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Operator: Good day, and welcome to Phillips Edison & Company's third quarter 2025 earnings call. Please note that this call is being recorded. I will now turn the call over to Kimberly Green, Head of Investor Relations. Kimberly, you may begin. Kimberly Green: Thank you. I am joined today by our Chairman and Chief Executive Officer, Jeffrey S. Edison, President Robert F. Myers, and Chief Financial Officer John P. Caulfield. Following our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our Investor Relations website. Today's discussion may contain forward-looking statements about the company's view of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings, specifically in our most recent Form 10-Ks and 10-Q. In our discussion today, we will reference certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release and supplemental information packet, which have been posted on our website. Please note, we have also posted a presentation with additional information. Our caution on forward-looking statements also applies to these materials. Now, I would like to turn the call over to Jeffrey S. Edison. Jeff? Jeffrey S. Edison: Thank you, Kim, and thank you, everyone, for joining us today. The PECO team is pleased to deliver another quarter of solid growth. Given the continued strength of our business, we are pleased to increase our guidance for NAREIT and core FFO per share. The midpoints of our increased full-year 2025 NAREIT and core FFO per share guidance represent a 6.8% growth and a 6.6% growth, respectively. I would like to thank our PECO associates for their hard work in maintaining our unique competitive advantages and driving value at the property level. The market continues to focus on tariffs and U.S. economic stability. As it relates to PECO's grocers and neighbors, we continue to feel very good about our portfolio. PECO has the highest ownership percentage of grocer-anchored neighborhood shopping centers within our peer group. 70% of our ABR comes from necessity-based goods and services. This provides predictable, high-quality cash flows and downside protection quarter after quarter. This also limits our exposure to discretionary goods, which we believe are at risk of greater impact from tariffs. PECO continues to deliver strong internal growth. Our neighbors benefit from their location in the neighborhood, where our top grocers drive strong foot traffic to our centers. We have high retention and strong leasing demand from retailers wanting to be located at our neighborhood centers. And we continue to see a healthy pipeline for development and redevelopment. In addition, the PECO team continues to find smart, accretive acquisitions that add long-term value to our portfolio. Including assets and land acquired subsequent to quarter-end, this brings our year-to-date gross acquisitions at PECO share to $376 million. A few shout-outs for the quarter: The operating environment and PECO's ability to deliver growth continues as it has for the past several years. Our leasing activity and occupancy remained very strong. We continue to operate from a position of strength and stability. Moving to the transactions market, activity for grocery-anchored shopping centers remains competitive. The strength of our activity in the first half of the year allowed us to be more selective in the second half. We remain committed to our unlevered return targets, and we remain confident about our ability to deliver on our full-year acquisition guidance. Including acquisitions closed after the quarter-end, we acquired $96 million of assets at PECO's share since June 30. This activity includes two unanchored centers. These centers offer reliable fundamentals similar to our core grocery-anchored properties with a stronger long-term growth profile. They are located in the same trade areas as our grocery-anchored centers, growing suburban markets with strong demographics. With a focus on everyday retail, neighbors located at these centers are delivering necessity-based goods and services within their respective communities. We will share more details on why we believe these everyday retail centers are a natural complement to PECO's long-term growth strategy during our upcoming virtual business update. This webcast is planned for December 17. We also continue to make great progress with our joint ventures. During the third quarter, our JV with Lafayette Square and Northwestern Mutual acquired The Village at Sand Hill. This is a grocery-anchored shopping center located in a Columbia, South Carolina suburb. Our pipeline for the fourth quarter and 2026 also includes additional assets for our JVs. Lastly, we are actively expanding our development and redevelopment pipeline. We build in our parking lots and acquire adjacent land to our centers. And this quarter, we acquired 34 acres of land in Ocala, Florida. While it is too early to share details of this project, we are working with partners to build a grocery-anchored retail development. As you know, these take a long time. We will share more details on this project as we are able to update you. We are very pleased with our results for the quarter and our outlook for the balance of 2025. And we are actively growing our leasing and transaction pipelines for 2026. We believe we are the most aggressive operator in the shopping center space. The PECO team is continuously looking for opportunities to grow our business better. We look forward to updating you on our long-term growth plans during our December 17 business update. I will now turn the call over to Bob. Bob? Robert F. Myers: Thank you, Jeff, and thank you for joining us. PECO continues to deliver strong leasing activity driven by our grocery-anchored neighborhood centers and necessity-based neighbor mix. This momentum is clear in our operating results again this quarter. Our neighbor retention remained high at 94% in the third quarter while growing rents at attractive rates. High retention rates result in better economics with less downtime and dramatically lower tenant improvement costs. PECO delivered record-high comparable renewal rent spreads of 23.2% in the third quarter. Comparable new leasing rent spreads for the quarter remained strong at 24.5%. Our continued strong leasing spreads reflect the strength of the retail environment. We expect new and renewal spreads to continue to be strong for the balance of this year and into the foreseeable future. Leasing deals we executed during the third quarter, both new and renewal, achieved average annual rent bumps of 2.6%. This is another important contributor to our long-term growth. Portfolio occupancy remained high and ended the quarter at 97.6% leased. Anchor occupancy remained strong at 99.2%, and same-store inline occupancy ended the quarter at 95%, a sequential increase of 20 basis points. Given our robust leasing pipeline, we expect inline occupancy to remain high throughout the remainder of the year, which is very positive. As it relates to bad debt in the third quarter, we actively monitor the health of our neighbors. Bad debt remains well within our guidance range. We are not concerned about bad debt in the near term, particularly given the strong retailer demand. We continue to have a highly diversified neighbor mix with no meaningful rent concentration outside of our grocers. Turning to development and redevelopment, PECO has 22 projects under active construction. Our total investment in these projects is estimated to be $75.9 million, with average estimated yields between 9-12%. Year-to-date, 14 projects stabilized through September 30. This represents over 222,000 square feet of space delivered to our neighbors and incremental NOI of approximately $4.3 million annually. As Jeff mentioned, we continue to grow our pipeline of development and redevelopment projects. This activity remains an important driver of our growth. I will now turn the call over to John. John? John P. Caulfield: Thank you, Bob, and good morning and good afternoon, everyone. Our third quarter results demonstrate what we have built at PECO, a high-performing grocery-anchored and necessity-based portfolio that generates reliable, high-quality cash flows. As Jeff said, the PECO team continues to operate from a position of strength and stability. Third quarter NAREIT FFO increased to $89.3 million or $0.64 per diluted share, which reflects year-over-year per share growth of 6.7%. Third quarter core FFO increased to $90.6 million or $0.65 per diluted share, which reflects year-over-year per share growth of 4.8%. Turning to the balance sheet, we have approximately $977 million of liquidity to support our acquisition plans. We have no meaningful maturities until 2027. Our net debt to trailing twelve-month annualized adjusted EBITDAR was 5.3 times as of 09/30/2025. This was 5.1 times on the last quarter annualized basis. As Jeff mentioned, we are pleased to update our '25 guidance. We are reaffirming our guidance range for 2025 same-center NOI growth. This reflects solid full-year growth of 3.35% at the midpoint. As we have said previously, the timing of our same-center NOI growth in 2024 presents difficult comparisons to 2025. Specifically, the recoveries in 2024 were weighted to the fourth quarter, whereas they are more even quarter to quarter in 2025. Our current forecast for 2025 reflects same-center NOI growth between 1-2%. We estimate this growth rate would have been closer to 3% if the recoveries in 2024 were more evenly distributed. While we are not providing 2026 guidance at this time, I will remind everyone that we believe this portfolio can deliver same-center NOI growth between 3-4% annually on a long-term basis. As Jeff mentioned, our increased guidance for 2025 NAREIT FFO per share reflects a 6.8% increase over 2024 at the midpoint, and our increased guidance for 2025 core FFO per share represents 6.6% year-over-year growth at the midpoint. Our guidance for the remainder of 2025 does not assume any equity issuance. Importantly, our FFO per share growth is a function of both internal and external growth. PECO is not dependent on access to the equity capital markets to drive our strong growth. As it relates to dispositions, the PECO team plans to sell $50 million to $100 million of assets in 2025. Year-to-date, including activities subsequent to quarter-end, we sold $44 million of assets at PECO share. The private markets are more appropriately valuing anchored shopping centers than the public markets. This gives us an opportunity to lean into portfolio recycling. We have an active pipeline for the fourth quarter, and we have plans to do even more in 2026. We plan to share more details during our December 17 business update. Long-term, the PECO team is focused on recycling lower IRR properties into higher IRR properties to help drive strong earnings growth. We believe that performance over time and consistent earnings growth should be rewarded in the capital markets. We also reaffirmed our 2025 full-year gross acquisitions guidance. We believe our low leverage gives us the financial capacity to meet our growth targets. We have diverse sources of capital that we can use to grow and match fund our investment activity. Match funding our capital sources with our investments is an important component of our investment strategy. We continue to believe the PECO platform is well-positioned to deliver mid to high single-digit core FFO per share growth on an annual basis. We also believe that our long-term AFFO growth can be higher as more of our leasing mix is weighted towards renewal activity. We believe our targets for growth in core FFO and AFFO will allow PECO to outperform the growth of our shopping center peers on a long-term basis. We look forward to updating you on our long-term growth plans during our December 17 business update. In addition to what Jeff mentioned, we plan to share preliminary 2026 guidance. We also plan to share new analysis and insights related to our unanchored investments or everyday retail centers. We look forward to updating you on our internal and external growth plans. With that, we will open the line for questions. Operator? Operator: Thank you. For any additional questions, please re-queue. And your first question comes from the line of Andrew Reel with Bank of America. Please go ahead. Andrew Reel: Good afternoon. Thanks for taking my questions. First, can you just share more on your thinking around acquiring development land at this point in the cycle? Why is right now the right time to pursue opportunities like this? And are you evaluating other ground-up development sites at this point in time? Jeffrey S. Edison: Well, Andrew, thank you for the question. Bob, you want to talk a little bit about this specific project? Robert F. Myers: Yes, absolutely. Thanks, Jeff and Andrew. Thank you for the question. We are really excited about this opportunity. We had a nice partnership with a national grocer that was interested in the growth aspects of Southern Ocala, 10,000 new homes in residential opportunities coming into the market over the next five years, a lot of positive growth. It's going to be a 34-acre site. And we will end up selling part of it to the grocer, and then we will have seven outparks available for us to continue to do what we do year over year. I mean, we have developed 51 out parcels in our portfolio over the last five years. And we will either do ground leases or build to suit. So this is kind of a one-off scenario. Will we continue to look for sites in the future? Yes, if it makes sense. In this particular asset, we are going to deliver about a 10.5% unlevered return. So we feel really good about not only being some of the landlord's largest of the retailers' largest landlords, but this is a great opportunity for us to step in, in the right market. Andrew Reel: Okay. Thank you. That's helpful color. And then if I could just ask a follow-up. Could you maybe just provide more detail on the makeup of your current acquisition pipeline and just how much more incremental volume could you potentially close before year-end? I know Jeff, you had mentioned you're being a little more selective in the second half now. So just curious on where we might shake out relative to the acquisition range. Thank you. Jeffrey S. Edison: Yes. I'll give you and Bob follow-up as well. The way we're looking at it, kind of given you guidance. We're pretty comfortable. We're going to meet the bottom end since we're already about $25 million above the bottom end of the raise that we've given. And we continue to see good product and we're continuing to see a volume of product that we feel comfortable will be in good shape, but in terms of our ability to buy. As you know, going quarter by quarter is a little bit difficult because stuff moves month or two and that's just the closing process. So it's always a little bumpy. Feel really good about the products we bought. We had a really great first half. It's a little slower, but I would tell you that we feel good about what we're getting. And we bought $400 million the midpoint is about $400 million this year. It was $300 million last year. Pretty good that's a pretty good increase. And we see that continuing to happen. So Bob, anything else on the Robert F. Myers: Yes. I would like to add that we've acquired 18 assets this year for $376 million and we do have deals that have been awarded and under contract to close before year-end. So we feel really good about we're going to be well within the range. The other thing I would mention is just we're delivering unlevered returns above a nine in all these categories. So we feel real good about the acquisitions. The other thing I would mention is these blend to like a 91.5%, 92% occupancy going in. And when you look at our portfolio at 97.7 this continues to give us internal growth in the future for same-center NOI growth. So it is it's a dual path in terms of growing earnings and NOI. We're really excited about what we've acquired so far and early indications would suggest that we're operating them extremely well and we're getting continued leasing momentum. Andrew Reel: Okay. Thank you very much. Jeffrey S. Edison: Thanks, Andrew. Operator: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead. Caitlin Burrows: Hi, everyone. Maybe sticking on the acquisition side. So looking at leverage now, it's at 5.1 times, which say is totally reasonable. But I guess it sounds like going forward, you might be in or willing to increase leverage. So wondering if you could discuss for a little bit what the kind of upper level is on leverage and how you think about that as a funding source? Jeffrey S. Edison: Yeah. Caitlin, I'll I'll give you an John follow-up as well. What we've said and continue to believe is we want to be in that 5.5% or below range debt to EBITDA on a long-term basis. And we are we'd be willing to move around that if we had a clear vision of bringing it back down into that sort of mid to the mid-5s to lower 5s. And we're very happy with where we are. We've got good capacity to continue to grow our acquisition. Program. And so it's it's nice to be where we are right now. And if the opportunities come, as as you know, we're prepared to take advantage of them if we can. Anything else John? Nope. I think that's good. Operator: And then just, as the other kind of source of funds, it sounds like you might lean more into dispositions. And so if we look at the you guys have done historically, you do give great disclosure on the cap rates of the acquisitions versus dispositions. Historically, the dispose have been at higher cap rate. So I was wondering going forward, are there assets that you would be, I don't know, maybe newly looking to sell that would make that process accretive? Or how are you thinking about that acquisition disposition cap rate and kind of the types of properties you'd be looking to sell and who the buyers are and what they're willing to pay for them? Jeffrey S. Edison: Yeah. John, you wanna talk about them? John P. Caulfield: Sure. Thanks, Caitlin. So I think the dilution or accretion on their cycling of assets is going to depend on the mix of assets sold and acquired. I mean, as you know, we are IRR buyers and sellers. So we believe that right cycling will be beneficial to our earnings per share over time. And as owners of about 8% of the company, that's really important to us. So I I think as we look at it in terms of we are achieving victory on a lot of these. We've already sold some some properties this year, and we're gonna look to do that. But ultimately, mean, repeat, we believe we can do mid to high single digit FFO per share growth. And although we're not giving guidance until December, I think that is going to be true in 2026 as well. So not exactly answering your question because it's gonna depend upon the mix of the timing of the closing, but but we're managing that very closely. And the relationship you're describing has been true historically, I think it's gonna tighten and improve as we look forward, but it again, it depends upon the mix. Caitlin Burrows: Thank you. And Caitlin, would just add, I mean, I think the way we think about it is we're going to be trading out of lower growth for higher growth properties and that is the strategy of the disposition program. There is some derisking in that, but mostly it's going to be trading to areas where we can get more growth. Operator: Your next question comes from the line of Haendel St. Juste with Mizuho. Please go ahead. Ravi Vaidya: Hi there. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. I wanted to ask about redevelopment here and broader redevelopment pipeline. What's your target size for this to be? And how should we consider funding? Is this need primarily through free cash flow or through further dispositions? Thanks. Jeffrey S. Edison: Okay. Ravi, when talking about that, are you talking about all of our redevelopment, including the outlawed stuff that we're doing? Or is that what you're you're focused on there? Ravi Vaidya: Yeah. Both ground up new development and redevelopment of existing pads or any k. Outlook kinda work. Great. Okay. Jeffrey S. Edison: Bob, you wanna take that? Robert F. Myers: Yeah. No. Absolutely. I appreciate the question. So over the last three or four years, we've generated between $40 million and $55 million in our ground-up redevelopment bucket. And those years we were solving for between a 9-12%. We find that this is a wonderful complement to our same NOI growth and we are hopeful to get 100 to 125 basis points towards it through this pipeline. We have a nice pipeline out for the next three years that would be consistent of approximately $50 million to $60 million a year. To contribute to that. So we don't see anything slowing down on the development side or redevelopment side, and we've seen a lot of success with generating solid returns. Got it. That's helpful. And maybe just one on the on the bad debt Would you say that this quarter's, you know, bad debt expense in the current tenant credit landscape is that appropriate to consider as a a run rate going forward into fourth quarter and into '26? Thanks. Jeffrey S. Edison: John, you want to take that? John P. Caulfield: Sure. Thanks, Ravi. So I would say that, yes, I think that, when you look it, whether it be on the same store, total portfolio, we've been between, let's say, seventy five and eighty basis points. I do know that the midpoint of our guidance range is 90 basis points. And it's more just giving ourselves a little bit of the elbow room. I will say for the '25 and for '26, we don't actually see the environment materially changing. So we think that, you know, this 70 to 80 basis points in the range that we have is pretty reasonable. I do think that, you know, again, when you look at at PECO's demographics at $92,000, we are 15% above The US median, and our retailers continue to be very, very successful. So our watch list is lower than, anyone else's and very consistent with historical around 2%. And so we feel really good about it, but I think, you know, this is a good run rate as we look forward. Ravi Vaidya: Got it. Thank you so much. Operator: Your next question comes from the line of Ronald Kamden with Morgan Stanley. Please go ahead. Ronald Kamden: Hey, thanks so much. Just going back to sort of the occupancy and more of the inline occupancy here. You're getting good retention rates. You're you're pushing rents. Remind us what the message is to the team, how much more occupancy upside you sort of think that is there? Is there? And just strategically, how are you guys messaging sort of pushing rents here? At the expense of retention rates? Thanks. Jeffrey S. Edison: Sure. Bob, you want to grab that one? Yeah, absolutely. So thank you for the question. So currently, we're at like 94.7%. And we believe that we can generate another 125 to 150 basis of inline occupancy. The demand and the retailer interest that we're seeing in all the meetings in our national account team shows very good momentum. The visibility I have out for the next six months, seven months with our pipeline would suggest that we should move in that direction. So feel very good about moving the needle on inline occupancy. I think in terms of growing rent, on the renewal question, in particular at 94% retention, that's a very solid retention number. And I think last quarter, we spent $0.60 a foot in tenant improvements In this quarter, we spent $1 to generate 23.3% renewal spread. So we feel very good about the retention at 94% and the current spreads we're seeing. So again, I don't see any new supply coming online to compete with that. And I think we'll just keep our neighbors profitable and healthy and look towards the future. I don't see anything slowing down. Great. And then if I could ask a quick follow-up, just on the unanchored centers We talked about it last quarter, but as you're sort of looking at more of the opportunities, just what's the update in terms of the opportunity set and sort of the conviction in that strategy? Thanks. Robert F. Myers: Yes. Another great question. I'm really excited about the strategy. We've acquired eight properties in this category for about $155 million And we've seen very positive momentum operationally. I believe our centers currently from what we paid, were about $300 $3.00 $5 a foot. We are seeing unlevered returns between 10.5-12% early indications. We're seeing new leasing spreads above 45% and renewal spreads above 30%. So again, we're going to continue to define the criteria. You'll hear more about this in our December update. But early indications this is going to be a great complement to growing our same-center NOI in the future. So we're really excited about it. Jeffrey S. Edison: Thank you. Ron, yes, it's a great question. And one thing, I mean, have built a phenomenal team at leasing. This we kind of look at this as just having more neighbors. We have a way of bringing this finding more neighbors that we can put the machine to work on and get these kinds of returns that Bob was talking about. So we're excited about it. Again, it's as you know, it's a small very small piece of the overall portfolio and it's but it's very consistent with our focus on necessity retail and giving the consumer what they want and being locally smart at the property level. So all those pieces are encouraging to us as well as the results Bob talked about. In terms of investment in that product. Ronald Kamden: Really helpful. Thank you. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead. Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. My first question, Jeff, is when you said in the prepared remarks about being more selective in the second half. What do you mean by more selective? Are you looking more on price? Is it more on location? Is it more on shopping center formats? Just trying get a sense of of where that selectivity is leading you. Jeffrey S. Edison: I think it's it's it's tougher underwriting. It's not a difference in terms of what we like, what we do. But in terms of underwriting, with the potential risks of the stability of the economy, I think we took a tougher we were tighter on some of our rent spreads. We were tighter on some of our pace of leasing. That's really what I'm saying in terms of volume. And that translates into us offering lower prices than than we would at other times to get to that nine unlevered IRR. And so that's I think that's what slowed down some of our our pace a bit. It's important to know that, I mean, at the midpoint, we're buying $400 million of assets on an individual basis. That's the most I think in the space on an individual basis by far. And we think that that is we that's $100 million more than we bought last year. We're taking our share of the market. And I think we've had it's shows the discipline that we've had for thirty years in this business You've got to be disciplined and you've got to make sure that you're not getting ahead of yourself or too aggressive or not aggressive enough. In the market. And that I think that's what we kind of bring to to the market on that. Michael Goldsmith: Thanks for that. And my follow-up is, right, on the competition, you said it remains competitive. Has gotten any more incrementally competitive in the last quarter? And then just like, if you can provide some color on deals that you don't who are you losing to? Is it is it new yeah. Is it new entrants or or is it kind of the the same folks that are still bidding on I don't yeah, I don't think it's gotten more competitive. I think it's but it's fairly stabilized. I mean, is good demand out there and it is it's the full gamut. I mean, it's some of the REIT peers, it's some of the some institutional players and as well as private players. So you have a pretty wide range of people looking in the space. So that our feeling is that it's kinda it's stabilized at where it is and really has been for the last couple of quarters. And we think that that's kind of going to be is more normalized and probably what we're going to see for the next quarter and certainly or maybe the next few quarters as the and the beauty is with what we've done, we have we look broadly at country and we're looking for that number one or two grocer to buy. And that breadth gives us the ability to find product consistently over, you know, year after year after year. And so we feel comfortable we'll have another good year next year. We're not that's not a concern. It's just it's a little harder shopping to buy than when a lot of others have gotten into the space that we've been in for thirty years. Michael Goldsmith: Thank you very much. Good luck in the fourth quarter. Thanks. Operator: Your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Please go ahead. Omotayo Okusanya: Hi, yes. Good afternoon, everyone. I was wondering if you could just give a view on the outlook for grocers in general. I think, your your sales are going up. But I just but, again, we just gotta hear a lot conflicting noise around you know, more selective consumer, you know, inflation is kind of causing volumes or trips to to grocers to kind of slow down. Just kind of if you just kind of give us an update in general kind of what you're seeing and how you think that space is evolving, we'd appreciate that. Jeffrey S. Edison: Yeah. I I want to take a shot, Bob, to join in as well. From our conversations with the grocers, they continue to see a very resilient customer. And we're not hearing any sort of pullback, any kind of like dramatic concerns. It's kind of business as usual and in some for some of our grocers, see it as really, really positive. I mean, when you talk to publics and HEB and some of the the Trader Joe's, mean, are they are actively growing. And so they see things very positively. And so I would say our feedback overall is that the grocers are thinking long term, they're very positive about what the environment is today and their ability to pass on increases in cost. To the consumer they're always going to be nervous because they're nervous all the time and they should be because it's a tough it's a really tough business. But they're really good at it and they're great partners for us the shopping centers that we have. Omotayo Okusanya: That's helpful. And then how do you think about when we kind of think about sources and uses of capital how does potential stock buybacks kind of fit into the equation at kind of current stock prices? Jeffrey S. Edison: The way we look at it is a tool. Just like selling properties, just like raising public equity. And it's a tool to be used at the right time when you when it's the best investment and the best use of your your free cash flow. So that's the way we think about it. We so it's it's one of the tools and we wouldn't be hesitant to use it at the right time. And But we're not also eager to use it if we particularly environment where we are today where we have really good uses of our capital that we think we can grow significantly. So that's it's a great question and it is one that is part of our sort of regular conversation about where we should be depending on where the stock price is. Omotayo Okusanya: Got you. And then one quick last one for me. How do we think about that position Again, you already had $376 million year to date guidance $350 to $450. I'm just kind of curious whether there's some conservatism in that number or the way 4Q is shaping up. There may not be a lot of deal activity. Jeffrey S. Edison: I would say, $100 million a quarter is pretty decent activity and we'll we that gets us to $400 million for the year. We feel which is the midpoint of the guidance we feel good about that. And I wouldn't be overly feel more a lot more aggressive than that we would we change guidance and we but we don't feel that we won't meet that either. So we're we think the guidance is a pretty good place to be looking at. Operator: Thank you very much. Your next question comes from the line of Todd Thomas with KeyBanc. Please go ahead. Todd Thomas: Hi, thanks. First question, just regarding dispositions. You commented it sounds like next year will be will be higher than this year's $50 million to $100 million target. Is there a segment of the portfolio or kind of a larger portion of the asset base that you ideally would like to recycle out of? Is there any insight around much you might look to sell over time and also whether the plan is to sell assets on a one-off basis or if there could be some larger transactions perhaps given the increased competition that you're saying? Jeffrey S. Edison: John, do you want to take that one? John P. Caulfield: Sure. And then Bob, you can after that. So Todd, I would say that, you know, we're looking at multiple ops because I think we do think that as there is great competition for grocery-anchored shopping centers in the market, there are a lot of them that we've taken to stabilize place. And there are buyers out there that are just interested in more of a completely solved button-up solution. So that is something you're gonna see. I think you will see us sell more next year. It's hard to say because, again, similar to the acquisition timing, it can move quarter to quarter or things like that. I wouldn't say, and this is where Bob will come in, I I wouldn't say we're looking at anything specific on an an individual region or things. It's more the IRRs. It's that if we look at forward and realize that we've taken most of the or achieved most of the growth, in the asset that we will look to sell that. And I think we look to sell it individually or as a portfolio. Bob, anything more? Robert F. Myers: Yeah. I'll just add that I think we'll end up selling between $100 million and $200 million next year. And I believe that it will all be done on one-off basis. So I don't see a portfolio there because we do want to be very surgical being active portfolio managers. So Jeff touched or Jeff and John touched on it, but certainly 100% stabilized assets that when I look at our forward IRRs would generate 6.5-7% returns. We think we can replace those assets with these 9%, 9.5-1 unlevered return deals and pick up 200 basis points in spread over the long term. That's what we're focused on and that will be our strategy. Todd Thomas: Okay. Got it. So so it sounds like little more of an ongoing portfolio sort of asset management process just to you know, the plan is to remain net acquirers just sort of prune the portfolio over time by selling lower growth assets and and upgrading quality. And improving growth. Robert F. Myers: Yeah. It is. I think that makes a lot of sense. Todd Thomas: Yeah. Okay. And then, my last just for for John, real quick. Can you just talk about the drivers behind the interest expense decrease underlying the updated guidance? And are there any updates on the swap expirations in November and December? John P. Caulfield: Sure. So the, with regards to the the guidance and interest rates, I mean, I think part of it was conservatism for us and and then the timing of the acquisitions relative to the guide. I don't think there's anything much much farther than that. With regards to the swaps, you know, we're we're 5% floating today. If those burn off and nothing changes, we can be about 15% floating today. We do have a long-term target of about 90%. Ultimately, those if they went based on where today's rates are and no further cuts, they'd be kind of around 5.3%. You know, we can issue in the long-term debt markets wrong 5%, but I think we are in a position now where interest rates are coming down. Down. At least that is the perspective of the market. And so we were gonna do what we do, which is we are looking opportunistically at extending our balance sheet. We do like the idea of being a repeat issuer in the long-term bond market. And and that's where there'll be capacity. So I think we're comfortable right now with if those expire and we remain floating with that floating rate, but we will be looking to access the bond market out point out we don't have any meaningful maturities until 2027. And we our actions will be consistent with what we've done in the past. Todd Thomas: Thank Operator: Your next question comes from the line of Cooper Clark with Wells Fargo. Please go ahead. Cooper Clark: Great. Thanks for taking the question. Just given the supply backdrop and current strength in the leasing environment, curious how we should think about long-term upside to NOI growth on an occupancy neutral basis as you capture upside on spreads, improve escalators and other lease structures? Jeffrey S. Edison: John, do you want to break I think that's probably best broken down in terms of what we see as the pillars of that growth. John P. Caulfield: Cooper, I think the pieces for us is we're going to look to deliver 3% to 4% on a long-term basis. You know, our our rent bumps are 110 basis points. And and I'll point out that that's up I think, 50 basis points over the last couple of years. So we think that we've got good continued growth there. And our leasing spreads continue to be very strong on both renewal and a new leasing basis. So I think as we look at it, there's a combination of the new leasing, the rent bumps, the development that we're able to do on the outparcels that are already part of our existing properties to really drive that towards that, know, keeping us in that 3% to 4%. I think that we will continue to buy assets that Jeff or Bob referenced earlier, with occupancy availability that'll allow us to kind of continue that momentum move up from there. Bob, I don't know if you have anything you wanna add. Robert F. Myers: I don't have anything to add, John. Cooper Clark: Great. And then you noted, though, you expect that $100 million and $200 million of dispositions next year. Curious how we should think about additional funding sources in your current cost of capital with respect to the $350 million to $450 million annual long-term acquisitions target? John P. Caulfield: Yeah. John, do you want you want to just give the the latter on Sure. As as we had said on the call, I would say, you know, funding sources are gonna be the 100 over a $100 million of free cash flow that we generate and retain after the dividend. Which I would also highlight we just raised almost 6% this quarter. We have the cash flow that we generate. We have the growth in the base. We are levered at 5.1 times in the last quarter annualized. And this disposition is going to allow us to recycle at using management strategies like Todd just talked about. That is going to be able to drive us and propel us forward in executing our growth plans. Cooper Clark: Great. Thank you. Jeffrey S. Edison: Thanks, Cooper. Operator: Your next question comes from the line of Floris Van Dijkum with Ladenburg. Please go ahead. Floris Van Dijkum: Hey, guys. I've got two two questions. By the way, so you guys had, I think, it 23% almost 23% renewal spreads But if you look at your overall spread, there were only 13% because I think 46% of your leasing activities were options. Can you and obviously, what would the growth have been if you didn't have those options? What would the growth have been in your same store NOI And what are you doing in terms of your you know, new leases where are you limiting, you know, options, etcetera, so that you can, you know, mark to market more rapidly? Jeffrey S. Edison: So, Bob, want to talk about the options? John, do you want to talk about the what Flores was by the way, hello Flores. Good to hear your voice. And the on the options and then John, if you could just kind of walk through what that impact would have been without the so the growth without options. Robert F. Myers: Sure. Floris, good to hear from you. And great question on the options. This is absolutely an area that we're very focused on, on structuring any new renewal or any new lease. Is something that we've approved over time. I know directionally for our team, I give direction that we don't want to give any tenants an option unless there's a 25% increase in the option period. The challenge with it is national retailers are making a large investment in this space So they do want to have options, three, five-year options as an example. And they certainly want to negotiate that number. But as a foundation to our strategy, you know, we're always starting with no options. And, you know, there's a lot of reasons why we say that because as the landlord has nothing to gain from it. So we want to push back hard on that. As as we negotiate options. John P. Caulfield: And with regards to the math, I would say that it's it's tough because the option, the biggest portion is coming from our grocers isn't part of the strategy as we look back at the combined leasing spread of all of it, it was 16% last quarter. It's 13% now. I think as Bob said, we have strategies to do that. But I do think this is where the compliments come in of more neighbors and other ways. But, you know, the new leases was almost 30% over the last twelve months and 21% on renewals or less so in the volume of footage is about the same. So you'd had 25% net growth. Instead of the 13% net growth adding to your NOI. So it's very strong, but I do think the options are something we try to mitigate, but but are still, you know, part of the part of the portfolio. Floris Van Dijkum: Thanks, guys. John, I appreciate that. We've Can I my follow-up question is regarding and maybe I get your view on cap rates? I mean, we hear that cap rates for grocery anchors are very low relative to other retail types. You've been able to acquire an average 6.7% cap rate. Jeff, what is your view on what's going to happen to grocery-anchored cap rates they going to go up or are they going to go down? And then also, what is your appetite for you know, if there is such strong institutional, appetite, maybe maybe doing a larger JV with part of your portfolio. To where you benefit from, you know, getting management fees maybe not for your lowest growing assets, but, you know, to to to free up some more capital and to prove to to the market that your stock is undervalued? Jeffrey S. Edison: Alright. That that Lars, you asked, like, four questions there. So let me let me start with the, you know, the the the supply demand dynamic right now is it's fairly stabilized. We don't see a major compression in cap rates from where we are right now. It will be by segment. And again, when we generalize about cap rates, it's a broad brush you're painting with because it really as you know, it's a market by market event and it's going to be very different in the Midwest than it's going to be in Florida. And you've got a lot of variety to talk about there. But I mean, think generally, would say that the supply demand dynamic is fairly stabilized and the the amount of product coming on the market is taken care of the increase in demand. From some of the primarily institutional players that have sort of come into market and added a additional capital into the market. So that would be the our answer on that. In terms of JVs, I mean, we do have two active JVs that we're growing. We do see that as a way of having growth and getting better returns as you point out through the fee structure and owning less of the overall equity. So that is an opportunity. It's not a major part of our business. But it is an opportunity to continue to find places to put the PECO machine to work and create value. And that's what we do and that I think that will be continued to be something that we look at. And And we'll look at our disposition program too because there are other ways to take assets that are slower growth, but that would be we'd like to own a long-term basis and maybe take a little less equity in those. So those are all things that we're looking at. As opportunities in a market where the values are compressed in our space So we've got a lot of options and we'll continue to use those. Floris Van Dijkum: Thanks, Jeff. Jeffrey S. Edison: Yep. Thanks, Lars. Operator: Your next question comes from the line of Hong Zhang with JPMorgan. Please go ahead. Hong, your line is open. Hong Zhang: Hi. Can you hear me? Jeffrey S. Edison: Yep. Hong Zhang: Yeah. We got you. Oh, cool. Thanks. I guess just just a question on funding your acquisition pipeline from next year. You've traditionally funded your acquisitions through with with majority debt. I I guess what is the thinking around changing that composition to be more with dispositions next year, especially with rates falling where they are. Because correct me if I'm wrong, but once you get more of a spread, if you were to fund fund your acquisitions on debt currently, Jeffrey S. Edison: I'll take the first and then John you can the question. We are we always have been and will continue to be focused on keeping a really good balance sheet so that we can take care of we can take advantage of our opportunities as they arise. That doesn't really change based upon exactly where the rates are. We're really focused on making sure that we have the right depth of capacity. Right now, we have capacity in terms of our target of 5.5. But that's going to be used when we have great opportunity. And that's we are very protective of our balance sheet. So John, do you want go on to talk a little bit about dispose and how we use that? John P. Caulfield: Yeah. Hong, the piece that I would say is that at 5.1 times in the last quarter annualized and a long-term target of 5.5x, We do think we have capacity there in addition to the $100 million of cash flow that we retain. The other piece I would say is that we believe that on a leverage neutral basis, we can buy $250 million to $300 million of assets a year So leaning into disposition gets to what Jeff was saying, which is that in a market where we believe there are great acquisition opportunities, and an opportunity to recycle assets that we have achieved and stabilized the growth plans that we have that's something we're going to do. So when we talk about the dispositions, it is balanced based on the acquisition opportunity. We have a very solid portfolio and nothing that we're you know, that's melting that we're looking to get rid of quickly. So we're gonna be thoughtful and prudent but it's ultimately so that we can recycle into better IRRs and and that kind of balanced balanced plan. Got it. And then I guess I guess just on thinking about the cap rate on your potential disc dispositions. I mean, you've talked about selling, I guess, stabilized centers. I guess, could you you give a general range of what cap rate those centers would trade out today? Robert F. Myers: Yeah. I'll take that one. Go ahead, So based on some of the assets that we currently have in the market, we believe that the assets will trade anywhere between a 6.3 and a 6.8 Got it. Thank you. Operator: Your next question comes from the line of Paulina Rojas with Green Street. Please go ahead. Paulina Rojas: Good morning. Among your early positions, you you had the sale of Point Loomis, which to my knowledge, included a Kroger store that recently closed And I understand the buyer is a small grocery operator. So when you consider the sale price of that property, how do you think the store's closure impacted value, if at all? Compared to what it might have been had Kroger not closed? Jeffrey S. Edison: Well, Pauline, it's thank you for the question. Bob, do you want to talk about Point Loomis? A great story, actually. Robert F. Myers: Well, it is a good story. I mean, it's an asset that we've owned now for I believe, around eight years. And we ended up doing some redevelopment in the parking lot and build a little small outparcel development. We had a really nice bank, Chase Bank. We had Kohl's as an and then we had Pick n Save. We knew that Pick n Save was struggling for the last I would say five to seven years. So we had worked with them on two-year renewals. And finally came to a point when they announced that they were going to close those 60 stores that this would be on the list. So it wasn't a surprise. The good news is that we did have another grocer lined up who was an owner-operated operator that that purchased it that we've recently closed. So it was time for us to move on from the asset and we did well with it. And I think specifically, Jeff may have a different answer than I do on this, but I think when you lose a grocer like a Kroger, it could certainly impact your cap rate 100 to two fifty basis points. Jeffrey S. Edison: Yes. The only thing I'd add there, Bob, is once you know that the grocer is in trouble, which we've known for seven years, The cap rates already changed. So you're not going to not going to see 200 basis point change in that cap rate the day that they close. It will have already happened. And that's what happened here. That's when we bought the property, we bought it at a cap rate that was very high. And so it was we were we knew we were taking on that risk from the very beginning. That's why we've made a lot of money on that property, even though it didn't it's not very pretty, but we made a lot of money on it. So that is how we you know, the the we think about it. And that's why you've gotta be very you got to be thinking really long term because the the moment there is question about the grocer, that's when the cap rate hits. Paulina Rojas: Yeah. That that makes sense. And somehow related a little bit, but regarding the the new development that you mentioned, I think I heard an IRR of around expected IRR around 10%. And I also believe you mentioned that you plan to sell a portion to the grocer and so I presume you will focus on on small shops mostly in that center. And and my question is, how much would your IRR defer if if you retained ownership of the grocery store rather than selling it to the to the retailer. Right. Jeffrey S. Edison: So, we are going to answer that question December 17 for you We really we can't really answer that. I think we really want to answer that right now. Early and we want to make sure that we're far off on. But your point is well taken. If we had to grow if we kept the grocer the IRR would be less. But we'll get we'll talk more about that in in December. If that's okay. Operator: Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead. Juan Sanabria: Hi. Thanks for the time. I'm just curious if the plan for '26 may include moving the acquisition volume or focus more towards that unanchored given presumably higher yield or or if that's not necessarily the case. And and as part of that do the unanchored centers that you're interested in buying also have that previously mentioned occupancy upside? Or is that not part of that particular story? Yeah. Robert F. Myers: No. That's yes. That's a great question. And answer the question, we're going to speak more in December in terms of our guidance next year. But early indications would suggest that we'd be in the same ZIP code of where we were at this year. In terms of the unanchored strategy, we are going to look more aggressively in that category next year we are already seeing great results from it and better returns. So I can't tell you specifically if we'll buy $100 million or $200 million of the product next year, but we are finding there's 65,000 opportunities in the market in that category and given our operating expertise, we feel like this something that we can step into. So we'll be highly selective. We'll be solving for above 10% unlevered returns in the strategy. But again, I just think it's a very solid complement to what we're doing. Juan Sanabria: Okay. And then just the last one for me. G and A went up the guidance there. If you could just provide a little color as to why and how we should think about growth should it '26, is that more in line with inflation? Is there any sort of tech or other type of investment opportunities you're looking at that may seem to increase it higher a bit. Relative to history next year. John P. Caulfield: Sure. It it's primarily related to performance-based incentive compensation. Ultimately, last year, our growth was lower, and and therefore, you know, we have, an environment that we incentivize for results and so you're seeing improvement in that. As well as investments as we talked about in in in technology and resource that are going to allow us to scale as we look forward. So when I I think about going forward, you know, I I would think we would be, you in this range here. I still think that we are quite efficient when we look at it on a variety of metrics. But the key piece for us is gonna be driving that mid to high single digit FFO per share growth. Going forward? Operator: Your next question comes from the line of Richard Hightower with Barclays. Please go ahead. Richard Hightower: Hey. Good afternoon, guys. Thanks for squeezing me in. I think, just one for me, but maybe put a a different twist on Juan's question You know, you you guys have mentioned it a couple of times on the call, so it's strikes me as as something that's fair game. But when you when you acquire assets, with, you know, fairly significant occupancy upside, you know, does that represent sort of a material component to the long-term three to 4% same-store NOI target. And then, you know, is just just so I understand it, is there any sort of qualitative element about the asset in particular or or even in general, you know, where you have sort of low occupancy going in, is there is there anything to read into the quality of the assets or the location, you know, when that circumstance occurs? Thanks. Jeffrey S. Edison: I don't know, Bob, you want to take sort of the qualitative part? And then John, maybe you can talk about the impact on the of the lease up. Robert F. Myers: Yeah. I definitely believe that the strategy is to find assets. And if you look at what we've acquired, the eight so far, we've been anywhere from 82% occupied to about 100%. So it's all over the map. But there's so much criteria that goes in the decision based on our thirty years of experience and then the growth in the market and the criteria around foot traffic configuration and upside. So we certainly right now we're at like a 6.7%, 6.8% cap rate on what we've acquired and we're in the mid-10s on the unlevered return And certainly, our average around 92% occupied on a blended basis will help us get to those returns. I wouldn't say that there's any quality creep or actually the markets that we've acquired in have stronger demographics, than our core portfolio. So we are staying very disciplined disciplined in terms of what we're buying and we feel really good about it. John P. Caulfield: I think as it gets to the NOI growth, one of the pieces that I would highlight is a lot of times you know, that asset class doesn't have the exclusives or option that some of the larger ones do. But ultimately, we look to our forward NOI growth, the I think this gets a little bit to why we we don't often try to talk about cap rates and we're IRR buyers because there's a direct, you know, tie or, you know, between the going in cap rate and ultimately where what the growth in that asset is. I think the other piece that I would say from a quality standpoint is true on all the assets that we acquire. We're looking at inefficiencies in the market. Ultimately, for undermanaged assets, where an experienced operator with the capital to invest in the asset and the platform that has the leasing expertise and the legal expertise to really maximize the value there, that is what is really driving the IRR growth that we have. And so I think these are those and all of the growth rate anchored assets that we acquire are really, you know, just kind of pushing through that that PECO way of of delivering on the growth, and that that's where we excel. Richard Hightower: Okay. Great. Thanks for the color. This concludes our question and answer session. I will now turn the conference back to Jeffrey S. Edison for some closing remarks. Jeffrey S. Edison: Thank you, operator. So in closing, the PECO team continued our solid performance in the third quarter. And we're pleased to increase our full-year 2025 earnings guidance for NAREIT FFO and core FFO per share. Because of our grocer-anchored neighborhood shopping center format, and our unique competitive advantages, we believe PECO is able to deliver mid to high single-digit core FFO per share growth annually on a long-term basis. The PECO team remains focused on delivering on this expectation and driving value at the property level. Given our demonstrated track record through various cycles, we believe an investment in PECO provides shareholders with a favorable balance of quality cash flows, mitigation of downside risk, and strong internal and external growth. In summary, we believe the quality of our cash flows reduces our beta and the strength of our growth increases our alpha. Less beta, more alpha. On behalf of the management team, I'd like to thank our shareholders, PECO associates, and our neighbors for their continued support. Thank you all for your time today. Have a great weekend. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.
