And now looking at the operating cash flow year-to-date, we are also up versus '24. So just shy of CHF 1 billion for the first 3 quarters and setting us up for another strong year for cash conversion. Finally, our net profit continues to increase versus last year in both absolute and margin terms, despite the decline in financial income as well as FX headwinds and higher restructuring costs. Now moving to Slide 8 and taking a look at our top line development. Let me first say that we don't see any material shift in order trends overall, even though growth in Q3 came in somewhat lower than in our first half. Now large projects are lumpy, and we had fewer of them this quarter compared to the prior 2 quarters. And if you look at the underlying trends by region and segments, there are 2 things that stand out. First, the continued steep decline in China; second, the strength in modernization. So on China, here, our new installation orders declined by over 30% in value in quarter 3, driving the group new installation orders down mid-single digits in the quarter and more than offsetting the growth we saw in new installation orders outside of China. So even as China becomes or became a smaller part of the overall group orders, it continues to materially impact our growth profile, notably in new installations. However, organic growth was still positive in the quarter due to the growth in service and modernization. So in modernization, order intake was up 16.4% in quarter 3 and this on a tough comparison versus quarter 3 last year when we grew at 20%. And growth was broad-based with strong double-digit growth in Europe and Americas, whilst China had a standout quarter, up well over 50%. Year-to-date, China is up close to 40%. Now this strong order growth in modernization also presents some operational challenges for us in terms of scaling up our delivery capabilities. So the execution of our MOD backlog was not as efficient in quarter 3 as it could have been. So we recognize that, which meant that revenue growth came in at mid-single digits in the quarter, albeit on a tough comparison from last year when MOD revenue grew over 12%. I should say that the slightly longer backlog rotation times are also a reflection of the project mix in the backlog. That said, we expect MOD revenue growth to accelerate in the coming quarters from the level that we have seen now in quarter 3. But it is still the new installation, which is actually burdening our revenue growth, down 10% in Q3, driven by the steep decline in China, which was down over 20%. And with MOD and Service, both growing mid-single digits, that left the total group revenue down 0.5 percentage point in the quarter, but up 0.8% year-to-date. Now as of the quarter end, our backlog was up 1.5% in local currencies, driven by MOD, driven by Service, which had backlogs up mid-teens and mid-single digit, respectively. So our backlog in new installations declined by low single digit. Now in terms of backlog margin, this quarter was slightly down sequentially, but still clearly up year-on-year. And the weaker sequential development was entirely due to the tariffs being reflected in our U.S. backlog. So as our backlog gets repriced over time, you will see the offset to backlog margins. And importantly, excluding the tariff impact, backlog margins continue to improve also sequentially. Now moving on to Slide 9 and looking at our EBIT performance. As I shared already, it's a really strong development now to 13% reported margin in quarter 3 and 13.9% on an adjusted basis. Now the operational improvement of CHF 35 million this quarter primarily reflects the good progress in SG&A savings, but also next to that, the procurement savings continue to deliver. Price and mix were contributors, but less so than the efficiency savings this quarter. Our reported EBIT was burdened by CHF 25 million of adjustments in quarter 3, of which CHF 21 million of restructuring costs, translating to minus CHF 2 million in our Q3 EBIT bridge compared to last year and minus CHF 13 million in our year-to-date bridge compared to last year. Now taking a look at the net profit on Slide 10. Net profit grew to CHF 265 million in quarter 3 reflecting a 9.9% margin and to CHF 796 million year-to-date with a margin of 9.8% despite lower interest income, despite higher restructuring costs and despite onetime financial gains in last year. So we are very pleased with this result. Moving to the operating cash flow on the next slide. So our operating cash flow grew in the quarter as well as on a year-to-date basis. So operating cash flow reached now CHF 967 million for the first 3 quarters of the year, and that sets us on the path to deliver another strong performance in '25, even if we might not hit the exceptional level of last year. The improvement of the operational cash flow is coming from our operating earnings, supported by higher noncash impacts, offsetting a minor headwind of net working capital after the strong improvement in '24 and the missing positive net cash flow from financing income. So that brings me to the guidance for the remainder of the year. And as Paolo mentioned already, we are now specifying our full year EBIT reported margin guidance at 12.5%. So this compares to the previous 12%. And as Paolo and I have discussed, this revision comes primarily on the back of the efficiency initiatives that we have been executing and which are yielding savings slightly ahead of our expectations. We also now have an increased visibility on the impact of the tariffs this year, while the measures also taken to restructure our Chinese operations are partly offsetting the end market headwinds that we are facing here. Finally, the mix headwinds associated with growth in modernization in H2 are somewhat less than we expected in July at the time of our H1 results. And on mix, it is also important to recognize that we are benefiting from the continued outgrowth in our service business. And this revision to our full year '25 guidance also implies that we expect to see continued strong margin improvement year-on-year in the final quarter of the year. Now a small word on tariffs, which I think we have managed well so far in '25. So the U.S. tariff cost now reflected in our backlog. So I just mentioned, we will continue to work on this hard in the coming period to mitigate the impact, including making price adjustments to offset the impact. Now it's fair to say that the U.S. tariff environment remains very dynamic. So let me give 3 additional comments as we see the impact today. First of all, you will recall that with our H1 results in July, we provided you with an estimated annual gross tariff impact of approximately CHF 30 million. What happened since then? Since then, we have had the changes to the reciprocal tariffs, which has taken U.S. tariff levels on Switzerland to 39%. That takes our estimated impact to CHF 35 million from the initially CHF 30 million. So we also had the expansion of the Section 232 tariff list in mid-August, but that had no material impact on our estimate. Finally, we had the recent escalations by the U.S., including a possible 100% tariff on Chinese imports starting 1st of November. If this were to be implemented, that would take the annual gross tariff impact to CHF 72 million. Now we will come back in February with our full year '25 results and update you then on the '26 impact. But I expect us to make good progress on continuing to offset the tariff impact with our mitigating actions. Now with regards to the '25 revenue outlook, I confirm that we expect to deliver on our full year '25 revenue guidance of low single-digit growth, albeit this is likely to be very low single digit, so similar to '24. So in conclusion, let me take the opportunity to thank all our colleagues around the world for their efforts so far in '25, not at least our colleagues in the field who are operating in some exceptionally challenging circumstances in many places around the world. And it's a clear testimony of their contribution to our strong results in the third quarter of this year. And so with that, I hand back to Lars. Lars Wauvert Brorson: Thank you, Carla. With that, Paolo and Carla are now happy to take your questions. Can I ask you please to limit yourself to 2 questions only, given the limited time we have available. With that, operator, please. Operator: [Operator Instructions] The first question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I will have 2, but I'll ask them one at a time. The first one is regarding sort of your organic order growth rate today, quite a bit lower, I guess, than one of your peers yesterday. I understand from what you said sort of a much bigger drop in China from you. Can you talk to what extent that is just the regional or the product mix? Or it was more an intended effort to try to control your backlog margin or something else? I'll start there. Paolo Compagna: Daniela, Paolo here. Very clear, China order intake in the quarter is driven by 2 factors. One is obviously our clear dedication in pricing discipline that we watch out what we take into the books as part of our China program we discussed with you back in February. And the second one is also a quarter in which we still see a decline in the market, and we just follow here the trend. So this has impacted our Q3 numbers for the China order intake. Daniela Costa: And then just in terms of sort of the Americas service trend, which seems sort of weak and down. Can you elaborate a little bit? From one side, you're upgrading on the original equipment, but the delivery on the service side seems a little bit on the weak side. What's going on, on the service? Paolo Compagna: Yes. So let me elaborate on the topics. And our upgrade is on new installation going forward, we were not conservative. We were back in July looking at the market trends, and we saw some signs of cooling down in North and South America, which now for the reasons discussed, we say, well, market might stay stable, especially as in North America, we don't see yet a significant negative trend, which would require this adjustment downwards on new installation. But your question was about service, and let me elaborate on this one. Here, there is a mix of 2 factors and also a bit different between North and South America. What we see in Q3 in this quarter is a combination of 2 things. Number one, in the recaptures, we call it recoveries, these are the new service contracts we take on board. We moved to a more diligent way of assessing their economics. This led now in a comparison quarter-on-quarter, quarter to the quarter to a slightly negative trend. And the second one is that you might remember in '23, we were facing a couple of quarters with a slower NI new installation order intake. What we see now is the combination of the slower conversions, which means the contracts, right, which come into service after new installation is finished. And due to the lead time of the NI order backlog from '23, and it's the combination of these 2 factors leads to this mathematical slow Q3 in Service Americas. Operator: The next question comes from Andre Kukhnin from UBS. Andre Kukhnin: I've got 2 and one of them actually dovetails