Operator: Good morning, and welcome to FIBRA Macquarie's Third Quarter 2025 Earnings Call and Webcast. My name is Rob, and I'll be your operator for this call. [Operator Instructions] I would now like to turn the conference call over to Nikki Sacks. Please go ahead. Nikki Sacks: Thank you, and good morning, everyone. Thank you for joining FIBRA Macquarie's third quarter 2025 earnings conference call and webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer; and Andrew McDonald-Hughes, our CFO. Before I turn the call over to Simon, I'd like to remind everyone that this presentation is proprietary, and all rights are reserved. The presentation has been prepared solely for informational purposes and is not a solicitation or an offer to buy or sell any securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S. dollar equivalent amounts, unless otherwise specified. As usual, we've prepared supplementary materials that we may reference during the call. If you've not already done so, I would encourage you to visit our website at fibramacquarie.com and download these materials. A link to the materials can be found under the Investors, Events and Presentations tab. And with that, it is my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon Hanna. Simon? Simon Hanna: Thank you, Nikki, and good morning, everyone. I'm excited to share that we delivered another solid quarter of financial and operating performance with record-breaking results across key metrics. At the same time, we executed on both strategic and opportunistic initiatives that create value for our certificate holders and continue to position us for sustainable growth. The third quarter showcased the strength of our business model, starting at the top line. For the quarter, we achieved record consolidated revenues, up 8.4% in underlying U.S. dollar terms over the prior year. This momentum translated through to our quarterly U.S. dollar AFFO, which increased an impressive 6.6% annually. [ AFFO ], our quarterly distribution reflects a significant 17% increase from last year, all whilst maintaining a comfortable and prudent payout ratio. Turning to our industrial portfolio. We continue to see strong performance amidst a subdued market backdrop with average rental rates increasing 6.8% year-over-year. Notably, we achieved another quarter of double-digit renewal spreads, 17% on negotiated leases with high quarterly retention of almost 90%. Our full year 2025 performance continues to shape up rather well, perhaps best demonstrated by the 6.1% increase in U.S. dollar same-store NOI year-to-date. So in summary, we are very satisfied with the sustained momentum enjoyed from our industrial portfolio through to today, and we expect that momentum to carry through to the fourth quarter, providing for a strong finish to the year. Moving to our capital allocation and asset recycling initiatives. We had an active quarter closing on a number of transactions. I'm excited with the continued growth of our Mexico City footprint with the acquisition of a prime 250,000 square foot logistics facility. We acquired the property through a sale and leaseback for $35 million, leased to a leading global consumer company under a 3-year U.S. dollar-denominated contract. It not only provides 2025 NOI and AFFO contribution, but also positions us to capture embedded real rental rate growth. This acquisition exemplifies our thoughtful approach to capital allocation. In this case, we secured a scarce well-located infill asset that enhances our portfolio quality, while providing visible earnings and NAV accretion. We're optimistic about repeating this type of success in other deal opportunities under our review, alongside pursuing additional strategic land investments in our pipeline. We also continue to selectively pursue asset recycling initiatives. And during the third quarter, we sold a vacant industrial property in Chihuahua City for $14 million, representing a 30% premium to book value. This transaction demonstrates our commitment to active portfolio management, allowing us to accretively recycle capital into attractive opportunities like the Mexico City acquisition, I just mentioned. Turning to our retail portfolio. We also delivered strong results and achieved a post-pandemic record occupancy of 93.6%. Rising occupancy and rental rates contributed to annual NOI growth of 4.1%, essentially reaching record levels of operating cash flow. We maintain a cautiously optimistic outlook on the operating performance of our retail portfolio and expect the medium-term growth trends to continue. Looking at the broader market environment. While we acknowledge the ongoing uncertainty around trade policy, we also remain confident in Mexico's strategic position within North American supply chains. The long-term fundamentals that have driven Mexico's manufacturing growth over the past decades remain firmly intact, including high-quality labor, proximity to major U.S. markets and continued trade advantages. Notwithstanding the evolving geopolitical landscape, our high-quality portfolio, internalized platform and strategic market positioning, enables us to continue to deliver strong results and capitalize on growth opportunities. It is also worth mentioning our unique vertically integrated platform gives us, amongst other benefits privileged access to market intelligence and allows us to respond swiftly to changing conditions. This positioning, combined with our ability to capture embedded rental growth allows us to continue delivering value to certificate holders, while building a long-term portfolio resilience. Before turning the call over to Andrew, I want to highlight our ongoing commitment to sustainability. We are proud of achieving 3 green stars in our 2025 credit assessment, including a score of 94 points for the development benchmark, exceeding our peers on a regional and global basis. We're also taking this opportunity to publish our annual ESG report that is now available on our website, which provides a comprehensive overview of our sustainability initiatives and performance. Andrew, over to you. Andrew McDonald-Hughes: Thank you, Simon. I'm pleased to report another quarter of strong financial performance that reflects both the quality of our portfolio and the effectiveness of our capital allocation strategy. For the third quarter, we delivered AFFO of USD 29.7 million, representing a solid 6.6% increase year-over-year and demonstrated our continued ability to grow earnings on a per certificate basis. Our balance sheet remains exceptionally well positioned. During the quarter, we successfully completed the refinancing and expansion of our sustainability-linked credit facility. This USD 375 million facility comprises a $150 million 4-year term loan and a $225 million 3-year revolving credit facility. The transaction delivered multiple strategic benefits. Firstly, it enhanced our liquidity position to approximately USD 625 million, providing substantial financial flexibility to fund growth initiatives. Second, it reduced our weighted average cost of debt to approximately 5.5%, while extending our debt maturities. And third, the sustainability-linked features align our financing strategy with our ESG objectives through green building certification targets with the sustainability-linked portion of our drawn debt now representing 68%. As of September 30, we maintain a prudent debt profile being 92% fixed rate with our CNBV regulatory debt to total asset ratio standing at 33.2% and a robust debt service coverage ratio of 4.6x. Embedded firepower stands at approximately USD 500 million, whilst managing to a 35% LTV ratio, including the potential recycling of our retail portfolio. Turning to our guidance. We are reaffirming our FY '25 AFFO per certificate guidance to a range of MXN 2.8 to MXN 2.85 and our FY '25 AFFO guidance in underlying U.S. dollar terms to a range of $115 million to $119 million, representing annual growth of up to 5%. We are also reaffirming our cash distribution guidance for FY '25 of MXN 2.45 per certificate. This represents a 16.7% increase in peso terms and translates to an expected FY '25 AFFO payout ratio of approximately 87% based on our guidance midpoint, representing a well-covered distribution. This guidance assumes stable market conditions and no material deterioration of the geopolitical landscape or Mexico's key trading relationships, including the potential implementation of tariffs. Looking ahead, our strong balance sheet, ample liquidity and disciplined approach to capital allocation position us well to navigate market uncertainties, while selectively pursuing growth opportunities that create long-term value for our certificate holders. In closing, I want to recognize the exceptional work of our entire team. Their dedication and expertise continue to drive our operational excellence and strategic execution. With that, I'll ask the operator to open the phone lines for your questions. Operator: [Operator Instructions] And the first question comes from the line of Andre Mazini with Citigroup. André Mazini: Yes. So my question is around the potential economic deceleration Mexico is supposed to be having now in the second half of 2025. A lot of talk on that among investors and media. So I wanted to understand if you're feeling that this economic deceleration in your conversation with tenants, maybe splitting between the 3 tenant types, industrial light manufacturing, industrial logistics and the retail tenants as well. Simon Hanna: Yes. Thanks, Andre. Thanks for the question. Yes, I guess it's a bit of a dynamic backdrop out there. As you can appreciate, really where we're much more correlated with the U.S. GDP, U.S. economy more so than Mexico, and that's obviously going to be where most of the activity will basically drive outcomes for us. When we break it down between those 3 categories, look, I'd say, in general, for industrial light manufacturing, fair to say that our volumes production is slightly off compared to last year. When you look at auto parts production, it's off around sort of 7% compared to last year. So I'd say nothing that's fundamentally causing a problem there from a demand perspective, maybe a slightly lower utilization. But in general, sort of, I'd say, steady demand backdrop and something which we expect to prevail regardless of that Mexican -- Mexican economy dynamic, more so just to do with how trends continue out of the U.S. So that will very much then link into the logistics part of industrial, at least for the business-to-business, where we have most of our exposure. It will be correlated more or less with the trend on light manufacturing. So again, I'd say for both manufacturing and the B2B logistics going pretty steady, and I think the outlook is steady as well. Obviously, the name of the game there is really USMCA as a real catalyst to change that demand environment probably heading towards the second half of next year. Retail, yes, definitely more sort of linked to Mexican economy fundamentals. But I'd say the consumer remains in pretty good health. We're seeing good employment, wage numbers, et cetera. general foot traffic and activity in the shopping centers is we've been happy with that. You would have seen some of the encouraging metrics come through the quarter, record occupancy, rising rental rates, same-store were up about 5% year-over-year at the NOI level. So I'd say generally good conditions there. Cinema is continuing to struggle a little bit more, I'd say, compared to the rest of the tenant mix to be fair. Gym is doing rather well. Supermarkets is doing rather well, restaurants rather well. So that's probably cinema probably the main weakness that we're still looking for a bit of a pickup. But again, we have a cautiously optimistic outlook as well when it comes to retail, expecting fairly steady demand environment. So overall, that leads us up to a pretty good outlook for heading into 2026. Operator: The next question is from the line of [ Helena Ruiz ] with [indiscernible]. Unknown Analyst: I have a couple. The first one is on the stress. I was wondering if you could give us like any color if you expect them to remain like at these levels for the last quarter of the year and next year? And also, if you could give us a breakdown like this growth is coming from all regions like especially one market? And then my second question is on occupancy, like looking at each market, like most markets remain like really strong. The only one that saw a drop in occupancy are Monterrey and Juarez. So if you could also give us a bit of color on why the occupancy fell in those markets? Simon Hanna: Thanks, Helena, for those questions. Yes. Look, when it comes to lease spreads, firstly, taking that one on. Look, pretty good quarter again, around 17%. We have a sort of a last 12-month run rate of around 20%. So that's been tracking, I'd say, at a pleasing level for us. When we look ahead, virtually 0 rollover on 4Q, so it doesn't really move the needle. So we should be somewhere close to that run rate level on a full year basis. Outlook for next year, it's still early. We have about 16% rollover, 17% rollover next year. So we have some opportunity there to continue capturing, I would say, positive momentum when it comes to spreads, a little bit early to say how much. Obviously, the -- a little bit there depend on market conditions. But I think we -- we'd like to think that we can capture positive momentum in the same way we're seeing through the balance of this year. When it comes to some of those, I'd say, market-by-market dynamics, and I'd say there's -- it's quite an active market out there even despite the subdued new leasing conditions. I would say, in general, we are seeing that the same dynamic we have today is what we've seen for the last couple of quarters, where steady occupancy and operating trends with USMCA being the real catalyst to, we think unlock new demand. But taking that down to, I guess, market levels to answer your question, Monterrey is probably the most active market. It's also one of the biggest in the country, around 185 million square feet. So we still see a lot of activity there, a lot under construction. So supply is still coming through. And that's always been the Monterrey way to be fair, but there's probably around 8 million under construction. Amongst all that, though, on a quarterly basis, we're seeing sort of close to 4 million new leasing to basically offset some move-outs of about 4 million. So no doubt, there's a little bit of vacancy there north of 5%. And you can probably say it's more of a tenant market than a landlord market these days. But -- when it comes to the type of product that we're delivering in the market, this is in Monterrey, but in other markets as well, I'd say that we're at the upper end of that tier. And that pro forma vacancy is not so much of an issue for us. We're looking at in terms of the best quality buildings in the market, that's who our competition is because that's what we're building in terms of location, quality of building size, utilities, et cetera. So that real competition is much more narrow. So whether you're even talking someone like Tijuana, where, again, you're seeing a lot of vacancy or supply come on, it doesn't really change the equation for us. We're in the best part of town with some of those flagship developments up against really just a handful of building competitors. And so that noise around sort of 13%, 14% vacancy in Tijuana or 8% in Monterrey, it's not as relevant when you actually just boil it down to what the hard competition is against our Class A development product and we feel very well positioned to have some activity on that as we get through the year in USMCA in particular. Juarez, I'd say, is probably remains pretty soft. That one has got a lot more sort of undifferentiated vacancy. It's a bit more of a slower market than Monterrey at the moment, much more USMCA linked as well. So I think we expect more activity in that second half of next year or maybe the summer. Reynosa, again, sort of a key northern market, I'd say, very, very quiet as well and had a good positive absorption quarter for the quarter. But on a year-to-date basis, it's pretty flat in terms of absorption. And again, you'd expect that to be more correlated with USMCA pickup. Operator: The next question is from the line of Jorel Guilloty with Goldman Sachs. Wilfredo Jorel Guilloty: So my first question is around the recent M&A that you announced or mentioned in the report in Mexico City. So you bought an asset $35 million, sale leaseback. And back of the envelope, this is like $1,500 per square meter. So I wanted to get a sense of what cap rate you saw for this asset? And also, if the idea here is on further capital allocation, if it's in Mexico City that you want to focus on. And then -- and I'm sorry if you spoke about this earlier, but I wanted to ask about Monterrey and Juarez where you saw occupancy declines of 300 and 120 basis points each on a sequential basis. So I wanted to get a sense of what drove that, if it's 1 tenant or multiple, just to understand if this is a one-off or a trend. So any color would be very helpful. Simon Hanna: Okay. Thanks, Jorel. Great questions there. Yes, the Mexico City acquisition, that was a fantastic one to do is irreplaceable location around 15 minutes from downtown in the Vallejo submarket. And so that's a great last mile district to be in for sure. We're able to access that facility, really thinking about the stabilized cap rate at around a 10% level U.S. dollar sort of the rental as well. So that's the way we're looking at it sort of seeing that stabilize into a 10% cap. Now it's got an initial 3-year lease period there with the user. So -- sort of coming in at sort of an 8% area, but that's definitely below where we think the market rates are. So just thinking about that on a real embedded rental rate growth profile when you actually look at 3 years down the track, where you think that should land around 10%. And so if you're able to access Mexico City last mile stabilized 10%, dollarized 250,000 square foot, we take that all day long, and we're very excited about that. And yes, potentially, there could be 1 or 2 other opportunistic deals like that, that could come along. We're currently looking at 1 deal in particular and we'd like to think that maybe there's an opportunity to do that opportunistically. Again, let's see, so I think that was a great transaction to pull off from a capital allocation point of view. And I'm happy to say, repeat that success. Moving to the second question, on Monterrey, Juarez. So yes, I think from our own perspective, we -- in line with the market trends, we did see some vacancy there. But when you actually look at what drove that year-over-year, pretty simple story, Jorel, in the sense that we just delivered some Class A product that has not been leased up. So it's been added into our inventory. Both fantastic buildings, and we think very marketable. And again, something that will probably be more linked to USMCA ultimately, given the type of buildings and locations they're at. So we feel very good about the buildings that have been added to inventory, even though they're unleased in the short term. We do think they've got great income potential over the medium term. And we actually take the step back there, Jorel, actually not just what we've delivered in Monterrey and Juarez, but the other Class A product we have that basically has income potential and you add that up in terms of sort of getting close to 1 million square feet around the country. The exciting thing there is that we actually do have some real embedded growth that I don't think has been properly priced into our valuation or share price. And any type of a meaningful lease up there on that sort of Class A development product that we have, we're fully invested. It's basically built product ready to be leased up, mainly subject to USMCA, if you want to say that. That's got the potential ability to add something like, I'd say, comfortably north of $10 million at the NOI level. And you can obviously just drop that down to AFFO as well given that we're essentially fully funded and built that. So that's a pretty exciting sort of short-term opportunity we think, to help drive NOI and earnings is to basically take advantage of improving market conditions into next year, particularly with USMCA to trigger that lease-up. Wilfredo Jorel Guilloty: And a quick follow-up, if I may. So the sale leaseback opportunity, you mentioned there's a few in Mexico City, but are there opportunities such as those in other markets that you're in? And would it be focused on logistics? Simon Hanna: Yes. I think the answer is there are. Obviously, we're sort of looking at selective opportunities here. We particularly like Mexico City Logistics. That's a favored market for us where we'd like to increase our footprint. There are other opportunities in those other large consumption markets as well, sort of more of a logistics spend, you could say. But as I say, when you look actually see what's in our immediate pipeline and possible opportunities, we're thinking more Mexico City as being executable in the short term. Operator: The next question is from the line of Alejandra Obregon with Morgan Stanley. Alejandra Obregon: Mine is on capital allocation as well. So I was just wondering if you can provide some color on how you're thinking of your uses of cash for 2026. I mean if we split it between dividends, acquisitions, development, how would that look like in 2026? And what are the elements that will get you to any sort of decision on the mix on that front? And then the second one is on the M&A market. So I was just wondering if you're seeing any change in sentiment or acceleration in M&A activity that perhaps could trigger some recycling opportunities for you other than the sale and leaseback that you just mentioned? Simon Hanna: Sure. Yes. Thanks, Alejandra. So yes, look, I think in terms of capital allocation, fairly consistent outlook with how we currently have been deploying our capital. I think the main focus in the medium to long-term is going to be on that industrial development program. We have a land bank there of around 5 million square feet of buildable GLA in core markets. So that's something that we can flex up in terms of development activity. As you know, we've been doing 0 construction starts for the last few quarters. But as we get better visibility on demand fundamentals, that will remain the primary avenue of how we allocate our capital into those development properties, mainly on a spec basis, you could say. We remain also interested in pursuing certain opportunities in the short term. They boil down, as I say, one is 2 opportunistic acquisitions where we can access those sort of development like returns, if you want to call it that, something like the 10% cap Mexico City. If we can do that on a more sort of a bite-sized basis to complement what we're doing on the development program, that's great. I would say the other investment portal would be through strategic land bank investments to basically complement and add to the $5 million that we have so that we will basically continue that runway for building out getting back to that sort of 1 million to 2 million square feet of velocity on a medium- to long-term basis is where you want to be. And adding to that land bank will be an important part of that equation. When it comes to buyback, I guess that's obviously another opportunity. I'm not sure, Andrew, if you wanted to give color on that. Andrew McDonald-Hughes: Yes, happy to. I think as we've said previously, we continue to favor allocating capital to development and value-add opportunities where we see obviously; a, you have a much lesser impact on the balance sheet over the long-term. You're not impacting liquidity overall and you're setting yourself up for valuation upside and the growth of those underlying assets. And so we'll continue to do that. I think historically, we've guided to in the order of $100 million to $150 million of development per year. We've obviously been softer this year given the broader macro backdrop, but we continue to work towards some permitting and predevelopment works with respect to the recent acquisitions that we made in both Guadalajara and Tijuana. And I think there's a good opportunity for those particular projects to progress over the next 12 months. And I think more to the point, we see a broader opportunity for future growth with the embedded potential recycling opportunity of our retail portfolio, along with the broader liquidity that we have access to through the balance sheet, which really sets us up for in the order of $500 million worth of potential firepower over the medium term. So ultimately, from a growth perspective, over the near term, there's a deep sense of embedded value with the development projects that we have delivered to date that are well positioned for lease-up once we see the tailwinds return to the markets, which we're positive on with respect to how that looks over the short to medium term. And just with what we have already completed and delivered; that's in excess of $10 million in potential NOI contribution over the coming years. And we think that, that will come to fruition and have a good line of sight to lease up on those properties as we go through the USMCA renewal and have more, I think, surety on the tariff and macro backdrop going forward through 2026 and into 2027. So overall, I think broadly speaking, from a capital allocation standpoint and the growth opportunities that the business is well positioned. Alejandra Obregon: Excellent. That was very clear. Operator: The next question is from the line of Alan Macias with Bank of America. Alan Macias: My question was answered, but just going back to M&A, anything on the table regarding the retail sector? Simon Hanna: Yes. Thanks, Alan. Good to hear you. So I think retail, we're definitely very satisfied with the general trend of what we're seeing in operating financial metrics at the risk of repeating myself, but happy to say at 93.6%, record occupancy on a post-pandemic basis, NOI essentially at record levels, up around sort of $7 million, $8 million quarterly run rate. It's been a fantastic contributor to the overall returns. As we think about operational performance, probably a little bit more upside to go, I think, even as good as it's been, that we are seeing some interesting opportunities to add to that overall, NOI performance, and that will obviously lead into valuation also becoming higher. And as you think about that sort of valuation number, it's not insignificant by any means, sort of -- we're talking sort of $300 million plus. And so the interesting dynamic that we're seeing just as NOI continues to improve is obviously a more conducive interest rate backdrop with the interest rates locally falling from, let's say, 10% to sub-8% and you're sort of getting into positive leverage territory and sort of more compelling M&A backdrop. So we like the sound of that in terms of how that's all converging and [indiscernible] for an ability to start thinking about that sort of medium-term opportunity that Andrew mentioned around recycling. And really, that's what we've got to be thinking about in terms of -- apart from that short-term catalyst to grow earnings, which is really simple, which is just to lease up the Class A stuff that we've built and is ready for lease-up. The medium-term opportunity is certainly quite exciting and quite compelling when we think about that embedded firepower of around $500 million, that really allows us to flex up when it comes to building out the land bank and thinking about additional investments. We feel quite excited and well positioned with the ability to do that. Operator: Thank you. At this time, there are no further questions. I'd like to turn the floor back to management for closing remarks. Simon Hanna: Yes. Thank you for that, Rob, and thank you for everyone for participating in today's call. Along with Andrew, I would like to thank all of our stakeholders for your ongoing support, and we very much look forward to speaking with you over the coming days and weeks as well as updating you again at the end of the quarter. So have a great one. Thank you. Operator: The conference has now concluded. Thank you for joining our presentation today. You may now disconnect.
Operator: Good day, and welcome to the Third Quarter 2025 Comfort Systems USA Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Julie Shaeff, Chief Accounting Officer. Please go ahead. Julie Shaeff: Thanks, Michelle. Good morning. Welcome to Comfort Systems USA's Third Quarter 2025 Earnings Call. Our comments today as well as our press releases contain forward-looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based upon the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K and Form 10-Q as well as in our press release covering these earnings. A slide presentation is provided as a companion to our remarks and is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks. Brian Lane: All right. Thanks, Julie. Good morning, and thank you for joining us on the call today. Our amazing teams across the country continue to deliver excellent results for our customers, and they have delivered financial results that far exceed even our recent outcomes. We earned $8.25 per share this quarter, which is double what we earned in the same quarter last year. Our mechanical business had a sharp increase in profitability, and our electrical segment was higher as well. We also had favorable developments in some late-stage projects that contributed to our great results. Construction is driving most of our results, but service revenue and profit also grew by double-digit percentages. Our bookings were strong, and our backlog at the end of the quarter grew to a new high of $9.4 billion. As a result of exceptional demand for our services, we achieved a second consecutive same-store backlog increase of more than $1 billion despite significant third quarter burn. We continue to book work with good margins and good working conditions for our valuable people. We entered the fourth quarter of 2025 with $3.7 billion more in backlog than last year at this time. I'm happy to announce the acquisition of 2 companies on October 1. FZ Electrical, a contractor with strong industrial capabilities located in Grand Rapids, Michigan; and Meisner Electric, a contractor based in Boca Raton, Florida, with strong capabilities in health care and other attractive markets. We are thrilled to have these 2 companies join the Comfort Systems USA family of companies, and we welcome them. Today, we increased our quarterly dividend by 20% to $0.60 per share, and we have actively purchased shares during 2025. With solid bookings and great demand, we expect continuing growth and strong results in 2025 and 2026. Trent will discuss our operations and outlook in a few minutes, and I will make closing comments after our Q&A. But first, I will turn the call over to Bill to review our financial performance. Bill? William George: Thanks, Brian. Our third quarter results were remarkable in every way with 33% same-store revenue growth, sharply higher margins, EPS up by over 100% from the prior year and a surge of over $500 million in quarterly free cash flow. We achieved more than $400 million in quarterly EBITDA for the first time ever, and that's a 74% increase over the same quarter 1 year ago. So we'll start with revenue. Revenue for the third quarter of 2025 was $2.5 billion, an increase of $639 million or 35% compared to last year. Electric segment revenue grew by 71% and mechanical revenue increased by 26%. Through 9 months, same-store revenue increased 23% and currently, our best estimate is that fourth quarter same-store revenue will grow in the high-teen range as compared to the same quarter last year. For full year 2026, we expect same-store revenue growth to continue most likely by a percentage in the low to mid-teens and weighed more heavily to the first half of the year. Gross profit was $608 million for the third quarter of 2025, $226 million higher than 1 year ago. Our gross profit percentage grew to a remarkable 24.8% this quarter compared to 21.1% for the third quarter of 2024. Quarterly gross profit percentage in our mechanical segment increased significantly to 24.3% this year compared to 20.3% last year. Margins in our electrical segment also grew to 26.2% as compared to 23.9% in the third quarter of 2024. Great ongoing execution augmented by favorable developments in certain late-stage projects drove us to higher margins in both segments. Our largest single discrete project development was recognizing $16 million of previously deferred revenue on a project as a customer emerged from bankruptcy. We currently expect that 2026 profit margins are likely to continue in the strong ranges that we have achieved and averaged over recent quarters. SG&A expense for the quarter was $230 million or 9.4% of revenue compared to $180 million or 9.9% of revenue in the third quarter of 2024. SG&A increased mainly from ongoing investments in people to support our higher activity levels. Our operating income increased by just over 86% from last year from $203 million in the third quarter of 2024 to $379 million for the third quarter of 2025. Our operating income percentage surged to 5.5% this quarter from 11.2% in the prior year. Our year-to-date tax rate was 20.9%. Our effective tax rate in the first quarter was lower due to interest we received on a delayed refund relating to our 2022 federal tax return. We expect our tax rate to continue to be around 23% for the rest of 2025 and into 2026. After considering all these factors, net income for the third quarter of 2025 was $292 million or $8.25 per share as compared to net income for the third quarter of 2024 of $146 million or $4.09 per share. Thanks to great execution by our people, EBITDA increased by 74% to $414 million this quarter from a strong $238 million in the third quarter of 2024. Our trailing 12-month EBITDA is now $1.25 billion. Free cash flow for the third quarter of 2025 was $519 million, and year-to-date, our free cash flow is $632 million. We purchased additional shares this quarter. And year-to-date, we have spent around $125 million, buying approximately 345,000 shares at an average price of $363.13 per share. At the end of September, our net cash position was $725 million. As Brian mentioned, we acquired 2 fantastic companies on October 1, Feyen Zylstra and Meisner Electric. We funded approximately $170 million in purchase consideration in the first -- fourth quarter, and these acquisitions are expected to provide over $200 million in incremental annual revenue and $15 million to $20 million of annual EBITDA. In August, we finalized an amendment to our senior credit facility that increased our borrowing capacity from $850 million to $1.1 billion on very favorable terms. The new maturity date is October 2030. Our balance sheet and cash flow have put us in a great position to continue to invest, grow and reward our shareholders. That's all I got. Trent? Trent McKenna: Thanks, Bill. I'm going to discuss our operations and outlook. Our backlog at the end of the third quarter was a record $9.4 billion, a large sequential and large year-over-year increase. Since last year at this time, our backlog has increased by $3.7 billion or 65% and $3.5 billion of the increase was same-store. On a sequential basis, backlog increased by $1.3 billion or 15%, all of which was same-store. Third quarter bookings were especially strong in the technology sector, both in our traditional construction business as well as the modular part of our business. We are entering the final quarter of 2025 with same-store backlog 62% higher than at this time last year, and our project pipelines remain at historically high levels. Industrial customers accounted for 65% of total revenue in the first 9 months of 2025, and they are major drivers of pipeline and backlog. Technology, which is included in Industrial, was 42% of our revenue, a substantial increase from 32% in the prior year. While our manufacturing revenues declined on a percentage basis, we continue to see good demand for manufacturing, but in many cases, data center opportunities are more compelling. Institutional markets, which include education, health care and government remain strong and represent 22% of our revenue. The commercial sector provided about 13% of revenue. Most of our service revenue is for commercial customers. Construction accounted for 86% of our revenue with projects for new buildings representing 61% and existing building construction 25%. We include modular in new building construction and year-to-date, modular was 17% of our revenue. We remain on track to have 3 million square feet of space in our modular businesses by early 2026, and we will prudently consider additional investments next year based on the strong demand we are seeing in modular. Service revenue was up 11%, but with faster growth in construction, it is now 14% of total revenue. Service profitability was strong this quarter, and service continues to be a growing and reliable source of profit and cash flow. I cannot say enough about the amazing team of craft professionals that we have working hard for our customers every single day. Thanks to the teams that are working across the country, we are optimistic about our future. I want to close by joining Brian and Bill in thanking our over 21,000 employees for their hard work and dedication. I will now turn it back over to Michelle for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Adam Thalhimer with Thompson, Davis. Adam Thalhimer: Congrats on another wave of record results. I wanted to ask high level on the technology side. Does the bidding activity match the bookings and the revenue growth that you saw in Q3? Brian Lane: Yes, Adam, the opportunities, the pipeline is still robust, matching quarter 3. There's still more opportunities that then probably can be handled out there in the market at the moment. So we've seen no let up at all in the opportunities. Adam Thalhimer: And then I'm curious on capital allocation. Your free cash flow -- your net cash, I think, broke out to an all-time record in Q3. Just curious how you're thinking about that and if just accumulating cash from here wouldn't be the worst thing in the world? William George: Well, that's never the worst thing in the world. There are worse alternatives to accumulating cash. But we haven't changed our capital allocation thinking since 2007. We will -- to the extent we can find opportunities that we have conviction around, we will deploy most of our cash doing acquisitions. We will continually buy back our shares using a portion of our free cash flow, and we get aggressive on that when we feel like the stock has dipped to -- relative to our prospects. So for example, when it dipped earlier this year, we spent $100 million in a couple of weeks buying shares. And then we -- one point you might be making is there's so much cash now. Is it realistic for us to deploy it into acquisitions? And I think the answer is we've faced that problem on a couple of stair steps in our cash over the last few years. So far, our reputation as an acquirer and our commitment to great outcomes for the people we buy have allowed us to find good opportunities to deploy our cash. One thing people might not think about is we are growing, but the companies we're buying are growing as well. There's a certain amount of scaling going on. So I meet with companies regularly that are having -- that have results that are twice as big as they were 2 or 3 years ago. And so in a sense, the reality is the opportunity set that's facing a company with a great, deep, well-established workforce of pipe fitters or electricians is amazing. These companies are worth more today than they were 5 years ago just because of actually what's going on because of the investments they've been making in the meanwhile. And we're optimistic. We're going to just try to keep doing what we've been doing. And if we wake up with the problem of we just can't keep up with the cash, then we'll find ways to reward our shareholders in other ways. Operator: Our next question comes from Sangita Jain with KeyBanc Capital Markets. Sangita Jain: So a couple that I have. One is on the cash flow in third quarter, your free cash flow was especially strong. So I'm just trying to think how we should think about it for the whole year and if there were any material advance payments included in 3Q that we should be aware of? William George: So for one thing, there wasn't an extraordinary event like there has been a few times over the last few years where we get way ahead due to some specific event or we have a turnaround where that event is sort of recalibrated. I will say that you can always expect our cash flow to be roughly equal to our net income. We are a cash business. We pay our taxes in cash. So when you see a quarter where we have cash flow above our net income, at some point, we're going to give that back. When it's below our net income, then we have cash we'll collect in the future. Through 6 months, we were behind our net income. There were some specific reasons for that, that we've discussed. In the third quarter, we had a big catch-up. We're getting fantastic payment terms. As we can negotiate good pricing and good conditions for our workers, we can also negotiate good payment terms. So we just had a great cash flow quarter, but nothing fundamental has changed. We're going to cash flow our net income. Sangita Jain: Got it. And then if I can ask one on backlog growth. Obviously, your backlog suggests that you're booking out further than a year. Can you speak a little bit to that? And if it's primarily on the modular side or also on the traditional construction side? If it's just data center or also life sciences pharma work that you feel like you're booking out earlier and earlier? Trent McKenna: So when -- our bookings for the quarter, right, we were broadly across all of our businesses. And there were some -- the bookings that we had in modular, those are going to -- those are pushed out farther. So those aren't going to be exactly relevant to what I'm about to say. But for the rest of our bookings, all of those bookings are going to start sometime within the next year. They might be longer-term projects because of the size of the projects, but they are all projects that are slated to begin in 2026. So when we talk about bookings out further out, that's more of the modular side of the business. Operator: Our next question comes from Julio Romero with Sidoti & Company. Julio Romero: Just following up on the last question about the order acceleration. Historically, you guys are very prudent at kind of not taking on additional backlog and not getting out over your skis. I know, Trent, you mentioned a piece of the backlog growth was modular orders that were further out. But just help us think about the step-up in orders here for the last several quarters. Part of it is booking yourselves further out, but some of it is also, I guess, securing enough pricing in your bid margins to compensate for that additional risk of additional orders? Brian Lane: Yes. So Julio, we still have the same philosophy we've always had. We'll take on work we know we can do that we can handle with the skilled workforce that we have. So we look at each opportunity, particularly on the lodger side, make sure the timing is right, work for us that we can achieve a good product for our customers. So if you look at the timing of what we're winning, when it's coming in and can we handle it, we feel very comfortable with the workload that we have today. Trent McKenna: And I want to add too, Julio, the collaboration between our companies is really permitting a lot of this additional booking that you're seeing. It's the companies working together to share workforces so that they can tackle projects that would otherwise have been kind of outside of their ability scope previously. Brian Lane: And Julio, one thing that we do have going for us is that we have folks that will travel and you see some of this work, maybe get all the West Texas, Abilene, Amarillo that we can handle because we have people that will travel to these sites. Julio Romero: That's very helpful. And then I know a big emphasis is being selective with regards to the specific partners you work with. And I think you guys mentioned earlier, your partners are getting bigger. They're taking on additional work. But just throwing that question back at you guys, has the pool of partners that you work with increased? Or is this just more a function of you doing more with your existing partners? William George: So what Trent was referring to was our companies working together. We do work sometimes with -- we worked with some companies. We worked with a company we bought, called Ivey, before we bought them. We have selected situations like that. But I think overwhelmingly, we're really talking about companies that are Comfort Systems USA companies that are 50 or 100 or 10 or 50 miles from each other. Brian Lane: And it's really a great point for people to come and join us. They have opportunity to work with a lot of other companies in the same industry. under the same overall structure that we have. Julio Romero: Yes. And I'm sorry to rephrase my question, I meant when I said has the pool of partners increased, I meant has the pool of kind of the customers that you typically have worked with increased? Or are you doing more with existing customers? William George: I would say there aren't many people in the United States we haven't done work for in the past. If they've done work in the past, we've probably done it. So that's kind of a hard question to answer, but it's mostly -- there is a definite preference for people who we have a history of succeeding together with. We have rough projects, we don't want to do work with those people anymore. We want to do work with the people that we have great projects with over and over. Brian, did you -- I mean... Operator: Our next question comes from Brent Thielman with D.A. Davidson & Company. Brent Thielman: Congrats again, another great quarter. I guess, Brian, Trent or Bill, one of the questions that seems to come up often is just your ability to sustain the growth you're seeing outside of modular, just given sort of the industry labor constraints out there. You've grown same-store, call it, 20% or more for what looks to be a fourth year in a row here. And I know there's a lot of factors to the growth over the last few years. But maybe you could talk about just sort of how critical have your sort of internal recruiting, hiring efforts been in recent years in support of that growth versus job values getting bigger? And then also, I guess, is there any sort of slowdown or change you've seen in terms of your ability to bring in people to support the growth, I guess, outside of acquisitions? Brian Lane: Yes. So I'll go first, Brent. First and foremost, this is a good place to work, right? We treat people fair in what respect. We pay them well, and there's a good benefit package. So we're constantly recruiting. But as you can tell by our numbers, we're up over 21,000 access to another probably 35,000, 34,000 contract labors that we have. So all in all, we're constantly recruiting, but we do get people to come here and work. We also have a lot of work, which makes us a good place to work as well. So how much can we grow? We continue to train. We're improving productivity constantly. We're trying to pick the right jobs that we're good at planning them using BIM, prefab and modular help us. But the enhancement that we are achieving with the skilled workforce is the best I've ever seen in my career today. Brent Thielman: Okay. All right. And then the 3 million square footage of space in modular that, I guess, becomes available early 2026, I think you said Trent. Is that capacity or space already effectively sold out? Or do you expect it to be soon? Trent McKenna: Yes. The answer is yes. Brent Thielman: Okay. Just one last technicality, if I could. The $15.5 million write-up that you called out, I think, in the filing, is that all reflected in the mechanical segment? Or I'm just trying to level set what kind of normalized margin looks like. William George: So that happens to be in the electrical segment. But one of the things we were basically saying is we always get these questions, did you have anything special in the quarter? Did you have jobs that closed out especially well? We have a lot of jobs now. So we almost always do. But at this point, we did have some special closeouts this quarter that were particularly helpful. That was the biggest one. So in MD&A, you're required to give an example. We gave the biggest single example, but they happened in both electrical and mechanical. We're late in some jobs. The jobs are going well. The systems are being turned on and they work well. We're able to relieve contingency. So we did -- this would have been a great quarter without those. This would have been a record quarter even without some of those pickups. Some of those pickups pushed our results a little further, and we wanted to just let people know that. Brent Thielman: Okay. Sorry. And Bill, theoretically, you have these every quarter. It just varies. So even if we compare year-on-year, you might have had them last year? William George: But the last 3 or 4 quarters, we were frequently asked, did you have any special closeout? And we said nothing out of the usual. This time, we're saying we kind of had some a little more than we would -- we might normally count on having. So I would say we do have -- we had some really good stuff happened this quarter. Operator: Our next question comes from Josh Chan with UBS. Joshua Chan: Congrats on a really great quarter. I wanted to ask about the backlog question, but especially within the last 6 months because obviously, you've had a strong demand environment, you have labor constraint, you have labor sharing for a while now. But really over the last 2 quarters, you had these 2 consecutive $1 billion step-up in the backlog. And I was just wondering if anything is different in this last 6 months versus the longer period, I guess. William George: It's an interesting way you asked that question. Every quarter is different from every other quarter, right? We had some big bookings. Sometimes they're in pharma, sometimes they're -- it's never exactly the same because this is lumpy stuff, as we've said. We had a lot of really, really good opportunities get to the point where they were documented and could go into backlog this quarter. Year-to-date, it's the companies you guys know of and think about. There were some interesting ones this quarter. It's work we know are really companies that are doing work they've done over and over. So we feel great about it. But there's just such a good market. There's such a good opportunity. Our customers, they want us to commit early, so they commit early. It's just a fantastic market, and we have just unbelievably good companies. Joshua Chan: Yes. That makes a lot of sense. I appreciate the color there. And then on modular capacity, if you were to expand kind of incrementally from here, would there be a preference to serving existing customer or I guess, demand for that? Or would there be a preference to kind of grow with other types of customers within modular? William George: I would say we always have a preference towards meeting the needs of the people who have been great partners for us over years. And in the case of one of the ones you would be referring to more than a decade. So we'll always have a preference towards great customers as opposed to new customers. Having said that, we are -- we talk to new customers. We have opportunities. As you know, we added a customer. But if you were asking me the question, would our guys rather do work with people who they have a great relationship with or find out how good somebody else is, they'll take the sure thing. Operator: Our next question comes from Tim Mulrooney with William Blair. Timothy Mulrooney: I hate to go back to this backlog question and beat it to death, but I'm newer to the company here. So I just want to make sure I understand how this works. How much of your backlog, excluding that modular piece, would you expect to start at some point over the next 12 months? I'm just trying to understand how much of this backlog is actually being pushed out versus just elongated due to the larger projects? William George: So I'm really glad you asked. The majority of the backlog numerically is jobs that have already started. It's the work left to finish on jobs that have already started. When Trent says everything is going to start within a year, he means all the new bookings. We don't have new bookings. Really many of the new bookings have already started at some level in the sense that we're doing preliminary work, underground work. We have engineering we're billing for. But it is -- this is really a -- because the definition of backlog in sort of what's called a remaining performance obligation under GAAP is so strict. You really don't put something into the reported backlog number until you have a price, a scope and a legally binding obligation that can be audited. We are -- almost any project that we put into our backlog, it was awarded to us a quarter, 2 quarters, 3 quarters ago. We received a phone call saying, this is your work, long before it shows up in backlog. So I hope that helps because it's not like -- we're not like a manufacturing company that's selling stuff we're going to start producing far in the future. You can't really price the building until it's been designed. You can't really design a building until you're about to start it. So... Timothy Mulrooney: Yes. No, that's really helpful, Bill. I guess, a more firm picture for a more firm backlog. That's helpful. So my other question just really quick is actually something I don't hear discussed a lot on these calls, but I'm curious to learn more is that service revenue piece. I mean it's up 11%. You said it's like 14% to 15% of your revenue. It's not insignificant. I don't hear it talked about a lot. What's driving that strength in the revenue growth there, and it sounds like -- and in the profitability? And is there some sort of conversion like when your new construction is stronger that brings along some service? Or are those pretty much not correlated? Just any color on that piece of the business. Trent McKenna: So the service business continues to be strong. There's a lot of investment in sales force collaboration, making sure that we're going after the right parts of that market. Across the board, we're just seeing broad strength in that business, and it's execution driven. We have a lot of people -- the service business, it's really -- it's a day-to-day kind of bunt single doubles business. It's not like the construction business where you add a lot to your backlog at once. It's small maintenance contracts, pull-through work that comes from that. To your point, it's converting new work to service contracts over time. So it is the kind of business that just by its nature, doesn't grow quite as episodically as the construction business. But what you've got is you've got some real strength in that from the teams out in the field that are making it happen. Operator: Our next question comes from Brian Brophy with Stifel. Brian Brophy: Congrats on a nice quarter. Just wanted to follow up on some of this headcount discussion. I think the over 21,000 employees implies a little bit over 15% headcount growth since the end of 2024. It obviously seems to be an important enabler of some of the organic growth we've seen here this quarter. Just could you help us understand how sustainable that pace of hiring could be, assuming demand remains healthy here? William George: That number does include some acquisitions. So -- but I would say the majority of that was 15 points were added by our companies. And we don't -- we would never tell you, oh, we can regularly add 12% to our workforce of craft workers. We had a really good 9 months. We're confident we can -- we have -- on any given day, we have apprenticeship programs going on that we really are trying to get as many people as we can legally put into them involved in. There are like state-mandated ratios where you can only have a certain number of apprentices per journey persons. So we're trying to grow as fast as we can. I think high single digits is what we've accomplished over a long period of time. We're pretty proud of that, by the way, because that means you're creating or you're helping people create themselves as electricians and pipe fitters and that's good for them. That's good for us. That's good for the U.S. Brian Brophy: Okay. Yes, that's helpful. And then wondering if you could give an update on some of the automation investments you've made on the modular side. And just to what extent you're seeing some productivity benefits? Any color you can provide there would be interesting. William George: You want to -- Okay. Well, so more and more robots, right? So as we get more and more buildings implemented, we see the bills go by for robots we're buying. We've added turn tables. It's what Trent was saying, it's singles and doubles, but yes, no, there's a lot of automation going in. There's improvements in welding proficiency that's driven by better software, really AI-enabled software. There's just a million little things. I mean... Brian Lane: I'll also tell you, Brian, in terms of the history of construction, the amount of innovation and technology that's being developed and applied today leaps and bounds over what it's ever been. And it's going to be a huge help into helping us build stuff as we go forward safer, more productively and the quality is getting better every day. So... Trent McKenna: Yes. And one of the benefits Comfort Systems has is we have 48 different test beds where we can try new things and then move them throughout the enterprise if they work. And so it's a really excellent way to be able to test and innovate and then be able to do it in a controlled way and then move it out if it's effective in one operating unit, then it will be effective across. And it's a way for us to be able to innovate inside of a construction environment without significant risk. So it's a real benefit to our structure. Brian Brophy: Yes, that's really helpful. Last one for me. Pharma was mentioned very briefly. Just would you give us an update on kind of what you're seeing on the project pipeline side, particularly some of the onshoring opportunities that may be coming. Obviously, we've had a little bit more tariff discussion on pharma products. I'm just curious if you've seen any movement in that market. William George: Our biggest single booking, I think, in the last couple of quarters was in pharma, but the majority of our bookings today are in technology. It's not because there aren't pharma opportunities. It's because technology is competing for our resources and they're making a compelling case for our resources. I will also say, if you talk to -- we have a very, very strong pharma group of people that have done work in pharma for decades in the Mid-Atlantic. I've spent time with some of them recently. They say that there is a lot of planning going on projects with code names for construction along the Eastern Seaboard. But in our case, that would be the Mid-Atlantic area and especially the research triangle, the area around the research triangle. So there's a lot of work coming. Pharma has very, very long lead times. They they think and plan for years. So unless something like -- there are exceptions to that. GLP-1 boom, they're just building it as fast as they can. The COVID vaccines and all sorts of things that were needed for the COVID vaccines, very, very fast. But normal regular day-to-day pharma stuff, it develops over a long period of time. And that pipeline, the people, the smartest people in our company who know about it, say it's very, very good. Now the time may come when it's available to us, and that's not what we choose to do, right? But I think that the opportunity is out there. Operator: Our next question is a follow-up from Sangita Jain with KeyBanc Capital Markets. Sangita Jain: I just had a follow-up on -- as you see large data centers starting to get commissioned, I'm wondering if there's a change in the type of electrical or mechanical scope that you may be seeing because we're hearing that developers are now looking at DC power instead of AC power. And I wonder if that impacts you or if it just kind of stays outside the wall. William George: So we don't -- for us, electrons going through a wire, you just can't even imagine how generic that is to an electrician. He couldn't care if those electrons are -- he doesn't care if it's going to make pills or it's going to make data. So you'd be -- you just need electricians. That's a great thing about our positioning. Whatever you -- if you need to do something, you need us. And I haven't heard anybody saying that it's materially changing. The one thing you do hear is scale, like the amount of copper, the amount of switchgear, the density of cooling, just the sheer scale, people -- even very, very seasoned people are amazed by that in our organization. But as far as like those kind of tweaks, I'm not hearing anything. Trent? Trent McKenna: No. Operator: There are no further questions at this time. I'd like to turn the call back over to Brian Lane for closing remarks. Brian Lane: Okay. I just want to reiterate my gratitude for the amazing dedication and excellence of the teams we have across our nation, serving our customers every day. Demand is strong, and our people are rising to the challenge of addressing the unprecedented need for their unique skills. As Trent mentioned, we feel that conditions are good for us to continue to perform. And as Bill indicated, we have the resources and the commitment to lean into delivering for our employees, our customers and for you, our shareholders. As we embark upon the holidays that are coming up, we won't have another call. I wish everyone the best for the rest of the year and enjoy your time with your families as the holidays come upon us. Thank you for your confidence. Have a great weekend. Operator: Thank you for your participation. This does conclude the program. You may now disconnect. Good day.
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.