nicely with what Daniela asked about just now. So I'll start with that. I wanted to also ask about the dynamics between modernization and service growth in North America, but also in Europe, where you're seeing such a substantial divergence. And I presume at some point, this strong growth in modernization in all those projects that you execute on in MOD will help converting into service. Is that the case? And could you give us some idea on the kind of lead time on that? And maybe -- sorry to pile them on, but while we're on service, could you give us an idea of what the unit growth was for you globally in the quarter? Paolo Compagna: Thank you, Andre. Let me elaborate on both. Number one was about modernization, how it works into service. So here, obviously, yes, modernization captures as long as they are outside of our portfolio would obviously lead to portfolio gains. So here, the answer is yes, there will be a certain positive contribution to the portfolio, and that's clear one of our targets. This being said, the second part of the first question was about lead times. Here, I must say, a bit different geography by geography, but actually, overall trend is that the lead times on modernization are also going up. So it means the time to convert this modernization, I repeat outside of portfolio. So it's not that entire modernization would add portfolio, but the portion which adds portfolio might start to contribute between end of '26 and going forward. So there is a positive momentum. Yes, there is a time in between, yes, and we expect to contribute from Q4 next year going forward. The second question was about the growth in the portfolio, which we can share on a good low single-digit number. Andre Kukhnin: Great. And I appreciate it more than one question already. So I'll just ask a short one. On the tariffs and the backlog repricing, could you confirm that this is just purely mechanical that's kind of triggering the escalation clauses are already in contracts and it's just a matter of working through that? Or are there new renegotiations to be had with customers? Paolo Compagna: Yes, Andre. We have done, as we shared in July back a little program on it, which is showing good effect. But Carla, you might elaborate on that. Carla Geyseleer: Yes, yes. No, you're absolutely right. Andre, thanks for the question. Yes, I confirm it's rather a mechanical exercise that you need to work through. So because, of course, there is a pricing towards the customer, and there is also a piece in our supplier management side. Operator: The next question comes from Vivek Midha from Citi. Vivek Midha: I have 2 questions. My first is a follow-up around your comment around the margin drag from modernization growth not being as large as you thought. Is that because of that slower conversion of modernization growth that you highlighted, which potentially might then have more of an impact in 2026? Or is it also because of the improved modernization profitability as you've grown? Paolo Compagna: Well, it's a bit of a combination between margin and the rollout of the backlog, and I will leave Carla to come through the details. But actually, the margin within modernization are not deteriorating. The opposite is the case. So your observation, we are improving on modernization margins is right. And is this one of the reasons for having a slower conversion into operating revenue. It's not the case. But Carla, please, would you like to elaborate on this? Carla Geyseleer: Yes, I want to be clear. I mean -- so we have the strong growth in the order intake and a slower realization of the projects itself, but we don't have pressure on the MOD margin. So just to be very clear there. Vivek Midha: Totally understood. My next question is just looking at the headcount, the number of employees. It looks like it's gone down by over 1,000 relative to the second quarter. Is that the effect of your efforts to reposition in China? Or is there something else driving that reduction in the headcount? Paolo Compagna: That's a very good observation. Yes, we announced back in July that we are repositioning our -- especially new installation business in China. And what you see in the overall numbers is mostly that. That's true. Carla Geyseleer: Yes. But this comes on the combination. If you look at the year-on-year versus December, it comes on top of the initiative that we took to reduce our cost levels in the -- mainly in the back office in the indirect part of the headcount, and that is actually what you see coming through. So we are just executing on this. So it's a combination of the 2. Operator: The next question comes from James Moore from Rothschild & Co Redburn. James Moore: Could I ask one on service? I mean if we're talking about a sort of 5% constant currency growth for service, would it be possible to split that between maintenance and repair? Are they at a similar pace? And tied to that, if they're at a similar pace and we're at 5% maintenance growth, is that to say with your good low single-digit comment? 2.5% unit growth and 2.5% price. And I ask because I'd like to unpack that to another level, if I could. And behind the price piece, would it be possible to say how much of that is kind of a wage escalator pass-through versus any other form of premium over and above that, whether digital or other initiatives? And behind the unit growth, is that basically just the past orders coming through? Or have you got any conversion topics like is conversion getting better or worse? Or have you got any win-loss retention topics? And how do you think about maintenance growth going forward for the next couple of years? Paolo Compagna: Good question with some components into it. Let me combine them. So on the first part of your question, service, repair without going to the details of both as we never do. But it's obviously that both are growing together. So as repair, you can only execute on the portfolio you have and with the customers we are happy to serve. So there is obviously a certain correlation between the repair business expansion and the portfolio growth itself. So this is very fair to be assumed. Second part of the first question, are there components of digitalization, monetization of the digital business? Surely, yes. As we announced also previously, we continue our efforts in digitalizing for our customers our services. So we don't only digitalize for ourselves for the beauty of technology. We also have an increased and steadily increasing offering on digital services for our customers, which obviously, yes, starts to get some traction and contribute to this overall picture. So that's absolutely right. And your second question, how we expect this whole service/repair/digitalization business to move. Here, we expect, as mentioned before, that we see at least a steady continuation of this growth in which we absolutely intend to participate. James Moore: And can I just follow up on the NI margin, new equipment? My sense was you were doing better than others in China, and you had some topics in the West, which you're addressing with your standardization program. And we've seen some procurement savings, and I'm sure next year is more about efficiency savings and we're doing amazing things there. But are you seeing a scenario in which is the NI margin down year-on-year? And is it that the Chinese revenue decline is more than offsetting some of the organic actions on the other side or vice versa? Paolo Compagna: Your first assumption, I don't like to comment, as I don't have it. But in terms of margins in new installation, let me share in all clarity that our efforts in improving efficiency in the field, and we have talked about now the last couple of years and intensified last year and this year as now we see -- we start to see really traction in the field, this improvement of margins in new installation in the execution we see everywhere. So now to distinguish between China specific and rest of the world, I would say the improvement in the execution, I would say, is everywhere the same. And to assume that the picture has reverted between rest of the world and China, well, I would say China is more under pressure in terms of margins than the rest of the world. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: Just maybe start with a clarification on the full year guidance when it comes to revenues. I think now you're talking about very low single digit, which also means very low single digit for the Q4. How should we think about this? Is still these bottlenecks when it comes to modernization is still going to be there? And how should we also think about the service growth in Americas? You talked about recapture weak NI back in 2023. Does that still means that it's going to be a drag again in Q4 and potentially even 2026? Paolo Compagna: Let me start maybe with the second part on the service in the Americas. Obviously, right to observe that we are now on a level which we also compare to previous year growth rates, right? So is it expected to stay at that level? Maybe we will see not now in the next quarter, but we expect in the quarters to come to see growth again also -- more growth again also in service in Americas. When we get our backlog executed and as I was sharing before, we see certain delays in delivering on the project, which then it's a question of time, we will come back on that. So therefore, if you ask specific on Q4, we expect to be on that level. But going forward, we would also expect to see growth rates again also in Americas. Talking now the order -- revenue for the full year, we expect Q4 to be in line with our plans. So hence, if we see the year-to-date numbers in the Q3, we like to be super transparent in what would be the full year expectation. So we don't worsen it, but we also don't see room to get euphoric on additional revenues. To your observation, is it a timing issue? Is it projects and kind of delays? Yes. So why we still are quite confident for the future to come is that the backlog is promising. We are building up resources to execute on modernization. So your observation is absolutely spot on with the time, and we will see also this OR then picking up. Carla, anything you'd like to add? Carla Geyseleer: No, I think I confirm perfectly. I think we are complete. Rizk Maidi: And then the second one is really just to understand your cost efficiency. We're now getting towards year-end. Maybe if you could just please correct me if I'm missing anything. But my understanding is you're running with different programs. One of them is procurement. The other one is SG&A. There's an FTE sort of reduction or repositioning of your China business. Maybe can we talk about what has been achieved year-to-date? And what should -- how should we think about these -- each component heading into 2026? Carla Geyseleer: Yes. Thank you very much for the question. I will take it. So first of all, the plan has not changed. So we are still working on the same 4 building blocks that we have always been super transparent on. So first of all, starting with the procurement and the supply chain savings, that is the more mature one, and this is now the second year that it continues to fully deliver, and that is