Linda Palsson: Good morning, everyone, and warm welcome to our presentation of Afry's Q3 results. I will begin with some of the highlights from the quarter, and then our CFO, Bo Sandstrom, will provide a more detailed overview of the financials. So in the third quarter, we delivered stable results and improved our EBITA margin to 6.4%. We also saw a positive development of the order backlog, which increased 3.6% compared to the same period last year, or 5.3% when adjusted for currency effects. We achieved this despite a decline in net sales with a total year-over-year growth of minus 5.1%. Similar to what we saw in the second quarter, currency effect had a significant negative impact on sales. For Q3, it amounted to minus SEK 118 million. Sales volumes were also impacted by a challenging market we experienced in parts of our business, mainly in our global division Industry. The third quarter was also the first within our new group structure and our three global divisions. Under the new group structure, we have intensified our efforts to improve utilization and to structurally address the cost base. As part of this, we have continued executing on the restructuring agenda that we initiated during the second quarter. And for the third quarter, we report restructuring costs of SEK 31 million related to this, and they are classified as item affecting comparability. So to summarize, I can conclude that we have been able to deliver stable results despite a decline in net sales, and we continue our efforts to pave the way for profitable growth. Moving on then to the market, and let's start with Energy. We see a continued strong long-term demand across segments and on a global scale. Market activity is particularly high in areas such as transmission and distribution, hydro, and nuclear. At the same time, we are seeing some short-term regional variations. This is evident in areas such as thermal, solar, and wind power, where, for example, demand in the Nordics is currently somewhat slower. With that said, this kind of variations are expected over time for a growing and dynamic sector like the energy sector. For Global Division Industry, the demand remains mixed. We see that persistent global uncertainty continues to impact the overall investment sentiment in several segments. For example, in the Pulp and Paper, where the demand for new large-scale projects remains at low level. The slowdown in the Nordic industrial market is also impacted in the automotive segment. At the same time, we see strong market opportunities in areas such as defense and also within mining and metals, which is encouraging to see. And finally, in Transportation and Places, public investments in transport infrastructure and water remains at good levels across the regions. The investments are driven by large-scale infrastructure programs and increasing focus on climate and defense-related projects. At the same time, we see that demand in the Nordic real estate market remains at low level and is mainly driven by refurbishments and public investments. So now let's dive a bit into our new global divisions and their performance in the quarter, starting with Energy. We continue to see high project activity in several of our segments, which reflects the overall market that we experience in Energy. We report negative total sales growth in the quarter, which is impacted by significant currency effects of minus SEK 45 million as well as short-term regional variations in some segments. We keep profitability at a solid level of 9.8%, which is slightly lower than last year. Moving on to our Global Division Industry, a challenging market reflects the net sales development in some of our segments. Despite this, profitability improved year-over-year, and this is due to the ongoing capacity adjustments and the improved utilization in the quarter. In the second quarter, we announced the acquisition of Reta Engineering, a Brazilian company specializing in project and construction management services with a strong foothold in the mining and metal sectors. And in the third quarter, we completed the acquisition, and the numbers are consolidated into the Industry division as of September 1st. And finally, Transportation and Places. Here, we saw some sales growth in the quarter, which was driven by high activity in projects as well as improved attendance rates. Also on the EBITDA side, we continue to see positive development, driven by the continuous efficiency measures that we do in the division. I would also like to highlight some of our key project wins in this quarter. In the Mining and Metals segments, we were selected by the British mining company, Anglo American, to lead the pre-feasibility study for the Sakatti mining project in Finland. The mine is planned as a highly automated underground operation with low carbon footprint. And once operational, the mine will supply critical minerals that are essential for Europe's green transition. And Afry's strong expertise in sustainable engineering makes this a great fit. On the Energy side, we have signed a strategic framework agreement with Svenska Kraftnät, Sweden's national grid operator. This is the second of two recently announced agreements and covers technical consultancy and design planning services within transmission and distribution, which will strengthen Sweden's energy system. Svenska Kraftnät is one of our key clients in the Swedish energy market, and we are pleased to strengthen our partnership with them through these agreements. In Denmark, we have won a contract in the Road and Rail segment, covering comprehensive advisory services in intelligent traffic systems, traffic management, and emergency preparedness. With Afry's extensive experience in traffic engineering, this project is a great opportunity to deliver innovative and effective solutions that improve road user safety and mobility. And with these great projects, I would like to hand over to you Bo. Bo Sandstrom: Thank you, Linda. So I will cover the financials for Q3 2025. Quarter three showed net sales of SEK 5.7 billion and EBITDA, excluding IAC of SEK 362 million. On rolling 12 months, we are now at SEK 26.2 billion on net sales and remain right below SEK 1.9 billion on EBITDA. On the rolling 12 months development compared to 12 months ago, we carry significant negative currency and calendar effects, explaining approximately SEK 600 million on net sales and SEK 240 million on EBITDA. In Q3, with a net sales of SEK 5.7 billion, adjusted organic growth came in at negative 3.7%, where volume continued to be pressured by capacity adjustments during the last quarters. As previously, the decline in volume was partially compensated by positive pricing. For Q3, we continue to see higher average fees, although at a somewhat lower level than the last number of quarters. Total growth is reported at minus 5.1%, affected also by FX movement from a strengthened SEK compared to last year. The negative adjusted organic growth in Q3 was sequentially lower, and global divisions, Energy and Industry, both saw lower growth levels. In particular, Industry experienced a challenging market and continued capacity adjustments pressure growth rates. In Q3, Industry also saw show lower sales of material than last year, affecting the quarterly growth. Transportation & Places showed sequential improvement, mainly driven from the Road and Rail segment. The order backlog continued to develop favorably and is reported at SEK 20.4 billion, improving to last year, but somewhat lower sequentially. Currency adjusted, the backlog has improved 5.3% to last year with improvements primarily from Global Division Industry. The Energy division maintained the largest order backlog in relation to net sales at a level in line with last year, but improving 3.7% adjusted for currency effects. EBITDA excluding IAC is reported at SEK 362 million, and the EBITA margin was at 6.4%. Calendar affects EBITA with plus SEK 15 million and the EBITA margin with plus 0.2% to last year, so that calendar adjusted margin was marginally better than last year. Currency movements have marginal impact on the EBITA margin, but on absolute terms, we estimate a negative currency impact of SEK 13 million on EBITA compared to last year. Global Divisions Industry and Transportation & Places support the calendar-adjusted margin development of the group, while Energy reports the highest margin of the global divisions, but somewhat lower than last year in this quarter. We reported utilization of 72% for Q3 in line with the rolling 12-month level. Looking at the year-over-year development by quarter, we see that Q3 '25 is again behind last year, but with a decline at a lower rate than seen last two years. Utilization is a clear focus for Afry, and we are determined to turn the negative trend. We report SEK 31 million restructuring costs as items affecting comparability in the quarter. The restructuring costs again primarily relate to redundancies across the group. In the new group structure, we will continue to address our cost base as well as making portfolio optimization in quarters to come. And we reiterate our estimate of restructuring cost of SEK 200 million to SEK 300 million in the quarters from Q3 '25 to Q2 '26. We have not guided on phasing, but given that the cost levels were slightly lower in Q3, it is fair to assume that they will, on average, be higher for the upcoming quarters. Cash flow from operating activities in Q3 was stronger than last year. Available liquidity remained at SEK 3.8 billion. Net debt remained at SEK 5.1 billion, where the positive operating cash flow compensates completion of the acquisition of Reta Engineering that was completed during the quarter. On net debt to EBITDA, we remain at 2.9x. Normal seasonality would provide significant deleveraging in the last quarter of the year and take us to around or below our financial target of 2.5x. With that, I leave back to you, Linda. Linda Palsson: Thank you for that, Bo. So I would also like to say a few words on our next chapter and what we've achieved in the third quarter. So as I mentioned in the start of today's session, we launched a new group structure in the third quarter. We now operate through three global divisions, representing 14 core segments, which all will drive global sales and delivery. This has been a key milestone, simplifying our operating model and paving the way for profitable growth. During the quarter, we also intensified our efforts to improve utilization and to structurally address our cost base. As a part of this, we continue to execute on our restructuring agenda, which remains on track and will proceed as planned through the second quarter of 2026. We have also reviewed our existing incentive structure, and we took action to align and harmonize them. This will reduce complexity and suboptimization and ultimately drive group performance. And finally, strategies for each global division and segment are now in place, which provides a strong foundation to deliver on our strategic ambitions going forward. And even if we are still in the initial stage of our strategy execution journey, it's encouraging to see the progress we are making. As we finalize our group strategy and have the organizational foundation in place, we are ready to fully move on to strategy execution. We will share more details about this at our upcoming Capital Markets Day. In parallel, we are progressing according to plan with the implementation of the fit-for-purpose operating model while continuously working to address operational efficiency and our cost base. And as mentioned, we are looking forward to welcoming you to our Capital Markets Day on November 4, where we will be presenting our new strategic direction and our plans ahead. I'm excited to meet many of you there and to good discussions and insights. And with that, let's open up for the Q&A session. Linda Palsson: [Operator Instructions] And let's start with Raymond Ke from Nordea. Raymond Ke: A couple of questions from me. I'll take them one by one. The short-term regional differences in energy, could you elaborate a bit in terms of whether it's due to market, certain customers being hesitant, or where you are in these projects? Any color to help us understand sort of how long this might persist would be helpful. Linda Palsson: They are related to wind, solar, and partly to thermal, and it's mostly related to the Nordic region. We don't expect it to be that long-term. We see it more as a temporary bump, but there are delays in some investment decisions from clients in the Nordic market. On the other hand, on the same segments, we see a strong growth in Asia in the same segment. Raymond Ke: And regarding your restructuring plans ahead then, which, of course, may impact personnel. How many FTEs or how should we think about this when we compare sort of consultants against back-office employees? What's the sort of share of headcount reduction distribution there? Bo Sandstrom: Well, I'll provide some light on it, and then hopefully, you get even more light when we come to CMD. We haven't provided guidance on that split. But like we elaborated last time, Raymond, you will have a split between different kind of redundancy costs coming out from this restructuring. There will be a part that is more on a managerial level. There will be a part that is more based on the support structure of the company, and then there will be an operational part as we move ahead into the restructuring efforts. We experienced that in Q2. We see it again in Q3, and we'll elaborate a bit further when we come to CMD. Raymond Ke: Looking forward to that. And just one final one. On the new incentive structure that you talked about there briefly, could you maybe just clarify how was it before and why you expect it maybe to make a major difference or where you expect it to make a difference this time around? Linda Palsson: As we talked about before, now when we have deep dived into our organization and the setup and our ambition to simplify, we actually saw that we had a lot of different incentive structure programs that were somewhat contradictory to each other. So, by harmonizing this, this will drive our efficiency, it will drive internal mobility. And ultimately, it will support the development of Afry. Then we'll open up for Johan Dahl from Danske Bank. Johan Dahl: Just on this -- interesting to hear that you finalized the plan for the new divisions here to sort of improve the margins. I presume that's some sort of multiyear progression to achieve financial targets. And the question is, you have been quite clear on cost-out actions in the near term, the coming 12 months. But what other buckets do you identify in this plan to sort of drive towards financial targets? If you could just broadly outline those. Linda Palsson: I can start. Yes, of course, we have the cost side, but we also have the revenue side. And here, I mean, our sales effort is paving the way for that. As you have heard over the last quarters, we have been quite successful in securing important contracts going forward, and we are building our order backlog. And this will continue. So we've continued to put a lot of efforts into our sales force and also to our structured key account approach. And this is evident that this is a way forward for us. So that's related, I would say, to the revenue side and our structure going forward. And then maybe you should comment, Bo, on the other initiatives. Bo Sandstrom: No, I can just add to it. I mean, ever since we started the work with the next chapter of Afry that we will present in just a couple of weeks, it has been clear that it's a multi-component effort that we're working on, kind of starting in sense with the clients and the commercial aspect of the business that we're doing, but also looking at what is actually the portfolio and how do we structure that and then leading into the operating model and the cost-out actions that you are referring to. So it is a multifaceted, and we'll do our best to explain that in better detail also on CMD. Johan Dahl: Do you see currently -- you talked about positive pricing in the operations. But can you see currently in the order book proof of concept that the sort of intense -- you start talking about improving the order book quality quite some time ago. Can you see that for a fact now that's having an effect? Or is that still something you expect going forward? Bo Sandstrom: Yes, I'll elaborate a bit. It is tricky. I mean the order book is, of course, a very long-term -- it's a very long-term order book, particularly given what we do and the length of many of our large projects. At the same time, the market is developing and the market is developing fairly short-term in that sense. So it's that combination. But of course, we're happy with the order book and the profitability margin in it, and the steps that we're taking towards a better profitability through the order book. But it's really difficult to see, in a sense, quarter-by-quarter, the development. But over time, we're happy with where we are also compared to 1 or 2 years ago when we started talking about these things. Johan Dahl: Final question. Just the increase, 5%, 6% FX adjusted on the order book, when will that translate to revenues, do you think? Or when would you see that inflection point on reported revenues? Linda Palsson: I start, yes. Yes. And that is exactly the tricky ones, as the order book contains of large projects over many years, and it's also very short-term. So of course, we see that continuously, we will improve, but it's difficult to say exactly what kind of revenue is converted from the order book in Q4, for instance. So -- but we see a slight improvement quarter-by-quarter. Next question is from Fredrik Lithell from Handelsbanken. Fredrik Lithell: Maybe a follow-up on Johan's question there. The order book, is it broad-based the development? Or is it sort of very narrow in certain pockets of exceptionally good demand? Or how does that look? Linda Palsson: No, I would say it's broad. We present the differences between our new 3 global divisions here. But you can see that there are some differences. And of course, that Energy, for instance, had relatively stronger order book than the others. But I would say with -- it is a broad base that we have in our order book. So it's no segment that is without orders. Fredrik Lithell: Another question is on sort of your support platforms. You have earlier, and we have talked at length many times before about your upgrades of CRM, HR, ERP, maybe billing systems, maybe something else. Where are you on that route? And how big of an impact have you had so far in better being able to follow your trends, offboarding, onboarding, billing rates, and what have you. So it would be interesting to hear you elaborate. Bo Sandstrom: Yes. It is a broad question, Fredrik. But we come quite a bit on that journey. It is a long-term journey because, like you said, it involves kind of several parts of the company. It's not just a one system, and then you can measure how far you are progressing. It's a combination of different things. I would say that we're more than halfway in that sense, but we still have a bit to go kind of to get to fully there. And successively, we're getting -- I would say that in the phase where we are right now, we're getting better and better transparency. We're shifting into the part where we can also translate the transparency to efficiency and improvements. But that is also kind of a gradual shift, if that is elaborating a bit on your wide question. Fredrik Lithell: Yes, yes, it's very helpful. And on that, just a follow-up, do you have any sort of heavy lifting? Are there any specific big steps in this project in any way? Or is it really just a gradual work every day? Bo Sandstrom: It is, to a large extent, from an overall perspective, it is a gradual work. Then, of course, we have internal milestones that we are kind of kicking off as we go. But from kind of from an investment and cost perspective, we're not expecting any significant effects kind of shifting upwards that will be material for the group as such. Linda Palsson: Thank you, Fredrik. Then we welcome Johan Sundén from DNB, Carnegie. Johan Sundén: A few questions from my side as well. I think, firstly, a little bit curious to hear some kind of high-level comments on the kind of sentiment within the organization. How has voluntary employee turnover developed over the summer? How is commitment among employees? Just curious to hear those kind of feedbacks. Linda Palsson: Thank you. That's a good question. I would start by saying it was a big shift for us of what we are doing. With that said, I think it's quite logical and well understood why we're doing it. So there's a lot of commitment within the organization towards our new strategic direction. But of course, when you are impacted directly, there will be some additional question marks. So it's not all sort of 18,000 super happy. But I would say the overall direction is good, and we have our employees with us on this journey. The second one was related to the employee turnover. Was that right? Yes. Actually, we haven't seen any sort of negative development on that. So it's in line with what we have seen the last quarters. So no change there. Healthy level. Johan Sundén: And also on the kind of more of an HR place, maybe the leadership within Transportation places, where are we in the process there? Linda Palsson: Yes. So Robert Larsson will do his last day here at AFRY, the 31st of October. And then from 1st of November, we have an acting solution in place, Tuukka Sormunen, who will take on the division as acting. And we are in the final stages of the recruitment process for the successor. Johan Sundén: And then maybe a little bit of a nitty-gritty question for Bo. Firstly, on the order backlog, and there's been pretty negative news flow regarding the forestry sector in the Nordics recently. Should we be worried for cancellation or those kind of things that could impact the order backlog going into Q4? Bo Sandstrom: No, I wouldn't be particularly concerned, Johan. I mean you're right. We're not floating a lot of positive news now, but we haven't really had that positive news flow over the last couple of years. So we're not necessarily looking at a large order backlog that is particularly exposed. So I don't see a big kind of downside risk on that from where we are right now. Johan Sundén: That's encouraging. And then 2 small nitty-gritty questions. Firstly, on working capital. If it's just possible, been a busy reporting day, I haven't had time to go into all the details, but can you please go through the dynamics between the kind of how you come with such good working capital release in this quarter? Bo Sandstrom: Yes. I mean you're right. We had a healthy working capital flow on an overall perspective, particularly if you look at a normal Q3 for us, it was a bit stronger this year than it was in a normal year. We don't have a big reason for it to present in that sense. You should expect that, that would be more seasonal swings also, then looking at how Q3 is normally then composed, then this could very well kind of have a contradicting effect in Q4. That's how it's normally played out. But it's nothing out of the ordinary in that sense, more referring to seasonal swings that we saw in a positive way, of course, in Q3. Johan Sundén: And on overhead cost, which has trended a little bit higher first quarter this year, I think you mentioned in Q1 that there was some intra-year phasing that pushed that up a little bit in Q1. Should we expect very low overhead cost in Q4 then? Or how should we think there? Bo Sandstrom: I mean we're clearly -- I mean, now we closed Q3, so we're pretty far into the year. So as been seen throughout the year, we will expect -- I mean, you should expect a higher full year than last year. That's pretty evident where we are kind of 3 quarters out. Looking at Q3 specifically, then the main rationale for the year-over-year is we have -- we carry a very high activity level currently, or particularly during this year. That's one side of it. And then we have some currency-related effects that sneak into the net group cost that we report as well. But in general, I would more look at the activity level that we are carrying at this moment. Johan Sundén: And when should we kind of be ramping down to more normal levels? Is it '26? Bo Sandstrom: Yes. No, I don't necessarily see that. I mean, over the next few quarters, we will be looking at more normalized levels. That is to be expected. Then whether it will happen in Q4 or going into '26, too early to say. But this is not -- it's not a permanent level, I would envision. Linda Palsson: Next question is from Dan Johansson from SEB. Dan Johansson: Two additional ones. Linda, I think you spoke briefly on the billing ratio declined slightly versus the quarter last year, but perhaps less so than previously. And connecting this to the restructuring program, how do you think it's progressing versus the initial plan you had when you introduced it? I know it's a short period. And I assume you did not see much now in Q3, it's a summer quarter. But you have taken out SEK 120 million of restructuring costs now. So for Q4, if we look into that, do you expect to see some first positive signs in terms of utilization? Or will it take a bit longer to see the effect from that? Just so I get it right from a run rate level here going forward. Linda Palsson: I start? Yes. Our important topic of utilization rate. And actually, as you saw on both slides, this was actually the -- it was still lower compared to Q3 last year, but not as much lower as we have seen before. So that's why we say we see some early positive signs within the quarter, and we also see the end of the quarter going better. So we will keep our focus on this question during Q4 for sure and during next year. In terms of the capacity adjustments, that is ongoing at the moment. And as Bo said, we can also expect relatively more in Q4 from that adaptation, our capacity towards our current workload, and see that we get that right, and by that, also improving our utilization rates going forward. Bo Sandstrom: Just to add a bit on it. I mean we are progressing according to our plan, and we're seeing the effects that we expect in a sense so far. But still, also with the guiding of the restructuring program that we launched right before the summer, I mean, you're completely right. We just passed a summer quarter. And then looking at the SEK 200 million to SEK 300 million that we guided, we have just stepped into that bucket, so to say, in terms of restructuring efforts. So where we are right now, a bit early days still, but we are seeing the effects that we anticipate, but more to come. Dan Johansson: And maybe a final one, if I may. In the industry, I'm still a little bit stuck in the past on your old segment structure here. So just to improve my understanding, the industry margin uptick, is that mainly an effect of your Process Industry business, the Pulp and Paper part, I guess? Or is it more like a -- the local broader industry part you have in Sweden that's a little bit better than last year, i.e., the Industrial Digital Solutions, we look at your previous segment structure. What sort of the improvement here in the quarter? Bo Sandstrom: If you're talking about the order backlog, it's more related to the Process Industries part. If you're looking at the net sales development and the negative growth, it's more related to the historical the IDS part. Linda Palsson: Thank you, Dan. And those are the questions we had today. Super. So then we say thank you for today, and we look forward to talking to you again at the Capital Markets Day. Have a nice weekend.
Anette Olsen: Good morning, everybody, and welcome to this third quarter 2025 presentation. My name is Anette Olsen. I am the CEO of Bonheur and Fred. Olsen & Co. As usual, today, Richard Olav Aa, our CFO, will start the presentation going through the main figures and then the different CEOs for the individual companies will present to you. And we will take questions and answers at the end. Today, we have Samantha Stimpson with us, the CEO for Fred. Olsen Cruise Lines. So she will also present to you. So welcome. Richard, I give the word to you. Richard Olav Aa: Yes. Thank you, Anette, and also a hearty welcome from me to this third quarter presentation. Before we go into the numbers, I would like to give some reflections on the report. I think the Bonheur Group of companies delivered a solid set of numbers this quarter. But we can also say that there are room for improvements in the numbers. We see cruise lines improving utilization, but still room to grow. We see Windcarrier, vessel at yard also this quarter, and we also see downtime in renewables. So yes, a good set of numbers, but definitely more room to grow the earnings on existing assets. So with that in mind, we can move over to the highlights. And my colleagues will go through the main strategic and operational highlights of the quarter within each company. So I will limit myself to comment on the more financial aspects of the highlights. But starting on renewable energy, reporting an EBITDA slightly below last year, some NOK 40 million plus NOK 40 million down on EBITDA, mainly related to reduced generation and reduced prices of REGO that Sofie will cover in more detail. Things to be aware on the financial side that there will be a grid outage on Midhill now this winter, Midhill being a significant wind farm. So that will impact earnings and EBITDA going forward. And then we'll be notified on another downtime next winter. And these downtimes don't have any automatic compensation and [indiscernible] works heavily on mitigating actions on this downtime, especially the second one, which will come -- Sofie will come back to. But no doubt, if they last as long as they are stated there, they will have impact on the earnings going forward. Wind Service, an EBITDA from -- up from NOK 435 million to NOK 577 million, which is coming off of a good operational quarter, both in FOWIC and also in GWS. I'll come a little bit back to the underlying improvement in Wind Service on the next slide because there are some special items both last year and this year. I'm also happy to see the backlog increasing and 2 new contracts signed, and it's the firm contract that is reflected in the backlog, while the reservation agreement is not reflected in the backlog. Haakon Magne will cover that more in detail. On Cruise, I will leave that to Samantha, but all in all, an improved quarter. EBITDA up with close to NOK 100 million coming off improved occupancy yield and good cost control. Then in the other investments, NHST continued to deliver healthy results and the margin levels are at higher levels than we have seen in this company before. Also under other investments, we had a refinancing of a NOK 700 million green bond this quarter. utilizing a healthy market and also utilizing the Bonheur Group of companies good standing in this market, we were able to place that bond at the lowest spread we have ever seen of 215 basis points above NIBOR. Fred. Olsen 1848 will present later by Per, continuing to progress technologies. And today, we will cover more detail on the floating solar. Moving on to the segment analysis per third quarter '25. We have showed you these graphs a few quarters now. We think they are very good to also focus on how the group develops in the longer term. Maybe not so much reflection on the revenue side this quarter, but on the EBITDA side, where this quarter is another quarter that builds on the momentum we have seen coming out of COVID where we have been able to lift the running EBITDA of the Bonheur Group of companies to a level actually on an average, somewhat north of NOK 3.5 billion on a 12-month rolling basis compared to pre-COVID of around NOK 1.5 billion plus. And we see all 3 segments have significantly better earnings than pre-COVID, especially the Wind Service segment. Yes. Briefly comment on revenue and EBITDA per segment. We have covered the EBITDA already, but there are a few items to note, especially on Wind Service, which I mentioned on the previous slides. We see on Wind Service that the revenues are down by NOK 281 million and that is really related to that in the third quarter last year, we had a big contract with the Shimizu vessel Blue Wind, which contributed by more than NOK 500 million to the revenue. So excluding that and excluding UWL being included in the third quarter '24 and not third quarter '25 as we successfully sold that last quarter. There is a strong underlying revenue improvement in Wind Service. And we can see that more on the EBITDA on Wind Service, which has an improvement of NOK 142 million. I think if you exclude the Shimizu contribution, the one-off we also now have related to the Ocean Wind termination fee and UWL, we see an underlying improvement in EBITDA in Wind Service of more than NOK 200 million year-on-year this quarter. So on back of that, we come out with an EBITDA of NOK 1.117 billion compared to NOK 938 million third quarter last year, which is an improvement of NOK 179 million. And remember that figure when we move now on to the consolidated summary, so we can start with the EBITDA line. And again, the same numbers there, an improvement of NOK 179 million, and I will briefly comment on other P&L items. Balance sheet, I'll cover on the next slide. Depreciation is down by NOK 36 million. That's really related to a one-off and reversal of an impairment in the media company. So the improvement there is a one-off. Net finance. Interest cost at a quite normal level on a net basis this quarter around NOK 70 million. And then we have these unrealized currency and interest rate effects, mainly related to the interest rate swaps in the U.K. that goes up and down each quarter, but I really point out that, that's unrealized. So -- but also an improvement there of NOK 28 million. So earnings before tax is at NOK 680 million, which is an improvement of NOK 242 million. Taxes are up mainly related to better results. So the net result is NOK 561 million, which is an improvement of NOK 210 million. What is worth noting is that a bigger share of this result flows to the shareholders of the parent, the shareholders of Bonheur because more of the results comes from 100% controlled entities. So the NOK 561, NOK 461 flows to the shareholders of the mother company. So actually, we're delivering earnings per share of more than NOK 10 per share this quarter, which is quite strong. Then final slide for me is the group capitalization per third quarter. First to the left, our financial policy that we obviously reiterate every quarter because it's very important to us. And it's also important to check that we are in line with the financial policy, and we can confirm that our numbers are fully in line with the financial policy. Then going through the numbers. And if we start with the table above with 100% owned entities, we see that we now sit with more than NOK 5.3 billion in cash and close to NOK 3.4 billion in debt, and then a net cash position slightly below NOK 2 billion. So a few things to note there is that Wind Service, we have dividended out the proceeds from the successful sale of UWL and also some dividend up from FOWIC up to Bonheur this quarter. So there is a big change in the cash position between Wind Service and Bonheur ASA in the quarter. And that you will also see in the mother company's results, which are attached in the report that the mother company delivered profit close to NOK 900 million this quarter due to the dividends up from Wind Service. Despite that dividend, Wind Service still sits with close to NOK 1 billion in cash and very little debt left on [indiscernible] around NOK 300 million and net cash position of NOK 675 million. Renewable Energy, that is the Scandinavian wind farms plus the development portfolio is debt-free and a small cash position there of NOK 338 million. Point to note, Cruise Lines paid down the final installment on the seller credit on the 2 new vessels this quarter. So Cruise Line have no -- 0 external debt. So a small milestone for Cruise Lines there. And Earnings are improving. So a cash position of NOK 605 million, also Cruise lines is paying down its debt to Bonheur that they took up during COVID. And then finally, Bonheur, with the refinancing of the bond and the dividends out of wind service sits with NOK 3.4 billion in cash and net debt around NOK 3.1 billion and a net cash position of slightly more than NOK 300 million. So a solid position of what we control 100%. If we look below what we don't control 100% on renewable energy, which is really the joint ventures. Debt of NOK 4.3 billion and NOK 767 million in cash on net NOK 554 million. But remember, this we consolidate 100%, so Bonheur is 51% of this net debt position. Wind Service, it's Blue Tern and also GWS, almost now debt-free in combination and other investments also close to debt free. So all in all, a strong balance sheet, fully in line with the financial policy. So with that, back to you, Anne. Anette Olsen: Thank you. First to present today is CEO of Fred Olsen Renewables, Sofie Olsen Jebsen. Sofie Olsen Jebsen: Thank you. This quarter, we saw production lower than the same quarter in '24. There are some reasons for that, the Crystal Rig 1 recovery project, which I've told you about earlier, that has early generation turbines. Also, we have some market reasons at our Swedish wind farm that is ancillary services, low prices and grid export limits in addition to blade issues. We've also seen lower revenues due to lower REGO prices this quarter and REGO's renewable energy guarantees of origin, those are certificates that are issued per megawatt hour produced that can be bought by consumers wanting to offset their carbon emissions. In the last years, we've seen quite high prices on this before they have been decreasing back to the current levels because more renewable energy is coming into the market with subdued demand. Then we also have construction work of our 2 wind farms progressing well this quarter. Our business model, as you have seen before in Fred. Olsen Renewables, outlined on this slide, and there are some changes this quarter that I'm happy to report. If you see under the consented column, we have some projects that have received consent, 2 solar projects, one in the U.K. and one in Italy. In addition, we have received consent for Wind Standard 1 Repower, which is our first repowering project receiving this. And we are advancing and maturing these projects through our normal development process to ensure long-term value creation. Taking a step back and looking at the market, the prices have been steady. We see that there is now lower gas storage levels in the EU, which is a change in regulation there. This means that changes in weather or colder weather for longer times could mean an increase in prices. But what we also do see is that the long-term trends are pointing towards softer prices as there is an expansion of LNG supply. Moving on then to talk about production. The generation was below estimates this quarter. I mentioned the Crystal Rig 1 recovery project with the early generation turbines. This is increasing availability steadily, which is good to see. We've also had the lower production on Högaliden and Fäbodliden in Sweden. That is mainly due to market then shutting down due to low prices and provision of ancillary services, grid export limit and blade issues. In terms of the ancillary services, we have recently entered that market and are offering to turn down production of our wind farms in order to help the system operator, which is [ Svenska Kraftnet ] in this instance to balance the grid. And we see that this provides revenues, and we are offering this service on an hourly and 15-minute basis together with our balancing system provider. The blade issues I commented on the last quarter. We have 3 turbines offline with suspected blade cracks and are working together with the manufacturer to assess and perform necessary repairs. We also see grid outages this quarter. And as mentioned by Richard, we have a planned grid maintenance work at Mid Hill. That has been going on from the 15th of September and will last until May '26. And then we have a further estimated outage of from November '26 to April '27. There is no automatic compensation from the grid owner here. We are working on mitigating actions, especially on shortening the -- trying to shorten the second outage with Technical Solutions there. And I think it is fair to note that this quarter, we actually had more production from Midhill Wind Farm than the previous same quarter the last year. That was because last year, Midhill was out due to a failure at the external Fetteresso substation. That was a highly unusual event. And it is although still quite unusual that we see this length of grid outage that we now are in with Mid Hill and that we also have in front of us. I would like to point out that grid outages are, in general, infrequent. And when they do occur, it's normally due to scheduled maintenance, and it's quite specific for each substation. This outage we are in the middle of now is because of an upgrade of the substation at Mid Hill, which is still quite unusual. And we are notified of all the outages in advance and also monitoring to keep overview ourselves. So moving on then to talk about our construction projects. Crystal Rig IV has good progress this quarter. We have 5 turbines installed, most likely 7 by the end of this week. There has been a delayed transport of components that has postponed the installation start, and that has been due to low capacity on police escort in Scotland. We are taking mitigating actions to this and currently operating with 2 cranes for installing to use all available weather windows. We also saw blade damaged by the storm Amy that was under -- or the blade was under the manufacturer's responsibility, and we are working together with the manufacturer to see how this will might affect us. Then moving on to our second construction project, Windy Standard III, more in the Southwest of Scotland. The project is progressing well as well. We have 2 wind turbines foundations successfully poured. These are gravity-based foundations where you need to pour the concrete and the civil works are progressing according to plan. So that was all for me this quarter. Thank you. Anette Olsen: Thank you, Sofie. Next is Lars Bender, CEO of Fred. Olsen Seawind. Lars Bender: Thank you, Anette. Yes, and I will take you through the highlights for Fred. Olsen Seawind this quarter. First of all, we remain confident in our projects. We have good projects in attractive markets with strong political support, both Codling in Ireland and Muir Mhòr in Scotland are in markets with political support and where offshore wind is a focus area in the energy transition. We still, as I have alluded to before, deploy very diligent development strategies on our projects, which basically means that we have focused on having lean spend profiles. We limit pre-FID commitments, and we focus on progressing the projects and creating incremental value quarter-on-quarter. Then this quarter, we have received a request for further information for Codling in Ireland. This will postpone the expected consent determination, and I'll come back later in the presentation to what this exactly means and also put it into the context of the consenting process in Ireland. Then the fourth bullet, we have secured a landfall area and onshore substation area for the Muir Mhòr floating project. This is naturally a good milestone and good progress for the project. I'll also come a bit back to that later. So as I mentioned before, we are in the consenting process in Ireland with Codling. We submitted our consent application last year, and we have now in this quarter, received a request for further information. That request for information will postpone the expected consent determination. The content of the request for further information is a range of surveys, including offshore surveys, which we have to conduct. Then we have to, on the back of that, analyze the data and then put it into a report, which needs to be submitted to the consenting authorities. It's important to note that other Phase 1 projects have received similar requests for information, and we very much see this request for information as a clear sign from the Irish planning body that they want a diligent and process and very robust consent determinations at the back of that. So we have already started this work and we will naturally continue this at pace. Just to maybe recap the process around consent in Ireland because I think it's important to put this RFI into context. First of all, the RFI was from our perspective, expected. It is quite usual in offshore wind to have a request for further information. And also in Ireland being a new offshore wind regime and a new planning body, it was also expected in that context. As I said before, we submitted our consent application last year. That was then sent into consultation. And now we have received this request for further information from the government. On the back of that, the planning body will make a consent determination, which is basically the planning body's decision on our application. There is no fixed time lines to that, as I've said before on the quarterly presentations. And when the consent determination is issued, there is in Ireland, a risk of judicial review, which basically means that any person or any company can challenge the government's decision. We will not be parties to such challenge, but it is a risk that's sitting on the back. So this process, as I've said before, has some time uncertainty attached to it. But it's important to note a couple of things in that connection. First of all, our development strategy, as I mentioned before, we have been expecting that we had to be flexible in relation to timing. So we have been geared for that. Secondly, on the financial side, we have 100% indexation of our CfD until FID. And then I think thirdly, and that's my third bullet, we are in an environment in Ireland with a government with strong support, which also very much are supporting the build-out of offshore wind and taking measures to support the industry, which, again, of course, gives us confidence in the project. That leads me to the fourth bullet. We are still pushing ahead with the project and preparing all procurement processes and engineering and so forth for the project. So we are ready on the back of the consent determination to move the project forward towards FID. If we then go to Scotland, as I said before, we have secured land for both landfall and onshore substation this quarter. This is something we've been working on for a while. The area where we are connecting in north of Peterhead is a very attractive area for connection, and therefore, it has been important for us to be one of the first projects to secure this area because it is, of course, a very important precondition to develop the project that we have access to land and grid. Secondly, consent is progressing as planned. I said before that we received the onshore consent and we're awaiting offshore consent. When we have the consent, we are basically in a position to bid into a CfD auction. So currently, I would say the pieces of the puzzle, consent, grid, land are falling into place, and that also very much supports the strategy that we have deployed of being one of the first mover projects on floating wind in Scotland, and that continues to be our direction and also what we aim towards. And with those comments, I'll give the word back to you, Anette. Anette Olsen: Thank you. Per Arvid Holth, CEO of Fred. Olsen 1848. Per Arvid Holth: Thank you, Anette. So as mentioned by Richard and not visible on the first slide there, we'll focus on floating solar. And the backdrop for this presentation is that earlier this month, the International Energy Agency updated their annual report on renewables. So we'll allow ourselves to zoom out a bit and go through some of the results. So on this slide, I think we'll jump to the graph on the right side. This is one of the main conclusions to me. This is showing the actual product, the electricity produced until today and expected to be produced from renewable energy sources until 2030. If we look at wind first, then this shows a good momentum both in offshore and onshore wind as well, but it's solar that is sticking out, having started a significant momentum today, and that is expected to continue until 2030. So if we compare the sources a bit here, then more terawatt hours of electricity will be produced from solar than from onshore wind this year already. combined onshore/offshore will be surpassed by solar next year. And in 2028, 1 year earlier than was projected last year, it is expected that more electricity will be produced from solar panels than from hydroelectric plants around the globe. So that is quite significant. I also added the capacity expectations of installed capacity until 2030. And it's a bit more complicated looking at that when it comes to electricity production. But it gives an indication of how much solar needs to be installed to produce the power that is visible to the right there. And it's a significant amount. It's around 3,600 gigawatts, which is expected to be installed until 2030. So in conclusion, by 2030, amongst renewables, solar is expected to become the largest source and it will require a significant amount of panels. So then the question is whether the supply chain can supply those panels. So that is the next slide. And there are 2 things here. One is that the short answer is really yes. The panels -- panel production capacity is there. Already, there has been a significant increase in growth, but the utilization of the production facilities in the supply chain is quite low. And this fierce competition that exists, that has also resulted in a significant drop in prices. So it is -- now the global spot price is down to $0.09 per watt peak, and that is quite affordable. So if you add then that -- when it comes to solar PV, it's usually quite easily installed and it's available and quite affordable, then that is why that growth is picking up as shown in the first slide. But it does require a lot of area. And if we go then to the next slide, where does that leave us, 1848 promoting our floating solar technology, BRIZO. We, of course, see this as very positive. Solar PV is area intensive, and we see that the market for utilizing water surfaces for installing solar PV is growing. So that is positive. But of course, with the amount of solar that is expected, we believe that it's important that there is a high flexibility in the application areas and our technology can facilitate that, either utility scale in hybrid setups with hydro or storage or indirect industrial applications as well. So all in all, these offer a stable and flexible and robust solution, which serve the application areas that we see for floating solar and has a potential for opening up new areas. So that is it. Thank you. Anette Olsen: Next in line is Samantha Stimpson, CEO of Fred. Olsen Cruise Lines. And Samantha, you're joining us on Teams this time. So please go ahead. Samantha Stimpson: Thank you. Good morning. So an update from Cruise Lines. We've seen growth in revenue and EBITDA. This is through improving our occupancy and our yield as well as putting some cost control measures in place. I'll also update you in a bit more detail from customers telling us that they are happier, and that's through measurements of customer surveys, focus groups and the introduction of Net Promoter Scoring. And I'm also pleased to announce that the future bookings performance is good as well. If we move on to the next slide, I'll be able to talk you through some details. So our passenger numbers are up 19% in quarter 3. This is predominantly due to us taking the decision to introduce more shorter duration sailings. This was a decision taken to encourage new to Fred. Olson cruise line customers, introduce them into the business as well as giving our loyal customers more choice to sail with us during the summer months. And I'm pleased to say this has worked. Our occupancy in quarter 3 was up to 81%. And it's easier to achieve that through the warmer months of quarter 2 and quarter 3. So it was a good decision. If we then look at our yield performance, yield has improved by 13%. And this is due to some product mix. Every year, our itineraries and destinations and durations across the fleet change. In addition, we've made some decisions around how we manage our revenue performance pre-cruise and during the cruise. And all of the above initiatives have supported the growth that you can see here with our EBITDA. If I then talk to you about Net Promoter Score, I'm pleased to say this has increased from 68 -- from 63, sorry, to 68. That's a 5-point improvement in Net Promoter Score. We are investing a lot of time to understand where we need to make improvements with our customer satisfaction. And this is to ensure that we are improving retention and satisfaction rates. We're making good progress, and this is something as an organization, we are committed to continue to improve. If we look at the forward sales, during quarter 3, we had our 2027 World Cruise on sale. We had the rest of 2025 to continue to sell, and we had the year of 2026. And I'm pleased to say that a big focus on 2026 has driven the improvement in the forward sales performance that you see here of plus 12%. We understand in the organization the importance of filling our ships, and we understand that one of the best ways of doing this is to ensure that we get guest commitment further in advance. And if we move to my final slide, you'll be able to see during quarter 3, the number of departures that we took for each of the vessels and some of the key destinations that we visited. And what I'd like to highlight is that Norway continues to be a positive performing destination as did the U.K. during the period of quarter 3, and that's predominantly supporting the shorter duration cruises that we've been able to see improvement in occupancy through. And that's it for me. Thank you. Anette Olsen: Thank you, Samantha. Haakon Magne is now standing here to talk about Fred. Olsen Wind here. Haakon Magne Ore: Thank you, and good morning. Very happy that I can start the summary, as I've done the last time by reporting about a very good performance also this quarter. The vessels that has operated has been above 99% utilization, and we are delivering one of the best financial performance in the history. Further on the positive side, we have, during the quarter, signed 2 new installation contracts for installation in '27 and '28, respectively. And on the market, I think we reiterate what we have said for the last year that there is an increasing volatility on demand side, which impacts visibility and some uncertainty towards the end of the decade. If we go down to what the vessel has done during the quarter, Bold Tern that commenced the work offshore under the Saipem drilling campaign. It took almost 5 months to make the vessel ready for operations with all the equipment and is now performing well offshore. Brave Tern went into yard to do the same work as we did on Bold Tern to prepare her for a generic 3 turbine sea fastening setup with 15-megawatt generator. So we can easily switch between the different models. We also had to do some carryover work from our stay in Navantia on the crane upgrade last year. Blue Tern, it completed its second major on campaign with Siemens this quarter and went straight in direct implementation over to a third campaign with Vestas early October. Blue Wind, there, we completed the Hai Long in the quarter. If we then go over to the financials, as I said, good performance and good results. We had one vessel in yard. That's why we only were able to sell 67% of the days. But of the 67 days we were able to sell, we got paid over 99% of it. And that is decent. On the revenue side, we had revenues of around NOK 60 million with an EBITDA of close to NOK 43 million. Just note, I think, as Richard also mentioned, that around 4 of those are related to some -- the last accounting effect of the termination fee of a contract that was terminated in 2024. If we look to the bottom right of the slide, you see the development of annual performance. And year-to-date, we are close to 2024, which was a record year for us. So that is good. If we then go over to the market and the backlog slide. Yes, that appears not to be included in the slide. But I can take it anyway. If you see, I think order intake for the general industry has, to a larger extent than normal been driven by delayed projects and major O&M campaigns that has been triggered by quality issues on some of the turbines. But I think we are then happy to report that this quarter, we actually signed 2 contracts. We signed one contract for installation in 2027, and we signed a preferred supplier agreement for execution on the Gennaker project in 2028. Both contracts are for more than 60 turbines. Our backlog for the quarter stands at NOK 360 million, slightly up from last quarter. But please note that, that does not include the reservation agreement as we do not report that in the backlog to the market. On the market, as I think, we are giving the same measures as we have done now for some time. You see in the medium term, there is very limited vessel availability of the high-spec vessels. So their impact on the demand side could have a quite strong impact on the outcome. The uncertainty and the issues that we see in the offshore wind value chain in general industry, again, that impacts the volatility of demand. And that we continue to see. But given the lead times in our industry, that doesn't impact the next year performance. So it's more impact the end of this decade. But I think this is the pick we have seen for some time. So the trend is the same in this quarter as we have seen before. So I think that concludes my comments. Then I give it back to Anette. Anette Olsen: Yes. Thank you. We will now open up for questions. So please. Operator: [Operator Instructions] We will now take the first question from the line of Daniel Haugland from ABG Sundal Collier. Daniel Vårdal Haugland: Congratulations on great results, even though it's been maybe a little bit difficult quarter for some of the businesses. I think it's still great results. I have 4 questions. I think I'll just do them by segment. So just kind of a simple question on renewable energy. So the grid outage at Midhill, why is that not compensated given that -- yes, it's a grid outage, which seems to be controlled by someone else? Sofie Olsen Jebsen: In general, grid outages are not -- or planned grid outages are not compensated in the industry. Those are due to maintenance. In this case, it's upgrades of the grid. And yes, that's how it is. Daniel Vårdal Haugland: Okay. And then one question on Sea Wind. So the Codling consent, if I heard correctly, that is -- it's postponed a little bit. So I don't know if are you able to give any comments on when a potential FID on that project could happen? Obviously, I'm asking for kind of guidance here, but kind of more like are we now into maybe a '26, '27 decision or maybe even later? Lars Bender: I can, of course, understand the question, but we cannot guide on the FID time line. As I said earlier in the presentation, the process does have uncertainty attached to it, and we are dependent on the government in relation to this. So we are currently awaiting the determination. We are handling this RFI now where we have extensive surveys we have to do. We have to analyze the data. We have to submit it back. They need to issue the determination, which then again has uncertainty around whether it will be subject to a judicial review or not. So for me, to give an indication of FID would be very arbitrary at this point. But it is important to say that we remain confident in the project and the diligent development strategy that we are deploying currently for the project. Daniel Vårdal Haugland: Okay. And then I have one question for Haakon Magne on Wind Service. So just on the demand picture right now, you touched a little bit in on it being volatile. But if I'm kind of just thinking a little bit loudly here, so Ørsted canceled Hornsea, Hornsea 4 earlier this year. We're seeing Vestas and Siemens Gamesa now pausing expansion at some offshore wind factories that they planned. And we also saw Maersk cancel and almost finished WTIB. So other than kind of just the very short to medium term here, how do you see kind of the outlook a little bit more out? Is it possible to give any kind of comments around this? Haakon Magne Ore: Yes, thanks for the question, but I think it's a very hard question to answer. But I think I would like to start, I think that the main drivers behind offshore wind is still there. We see that the government in the key areas that building offshore wind still is supportive for the industry. We still see new countries coming in with plans. But unfortunately I think every industry has a tendency to get some growth. So I think it's very hard for me again to explain when exactly this growth then will come back into the growth trajectory. So I think it's a good question, but I think it's very hard for us to answer. Daniel Vårdal Haugland: Okay. I appreciate you don't have the answer, but do you kind of agree that the, should I say, 2028 to early 2030 picture looks a little bit different now than it did, let's say, 1 year ago or you don't see it that way? Haakon Magne Ore: No, I think we have been quite consistent in our focus on this last year on the quarterly presentations. Daniel Vårdal Haugland: Okay. And then I have a last question, and then I'm going to hand on to the line. I think this maybe will be for Richard. So you now have a lot of cash, and I've been asking almost the same question for a couple of quarters. But given that the outlook for offshore wind might have deteriorated a little bit at least in kind of the period I mentioned. Have you kind of changed any view on, for example, ordering a new wind vessel? Are you kind of able to share any thoughts with shareholders on what to do with the cash? Richard Olav Aa: Thank you for the question, Daniel. I think I'll then just relate to our capital allocation policy that we spent quite a bit of time with the Board to develop during the winter and that we announced in connection with our annual report, where we obviously are very aware of our duties of maximizing shareholder values and balancing what we invest in to secure that they create good value up against distribution to shareholders. So that is our starting point. Having said that, a lot of cash is relative. If we look at the capital intensity of the industries we're in, one single investment can easily relate to several billions of kroner. Just an example as wind farms, not the biggest wind farms in the world, but still sizable wind farms, but NOK 3 billion approximately in gross CapEx just on those 2 wind farms. You also have to put the cash position relatively to the investment sizes we are facing. But again, I'd like to reiterate to all listening to this call to read our capital allocation policy because you'll find very valuable information there about the thinking of the governing bodies of the Bonheur Group of companies. Operator: We will now take the next question from the line of Ral Hardison from Clarksons Securities. Unknown Analyst: Congratulations on a very strong quarter. I want to touch a bit on the Cruise segment. So your occupancy there stood at 81% this quarter, as far as I can see, the strongest on this side of the pandemic, but still a little bit behind what you saw during the strongest quarter before the pandemic, which could reach into the high 80s. So with that in mind, do you think there's still room to lift occupancy further for the cruise segment as bookings seems strong? And do you believe that the high 80s figures that we occasionally saw prior to the pandemic still is attainable for the summer quarters going forward? Anette Olsen: I think Samantha is there, hopefully, to answer your question. Samantha Stimpson: Thanks for the question. Yes, occupancy and retaining the focus on filling the ships is a priority for us within the organization. Definitely continuing to improve the increase as high as we can to the top part of the 80s, as you referenced pre-pandemic is something that we are focused on. Just to also reiterate that part of our focus as well has been to introduce additional sailing volumes. So that's where the passenger growth has come from. We've increased the number of sailings as well as trying to fill the vessels. So sometimes it's not a like-for-like comparable, but it is something that we're focused on finding the balance for sure. Unknown Analyst: And then on, I guess, a continuation of the question that was asked previously, but you are making quite substantial upstream dividends this quarter, freeing up cash to the parent company level. And I'm not going to ask about the return of -- or potential return of capital to shareholders because I think that has already been addressed. But should we view this as a step to increase flexibility and potential reallocation of capital within the group? And of course, I appreciate that you can't give any details there, but any color here is welcome. Richard Olav Aa: I think.. Yes. I think the distribution of dividend up to the parent comes also fully in line with our financial policy. Excess cash should not sit on the balance sheet of the subsidiary. It should be upstreamed to the mother company as then the mother company will have full flexibility in future capital allocation and can also do a better treasury activity than having excess cash spread around in the system. So the upstreaming of the UWL proceeds and the dividends out of FOWIC is just a normal upstreaming according to the capital allocation -- sorry, the treasury and financial policy. So it's nothing more than that. Operator: [Operator Instructions] We will now take the next question from the line of Helene Brondbo from DNB. Helene Brondbo: I have 2 ones on FOWIC. I can just start with sort of -- I just want to understand or maybe if you just could address sort of how are you addressing the situation with the higher uncertainty in FOWIC? How do you approach that when going into tenders, contract negotiations, et cetera? Are you, for instance, doing any planning for maybe taking on longer-term O&M agreements to secure a baseline of utilization? How are you thinking around this? Richard Olav Aa: I think we all think a lot of what we are doing, not necessarily in this situation. But I think it's hard for us, I think also back to Bonheur's general, I think it's very hard for us to comment on what we going forward. Helene Brondbo: Okay. I fully appreciate that. And I also wonder what -- in light of this, what do you see as a general trend in day rates given this market volatility? Richard Olav Aa: I think the market is well functioning, but I think we do not never go into details or into specific day rates neither on what we have or what we are bidding. But in general, we see a healthy market. Helene Brondbo: So you would say that day rates in the market are keeping up with levels seen before? Richard Olav Aa: I'm not saying anything. I'm saying that I think we do not comment specifically on day rates. You are saying that, but I'm not saying that. Operator: Thank you. There are no further questions at this time. I would like to hand back over to the speakers for closing remarks. Anette Olsen: Okay. Thank you very much, everybody, for joining us today, and have a nice weekend.
Operator: Good morning, and welcome to Procter & Gamble's quarter end conference call. Today's event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends. and has posted on its Investor Relations website, www.pginvestor.com, a full reconciliation of non-GAAP financial measures. Now I will turn the call over to P&G's Chief Financial Officer, Andre Schulten. Andre Schulten: Good morning. Joining me on the call today is John Chevalier, Senior Vice President, Investor Relations. I will start with an overview of results for the first quarter of fiscal '26 and spend a few minutes on strategy and innovation, and we'll close with guidance for fiscal '26 and then take your questions. First quarter results reflect strong execution of our integrated strategy in a difficult geopolitical competitive and consumer environment. This marks 40 consecutive quarters of organic sales growth and keeps us on track for the tenth consecutive fiscal year of core EPS growth. Organic sales rounded up to 2%. Volume was in line with prior year. Pricing and mix were each up 1%. Growth continues to be broad-based across categories and regions, with 8 of 10 product categories growing or holding organic sales. Skin & Personal Care led the growth, up high single digits. Hair Care, Grooming, Personal Health Care, Home Care and Baby Care each grew low singles. Oral Care and Feminine Care were in line with prior year, and Fabric Care and Family Care were each down low single digits. 6 of 7 regions held or grew organic sales. Focus markets were up more than 1%. Organic sales in North America were up 1%. Consumption in our categories decelerated throughout the quarter, with unit volumes essentially flat for both markets and P&G brands. Price mix added a point of growth. The pricing for innovation and supply chain costs that was announced on June 15 went into effect on September 15. This caused some trade inventory volatility in the quarter, but shipments were largely in line with offtake for the full quarter. European focus markets organic sales were equal to prior year with strong growth in France and Spain, offset by a softer period in Germany and Italy. Greater China organic sales grew 5%, another quarter of sequential improvement and positive momentum. 6 of 7 categories grew organic sales in quarter 1 with Pampers and SK-II each growing double digits. This progress is the result of interventions made across the digital commerce and distributor business, along with strong innovation and execution of the integrated strategy. Enterprise markets grew more than 1% for the quarter. Latin America organic sales were up 7%, with strong growth across Mexico, Brazil and the balance of smaller markets in the region. Organic sales in the European enterprise region were in line with prior year and the Asia Pacific, Middle East, Africa enterprise region was down low singles. Global aggregate market share was down 30 basis points, 24 of our top 50 category country combinations held or grew share for the quarter. On the bottom line, core earnings per share were $1.99, up 3% versus prior year. On a currency-neutral basis, core EPS also increased 3%. Core gross margin was down 50 basis points and core operating margin was equal to prior year. Strong productivity improvement of 230 basis points with healthy reinvestment in innovation and demand creation. Currency-neutral core operating margin was up 40 basis points. Adjusted free cash flow productivity was 102%, a very strong Q1 results. We returned $3.8 billion of cash to shareowners this quarter, EUR 2.55 billion in dividends and EUR 1.25 billion in share repurchases. In summary, a solid quarter to start the year in what continues to be a challenging environment, including heightened competitive activity in the U.S. and in Europe. Moving on to strategy. Given the market and competitive challenges we face now is the time for increased investment in and flawless execution of our integrated growth strategy consumer firmly at the center of everything we do. We will drive superiority in every part of our portfolio across all value tiers where we play, all retail channels and all consumer segments we serve to grow categories, provide value to consumers and customers and create value for shareowners. We will strengthen the integration of all vectors of superiority starting with a very strong innovation program this year, building stronger core brand propositions and growing bigger adjacencies and forms to enhance consumer delight, core and more. In U.S. Fabric Care, we recently started shipments of Tide's biggest upgrade to liquid detergent in 20 years. Tide's boosted formula combines its ultimate grease and stain fighting technology with an advanced perfume innovation, resulting in laundry that's cleaner, whiter, brighter and fresher. The significant innovation on liquid detergent strengthens the core of the Tide franchise as we continue plans for expansion of Tide evo, our new laundry detergent developed on our breakthrough Functional fibers platform. evo has started its first stage of national expansion with an online launch of Tide evo Free & Gentle. evo offers superior cleaning performance in a recyclable package, no plastic bottles or water. In test market stores, evo sales have been highly incremental to category growth and retailer demand has been well above initial expectations. We're in the process of adding manufacturing capacity to prepare for an eventual national launch. We have a strong bundle of innovation launching across U.S. Baby Care business -- the U.S. Baby Care business this fall, including improvements on Pampers, Easy Ups, Swaddlers, Cruisers, and the first phase of restage to our mid-tier Pampers Baby Dry line. Each are important upgrades to drive consumer trial and delight, especially considering the ramp-up in competitive promotional activity in the category. In Greater China, premium body wash innovation on both the Safeguard and Olay brands drove 9% Personal Care growth in the quarter. Safeguard Detox Body Wash is designed to provide superior deep for cleansing and skin transformation. The recent restage across all elements of the superiority has accelerated market conversion from bars to liquids and from basic products to premium offerings. Olay premium body wash launched in July, contains Olay facial skin essence and the first ever sparkling liquid to provide visible skin benefits and an unforgettable showering experience. Since launch, the new premium line has grown over 30% in off-line channels and 80% online, driving category growth and Olay share growth. In Latin America, Personal Healthcare grew organic sales plus 15% in quarter 1, driven by improved execution of the integrated superiority strategy. The combination of strong product and packaging innovation on the Vicks brand compelling consumer communication, strong retail execution and superior consumer value drove both growth across markets and the region. Brazil led the growth up nearly 30%, along with growth in Mexico, Peru, Colombia and smaller distributor markets. Our innovation program is designed to strengthen the core brand propositions combined with full media and in-store support across the portfolio. where we add new elements to our brands, like we are doing with Tide evo, we ensure the more is sufficient in size to warrant full brand communication and go-to-market support. Superiority integrated across all 5 vectors. We will continue to accelerate productivity in all areas of our operation, including the recently announced restructuring work to fuel investments in superiority, mitigate cost and currency headwinds and drive margin expansion. We have an objective for growth savings in cost of goods sold of up to $1.5 billion before tax, enabled by platform programs with global application across categories with Supply Chain 3.0. We have line of sight to savings for improved marketing productivity, more efficiency, greater effectiveness, avoiding excess frequency and reducing waste while increasing reach. We're taking targeted steps to reduce overhead as we digitize more of our operations. Visibility to more savings opportunities is increasing as the businesses continue to build their 3-year rolling productivity master plans and as we accelerate productivity with our restructuring efforts. We will continue to actively manage our portfolio across markets and brands to strengthen our ability to generate U.S. dollar-based returns in daily use categories where performance drives brand choice. The portfolio choices we are making as part of the restructuring program include different go-to-market choices in some geographies and surgical exits of some categories, brands and product forms in individual markets. We've announced several steps so far, redesigning our business model in Pakistan to an import model with local distributors managing trade relationships, discontinuing laundry detergent bars in India and the Philippines, exiting several low-tier oral care products in some enterprise markets, focusing the Olay brand on the most productive European markets, and streamlining our grooming device portfolio and focus and enterprise markets. These steps are aimed at accelerating growth as we move further through the restructuring program. Also, these portfolio moves enable us to make related interventions in our supply chain, rightsizing right-locating production to drive efficiencies, faster innovation, cost reduction and even more reliable and resilient supply. As part of the 2-year program, we are making additional organization process and technology changes to enable an even more agile, empowered and accountable organization, making roles broader, team smaller and faster and work more fulfilling and more efficient, actively reducing, eliminating or automating internal work processes, supporting teams with data and technology to increase capacity and capability to focus on integrated plans to deliver superior propositions to our consumers versus spending time internally. We expect to reduce up to 7,000 nonmanufacturing roles or up to 15% of our current nonmanufacturing workforce over this fiscal year and fiscal '27. We're making very good progress with organization designs to deliver this objective. While not easy, we firmly believe this will further empower our highly capable and agile organization that is ready to step forward to create value for our consumers, customers and shareowners. We will continue our efforts to constructively disrupt ourselves, our industry, changing, adapting, creating new ideas, technologies and capabilities that will extend our competitive advantage. These strategic choices across portfolio superiority, productivity, constructive disruption and our organization will continue to reinforce and build on each other. We remain confident in our strategy and its importance, especially in challenging times to drive market growth and to deliver balanced growth and value creation. Long-term focus on the strength of our brands and categories is the best way to position ourselves for stronger growth when the economic climate and consumer confidence improves. This starts with a strong innovation plan and healthy investment to drive trial and user growth, the plan we are executing. As we said in the July earnings call, there are times when bigger steps are needed to both the growth and value creation. The teams are on it. Moving on to guidance for fiscal 2026. As you saw in our press release this morning, we're maintaining all guidance ranges for the fiscal year. Organic sales growth of in line to plus 4%. Global market growth for our portfolio footprint is around 2% on a value basis at the center of our guidance range. As a reminder, this guidance includes a 30 to 50 basis point headwind from product and market exits that are part of restructuring work. As we consider phasing of top line growth, recall that Q2 last year benefited from 2 spikes in orders related to port strikes. The actual port strike that took place early October and the concern of another strike in January, these dynamics will likely result in quarter 2 this year being the softest growth quarter for the year with stronger growth in the back half. On the bottom line, core EPS growth, in line to plus 4%, which equates to a range of $6.83 to $7.09 per share or $6.96, up 2% in the center of the range. While we delivered strong EPS growth in quarter 1, we expect modest earnings growth over the balance of the year as investments in innovation and competitiveness increase, particularly in the U.S. and in Europe. This outlook includes a commodity cost headwind of approximately $100 million after tax and a foreign exchange tailwind of approximately $300 million after tax. Our fiscal '26 outlook now includes approximately $500 million before tax and higher costs from tariffs. While this is an improvement to the isolated tariff impact. Keep in mind that these -- that there are other offsetting impacts, including related supply chain investments and adjustments to pricing plans also assumed in our guidance. Below the operating line, we continue to expect modestly higher interest expense versus last fiscal year and a core effective tax rate in the range of 20% to 21% for fiscal '26 combined a $250 million after-tax headwind to earnings growth. We are forecasting adjusted free cash flow productivity in the range of 85% to 90% for the year. This includes an increase in capital spending as we add capacity in several categories, and as we incur the cash cost from the restructuring work. We expect to pay around $10 billion in dividends and to repurchase approximately $5 billion in common stock, combined a plan to return roughly $15 billion of cash to shareowners in fiscal '26. This outlook is based on current market growth estimates commodity prices and foreign exchange rates. Significant additional currency weakness, commodity or other cost increases, geopolitical disruptions, major supply chain disruptions or store closures are not anticipated within the guidance ranges. So again, a solid start to the year, growing sales and earnings and returning strong levels of cash to shareowners as we look to strengthen investments in demand creation throughout the balance of the fiscal year. We continue to believe the best path to sustainable balance growth is to double down on the strategy, excellent execution of an integrated set of market constructive strategies delivered with a focus on balanced top and bottom line growth and value creation, starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners. We are taking proactive steps to improve the execution of the strategy and our ability to deliver our growth and value-creation objectives. With that, we'll be happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Dara Mohsenian of Morgan Stanley. Dara Mohsenian: So I just wanted to touch on the restructuring you announced back in June, given you're now a few months into putting the initial plans into place. A, just how do you think the organizational changes are being received internally by your workforce, given there's a significant reorg and also rationalization of the job roles at P&G? And then just b, the context externally is a more difficult top line environment in general in CPG, that's also volatile. So I just love a high-level overview of what the reorg does for the organization and P&G's competitiveness relative to that challenging broader industry landscape. Andre Schulten: Dara, thanks for the question. Yes. So let me both -- take both elements here in turn, starting with the progress we are making. We are right now perfectly on track on all elements of the restructuring execution. This is never easy, especially when we're talking about reducing our enrollment. I think the organization is taking it in stride because the mission is clear. We have now constructive plans in every business around the world on which roles to reduce and how to organize ourselves with the vision of creating a more agile and faster executing -- better executing organization for the future. So if you go through the 3 components of the restructuring program. On the portfolio side, this is just the regular execution of portfolio discipline. We have now reviewed all brand country and category combinations to ensure that we can add value and in those where we found that we cannot add value, you see us changing the business model or reallocating resources. You heard us just talk about the projects that we can announce today, which is the business model change in Pakistan and some of the portfolio streamlining across our Fem care business et cetera. So those elements are now clearly defined. We are working through the execution, and I feel very good about the progress we are making. We'll end up with a faster-growing and more effective portfolio when we're done. On the supply chain side, these portfolio choices give us flexibility to take another look at our supply chain. And again, I think the product supply teams around the world now have firmly confirmed what the interventions are they want to make, and we are in execution mode. This will give us both a cost savings element but also an agility and supply assurance element which we feel very good about. The third component, the up to 7,000 non-manufacturing head count reduction really is the enabler for us to create smaller teams that are better set up. We are fully digitally enabled data access and analysis to focus on the consumer and focus on brand building. And those org designs have now been developed. They are slightly different in every category as they should be because the context and the work in every category is different but they have the consistent objective to create smaller teams that are focused on the brand. They are digitally enabled, and we're building some of these technologies and platforms globally. Some of them are individual. And they will ultimately result in what I see as the third step of the organization evolution when we went from the ticket to fully enabled category end-to-end now to smaller brand teams that are enabled by technology to be much faster and much more consumer-centric. And that, combined with Supply Chain 3.0, which will change the way that our supply chain operates via automation and digital towards is very exciting for us. The short-term benefit is cost and fuel for us to be able to invest over the next 12 to 18 months into the very strong innovation programs that we're launching. I think the longer-term benefit is just an even strengthened portfolio and a strengthened organization. Operator: Your next question will come from the line of Peter Galbo of Bank of America. Peter Galbo: Andre, I just wanted to maybe click in a bit more on some of the subcategories in North America. And in particular, on Fabric Care, and Baby Care, where you noted a bit more, I think, competitive activity. Obviously, there's a list of innovation that you outlined over the coming year. But maybe you can just give us a bit more detail on what you're seeing real time from a competitive standpoint, both in North America Fabric Care and Baby Care. Andre Schulten: Yes, Peter, look, both are obviously big and important categories for us. And as you will have seen in the results, both are not delivering at the level that we want them to deliver. And as you pointed out, what we see is a heightened competitive environment, which is not unexpected, where consumers are a bit more careful in terms of purchase decisions and consumption. The market gets tighter. And some of the response -- competitive response is increased promotion and that's certainly what we're seeing both in Fabric Care and in Baby Care. Our response to a more competitive environment has to be a more integrated answer, which is what we are executing across both baby and Fabric Care. So when we talk about driving integrated superiority, that's what we mean. And while value or promotion might be a component to that answer, the real solution here to create sustainable growth is to drive innovation and drive superiority, communicate that innovation with the right claims, meaningful to the consumer, meaningful to the retailer, get the retailer support online and in physical stores and thereby create value for the consumer that is attractive. Where we've done that, specifically on Baby Care, we're seeing the results. So we've continued to innovate and stay ahead on Swaddlers, on Cruisers 360, on the pants business, and we continue to do so, and we see share growth. We have intervened on the value tier with Luvs Platinum innovation which we've launched in the fall of last year, and we have been able to grow share even competing in what is probably the most pressured tier within the Baby Care portfolio. And we are now expanding that same approach to the mid-tier, launching the first wave of Baby Dry, which is our mid-tier innovation in the fall. And the second part of that innovation in the spring and we are confident that the share pattern will follow the same playbook as we've seen. You've heard us talk about the innovation in Fabric here. The Tide liquid innovation is truly exciting. The biggest upgrade in 20 years, a significant investment, great commercialization. We believe that is the right answer to drive trade-in, trade-up and continue to create category growth. We're adding on Tide evo, which will add a completely new form to the category. And again, that's the path forward to drive category growth, share growth in a sustainable way. Last comment, this plan takes longer. It's not as easy as throwing promotion funding out there. But again, we believe that is the way to both create value for our consumers and for our retail partners and shareholders. Operator: Your next question will come from the line of Lauren Lieberman of Barclays. Lauren Lieberman: Just wanted to touch on the market share stats, the global market share down 30 basis points. I know that can be very impacted by geographic mix to some elements, but even just at the 24 of 50 category country combinations are holding or gaining share is on the low side. So I'm asking for you to walk through the 26 that are troubled. Maybe just where might you call out some particular hotspots of activity things where is it a matter of macro and positioning and relative affordability at this time? Is it a matter of the innovation that's yet to come, you think will be the answer, but it was a pretty stark statistic, and I'd love to get your thoughts on that. Andre Schulten: Lauren. Yes, global aggregate share, as you point out, is down 30 basis points over the past 3 and past 6 months. if you look the past 1 month, we're closer to flat. So the last reading is minus 0.1%, but I would view that as normal variability. I think the hotspot. So let's talk with the U.S. Let's start with the U.S. I think we're coming from a very strong base period. And there are some categories where we clearly see increased promotional activity. We touched on Baby Care. We've seen very aggressive rollbacks and promotion activity in the Baby Care mid-tier section. We also see very intense promotions in Fabric Care. We've seen a period of intense promotion in Oral Care. So certainly, the competitive aggressiveness has increased. And the way we respond is more structural. It takes a bit more time. While we will remain value competitive in the short term. We truly believe the right answer here is to drive integrated superiority with innovation and investment in our brands. And the positive read of the U.S. shares would be that if you look sequentially, we are actually increasing absolute share. So past 12, past 6, past 3, past 1 month, our absolute share in the U.S. went from $33.6 to $33.9 to $34.1 to $34.9. So absolute shares are moving in the right direction. We are still annualizing a relatively high base period, but the plans are clearly in place, I think, to exit the year with share growth in the U.S. Europe is a very similar situation. Competitors have been not very active over the past years, and we see some of our competitors headquartered in Europe, get back in the arena which, if it's driven by innovation is a good thing in our mind. It drives attention to the categories. But in some cases, it's also very heavy promotion. So if you look at Fabric Care, for example, in our Germany business, we were up last year same quarter, 33%. We are down this year because we have competitive activity in the market. the playbook is the same. We will continue to invest in integrated superiority. On the other hand, if I look at our China business, very strong progress. We probably started the right interventions in China because of a difficult market environment earlier about 2 years ago. And with the interventions in innovation, the interventions in go-to-market capability, we now see solid progress in a difficult market environment, again, China Mainland up 6%, SK-II up, Baby Care up 20%. So it gives us confidence that these interventions were driving. They take some time, but they ultimately result in what we want in terms of market growth and share growth. Last example I'll give you on the success. If we do this right, is Latin America, again, 7% growth in the quarter, broad-based in Mexico, in Brazil and in a lot of smaller markets driven by a strong portfolio with strong innovation. Operator: Your next question today will come from the line of Steve Powers of Deutsche Bank. Stephen Robert Powers: Andre, maybe talk a little bit more elaborating on China picking up on what you had just spoken to. A good result this quarter with Greater China, up 5%. Maybe just a little bit more perspective about what you've seen evolving on the ground in that market, how the business was trending entering the quarter versus how it exited. And just how confident you are in the relative progress you've seen so far just sustaining through the year? Andre Schulten: Thank you, Steve. Let me maybe start with the team on the ground and the interventions they have made. I think it was clear to the team that the consumer environment will not get easier. The competitive environment will not get easier. And therefore, we had to fundamentally change many of the variables that drive the business. And that's, I think, what the China team has done very successfully. They basically lifted up every part of the business model across all categories. They completely changed the go-to-market model, including the incentive system for the distributor network, which is critical in China. They've launched consistently strong innovation grounded in local insights. When I think about our Baby Care business growing 20%, that certainly is driven by absolutely superior consumer insights and innovation that matches those insights. And lastly, they've changed the way we communicate with consumers and the way we collaborate with our most strategic customers, many of them online businesses. So all of that has resulted in, I think, a good turn of the business. It is China. So I'm not pretending that this will be a straight line. this can go up and down. But now we have 2 points on -- that we can connect and both points are pointing in the right direction. But again, I would urge us to be also cognizant of the fact that we're dealing with a volatile market environment. A couple of examples that we are particularly proud of, number one, SK-II, just the discipline with which the team worked on the brand fundamentals on strong innovation, having the courage to launch a super premium in addition to the core I think is paying dividends. SK-II up 12% and even the travel retail business has now turned positive. We have streamlined our Fabric Care portfolio, launched innovation that is truly superior. The business is up 5 points. The Hair Care business where we've been able to innovate is growing. And on the Skin Care business, the mass Skin Care business, Olay is growing and Skin & Personal Care in aggregate is growing 8%. And I mentioned Baby Care. So while the consumer sentiment is still somewhat less confident. I think the team has found a way to break through. Don't expect it will be a straight line, but I feel very good about the progress we've made. Operator: Your next question will come from the line of Rob Ottenstein of Evercore. Robert Ottenstein: Great. I want to swing back to the U.S. and there was a lot of talk about the need for competitive promos that are going on in the market. And I guess my question is, as you look at the other side of that, which is the consumer side and the research you're doing on the consumer, has affordability become a bigger driver of consumer choice in the quarter? Do you expect that to continue? And then specifically, if that is the case, that it is a bigger driver, how do you look to address affordability apart from innovations, but looking at whether it's a change in shift in channel strategy, RGM, price pack architecture, other ways to get at affordability issues. Andre Schulten: Thanks, Robert. I wouldn't call it affordability. I would say value is clearly in the center of the equation and value defined as price over integrated performance, which is the other 4 vectors that we're talking about. We continue to see consumers trade up, price/mix is positive, mix is positive in the U.S., where the value equation is attractive for consumers. In some channels, we see the majority of growth in our categories in the premium end, not in the value end of the lineup. We also see continued decline of private label. Actually, private label shares in the U.S. are now down 50 basis points. So for the first time, private label shares dropping below 16%. And which was kind of the historical threshold. And as I mentioned, our sequential value share is actually improving by more than 1 point even though we've not quite caught the base period yet. I think the right answer to the environment we're in is to serve the consumer where they want to shop and with the cash outlay and the value tier that they are prepared to go after. And I think we have built very strong price ladders across different pack sizes. We continue to optimize those. So we find in some channels that we might have crossed price points relative to competitive offerings we need to adjust. We will adjust those quickly. But we are present in every channel across the U.S. so we can compete with the right price points, both on shelves and in promotion as we need to. We continue to innovate across every value tier. You heard me talk about Luvs, for example, in Baby Dry -- in Baby Care, but we're also innovating at the top end, and both are successful if we do it if we do it right. I think the channel play is interesting because the consumers continue to move into a good part of the consumer continues to move into larger pack sizes. They shop in mass, in club and online. And so we need to make sure that we have the right value offering there, and we're working on that with all of our retail partners. And then some consumers continue to live paycheck to paycheck, and they are looking for smaller cash outlay. They're really looking at low promoted prices so they can stretch the paycheck a little bit longer and we're, again, very intentionally driving our competitiveness there. But again, I come back to where I started. I wouldn't say it's affordability. I think it's sharper value and how we present that value to the consumer is critical. And we don't believe it's just price. We believe it's the combination of all factors that we need to integrate. Operator: Your next question will come from the line of Chris Carey of Wells Fargo Securities. Christopher Carey: I wanted to follow up on your commentary in China, Andre, I think it sounds like SK-II and Olay and as such, your broader personal care business in China were similar to last quarter. Correct me if that's wrong, but I do think it implies then that you're seeing improvement in businesses outside of that Skin & Personal Care segment in China. Would you agree with that assessment and are you seeing signs that improvement is durable? Or were there any factors that are specific to the quarter that may have helped that business. So I just wanted to test that just a little bit. Andre Schulten: Yes. Chris, no, good pressure test. You're right. I think we're seeing our Skin and Personal Care business is moving along. It's slightly accelerating in terms of growth rate, but we see consistency in terms of results getting better. We also see the other categories picking up pace. As I mentioned, Fabric Care is up now 5%. We made portfolio interventions. We have strong innovation out there. We're driving distribution. Our Fem Care business is growing. Our Hair Care business is growing with a more streamlined and focused portfolio. Baby Care continues to accelerate with 20% growth. So the breadth is comforting. And the other comforting fact is that we understand what we did and what it's doing in the market. So our approach to how we define the priority and how we execute it, I think it's paying dividends. So that's reassuring that better consumer understanding, innovation that is grounded in that understanding with better shelf and retail execution, online and in stores is paying dividends. So I have a high level of comfort with the results and the breadth of results and how we accomplish them. It's still China. So we will continue to observe. I would -- we continue to expect some volatility here. We continue to expect strong competitive activity. But if I had to summarize, I think we are well positioned to continue to build the business in China. The market, hopefully, will strengthen over time, which will be a tailwind, and we'll keep track of where we are over the next 2 quarters. Operator: Your next question today will come from the line of Andrea Teixeira of JPMorgan. Andrea Teixeira: I was trying to -- Andre to dive into a little bit more on the price/mix and then by categories. I know you had invested more in Luvs and in particular, in diapers in the U.S. So I was hoping to see if you've seen response from the consumer. You did say that consumers in general have been into premiumization, but obviously, that's a picture -- overall picture. I wonder if you can kind of give us some examples of ways the Procter has been more active in pivoting for that low-income consumer and in categories where they are looking for value not only in diapers but also in paper goods. Andre Schulten: Thanks, Andrea, for the question. The first part of my answer will sound familiar, but where we choose to play, we choose to be superior. And that's across all value tiers. So when we innovate, we innovate across all tiers. So for example, the most recent Auto Dish innovation on Cascade was a formula upgrade across the super premium, the premium and the mid-tier. As we've talked many times on this call already, we've upgraded our product lineup on the super premium, the premium side and diapers the value side of diapers and we are about to upgrade the mid-tier. The same is true across categories. In Olay, for example, the most successful lineup is the super serum lineup right now, and that's at a premium to the market. And we're driving innovation on the Jars business with better execution, better packaging, a shelf reset, which is going into the market starting in O&D. And when we get this right, the consumer responds. We see volume share growth and value share growth, and we see trade in and trade up, which is ultimately what we're trying to accomplish. So when we're upgrading Tide liquid, we're also upgrading the other forms and tiers within the laundry lineup, for example, we're upgrading the gain lineup as well. And that combination of tier approach with the right pack sizes, as Robert pointed out, with the right channel distribution and the right promotion strategy to drive trial is what drives the response. Now we've not done that across the full portfolio in the U.S. And that's really the work that we are approaching over quarter 2, quarter 3 and quarter 4 that is enabled by the productivity progress, by the restructuring that allows us to push the investment, and I feel very good about the aggregate of the plan, but you're pointing exactly at the right thing. We need to be sharp on integrated superiority in every value tier in which we play. If we do that, the consumer response, and we have the examples that I just mentioned to confirm that, that still works. Operator: Your next question will come from the line of Filippo Falorni of Citi. Filippo Falorni: Andre, I wanted to ask on some of the items that you called out in the guidance. You clearly lowered the headwind from commodities and tariffs. So maybe if you can give us some more color on what drove that lower headwind on those 2 items. And then if you sum up all the items that you call out, it's now like a $0.19 headwind before it was $0.39. So you have some flexibility about $0.20, but obviously, the EPS guidance is unchanged. So can you walk us through like what is the offsetting factor? It seems like there's probably more investment in promotion in marketing to offset some of the competitive environment that you're seeing in the promotional environment. But maybe help us understand where is the incremental $0.20 of benefit being invested in. Andre Schulten: Thanks, Filippo. The commodity headwinds, you see the news on the petro complex oil is not -- is coming down. That's helping us from the energy side. And the tariff environment continues to be volatile, but the biggest help on tariffs has been exclusion of materials, natural materials and ingredients that cannot be grown in the U.S. So when you think about eucalyptus pulp, when you think about psyllium, which is the core ingredient in some of our PHC products that is imported from India. So the administration having an open year to adjust policy where product or ingredients cannot be produced in the U.S. retaliatory tariffs coming down, Canada, resending retaliatory tariffs of 25% which just happened before the last quarterly call. And so those components in aggregate are representing the commodity and tariff headwinds. On the question of guide impact. I will tell you there's really -- you called it out, right? Number one, we're in quarter 1. So it's still very early. And as you can see, the tariff environment can change very quickly. You heard the administration's comments on Canada. And so there's still volatility in the impact for the year. Number two, a lot of the commodity -- a lot of the tariff changes. So for example, Canadian tariff rescinded was linked to pricing. So as the tariff goes out, so does the pricing. So the net effect on the P&L within the year is limited. So volatility, it's still early, and you're very right, we want to absolutely preserve our ability to continue to invest because we have proof and we continue to be convinced based on the consumer reaction to where we successfully invested in integrated priority that this is the right path forward. It is the path to stimulate category growth back to 3% to 4%. and within that, the path for P&G share growth in a sustainable way. So early in the year, still volatile reserve investment. Operator: Your next question will come from the line of Peter Grom of UBS. Peter Grom: So I wanted to ask a follow-up on North America. Andre, I think you mentioned consumption decelerated throughout the quarter, and you alluded to some of the phase-in considerations related to the port strike a year ago. So just maybe first, how do you see underlying category demand evolving from here? I know it might be a little bit harder now because you're lapping some of the impact, but just curious whether you would expect this deceleration to continue? And then just related on the comment on the port strikes that will make 2Q the soft this quarter. Is there a way to frame how much of an impact these laps will have? Or maybe how much of a step back you would expect from where we started the year. Andre Schulten: Peter. Look, I think the North America consumption decelerated. So that's correct. We are -- we probably entered the year at about a strong 2%, 2.4% value consumption. We're now a weaker 2. So 1.8%, 1.9%. Some of that is just variability of base periods. But I do believe that for the next 2 quarters, the consumption will be around the 1.5% to 2% range. And as you said, particularly in quarter 2, because of the port strike in October and then the threatened port strike in January, what we expect to see is that the run rates of consumption, both on the market side and P&G side is probably going to continue. But you have a point higher base period. So that's probably the best way I can describe what we're expecting. And if there's 2 things you need to take away is quarter 2 is going to be lower than quarter 1 and half 2 is going to be higher than half 1. That's about the best logic I can give you. Over time, maybe last comment in the not too far future, if we are successful with everything we're doing with the investment, we expect category growth to return to 3%, both in the U.S. and at a global level. And again, that's job 1, 2 and 3, drive more users in the category, drive more usage and drive value per use. That's how we get back to 3%. Operator: Your next question will come from the line of Olivia Tong of Raymond James. Olivia Tong Cheang: Two questions for you, Andre. First, in terms of the regional outlook. Obviously, you just talked about the U.S., you've been pretty guarded in terms of China. But what about rest of world, just thinking through dynamics with respect to demand, how the consumer is doing in Western Europe and Latin America, in particular. And then in terms of some of the restructuring actions that you've taken, you mentioned some of the portfolio changes in the Middle East and then also in Fem Care. If you -- can you expand on that a little bit in terms of potentially bigger changes to the portfolio to make a step change in terms of the growth trajectory, either more culling -- more substantial culling of the portfolio or potentially looking the opposite way in terms of filling some of the gaps with inorganic growth. Andre Schulten: Thanks, Olivia. Dynamics in Western Europe, very similar to North America, volume growth in the categories that we're in about 1%, value growth, around 2% weak 2%, and effectively, the same dynamics I described in North America. L.A. continues to be strong. We saw 7% growth in the quarter. Last quarter was very strong. And we continue to drive market growth in the region. Strength in Brazil, up 6% or 7%, Mexico up 4%. So the LA region is doing well from a consumer standpoint and from a P&G standpoint. Asia, Middle East, Africa and Europe enterprise markets more muted, both geopolitically from a consumer standpoint and from a competitive standpoint, I expect that not to change. So in aggregate, I would say, enterprise markets probably around 3%, 4% developed markets, Europe, North America, around 2%. China is the wild card, still negative in terms of market growth. But again, we're making good progress. So that's as much perspective as I can give you. On the bigger portfolio changes, look, the portfolio actions we are executing are really on the fringes, right? We are making sure that we do what we should do is ensure that we can create value in every category country combination in which we are, and if not, make the appropriate changes. And the type of change you've seen us announce in this release, that's about the type of change you should expect. There's nothing more dramatic that we're planning to do. We're very comfortable with the core portfolio that we're in. We've chosen these 10 categories very carefully and we continue to believe these are attractive categories in which P&G can continue to drive growth. We have talked about the growth opportunities within the existing portfolio across regions driving our brands in North America, serving underserved consumers in North America is a $5 billion opportunity, getting Europe consumption in the European markets to best-in-class in Europe from a household penetration standpoint is $10 billion. And driving enterprise market penetration in those markets that are similar to GDP per capita as Mexico, to the same level of consumption in those categories in Mexico is about $15 billion. And as I said last time, these are numbers on the piece of paper until you start allocating resources to those ideas, and that's exactly what we're doing. That's exactly why we want flexibility to invest. So we can drive the consumer insights, we can drive the innovation that goes after these growth opportunities. And if you add them up, you find that they will allow us to grow with an algorithm for the next 5 to 10 years. So there's no need to have any transformational acquisition on inorganic growth opportunity added. If there is an attractive opportunity, we'll always look at it. Operator: Your next question will come from the line of Nik Modi of RBC Capital Markets. Nik Modi: Andre, I was hoping maybe you can just kind of opine on agentic commerce and how you think P&G can leverage some of the advantages you have in kind of the brick-and-mortar shopping environment to this kind of new world that we're walking into, especially given the announcement with OpenAI and Walmart. So just any thoughts you have. I mean, the big question I have is just how do suppliers get their products in the actual basket if people are shopping through prompts? Any thoughts would be helpful. Andre Schulten: Thank you, Nik. Indeed an interesting question. And the way I think about it is it is all opportunity, right? I mean if you think about it, we're in business for 187 years. We went from Kendall store to supermarkets to hypermarkets to online shopping to social commerce, all an opportunity. We went from newspaper ads to radio to TV to Internet to social media, all an opportunity. So I think it's about getting ready for that reality. And I do believe that it opens up new possibilities for brands to make themselves visible. And it all comes back to the underlying fundamentals, do you understand the consumer, do you understand how they look for information, how the agent will find your product, how the agent will extract the information to decide whether your product should be in the basket or not and how you work with your retail partners to ensure that you have the best understanding and the best access to these algorithms so that you can communicate your superior brand proposition every day and every shopping opportunity. And that's the path forward. I feel we're well positioned. I feel our data infrastructure, our consumer understanding, our collaboration with retail partners is very good. And so again, for me, this is all opportunity. Operator: Your next question will come from the line of Kaumil Gajrawala of Jefferies. Kaumil Gajrawala: Just a couple of clarifying questions. There was a commentary around tariffs and sort of natural products being exempted as Were there any particular deals or maybe just that the threat wasn't as much as what perhaps you had estimated earlier. And then on China, a lot of conversations around distribution and distribution changes. Was there anything onetime in there as it relates to sort of a near-term benefit from flipping into a new distribution structure? Or is what we're seeing more related to an improvement in consumption. Andre Schulten: Thanks, Kaumil. The change on the tariff side was before these products or these materials and ingredients were included in the overall tariff structure. And I think what the administration that has done is basically grant exceptions, broad exceptions in some of these tariff frameworks for those materials that cannot be grown in the U.S., which is highly appreciated and makes sense. On the China question, we've made these interventions on distribution network in the fall -- summer and fall of last year. I know there were not any onetime distribution gains that drive these results. It is just a streamlining and changing the incentive system for the distributor network. So we have fewer distributors. They are better aligned to what we're trying to do in terms of quality execution in stores and online, and that is starting to pay dividends. So this is not a onetime effect or onetime bump. This is actually the new go-to-market approach starting to pay dividends. And if everything goes well, I expect that benefit to actually slowly accelerate over time. Operator: Your final question today will come from the line of Robert Moskow of TD Cowen. Xin Ma: This is Victor on for Rob Moskow. Two for me as well. So I think previously, there was a discussion of taking a mid-single-digit pricing on about 25% of your U.S. SKUs to mitigate the tariff impact. So now that the tariff impact is half of what it was before curious on how that affects your pricing strategy, if at all? And then on LATAM, we've heard from competitors of consumer weakness and from a challenging macro backdrop, are you seeing this impact your trends at all? And if so, how are you performing so well? And did you gain other category share in the region? Andre Schulten: On the pricing question, yes, we've taken in the U.S., we've announced pricing in July. It's gone into effect in September. Most of the pricing was innovation-driven and in aggregate, it's about a 2%, 2.5% price increase across the entire portfolio. The underlying tariffs that have contributed to the need for pricing has not really changed. The biggest change in the tariff exposure has been retaliatory tariffs on the other side. And those pricing effects have been taking out, I was talking about Canada. But in the U.S., the majority of the pricing was underlying innovation-based with tariffs being a contributor, but not the main contributor, so no change to pricing approach. I think we've talked about the consumer backdrop in the U.S., plenty. We've talked about the share development. While we haven't fully annualized our base, we continue to make sequential progress in absolute share, and we expect to exit the U.S. with neutral to share growth by continuing to give the consumers better value propositions, we are integrated superiority every day. So I'll bring it back to integrated superiority to end the call. So if there are no more questions, I want to thank you for your time, and thank you for your support of the company. We continue to double down on the strategy. We feel we are well set up both from a funding standpoint, from a strategy standpoint with the right innovation at hand, and we'll continue to drive forward. Thank you very much. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.
Angelo Torres: Good afternoon. Thank you for joining us to review Robinsons Retail's unaudited results for the first 9 months of 2025. I'm Angelo Torres, [indiscernible] Corporate Planning and Investor Relations Officer. The speakers for this call are Stanley Co, our President and CEO; Christine Tueres, our MD for the Big Formats of the Food segment, Joanne Arceo our Group GM for the Drug Store segment; Celina Chua, our adviser for the Robinsons Department Store, Toys R Us, Sole Academy, and Spatio Group; and Theodore our Group GM for the DIY segment and Pets; and Dondon A. Gaw, our GM for Robinsons Appliances. Our Chairman, Mr. Robina Gokongwei-Pe, and Adviser for Corporate Planning, [Gina Roa-Dipaling] [indiscernible] call. So, [indiscernible] agenda for this afternoon's call. So we will provide an overview of our financial performance and share key updates across the organization. [Operator Instructions] So with that, I turn you over to Stanley CO, our CEO, to discuss our financial [indiscernible]. Stanley Co: Here are the highlights of our third quarter 2025 results. Consolidated net sales increased by 4.3% to [indiscernible]. Net results for sales growth of 1.6%. Gross profit rose by 5.9% to PHP 12.5 billion. EBIT grew by 3.1% to PHP 2.3 billion. Core net earnings increased 33% to PHP 1.5 billion. Net income [indiscernible] down by 13.5% to PHP 872 billion [indiscernible] expense and advertise losses for both sales. Earnings per share rose by 12.5% to PHP 0.79 per share due to lower number of [indiscernible] shares [indiscernible]. [indiscernible] 2025 consolidated net sales increased by 440% to PHP 149.3 billion. [indiscernible] sales growth registered at 3.1%. Gross profit rose by 6.2% to PHP 26.4 billion. EBIT grew by 4.5% to PHP 6.6 billion. Our net earnings improved by 3.9% to PHP 4.2 billion. Net Income to Parent decreased by 60% to PHP 3.1 billion. [indiscernible] reported early last year. [indiscernible] declined PHP 2.45 per share. Our [indiscernible] P&L in the sales grew 4.3%, PHP 50.8 billion in the third quarter. [indiscernible] sales to PHP 149.3 billion up 4.8%. Despite heavy rainfall, [indiscernible] same-store sales growth still grew by 1.6% in third quarter on higher basket size. With the [indiscernible]. [indiscernible] slightly 0.1% to PHP 2.3 billion in the third quarter and by 4.5% to PHP 6.6 billion due to the driven by improved category mix [indiscernible]. Net Income to Parent declined by 123.5% to PHP 807.2 billion in Q3 due to high expense from the DFI [indiscernible] buyback. From the higher associate losses earnings per share however increased by 12.5% due to gross shares outstanding from the shares by up from the DFI retail shares. Lastly, [indiscernible] Net Income to Parent [indiscernible] PHP 1.1 billion but 60% [indiscernible] last year’s [indiscernible] gains. Core Earnings overall rose 3% to PHP 1.5 billion in third quarter and PHP 4.2 billion [indiscernible] 0.5% quarter by the [indiscernible] period. [indiscernible] posted [indiscernible] sales growth [indiscernible] stores which does [indiscernible]. [indiscernible] delivered soft performance [indiscernible] both [indiscernible] digit growth in the third quarter. [indiscernible] businesses Food and Drugstores accounting for 80% of total net sales to 85% of total [indiscernible] for year to the September. Meanwhile our [indiscernible] Department stores, DIY and Specialty comprised 11% of net sales and 15% of the EBITDA respectively. In the first 9 months we opened 14 different stores and [indiscernible] Meanwhile our total store count is 2501. The store count is comprised of 777 [indiscernible], 1150 Drugstores, 51 Department stores, [indiscernible] DIY stores and 286 Specialty stores. In addition, we have 2180 franchise stores [indiscernible] and more store [indiscernible] are expected to be in the coming month. Passing the over to [Christine Tueres] for the food segment. Christine Tueres: Thanks Stan. Food segment sales rose by 4.5% to PHP 31.1 billion in third quarter from PHP 25 billion driven by same-store sales growth of 2.8% and the contribution of 19 [indiscernible] stores. Same-store sales growth was supported by a higher basket size [indiscernible]. Due to this the sales reached PHP 90.2 billion up by 4% year-on-year. Our gross profit grew by 7.8% to PHP 7.8 billion in third quarter and 5.6% to PHP 20.7 billion in 9 months. [Outstanding] revenue growth and this was supported by increased [indiscernible] and higher penetration of [indiscernible] products. This led to the EBITDA growth of 6.6% to PHP 2.7 billion in third quarter and 5.2% to PHP 7.7 billion in 9 months. [indiscernible] Joanne for Drugstores. Joanne Dawn Seno-Arceo: It was [indiscernible] double ratio [indiscernible] growth in third quarter [indiscernible] driven by same store sales grew at [indiscernible]. [indiscernible] new stores. For year-to-date September net sales increased by 9.8% to PHP 28.9 billion. Gross profit rose by [indiscernible] in third quarter and 15.4% year-to-date up to the same revenue growth. This was supported by price adjustments, higher penetration of house brands and improved vendor support. As a result, EBITDA grew by 14.2% to PHP 899 million min third quarter [indiscernible] year-to-date. [indiscernible] Celina. Celina Chua: Department store net sales declined by 11.7% to PHP 3.3 billion in the third quarter due to the shift in school opening to June this year from July last year. Store renovations also in preparation for the fourth quarter season and stiff competition. On year-to-date, net sales still rose by 2.1% to PHP 11 billion driven by the opening of Robinsons department store [indiscernible] in the second quarter. As a result, gross profit declined by 10.5% in the third quarter. However, gross profit for the first 9 months of the year still grew by 3.1%, faster than net sales growth driven by a favorable category mix and strong vendor support. EBITDA declined to PHP 535 million in the first 9 months, reflecting higher operating costs. Let me turn you over to [Theodore] for the DIY segment. Theodore Sogono: Our DIY segment posted 2% growth in net sales in the current quarter to PHP 2.9 billion supported by [indiscernible]. [indiscernible] reached PHP 8.6 billion [indiscernible] year-on-year. Gross profit was flat at PHP 951 million in the third quarter and PHP 2.8 million in the first 9 months. [indiscernible] were offset by increased [indiscernible] penetration and introduction of new higher [indiscernible]. However, EBITDA declined to PHP 916 million in the first 9 months. Due to higher [indiscernible] sector. I will turn you over to [indiscernible] Unknown Executive: Business for the Specialty Segment rose 7.1% [with quarter to date] PHP 0.5 billion. [indiscernible] delivering double digit growth in [indiscernible] home appliance. Gross profit increased by 2.8% from [indiscernible] lower than the revenue growth. [indiscernible] appliances. EBITDA declined to PHP 426 billion due to higher OpEx, however, appliances EBITDA improved quarter-on-quarter up by 14.1% [indiscernible]. Unknown Executive: Our cash conversion cycle rose to 29.9 days driven by higher inventory days at 81.4% [indiscernible] items increased to meet strong demand for the peak season, and also our payable days were lower at 56.0. On our balance sheet, our net debt as of September 30 increased to PHP 30.1 billion. This is largely due to the acquisition loan for the DFI retail share repurchase, which we did last May. Despite this, our balance sheet remains fairly healthy with a net debt-equity ratio of 0.4x. Return on assets and return on equity normalized to 3.4% and 6.9%, respectively. This following the absence of a one-time gain from the BPI and Robinsons Bank merger, which was booked in early 2024. In advance of [indiscernible] CapEx, this amounted to 3.3 billion as of 9 months. This is up around 4% year-on-year. Food amounted for 61% followed by Drugstore segment of 15% share. With the balance [indiscernible]. And now tuning over to our [indiscernible]. Unknown Executive: Allow me to walk [indiscernible] some of our minority business in the [indiscernible]. [indiscernible] 662 in 9 months from 318 last year which led to net sales rising by 0.2 [indiscernible] to $349 million. [indiscernible] customers [indiscernible] $745 million from $4.4 million last year. [indiscernible] in the country. Growth [supported] by 2.1x growth in [indiscernible] to [indiscernible] [indiscernible] increased 21% from last year to $693 million [indiscernible] So let me update you on some key corporate developments across the business. [indiscernible] magazine [indiscernible] best companies of 2025 which recognizes companies for excellence in employees satisfaction, revenue growth and [indiscernible]. We were one only then believe in the importance on the global [indiscernible]. [indiscernible] welcome 13 [indiscernible] employees in August, [marking] their transition to regular employment after completing training under [indiscernible] ongoing commitment to [indiscernible]. And finally, per our guidance, we are maintaining our full year 2025 guidance, targeting 130 to 170 net new stores, mostly from the Food and Drugstore segments, where bulk of the stores will be opened this quarter. We are aiming for blended same-store sales growth to 4%, 20 to 30 bps expansion in gross margin, and allocating PHP 5 billion to PHP 7 billion for organic CapEx. This ends our presentation for our 9 months results. We will now open the floor for Q&A session. Angelo Torres: We’ll begin the Q&A with the questions received ahead of time. So, from Felix of Philippine Equity Partners. Can you give us an update on the remaining balance of the debt used for the acquisition of the BPI shares? Also, what is the [indiscernible] interest expense related to this… Unknown Executive: As of 9 months, the outstanding balance on the BPI acquisition loan is PHP 10.8 billion. So this is unchanged versus June 2025. Interest expense is PHP 500 million [indiscernible]. Angelo Torres: The second question. Are all remaining treasury shares coming from the buyback of DFI own shares? Any plans for the remaining treasury shares? Unknown Executive: Okay. So our treasury shares consist of 2 components. The first one would be 158 million shares is coming from the regular buyback that we started last March from [indiscernible]. And then we have also around 315.3 million shares after the DFI Retail buyback. So [indiscernible] the combination of few type of buyback so total cash under treasury [indiscernible] PHP 474 million, but if you will recall, we are currently in the process of retiring the 158 million shares just from the regular buyback program. We saw shareholder approval last September 16th to [indiscernible] retire these shares, and it would take about six months to complete the entire process -- at least six months. Angelo Torres: For the final question, how much dividends did RRHI receive from its 6.5 [stake] in BPI? Unknown Executive: Okay. So on the dividends --the dividend income from this stake is about PHP 680 million in 9 months. Angelo Torres: Question from [indiscernible] of JPMorgan. What is the SSSG supermarket and CVS banners in the third quarter 2025, respectively? How our basket size and transaction [indiscernible] in both subsegments? Unknown Executive: Thank you for the questions, Jeanette. For 3Q of supermarkets, SSSG is about 3% and for Uncle John's in 3Q, it's negative 1%. In terms of basket size, in 3Q for supermarkets were up about 7% to 8% versus last year. And for Uncle John's were up by about 1% in 3Q versus 3Q ’24. Angelo Torres: Follow-up from the [indiscernible] Your share color on trends and intensity of supplier support in 3Q 2025 versus 2Q 2025 and then 2024, which product categories are seeing higher than average supplier support? Unknown Executive: Okay. Sequentially from 2Q to 3Q, we saw an improvement in supplier support. So generally, in the third quarter and in the fourth quarter of every year, supplier support ramps up. This is particularly because in preparation of the holiday peak season. On a year-on-year basis, for full year, we should be seeing an increase supplier support. The product categories where we're seeing more supplier support in the food segment or the food categories. Again, this is largely related to Christmas-related shopping, but the other categories, nonfood categories are also seeing very decent supplier support. Angelo Torres: So from [indiscernible] on wholesale, what is SSSG in 3Q 2025? And what is the trend between basket size and transaction count? Can you share the latest EBITDA figures for wholesale? What is the target EBITDA breakeven for wholesale? Unknown Executive: Maybe we can have [indiscernible] answer the first ones. Unknown Executive: Yes, sure. Thanks for the question. I appreciate that. So our SSSG is around… So our SSSG for the third quarter is around 19%, and that primarily comes from transaction count. So that is almost all of that is transaction count versus last year, basket size remains relatively stable. In terms of EBITDA breakeven, we are still targeting or we are targeting at the moment on a full year basis to breakeven in 2026. Angelo Torres: For premium bikes, what is the latest update on the approvals in the premium bikes acquisition? When are you expecting it to close? Unknown Executive: Okay. So this is still under review by the Philippine Competition Commission. We're still in Phase 1. And we still expect to close this year. So this is the target. Angelo Torres: And then outlook for 2025, our top line SSSG and margins per segment. Unknown Executive: Okay. On a blended basis, as what was mentioned earlier, we're looking at close to 4% SSSG and then gross margin expansion of up to 30 basis points. On a per segment basis, more or less should be aligned with this one. So Food would be about 3% to 4%, which is the main driver of margin expansion of around 30 basis points. Angelo Torres: So a question from Victor [indiscernible]. Will the shares purchased from DFI be canceled? And the second question, how will this purchase affect your dividend policy? Will the company still maintain EPS? Unknown Executive: Yes. Thank you, Victor. Still no plans as of today. You mentioned in the stockholders' meeting that there’s no limit or there’s no time limit as to when we can hold treasury shares. So again, no plans to [indiscernible]. And in terms of dividend policy, we're maintaining 40% payout ratio versus the previous year's net income comparable. Angelo Torres: [indiscernible] supermarket only excluding Uncle John's, what is the SSSG in 3Q 2025? What is the same-store growth in ticket size versus transaction count in 3Q 2025? Another question would be what were the revenues from gross profit and EBITDA in 3Q 2025 [indiscernible] change year-to-year in 3Q 2025? Unknown Executive: So for supermarkets only excluding Uncle John's in 3Q, that is [indiscernible] 3%. And then for 9 months about close to 4%. CapEx size for supermarket could be about 7% to 8% growth in the third quarter. And then the revenues were up about 5% to 6% for supermarket only in Q2. For 9 months about the same, and then EBITDA growing faster than net sales for both 3Q and 9M and [indiscernible] supermarkets only were up about around 20 to 40 basis points 3Q and 9M combined Angelo Torres: For department stores [indiscernible] can you share what specific subsegments drove the steep drop in sales in SSSG? Any SSSG sales indications you can share so far for October? And then the second question, can you expand on the steep competition you mentioned for the department store or the key players you're looking out for? Christine Tueres: For the subsegments that effect that the SSSG is more or less departments the back-to-school related departments such as shoes and baskets for children, [men’s and ladies apparel] [indiscernible] the online sales then market recess. Angelo Torres: Can you please discuss the expected impact of rapid expansion of the likes of [indiscernible] wholesale in their business year-over-year? Unknown Executive: Thank you for the question. I think what we see is the first few months, some of our minimarts are affected in terms of [indiscernible]. This is because of that element of curiosity in the neighborhood. But after a few months, we're able to see a recovery in our sales because number one, it's a different market targeting the lower end of the mass market. We target the ground middle income market plus at about 3,000, 4,000 SKUs in our minimart département [indiscernible] complete the weekly basket requirements of shoppers. So we have fresh items as well [indiscernible]. Angelo Torres: From [indiscernible], what were the respective financing cost amounts related to A, the DFI share buyback and the financing of BPI shares for 9 months 2025? Unknown Executive: For the 9 months 2025 for BPI its PHP 500 million up for DFI its about PHP 280 million. Angelo Torres: From [indiscernible], how much dividend from BPI do you expect to receive in 4Q 2025? Unknown Executive: The dividend per share paid in the second quarter was PHP 2.08 per BPI so they usually pay in June and sometime in the fourth quarter. So BPI PHP 2.08 and you have about 300 million shares and [indiscernible]. So that's the amount in 4Q. Angelo Torres: Another follow-up, can you share the expected interest in 4Q 2005 to 2026? Unknown Executive: For? Angelo Torres: For the DFI. For both. Unknown Executive: Combined its about 500 [indiscernible]. Angelo Torres: Another question from [indiscernible], why was the decline in SSSG in department store and outlook for 4Q? Christine Tueres: SSSG with department store declined in the third quarter of this year due to the shift in the back-to-school opening, which was from July last year to June this year. So we expect to rebound in the last quarter of this year as our major renovations of our key stores will be completed in advance and sales will normalize. Angelo Torres: From [indiscernible], given the recent buyback of shares, how much debt was available to complete the transaction and what was the increase interest expense as a result? This has been answered already. Unknown Executive: [indiscernible] A little over PHP 50 billion to finance really DFI retail [indiscernible]. And in 9 months in ‘26 stands about PHP 280 billion. Angelo Torres: Another question from [indiscernible]. How have the different segments performed so far for the month of October? Are we seeing sales momentum pick up for discretionary? Unknown Executive: This is mid-month October [indiscernible]. Our food SSSG is holding up pretty well even for our drug store business. For the other formats [indiscernible] is positive, but we're still seeing some challenges in the rest of, I mean discretionary items, sorry formats. Angelo Torres: And then a final question for the Food segment, how do you describe current consumer behavior trends as downgrading and or preference surrounding [indiscernible]? Unknown Executive: Downgrading is in the last two quarters. And the reason why we think this is so is because basket sizes are actually increasing. So in second quarter, basket sizes were up double digits and then 3Q were up 7% to 8% on a year-on-year basis. So with inflation quite steady at 1%, below 2%, we're seeing a very positive impact in terms of consumer baskets. Angelo Torres: For [indiscernible], what led to the 6% year decline in royalty and other revenues in 3Q 2025? Unknown Executive: I think this is just timing in terms of [indiscernible] but you can get back to you [indiscernible]. Angelo Torres: What drove the 17% year-on-year increase in [indiscernible] in 3Q 2025? Unknown Executive: [indiscernible]. Can you clarify that question. I’m not sure that [indiscernible]... Well that’s OpEx excluding depreciation or [indiscernible] and just plus 9% [indiscernible] plus 6%. Angelo Torres: And then another question, what drove the higher effective tax rate impeding 2025 to 29.5% versus 25.6% in 3Q 2024 220.2 in the first half 2025? What [indiscernible]. Christine Tueres: That was just quarterly timing for [Indiscernible] Angelo Torres: Few questions from [indiscernible] and what is share so far in [indiscernible]? Unknown Executive: Let me just clarify this again. For mid-month this is flat [Indiscernible] over 3%. So this is slightly above the net point of that 2%-4% as of [Indiscernible] guidance that we have for full year. Angelo Torres: [Indiscernible] department store any [Indiscernible] sales indications you shared so far in October where you missed that FY ’25 [Indiscernible]. Christine Tueres: Our October sales remain silent due to many weather disturbances and earthquakes and also our major renovations are still not completed. So, we expect to end the year positive low single digit. Angelo Torres: [Indiscernible] view, what is the impact of the DFI divestment [Indiscernible] brand? Unknown Executive: Thank you. So, the partnership with DFI in terms of the [Indiscernible] private label brand [Indiscernible]. So, this will be maintained even if they're no longer shareholders in the company. Angelo Torres: Can you expand on the breakdown in revenue for the specialty segment? What percentage of revenues for appliance and other specialty stores? Unknown Executive: Thank you, Michel. Appliances will be about 60% to 65%. Merchandise and toys would be about around 15% to 16% each. And then the balance would be pets, beauty and lifestyle [Indiscernible] Angelo Torres: Can you comment on the overall demand scenarios across your various business formats? Any trend in the consumption you can share? What would be [Indiscernible] drivers going forward? Unknown Executive: Very healthy for our food and drugstore business Indiscernible]. In fact, basket sizes in the third quarter alone are up. We're very happy with what we're seeing. In terms of margin drivers, a couple of things. Number one, increasing our mix of private label items for the drugstore segment. We're always improving the mix to see what works best. And hopefully, we get margin uplift from that. And then we're also adding [attendant] for important items, especially for the food business, which are also higher. Angelo Torres: A couple of questions from [Indiscernible]. The store expansion target for 2025 and progress so far in openings. Will 2026 see similar store expansion plans? Unknown Executive: We opened about on a net basis, we're around 50 new stores. Our target for this year is at least 130. We're still aiming to achieve that. Historically, we're opening a lot more stores in the second half of each year. For 2026 we will provide more color in the next quarter. Angelo Torres: Another question from Paul. Given the majority of store openings will be in 4Q, did you see an increase in [Indiscernible]. related expenses in 3Q? Unknown Executive: I think not much because our cash OpEx [Indiscernible] excluding depreciation in 2026 itself. We'll provide more color on the next call. Angelo Torres: On DIY, when should we expect margin pressures from markdowns to subside? Unknown Executive: [Indiscernible] Angelo Torres: Which regions or areas [Indiscernible] are we prioritizing for new store openings? Unknown Executive: Thank you for the question. We try to open where we think we can make money. But in the first 9 months, around 70% of our new stores were outside Metro Manila and for very clear reasons because it's much more [Indiscernible] Angelo Torres: Has premium bikes been included in Q3 performance? If so, how much did the [Indiscernible] and how much do you expect? Unknown Executive: We haven't consolidated premium bikes yet because we still have to wait for a formal approval from the regulator in particular the Philippine Competition Commission. But to give you context in 2024, the performance of premium bikes was about just 2% [Indiscernible] consolidated [Indiscernible] basis. Angelo Torres: What is the percentage product ration of [Indiscernible] for supermarkets in the [Indiscernible]. Christine Tueres: For supermarket for food segment its 7.2% to 7.8% share of business and increase of 13.5% for [Indiscernible]. Unknown Executive: In bp size around 3%. This is combined [Indiscernible]. Angelo Torres: So would this needed any [Indiscernible]. Either any [Indiscernible] store level or [Indiscernible] levels. Unknown Executive: I feel in [Indiscernible] in some banners -- some premium banners is in the up trading. But then generally the cost of banners now not much. I think what’s driving our basket size through is that we are seeing more spontaneous addition to their baskets. Angelo Torres: And then [Indiscernible] are we seeing the same challenge for Specialty and [Indiscernible] in 3Q. 4Q [Indiscernible] formats. Unknown Executive: Behind the involvement, I think the overall, the specialty segment is still holding up in October. I guess general consumers are [Indiscernible]. Daily priorities the stable items [Indiscernible] December [Indiscernible] up 2%, but [Indiscernible] unchallenged. But now month-on-month basis, a lot of them are also improving. So hopefully, with the Christmas spending happening soon, we see more positive results across the board for this segment. Angelo Torres: No further questions, we will end the call. Thank you, everyone, for your time, and we look forward to seeing you at the next earnings call. Thank you.
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.