also the one with the biggest impact. Now what clearly scaled up during the first 3 quarters, that is the second initiative, the reduction of the SG&A cost. And of course, driving efficiency in the back office, that's what you see also coming through in the headcount reduction. So we started with that in quarter 4 last year, and that is now really delivering. And that will also, yes, I would say, continue to deliver, obviously, not with the same incremental savings, but we have not completely come to an end of that initiative. What is rather new, I would say, in the quarter 3, that is we have also been focusing on driving efficiency in the NI and the MOD business. And that is the third initiative where we see now in quarter 3, the first benefits coming through. So that is, in a nutshell, what you -- what is also flowing through to the bottom line. Now immediately making the step a bit to the period to come. So we definitely still have potential for these building blocks. And there will still be significant amounts coming through. However, the composition will change because, as I said, the procurement savings become more mature. So their relative weight will decline. And of course, also going forward with the SG&A. But then if we execute according to plan, the incremental savings coming from the efficiency in the NI and the MOD will further increase. And also on top of that, efficiency in our service business. So that is, in a nutshell, what is happening and what will -- or what is expected to happen going forward. What is also interesting to see is that we came now to a situation where the efficiencies are actually really offsetting the inflationary effects and becoming even more important than some of the pricing elements in some of the areas. And that was the whole initial target, why we have set up these 4 building plans. And that's why you see the nice uptick in the margins and in the profit. Does that answer your question? Rizk Maidi: Yes. Lars Wauvert Brorson: Thank you, Rizk. The next question, please, operator? Operator: The next question comes from Vlad Sergievskii from Barclays. Vladimir Sergievskiy: I'll ask 2 and start with modernization. You disclosed standardized MOD solution was 17% of total modernization orders now. Do you think there is a natural limit of how big standard solutions could be in the future compared to the total MOD market? And are those standardized solutions opening new market niches for you in any way? Are they addressing customers that would have perhaps otherwise not ordered at all or ordered it a bit late? Paolo Compagna: Yes. Vlad, to the first part, is there a limitation in the creation of standard solutions? Well, there will be a logical limitation one day as if you recognize that the installed base is a kind of 160 years of elevator technologies built many, many times in many countries by very local companies. So you've got 10,000s of different elevators to be modernized. So let's talk that. With that, you can imagine you cannot have a standard solution for 10,000s of different elevators around the globe. So you're going to fix it by group of similar technologies you can address. So to the first part of your question, is there a limitation? Yes. Are we already there? No. To the second part, -- does it open new opportunities? I personally believe, yes. Then when you get to a standard solution, which could offer to a customer to improve safety, quality and also maybe user experience by having affordable costs, I think there might be a group of customers who today can only go for a full replacement of the elevator, which comes with certain cost and also civil works around it. Now having this opportunity. So to the second question, I personally believe there might be a segment, is it incredibly big? I think it depends from country to country, coming back to my first part of the answer. Then in some countries, we have a bigger number of local products, as we call them, and we have some countries with less number of local products. So in those countries, this opportunity might be bigger. Vladimir Sergievskiy: Excellent. That's very clear. Second one is on the sales mix. Sales mix has been a tailwind to profitability for quite some years. Is there a chance that this tailwind eases or completely stops in '26 when MOD growth accelerates when perhaps new equipment decline slows and maybe grows outside of China and service keep growing as it does. Carla Geyseleer: Well, for sure, I mean, this mix will change. Will it go as fast as you point out? I don't think so. But we definitely -- yes, we definitely have that in our -- calculated that in our plans. So yes. Operator: The next question comes from Martin Flueckiger from Kepler Cheuvreux. Martin Flueckiger: I've got 2, and I'll take one at a time. First one is for Carla. Just coming back to your general comments regarding incremental cost savings from restructuring and operational efficiency going forward. I was wondering whether you'd quantify those for '25 and '26 to -- basically to understand whether there's been any changes? That's my first question. I'll come back to the second one. Carla Geyseleer: Well, as I said, there are no changes in the components that are driving this cost savings, but the relative weight of the components, that, of course, changes because, as I said, if you talk about procurement and supply chain, it's a very mature initiative. So your incremental obviously decreases. This year, we put a lot of focus on the SG&A savings. And together with that, we start up more and more the efficiency -- driving the efficiency in the new installation