Krister Magnusson: Good morning, everybody, and welcome to the Nilörn Q3 interim report presentation. I know that today there's lot of presentations, a lot of companies. So I really appreciate that you take your time to join our presentation here. Myself, I am in Portugal at our factory here. As you probably know, we're doing quite the big adjustments in the factory, uplift in the factory, so here to follow that. So it's an interesting project going on. So I think that will be really good for Nilörn in the future. But I'm sitting here on a small laptop and I think it will work out well. So I will start sharing my screen and put that on presentation mode here. Yes. Now we start. The Q3, we are quite pleased with the Q3. The order intake here was negative 13%. But if we take into consideration that we had a big packaging order in Q3 last year on SEK 18 million, and that will come now in Q4 instead, that is around 7% of the explanation. We also have another currency effect explaining another 6%. So adjusted for the currency effect and this packaging order, it's quite flat. In general, it's a difference between the segments. Luxury segment is still quite weak, though the Outdoor and the other segments are quite strong. So still weakness in the luxury segment, no big improvement there. Sales up 10%, and adjusted for the currency effect, it's actually up 18%. I think it's partly -- we had a quite weak Q2, so it is spillover from the Q2. Looking at the different months, so it was quite strong both in July, August and September. So we're quite even throughout the quarter. And here, we see also in the Outdoor segment and the other segments, but still a bit weaker in the luxury segment. Operating profit, SEK 26.3 million versus SEK 15 million last year, and that gives an operating margin of 11.4% in the quarter. And as you probably know, the goal has been or should be between 10% to 12%. That is the goal we have set. So we in quarter, we target that. Looking at the P&L here. Also, we have a quite strong currency impact on the whole P&L and not only the top line. As you know, most of our business is handling outside Sweden. In Sweden it's mainly sales companies, but we don't do any invoicing from Sweden at all. And then we have the headquarter costs. So we have some costs in Swedish krona, but the majority and all the invoicing is outside Sweden. Yes. And what I want to say more here is also looking at the tax rate, tax rate for the quarter is 24.6%, and that is in line also with the accumulated number. We'll see what happens with the tax rate in the fourth quarter. It's always adjustments and everyone is doing proper calculation, really the calculation of the tax. But we think it will be in line with this 24.6% also for the full year. Personnel cost has quite been stabilized now on this level, I would say, also currency impact on this level and other external costs, but coming back to that a little bit later. Split by product group, not so big difference compared to last year. It's mainly in packaging. That has gone down and it's contradictory to what we do now. We're putting quite a lot of effort into the packaging. And the reason why packaging was down here is due to the luxury segment as we still have quite big packaging delivery to the luxury segment. But they are overstocked so it will take some time. So I think it will take like in mid-2026 until we are back into normal deliveries for the luxury segment in packaging. Looking at the quarterly income statement and the gross margin. Normally, the Q3 has a quite strong gross margin and also this quarter, as you can see here, if you're looking at the historical level. The reason for that is we have less packaging, packaging has a lower gross margin, and less packaging in Q3 normally and also this quarter. Operating cost is also lower normally in Q3 and also this quarter, and that is due to the holiday. Most countries take holiday in July, especially in Europe. So that's why that has a big impact on the quarter 3. Operating profit. As you see, it was a strong operating profit this quarter. And as I explained, it was not only one single month. I think it was strong all the July, August and September. And of course, you who have learned Nilörn now, it's very much volume driven. Once we get good volumes in a quarter or in a year, we also get a good profit. It goes a long way down. So we're very much depending on getting volumes. And then if you look at the similar but in a graph. And also that is to say that in the past, it was always Q2 and Q4 that was sticking out as the best quarter. Nowadays, we see it's very much flat. So it's the change of purchasing pattern from our customers. So they even out much more, buying much more into season and much more shorter lead times. And that makes our pattern different than it used to be. And here, it's also following the profitability, just in a graph. And you can see here now Q3, that was quite strong. Balance sheet. We have a strong balance sheet, an equity level of almost SEK 350 million. And that is good because we're now taking more and more time to search and see for acquisitions and so on. I will come back on that. And also we're doing at the moment both a big investment in Bangladesh and also in Portugal. Also coming back to that later in the presentation. Just want to raise here. As we are an international company, relatively our size, we are in 19 countries and with only the headquarters in Sweden, and therefore, we have a big part of our equity abroad. And that also had a big -- currency has a big impact when we translate the equity in the different countries into the Swedish krona. And this now in 2025, that's had a negative impact on the equity of SEK 32 million. And of course, in the past, we also have had positive impacts. But now due to the relatively strong Swedish krona, that has an impact. Financial indicators, I will not go through them so much. But I just want to mention here, we are almost 700 employees. And as you can see here over these years, we have increased that quite much. That is mainly in the production companies, mainly in Bangladesh, I would say. But also we have invested in other specialist areas, where we employ people to be in forefront with the competitors. And we also invested in countries like U.S. Also coming back to that later on. In U.S., now we have 4 people. This one, this is to explain the movement we have done between year 2020 and today. We, by heritage, has been really strong in design and we continue to be work on that. So design is a strong unique selling competence for Nilörn. We have in packaging started and done much more here effort. We have a really good collection. We have a Category Manager working with that. And so we're really taking a big step forward in packaging. Packaging, as I mentioned, we're also delivering into the luxury segment. But we're also packaging for sports and for Outdoor segment. We're talking here about underwear packaging, sock rider and so on. So it's not packaging for corrugated, standard brown packaging. It's more for the garments and for luxury segment. Financial strengths. We have had a strong balance sheet for many years, but we even now has even stronger. Sustainability, CSR and compliance is an area where we have put a lot of effort and employed people all around the world to build up that, which gives us also -- in the past, we were talking about design. But I would say now sustainability is another core competence that is unique -- I would not say unique, but a selling point for Nilörn, what we push for and where the clients appreciate our offer. Digital solutions and Nilörn:CONNECT, this one is something we didn't have. We had digital solutions like RFID in the past and so on, but now we're taking even more steps into this. I will explain, coming back to Nilörn:CONNECT, what that is all about a little bit later. Global deliveries. What I mean by that is that we're setting up distribution companies in new countries like in Vietnam end of last year and also now in Sri Lanka, but also we are setting up a company in U.S. So we're getting more and more international. Yes. Big currency impact both on the top line and in the balance sheet. And I used to say that we are quite well hedged. We match the cost with the income. So we take a country like Hong Kong, we have big income there. And then we have all the costs matching that. And then in the end, we have a net profit. So in different countries, we are matching quite well. But in the end, we have a profit that will be converted back to Swedish krona. And in my example then, the Hong Kong dollar will have an impact, as you saw earlier on the equity. As I mentioned, still volatility in the luxury market. And we see now less uncertainty due to the tariffs. We'd learned to live and also, I would say, it doesn't affect us directly. It's more indirect effect. It's our client that export to U.S. that has been affected. And I think the uncertainty is most -- I mean, as long as you have the uncertainty, you don't dare to move. But now the uncertainty moves away so it's more movement in the market. Operating profit, we mentioned already. Portugal factory where I am at the moment. We have been here in Portugal like in 40 years. So the factory needs an uplift. We looked at moving the whole factory but we decided to stay. We think there is less risk in that. And we moved out to warehouse to get more space in the factory. And at the moment, we are changing the complete layout inside the factory and to get a much more flow into the factory and also implementing LEAN. So that is good. I think Nilörn Portugal had tough times 10, 15 years ago, but that is now one also a competitive edge for Nilörn, to have a good factory in Europe. Building for the future, that was where we now employed or built up these specialists we have within the group, where we have compliances, our packaging materials. And that is supporting sales. So I would say being a salesperson in Nilörn today versus 5, 10 years ago is a totally different story. In the past, we were out selling labels. Now it's all about selling a concept. And the client is much more demanding now as it has been in the past. Yes, here is the specialist here in different in areas. And then we increased in production capacity. Here, we also have Bangladesh. We are currently -- I mean, we've got the land now and we're doing soil test and we are working on that. But it will take some time. And we said earlier that it probably most likely will be ready by end of 2026. Now we say it will be ready in first half year 2027. We've done geographical expansion, as I mentioned. We see a consolidation in the market. We've seen [ TIMCO ], we've seen SML. We see Avery and all the companies are taking part of that. And we also see companies now that are for sale and actively selling, looking at the label market as such. There are a few big players. It's a mid-segment and there's quite a long tail of small niche players that is working in one market or with a few products. And for Nilörn, we come to the stage now that we're putting much more effort into this, and we have a team dedicated to search for this. And what are we looking for? I think here, we will search for companies that can contribute either geographical expansion in areas and countries where we are not strong in. It could be like France. It could be Holland. It could be Spain. It could be U.S., where we can take more geographical expansion. Or it can be vertical integrations in areas where we are not strong like in heat transfer or in RFID or in packaging. So we're not sure that we will succeed, but we now definitely take this seriously and put much more effort into that. I presented this earlier. There are some new slides. I will just add them quite quick here. What Nilörn:CONNECT is about. Nilörn:CONNECT is the QR code, like you can see on a jacket here, where we have a system -- it is a system behind. That is the Nilörn:CONNECT. And it's a QR code and it's an NFC or RFID. And why Nilörn:CONNECT? We see three reasons why people want to go into buying Nilörn:CONNECT. One is the legal compliance. The legislation, Digital Product Passport, that is here to come. They will come, I would also present that, soon here. So this will be a must for our clients. So this is a headache that we, through our Nilörn:CONNECT, can be part of solving their problems. Then there are more nice to have for them. We can be part of the trend. Now we see repair, resell, recycle, where you have this QR code and the information carrier. And consumer engagement. They, through the QR code, can have consumer engagement and communicate with the end consumers. And that will drive sales, create loyalty and acquire new customers. Just the timeline regarding the DPP. It has been going on for some years with a lot of discussions, a lot of preparation. Some clients are in this already, not in the DPP but into the Nilörn:CONNECT, and have this providing information to the end consumers about their garment and their sustainability. And in 2026, [indiscernible] expected for the first product groups, and the first is apparel and accessories. And in 2027, batteries we go full live with DPP. And the mid of '27, we expect that the DPP will be a fulfillment for textiles. And through this QR code, when you scan it, you can have carbon footprint, you can have the different certificates they have on the garment, production history and the country where it's produced and so on, recycle instruction. All that is within the DPP fulfillment. To the brand owners, we provide them with information so they can see what countries they have been logged in. They can see how many scans they have had, what garments they are scanning. They can also see if they have a QR code outside the jacket and inside the jacket, and they see the difference how that is scanned. So we also provide information to the brand owners. And like this, they can see on the map here where it is scanned. And also what we have been working on is an AI tool, talking to the product. And when you're scanning the QR code, you get to the page where you can write and communicate with them through an AI tool and ask questions. I got this spot on my jacket here, how should I remove that and so on. And that we also do in cooperation with brand owners. So we make sure that we provide the information that they want. We can go out widely in the Internet or we can just provide their database and provide information that they have in their database. And this you have seen in the past, the financial target and so on for Nilörn. We have, yes, achieved 7% growth with an operating margin above 10%. Yes. Good. I will stop sharing this, and coming back to you and see here -- and Maria is also with me, I forgot to mention at the beginning, Maria, the CFO for Nilörn. And Maria, do we have any questions for us? Maria Fogelstrom: Yes. Actually we have only received one question. And that is the question about the sales split between outdoor and luxury, the percentage for each segment. Krister Magnusson: Yes. Outdoor is still the biggest, absolutely biggest. Luxury segment, we started off with a few years ago, and we see that the luxury segment is coming and we think we can do much more there. And the split here, I don't have the exact numbers, but I would guess that the Outdoor is between 25%, 30% and luxury is between 5% to 10%. But what's interesting with luxury is that we can do much more. Luxury, in the country, it's France. It's in Italy. Outdoor is mainly in -- and Outdoor, I would say outdoor sports, it's mainly in Scandinavian countries, in Germany and in the U.K. Maria Fogelstrom: Thank you for that. Now we received some more, so I will continue here. We also got a question about the EBIT. Could you elaborate on how much of the EBIT that comes from operating leverage and how much that is due to recent efficiencies? Krister Magnusson: I think most is -- I mean, as I mentioned, the volume matters a lot. I talked also last time that we intend to do cost savings. We have a program here. We have not launched all of that yet. And cost is -- but we're also taking on cost here, moving into new countries and so on. So for me, this quarter is volume driven, I would say. Maria Fogelstrom: And continuing on the cost savings because actually we got the question about that as well. And the question is, you previously commented on reducing your cost base in Turkey and doing a similar analysis on other parts of the group. Do you have any updates on that front? Krister Magnusson: Absolutely. We have done that in Turkey. So that is being implemented and fully -- and we are now working on other countries. This is partly, but also that we are moving now volumes from a country like Hong Kong, China into Vietnam and Sri Lanka. So that's moving our cost and, at the same time, doing cost savings. And so that is mainly in the Asian area but partially also in Europe. But at the same time, we're also taking on more and more employees in new assets. They are expensive and so on. But my goal is that we can be more clear on that once we have done the restructuring that we are in the middle of. Maria Fogelstrom: Thank you. And now we got a question about the outlook for 2026. Has anything happened during the quarter that changes your view of the market outlook for 2026, specifically regarding different product groups? Krister Magnusson: I cannot say. I think there's nothing new regarding the product group. I hope and think that luxury segment will be back in swing again but I think it will take until mid-2026. For other product group, I don't see any major change, not as it is at the moment, at least. We had, as you know, the Outdoor obviously peaking during the pandemic and then really bounced back. But that is back to normal now. Maria Fogelstrom: Thank you. And the last question that we have received is, are there any ongoing discussions to include segment reporting in the quarterly reports? Krister Magnusson: Segment. Maybe qualify what -- because we do segment reporting in the interim report with country-wise. But I assume here, it's more on product group levels, isn't it, I assume they want to know. Maria Fogelstrom: Yes. I would say. Krister Magnusson: Yes. And absolutely, that's a good point. I think that is something that we should consider maybe and see what we can do there. We have not done it in the past, but it's a good point. Maria Fogelstrom: Thank you. And that was all of the questions we have received. Krister Magnusson: Super good. Thank you very much for participating today. I know it's a super hectic day with a lot of companies presenting. And thank you very much, and have a great weekend. Thank you. Maria Fogelstrom: Thank you.
Operator: Good morning. Welcome to Megacable's Third Quarter 2025 Earnings Conference Call. With us this morning, we have Mr. Enrique Yamuni, CEO; Mr. Raymundo Fernandez, Deputy CEO; and Mr. Luis Zetter, CFO. Let me remind you that the information discussed at today's earnings call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Megacable undertakes no obligation to update or revise any forward-looking statements. I will now turn the call over to Mr. Enrique Yamuni. Sir, you may begin. Enrique Robles: Thank you, Saul. Good morning, everyone, and thank you for joining us today. During the quarter, we remain firmly aligned with our strategy and continued with the execution of our expansion and network evolution projects as planned. This disciplined approach has enabled us to sustain subscriber growth above market level, positioning Megacable as the second largest operator in the country by number of broadband subscribers. The achievement reflects our commitment to becoming a leader player in Mexico telecommunications sector. A key driver of this progress has been the expansion of our infrastructure. During this period, we successfully reached our goal of doubling our infrastructure by number of homes passed compared to those at the expansion announcement, making a significant milestone 3 years into the execution of this initiative. Today, our network is capable of serving 82% of our subscriber base to fiber, a tangible result of our strategic investments. We have already captured over 50% of the subscribers originally target in those territories, and we continue working diligently to increase penetration and reach the next set of objectives. In parallel, we have made substantial progress in our network evolution project, migrating subscribers to a state-of-the-art fiber network. This effort is part of our clear vision to become a full fiber operator in the medium term, enhancing our competitive edge. We are proud to offer a robust service portfolio with competitive pricing bandwidth, tailored to evolving needs of our customers and outstanding customer service. This is evidenced by our performance in key indicators such as Net Promoter Score, which continues to improve quarter-over-quarter. Operationally, we remain focused on driving value to quality service and fair prices. In this sense, ARPU increased both sequentially and for the first time in the last 12 months on a yearly basis, thus reflecting the strength of our value proposition and the positive impact of recent commercial adjustments. From a financial standpoint, subscriber growth has consistently translated into revenue growth. Our mass market segment has maintained high single-digit growth with an acceleration observed during this period. Likewise, with consolidated EBITDA has increased its growth pace, resulting in margin expansion on a year-over-year basis, a trend we expect to sustain in the coming quarters. Our capital investment levels are showing a clear deceleration trend. Excluding extraordinary investment projects, our organic CapEx has declined to mid-teens aligning with global best-in-class telecom operators aligning the foundation for a more efficient investment structure going forward. As a result of this lower CapEx intensity and continued EBITDA growth, we are approaching our cash generation target. This year, we expect to be cash flow positive before dividend payments and very close to achieving net cash flow even after dividends. It is also worth noting that throughout this investment cycle, our debt levels have not increased significantly. We maintain a solid balance sheet with one of the lowest leverage ratios in the market. This highlights the efficiency with which we have executed our initiatives and position us well to capitalize on future strategic investment opportunities. Our financial strength has been recognized again by the rating agencies as HR Ratings confirmed -- reaffirmed our AAA rating this quarter, following Fitch's rate confirmation in the second quarter. These rating actions reflect the quality of our balance sheet, the consistency of our performance and the strength of our long-term outlook. As we approach the final quarter of the year, we remain committed to execute our fiber deployment strategy, consolidated growth in new territories and drive operational efficiency. Above all, our focus is on maximizing free cash flows and solidifying our position as Mexico's most reliable telecommunications platform to preserve the strength of the Megacable brand, with millions of households and businesses across Mexico have come to rely on connectivity and entertainment. All this said, now I pass the call over to Raymundo for operational remarks. Please Raymundo, go ahead. Raymundo Pendones: Thanks, Enrique, and good morning, everyone. As Enrique just note, this was another quarter of steady progress. Our results reflect the continued momentum of the core business, reaffirming the strength of our strategy and our ability to adapt to shifting market dynamics and evolving customer expectations. Our subscriber base continues to grow both in new territories and expansion areas where penetration levels keep increasing. And more importantly, this growth in our base has consistently translating to revenue increases particularly during this period where mass market segment revenues accelerated. Let me walk you through the key operational metrics of the quarter. We ended the quarter with nearly 5.9 million unique subscribers, an increase of 9% year-over-year, equivalent to 506,000 net additions. In this quarter alone, net additions reached 122,000 slightly below last quarter's, but well within internal expectations in line with the consistency of our performance. In the Internet segment, subscribers totaled almost 5.7 million, up 10% versus third quarter '24, representing 528,000 net additions, of which 129,000 were added this quarter. This performance reflects strong demand for high-speed connectivity, even following the price adjustment implemented at the start of the quarter, highlighting the continued relevance of our value proposal particularly in price-sensitive markets. Regarding our Video segment, we closed the quarter with nearly 4 million unique content subscribers, including 3.9 million of linear TV and 124,000 users with streaming service coupled only with our Broadband solution. Within the linear TV segment, XView continued to expand, reaching almost 3.7 million users at 9.9% year-over-year increase with 333,000 net additions. In Telephony, we surpassed the 5 million subscriber mark, up 11% versus the prior year, equivalent to 490,000 net additions with 98,000 net additions during the quarter. While this service remains primarily complementary within our bundles, its expansion contributes significantly to customer retention. Turning to our mobile virtual network operator business, our revenue, total lines reached 640,000 with 21,000 net adds this quarter and 128,000 over the last 12 months. Growth remains focused on postpaid offerings continuing the upward trends since early 2023. We closed the quarter with 14.6 million RGUs, up 8% year-over-year driven by a steady subscriber growth in the mass market, whilst revenue generating units per unique subscribers stood at 2.49, ARPU improved to MXN 422.3, up from MXN 418.9 in the same period last year and MXN 421 last quarter. This figure reflects pricing optimization despite a bundled mix more inclined towards double play. Our expansion and modernization of network continues to be core drivers of our growth. Our infrastructure now extends to 107,000 kilometers, allow it to serve over 18.7 million homes, up 10% from last year. As of quarter end, over 82% of our subscriber base was already connected via fiber compared to 73% in the same period last year, a clear indicator of the progress made towards becoming a full fiber operator. Churn levels stood at 2.3% for Internet, 2.7% for Video and 2.7% for Telephony, reflecting the price adjustment carried out at the beginning of the quarter and despite the upward fluctuation within reasonable levels. It is important to mention that based on seasonal patterns, we anticipate churn to improve toward next quarters. In a nutshell, our mass market segment remains a primary engine of growth and profitability driven by expanding coverage and improved operational leverage in both legacy and developing markets. By contrast, the corporate segment remains soft, consistent with trends in earlier this year, mostly attributed to an economic slowdown in the corporate segment. Undoubtedly, competitive conditions in this market have intensified. With greater fiber availability, there has been an increase in the supply of available services, which has negatively impacted market prices for these services. On the positive side, the integration of the corporate segment has progressed steadily under the business Tech-Co model. As part of this merger, we have focused on evolving the business model shifting from generating most of our revenue from equipment sales to managed service models, which generate a larger recurring revenue base. This has had a temporary effect on the results of these 9 months of 2025. However, we expect greater stability and recurrence in revenue as these consolidation matures. Before I close, I want to emphasize that these quarterly results were achieved through disciplined execution and quality service despite an increasingly competitive and price-sensitive market as our network reliability coverage expansion and bundles continues to differentiate our value also. Looking ahead, we remain focused on preserving momentum to the fourth quarter, with churn expected to soften in the next quarters, territory penetration to move forward an infrastructure deployment to meet customer needs, we are confident in our ability to deliver resilient results as of year-end. Thank you for your attention. I will now turn the call over to Luis for the financial review. Luis Zetter Zermeno: Thank you, Raymundo. Good morning, everyone. Let me walk you through our financial performance for the third quarter 2025. During the quarter, as Enrique and Raymundo mentioned, we continue to execute our long-term strategy with discipline and consistency, enabling us to deliver solid top line growth and strong profitability. Taking a closer look at our financial performance for the quarter. Total revenues reached MXN 8.9 billion, a 9% increase against the MXN 8.2 billion recorded in the third quarter 2024. This performance was mainly supported by the mass market segment that grew 11% year-over-year, the highest growth in the last 6 periods driven by ongoing subscriber growth and a gradual ARPU improvement. In the same period, corporate segment revenues contracted 5% compared to the third quarter of 2024, mainly explained by the economic deceleration in this segment, coupled with a higher competition. As a result, mass market operations contributed with 85% of total revenues in the quarter and the remainder on the corporate segment. On the cost side, cost of services for the quarter totaled MXN 2.4 billion, up 6% year-over-year, mainly due to a deeper revenue mix composition in the corporate segment, favoring higher margin income streams. Well SG&A reached MXN 2.5 billion, increasing 9% primarily from higher labor costs. Both lines remain under control advancing at the same level or below revenue. Turning to profitability. EBITDA reached MXN 3.9 billion, up 10% year-over-year, accelerating its growth trend in the annual comparison along with total revenues. EBITDA margin was 44.2%, slightly below sequentially as a result of seasonal effects, but above the 43.6% recorded in the third quarter of 2024. Again, an expansion of 50-plus basis points, regardless of the contraction in corporate revenue. Notably, margin expansion at newer territories continue driven by an incremental subscriber base and improve infrastructure utilization. At the same time, margins in mature regions remain solid and aligned to historical trends. Net income for the quarter was MXN 628 million, accumulating MXN 2.1 billion year-to-date, a 13% increase versus MXN 1.9 billion recorded in the same 9 months of last year. In this context, we remain confident that profitability will strengthen as depreciation stabilizes and newly integrated regions mature. Turning to the balance sheet. Net debt declined sequentially, but remained largely in line with the same period of last year closing at MXN 22.3 billion at quarter end, supported by a solid cash generation and the absence of any additional debt. The net debt-to-EBITDA ratio stood at 1.45x down from 1.56x in last quarter and below the 1.54x of the prior year. In this sense, we continue to maintain one of the strongest leverage profiles of the industry. Additionally, our interest coverage ratio remained solid at 5.59x and the weighted average cost of debt stood at 8.77%, continuing its downward trend. This indicator reinforce the strength of our capital structure and provide flexibility to support our long-term goals. Turning to investments. CapEx for the quarter totaled approximately MXN 2.4 billion, above the MXN 1.9 billion reported last quarter, mainly due to typical second half seasonality. However, we remain comfortably within our full year investment guidance. In relation to revenue, CapEx represented 26.6% in the quarter and 25.1% year-to-date. And we continue to expect the full year ratio to lie as we have been mentioning between 26% and 28% of revenues, consistent with our soft lending investment trend. Looking ahead, we focus on balancing growth with cautious capital allocation, and our priorities continue to include the generation -- increase the generation of positive cash flow in 2026, preserving our investment-grade credit profile and advanced maturation of recent investment across both new and legacy markets. Lastly, I would like to highlight 2 items that reflect our continued commitment to transparency and value creation. First, as noted by Enrique HR Ratings reaffirmed our AAA credit breaking, following the reaffirmation rate by Fitch Ratings in the second quarter. Both rating actions validate the strength of our balance sheet and consistency of our financial strategy. Second, we continue to advance at our sustainability and disclosure activities with the release of our 2024 integrated annual report under GRI and SASB standards. Verified by 35 professionals in accordance with these standards as we continuously strive to further strengthen our ESG reporting in anticipation of evolving market standards and practices. In line with this, the impact allocation report of our 2024 local notes is also now available. In summary, our third quarter results reflect the strength of our business model, discipling financial execution and a healthy position for long-term growth. Thank you. We are now ready to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Marcelo Santos from JPMorgan. Marcelo Santos: I have two questions. The first is regarding CapEx. So you made it very clear what's the outlook for this year. How do you see CapEx going in 2026 and 2027. And the second outlook is a bit about the competitive environment and growth. I mean, you had very good adds, but churn was a bit higher and SG&A was a bit higher sequentially. So is growth coming at a more expensive cost than what was foreseen? Is this because of a bit of the environment? So just wanted to tie these things. Raymundo Pendones: Luis, you want to go ahead? Luis Zetter Zermeno: Yes, on CapEx, for sure, Marcelo, thanks for your question. And as we mentioned, our CapEx is in the downhill trend and even when we are going to end this year around 26% as we expected, our forecast for the future '26 and '27 will be, '26 will be around 24% to 26% of revenues and declining on '27 to grow between 21% and 23%. Enrique Robles: Yes. The CapEx trend continues to decline, even though we have [ up ] worth in this quarter because of the build of the network and the [ comps ] that we activate, we expect that we announced that in the second quarter when we said the second quarter wasn't difficult. But the good news is like Luis is saying that we continue to have a lower CapEx over revenue this year around 26% to 28%, that's what we expect. And the message here from the management is that we will have that decline for next year between 24% to 26%. Raymundo Pendones: And Marcelo regarding the competitive environment. The highest growth that we have in subscribers, the highest growth rate comes from expansion territories as there is a greater opportunity for penetration and company's expansion on that part, of course. In legacy territories, the good news is that penetration remains stable at around 40% and growing. That means despite of competition, the offer that we have and the strategy of a good product, good network at the best affordable price is proving to provide a 10% growth in revenue, EBITDA and subscribers all around and we continue -- we will continue to forecast that for the early 2026 if you might say. Now the churn, remember that we have an increase in rates at the beginning of the quarter. That increase in rates put pressure on the churn. Our level of gross adds is the same. It's a little bit higher than what we had in the second quarter. So that means we're improving and having more capacity of bringing gross adds. We're not against any increase in rates that we that we have at the beginning. And in some of our high penetrated market, we have that increase in short. We expect that's shown to stabilize and decline slightly in the quarters to come. That's our view of what we have. Of course, it is a competitive environment. We've been having that competitive environment for a long time. We have Izzi, we have Total, we have Telmex in our markets. But as we said before, we believe that we'll have the best offer and to continue to provide growth in the markets where we are. Operator: The next question comes from Milenna Okamura from Goldman Sachs. Milenna Okamura: The first one is you mentioned in your early remarks, some commercial adjustments that drove your ARPU increase. So can you give us a little bit more detail about these initiatives, aside from the price you have implemented? And how do you expect margins to evolve going forward as you continue to increase your fiber penetration in new areas? Raymundo Pendones: Yes. Thank you for the question, Milenna. Regarding the ARPU, we continue to provide a slight increase in the ARPU that we have there. And that's a combination of several factors. One is the increase in rates that we have on that part. The other one is the increase in apps and services per unique subscribers that we also are successful in that part. And that's coupled with the increase of subscribers bring a lower ARPU because of the promotions that we have. So all that combination doesn't allow us to increase more the ARPU, but we believe that we can continue to have a slight trend increasing going forward. Now in terms of the markets, we still have room to grow, we are at around 81% Broadband penetration in our markets, and we really believe that we can raise to around 90% -- to below 90% in the years to come. So all the companies will continue to grow in that part. The thing is that who has the better offer price and margins to take part of that growth in the market. So far, we have growth in expansion. That means we're capturing market from competition. And of course, some of them also will be new market subscribers. And we're capturing subscribers, also 1/3 of our subscribers come from organic systems. That means we're growing above market growth because of that offer that we have because we convert and we have all our subscribers, 83% of our base, the majority of those organic subscribers already has access to fiber, brand-new CPEs, better quality of the video that we have there and better offer. So that's what we see that we will continue to grow in the markets to come. You can expect 2026 and 2027 to continue to provide for Megacable growth between 100,000 to 150,000 subscribers per quarter. Operator: The next question comes from Phani Kumar from HSBC. Phani Kumar Kanumuri: So the first one is regarding the comment that you made earlier, saying that if you exclude the special projects, your CapEx margin is in mid-teens. So I wanted to understand like what are you excluding from this? Is it just the expansion project and the migration products that you have? The second question is how was this CapEx, the maintenance CapEx, let's say, 3 years ago, has it come down from like 20% to mid-teens? Or is it -- how is the trend evolving? And what is driving that trend? Raymundo Pendones: I'm sorry, this was [indiscernible], it was productized in my opinion. Luis Zetter Zermeno: Phani -- a little bit. Can you rephrase the first question, please? Phani Kumar Kanumuri: The first question is, you said that you are excluding some special projects. So what are the special projects that you have? Is it just a recognition or does it also include the customer premise equipment? Luis Zetter Zermeno: So what we consider special projects are both the expansion and the GPON evolution CapEx projects per se. There are other small investments that come along with that -- those strategies. But basically, those are the 2 special projects that we mentioned. Raymundo Pendones: The expansion project like Luis was saying, we announced that at the end of 2021, we start getting subscriber at the mid of 2022. We're very happy that we already doubled the infrastructure of the company, getting more than 9 million home pass in addition, put us in a very similar position to that of the competition as a strength company and growing subscribers on that. We are very well in terms of how we're increasing those subscribers, and that's reflect on the growth of revenue. And that means that in the future, we will slow down kilometers and homes to be activated in the expansion territories and that's for sure. The other project that we have, which is the GPON Evolution we call it, that's evolving from HFC to GPON to fiber, all our existing territories. We're very successful also. As I said, totally, we already have 83% of the company is already on fiber. So for the years to come, the evolution from HFC to fiber, it will be smaller. So what Luis is saying, our 2 main projects -- special projects are decreasing in CapEx intensity expenditures, okay? This company will never stop investing in CapEx, that's for sure because we're a technology company. But the levels that we expect after we finish those special projects and that's around 2028 will be levels between the 15% to 28% CapEx over revenue. Enrique Robles: But in the meantime, it will be declining from the current 25%, 26% to the lower very low 20s, and we will get to below 20s when we finish -- when we finish those 2 special products. Luis Zetter Zermeno: And to your second question, the maintenance CapEx has reduced, yes, because it's easier or cheaper to maintain network on the GPON side of the house compared to the HFC previous network. Phani Kumar Kanumuri: Is there any quantity measure? Is there any quantification of what's the decrease that happened, let's say, over the last 3 years? Luis Zetter Zermeno: Well, it was a little bit above 20%, and now it's on the high teens or mid-teens. So that's basically on the maintenance CapEx. Operator: Next question comes from Andres Coello from Scotiabank. Andres Coello: Two quick questions, please. The first one is on the competitive environment. I think Televisa just confirmed that they will invest $600 million this year. I think that's 20% more than what you are planning to invest, around $500 million. So I'm wondering if you are noticing any change in behavior from Televisa, if you think that Televisa can become a little bit more defensive in the territories that you just entered. That's my first question. And whether this can, in any way, affect your CapEx guidance to have Televisa investing more than you. And my second question is on the recent natural events in Veracruz and other states. I'm just wondering if there was -- if you're expecting any nonrecurring impact in the fourth quarter, perhaps in terms of revenues and also in terms of infrastructure. Raymundo Pendones: Yes, Andres, thank you for the questions. Regarding the competitive environment, Televisa is investing more than us because we already invest what we have to invest. We have been investing in fiber before they did hit on that part. We have a good offer, a good product and good price and we don't see why we are going to slow down our CapEx and our growth in subscriber. Regarding Veracruz, we were affected and hit in some of our markets. One of those markets being Costa Rica. We already have all the system back and working and on and working with our subscribers. And what we can say is that we're working in a normal condition. Operator: The next question comes from the line of Emilio Fuentes from [ GBM ]. Emilio Fuentes: I was wondering if you could give us some outlook on how your dividend will evolve going forward, especially given how you've been able to pay around 20% of your EBITDA. Now that you -- the company will go into a less intensive investment phase and the more cash generating phase, should we expect this to go up? Enrique Robles: Well, we haven't made any decisions yet. Obviously, it will depend on the future, how we see the industry and opportunities going forward, but if we do not have anything better to put our money in. Obviously, we could always raise our dividends. We don't see why not, but it's too early to call that. Operator: The next questions come from Ernesto Gonzalez from Morgan Stanley. Ernesto Gonzalez: Look, I know it's early to discuss 2026. But given the high levels of penetration in the Broadband market in Mexico, is it reasonable to assume that you can maintain the current level of growth for next year? And the second question is, can you also discuss the main drivers of why your subscribers churn? Is it because they get better prices elsewhere because they're looking for a better network or any general commentary in churn is appreciated. Raymundo Pendones: Thank you, Ernesto. Yes, as we mentioned, we don't see why we should slow our growth. We forecast the same growth that we have between 100 to 150 per quarter. That's what we're looking for 2026. And that's based in the offer and also because the market at 81% penetration still have room to grow on that part. Regarding the churn, what we see is that a slight amount of our churn goes to competition. But as I said, this slide, what we see is that every churn that we have is economically, that's the main reason that they can afford to pay. And as I said at the beginning of the third quarter, we had an increase in rates that put pressure on the churn. That's the reason of the increase in churn. Operator: The next question comes from Lucca Brendim from Bank of America. Lucca Brendim: I have only one here from my side. Can you give us an outlook on the corporate segment. It has slowed down this year, but how can you -- we think about it going forward, especially for 2026, 2027, how much do you think that this segment can grow. Raymundo Pendones: Yes, it's a good question. Look, as I said, the corporate segment has a slowdown, it's a soft result that -- what we have. And that's due to -- 2 main factors. One is the market. The market has decreased the price of fiber and the price of connectivity. And the other one is that we changed the way that we sell our infrastructure product before we used to sell a lot of that infrastructure on a cash basis. And now we changed that into more products that has serviced over a long period of time, bringing a more recurring into the future, more profitable instead of just selling hardware in that part that we don't like that part. So we make a shift in the strategy of the corporate segment that affect us slightly in the short term, but that sure will bring better results in the future. Something that I want to say is that the corporate -- even for the corporate segment has a 5% decline year-over-year. We did not see a decline in the EBITDA of that segment. That means we have a much more better margin with our strategy, recoveries of the decrease in the revenue that we have. So that's part of our strategy. We are very happy of that part. We integrate our 3 companies into MCM business, Tech-Co and that shift is sure it's going to pay off in 2026. Operator: The next question comes from Alex Azar from GBM. Alejandro Azar Wabi: I just wanted to pick your brains on what's next. Several questions from my colleagues being on capital allocation, fully penetrated market. So what's on your mind when you see Mexico fully penetrated in terms of cable perhaps '27, '28. How should we think about Megacable in the next 5, 10 years? Are you guys going to grow more aggressively in -- as an MVNO or perhaps the corporate networks. Just wanted to understand how you're viewing the company very long term. Enrique Robles: Thank you, Alex. Obviously, in the telecom industry, there is very many opportunities in the future, like as you mentioned, mobile with MVNO. In the corporate market, we have a great, great opportunity. In the digitalization of the country, obviously, also in education and telemedicine and all that and with the AI accelerating, growing -- the growth of the AI and all the applications that will come with that. Obviously, there is a big -- very big opportunities in the future for the telecom industry to sell -- to upsell services and applications for the Mexican homes and for the business community. Also in the education and medicine industries and services are really big -- it's going to open very big opportunities. We still have a lot to do in digitalization, and this government is putting a big emphasis in that. We have to digitalize the country banking and everything. I think that the market is there. Obviously, it will decelerate in some segments like the connectivity of homes, but we will get to saturation point at times -- some certain time, but there are a lot more things to do. And also, we -- I mean we don't know what new things are coming with AI and the new technologies. For sure, we will find something to do. Raymundo Pendones: That's the remark. At the end, this is a MXN 64 million question, what are you going to do? We're really, really, really focused, Alex, in what we announced at the end of 2021 in that part, those main 2 projects as we like to say, the GPON evolution that brings us that strength in the network and in the product for the future to come and expanding and being effective in both. That's where we're focused on the management right now on that part. But for sure, we're not going to stay on that part. CapEx will decrease. Free cash flow will increase. Revenues will continue to come. EBITDA will continue to come. And the same question that you have, it will be good to know in a year or 2, what we are going to do. But for sure, we're going to continue to be part as Enrique said, on a market that will continue to move from connectivity to IT solutions and value-added services, both in the corporate segment and the residential and maybe other technologies, too. Luis Zetter Zermeno: And we will have the balance sheet to support any endeavor that we will be searching. Raymundo Pendones: We won't be steady, that's for sure. Alejandro Azar Wabi: If I may add, if I may have a follow-up, and thank you for the color. But the market has been really hot in terms of AI, data centers. If I'm not mistaken, you have some data centers. So how are you thinking on these assets? Are you seeing them as core assets? Or would you be thinking of divesting like Axtel bid that under different circumstances. But how are you seeing your data centers? Are you -- are those core assets or you can divest them? Or how you think on those? Enrique Robles: Well, the data center is an asset that would be able to test the waters there. I think that's going to be really big players in that specialized in data centers. Ours is a very good asset that we have. But I don't think we will be growing in those kind of data centers. We will be more focused in edge data set. We already have built over 300 of those all across the country. Raymundo Pendones: And also, like Enrique telling you and your straight question, it is not core. What we have on those both in our main data centers, centralized data center and the edge, we have Megacable infrastructure. Those facilities are built mainly as an anchor for Megacable and an office space and kilowatts for other people to be here. We don't have the mind in investment in fixed data center assets. We want to have a solid core network, both in the long haul and the last mile, the best fiber company in terms of products and services and put applications on top of that. The other ones, the main anchor for the data center is Megacable. It has a great asset for somebody else in the future because it's located in the western part of Mexico. There is no other asset like that in this area. The hyperscalers and the content and the streamers will have to come after going to Greater Mexico, will have to come to different parts of Mexico, one of those being Guadalajara, and that's where we have it. And that's the mind that we have for that part. Our infrastructure is for Megacable use. We don't know whether to maximize that in the future. We will explore that when we finish having our mind in bringing the growth of subscribers increase in margin, the decrease in EBIT -- in CapEx and all the KPIs that we're telling you we're focused on that point. Operator: We have one question through the chat is coming from [ Patrick Brook ] from DS Advisers. There have been reports that AT&T is looking to sell its mobile business in Mexico. Is that something Megacable will be interested and consider buying? Enrique Robles: Not currently, we are pretty much focused in our main projects, which is finishing our expansion plan. And we don't want to go into -- I mean, we're going into a cash positive cycle, and we don't want to reverse that, not currently. We are focused in our main projects. Thank you very much. Operator: Okay. That was the last question. With no questions in the queue. This session is concluded. I pass the call over to Mr. Enrique Yamuni for final remarks. Enrique Robles: Okay. Thank you very much, Saul. As always, it is a pleasure to discuss our results with you. Please contact our Investor Relations department if you have any questions or concerns regarding the company. Have a very wonderful day and a great weekend. Luis Zetter Zermeno: Thank you, everybody.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the WSFS Financial Corporation Third Quarter Earnings Call. [Operator Instructions] I'd now like to turn the call over to your host today to Mr. David Burg, Chief Financial Officer. Sir, you may begin. David Burg: Great. Thank you very much, and good afternoon, everyone, and thank you for joining our third quarter 2025 earnings call. Our earnings release and earnings release supplement, which we will refer to on today's call, can be found in the Investor Relations section of our company website. With me on this call are Rodger Levenson, Chairman, President and CEO; and Art Bacci, Chief Operating Officer. Prior to reviewing our financial results, I would like to read our safe harbor statement. Our discussion today will include information about our management's view of future expectations, plans and prospects that constitute forward-looking statements. Actual results may differ materially from historical results or those indicated by these forward-looking statements due to risks and uncertainties, including, but not limited to, the risk factors included in the annual report on Form 10-K and our most recent quarterly reports on Form 10-Q as well as other documents we periodically file with the SEC. All comments made during today's call are subject to the safe harbor statement. I will now turn to our financial results. During the third quarter, WSFS continued to demonstrate the strength of our franchise and diverse business model. The company delivered a core EPS of $1.40, core return on assets of 1.48% and core return on tangible common equity of 18.7%, which are all up versus the second quarter. On a year-over-year basis, core net income increased 21%, core PPNR grew 6% and core earnings per share increased 30%. In addition, our tangible book value per share increased by 12%. Net interest margin expanded 2 basis points to 3.91% quarter-over-quarter. This reflects a reduction in total funding cost of 2 basis points with a deposit beta of 37%. Given the September rate cut, our exit beta for September is 43%, which reflects the repricing actions taken after the rate cut. Net interest margin for the quarter benefited from an interest recovery from a previously nonperforming loan, which added about 4 basis points. Core fee revenue was flat quarter-over-quarter as our results were impacted by 2 previously announced strategic exits in Wealth and Trust as well as the Spring EQ earn-out from last quarter. Excluding these items, core fee revenue grew 5% quarter-over-quarter, primarily driven by Capital Markets and Cash Connect. Our Wealth and Trust business continues to perform very well and grew 13% year-over-year. Total client deposits increased 1% linked quarter, driven by commercial business. On a year-over-year basis, client deposits grew 5%, driven by growth across consumer, commercial, wealth and trust. Importantly, noninterest deposits grew 12% year-over-year and continue to represent over 30% of our total client deposits. Loans were down 1% linked quarter, driven by the previously announced sale of the Upstart loan portfolio and continued runoff in our Spring EQ portfolio. Excluding these items, loans were generally flat this quarter, but we saw solid momentum in several areas. Our residential mortgage and WSFS originated consumer loan portfolios, both delivered strong growth with linked quarter increases of 5% and 3%, respectively. These results reflect the momentum of our home lending business as well as the learnings obtained from our partnership with Spring EQ. In commercial, new fundings this quarter were offset by lower line utilization and the payoff of problem loans, which supported improvements in our asset quality. Importantly, our commercial pipeline remains strong across both C&I and commercial real estate, increasing to approximately $300 million. We saw a meaningful improvement across our asset quality metrics during the quarter. Total net credit costs were $8.4 million this quarter, down $5.9 million compared to the prior quarter. Net charge-offs were 30 basis points for the quarter and 21 basis points when excluding NewLane. Importantly, we saw a decline in problem assets, delinquencies and nonperforming assets this quarter. NPAs declined by over 30% to 35 basis points, driven by 2 large payoffs with no additional losses, while delinquencies declined by 34%. In each of these areas, we are now at or below the lowest level in the past year. During the third quarter, WSFS returned $56.3 million of capital including buybacks of $46.8 million or 1.5% of our outstanding shares. Year-to-date, we have repurchased 5.8% of our outstanding shares. Despite these higher levels of repurchase, our capital position remains very strong with a CET1 of 14.39%, well in excess of our medium-term operating target of 12%. We intend to maintain an elevated level of buybacks in line with our previously communicated glide path towards our capital target of 12%. While retaining discretion to adjust the pace of these buybacks based on the macro environment, our business performance and potential investment opportunities. These results position us well to meet our previously announced full year outlook, even with an additional October rate cut, which was not previously included in our assumptions. While the half and timing of future rate cuts remains uncertain. It's important to note that the impact of additional rate cuts on our financial results will not be linear as we continue to manage our margins through deposit repricing our hedge program and securities portfolio strategy. As we have done in the past, we will provide a full year '26 outlook in January with the release of our fourth quarter 2025 financial results. We remain excited about the future and committed to continue to deliver high performance. Thank you, and we'll now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Russell Gunther from Stephens Inc. Russell Elliott Gunther: I wanted to start kind of with the bigger picture question, David, and you kind of touched on it towards the end of your prepared remarks. But that medium-term target on CET1 challenging to hit, given just how much money you guys make. So it would be helpful to get a sense just kind of big picture in your mind, what's your base case scenario to achieving that target? And sort of what does that assume for organic growth rates over the next couple of years, acquisitive growth, be it depositories or fee verticals? And then you mentioned potentially flexing the buyback at a more accelerated clip. Just your base case to get there would be helpful to start. David Burg: Yes. Yes, absolutely, Russell. So yes, look, as you've seen this year, we are buying back at a clip that's significantly ahead of both the last couple of years. We're buying back approximately 100% of our net income. Given some of the balance sheet dynamics, the sale of the Upstart portfolio, for example, the runoff in some of the partnership portfolios our RWA has not increased, and therefore, our capital levels, despite these buybacks, our capital levels are still very high and actually increased since the beginning of the year. So that's the dynamic. And as well as the profitability levels that you mentioned, we do generate a lot of capital. So I think that if you look forward, even with a robust growth rate on our balance sheet, we still have a lot of dry powder to execute the buybacks at or above the level of 100% of our net income for a couple of years, for 2 to 3 years. And so that's really the strategic intention that we have. And depending on what happens with the balance sheet, we may accelerate that path. So I can completely see us leaning in more and doing even in excess of our net income on the buyback side. And obviously, as you said, we look at -- we continuously evaluate different investment opportunities. The first priority and the preference is always to invest the capital in the business where those accretive opportunities exist. But after that, we would look to return. Russell Elliott Gunther: Okay. Got it. And then just second question for me. So asset quality resolution and trends were really constructive this quarter. You guys have a healthy reserve and we just talked about the healthy CET1 for that matter. So I guess how are you thinking about reserve levels here amid what is still a somewhat volatile macro? And then could you share particular sectors of your loan portfolio where you continue to keep closer incremental eye? David Burg: Yes. I think on asset quality, generally, as you've seen in our numbers, we have good momentum and good progress. I think -- I would say a couple of things. I think, first and foremost, with respect to asset quality, one of the things that we try to do, obviously, is disciplined originations. It starts there, and we try to have recourse for most of our lending, vast majority of it and those type of actions to make sure we have good underwriting. And then we also try to be proactive around engagement with clients should things -- should there be unexpected bumps and bruises. We try -- we have a very kind of long forward-looking pipeline. We stress our portfolio for higher rates and with our issues -- where we think there are issues at maturity, we try to engage very early and proactively with our clients. And that's been the key to working through our pipeline and some of the migration that you've seen and the favorable trends that you've seen. And so I think commercial is always going to be lumpy and there may be 1 or 2 uneven situations. But generally, we feel good about our portfolio, and we feel good about continuing to make progress on resolving and working through the remaining NPAs. The consumer asset quality has been very strong, both within our home lending business and within the Spring portfolio. So we feel good about the trends, and we feel good about continuing to make progress. In terms of our reserve, I would say that we -- it's -- when you look at the pure -- when you look at the pure macro data that goes into the model, it would suggest that we have the capacity to release some reserves. But we have conservatively made some qualitative offsets where we see still potential volatility in the macro economy to keep that reserve where it is. So I think that's purely a function of all the volatility that we see with rates, potential inflation, some of the labor weakness and us being an erring more on the conservative side. So hopefully, that covers the question, but please let me know if I missed something. Operator: Your next question comes from the line of Kelly Motta from KBW. Your next question comes from the line of Christopher Marinac from Janney Montgomery Scott. Christopher Marinac: I wanted to dig in further to the Wealth and Trust business lines and just understand a little bit more about the future growth in terms of new accounts being opened versus just doing more business with existing accounts. I know you called a little bit of that out on the Bryn Mawr Trust, but I wanted to do more on the other pieces. David Burg: Sure. Chris, thanks for the question. So as you know, our wealth business is a pretty diverse business. And there are really 3 business lines within that business. There's the institutional services, there's the Bryn Mawr Trust of Delaware and then the private wealth management. And also about 60% of the revenue in that business is really not AUM-based revenue, not tied to AUM, but really tied to new accounts and tied to transaction activity. And so we've seen the places where we've seen a lot of new activity growth, new clients, new accounts have been both on the institutional services side and the BMT of Delaware side. When you look at year-over-year, institutional services is up about 30% this quarter, when you -- and BMT of Delaware is up about 20% this quarter. And so we're seeing growth in new accounts and transactions with existing clients. We're seeing a lot of activity there. Arthur Bacci: Chris, this is Art. I would tell you on a few things. I mean, the institutional services team just came back from the ABS East conference in Miami this week, and they're jazzed. I mean our reputation and our quality of service is really being recognized in the marketplace. There's been comments about deterioration in service with some other trustees. And so we are continuing to see a very robust pipeline with new clients and actually becoming the preferred provider for many clients. On the BMT of Delaware side, similar thing. We've seen a recent bank acquisition that one of the subsidiaries was a Delaware Trust, and we're seeing clients starting to leave that and coming to us. We're seeing opportunities on the international side of that business. So that team is really continuing to look to grow its business. And then on the private wealth management side, we've kind of got past the Commonwealth divestiture, if you will. And the last 2 months have been net client cash flow positive, and we're starting to see very good referrals from commercial. We're also really honing in on COIs and really trying to focus on getting more business from some of our COIs. So I think all in all, we have a really positive outlook going into 2026 with our Wealth and Trust businesses. Christopher Marinac: Great. And I guess, just to extend one more thought. You have operating leverage on all ends of the company, but is the operating leverage greater in the wealth space where you can create more earnings from that versus the bank operation? David Burg: Yes. I think the -- one of the things that goes to the diversity of the business model, when you look at our profit margins in the wealth business, I would say they're higher than the traditional profit margins that you may see in other wealth businesses. And it's really -- it really goes to that model. We do have a lot of operating leverage and a lot of opportunity for scale there for sure, particularly institutional services in BMT of Delaware. So I definitely would echo that comment. Arthur Bacci: And I think you can see it in our deposit base that comes out of the trust business because that's large deposits. They're not using our branch network. They're not using ATMs. It's a very scalable business for us. Operator: Your next question comes from the line of Janet Lee from TD Bank. Sun Young Lee: On Cash Connect business, as rates -- if rates were to come down, I would expect the revenue to get compressed, but then I believe that the funding side of it could offset. In terms of the NII benefit coming from the Cash Connect, how do you guys forecast in terms of the potential financial benefit coming from Cash Connect increasing? Or is it more compressed? David Burg: Yes. Yes, Janet, Happy to answer that. So I would say a couple of things on Cash Connect. One, I think the way you described it is exactly right. The Cash Connect revenue, the pricing is tied to interest rates. And so as interest rates come down, we would expect a reduction in our fee revenue in Cash Connect, but that will be more than offset in a reduction in expenses. And so basically, from a profitability perspective, we do benefit from rates coming down. And you can think of it as roughly for every 25 basis points, about a $300,000 kind of pretax profitability benefit. So that's -- as we've seen that play out over the last couple of cuts. And as we have the cuts, September is really not in the numbers yet, but as we have September, potentially the cut next week in December, all of those will flow in into the beginning of next year. I would say that's one dynamic with Cash Connect and we'll drive towards increasing profitability. The other thing which is if you look at our segment reporting and Cash Connect, one of the things we've been talking about is increasing the profit margins in that business in general. And that's not just because of rates but also because of pricing leverage that we think we have in the market, given our market share, that's also on the expense and efficiency side. So there are a few different levers to that. And that's been playing out nicely so far. If you look at year-over-year, the profit margin in that business was about a little bit under 6%. And this year, we're over 10%. Last quarter, it's important to note that there was an insurance recovery last quarter, which -- so the margins look a bit elevated. But if you normalize for that, last quarter was about 8%. So we went from kind of 6% to 8% to 10% on that trajectory that we were looking for, and that's -- so we're executing against that strategy. Arthur Bacci: And Janet, just as a reminder, the way we account for the bailment business, the benefit that David is talking about won't necessarily flow through NII. It's a combination of fee income and noninterest expense. Sun Young Lee: And just on -- so you maintain your low single digit, all guidance including the low single-digit commercial loan growth for the year. So that includes the problem loan payoff that you experienced in the quarter? And also, could you help us size the -- or size the pace of the payoffs coming from the consumer partnership going forward? Should it decelerate from the current like $140 million levels? How should I think about the total impact of the payments and the trajectory there? David Burg: Yes, yes. So Janet, let me take the consumer first and then I'll circle back around to the commercial question. On the consumer side, we had 2 things happened this quarter, and it's important to separate them. One was we closed the sale of the Upstart portfolio. And that was about $85 million that came off our balance sheet at the beginning of the quarter. As you know, that was a nonstrategic portfolio that was in runoff it had some elevated net charge-offs. And so we made the strategic decision to exit that portfolio, and we're also able to release some reserves based on that transaction. So that's the Upstart portfolio. Beyond that, the remaining runoff that you see is really in the Spring EQ portfolio, and that runoff for the quarter was about $50 million. And so that's the pace more or less that we would expect comes somewhere in the $15 million to $17 million per month is what we would expect in that runoff of Spring EQ. So we expect that to continue. However, we -- one of the -- I think one of the areas where we've been leaning into and we think we have -- we've had good momentum and we think we have continued momentum is in our Home Lending business, which is our mortgage business and our WSFS originated consumer loans, which are primarily HELOC, lines of credit and installment loans. And we've had really annualized double-digit growth for a few quarters there. And that's really more than offsetting kind of the Spring EQ runoff that you see. So we think we have -- we think positively about that growth continuing. We think we have some differentiated origination capabilities in that mortgage business, we've been growing our origination officers. And so we feel good about leaning in to that area. So that's on the residential side, on the consumer side, rather. On the commercial side, this quarter, as you said, this quarter was really impacted by a couple of things. One was the work, the payoff of the problem loans which obviously is a good thing. We like to see that, and that supports our asset quality improvement. We also saw line utilization being down this quarter. That's kind of a bit of a volatile number. That moves up and down. There's some of the economic uncertainty plays into that. But generally, that's just a function of kind of business activity. But generally, if you kind of separate that. We feel -- we continue to feel good about our pipeline altogether across the board, including C&I. I would say we're focused on definitely making accretive and profitable originations. There's a lot of competition in C&I. We don't want to be the low -- we're not the low price point in the market. We want to be very thoughtful around profitability. We want to be very thoughtful about underwriting. But having said that, we feel very good about our pipeline. Our pipeline now is at a higher level than it's been in a number of quarters at about $300 million in total. So we feel good about our pipeline. And I would also add that we are continuing to win talent in the market, which gives us a lot of confidence. For example, we had -- we recently announced a new Philadelphia Market President who was the Market President for one of the major super regional banks in the area for Philadelphia. And so I think winning talent like that gives us confidence, and I think demonstrates the confidence that others have in the franchise as well. So yes, we feel good about -- it's hard to predict quarter-over-quarter, but we feel good about being able to grow that business and continue to lean in to C&I, and that's really the relationship engine that we want to anchor to. Operator: Your next question comes from the line of Kelly Motta from KBW. Kelly Motta: Sorry about the technical difficulties -- maybe just piggybacking where you left off last. You noted recruitment of [ Philadelphia ] Market President. Clearly, organic growth is a focus. Where -- are there other areas where you're looking to add talent where you think there's room to bolster up either in terms of product line, wealth or the core bank or parts of the geography that look like attractive growth opportunities and places where you could add some folks? David Burg: Yes. The answer is yes. So we're -- just like I mentioned, the commercial example. We have other relationship managers joining the commercial team. That continues to be an area that we're looking to continue to increase. And so that is an area of focus as well as the wealth business. That's been an area of focus all along. We've had some very successful lift-outs of teams in the last 12 to 18 months there that are really starting to bear fruit and play out the thesis, but that's another area where we're continuously looking at talent, both from a lift-out perspective as well as we look at potential RA acquisitions that we've done in the past. And so we continuously evaluate talent across our footprint. And we think we have a lot of opportunity there. And Art mentioned earlier the referrals, but that's something that we really think is -- there's a significant amount of opportunity in the referral pipelines across our businesses. That's between wealth and commercial, it's between small business. It's between our home lending business and each of those. So there's really a lot of untapped potential there as well. Kelly Motta: Got it. That's helpful. And then maybe turning back to the margin. I apologize if I missed this, but you guys have done a really great job managing the margin, keeping an overall relatively level -- high level of margin and neutralizing some asset sensitivity. You get a couple of cuts here again this quarter. Do you think you have enough flex in the deposit base to absorb some of that? Or could there be some near-term pressure in that margin ahead? David Burg: Yes, Kelly, happy to go and to work through that a little bit. So I think there's -- I'll give you a short-term answer and a longer-term answer. From a shorter-term answer, we do have sensitivity in our net interest margin, as you mentioned. I would characterize that as about 3 basis points per 25 basis point rate cut. So that's really the near-term impact. So when you think about the net interest margin this quarter, we were at 3.91%. We had the one interest recovery. If you kind of normalize for that, we're in the high 3.80% and so with a couple of a few rate cuts that go into the fourth quarter, we would tick down to maybe about 3.80% around kind of in that ballpark. But the, I would say, the longer-term answer is that we have a number of tools that we use to offset that sensitivity after the initial impact in. The best evidence that I can give you of that is if you look at what's happened over the last year, where we've had 125 basis points of rate cuts, but our margins are up year-over-year over 10 basis points. And so that sensitivity that I mentioned of about 3 basis points per cut, will go to 1 to 2 basis points as we are able to take the actions that we take. And those actions are -- one is the deposit repricing that you mentioned. We continue to -- our exit beta for the quarter, the cut obviously happened at the end of September. But if you look at the exit beta at the end of the month, it was about 43% in the low 40s. We're going to run a similar playbook for the other cuts, and we think that we can be kind of in that low 40% beta for each of the upcoming cuts. That's #1. Two is we have, as you know, the hedging program, where we have floor options that mitigate and neutralize some of the asset sensitivity. We have about $850 million of those that are in the money right now. And with the next rate cut, another $250 million would come in the money. And if we have 3 more cuts you would have the entire $1.5 billion program actually in the money. So that would neutralize essentially $1.5 billion of variable rate loans and essentially neutralize that to look like fixed. So that's something that we continue to deploy. We're going to continue to utilize that program. throughout '26. We're thoughtful about maturities there and making sure that, that full $1.5 billion is going to be deployed. And the third thing, I would say that the third tool -- actually, 2 more things. The third tool that we've been using is obviously new to the extent that we've been growing new deposits, and we're able to reinvest it and you think about a steeper yield curve going forward, and you were able to originate those deposits and the low-cost deposits that we've been able to have and then reinvest them at the higher yields. That, of course, takes some time to play out, but that's a big supporter of the net interest margin. And the last thing that I will call out is our securities portfolio. As you know, our securities portfolio yields south of 2.5%. And it rolls off -- we have about $500 million of cash flow every year that comes off that securities portfolio that then we reinvest either into loans or potentially other securities. We reinvested and we pick up a lot of yield. There's 4 to 5 basis points of annual yield pickup from that rollover. So the combination of all of those things, that's what allowed us to really mitigate the impact more than what the kind of the paper math would suggest, and we'll continue to lean in and deploy those tools. Kelly Motta: Great. I really appreciate all the color on that. That's really helpful and it will be helpful to go back to just one point of tying up loose ends of clarification. Just can you remind me how much floating rate loans you have and maybe index deposits just to help manage our margin with that component? David Burg: Yes. So our floating rate loans -- our floating rate loans are a little bit over 50%. And so our loan beta is about 50%. But when you incorporate the hedges, the loan beta drops to a little bit over 40% -- so -- and that's really -- and so when you think about our deposit beta in that range as well, that's really -- that's how we try to neutralize the portfolio. That's how we think about it. So -- and on the deposit side, we -- as you know, we have the CD book, which is the time maturities that -- most of that CD book is in kind of the 6 months with a little bit of 11 months. And so that kind of matures on its cycle. The other deposits are mostly non-indexed. We have about $700 million to $800 million of kind of indexed deposits. Operator: And with no further questions in queue, I would like to turn the conference back over to David Burg. David Burg: Okay. Thank you very much, everyone, for joining the call today. If you have any specific follow-up questions, please feel free to reach out to Investor Relations or me. Have a great day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, and welcome to the Xtract One Technologies Fiscal 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations adviser. Please go ahead. Chris Witty: Thank you, and good morning, everyone. Welcome to Xtract One's Fiscal 2025 Fourth Quarter and Annual Conference Call. Joining me today is the company's CEO and Director, Peter Evans; and CFO, Karen Hersh. Today's earnings call will include a discussion about the state of the business, financial results and some of Xtract One's recent milestones, followed by a Q&A session. This call is being recorded and will be available on the company's website for replay purposes. Please see the presentation online that accompanies today's presentation. Before I begin, I would like to note that all dollars are Canadian unless otherwise specified and provide a brief disclaimer statement as shown on Slide 2. Today's call contains supplementary financial measures. These measures do not have any standardized meanings prescribed under IFRS and therefore, may not be comparable to similar measures presented by other reporting entities. These supplemental financial measures are defined within the company's filed management's discussion and analysis. Today's call may also include forward-looking statements that are subject to risks and uncertainties, which may cause actual results, performance or developments to differ materially from those contained in the statements and are not guarantees of future performance of the company. No assurance can be given that any of the events anticipated by the forward-looking statements will prove to have been correct. Also, some risks and uncertainties may be out of the control of the company. Today's call should be reviewed along with the company's annual consolidated financial statements, management's discussion and analysis and earnings press release issued October 23, 2025, available on the company's website and its SEDAR+ profile. And now it is my pleasure to introduce Peter Evans, Chief Executive Officer of Xtract One. Please go ahead, Peter. Peter Evans: Well, thank you, Chris, and welcome to all of our investors and analysts joining us today. We're going to start off by turning to Slide 4 and talk a little bit about the state of the business. I'm very pleased to say that we ended fiscal 2024 with a very strong Q4 that has positioned us well for the immediate and long-term future, particularly as our new Xtract One Gateway benefited from strong and accelerating demand across a wide variety of markets, most particularly education where we are rapidly cementing ourselves in a leadership position by offering the most efficient, most adaptable frictionless technology suitable for screening solutions in environments where the average individual has a much higher volume of personal items on them as they pass into a venue, items such as backpacks or laptops, tablets, metal water bottles and other items. We see this application not only for schools in the education market but also for places like convention centers, office buildings and hospitals, where we've seen a significant uptick in interest for our solutions. Following a record $16.1 million of total bookings during the fourth quarter, we began fiscal 2026 with a solid backlog, including pending installations of nearly $50 million. These are signed contracts soon to be installed. This is clearly the largest in our company's history and something we're very proud and pleased about. While revenue was negatively impacted by certain onetime events, which we'll talk about in a moment, these were customer-initiated delays and also times when we saw a customer doing a phased approach for some of our larger installations. We continue to work through these items with our customers and cannot be happier about where the company stands as we begin on the next stage of our journey as a company. I personally am looking forward to the coming year being one of higher revenue growth, significant conversion of the backlog into revenue and continuing improvement of our bottom line results as well as continued progress on our path to cash flow breakeven, a key objective for the company and myself and the other executives. Let's turn to Slide 5 for a moment. I'd like to provide some further commentary on the rollout of the Xtract One Gateway. The market continues to be very large and growing for this recently launched product. As evidenced by the number of announcements that we've made over the past few months, particularly in the education marketplace, including organizations and school districts like Manor Independent School District out of Texas, The Delmar School District in Delaware, Volusia County Schools in Florida and Mecklenburg in Virginia. It was a very, very active summer for us with several of these awards taking place just before the end of our fiscal year or just after the fiscal year and some additional contract wins that have continued to go and be booked soon after the end of the fiscal year. Many of these are not yet reflected in our backlog. That said, during the year and predominantly in the fourth quarter, the company signed contracts for Xtract One Gateway with multiple customers worth over $13.1 million serving a variety of markets, including education, some health care and some commercial enterprises. Since then, we've continued to win additional contracts and have now successfully begun commercial deployment of the Xtract One Gateway just subsequent to the fiscal year-end. And the initial feedback from those first customers has been extremely positive with many of them looking to expand. We see this as the tip of the iceberg for us in terms of overall demand as deployments, referenceability, client demonstrations and all further drive interest that we believe will continue to show growth and acceleration in 2026 and beyond. We have surpassed the original business plan that we built and that we envisioned for the first year of deployments for the Xtract One Gateway. And accordingly, we now have plans in place to double the manufacturing capacity very quickly for the Xtract One Gateway in fiscal 2026 in order to serve this inbound demand that we're seeing from organizations like schools and others. This is a nice sign of having a vision to deliver something different and actually delivering on that and the market responding incredibly positively. That positive market response has been in comparison to other solutions where essentially you need to introduce other technologies like x-ray machines and create an environment like a TSA screening activity in airport in order to have a comparison versus the Xtract One Gateway. It's for these reasons that the customers are so excited. As a reminder and a point often asked by investors, we would love to announce many, many more of these customer wins but due to competitive reasons or their preference of a particular entity or perhaps their nondisclosure agreements, we may not always be able to announce some of those new wins. This is why we promote and highlight that our backlog is a much better barometer and a good forward-looking indicator of the health of our business and the future success of our business. It's the best measure of our performance than the number of press releases that we put out. We continue to visit potential customers and host demonstrations on a weekly basis, multiple different demonstrations across the country every single week, and this is resulting in an expanding way of interested school boards and new previously untapped industries who are intrigued by our unique and groundbreaking capabilities. Our AI-enabled technology is truly the best-in-class at determining real threats in a world where the average individual is carrying a large number of large metallic items like laptops, phones, chromebooks, chargers, metal bottles and all sorts of other paraphernalia. I'd invite anyone on this call to think about your own experience when you have to divest of all those items versus the Xtract One Gateway where you just simply walk through with your rolling luggage, your backpack or whatever, and we can uniquely highlight that is a gun and that is a knife on the person and on the location. We continue to meet not only the school boards, but health care entities have now shown interest, warehousing and distribution companies who are looking to protect on both inbound and outbound. Commercial property organizations due to some of the unfortunate incidents such as what happened in New York a few months ago, has caused these marketplaces to open up to us. Other organizations like that similarly are looking to showcase our applications, which will then result in us securing new contracts. All of this does take time, particularly as the size of the orders grow. A typical school board is much larger or a school district is much larger than, say, a theater. And so the analysis that goes in takes some time for these organizations, but we're very pleased because that is increasing the size of our average order, and it's -- we're very pleased with the pace of introduction and even more excited by what the future holds for this solution. With rapid growth on the horizon, we're planning for the future and expect fiscal 2026 to be a year of significant change here at Xtract One on many aspects. Complementing this new and accretive growth that we're recognizing with the Xtract One Gateway, we continue to win new contracts for our SmartGateway at a strong, steady pace. The SmartGateway has proven itself to certain specific vertical markets and is performing extremely well. In the past few months, we've announced awards from organizations such as Temple University in Philadelphia, a global performing arts organization, San Mateo Medical Center in California and follow-on contracts, for example, with a multinational entertainment organization amongst others. These wins underscore the continued and strong demand for the SmartGateway product and its unique fit to serve those markets particularly well, particularly with this latter customer that I mentioned, where this entity, a known worldwide organization known for its theme parks and related properties chose to order additional SmartGateway units to accommodate expansion in its locations. With a planned spring 2026 deployment for a 3-year contract worth about USD 2.6 million in value, we'll increase the Xtract One's global footprint, particularly with SmartGateway and further support the entertainment organization's mission to deliver a safer guest experience at all of its venues. Both the SmartGateway and the One Gateway deliver specific capabilities that are key requirements for unique market segments and their needs. So this is not a one size fits all, it's a perfect fit for each segment. So each of those products is well positioned to serve their respective marketplaces, and we're very pleased with the response from those markets. This provides balance across our portfolio and more future business predictability as we have different kind of cycles of purchasing across different segments and of course, delivers a differentiated value that each customer acquires out of their screening solutions. Overall, as a business, we continue to grow the pipeline of opportunities. We have more than about USD 100 million currently in our qualified sales pipeline, customers that we're actively engaged in at various stages of selling cycle. And this is across both product lines. And this number continues to rise due to increasing threats, unfortunately, across the world and in geographies outside the United States as well as inside the United States. This improves our positioning and growing brand recognition of who we are and what our technology can actually accomplish. Given the current outlook for these and other opportunities, we're very optimistic about the quarters to come, and we believe the company is on a precipice of a step level change in terms of the volume and scale of our operations; therefore, why we continue to do things like I mentioned earlier, about doubling the capacity to manufacture the One Gateway. This obviously leads us to be very positive about the trend towards cash flow neutrality and we look forward to sharing those updates as we get further into fiscal 2026. I'd like to address some prior comments about revenue delays. We have experienced a handful of customer-initiated delays in their deployments of systems, which will cause onetime delays in our revenue recognition. Let me provide a few examples of these. We've signed a contract and there's a desire for an expanded contract with a major U.S. federal organization that due to federal government optimization activities that have taken place through 2025 has caused a lot of reorganizations of their organizational structure and how different people are responsible for different activities like IT infrastructure, budgets, financing and these sorts of things. While the contract is still valid and while that organization has a federal mandate that they will screen for weapons at all of their locations, they've had to pause as they've gone through these reorganization activities. So the requirement is still there and the order is still there and has not gone away, but we're working with that customer as new individuals come into play to start scheduling those deployments. Similarly, a very significant sports venue that we signed a contract with earlier has undertaken a new rebuild of their venue, and they have paused deployment of the systems until such time as they get closer to building occupancy. The good news here is that they have invited us to work closely with them and with the venues architects, for the best placement of the systems, where the conduits would go underground, how do they bring wiring in, how they bring power in and optimize the deployment of the systems into the venue design to ensure the maximum guest experience and deployment of our systems. So I'm pleased that we're working with them closely. I'd just like the building to be finished that much faster, so we can actually convert that order to revenue. On the other hand, we do have scenarios where we're very pleased where things are accelerating. We signed a contract with one of the top 5 major car manufacturers who wish to protect various venues. And they had delayed their deployments for sort of reasons. However, when we were starting to get a little bit frustrated with their delays, they called us up and said, we are ready to take shipment. And so we shipped those months -- those systems this past month after about a 12-month pause where they worked through some entrance redesign activities. So along the same lines, these orders have not gone away. Sometimes a customer needs to pause as they work through some internal activities. The summary here that like all our investors to take from this is the bookings backlog is solid, and we are still actively engaged with all of those customers as well as new customers. At this point, I'd like to turn it over to Karen, who can then provide a little more detailed discussion on our financial results, and then we'll move to Q&A. Karen, over to you. Karen Hersh: Thanks, Peter. I'm happy to review the financial highlights for what amounted to a very busy quarter, setting us up nicely for a strong fiscal 2026. Turning to Slide 7. Total revenue was approximately $3.3 million for the fourth quarter versus $5.6 million in the prior year period, reflecting certain customer-initiated delays, which Peter highlighted previously. We've been working with these customers and many of these installations have started to ramp up in Q4 and into fiscal 2026. We have also been instituting a phased deployment schedule for some of our larger, more complex installations. In particular, this is an approach that we use with school districts, delivering first for the high schools, then moving on to the middle schools and finally, elementary schools. While this approach may initially slow down our revenue in the short term, we believe that working with our customers to develop systematic deployment schedules and instituting rigorous training programs are positioning the company for long-term revenue generation and high customer satisfaction. Similar to previous quarters, revenue for the fourth quarter was spread across numerous customers and industries with the largest contributors being entertainment, education and health care. We've recently made many announcements about various new customer contracts and growing demand for Xtract One Gateway, which are expected to positively impact revenue in fiscal 2026. The mix of business will continue to fluctuate and diversify in the coming quarters given the order acceleration and interest in our products across an expanding array of industries, which I'll elaborate on in just a few minutes. We also remain committed to expanding our channel partner program, which is a valuable contributor to the company's growth. Channel partners accounted for approximately 52% of deployments for the entire fiscal year and this is expected to increase in fiscal 2026. Our gross profit margin was a record 71% for the fourth quarter versus 65% in the prior year period. Margins were also higher versus the third quarter of fiscal 2025 with the improvement both sequentially and year-over-year due to efficiencies achieved in our SmartGateway manufacturing and supply chain processes, as well as the use of advanced software tools like our view dashboard that allow for continuous and proactive monitoring of customer environments. We anticipate margins to be slightly negatively impacted in the near term by costs related to the initial production and installation of the Xtract One Gateway. However, we expect that this will improve over time with broader commercial deployment in fiscal 2026. Turning now to Slide 8. New bookings for the quarter were a record for the company at $16.1 million compared to the prior year quarter bookings of $5.6 million, of which approximately 74% were upfront contracts, meaning that the majority of these new contracts will translate to revenue relatively quickly. Bookings for the quarter were almost evenly split between direct sales and channel partners, as markets like education and health care are well suited for the channel. Total bookings for the year were $38.5 million, up from $29.8 million in the previous year. Anyone who's been following our story will know that our initial target markets were entertainment and sporting venues with a view of further expanding into other markets like schools and health care. Interestingly, in fiscal 2025, approximately 33% of our annual bookings were in the education sector, up from 14% in the previous year, primarily due to the recent launch of Xtract One Gateway. We are excited to see that several schools are now coming on board as evidenced by many of our recent customer announcements. Further, health care currently represents 17% of our bookings, and we expect this will grow in the coming year given the strong product market fit with our SmartGateway for these facilities. With the diversification of our gateway products, we expect our customer base will continue to expand into a multitude of industries in fiscal 2026. Moving on to Slide 9. Our contractual backlog and signed agreements pending installation rose to record levels as Peter previously mentioned. At the end of the quarter, our backlog collectively totaled $49.5 million as compared to $26.8 million last year, almost doubling the backlog year-over-year, which we consider to be an excellent indicator of future revenue. The backlog of $49.5 million at year-end was comprised of $15.5 million of contractual backlog with an additional impressive $34 million worth of signed agreements pending installation, the majority of which are expected to be installed within the next 12 months. Given our current total backlog of almost $50 million and a substantial pipeline of opportunities reflecting strong bid activity and expanding interest in both of our gateway products, we anticipate bookings to continue to increase, putting us on sound footing for fiscal 2026 and beyond. Now let's turn to Slide 10, which shows fourth quarter and full year operating costs year-over-year for each of our key expense categories. Sales and marketing expenses were $1.8 million in the quarter versus approximately $1.5 million in the prior year period, reflecting increased business development initiatives across a wider spectrum of industries while costs associated with R&D were $1.9 million in the quarter versus $2.3 million in the prior year period due to streamlined R&D activities. General and administrative expenses were approximately $2.2 million for the quarter in both years. Overall, operating costs were lower year-over-year even as we significantly grew our backlog and invested in the rollout of Xtract One Gateway. We have consistently managed our operating expenses while growing the company, demonstrating the scalability of our business model as we move forward on our path towards cash flow breakeven. Finally, on Slide 11, I'll discuss cash flow. During the quarter, the company had operating cash usage of $1 million compared with $1.7 million in the prior year period. And excluding changes in working capital, we spent approximately $2.7 million compared to last year's $1.3 million. For the year as a whole, we had operating cash usage of $6.5 million versus $8.1 million in fiscal 2024, primarily due to focused management of our working capital. During the quarter, we also completed a successful public offering of a bought deal, including the full exercise of the underwriter's overallotment option and raised just over $8 million to finance working capital requirements and for general corporate purposes. Our fourth quarter has been a busy but productive quarter. With the completion of our financing, the successful launch of Xtract One Gateway and the growth of our bookings and backlog, we are well positioned for growth in fiscal 2026. With that, Peter and I welcome any questions that investors may have at this time. Operator: [Operator Instructions] Our first question comes from Amr Ezzat from Ventum Capital. Amr Ezzat: Congrats on the very strong bookings number. I appreciate your comments on revenue recognition, and I think it's -- we all get excited with signed contracts that often forget that customers have challenges as well in taking delivery. I'm just wondering how do you feel this friction from the customer side is evolving relative to your comments last quarter and I mean, Q1, which ends next week. Are you guys seeing a bit of easing into Q2? Peter Evans: Yes. From my perspective, Amr, it's Peter here. We are seeing that easing. We do see that some of the contracts take longer to work their way through from trial to contract signing because they tend to be larger deals that we're dealing with because there's more, let's say, as an example, Fortune 500 companies that we're working with. And then those organizations might have multiple locations that they wish to deploy, multiple manufacturing plants, multiple high schools and middle schools. And they're not as interested in flash cutting, for example, 12 high schools and 20 middle schools all in one week. It's not the best approach. So we're seeing kind of these phased deployments. And we're actually starting to see things loosen up and accelerate now in terms of those deployments and in terms of that acceleration. So I'm feeling much better. We did have these onetime events, but we're starting to see that subside. Amr Ezzat: Fantastic. But if I'm sort of thinking about fiscal '26, is it fair to assume a stronger second half relative to the first half? Is that a fair assessment? Peter Evans: From my perspective, yes, primarily because we will be -- as we've seen so far, we're seeing some good momentum for the business and for One Gateway. We're also seeing steady, solid momentum for the SmartGateway, and those contracts will start converting over revenue as we work our way through fiscal 2026. Amr Ezzat: Okay. On the bookings, like, again, exceptional this quarter, and you did announce a flurry of wins post quarter end. I'm just confirming your bookings number probably doesn't capture a lot of these post-quarter wins that you guys announced. So we should be expecting another strong Q1 bookings print. Then maybe on the $16 million of bookings, if you could walk us through the split between verticals. I believe, Karen, you gave it for the full year. Peter Evans: Yes. So in general, we're continuing to see the momentum. And to your question about the flurry of announcements. Yes, where we can, as we said earlier, Amr, we are always interested in keeping our investor base aware of the activities in the company as much as we're allowed to do so by the customers. And where we can announce schools, hospitals, other locations, we will. But the announcements that have been made post Q4, in general, it's a safe bet to say that those are new deals that are occurring post the close of Q4. Some might have been from a Q4 time frame, but just due to timing of getting press releases approved, they might have rolled over into Q1. Amr Ezzat: Then, Karen, I'm not sure if you guys have the split handy for the quarter itself between the verticals? Karen Hersh: For Q4? Amr Ezzat: Yes, the bookings for Q4, the $16 million. Karen Hersh: For sure. So the general split by industry for Q4 was 60% for education in Q4 and entertainment was about 24%. So those were the 2 big ones and health care came in around 12% with the rest being some miscellaneous through other industries. So the overwhelming winner for Q4 was definitely education followed by entertainment. And those, I think you could evidence towards 2 of the larger press releases that we did, one for Volusia and the other for an entertainment organization. Those ones both fell within Q4, and so those represented a good portion of the bookings for that period. As Peter said, the deals tend to get larger that we've noticed, certainly with the Xtract One Gateway, and that's evidenced in Q4 where we're seeing a number of larger deals come through. Amr Ezzat: Fantastic. I was very pleasantly surprised with the gross margins coming in at 71%. Can you unpack what drove that? You spoke to, I believe, manufacturing efficiency. And I just wonder, is that a peak you feel? Then obviously, into Q1, what I understood from the comments is that we should expect some step back on One Gateway before margins scale again. I just want to confirm if I understood that correctly. Karen Hersh: I think you've understood it exactly correctly, which is we have said all along that we continue to bring efficiencies in terms of our [ BOM ], In terms of our support that we manage for our customers, and we've done numerous things to help improve those efficiencies over time. And so it's really nice for us to see that this has sort of translated into 71% margins, which are frankly quite impressive for our industry. You did pick up correctly on the comments about Q1. This is what happened to us with SmartGateway. You bring a new product to market. There's things to work out in terms of support. There's little adjustments that we want to make. We want our customers to be completely happy. And this tends to cause some degradation in the gross margin, at least temporarily until we work out those kinks. And so that's what we're anticipating for Q1 is a little bit of an adjustment as we get used to the Xtract One Gateway and bring it to market. And we're also continually already making changes to our [ BOM ] and making further efficiencies. It's going to take a few quarters to run through that cycle and get it really running the way that we -- similarly to our SmartGateway. Amr Ezzat: Fantastic. Then maybe one last one on OpEx. I think you spoke to what's driving that. But are we -- should we view this as a new run rate going into fiscal '26? Or maybe you could quantify how much of it has to do with the launch of One Gateway? Karen Hersh: Well, a lot of the One Gateway charges that were sort of one-off type of expenses, we did capitalize because we felt that there was a long-term future value of those. We'll start to amortize those costs in Q1 as we've brought the product to market. But similar to what we've said in the past, we believe that our operating structure is fairly stable. We have to continue to add to it to some degree to continue to address, for example, business development across more markets than we were initially targeting. And R&D is still going to continue to be a focus for us as we continue to innovate. We're not going to sit on our laurels. So R&D is going to continue to be a focus for us. But these changes are relatively small when you compare them to what we're expecting from a top line growth. So I think that scalability, which is really what you're talking about is, I think, going to continue on. And I think the changes that we have and the growth that we have in the operating base will be quite modest. Operator: Our next question comes from Scott Buck with H.C. Wainwright. Scott Buck: Peter, I was hoping, given the momentum you're seeing in education, if you could give us a bit of a reminder on how big the education opportunity here is in North America? And then maybe touch on some of the other higher growth segments of the business like health care as well. Peter Evans: Yes, absolutely, Scott. So simple math, Scott, there's 130,000 K-12 schools in the United States. That is a public K-12 that doesn't include private. And if you assume 1 to 2 systems per school, depending on the size of the school, depending on the number of entrances, maybe they've got entrance for bus drop-offs, another entrance for main entrants. And we see a variety. Some schools want as many as 3 systems. So you can argue that depending on the systems, the feature functionality and things like that for very simple round numbers, $100,000 to $200,000 a school for argument's sake. And those are just round numbers for simple math. So multiply that by 130,000 K-12 schools, you're in the range of $13 billion to, what, $25 billion or so for that marketplace. So I believe that between ourselves and our competitors, we've barely scratched the surface in terms of the numbers of schools and the numbers of opportunities. I think there are some things that take time to work through the schools, particularly budgets. Most of the schools have to fund these kinds of acquisitions of the systems through grant applications and grant funds, which is -- can be a bit of an arduous process. The money is there, though. Recently, Texas awarded several hundred million dollars for school safety and security, which has opened up, for example, the Texas marketplace. So the market is there. The market is large. The market is significant. It doesn't all happen overnight, though, depending on grant monies and these sorts of things. What we're pleased with, though, is for those schools like Volusia County that did extensive testing over a month-long period, and they were previously using one competitive solution and tested a second competitive solution versus us. It was very obvious what the best solution was for those schools. They could choose an x-ray machine and a screening solution and still have issues with alerts and weapons getting through or they can walk through the One Gateway with kids streaming in at 66 per minute. So we're very pleased with our position that innovation has delivered. We're very pleased to be serving that school industry, that $13 billion to $25 billion market. And all of our customers that we've deployed with so far are very happy and have become strong references for us. Does that answer your question, Scott? Scott Buck: Yes. No, that's perfect, Peter. I appreciate that. You mentioned one example there where you went in and displaced a competitor. Typically in the education space, is that more often than not you're displacing somebody else? Or are there a lot of greenfield opportunities in there as well? Peter Evans: I think we barely scratched penetration in the marketplace between ourselves and all the competitive opportunities. There are some schools you'll see -- I think there's higher penetration, quite frankly, Scott, of walk-through metal detectors that might have been deployed in some intercity locations 5 years ago. I think a place like downtown New York or Detroit or Chicago. But in terms of advanced screening solutions, in the case of this one place where we displaced a competitor, they're using that competitive solution for screening of football matches on Friday evening. And they had occasionally used it for screening students entering into the school. And I was very pleased to get a call from the Chief Security Officer one day where he said, well, I finally scrapped my last of product X and thrown in the dumpster after we've deployed now in 6 high schools with you. Scott Buck: Great. That's helpful, Peter. And then one last one. I want to ask about some of the commentary you had on channel partners and that becoming, I guess, a larger piece of revenue. Are you adding new channel partners at this point? Or are your partners just getting better at helping sell the product? Peter Evans: It's a little bit of both, Scott. We are adding new channel partners, but we're very selective of how we do this. Weapon screening solutions need to be deployed correctly. It is a people, process and technology question, not just dropping technology on the ground. People need to be trained correctly. You have to get the [ con ops ] and the flow right. Otherwise, it gets a little lumpy. And so we look to very good channel partners who can essentially replicate what we do with the high quality and the high touch and the high customer focus. So I'm less interested in having 500 partners versus having 5 really excellent partners. Now we have more than 5, okay? But as an example or an anecdote. And so we're continuously recruiting new partners, but being very selective about who they are. And then what we're finding is our existing partners, as they get their fourth, fifth, sixth deployment with their customers, they as a company are starting to replicate our level of knowledge and our level of engagement, and we're seeing the aperture of their pipeline expand also. So we've got growth with new partners. We've got growth with the existing partners become more fluent in the solution. Scott Buck: Okay. And just given the partnership network that you guys have built, we shouldn't expect any kind of deployment delays on your side, given any kind of capacity constraints at this point. Is that right? Peter Evans: Right now, we don't have any capacity constraints. But as I mentioned in my comments, because of the high demand for the One Gateway that's outstripped what we had our original business plan, we are already in the process of looking to double the capacity that we built into the manufacturing lines so that we can deal with that. So there may be some slight delays until we get that ramped up, but not something that we think is going to be meaningful or significant. Scott Buck: Good problems to have, right? Peter Evans: Yes. Operator: Our next question comes from [ John Hyde ] with Strategic Investing Channel. Unknown Analyst: Congrats on the bookings as the other analysts have said. My first question is around contract split between upfront and subscription. I know, Karen, you mentioned, I think it was 75% or so was upfront in these bookings. Can you give us maybe, let's say, like a split between what type of customers are choosing the different types of subscription versus upfront? Karen Hersh: Sure. It was -- 73% was upfront for Q4. And interestingly, for the full year, the upfront came in at 58% versus 42% for subscription. And so we look to that to see what's going on here. And I think you heard from Amr's question that we had a strong education quarter. And I think that was the main reason for the upfront. So what we're finding sometimes with schools or fairly often with schools is that they have grant money that comes in and they tend to work on an annual budget. And that lends itself well to the upfront contracts. So we often see upfront when we're dealing with schools. Similarly, when we deal with entertainment or stadiums, arenas, any sporting facilities, they tend to be very highly focused on their P&L, and they like to have security as a service. And so that lends itself extremely well to our subscription model, and that's what we often see when we're dealing with sports and entertainment. Health care, we find can go either way. They're often upfront, but at the same time, we do find some of our health care facilities do like to use a subscription model. I would say it's perhaps a little bit more leaning towards the upfront. But you're definitely seeing a preponderance of a market going towards one type of contract versus the other. But that being said, we always have exceptions. And from our standpoint, we're agnostic as to which one our customers choose. We just want to meet the customer with what suits them best for their needs, and that's why we offer that flexibility of both models, whereas some of our competitors in the market are much less flexible in terms of what they offer and they're often pushing customers into a subscription model when they are, in fact, better suited towards an upfront model. So I think that's the key takeaway from us, which is we're very happy to meet our customer from whichever model suits their purposes. Our margins are comparable on both scenarios. And therefore, we just do what's best for our customers. Unknown Analyst: Awesome. So -- and on kind of that topic, having a lot to offer for the customers. I know, Peter, you mentioned, and I think this kind of goes under the radar sometimes. I think you guys are really the only player in the space as far as advanced weapons detection that offers kind of 2 different tailored products, whereas I think your competitors mostly kind of just take their product and try to maybe add on a metal detector like you were saying. Is this something that is really kind of driving some of the advantage with having those 2 products? And if you can talk about maybe which particular customers really do appreciate that advantage? Peter Evans: Yes. So John, it's a great question. I guess the easiest way to describe it is there are -- for each market segment, there are certain critical key factors that they're looking for. And by having more flexibility in the portfolio, that allows us to be more aligned to what those customers' needs are. And I'll give you some examples in a moment versus kind of a one-size fits all. If all you've got is a square peg and you've got to push into a round hole, a hexagonal hole, a triangular hole of unique needs, you kind of have to hammer it in there, and it's not going to fit very, very well. In our case, think of it like we have got a solution with SmartGateway and what it does uniquely and the flexibility for various environments to address the needs of the square pegs and the hexagonal pegs and with the One Gateway, the round pegs. There are certain things that certain markets want. The #1 thing for schools is they want the kids just to flow in. They don't want them to have to divest their backpacks, their laptops, put them on an x-ray machine, walk on through all that sort of nonsense. We want the schools to be very welcoming and the One Gateway allows people to do that. In the case of hospitals, the bulk of the hospitals, the majority of them are very worried about edge weapons. And there's unfortunate incidents like what happened in Nova Scotia in January this year, where 3 nurses were stabbed and one needed life-saving surgery, and that was from a 2-inch blade. And so being able to detect those small edge weapons without alerting on 70% to 80% of the smartphones like other solutions would do, is a competitive advantage for the SmartGateway. And then that applies when you start to think about international markets where the preponderance of the issues are edge weapons, they are not firearms. And so for health care organizations or international markets, the ability to detect the smaller knives without the untenable numbers of alerts is critical. For other organizations like stadiums and arenas, there's all sorts of other capabilities in the SmartGateway, ease of portability. Let just tip it, roll it, drop it on the ground, turn it on and it works. And it's up and running, self-calibrating, self-managing. I don't have to worry about moving metal doors or rebar under the ground or all these other silly things that make it operationally complex for people. The arenas and stadiums have enough to worry about to get 17,000 excited Billy Joel fans in to go see Billy. And so making our systems very simple to use, particularly in an environment where you're using outsourced security guards who change over frequently. Now these are things that we've built into the platform in a manner that makes it very easy for arenas and stadiums and the SmartGateway perfect fits that, very easy for hospitals. I was at one hospital location where they were doing a demonstration and the vestibule between the 2 sets of sliding doors was about 6 foot by 7 foot, fairly small, and we fit into it perfectly where others couldn't. So the ability to fit and align to those different market needs for the different segments is what's giving us competitive advantage. Unknown Analyst: Awesome. One last question. I know you talked about the advantage with -- internationally with knives. I know that's a big thing, especially with the SmartGateway. With schools, though, I know a lot of the schools, obviously, in the U.S. have been picking up on these technologies and we kind of only expect it to continue. But internationally, are you guys seeing the same trend with schools wanting to add security systems like these? Or is it kind of particularly just certain markets like the U.S.? Peter Evans: I think the primary issue in the U.S. is with weapons and firearms. There isn't a week that goes by where we don't hear a story about some child bringing a gun to school. You don't have the same issues in outside of the U.S. because there's not same easy access to firearms. However, there are anecdotally certain locations like I believe in the south of France, they have now mandated that schools will start screening for weapons. So we are starting to see this coming a little bit at the forefront, usually driven by some sort of an event. I was in the U.K. a month ago, and there are certain school districts that are now starting to make it mandatory to start screening for weapons also, primarily driven by some sort of unfortunate event. What we see is in countries outside of the U.S., when there is an event, there's a much faster reaction and mandate to start driving weapon screening solutions. Operator: Our next question comes from, Jeffrey Bennett, a private investor. Jeffrey Bennett: I just wanted to get some visibility into Europe with Martyn's Law coming into effect. I know you just signed Carlisle Support Services and you've done some demos for the Premier Soccer League over there. What kind of revenues are you expecting out of that? I'll put on mute there. And for Karen, I wanted to know what kind of warrant conversions are currently taking place with your warrants? Peter Evans: So thank you for the question. The U.K. is a very strong and emerging market for us. We're very pleased with the engagements with assorted football clubs, theater organizations and other iconic venues. Obviously, we can't speak to them specifically because we're under a nondisclosure with those organizations, until such time as we've either signed a formal contract with them or until such time as we have got their agreement to actually put out a formal press release. So I can't name any specific names. I wish I could, but we can't right now. But the U.K. particularly is becoming a very nice market for us, and we're very pleased with the business acceleration that's occurring there right now. All I can really say is stay tuned, more announcements to come. Jeffrey Bennett: Karen, for the warrant conversions, what kind of conversions are you seeing? Karen Hersh: We have seen some conversions happening in September. We had [ $2.8 ] -- almost [ $2.9 million ] of warrants that were exercised. And this was primarily -- this was exclusively actually related to the financing that we just completed in June. So we've had some additional cash come into the organization from those conversions. And that extended into a little bit more going on in October. In total, [ $4 million ] warrants, give or take, have been exercised since year-end that has provided additional cash for the company. And I would note that there are a number of warrants that are still in the money and could potentially convert throughout the rest of the year. Operator: At this point, there are no further questions in the queue. I would like to turn the conference back over to Peter Evans, CEO, for any closing remarks. Peter Evans: Well, first off, thank you, everyone, for taking the time out of your very busy day to join us today for this presentation. We are very pleased with how we wrapped up the year strongly. There's a few bumps in the road last year, but those were quickly corrected, and we feel that we've got our momentum back, and we've got that strength back in everything that we're doing. 