and in the MOD. But for -- going forward, we still have a significant incremental amount of potential sitting there, and we will work through that as we did over the last 2 years. Martin Flueckiger: Okay. And my second question is regarding the press reports with respect to TK Elevator being either up for sale or going for an IPO possibly. I was just wondering, thinking back, if I remember correctly, to 2020, I seem to remember press reports regarding Schindler's Board making statements about potentially suing KONE at the time if the deal had gone through, which, of course, it didn't. But I was just wondering if a major competitor were to take over TK Elevator, and I suppose Schindler is also interested. But just thinking if a major competitor were to get the bid, would Schindler's Board again consider legal actions? Paolo Compagna: Martin, let me take this one. Well, first of all, we don't intend to comment on competitors' decision about what they do in M&A. And in the same, as you know, we never disclose our M&As and what we do there. I must say what the reaction will be in the market, no one can predict. What will happen may be also difficult to predict. And with that, I must say, let's see what happens. With regard to ourselves, I mean, we always look at acquisitions which happens, and we look at our own opportunities in smaller and midsized and large acquisitions. So I would say there's no answer to your question in the form what will be a reaction. The market will show what happens. Operator: The next question comes from Walter Bamert from Zürcher Kantonalbank. Walter Bamert: Could you please comment which part of the 130 basis point margin improvement stems from the positive mix effect? Carla Geyseleer: Well, it is not the major part. So we will -- yes, we don't give the exact breakdown. But if you just -- I would say, yes, approximately, yes, up to 1/3, approximately is there [indiscernible] effect, yes. But we are very clear on that, and it's also part of our plans going forward if the mix effect changes. Walter Bamert: Perfect. And then nevertheless, coming back to the M&A question and that just generic, what's your assessment of the Asian market, which is still somewhat more fragmented? Do you think there is still room for globalization of those players? Or do you expect that the markets will remain fragmented somewhat? Paolo Compagna: Well, no one of us, Walter, has a glass sphere to look at for the future. If we would have then we would have to stop the call, go and make some decisions. But this being said, obviously, when you look into fragmented but interesting market, which you say -- if you say AP is it and it is, then one could assume things could happen in the next years to come. So this would be maybe my careful assumption. Then we talk about a still promising market, promising market for the future. And yes, as you rightly assess, there's a high fragmentation in that specific part of the world still. So therefore, one could assume there will be some movements, whatever type, difficult to say. When it happens, difficult to say. Could it happen? I would not exclude it, but it's a very personal assumption away from any detailed study. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: I'm wondering if we could go back to the order backlog and the revenue delivery in Q3. If I remember correctly, there was going to be a bit of legacy overhang on Q3 and Q4 deliveries and negative mix from Chinese exposure. Did Q3 progress as planned? Or were there delays to that mix or margin dilutive delivery set, I suppose? Paolo Compagna: To Q3 specifically, the revenue development might have been partially impacted by some projects which see a bit of a delayed execution. And obviously, when it comes to installation and larger modernization jobs, right? If you got a job which then is not completed for whatever reason and often, you know how it goes on construction side, then you might even see it in the books. This has, for sure, an impact in Q3. So therefore, I was mentioning before, in going forward, this will be flattening out by itself as the jobs will be completed, will be then built and then it moves on. So your assumption is right, I think, in saying in Q3, there is a certain impact by larger projects not completed. Yes. John-B Kim: Okay. And just as a quick follow-up to a comment you made about modular. In terms of supply chain, OpEx and perhaps CapEx, do you have what you need to deliver your backlog and modernization? Or is further investment needed from here you think? Paolo Compagna: So for now, we shared in February, you remember when we were sharing our dedication now to move on the modernization business with some of you, we were even discussing in detail what is behind. And one part was the development, production and rollout of those standardized, we call it packages, we call it kits, right? And here, the investment in supply chain, supplier base have been done. So is there any major investment, not specifically, but I like also in all transparency to share that we continue to invest and develop on our supply chain as obviously with the modernization piece growing and the new installation piece being where it is, it's a kind of logical consequence that you keep developing, we call it upgrading internally, the supply chain. And we work now with the internal program in upgrading our supply chain. We don't talk much about, but this takes place. Does it come with major investments? No. Is it partially in the one or the other supply chain. We have different in different continents. There will be some adjustments, but no major investments. And yes, what we deliver now, we are ready to deliver, and this work has been done. It was part of our program in the last 12 months backwards. Operator: The next question comes from Kulwinder Rajpal from AlphaValue. Kulwinder Rajpal: So just wanted to come back on MOD orders in China. So if I heard Carla correctly, she said 50% growth in Q3 and 40% year-to-date. So would it be fair to assume that this business faces tough comps as we go into 2026? So any commentary on growth in the MOD market in China in 2026 will be helpful. And just tied to it, is the share of standardized MOD higher in China compared to other geographies? Paolo Compagna: Let me take your question. So China MOD '26, well, modernization business in China is growing nicely, as shared before, and we don't see any change in trend at all. As I mentioned before, there are even some governmental programs, which are supposed to give some support, and we will also participate there. Allow me also here a very personal note. We have seen in the past also massive supportive programs in new installation in China, which afterwards came with a limited real impact. So now the modernization ones are out, but we are still to see what is the impact. This said, I must say that beside of this stimulus, the modernization business in China is going well and is supposed to continue going well. On the second part of your question, which is the percentage of the packages in China, here, we must say we have to see the market. So if I would say percentage-wise, in that specific market, you could say yes. However, it's logical that in more mature markets in which for longer decades, more products were installed, one could assume that the number of kits, so standard solution kits is higher than in a country in which growth for MOD, you can say more of a homogenic market in terms of technology, right, in terms of installed base. So therefore, is it strategically different? No, in number of pieces of solutions, yes. I hope this answers your question. It's a bit technical, but unfortunately, in that case, it's a technical background. Kulwinder Rajpal: Yes, absolutely. And then just to come back on wage inflation. So I wanted to understand the assumptions for your wage inflation in 2025 and 2026. Paolo Compagna: So it was a bit of disturbed connection here. I think it was about wage inflation. Kulwinder Rajpal: Yes, wage inflation, the assumptions in 2025? And how should we think about it in 2026? Carla Geyseleer: Well, I will say that. So thank you for the question. Wage inflation in '26, I think it will be on a level that is comparable with '25. So that is how we currently see it. Lars Wauvert Brorson: Thank you, Kulwinder. We'll take one last question, please. Operator: We now have a follow-up question from Rizk Maidi from Jefferies. Rizk Maidi: I'll be very brief. Just clarifying some of the points just on China new installations. Am I correct in thinking that the orders here are down 30%, where I think in the P&L, you talked about 20% decline. So perhaps a little bit more drag here going forward? And then more generally, we're now 4 years into this downturn, we thought pricing is not going to be as bad because local players, competitors, including yourself, are doing much lower margins in this downturn than in previous ones, but it feels like it's not getting any better. I'm just wondering who is actually taking on these badly priced sort of projects? And number two, how should we think about -- and also pricing pressure, how do you see it by geography? And how do you think -- how are you thinking about 2026 here? Paolo Compagna: Let me take this one, which is a complex follow-up question. So let me start with this decline in order intake, which I always have to remind might be different between units and value. Then in units, the market is down, as you assume, close to 30% and in value even above that. So for us. So therefore, your assumption is right. There's a bit of a mismatch between units and value, but in value, it has declined a lot. So part of your second question, who is taking on all these bad jobs? I cannot talk about who is taking bad big jobs. However, as we see it also in our numbers, the pricing in China was very tough in the last years, you are fully right. And by now, well, to be very optimistic about pricing in China is not us. So if you ask me how do we look going forward, we would hope to see a stabilization of the pricing. And if we get there, it's already an improvement then till now, pricing has shown to be very tough. So therefore, as soon as we get to stabilization of the pricing, one could say, well, from that point, we can start all to work on it. So -- and this is what we see for '26, right? So we don't expect any special magic. And Carla was referring to our plans for '26. And when we meet in February, you will look -- you know us, we are always very -- we try to be and are very down to earth in our plans. So on China, there's no euphoric assumption for what will happen in '26. I hope this answers your question. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Lars Brorson for any closing remarks. Lars Wauvert Brorson: Thank you, operator, and thank you all very much for attending the call today. Please feel free to reach out to me for any follow-ups you might have. The next scheduled event is the presentation of our full year results on the 11th of February 2026. You'll also find our reporting calendar for '26 at the back of our presentation today. With that, thank you all, and goodbye. 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.