2026 is looking very, very good. I'm feeling very pleased about it right now. I couldn't be happier. I'm very thankful for our investors who continue to support the company. I'm unbelievably thankful to all the employees that we have in our company. We have got a fantastic group of individuals who are all very passionate about what we do. And most importantly, I'm very thankful to our customers who continue to support us, continue to renew with us and continue to go tell all of their friends about us and why they want to work with Xtract One. So with that in mind, I'd invite everyone to stay tuned. We are looking forward to our Q1 announcement coming up very soon, and we will continue the momentum and keeping everyone aware of what we're doing here at Xtract One. Thank you, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to Kimberly-Clark de México Third Quarter 2025 Results. [Operator Instructions] Please note this call is being recorded, and I will be standing by. It is now my pleasure to turn the conference over to CEO, Pablo González. Please go ahead. Pablo Roberto González Guajardo: Hello, everyone. I hope you're doing well, and thanks for participating on the call. We'll go straight to results, and then we'll make some brief comments about the quarter and our expectations going forward. Xavier? Xavier Cortés Lascurain: Thank you. Good morning, everyone. Results for the quarter were better, with net sales growing and gross and operating profits recovering. During the quarter, our sales were MXN 13.4 billion, a 2% increase versus last year. Hard rolled sales impacted total volume, which was flat and price/mix was up 2%. Consumer Products grew 5%, 1% volume and 4% price/mix, while Away from Home remained flat. Exports were down 15%, impacted by a 32% decrease in hard rolled sales, while finished products grew 7%. Cost of goods sold increased 3%. Against last year, SAM, resins and virgin fibers were favorable. Recycled fibers were mixed, while fluff compared negatively. The FX was slightly lower, averaging 1% less. During the quarter, our cost of goods sold reflected the higher prices of raw materials from prior months and very significantly, the much higher FX, including the hedges as those trickled down the inventory layers. Our cost reduction program once again had very good results and yielded approximately MXN 500 million of savings in the quarter. These savings are mainly at the cost of goods sold level and are generated by sourcing, materials improvement and process efficiencies. Gross profit was flat and margin was 38.7% for the quarter. SG&A expenses were 4% higher year-over-year and as a percentage of sales, were up 30 basis points as we continue to invest behind our brands. Operating profit decreased 4% and the operating margin was 21.3%. We generated MXN 3.4 billion of EBITDA, a 3% decrease, but within our long-term margin range at 25%. As mentioned, the benefits of better raw material prices and a stronger peso take time to show up on the actual cost of goods sold, due not only to inventories, but also to contract transit time and particularly in this case, the currency hedges. Having said that, our gross margin did improve 50 basis points sequentially from the second quarter to the third quarter. That improvement does not go down to the operating profit or EBITDA level because the SG&A remained constant and was, therefore, higher as a percentage of sales because the third quarter sales are traditionally lower than the second quarter sales. Cost of financing was MXN 404 million in the third quarter compared to MXN 287 million in the same period last year. Net interest expense was higher at MXN 401 million versus MXN 290 million last year, despite our lower gross debt because we earned less on our cash investments. During the quarter, we had a MXN 3 million FX loss, which compares to a MXN 4 million gain last year. Net income for the quarter was MXN 1.7 billion with earnings per share of [ MXN 0.56. ] We maintain a very strong and healthy balance sheet. Cash position as of September 30 was MXN 11 billion. We have no debt maturing for the rest of the year and maturities for the coming years are very comfortable. Net debt-to-EBITDA ratio is 1x and EBITDA to net interest coverage is 10x. Over the last 12 months, we have repurchased close to 50 million shares, around 1.5% of shares outstanding, which brings the total payout to shareholders to approximately 7%. And with that, I turn it back to Pablo. Pablo Roberto González Guajardo: So we continue to operate against a soft consumer backdrop, but we managed to increase sales and post EBITDA margin within the target range. Growth in Consumer Products was significantly better supported by innovations and commercial initiatives, together with a strategic decision to reduce spending during the heavy summer promotional season to protect the value of our brands as well as reduce the negative price effects. Volume was slightly ahead of last year, an important improvement, but consumers remain stretched and cautious given the increased uncertainty, job growth deceleration, remittances slowdown and overall lack of economic growth. We see no significant catalyst for this to change in the short term and are strengthening strategies accordingly. Still more relevant and differentiated innovation, more effective engagement with consumers efficient execution hand-in-hand with our clients, and importantly, relentless focus on our most important opportunities by category, channel and brands will guide all our actions. In a market that's not growing much, gaining share and playing in areas where we haven't participated at least not aggressively, will be key to accelerate our growth. We look forward to sharing more details on the strategies as we get into 2026. The same holds true for Away from Home business, and we expect exports of finished products to continue to grow and accelerate in the coming years, behind a concerted effort with our partner, Kimberly-Clark Corporation. With respect to costs, we have yet to see the full effect of lower input prices on results and lower sequential volumes typical of the third quarter meant we had weaker operating leverage. Despite these headwinds, margins remain strong. As we get into the final stretch of the year and particularly into next year, we will see lower costs reflected in our numbers. We expect lower pulp prices, stable recycled fibers, lower resins and superabsorbent materials plus a stronger peso to be tailwinds going forward. In summary, our results continue to improve. And despite an expected continued weak consumer environment, we're executing strategies that will translate into stronger results in 2026 and the years to come. With that, let's turn to your questions. Operator: [Operator Instructions] We'll take our first question from Ben Theurer with Barclays. Benjamin Theurer: Congrats on the results despite the challenging environment. So I wanted to follow up a little bit on just the consumer sentiment and what you've been seeing across the different categories. So maybe help us understand and kind of like getting a bit closer into that 4% price/mix change. How are you able to kind of like implement that and at the same time, actually get about a 1% volume growth, just given the consumer is weak, but it felt like a very good execution on price mix with volume growth. So that would be my first question. Pablo Roberto González Guajardo: Sure, thanks for the question. Look, as I mentioned, we see a stretched consumer. And this is [ not news of ] uncertainty. And as I mentioned, job growth has decelerated, remittances have slowed down. I mean overall, the economy is pretty slow and consumers' sentiment is not at its best, if you will. So consumers are being very careful in how they are spending. We do see a fork, if you will, with consumers that continue to spend on premium products, but there are those who are trending down from value to economy products, not at a very marked rate, but there's certainly something happening there given the -- how the consumer is stretched. So the way we were able to put all of this together -- and let me say, by the way, the growth in our categories is pretty muted. Some of them, the categories that don't have such high penetration like kitchen towels and others are growing at higher rates. But even those the rates have slowed down a little bit. And the more, if you will, mature categories are flat or slightly growing when it comes to volume. So what we did is, one, Remember, we decided not to play as aggressively on the summer promotional season. Because what we were seeing over the past couple of years is that when you did that, the price would take a hit not only within the promotional season, but then beyond that, because consumers ended up with some inventory on their hands. So then it was a little harder to move volumes forth. So we were very careful on how we manage that, and I think we were successful in doing so. Plus the fact that we are through our revenue management -- revenue growth management capabilities found certain instances where we could adjust pricing and move forth. So that's how we were able to keep prices going and then volume really helped because of innovation and all of our commercial activities during the third quarter. So it was really a combination of executing on price and innovations that allowed us to put together both growth in price and for the first quarter in the year, growth in volume. Benjamin Theurer: Okay. And then just one quick follow-up. You've called out the softer hard roll sales volume. Was there a technical issue? Is it a demand issue on the export side? What's been driving that? Pablo Roberto González Guajardo: Really, I think what's happening there is that there's a lot of supply of hard rolls in the U.S., a combination of companies with excess capacity sending it to the U.S. and then maybe a little bit of companies buying before some of the tariffs came into effect. So there's paper out there that I think the system is going through. And hopefully, that will become more normalized, if you will, in the fourth quarter, certainly, I think by the first quarter of next year. But overall, just oversupply in the market of hard rolls in the U.S. Operator: We will move next with Bob Ford with Bank of America. Robert Ford: Pablo, I also was impressed by the growth in consumer given your intent to stay away from some of the summer promotions. Can you give some examples maybe of some of the more successful innovation and execution of efforts that are enabling you to improve pricing and take share? And with respect to the export mix between hard rolls and finished products, can you give us a sense both in volume and value in terms of the breakdown of those exports? And then how should we think about current capacity utilization rates for both pulp and finished product? Pablo Roberto González Guajardo: Thanks, Bob. Thanks for your question. Yes. Look, I mean, when it comes to innovation, as I mentioned earlier in the year, we have strong innovations for all of our categories throughout the year. And by the way, we have a very, very strong pipeline for the coming years. So we're very excited about that. And a couple of particular examples are on the diaper front, where we pretty much improved on every single tier of our offerings. And when you take a look at our shares, we're -- even though the categories, as I said, pretty flat, we're gaining share in pretty much all of the channels given the -- all of the channels and all of the tiers, given the innovations that we were able to put into the market. And again, those have to do with better observancy core, better fit, better stretch, better softness. So depending on the tier, again, we improved every single one of them, and that's a category where we see our shares improving nicely. Also, for example, in bathroom tissue in the premium tier, where we've introduced a couple of new features and new sub-brands under Kleenex, Cottonelle, and we're absolutely convinced we have the best product in market and products that can compete with products anywhere in the world. and they've been very, very well received by consumers. And as well, we also made some innovations to our economic product, particularly Vogue in the -- or [ Vogue ] in the wholesale channel, and we've been able to gain ground with that product consistently and significantly. So again, innovation at the core of everything we do and very, very excited with what we see for the coming years when it comes to innovation. With respect to the breakdown of our exports, I mean, hard roll sales represent 46% of the sales and finished product, 54%. And hard rolls, as I mentioned, hopefully, volumes will stabilize here in the coming quarters, and we expect that to continue to be -- hopefully, be a tailwind and if not, certainly not a headwind going forward. And on the finished product, we're excited. I mean we've had a couple of meetings with our partner, and we're looking at opportunities in the coming years to further integrate our supply chain. We've done a good job here in the past couple of years, but many more things that we can do, and we're working very closely together to make that happen, and we're excited with the opportunities we see for it. And as we move and are able to turn more of our capacity into finished product, then certainly, our hard roll sales will decline accordingly because, as you know, what we do is our excess capacity is what we turn into hard rolled sales and sell outside. So as this plans with our partner materialize, a little by little, we'll start to see lower hard roll sales, but finished product sales increase hopefully significantly. Robert Ford: And that was actually the idea behind the question on capacity utilization is we agree. We see this massive opportunity in exports of finished product. And as a result, we're a little curious in terms of where you are right now in terms of capacity utilization, both for pulp? And then how should we think about where you are today on finished product and we can make some estimates in terms of what you need to add. Pablo Roberto González Guajardo: Yes. And it's a great question, Bob, and we -- let me put it this way. We have enough capacity to grow on finished products aggressively together with our partner in the coming years. And not only what we're producing right now, but we're putting plans together so that we can get more throughput through our equipment or through our machines. So we will be able to support growth with them. And I think we will still continue to be able to put a decent amount of hard roll sales out there in the U.S. So I think the combination over the coming years will certainly be a support our growth and support our margins going forward. Operator: Our next question comes from Alejandro Fuchs with Itau. Alejandro Fuchs: I have 2 very quick ones. Pablo, maybe I want to see if you can discuss a little bit about competition, right? How do you see competition today in Mexico, given the increase in price and sales mix, are maybe the competitors following? Are they being more aggressive promotionally? And if you can also discuss maybe your expectations into next year, hopefully, with a better consumer environment in the country. Maybe you can talk us about what do you expect going forward? Pablo Roberto González Guajardo: Sure, Alejandro. Look, when it comes to competition, I mean, you know our categories have always been very competitive. And we maybe are seeing a little bit more from some participants, not all when it comes to their promotional aggressiveness. I wouldn't say it's something that it's radically different, but a little bit more as, again, the pie is not growing, some are losing share. So they're trying to recoup some of that and are being a little bit more aggressive on it. But not -- again, not something that it's too surprising or too different from other instances. And the fact also that our retailers are, one, continuing to keep inventories and overall working capital under control, they're putting a lot of pressure on that. And two, trying to keep prices, it seems to me a little bit more consistent. I mean that helps in terms of the aggressiveness of promotions not being even more so that it could have been in other instances when the economy is not growing. So a little bit more, but really nothing marked, if you will. Coming into next year, I mean, we hope that a lot of the -- or at least some of the uncertainty that is hanging over the economy can be resolved or at least we get a clear direction as to where it's going. Certainly, the uncertainty that's coming from the USMCA revision or renegotiation and what will happen with that. I mean, you've heard -- we've heard that in a couple of weeks, we'll be hearing from our government as to some of the agreements they've come to with the U.S. administration. So hopefully, that will start to settle down, and we'll know a little bit better where it heads. Hopefully, as we get into the first -- or the workings of the judicial reform, we start to see how it how it works, and we start to see some decisions that support, again, giving more certainty to investment. And again, just hopefully, some of this uncertainties start to play out and we start to get a better sense of what's going on. We know then what to expect. And if that happens, I think the economy will be able to start growing again at a faster clip, maybe come back to what we were doing before all of this uncertainty, about a 1.5%, 2% rate, which at this stands would be pretty good. Not what we need certainly as a country. I mean, we really should be working hard to take all of the obstacles away from investments so that we can start growing at 3% or higher rates, but that's going to take some time and uncertainty is key for that certainty. So that will hopefully play out by '27, but at least by '26, if we can get some uncertainty out, we'll see greater economic growth and then we might see a consumer that feels a little bit better about things and then domestic consumption can start to pick up again. That's our expectation. But let's see how quickly we can -- how quickly it unravels and happens. Operator: Our next question comes from Renata Cabral with Citibank. Renata Fonseca Cabral Sturani: Congrats on the results. So my first question is still about the consumption environment, but specifically to understand if consumers are making the trade downs and if you see a bigger penetration of private label in the categories that the company has? And the second question is related to cost. In the initial remarks, I understood that the company expects that the raw material prices should maintain for the upcoming months. I would like just to confirm if that's the view. And for the fourth quarter, if the company has any hedges or the effects? Pablo Roberto González Guajardo: I hope I can answer your questions. You were not coming through too clearly, but if I don't, please let me know. Again, when it comes to consumers, we're seeing a divergence. Those that buy premium products continue to do so. Those consumers that are used to buy either value or economy products, we see a little bit of trade down to the economy segment. not a big trade down, but a little bit of trade down given how stretched they are. And tied to that, we are also seeing growth in penetration of private labels in the country. And it's a combination of the economic situation and retailers being a little bit more aggressive when it comes to pushing their private label. When it comes to costs, again, we already have seen in our purchases lower costs of most of our raw materials, excluding fluff. And that's just taking a little bit of time to reflect on our cost of goods sold, but we expect that to continue to -- start to happen certainly in the fourth quarter. And no doubt early in 2026. And our expectations for costs in the 2026 is that we will come in with, again, most of them on a downward trend and that will certainly be tailwinds for our cost together with the exchange rate, which will compare very favorably in the first half of the year. So that should be very, very helpful going forward. And when it comes to hedges, no, we have no more hedges during this quarter, and we don't expect to hedge going forward. Operator: We will move next with Antonio Hernandez with Actinver. Antonio Hernandez: Just following up on [ Renata's ] question, should we expect given that because of the tailwinds from FX and maybe raw materials and so on, that maybe EBITDA margin, at least in the short term has already hit rock bottom. Is that like you see basically upside on going forward? Pablo Roberto González Guajardo: Yes, absolutely. And it's interesting how you put it rock bottom when it's 25%, and it's still one of the best EBITDA margins out there for any Consumer Products company in the world. But yes, we probably have hit rock bottom. And going forward, we should expect better margins, no doubt. Antonio Hernandez: Exactly. Yes. I mean, rock bottom considering the 25% to 27%. Pablo Roberto González Guajardo: I understand. I just -- quite frankly, I just used it to make a point, sorry. Antonio Hernandez: Exactly. It's all relative in the end, but yes, pretty good margins. Just a quick follow-up. In terms of innovation and how you're also treating these consumers that are willing to buy these premium products. Maybe if you could provide any color on how much do they represent or innovation in terms of sales? Anything like that would be helpful. Pablo Roberto González Guajardo: Look, I think most of our growth really is coming from products that -- where we've innovated. And again, we're very, very excited with what we've done, but even more so with what we have coming. And early in 2026, we hope to share a little bit more of our strategies when it comes to areas -- main areas of focus and opportunities by category, channel and brands and also the -- what we see would be some of the very exciting innovations that we're going to be putting into the market. So let's hold on that until the first quarter of '26, and we'll be able to provide you more insight and details into what it's done and how we expect it to contribute to our growth going forward. Operator: [Operator Instructions] We will move next with Jeronimo de Guzman with INCA Investments. Jeronimo de Guzman: Start with a follow-up on the cost side. You mentioned that there's no hedges impacting the fourth quarter, but I just wanted to understand how much did the FX hedges impact the third quarter? Pablo Roberto González Guajardo: I would probably say they did impact about 50% of our purchases for the second quarter and for the first part of the third quarter. So assuming that what we saw on the third quarter was mostly based on those purchases. You could say that approximately 50% of our dollar-denominated purchases were impacted by those hedges in the quarter. I don't know if that made sense. Jeronimo de Guzman: But only half -- but only for half of the third quarter... Pablo Roberto González Guajardo: Yes, because of the -- no, I would say for the full quarter, about 50% of our U.S. dollar purchases, which are about 50% of our costs were hedged. Jeronimo de Guzman: Got it. Okay. And what was the average FX for those hedges? Pablo Roberto González Guajardo: [ 20 70 ] something. Jeronimo de Guzman: That will be a big improvement. And then just want to understand, given the much better cost outlook and the fact that these hedges are less of a headwind going forward or not a headwind going forward, how are you thinking about pricing going forward? Pablo Roberto González Guajardo: Look, we continue to take a very close look at each category and each tier and each channel to see where there are opportunities for pricing because, yes, we see tailwinds when it comes to costs of raw materials. We see headwinds in other costs, for example, on labor costs, which have been increasing in Mexico for quite some years. And when you compound their impact over the years, it's becoming a little bit more impactful, if you will, and some other issues. And plus we want to continue to generate important margins and profit so that we can further invest behind our brands. So pricing will not be as maybe in the past where you would just [indiscernible] we're going to increase 4% in the diaper category in March and period. It's going to be more of a strategic analysis, again by tier, by channel, et cetera, to determine where the opportunities are together with a very important push behind mix for our brands given the innovation we have. And so we will continue to look for opportunities to price and opportunities to improve our mix going forward. Jeronimo de Guzman: Okay. Yes, that's helpful. So the 4% that you had this quarter year-on-year, how much of that was mix versus actual price changes? Or was it just less promotions versus a year ago, I guess, which is kind of a... Pablo Roberto González Guajardo: It was about half and half. It was about 2% price, 2% mix. Jeronimo de Guzman: Okay. Got it. Great. And just one other question on the competitive environment. I wanted to get your sense on market share trends in general, kind of where -- in what areas are you seeing maybe more pressure on the market share side and where you're seeing more more of the market share gains that you're having? Pablo Roberto González Guajardo: Overall, I think we have a very stable market shares, maybe except on diapers, as I mentioned, we see that share growing. When you take a look at bathroom tissue, we're fairly stable. Napkins, we're growing share. kitchen towels, we're growing share. Wipes, we're growing a little bit on value, not on volume. But that's a category where we have lost a little bit of ground to not only private label, but a whole bunch of offerings coming from Asia and other parts of the world at very cheap prices. So we've got plans to attack there and recoup some of the share. And I would say about that, I mean, facial tissue is is flat at about 92%. I mean, our shares are pretty stable overall. Jeronimo de Guzman: Okay. Sorry, one more question on the new JV, the penetration, any updates on that? Pablo Roberto González Guajardo: On what, sorry? Jeronimo de Guzman: The new business, the pet, animal [indiscernible] Pablo Roberto González Guajardo: Pet business. No, thanks for the question. Yes, we continue to make inroads. I mean we're getting cataloged in more retail chains and improving our reach within them. So getting more SKUs in there and getting into more stores. And again, the consumer reaction so far has been very, very good. The retail reaction has also been good. So right on track where we wanted to be, and hopefully, that will accelerate in 2026. Again, this is a long-term play, but we should be this -- we absolutely should see this business accelerate in 2026. Operator: We will move next with [ Miguel Ulloa ] with BBVA. Miguel Ulloa Suárez: It could be regarding the CapEx for next year and any changes in the repurchase program. Pablo Roberto González Guajardo: Miguel, CapEx will remain very likely in the $120 million range. Could be a little bit more if some of the opportunities for exports capitalize, but nothing that would change significantly the capital allocation. For buybacks, this year, we will complete our EUR 1.5 billion program. Still too early to talk about next year. We will definitely have retained earnings from the net income this year to grow the dividend. And as usual, whatever we have left, we will devote to to buybacks. So that we'll have to see after we end the year. Miguel Ulloa Suárez: That's helpful. And just one, if I may, is regarding further investments or big investments in line for capacity in coming years? Pablo Roberto González Guajardo: Right now, it doesn't look like we need to do anything beyond that 120 average CapEx. Again, if we see more opportunity, we could see a couple of years of ramp-up. And even if at some point, we need a tissue capacity, which at this point, it doesn't look like, but hopefully, that changes, then we would see a couple of years of 150, maybe somewhere around that. Again, nothing that should change significantly the capital allocation. Operator: And this concludes our Q&A session. I will now turn the call over to Pablo González closing remarks. Pablo Roberto González Guajardo: Thank you. Nothing else to say just thanks for participating in the call. I hope you all have a terrific weekend. And since this is our last call before the year-end, I know it's early, but I hope you all have happy holidays and a terrific New Year's and look forward to talking to you early in 2026. Thank you. Operator: And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Good day, everyone, and welcome to today's Fibra Danhos' Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by should you need assistance. Now I'll turn the call over to your host, Rodrigo Martínez. Please go ahead. Rodrigo Chavez: Thank you very much, Alvis. Hello, everyone. I am Rodrigo Martinez, and I run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos' 2025 Third Quarter Conference Call. We issued our quarterly report yesterday. If you did not receive a copy, please do not hesitate and contact us. Please be aware that they are also available on our website and in Mexico Stock Exchange website. Before we begin the call today, I would like to remind you that forward-looking statements made during today's call do not account for future economic circumstances, industry conditions and company performance or financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in according to IFRS standards and are stated in nominal Mexican pesos, unless otherwise noted. Joining us today from Fibra Danhos in Mexico City is Mr. Jorge Serrano, CFO of Fibra Danhos; and Mr. Elias Mizrahi. Now I will turn the call to Jorge Serrano for opening remarks and financial and operating indicators. Jorge, please go ahead. Jorge Esponda: Good morning, everyone. Thanks for joining us today. Let me share some initial remarks on Fibra Danhos' third quarter results. It has been only 2 years since we announced our interest in industrial assets and Danhos is already a reference player in the CTT logistics corridors that services Mexico City. We have been recognized for our execution capabilities and high-quality construction standards. We have not only delivered our commitments on time and within budget, but we are also working in new opportunities that will translate into profitable growth. During the quarter, we signed build-to-suit lease agreements for more than 300,000 square meters on 3 additional industrial parks with best-in-class tenants that will generate cash flow by the end of next year. This is very relevant. Not only because it will translate into profitable adjusted risk returns, but also because it reinforces our strategy of diversification in industrial real estate and complements our traditional growth strategy on mixed uses and high-quality real estate developments. Our CapEx pipeline is additionally confirmed by Parque Oaxaca and Ritz-Carlton Cancún Punta Nizuc project, which are under construction and up and running. Sound financial results were supported by strong fundamentals. Total revenues of MXN 1.9 billion were 14% higher against last year, explained by increased occupation levels, positive lease spreads, higher overage, parking adjusted revenues and contribution of industrial assets. Total expenses increased 10%, keeping control on operating and maintenance expenses and dealing with labor-intensive services that have posted major increases. NOI reached MXN 1.5 billion, an increase of almost 15% year-on-year with a 78.6% margin that is 75 basis points higher than last year's. AFFO reached MXN 1.1 billion that accounted for MXN 0.69 per CBFI. Distribution was determined at the same level of MXN 0.45 per CBFI which amounts to MXN 722 million and represents a payout relative to AFFO of 66%. Retained cash flow, as you know, was used to finance our CapEx program, which was complemented with MXN 300 million of short-term debt. Balance sheet, however, remains strong with only 13% [indiscernible]. Our portfolio overall occupancy continued growing and reached 91%, with retail occupancy reaching 94%, office at 76% and industrial of 100%. Thanks. We may now turn to the Q&A session. Operator: [Operator Instructions] Our first question today comes from Alejandra Obregon of Morgan Stanley. Alejandra Obregon: The first one is on your CapEx and dividend payout. If you can perhaps provide some color on how to think of these 2 metrics in 2026 and 2027 as you move forward with Nizuc and Oaxaca. So that's the first question. And then the second one is in terms of your portfolio mix and perhaps if I'm allowed to think of it in a more long-term sort of way, maybe 3 or 5 years from here, how much do you expect industrial to represent of the mix in your portfolio and whether you see some recycling opportunities elsewhere. So how do you see your mix 3 or 5 years from here? That's the question. I'll stop here. Elías Mizrahi: Alejandra, this is Elias Mizrahi. Regarding distributions, so as you know, we've been investing very heavily on industrial assets. We're starting construction of Parque Oaxaca in the coming months. And obviously, we're also investing in the Nizuc project. So as long as we continue investing at this rhythm, we expect at least for 2026 for the dividend to remain the same. I think towards the end of next year, we'll probably have better color for 2027. But I think that this gives us the ability to reinvest our cash flows and give better returns for our long-term investors. Regarding the mix on our portfolio, I would say that we don't have a specific target on where we see or where we want to have the industrial assets as a percentage of our total portfolio. I think we're opportunistic. We will be looking at new development opportunities. And we're also investing in retail assets as well. So we don't expect only to grow in the industrial segment, but in all segments. So I think that more than targeting a mix, we'll be targeting solid projects with great risk-adjusted returns. Alejandra Obregon: Got it. And if I may follow up in terms of land and backlog, if you can talk about what you're seeing in the Mexico City and metropolitan area. Do you think there's more interest for you to continue growing here? And what -- and how does your land access look like from here? Elías Mizrahi: Yes. So first, I mean, we highlighted in our report and Jorge just mentioned the lease activity we had for the quarter. So we leased 300,000 square meters this quarter alone. We're very proud of that achievement. We already have 250,000 square meters operating and generating rent. And by year-end -- next year, we'll have more than 0.5 million square meters generating rent for the Fibra in basically 2 or 3 years since we basically announced the industrial component in our portfolio. So we continue to see strong demand. I think the market, as Jorge mentioned, welcomed Danhos, welcomed its development capacity and ability. And we're assembling land for future projects, which if we find the right land and the right opportunities, we will be able to develop them and continue growing. But we see the Mexico City market as strong and resilient for now. Operator: Our next question comes from Igor Machado of Goldman Sachs. Igor Machado: I have 2 questions here. And the first one is on the retail sales. So we saw some deceleration from department stores company. So any color that you could share with us like if you expect a retail deceleration for the next quarters, this would be helpful. And the second question is regarding the land for the industrial real estate assets. I'm just trying to better understand here who is selling the land and the terms of the selling. So that's it. Jorge Esponda: Igor, this is Jorge. Well, as you know, I mean, our retail portfolio has very positive occupation levels. I think we have a very strong tenant base. But it's true that we've seen some deceleration in the economy in consumption. However, we continue to have demand for our shopping centers. This is given the location we have. And that allows us to be quite defensive in a deceleration environment on the economy. So, so far, we're posting still very strong results in our retail portfolio. Operator: Our next question comes from [indiscernible] of JPMorgan. Unknown Analyst: Congrats on the results. My question is regarding any update on the office segment. Could you maybe walk us through how easy or hard it has been to renew the office properties? How sticky were these tenants with some minor decrease in the Toreo property? Elías Mizrahi: [indiscernible], I'm sorry, but there was some interference in the question. Can you repeat it, please? Unknown Analyst: Yes. My question was regarding the office segment. Maybe could you walk us through how easy or hard has it been to renew the office properties? And how sticky were these tenants? Elías Mizrahi: Yes. So at the beginning of the year, we had 2 major leases that -- actually this was pointed out, I think, in the fourth quarter of last year's or first quarter of this year's call. And both contracts were renewed. One was in Toreo, the other one was in Esmeralda. So in both cases, we were able to renew both big leases. And the smaller leases are also being renewed basically every quarter. So we're -- as we've mentioned, we're in the midst of keeping our tenants. Unknown Executive: [indiscernible] Elías Mizrahi: Yes. And leasing activity has picked up. In Urbitec, we leased this quarter 2,500 square meters. And also in [indiscernible] 3,500 square meters. So during the quarter, we leased approximately 7,000 square meters. Unknown Executive: [indiscernible] Operator: [Operator Instructions] Rodrigo, we have no questions at this time. I'll turn the program back over to you for any additional or closing comments. Rodrigo Chavez: Thank you very much, Alvis. Thank you, everyone, for joining us today. Please do not hesitate to contact us, Elias, Jorge or myself for any further questions. We are always available. We'll see you on our next conference call. Thank you very much. Operator: That concludes our meeting today. You may now disconnect.
Operator: Good morning, and welcome to the Healthpeak Properties, Inc. Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead. Andrew Johns: Welcome. Today's conference call contains certain forward-looking statements. Although we believe expectations reflected in any forward-looking statements are based on reasonable assumptions. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. Discussion of risks and risk factors is included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on this call. In an exhibit of the 8-K referred to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with regulatory requirements. The exhibit is also available on our website at healthpeak.com. I'll now turn the call over to our President, Chief Executive Officer, Scott Brinker. Scott Brinker: Thank you, Andrew, and welcome to Healthpeak's third quarter 2025 earnings call. Joining me for prepared remarks is our CFO, Kelvin Moses. The past 60 days or so signal a turning point in our business. Leading indicators in life science are turning positive and private market values for outpatient medical are strengthening. As a premier scaled owner in both businesses, we see significant value and upside when we look at our stock price today. Two years ago, against the backdrop of raging inflation, the outpatient sector was out of favor in both the public and private markets. We saw a sector with good fundamentals that we're getting even better and seized an opportunity to grow our portfolio by $5 billion in a strategic merger with Physicians Realty Trust. In doing so, we established the best portfolio and platform in the outpatient sector. The merger also accelerated the strategic goal I described 3 years ago to get closer to our real estate and our tenants. We've now internalized property management on 39 million square feet with line of sight on another 3 million square feet. We now own the tenant relationship and the local market knowledge. The internalization also allows us to deploy technology at the property level quickly and at scale. With the addition of JT, Mark and team, we deepened our relationships across the outpatient ecosystem, creating proprietary growth opportunities, including accretive new development projects. Flash forward to today, as inflation has come down, there's a deep pool of buyers for outpatient medical. It's a great time for us to sell less core real estate and to recap some assets. We're in various stages of negotiation and execution on transactions that have the potential to generate proceeds of $1 billion or more. We see an exciting window to recycle outpatient sale proceeds into higher-return lab opportunities where the leading indicators are starting to turn positive. Increased M&A less regulatory noise, lower interest rates, positive data readouts, solid FDA approvals and priority reviews and recent biotech outperformance in the stock market. The real estate market will obviously lag, but the building blocks for a recovery in demand are encouraging. Our leasing pipeline today is roughly 2x the pipeline at the start of the year. We're also seeing some vacant development projects across the sector get absorbed by alternative uses, which will help accelerate a return to more balanced supply and demand. Important to note that purpose-built lab buildings are highly flexible and can support many alternative uses. I'll repeat that our occupancy will decline for the next few months due to expirations and terminations, but we're now gaining more confidence that will be the bottom on occupancy. At that point, we'll have more than 2 million square feet of available space in good submarkets to lease up and recapture NOI. We recently welcomed Denis Sullivan to our team. He will play a pivotal role in our life science business and investment strategy. Denis spent 14 years at BioMed, including time as CFO and CIO. We have exceptional local market leaders in the Bay Area with Natalia De Michele, with dentists in San Diego and with Claire Brown in Boston, all rolling up to Scott Bowen, our segment leader. We believe we have the footprint, people and balance sheet to capture market share as the sector recovers. Our CCRC business is performing at a high level. Six years ago, we bought out the 51% interest in the portfolio held by our joint venture partner, and we installed a new operator. Since then, NOI is up more than 50%, including double-digit growth this year. We believe then and now that the entry fee product is very attractive to seniors on fixed incomes, we are looking for a lower monthly rent payment. The continuum of care we offer is viewed favorably by seniors and their families because it creates peace of mind they won't need to move again in the future. And that's very important at that stage of life. Sequential occupancy in the portfolio was up 70 basis points, and we expect continued growth in the fourth quarter. I'll wrap up with our technology initiatives, which are already paying off with efficiency gains. Our G&A this year is projected at $90 million, which is less overhead than we had 5 years ago, despite significant inflation across the economy and closing a $5 billion merger. But the cost efficiencies are only part of the story. We intend to create a tech-enabled platform to streamline our operations, differentiate our property management and leasing platforms and expand tenant services to drive new revenue opportunities. We'll have more details to share in the coming quarters. Let me turn it to Kelvin. Kelvin Moses: Thank you, Scott. I'll expand a little bit on the technology initiatives that Scott just mentioned. We're advancing our strategic plan to strengthen our capabilities as an AI-enabled real estate owner with a leading investment management platform designed to meet our clients' needs across geographies and asset types. Operationally, internalizing property management now gives us end-to-end control of our workflows and establishes a consistent foundation to deploy technology across the property. Technology adoption of real estate has historically lagged other industries, and we see advantages to moving now. We're focusing our initial efforts where data and automation can offer more time in the field, and that starts with improving property operations, facilities engineering and accounting. We've partnered with a leading enterprise technology firm to help us drive this shift. Our automation initiatives are building a stronger foundation for our data architecture that will enhance connectivity across internal systems and reduce manual work. Our approach allows us to make measured investments and preserve long-term flexibility as commercial tools evolve. These fresh perspectives from outside of traditional real estate will also help us innovate faster. We see every part of our business as an opportunity. Now moving into the third quarter results. Financial and operating performance was in line with our forecast. We reported FFO as adjusted of $0.46 per share, AFFO of $0.42 per share and year-to-date portfolio same-store growth of 3.8%. Starting with CCRC. Our portfolio delivered another strong quarter, driven by continued pricing power modest expense growth and 150 basis points of year-over-year occupancy gains. Cash NOI increased by 9.4% for the quarter. We remain focused on these key indicators of performance as each flow through to NOI and ultimately, earnings growth for the platform. Our product offering and value proposition continues to resonate with consumers, and we remain well positioned to benefit from healthy demographic trends that support long-term growth. Moving to outpatient medical. Fundamental supporting leasing demand for outpatient continues to be favorable. During the quarter, we executed 1.2 million square feet of leases achieved 3% escalators or above on executions and positive cash re-leasing spreads of 5.4%, with TIs also below historical averages. Year-to-date leasing volumes totaled 3.2 million square feet, and we ended the quarter with total occupancy up 10 basis points at 91%. New leasing comprised of 270,000 square feet with Q3 representing the highest quarter of new leasing starts in the combined company's history. TIs on renewals were only $1.41 per square foot per year and year-to-date leasing commissions were approximately $0.87 per square foot per year. Additionally, we executed another 123,000 square feet of leases in October, and we have another 895,000 square feet under LOI. We are pleased to recognize our property management team whose sector-leading Kingsley client satisfaction results reinforce the consistent strength of our tenant retention and help ensure efficient operations for our clients. Thank you to the entire property management team across the organization for their collective efforts. The combination of consistent operating performance, favorable sector fundamentals and deep tenant relationships positions the portfolio for sustained growth and continued excellence in execution. And turning to Lab. During the quarter, we executed 339,000 square feet of leases, of which 45% were new. And on renewals, we achieved a positive 5% re-leasing spread. Year-to-date leasing volumes totaled 1.1 million square feet, and we ended the quarter with total occupancy of 81%. We continue to see escalators on executed leases between 3% and 3.5%, which supports sustainable long-term growth. Tenant improvement allowances on renewals declined to $1.30 per square foot per year, while corresponding rents rose to $65 per square foot given space condition. For new leases, TIs averaged approximately $15.73 per square foot per year, which when excluding two development leases was approximately $5.50 per square foot per year. In October month-to-date, we executed 22,000 square feet of leases and have an additional 291,000 square feet under LOI. Forward-looking indicators of demand continue to improve. Since Q1, the pipeline has doubled to 1.8 million square feet, about half are evaluating our current unleased availabilities. Each of our core markets is experiencing a similar uptick in demand. We have a healthy mix of discovery stage, clinical stage and commercial face tenants and some incremental demand from tech and AI-based companies. We're encouraged by the strengthening demand profile as we move toward in occupancy bottom and ultimate recovery. The decline in occupancy we experienced in 2025 will flow through to earnings in 2026. Recent leasing, together with the conversion of our active pipeline is expected to contribute to occupancy and earnings starting in late 2026 and thereafter. Moving on to the balance sheet. In August, we issued $500 million of senior unsecured notes at 4.75%. We achieved a spread of 92 basis points with no new issue concession. This execution represents one of the tightest investment-grade REIT 7-year spreads year-to-date. We ended the third quarter at 5.3x net debt to adjusted EBITDA and $2.7 billion of liquidity. We continue to prioritize balance sheet management and disciplined capital allocation to maintain maximum flexibility to pursue strategic investments and fund portfolio growth. Now turning to guidance. We are reaffirming our FFO as adjusted and same-store expectations within our original guidance range. We continue to outperform in CCRC in outpatient medical at or above the high end of our initial segment guidance. In addition, we reduced our interest expense and G&A guidance by a total of $10 million. This reflects better-than-anticipated pricing on our senior notes issuances, technology-enabled productivity gains, and additional synergies related to the merger, as well as timing of certain investments and higher disposition. Moving to sources and uses. Year-to-date, we've completed $158 million of asset sales and loan repayments. We have an additional $204 million of dispositions under a purchase and sale agreement as we take advantage of a strong private market in outpatients. These transactions could close in the fourth quarter or early 2026. And with that, operator, we can move into questions. Operator: [Operator Instructions] Your first question comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Just going to the lab leasing pipeline. It sounds like you said it's doubled since the beginning of the year. I was just hoping we could just double-click sort of what's changed? What's the mix of those tenants? And any sort of qualitative trends that you can highlight? Scott Brinker: Yes. It's a broad mix of tenants. It's Scott, from early stage to clinical stage to commercial stage. So the quantum has doubled, but equally important the mix of new and renewal is much more favorable. Year-to-date, it's been a lot of renewals, which is great. But obviously, it takes new leasing to drive occupancy and a good portion of that pipeline now is new leasing. And that's clearly being driven by the improved sentiment in the sector, improved capital raising. There's been a lot of good data in the sector, and that's being rewarded in the capital markets by the FDA and that virtuous cycle is starting to build, but all starting with great data as the science proves out. So we're encouraged. It's roughly 60 days of activity. Obviously, that needs to continue for that pipeline to turn into execution and then to refill the pipeline. But the trajectory, the momentum is very positive. Ronald Kamdem: Great. And then my follow-up is just on thinking about the capital recycling $1 billion out of potentially outpatient medical, just maybe can you talk a little bit more about sort of the buy side in terms of what potential opportunities you think out there, sort of any financial metrics we should be thinking about in terms of what you're going to be going into. Scott Brinker: Yes. Outpatient has been a great business for 20 years. It's one of the few subsectors in all of the real estate that's had positive NOI growth every year for 2 decades. Great financial crisis. Whatever is happening in the economy, it doesn't matter. That sector still has positive growth because it's a need-driven business, and there is a tremendous push to move things to an outpatient setting. That isn't changing. So we love the business. We think we have not only the biggest, but the best platform in the sector, the deepest relationships, which is key given most of the tenants or health systems. So that was one reason we did the merger 2 years ago. We love the outlook for the business. Scale does matter, especially in local markets, which we have. But not all of our portfolio is in concentrated core markets. We still have a few geographic outliers, and this is a great time in the cycle to take advantage of strong demand for the assets and sell some of those assets that are not as strategic for us, but can still draw great pricing from a pretty deep pool of buyers. It's mostly institutional for the types of assets we own, but it's broad-based and it's a deep pool and I think they're attracted to the strong fundamentals. And obviously, as inflation and interest rates have come down, that sector looks a lot more attractive. Maybe the growth of the economy is a little bit more questionable today and outpatient starts to look a lot more attractive in that environment. So I think all of those things are driving the demand. We have roughly $130 million undersigned contract at a really strong cap rate. We're working on a lot. We feel like it's an opportune time to take advantage of that buyer interest, especially in light of where the stock is trading in light of the outpatient development opportunities we have through our relationships and then the potential for opportunities in the Life Science business, but we have a great balance sheet already. We see a lot of advantages to having even more liquidity as we head into 2026, especially if we can get great pricing. Operator: Your next question comes from Nick Yulico with Scotiabank. Nicholas Yulico: In terms of the lab portfolio. I wanted to see if there was any way to get a feel for like where -- if your leased rate is higher than your occupied rates. I know you guys quote that 81% occupancy and lab in the South. You talked about some of the sort of leasing that happened and even in the works is addressing vacancy. So any feel for just like where the lease rate on assets would be versus in-place occupancy? Kelvin Moses: Yes. Nick, this is Kelvin. I would say that our total occupancy today in lab at 81% is largely in line with the occupied rate. We have certain instances where there are tenants that are probably in more space than they need. So the occupancy is a little bit lower physically. But generally speaking, the total occupancy is in line with the physical occupancy. Nicholas Yulico: Okay. And then just second question is on the impairment for the lab JV. Was that -- what triggered that this quarter and then was it also some sort of decision or functioning of how leasing is actually going for those assets? Kelvin Moses: Nick, it's Kelvin again. So typically, you'll see companies take impairments like this when they sell assets. These are assets that we have high confidence in, we'll continue to own long term but specifically for the unconsolidated JV accounting rules, there are rather specific requirements that you have to evaluate on a quarterly basis. Simplistically, if you have carrying values that fall below fair values for more than a temporary period of time you're required to take the charge. And this quarter, we determined that, that was the case. Specifically, the impairments, not cash, it doesn't impact FFO, but we thought it was prudent to do so this quarter given all the facts and circumstances around these ventures. Scott Brinker: Nick, I would just add, Scott and the team have done a great job leasing up the campus. We're at roughly 60% leased, it's 400,000 feet across seven buildings. The buildings that have been redeveloped are for the most part leased. And there's a couple of buildings that are yet to be redeveloped. We are waiting for leases to burn off and, and that work is now underway, and we're confident we'll be able to lease them up once they open. So it's not a matter of leasing. It's a matter of where the rents, where are the cap rates versus when we did that deal 3.5 years ago and obviously marked up the portfolio to the price that we got when we sold it. Operator: Your next question comes from Farrell Granath with Bank of America. Farrell Granath: I was curious if you could outline your kind of risk list and how that compares to the beginning of the year. And specifically, if you can touch on, if tenants have been adding in or are names finally dropping off as you've been seeing a shift in sentiment? Kelvin Moses: Farrell, this is Kelvin. I'll start. Maybe just to give context to our earlier points, we continue to be encouraged by the pipeline that's been building over the course of the last 60-plus days. And our existing tenant base continues to access the capital markets as it's opened back up, and we're seeing a number of folks that perhaps were a little bit more in focus before that are out of focus today given they're extending their cash runways and they're working towards their next clinical milestone. So the exposure in our portfolio has come down, I would say, pretty meaningfully over the last 60 days. So we still have tenants that we are actively monitoring. The quantum of that, I don't have an accurate number to give you, but I think, again, it's directionally has come down since the start of the year. Scott Brinker: Let me add. There's really two parts to your question that are relevant. There's the size of the watch list. That's part one. Kelvin just addressed that. But the equally important part, in our view, is do those companies have a good chance of raising money? Because there's always going to be tenants in the portfolio that have less than 12 months of cash that we're keeping a close eye on. And today, we feel a lot more confident that those companies can raise money. The challenge in the first 9 months of the year had been we have this group of companies that needs to raise capital. It's normal course business, and it was just a very, very difficult environment for them to raise it. So that second half of the question, I think, is equally important and that has improved pretty dramatically in the last 60 days, and obviously, we hope that continues. Farrell Granath: Great. And I also just wanted to touch on -- I've seen some recent headlines about the influx of demand for the AI companies, especially when it comes to lab spaces and those even converting back to an office. I was curious if you could just add a few comments on how that may impact the supply picture? And do you see stock participating in any of that conversion? Scott Brinker: Yes. Well, there's just pure AI tech companies, and certainly, that's helping the supply-demand dynamic in the Bay Area, in particular, but there's also AI-native biotech research, and that's been very much a positive for our portfolio. We've done a fair amount of leasing with companies that would fit that description, particularly in the Bay Area. In the last year, the pipeline includes them as well. And the notion that they only need office space is just not correct. Generally speaking, the 50-50 type mix of wet lab and office continues to hold for those companies as well. So we view it very positively. They're more likely to raise money. The companies that can attach that to their business profile right now. So we're taking advantage of that, but more generally and longer term, the ability of AI to improve the speed, efficiency, accuracy of drug research is pretty exciting in taking drugs from discovery to IND meaning clinical stage trials in 1 year instead of 5 to 7 years. I mean that has the potential to have enormous positive impact on the business. Operator: Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Good morning, everybody. Scott, I'm just curious, how should we think about the near-term earnings impact from recycling the outpatient medical proceeds from the strategic initiatives and then just that time line around the earnings ramp from reinvesting those proceeds given development does have kind of a little bit of a longer time line to it? And then maybe a sense of what the opportunistic lab investments you're considering today? Is it development? Is it sort of lease-up opportunities versus more stabilized deals? Scott Brinker: Yes. And the $1 billion that we've referred to, keep in mind, only $200 million of that is under contract. So hopefully, we move forward with the balance. It's really strong pricing. If that proceeds, keep in mind that pricing is going to be significantly better than our implied stock price. So I mean it has the potential, depending on use of proceeds to be immediately accretive. We're also looking at opportunities in outpatient development, as well as life science opportunistic investments that we think have the potential to have returns far in excess of the returns we'd be selling at. In terms of those outpatient sales. So one way or another, we're doing this with an expectation that it's going to create pretty meaningful accretion, whether it's day 1 or day 1 in the combination of year 2, 3. But obviously, that is the expectation and intention here. Austin Wurschmidt: That's helpful. And then can you just give a little bit more detail around the average size of tenants in the pipeline for lab, the lab leasing pipeline and whether you're seeing sort of any larger space requirements in the market today? I know previously, you had talked about kind of 30-plus thousand square feet was the sweet spot, but anything larger out there today? Kelvin Moses: Yes. Austin, it's Kelvin. I think that 30,000 square foot marker is still accurate in terms of the pipeline and the opportunities we're seeing. So with the 1.8 million square foot pipeline. There's a lot more activity from new potential clients that are exploring our assets. Scott Brinker: Austin, let me give you one additional piece of color on the acquisitions that we're looking at in life science as well as outpatient development. You can't really look at those just in isolation either. When you think about our investment model that's very much focused in both businesses on doing things in scale in local markets. There's really an ecosystem benefit as well. Like when we do a new development with a health system, that project is accretive, but it also deepens the relationship with that health system and draws or drives additional leasing with that tenant over time. And that's an important part of the consideration for us. That's obviously true in life science, where we've built a 12 million square foot portfolio that's essentially in 5 submarkets. And we want to continue to go deeper in those markets because we think there's great demand and tenant desire to be in those locations. And the more scale we have there, it's proven to have material advantages in terms of winning leasing deals. Austin Wurschmidt: What's sort of the average yield on the outpatient medical developments that you're evaluating today? Scott Brinker: 7-plus percent. Mostly highly produced and compare and contrast that with selling assets that are in 20, 25 years old that 100 basis points or more inside of that. So pretty compelling. Operator: Your next question comes from Seth Bergey with Citi Group. Seth Bergey: I guess my first question is kind of, of the $1 billion. How do you view that in terms of how much of that should we expect to be life science versus outpatient medical versus share repurchases? And then I guess on top of that, do you have like a target percentage of how much of the business you would like to be outpatient medical, life science and the CCRC? Scott Brinker: We do not have fixed allocations, and we're going to be opportunistic. So we're going to protect our balance sheet. Number one, it's a competitive advantage, gives us a lot of flexibility. And these sales will give us even more flexibility, but it could be any of those three that you mentioned in any combination. So no, we're not going to have a fixed allocation of what we're looking at will be opportunistic. Seth Bergey: Okay. And then just my second one, you talked about the strength of the outpatient medical business. what type of spread are you kind of looking for to compensate you just given -- you touched on the early shoots of the life science recovery, but mentioned that real estate is still expected to lag for a little bit. So just any color you can provide on what accretion kind of spread you're looking for there? Scott Brinker: Yes. Thanks, Seth. The underwritten returns on any life science distress. Obviously, each project is going to be unique in terms of size as well as the lease-up that needs to occur, but we'd be looking for certainly double-digit unlevered IRRs for those types of projects. So that would be the criteria there. For outpatient, I think I already covered it at 7-plus percent. So a nice spread to not only disposition cap rates, but also acquisition cap rates. So yes, that's how we're thinking about spreads or relative returns. And obviously, we have to keep in mind the implied cap rate of our stock price as we think about the assets that we're selling relative to buying back stock in an accretive way. So we're really looking at all three of those alternatives and all three of those metrics in terms of relative returns. Operator: Your next question comes from John Kilichowski with Wells Fargo. William John Kilichowski: Good morning. Maybe if we could start just talking about the Trump administration, we've had -- there's been tariffs on branded therapies, but there's also been a major surge in commitments by multinational pharma companies back in the U.S., especially as it relates to R&D. Can you talk to a lot of that's on the manufacturing side, but are you seeing some of that translate into lab space and then a leasing? Scott Brinker: Well, certainly, the regulatory chaos and uncertainty that existed in the first 6 to 8 months of 2025 had a big impact on sentiment in the sector. Obviously, investors making capital commitments are looking for certainty in terms of the environment that they're investing into, and we just didn't have that for the first half of the year. There's been a lot of positive news coming out of Washington and the FDA in terms of making that process more efficient. Our tenants are taking advantage of that. We've had 10 tenants in the portfolio that have received various forms of fast track or regulatory priority reviews, which is a huge positive coming out of this administration. But overall, I think you've seen a lot less negative headlines coming from D.C. on the biopharma sector, including some positives. Like the agreements with Pfizer and AstraZeneca, and that's been a big part of the change in sentiment. So yes, it's been very positive. William John Kilichowski: Got it. And then I know this may be a little early to ask, but I'll give it a shot. I don't know if we can discuss maybe the building blocks for '26 earnings here, especially as you have talked about a potential near-term bottoming in occupancy. Maybe what's realistic for occupancy gains next year, how you're thinking about pricing power? And then maybe on top of that, the addition of -- we've seen some G&A savings this year with your AI platform. What's the opportunity for that to generate even further savings in the next year? Scott Brinker: Yes. I mean, obviously, we'll wait until February to give guidance. But I mean the basic building blocks or 2/3 of the portfolio are doing really well with outpatient in CCRC, life science, obviously, the occupancy loss and there's a bit more to come, as we've described, we'll bleed into 2026. That will have an impact. We disclosed some purchase options and seller financing that will have an impact refinancing. I mean those are the basic building blocks. There's no new surprises there. But I'll just reiterate the obvious, but obviously, we'll give full guidance in February of '26. Operator: Your next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just wanted to see if you could maybe help investors and how you're thinking about how much dilution you're willing to take and how you're going to try to manage that. I mean, I think maybe there's a little bit of a concern that the MOBs, the $1 billion of dispositions will be plowed largely into lab opportunities that may have great growth long term, but maybe weigh on growth near term. So I guess how are you thinking about balancing some of that potential dilution with buybacks and/or other opportunities? Is it the intention that you're going to try to manage earnings somewhat, so to speak, as a result of that? Or how are you thinking about weighing those pros and cons? Scott Brinker: Yes. Well, we're not looking to manage earnings. I heard you say that. That certainly isn't anywhere on the priority list. We're looking to create value. I think when we did the merger 2 years ago, there were concerns, it's turned out to be a huge value creator for the company, not only the synergies, but the recognition of the strength of the outpatient business and the flexibility that, that's providing us right now. So that has turned out to be a huge positive in terms of the capital allocation around that transaction at a time when that sector was pretty out of favor in the public and private markets. Obviously, that dynamic is flipped very much in our favor 2 years later. And we see the building blocks of that dynamic changing for the life science business. It wasn't that long ago when certain investors couldn't get enough of the sector is one of the best performing subsectors in all our real estate for 10 years. Obviously, there's been too much supply. We've had some demand issues because of the regulatory environment. We, as we've described, see a lot of that starting to flip in our favor. It's not going to happen overnight, but we do see a window here to come in at a time when nobody else wants to invest. That's usually a pretty good time to do it. We have the balance sheet to do it, the platform to create value but it might end up being zero. We're very focused on basis and submarket and price and return opportunity, and I can't guarantee that we're going to find anything that meets our thresholds, but I'm optimistic that we will. There's a big opportunity set there, and it's an awfully good time to invest in our view. But again, at the right price and the right submarket. In terms of dilution, it's a $25 billion denominator. So even $1 billion is not a significant number in comparison to the entire company that I don't expect there to be meaningful dilution in any event, even if we plowed the entire thing in the vacant lab buildings, which is not our plan, by the way. Juan Sanabria: And then just a second question. For the balance of the year and maybe into the first quarter, you talked about maybe some slippage in occupancy from some known move-outs and maybe some of the watchlist tenants. Is there a way to put any brackets around how big the further slippage could be before that starts to recover? I think you mentioned in the second half of '26 before the earnings start to benefit from some of that occupancy coming back. But just like what's the risk from here to the trough, I guess, and the components there in? Kelvin Moses: Yes. No, this is Kelvin. I'll start. But again, we continue to be encouraged by the pipeline and the activity that we're seeing, but we recognize that there are still some headwinds within the portfolio that we have to work through we're gaining confidence with these leading indicators and the expirations and nonrenewals that we have for the balance of the year and going into 2026 with our general kind of 75% to 85% retention we'll likely have some occupancy slowdown over the next couple of quarters. And then from there, we'll be able to pick back up again. Occupancy could trend down somewhere in the high 70s before it starts to pick back up again. So I think we're going to be very mindful of the next few quarters in terms of where that goes, but that will be the inflection point that we believe we can start to grow back. Operator: Your next question comes from the line of Richard Anderson with Cantor Fitzgerald. Richard Anderson: So if I could just sort of get pacing or cadence of what you're seeing out of life science. You talked about occupancy bottoming turning on the distressed purchasing engine and then ultimately, pricing power. When do you -- if you had a hazard guess, when do you think those three important points in the life cycle going forward in life science are going to happen? Is the bottoming in early '26 event is the distressed purchasing sort of on top of that and pricing power, maybe 2027 time frame? Is that the way we should all be thinking about it? Scott Brinker: Rich, it's Scott here. And some of it is, I'd call opportunistic. It's not all distress, which is, vacant, empty building. There may be some of that. So that's an important distinction though. Some of it is just opportunistic and therefore a different profile than true distress. But it's not going to play out over a 3-month window. I think this is a 12- to 24-month window as the sector finds a bottom and truly starts the recovery. So it's not like this window is going away. If we do this earnings call in February, we haven't purchased anything yet. That's okay. It's not like the window is going to close next February. It's going to take a little bit of time for the sector to fully recover. I do think the core submarkets are going to come first. I think the big incumbent landlords, and there's only a couple are going to recover faster. Those things, I'm quite confident in. But maybe just to underscore the point that we made here that the sentiment, that the fundamentals are starting to turn in our favor during this conference call alone, we've had one tenant get acquired by Eli Lilly. That's now public. And we had another tenant report very favorable Phase III data, and I think their stock is up 60% or something. So to have -- the point is, we continue to get positive surprises after a couple of years of a lot of negative surprises. We've had a very different change in tone over the last 60 days, and that's continued here into the first 30 minutes of our earnings call. So that's great to see. Richard Anderson: Excellent. I love real-time stuff. And in terms of selling outpatient medical, I still call it MOBs, but that's me. You're not alone in this movement. We're hearing about others that are potentially going to be selling big chunks of MOBs. What would you call -- how would you characterize the buyer pool in terms of where all this might go? Is it going back in the hands of the systems or private equity? How would you describe your audience there? Scott Brinker: All of the above. There are some health systems looking to buy back certain assets. Private equity for sure, it's institutional, high-quality buyers big, sophisticated that are the counterparties at least on the projects we're working on. I can't comment on the others. Operator: Your next question comes from Michael Carroll with RBC Capital Markets. Michael Carroll: I want to circle back on the life science leasing pipeline, the 1.8 million square feet. I mean can you talk about the timing of, of where those transactions are within that pipeline? I mean, how close are they to be signed? And when they sign, how long does it take from them to actually commence? Scott Brinker: Yes, well, the LOI is obviously closest to assign lease execution, and that's approaching 300,000 feet. So the odds of those getting done are obviously pretty high. The phase behind that are what we call proposals. So we're actively negotiating terms, that's roughly half of the pipeline. So those are pretty far along. And then there's tours where you're starting to talk deal terms, they're looking at the space and space planning and all those things, and that's a pretty material part of the balance, and then there's just the inquiries kind of the early stage stuff. So I'd say it's weighted towards kind of the second half of the process between an inquiry and a signed lease. Michael Carroll: And then once they get signed, like how should we think about the commencement timing? I'm assuming, obviously, if it's a new lease or on a development or redevelopment, the commencement is probably, what, 12 months out? And the renewals is pretty immediate. So maybe can you talk about what is the split between new and renewals and the timing of those potential commencements if they do sign? Kelvin Moses: Yes. Michael, it's Kelvin. The -- I'll start with the last question, but the flip between new and renewal is roughly 50-50, I would say. We actually are seeing an uptick in new potential clients that are entering our pipeline as well, a good positive. Generally speaking, from a timing standpoint, the second-generation spaces that we have available to lease are actually in quite good condition. So it's really dependent on the space in terms of how long it will take to get a tenant in there and to commence the lease. You'll see in our executions from this quarter that -- we had limited TIs and continued strength in our leasing volumes. And a lot of that had to do with the quality of the space that we had available to lease. So it's really dependent on the space. We have some spaces that we're getting back that we'll invest capital into and reposition. So some of those could be on that longer 12-month time line that you highlighted, but we could see some commencements happen sooner than that. Operator: Your next question comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess -- I guess, Kelvin or Scott, do you mind just sort of stepping back and giving us a little bit more detail or clarity on sort of this whole occupancy bottoming the risk near term into 4Q, but then really how much of the signed but not commenced leases you have to offset some of this? Because I was just really confused, it sounded like you said occupancy and lease is the same. But maybe if you could just break up like leaving aside the development lease up just the core portfolio. How much of a benefit is there from the losses you see versus the signed but not commenced leases? Kelvin Moses: Yes. And maybe, Vik, just to kind of keep it at the higher level at this point. We do see these leading indicators as favorable signs of the execution opportunities that we have within our portfolio and where occupancy is trending over the next few months or a couple of quarters is somewhere in the high 70s. And that will give us a base to build back from. I think that's important to know. And as we talked about with respect to the pipeline, depending on the quality of the space and the execution time line of the team, we might be able to offset some of those near-term headwinds that we know are coming with some execution. So there's a lot of moving parts there, but I think that's generally good guidance. Vikram Malhotra: Sorry, just to clarify on that, I believe, like, if you just look at the core, the 93.2%, there's some slippage from nonrenewal potential tenant, et cetera, based on kind of our conversation but then there is a benefit from signed but not commenced. So can we -- are you able to just give us a little bit more color on how those two things interact just for the same-store pool? Kelvin Moses: Yes. So maybe just for the fourth quarter, we have about 300,000 square feet of expirations and you'll notice in the footnote in the supplemental, we're putting 186,000 square feet of that into redevelopment. We'll largely offset the redev component of that with new commencements and then we'll have a portion of the expirations that will vacate. So that's kind of the Q4 component. Within that, there could be some additional reduction in occupancy as a result of early terminations or proactive downsizing of tenants that we're negotiating space needs and space planning. So hopefully, that gives you a little bit more context. Vikram Malhotra: Yes. I'll follow up. Just the -- occasion, or if you could expand. I mean, I guess, Scott, you mentioned a lot of interesting events during the call in terms of Eli Lilly and fundraising and stuff. But just -- in the process of bottoming, assuming we have more M&A, maybe using the Eli Lilly as an example, like what does that mean for base needs in your mind? Like is the company that's being acquired your tenant? Do they keep the space? Is there a risk of them downsizing or maybe even expanding. Maybe just give us a sense of like what the M&A piece needs for the tenant for your portfolio? Scott Brinker: Yes, I just saw the headline. So we haven't talked to the company yet. Each situation is different. There are times when the big pharma is buying a platform and they're looking to use that team and science to build a new business opportunity, and that tends to lead to demand for real space or more space, and there's times when they're just buying a drug, in which case, they probably don't need the space anymore. And we've had, I don't know, 100 M&As in the course of the company's history. And it's about half and half in terms of the impact. Obviously, it's a credit upgrade either way. That's a fairly long-term lease, if I remember correctly on a campus that's really full, and we've got some growing tenants. So who knows it may end up being a positive in a lot of ways. But I think the important point is that M&A is just such a huge impact on the ecosystem and recycling capital, creating great exits for those existing investors to plow back into new companies. And the M&A year-to-date is something like 3x 2024, and it continues to grow. So that's just a huge benefit to the entire ecosystem that should drive more demand. Operator: Your next question comes from Wes Golladay with Baird. Wesley Golladay: For the potential acquisition opportunities, do you see a bigger opportunity set for the outpatient medical developments or the opportunistic lab properties? Scott Brinker: Yes. Opportunistic lab is exactly that, opportunistic, and those tend to be big projects. So they're chunky. So they can be big numbers or they could be zero. Our outpatient development is pretty normal course business. There's a number of health systems that we're quite close with and development partners that we work with I'd say that's more of a normal course, steady-state business, a couple of hundred million dollars a year that fit our criteria, which basically means pre-leased with good yields and good health systems in core markets. that's going to be less chunky and more just recurring normal course business. Wesley Golladay: Okay. And then on the last quarter, you talked about the potential change for the inpatient only rule. Are you seeing any uptick in leasing demand or development opportunities from this? Scott Brinker: Yes, the comment period closed. We haven't seen the final rule yet. So nothing has happened there in terms of the inpatient-only rule. But I also said at the time that the market forces are moving more of those services to an outpatient setting regardless of what CMS does. The CMS rule would just accelerate that process, but it's happening either way the payers prefer it, the health system usually prefer it. And certainly, the patients prefer it, which is a pretty important voter in the process. So it's happening either way. It's just a matter of how quickly. Operator: Your next question comes from Mike Mueller with JPMorgan. Michael Mueller: I guess this is kind of a hypothetical question. But if your implied cap was 100, 125, 150 basis points lower, do you think you'd still be looking to monetize parts of the outpatient medical portfolio today? Scott Brinker: The asset sales, we're getting out of noncore markets or noncore health system relationships at great pricing. Yes, we're also looking at some recaps today of core real estate where we're going to retain a meaningful economic interest, maintain the relationship, maintain the footprint, those we would not do if the stock price was more favorable. Michael Mueller: Got it. And I guess my second question, I think you answered part of it. I was going to ask the specific attributes of what you're specifically looking to sell. It sounds like it's -- what age and secondary markets or noncore markets? Scott Brinker: It's mostly market profile. When you look at our outpatient footprint, although it's a national portfolio, we've got 10 to 12 markets that comprise 2/3 or more of our footprint. We love those markets. We have great health system relationships. Critical mass in a growing demographic market that we find attractive. We're looking to do more in those areas. Dallas is an example, Denver, Nashville, other examples you see us do development there as well. So the profile of what we're selling tends to be in markets where we don't have that big critical mass or maybe we don't have the strongest health system relationship. Those tend to be the, the assets that we're looking to monetize and it's a good time in the cycle to do that. Operator: Your next question comes from Michael Stroyeck with Green Street. Michael Stroyeck: I appreciate that the step down in retention and outpatient was largely due to the CommonSpirit leases no longer being included. What have retention rates in recent quarters been if you do back out CommonSpirit. And has there been any sort of decline in retention as the company has pushed pricing maybe a bit harder relative to the sector's history? Scott Brinker: Michael, no, we've been in the 75% to 85% range across the portfolio. We did have a couple of big nonrenewals this quarter that we've known were coming for a long time, just legacy Healthpeak assets that we've owned for years and years and years. But the leasing has been really phenomenal. So like step back for a minute and look at the actual leasing volume we've had among our highest quarters in the history of the combined companies and the economics on the leasing are extremely attractive. We're getting better escalators, renewal spreads that are as strong as we've ever had, very little TI, the term of the leases is long. So same-store investors like it. It's an easy number. It's one number. It's not the most important number. The economics in the cash flow are really driven by the things I just mentioned. And those numbers continue to be very, very favorable. So Mark and the team are really doing a great job on leasing, and we expect that to continue given the fundamentals. Michael Stroyeck: Got it. Understood. Has there been any sort of spread in pricing power between, call it, your health system and nonhealth system tenants? Scott Brinker: There's definitely a distribution in terms of re-leasing spreads and some are 10-plus percent. Others are slightly negative. I'd say it's less focused on whether it's a health system or not and more focused on the quality of the building, the uses that are inside that space that tends to drive that dynamic more than whether it's a health system tenant or not. Operator: Your next question comes from Jon Petersen with Jefferies. Jonathan Petersen: Maybe just one for the sake of time here. So since we're talking about selling properties, I know at times in the past, you suggested that the CCRC portfolio might be something that could be sold at some point. So I'm just curious for an update on how you're thinking about that portfolio as a long-term hold on your balance sheet. Scott Brinker: Yes. We're happy we own it. We're happy we own 100% of it rather than 49% of it. LCS has done an incredible job. We've got a dedicated team, it's worked side-by-side with them to drive value. They're doing an incredible job. Obviously, the fundamentals are good. We have to put some money into the buildings that should pay dividends for years to come. Those buildings look great. Residents demand them. So we've never seen growth out of that business like we have over the last 6 years, even including the downturn. Our compounded growth rates around 9%, including the downturn. I'll just repeat that. It's an incredible performance by that portfolio that we think will continue. So yes, we're happy to hold it for the foreseeable future. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks. Scott Brinker: Thanks for your time today, everybody. Hope you have a great earnings season and hope to see you soon. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Primis Financial Corp. Third Quarter Earnings Call. [Operator Instructions] And I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. You may begin. Matthew Switzer: Good morning, and thank you for joining us for Primis Financial Corp.'s 2025 Third Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed with the non-GAAP measure is used, if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember. Dennis Zember: Thank you, Matt for that introduction, and thank you to everybody that's joined our conference call this morning. We believe our third quarter results reflect much of what we've been talking about in recent quarters, and we're excited to see the improvement and the lack of noise honestly in the current quarter. For the current quarter, we are reporting $6.8 million in net earnings and about $0.28 per share, which compares to core income of $2 million and $0.08 per share in the same quarter in '24. Our ROA and ROTCE in the current quarter improved to 70 basis points and 9.45%, respectively. We mentioned this in the press release, and I know Matt's going to give more current -- or more color. But our current profitability levels are higher than what we're reporting. When we adjust for some certain items that we know aren't permanent, we see a core ROA that's closer to 90 basis points and puts us right in line to be successful reaching the 1% ROA that we've been targeting. I know Matt is going to give more details on that. But from a high level, I want to recap some of the impactful things that happened this quarter and that give us the confidence that a 1% ROA is within reach. First, we're reporting our core margin in the quarter at 3.15%, which is up from 3.12% in the second quarter of this year, but up about 35 basis points compared to a year ago. At this point, we've replaced about half of the loans that we sold with the life premium business a year ago at yields that are at least 200 basis points higher. Importantly, we have -- importantly, we have the pipeline and the momentum to get the remaining portfolio replaced. And with current levels and margins that we see across our business, we expect that to add another 6 to 8 basis points of ROA and about -- excuse me, of margin and improved pretax earnings by about $1.6 million per quarter. We've also driven results on the deposit side. Compared to a year ago, we've grown noninterest-bearing checking accounts by about 16%, which has materially improved our deposit mix and taken our cost of deposits down by almost 20%. At the end of the quarter, alongside the rate cut by the FOMC, we were able to move lower again on the deposit side across our footprint -- across our business, both digital and in our core business. And thanks to our focus on core relationships, we've experienced very strong retention across the bank. Very little of this last move is reflected in our results due to the timing at the end of the quarter, but we expect this to be meaningfully positive to our margin and our results in the fourth quarter. When I look through the improvement in margin, I see new asset yields holding in strong, being funded incrementally at very attractive levels. Matt, I know it has more details on this. But in the current quarter, our new and renewed loans came in at about 7.16% compared to 7.57% in the second quarter of this year. New deposit business is a mix of us competing hard on new businesses, commercial businesses and driving down the overall cost with new checking accounts. New deposit business came in at around 2.51%. And so taken together, our new activity across the entire bank, all of our divisions produced spreads of about 4.65%. These kind of incremental margins on balance sheet growth is important because we're still relying on operating leverage to drive our results to where we know they should be. Our table in the press release reflects how steady we have been on operating expenses, showing that we came in at just $100,000 or so from our 5-quarter average. Looking ahead, we are confident that we can continue to hold growth in OpEx to a very minimal level, managing very tight in this environment and letting the investment that we've made in past quarters pay dividends with growth at the attractive levels we talked about. On our operating divisions, real quickly, I'm getting pretty excited about the investments we've made that are tied to residential mortgage. We've built our mortgage division from about $20 million a month of production to about $100 million to $120 million a month over the past few years. We've done this profitably too, slowly reinvesting enough of our earnings to build our production staff to what it is today. We've focused on culture and service as well as just products and pricing, and all of this work continues to pay dividends. In the third quarter, we had continued recruiting success that built annual production by about another $120 million or 10% of where we stood at the beginning of the quarter. Core results for the quarter showed pretax earnings of about $1.9 million, which is 58 basis points on closed volume and our strongest quarter yet. For core results in mortgage, we are excluding some legal fees associated with some recent hires that totaled about $900,000, and we expect this to moderate back to normal levels very rapidly. Mortgage warehouse continued to grow nicely and continued -- and shows real [ pace ] for the bank and for our earnings. To illustrate this, we had average balances in the quarter of about $210 million, but ending balances of about $327 million. Today, we have over $1 billion of uncommitted lines approved and in place and a pipeline of new opportunities working through the system of about $300 million. For the quarter, the warehouse group showed pretax earnings of about $1.6 million and moved their efficiency ratio down to about 27%. Long term and at scale, this business can be 2 to 3x its current size on our balance sheet with operating ratios that are accretive across the board and taken together with our mortgage company, we have the ideal -- we have ideal and sustainable exposure to residential mortgage that produces fee income and balance sheet growth that nicely augment what our core bank is doing. Panacea continues to gain steam and momentum. Loan balances moved higher in the current quarter to $530 million on average compared to $385 million in the same quarter a year ago. Deposits was really impressive, growing at a faster rate, ending at about $132 million in the current quarter, which is about 50% higher than they were a year ago. Importantly, Panacea's cost of deposits reflect a blend of technology, customer service and deep brand endorsement. For the current quarter, their cost of deposits came in at 1.37%, lower than our core banks and compares very nicely to 2.28% in the same quarter a year ago. I have -- obviously, I have a lot of conviction about the kind of value that we're creating here because the industry deeply values traditional community and commercial banking and honestly, rightfully so. And while Panacea and what we're doing here does have somewhat of a fintech flare to it, operating nationwide with deep embedded technology versus physical branches, it's producing dynamite credit results focused on C&I and owner-occupied CRE with excellent yields to one of the most, if not the most coveted customers out there. And it's funding the balance sheet at extremely attractive levels, lower than most established community banks. Strategies like this in the past didn't garner meaningful value because they focus on real easy credit and funded with flimsy or expensive solutions like CDs or institutional borrowings. But Tyler and his team is focused on relationships and technology and a customer experience that's proven to be more meaningful. And lastly, before I turn it to Matt for some more details, a few comments on credit. We noted in the last quarter that we've had a few downgrades that were centered on loans that weren't delinquent but did have weaker prospects and weaker guarantor support. Our negative exposure to 2 office real estate properties in the Northern Virginia market are reflected in our quality numbers, with both being in substandard and one being in nonaccrual. Both properties have improving NOI and strong leasing activity, but tenant improvements -- tenant improvements, leasing commissions and rent abatement have stressed the borrowers' cash levels and their ability to support the property. These properties are ideally situated outside of the district in very desirable locations. And it's important to note that the market here is stable to slightly improving compared to areas inside the District of Columbia. The remainder of our nonaccruals are centered in 2 loans. One is a $7.5 million loan to a private equity-backed company with proven value. Recent capital raises for the company indicate a strong enterprise value that puts us at about 35% loan-to-value. Matt's impairment testing on the company using pretty deeply discounted cash flows, continue to show no impairment on this loan. The other loan is a nationwide operating business with positive debt coverage, that's working several strategic opportunities to either be recapitalized or sold. On both of these loans, the banks working with the borrowers to exit the relationships through sales or refinance. And at this point, we don't believe there's additional losses or costs to be incurred. Outside of these properties, we really have virtually no exposure to office in any of our markets, but especially the D.C. metro area that is still not operating ideally. I don't want to minimize or gloss over any credit issue, but I don't believe we have exposures that should be causing problems or costs going forward. Okay. With that, Matt, I'll turn it to you. Matthew Switzer: Thank you, Dennis. As a reminder, a discussion of our financial results can be found in our press release and investor presentation located on our website and in our 8-K filed with the SEC. Beginning with the balance sheet. Gross loans held for investment increased almost 9% annualized from June 30 to September 30, including the Panacea loans reclassified to held for sale, gross loans would have increased approximately 15% annualized, led by growth in Panacea and mortgage warehouse. Importantly, average earning assets increased 10% annualized in the third quarter, positioning us to fully replace earning assets sold a year ago with the Life Premium Finance sale. Deposits were flat in Q3 due to limited runoff at the end of the quarter after the Fed rate cut, but we're still up 7% annualized using average balances for the quarter. Even more impressive noninterest-bearing deposits increased 10% annualized in the quarter, with a strong contribution from the core bank and mortgage warehouse. As Dennis discussed, our focus has been making sure we execute on the strategies that drive the ROA higher from here, which we've done. Our net interest margin in the third quarter was 3.18%, up from a reported 2.86% last quarter and 2.97% in the year ago period. We had limited impacts on net interest margin and margin -- this quarter from the consumer program and expect that to be the norm from here. The margin was impacted by interest reversals on loans moving to nonaccrual in the quarter and would have been 3.23% on an adjusted basis without those reversals. We're still booking new loans with yields near 7%, and we have a substantial amount of loans repricing later this year and next that will continue to move yields higher and help the margin. The core bank cost of deposits remains very attractive at 173 basis points in the quarter, down 6 basis points linked quarter. In addition, we used the Fed cut in late September as an opportunity to move digital rates down more aggressively by lowering rates of 35 basis points at that time, which should benefit us meaningfully in the fourth quarter. Our provision this quarter was a small release driven by growth in the loan portfolio tied to categories with lower reserve requirements, low core charge-off activity and the release of reserves for moving a portion of the Panacea loans to held for sale. Noninterest income was $12 million in the quarter versus $10.6 million in the second quarter when excluding PFH stock sale-related gains with increased mortgage revenue as the primary driver. Mortgage revenue and profitability bounced back in Q3 with pretax income of approximately $1.9 million versus $0.1 million in the second quarter and which had been impacted by cost tied to new teams onboarded at the end of March. To give you a sense of the scale we're building in mortgage, we funded 59% more loans in September of 2025 than we did in September of 2024. We also closed $26 million of construction of perm loans in the quarter, where we won't see material profitability at closing, but generate attractive gain on sale revenue in a couple of quarters. On the expense side, when you exclude mortgage and Panacea division volatility and nonrecurring items, our core expenses were $21.6 million versus $22.3 million in the second quarter. There are a handful of items described in the earnings release that are onetime in nature but don't rise to the definition of nonrecurring for reporting purposes and totaled approximately $1.8 million, including one more month of technology contract savings. Normalizing for these items, core noninterest expense was approximately $19.8 million, putting us only slightly higher than the year ago quarter. We are laser-focused on driving that number down further even in the face of inflationary pressures that would otherwise move it higher. In summary, as we detailed in the earnings release and investor presentation, our reported ROA was 70 basis points in the third quarter. Adjusting for the expense items we just highlighted, pretax earnings were close to $11 million, and ROA would have been approximately 90 basis points in Q3, with growth and repricing of earning assets, pretax earnings will grow to over $13 million in the near term, which equates to our 1% ROA goal with upside still from there. We're pleased that the third quarter showed meaningful progress on profitability with much fewer -- many fewer onetime items that have masked our core earnings power before. As I stated last quarter, we have substantial tailwinds from here that get us to strong profitability ratios without Herculean efforts just straightforward blocking and tackling. We recognize that one quarter is not considered a trend, but we firmly believe that we are seeing that trend play out and look forward to demonstrating our earnings power from here. With that, operator, we can now open the line for Q&A. Operator: [Operator Instructions] And our first question comes from the line of Russell Gunther with Stephens. Russell Elliott Gunther: I wanted to begin on loan growth, please. And it would be helpful to get your guys' thoughts on how you're thinking about overall growth for the fourth quarter, given maybe some potential mortgage warehouse seasonality, continued consumer runoff and then thinking ahead into '26 as well in terms of order of magnitude and mix. Dennis Zember: Russell, I'll start, and Matt can -- Matt can correct me, probably. I think on mortgage warehouse, we've got so much potential and so much still kind of maturing there that I think what's probably at scale, we would have more runoff in the fourth quarter. I don't know that we're going to have that same kind of runoff. I don't -- again, we only averaged $200 million or so, I think $210 million in the second quarter -- excuse me, third quarter. I think we can sustain those levels, maybe where we ended the quarter, we might not sustain that. Matt's probably got a little deeper understanding there. I think for Panacea, honestly, we could probably take the Panacea loans to whatever level we want the -- I think an annual production capacity there is probably about what their balance sheet is. We've got some other parties that are going to take some of that production. And Matt and I don't really want Panacea to take over the whole balance sheet. But I think we're ending at $550 million. I think we may sell a little bit of those loans in the fourth quarter to sort of get into some of the flow agreements with the larger bank, the third party. But I think for next year, $150 million or so, I think is definitely possible there. And on the core bank, I think we probably could squeeze out 7%, 8% growth there. I think for all of next year, if you're asking me, I think this point in time next year, we could be comfortably up, call it, 10% to 12%. Matt, what you -- what's your thoughts? Matthew Switzer: Yes, I agree with all that. I mean a lot of our growth this quarter was mortgage warehouse related. We would normally expect seasonality, but as Dennis mentioned, I mean, they're still on the growth path in terms of adding customers and loans. So even though utilization may drop some in the fourth quarter, the additional lines there they're bringing on is going to offset some of that growth. So they'll probably be up some on an average basis in the fourth quarter. Russell Elliott Gunther: Okay. That's great color, guys. And then my next question was in regard to Slide 11 of the deck, kind of 2 parts. One, the timing of when you'd expect to get to that 3.30% margin that you said is average earning asset driven. I think maybe just expand upon what you are referring to when you talk about continued shifts in deposit mix will then become focused. Dennis Zember: Go ahead, Matt. Matthew Switzer: Yes. I mean we'll -- I think we'll be closer to 3.30% margin as we exit this year, so probably first quarter next year. And then the deposit mix change is -- I mean, we've talked about this for a couple of quarters now. And I mean you can see it in the balance sheet results. We are 100% focused on increasing our proportion of noninterest-bearing deposits. We have, I wouldn't say a long-term goal, more of a medium-term goal to have that number closer to 20% of total deposits. It's about 20% in the core bank, but we wanted to be 20% for the entire institution. So '26, that is a focus of ours, just like it has been in '25, getting noninterest-bearing percentages up. So that's really the remixing we're talking about. Dennis Zember: Russell, I would add that if you look at the bank as a whole, we probably -- we have -- there's no probably -- we have more technology, and more strategies focused on driving low-cost deposits at a pretty fast clip than we do on the loan side. And we've got pretty notable loan strategies between warehouse and Panacea and the life business -- life premium business that we sold. But V1BE in and around our markets is driving massive pipelines and massive success. I mean, we've looked -- our peer group is up 5% in checking accounts and we're up 16%. And I'd attribute some of that to what we're getting in the lines of business as well as in the core footprint. So we really believe that our long-term value here of sort of being unique is centered more on the deposit side than the loan side. Right now, we're driving real success in the margin and with replacing the earning assets, as Matt showed you here in this graph. But I think as soon as we sort of tap out on replacing all those assets, the thing that will drive it is what Matt was saying, getting the deposit mix situated right, thanks to some of the technology that we got at play. Operator: [Operator Instructions] And our next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: I wanted to ask about deposits. And Dennis, the point you made on deposit costs incrementally with interest rates going down, does that get harder to do? Or does it get more easier or flexible for you to drive more deposits in at kind of the appropriate rate to push up margins? Dennis Zember: I guess it really could go either way. I think the -- you look at our universe or our competition, Chris, I mean, a lot of them are sort of looking at falling rates, the Fed cuts, they're looking at that to be -- I mean the whole industry honestly has been looking at that to be the sort of driver to get some of our margins back. So we suppose -- Matt and I both suppose that the competition is going to be using most of that to get the biggest beta possible. I think the fact that we're driving as many checking accounts into the bank lets us be sort of more aggressive on business money markets, business checking, consumer, even CDs and still sort of maintain a cost of deposits that's at or below our period. And I mean, we're more of a growth bank. So we have to sort of balance where we're bringing in or where we have things priced versus just straight for profitability. So that checking account growth is absolutely key to us keeping deposit flows at the right level. Matt, and I don't want to fund the balance sheet with brokered CDs and institutional borrowings like Federal Home Loan Bank. We want to be core funded. And we don't want that to eat into the margins or the operating leverage we want. The only thing we can do to stay competitive and we're very competitive is are those checking accounts. And as long as we're driving checking counts in a sort of better than 10%, I think we can be very competitive on the rate-oriented products, Chris, and still punch out good growth and good profitability. Christopher Marinac: Got it. That's helpful, Dennis. And I guess, just kind of another point because you've now been doing the digital bank process for several quarters, a couple of years now, are you finding evidence that these are more sticky customers, which is really differentiating Primis in the rest of the pack? Dennis Zember: 100%. And Matt can give you more color here, but I mean our average customer has over $50,000. The average customer, I think we're right, maybe a month from having average customers' deposit relationship for 2 years. Over 90% of our customers have either more than one deposit account with us or more than one product or they refer to a customer. Questionably these are stickier than what the industry believes. Chris, I would still caution you though, we -- these are not customers that are in the branch. These are customers using a digital experience that's by far better than what most banks are rolling out. Still, they're more rate sensitive than the traditional community bank so -- community bank customers. So we're not going to get ahead of ourselves and push -- try to push these rates down to Fed funds minus [ 150 ]. That's not going to be these customers. But we've moved rates 3 or 4 times now, Matt, can correct me. And we've got retention rates over 90%. Matt, help me make sure I'm right on most of that. Matthew Switzer: You're 100% right. And as I've mentioned in my remarks, Chris, we were aggressive after this last Fed cut because we were seeing still growth in balances without any advertising and based on our read of the deposit base, it looked like we were probably a little bit high relative to the rest of the market. So we actually had -- we cut rates a little bit more than the Fed cut in September, and we did see a little bit of runoff, but nowhere near the runoff you would have expected from a deposit base that was truly hot money based or rate sensitive. I mean there were some rate-sensitive customers in there, but frankly, no more than we would have in the core franchise. So we're pleasantly surprised with how sticky these deposits have been as we've lowered rates with the Fed and it's been a very valuable funding source for us. And as we talked about in previous quarters, allowed us to protect the core bank deposit base, which is still very low cost and very sticky. Dennis Zember: Chris, I'd add one more thing. Speaking on a panel a few weeks ago and people were asking about digital. And the industry -- and I mean, I'll be honest, I had this too. The industry believes that kind of digital customers that you never see or touch have some sort of hotness to them in their hot money. Honestly, every customer -- we have 20,000 customers, maybe 25,000 when you include all the lines of business, every single one of those customers has a banker. And every single banker's cell phone is in the hands of every single customer. We're available to them 24/7 is what we pitch. Our bankers and our call center. We offer premium banking products, we offer the full suite of banking products. I mean, yes, the digital products are deposit oriented. But if any of those customers needed anything, loans, deposits, loans, mortgages, HELOCs, anything, we are ready to do this. That's the reason, honestly, that they're sticky. I don't think that the industry is wrong about whether these customers are sticky or not or rate sensitive or not or how rate sensitive. I think we just sort of neutralize that by working hard to -- just to build relationships with these customers and sort of, I guess, I hate to say it, but sort of community bank style. And I think that's been successful. And really, we're proving it out with what Matt just said. Christopher Marinac: Understood. I had a asset quality question, which is the -- and thanks for the information you gave on a couple of loans. Do you see any of those things resolved in the next 2, 3, 4 quarters? And even though it's only a few basis points of margin difference, do you see any of that helping you in the next few quarters? Dennis Zember: The larger C&I -- the C&I property that's sort of the operating business. I think there's a chance that could be resolved -- sold, potentially the business sold or recapped in the fourth quarter, that would improve the margin, obviously, because that one is on nonaccrual and was for the whole quarter. The others are still sort of -- we're still sort of receiving payments and working with the borrowers. I think the real estate deals in Alexandria are not going to be resolved in the current quarter, although I think if you gave us probably a couple of quarters or maybe to the midpoint of next year, just given the leasing activity and Matt and I are personally involved in these loans and in the leasing activity and just to have very relevant right now data. I think by June of next year, given the leasing activity we're seeing, those properties could be strong enough to be and have strong enough debt coverage to at least not be on nonaccrual. Both of the properties right now are at 1x debt coverage on interest on P&I. One is above debt -- one is above 1, one is like [ 105 ] and the other is not. But the leasing activity on the one that's on nonaccrual, I think June of next year, we could have it above 1x debt coverage on a P&I basis. So I would tell you, really, we just got one that could be resolved in the current quarter and the others, I don't -- I mean I hate them being in nonaccrual and such [ and all ], but I believe we're in the best possible place we could be with those. Christopher Marinac: Great. That's good background. And then just last question, just to connect that what you said at the beginning of the call, but the expense number should continue to get better given the operating difference as you outlined in the release, and we'll just see that quarter-to-quarter. I suspect it's not just the fourth quarter phenomenon, but it will go over the next few quarters. Matthew Switzer: Yes. Yes. Operator: [Operator Instructions] And with no further questions, I will now turn the conference back over to Mr. Dennis Zember for closing remarks. Dennis Zember: Okay. Thank you, everybody that's joined our call. Matt and I are available if you have any further comments or questions. And if you don't, I hope everyone has a safe and happy weekend, and we'll talk to you soon. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Hello, everyone, and thank you for joining the Financial Institutions, Inc. Third Quarter 2025 Earnings Call. My name is Lucy, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to hand over to your host, Kate Croft, Director of Investor Relations, to begin. Please go ahead. Kate Croft: Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Martin Birmingham and CFO, Jack Plants. They will be joined by additional members of the company's leadership team during the question-and-answer session. Today's prepared comments and Q&A will include forward-looking statements. Actual results may differ materially from forward-looking statements due to a variety of risks, uncertainties and other factors. We refer you to yesterday's earnings release and investor presentation as well as historical SEC filings, which are available on our Investor Relations website for a safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements. We will also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed as an exhibit to Form 8-K or in our latest investor presentation, available on our IR website, www.fisi-nvestors.com. Please note that this call includes information that may only be accurate as of today's date, October 24, 2025. I will now turn the call over to President and CEO, Marty Birmingham. Martin Birmingham: Thank you, Kate. Good morning, everyone, and thank you for joining us today. Our company reported strong third quarter 2025 financial results marked by balance sheet growth, robust revenue generation, improved profitability metrics and meaningful build of tangible and regulatory capital. Our teams delivered growth on both sides of the balance sheet, including loan growth of 1.2%, driven by commercial lending in our Upstate New York market and a 3.9% increase in total deposits as seasonal increases of public deposits were supported by growth of core nonpublic deposits in our commercial and consumer business lines. Record quarterly net interest income and increased noninterest income led to net income available to common shareholders of $20.1 million or $0.99 per diluted share for the third quarter. These earnings translated to return on average assets and equity of 132 basis points and 13.31%, respectively, both up notably from the linked and year ago periods. Based on our strong year-to-date performance, we are making several upward revisions to our full year 2025 guidance and tightening some ranges previously provided. Among these changes are updates to profitability metrics, including return on average assets and return on average equity. We now expect ROAA for the year to exceed 115 basis points, up from our previous guide of 110 basis points and an ROAE of greater than 12%, up from 11.25%. Given our team's continued execution, along with the opportunities we see in our markets across business lines, we would expect to raise the bar for profitability again next year as we target incremental improvement in returns through 2026. We laid out loan growth of between 1% and 3% at the start of the year amid an uncertain economic environment. Given the strength of our performance year-to-date, we expect to achieve the high end of this range. As a reminder, our loan growth guide also reflects our expectations for consumer indirect loan balances to remain relatively flat year-over-year. with growth being driven by our commercial franchise. To that end, total commercial loans of about $3 billion reflect an increase of 1.6% from June 30, 2025, and 8.3% from September 30, 2024. Commercial business loans increased 2% during the third quarter of 2025, reflecting both new originations and increased line utilization which may come down in the fourth quarter. Commercial mortgage loans were up 1.5% from the end of the linked quarter and up 8% year-over-year. Third quarter commercial growth was driven by our upstate New York markets, including C&I activity in the Syracuse region and CRE in Rochester. In the Syracuse market, we continue to see expanding opportunities fueled by Micron Technologies' $100 billion investment in our region. For example, our Syracuse team recently closed a notable deal supporting the expansion of medical office space within close proximity to Micron's Central New York semiconductor site. Our pipelines remain strong across upstate New York markets, and we believe that we'll be able to maintain momentum heading into 2026 and as pent-up demand for credit is likely to be released with future rate cuts. Turning to consumer lending. Our indirect portfolio rebounded nicely in the third quarter on the heels of softer second quarter originations. Consumer indirect balances of $838.7 million at September 30 increased 0.6% from June 30 and were down 4.1% year-over-year. As a reminder, we are a prime lending operation with more than 350 reputable new auto dealers across New York State. Credit extension is for individual vehicle purchases, not floor planned financing, and we stay within a well-defined credit box, resulting in a portfolio with a weighted average FICO store exceeding 700. This portfolio's small average loan size of about 20,000 provides natural risk dispersion. Residential lending was up modestly from the end of the linked quarter and flat to the year ago period. The housing market remains tight in the Rochester and Buffalo regions and home prices have continued to increase, particularly in Rochester. That said, new listings and inventory are up on a year-over-year basis in both regions, which is promising. Our pipelines also look healthy heading into the fourth quarter and mortgage and home equity applications are up 12% and 11% year-over-year, respectively. Turning to credit quality. Annualized net charge-offs to average loans for the quarter of 18 basis points were half the level we reported in the linked quarter and relatively in line with the 15 basis points recorded in the third quarter of 2024. In the third quarter, we recovered approximately $400,000 related to a previously charged off construction loan associated with a historic property in our Rochester market. Our consumer indirect charge-off ratio was 91 basis points in the most recent quarter, up seasonally from the linked period but down from the third quarter of last year. This remains comfortably within our historic range, reflecting the prime lending nature of our indirect business. While we experienced 2 basis point increase in our ratio of nonperforming loans to total loans to 74 basis points at September 30, 2025. This is down notably from 94 basis points 1 year ago. We continue to work through the 2 commercial relationships that have made up the majority of nonperformers for the past several quarters. The $1.5 million increase in total nonperforming loans during the third quarter relates to 4 smaller commercial loan downgrades, each in different industries and geographies facing unique issues. Accordingly, this is not indicative of a downward trend in our overall commercial loan asset quality. The overall health of both our consumer and commercial portfolios remained solid and reflects enhanced diversification over the years. Indirect auto balances and residential lending make up 18% and 16% of total loans, respectively. Our commercial portfolio is well diversified by loan type, client type and geography and does not include any lending to nondepository financial institutions. We have consistently employed strong fundamental underwriting processes and have experienced credit professionals working in separate credit delivery and relationship-based functions. That credit discipline is reflected in our low credit costs. We remain comfortable with our guided full year net charge-off ratio range of between 25 and 35 basis points and our current loan loss reserve ratio of 103 basis points. Period end, total deposits were $5.36 billion, up 3.9% from June 30, driven by seasonal increases in our public deposit portfolio and also reflective of growth in core nonpublic deposits. As a reminder, public deposits are sourced through long-standing relationships with more than 320 local municipalities and the balances peak in the first and third quarters. Total deposits were up a modest 1% from a year ago, reflecting an increase in broker deposits to help offset the BaaS platform wind down we initiated in September 2024. BaaS deposits were a modest $7 million at the end of the third quarter, and we now expect those to flow off the balance sheet in early 2026. We continue to expect total deposits at year-end 2025 to be generally flat with the prior year-end. It's now my pleasure to turn the call over to Jack for additional details on our performance and outlook. Jack Plants: Thank you, Marty. Good morning, everyone. Net interest margin expanded 16 basis points on a linked-quarter basis, reflective of improved yields on average earning assets alongside deposit repricing that supported reduced funding costs. Our active balance sheet management contributed to 11 basis points of improvement to investment securities yields largely related to the modest portfolio repositioning that occurred in June. Activity continued during the third quarter when we sold $22.3 million of 30-year fixed rate mortgage-backed securities with higher expected prepayment speeds, the proceeds of which were reinvested into investment-grade corporate bonds. As this small restructuring was completed in September 2025, we expect to see further benefit to investment security yields in the fourth quarter. Average loan yields increased 3 basis points as compared to the second quarter of 2025. As a reminder, approximately 40% of our loan portfolio is tied to floating rates with a repricing frequency of 1 month or less. We expect loan yields to decline slightly in the fourth quarter given the recent rate cut. Cost of funds decreased 11 basis points from the linked quarter as higher rate CDs matured alongside overall downward deposit repricing. Given our year-to-date results, we're tightening our expected range for full year net interest margin to between 350 and 355 basis points. This guidance includes the expectation for modest margin pressure in the fourth quarter, given recent FOMC activity, as deposit repricing lags loan repricing, given the adjustable percentage of the loan portfolio previously mentioned. That compression is expected to be temporary based upon deposit repricing assumptions. Looking ahead to 2026, we anticipate incremental margin improvement to be driven by changes in earning asset mix through loan growth, coupled with active management of our funding costs. Third quarter double-digit margin expansion supported strong net interest income of $51.8 million, up $2.7 million or 5.4% from the second quarter. Noninterest income was $12.1 million, up $1.4 million or 13.6% from the linked quarter, reflecting increases from several revenue streams. Investment advisory revenue topped $3 million, up 4.8% on a linked quarter basis. Courier Capital experienced positive net flows as new business and market-driven gains offset outflows pushing AUMs to $3.56 billion at quarter end, up $173.6 million or 5.1% from June 30. During the third quarter, we announced the opening of a satellite office in Sarasota, Florida. The office allows our wealth management firm to better serve existing clients who spend time in Florida, while also opening the door to new relationships in one of the nation's most dynamic retirement markets. Third quarter company-owned life insurance income was $2.8 million, down from $3 million last quarter. As a reminder, in the first quarter, we initiated a COLI restructuring and the redemption of the surrender policy proceeds from the carrier did not occur until June, contributing to higher levels of COLI revenue in the first half of the year. Swap fee income was up 150% to $847,000 as a result of increased commercial back-to-back swap activity during the quarter. We also recorded a net gain on investment securities of $703,000, primarily related to the modest restructuring we completed in September. We expect noninterest income, excluding gains or losses on investment securities, impairment of investment tax credits and other categories that are difficult to predict, such as limited partnership income to exceed our original guidance of up to $42 million for the year. Noninterest expense was $35.9 million in the third quarter compared to $35.7 million in the linked quarter. This remains somewhat elevated, largely due to higher claims activity in our self-funded medical plan that resulted in a $452,000 increase in salaries and benefits expenses. While we do have stop-loss insurance, given the level of claim activity that we've experienced to date, we expect this expense category to remain somewhat elevated in the fourth quarter. As a result, we now expect full year expenses to come in closer to $141 million, approximately 1% higher than our original guide of $140 million. Professional services expenses of $1.7 million were up $237,000 from the second quarter, driven in part by outsourced compliance review expense and third-party commissions on swap transactions. These increases were partially offset by lower occupancy and equipment expenses due to a change in facilities maintenance service vendors and timing of costs associated with an ongoing ATM conversion as well as lower FDIC assessments. The ATM conversion project is substantially complete, resulting in an upgraded customer experience and the associated expense is now substantially reflected in our run rate. The strength of our balance sheet and growth of our relationship-based business lines supported robust revenue expansion that has more than surpassed expense growth during the year. The year-to-date efficiency ratio of about 58% puts us solidly below the 60% threshold we were targeting this year. We remain intently focused on expense management as we finish 2025 and move into 2026 in order to maintain positive operating leverage and a favorable efficiency ratio. Considering the strength of earnings from the first 9 months of the year, we are narrowing the range for our expected effective tax rate to between 18% to 19% for 2025, including the impact of the amortization of tax credit investments placed in service in recent years. We've been keenly focused on our capital stack as evidenced by the refreshment of our share repurchase plan during the quarter. We are also carefully considering our options relative to the outstanding sub debt given the repricing of both tranches that occurred in 2025. We are comfortable with our capital position, especially given the improvement in both our TCE and regulatory ratios in the third quarter. TCE improved to 8.74% and common equity Tier 1 increased to 11.15%, given organic increases in common equity through strong earnings, coupled with active management of our balance sheet and risk-weighted assets. Overall, our prudent balance sheet management, credit disciplined loan growth and resilient noninterest income has supported strong revenue generation and positive operating leverage. I am proud of our team's execution, strength of our operating results and the corresponding growth across tangible equity and regulatory capital ratios. That concludes my prepared remarks, and I'll now turn the call back to Marty. Martin Birmingham: Thanks, Jack. Our third quarter results demonstrate our capabilities and reinforce our excitement and optimism about the opportunities ahead. Profitable organic growth remains a top priority, and we believe that our year-to-date momentum will support a strong finish to 2025 and drive incremental performance in 2026. I would like to thank you for your attention this morning. Operator, this concludes our prepared remarks. Please open the call for questions. Operator: [Operator Instructions] The first question comes from Damon DelMonte of KBW. Damon Del Monte: First question, just regarding the margin and the outlook. Jack got the commentary here in the fourth quarter kind of being down modestly. Can you just kind of give us a little perspective if we have a couple of rate cuts this quarter, kind of when you would expect the margin to bounce back in '26? I mean is it kind of a step down this quarter and then a catch-up going into '26 with some kind of a grind higher? Or how do you think about the margin? Martin Birmingham: Yes. We've been fairly aggressive with some of our deposit repricing. We demonstrated that in the fourth quarter of last year. We made some changes right at the end of September. And with the expectation that there's going to be a cut this month in October, we're preplanning for adjustments there. So our guided range that we provided for full year margin, just given that there's -- it's late in the year would have -- a rate cut would have a modest impact to the full year guide. We'd still hold on that guidance potentially at the bottom end of the range. But I would expect that going into 2026, our jumping off point would probably be somewhere around 3.60%. Damon Del Monte: Got it. Okay. And then from there, you think it can kind of grind higher as you continue to benefit from new loan production and repricing of other fixed rate loans and continued management on the cost of fund side? Martin Birmingham: That's correct. Damon Del Monte: Okay. Great. And then just second question here on the buyback. Kind of good to see capital levels growing valuation still remains right around tangible book value. What are your thoughts on getting a little bit more active in the buyback and supporting the shares a little bit? Martin Birmingham: Well, we're pleased that our Board approved the buyback. It's another option that we have to support the shares and invest in ourselves, and we look forward to updating the market, Damon, when activity occurs. Damon Del Monte: Okay. Great. And if I could just sneak one more in on the loan growth. It sounds like you seem a little bit more optimistic today than you did maybe a quarter or 2 quarters ago. How do you look at maybe coming out of '25 and into '26, do you think you can kind of get back to that mid-single-digit rate of net growth? Jack Plants: This is Jack. I can take that one. So we're in the stages of building out our financial plan for 2026. Certainly, our experience we've had lately at the tail end of 2025 has been encouraging. I think that high -- or mid-single-digit growth, as you can is appropriate for modeling purposes. Operator: We currently have no further questions. So I'd like to hand the call back to Marty for any final and closing remarks. Martin Birmingham: Thanks to everyone who called in this morning. We look forward to continuing the conversation next quarter. Have a wonderful weekend. Operator: This concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Welcome to the Trelleborg Q3 2025 report presentation. [Operator Instructions] Now I will hand the conference over to CEO, Peter Nilsson; and CFO, Fredrik Nilsson. Please go ahead. Peter Nilsson: Hello, everybody. Peter Nilsson speaking. Welcome all of you to this Q3 of 2025 results. What we're going to give you some of our, let's say, input on how the quarter developed. Joining me on this call is also Fredrik Nilsson, our Group CFO; and also Christofer Sjögren, who is heading our Investor Relations. So as usual, we're going to refer to a slide deck from our web page. And then on that, turning to Page 2 on that section, the agenda slide and a normal starting with some general highlights, some comments on the business areas, and then Fredrik's going to guide us through the financials and then finishing off with a summary and some comments on the outlook for the running quarter. And then finally, ending our call with a Q&A session. So that's the agenda for this call this morning. Turning then to Page 3. Heading of our report, organic growth with higher margin. So a solid quarter in more or less all aspects, the development in the right direction in more or less all aspects, sales ending up relatively flat compared to last year in Swedish krona, an increase of 1%. But behind this, a very solid organic growth, plus 4%, which is something we have not seen for quite some time. M&A also benefiting. We have done several acquisitions, several smaller bolt-on acquisitions here in the last 12 months. And that is, of course, also bringing in some sales. So that is adding 3%. And then we have a currency headwind, well known by everybody, which is 6% in the quarter, which is then once again ending up with a 1% on the total sales. EBITDA also up and also with an improved margin, which is an all-time high margin and results for the third quarter. We are, let's say, a notch above 18% EBITDA margin in the quarter. And this is, as I already said, it's a stronger third quarter to date for us, both in terms of profit and margins. So solid. And I mean, the great thing, you're going to see later also is coming from all business areas. We have a substantial negative FX on EBITDA, almost SEK 100 million or SEK 90 million, bringing us in the wrong direction, if you may say. Items affecting comparability running as planned, relatively high level this year, but also coming from this rather high number of acquisitions, which is then kind of creating opportunities to improve the structure and then make sure we get all the benefits from these acquisitions as we move forward. Cash flow, very strong. I mean, we have to admit, surprisingly strong ending of the quarter on the cash flow, which, of course, is going to bounce back a little bit here in Q4. But nevertheless, we are happy to have the money in our pockets instead of sitting somewhere else. So very solid cash flow, which is, of course, yes, creating a stronger balance sheet and overall, a better business. We've done a smaller acquisition, small but important acquisition in Singapore called Masterseals, which is an acquisition which is strengthening a little bit, oil and gas markets and generally more in the kind of aftermarket-related segments of Sealing Solutions, which is an area which we are developing at the moment, an area we're growing into kind of a global business for us. Also note, continued share buyback on a level slightly north of SEK 500 million being spent on share buybacks in the quarter. So this is the quarter. This is what it is. And I mean, overall, once again, a solid quarter. So turning then to the next page, Page 4, where you see new slide for us, which I hope you will give some more input on the sales split per geography, which I don't going to comment that much on. But we also, more importantly, we see organic growth in all 3 major geographical areas, with Europe for us being the softest, slightly better in Americas, 5% organic growth in Americas, which is kind of on a high level, driven a little bit by project deliveries, but that's the way it is. But nevertheless, good solid quarter and a very solid quarter also for Asia, then particularly strong in China for us. But overall, strong in Asia and kind of a little bit bounce back in Americas and then Europe a little bit softer. So this is the -- and in all areas or levels, which, I mean, we have not seen for some time, especially if you talk both Americas and Europe while Asia continues on a good level, as you've seen throughout the year for Trelleborg. Turning to Page 5, the agenda slide, business areas and then quickly turning to Page 6 with some more detailed comments on Industrial Solutions, organic growth and we say stable margin, a slight uptick in margin. Organic sales 2%; M&A, adding 4%. And then, of course, also, as others here, a negative exchange rate of some 6%. Also behind these figures, we see oil and gas project declined in the quarter, sales declined in the quarter, but that is mainly due to a rather tough year-on-year comparison. Overall market still developing well and a very solid cash flow. But some of these sales is rather project heavy. It is that it sometimes goes a little up a little bit and sometimes it will be down and this quarter was a little bit down in the sales, but it's not -- once again, it's not a reflection of overall lower activity in this part of the business. Construction industry is still muted but we noted satisfaction that is getting slightly better if you look sequentially, although still, let's say, quite strong decline if we compare year-on-year. But once again, some light in the tunnel and some improvements kicking in. Automotive sales increased in the quarter. I mean it's been a little bit -- how should I say a little bit strange quarter, if I may say, for automotive. Those of you following automotive, you see that it's still relatively tough sales in Europe and North America, while China was extraordinary in the quarter, which as I said, 10% plus organic growth. And I mean, the business that we have in Industrial Solutions has a very good market share in China. And that is where we benefit from this. So we have actually a strong development in automotive within Industrial Solutions in this quarter. And then EBITDA and margin improved slightly. I mean Industrial Solutions is a fairly diverse business, and there are some ups and downs always. But overall, we continue to move in the right direction. We continue to improve. It's not major steps. It's a hard work coming from kind of operational focus and also some of the structural investment, structural improvements kicking in. Overall, a good quarter, well managed in more or less all aspects. And then we also should note that when we look at the margin here, this acquisitions that we've been doing is on a lower margin than the overall, and we have some tens of a percent negative kicking in for that. It could be -- I don't know, looking at Fredrik, 0.3%, 0.5% on the margin actually coming from kind of this acquisition kicking in and it will take us a year or so before we can get them back to the overall margin of Industrial Solutions. But that is also something that you need to note when you look at the margin development within Industrial Solutions. Turning to Page 7. Trelleborg Medical Solutions, strong organic sales growth. Organic sales is up by 13%. M&A, not doing any changes, so 0 impact from that. But we have to note here as well that we have some project deliveries related to one of our major customers, which is, let's say, boosting the sales dramatically -- in the sales. I mean, if you look underlying and try to kind of neglect these organic sales, I mean the more correct probably underlying organic sales is more in the kind of mid-single-digit territory. Medtech sales, we see also medtech sales in Europe developing well. North America, where we still -- struggle is the wrong word, but we still see some negative development where we still have some inventory issues. We don't see the overall activity going down, but we still see our sales is a little bit below where it should be. So we are pretty certain that we're still impacted by inventory reductions especially in North America, which we have been for some time, and we honestly, we believe that it's going to turn the corner, but we see it continuous. It is difficult to really see through exactly when it will turn, but we continue to gain business. We continue to gain orders, and we are overall satisfied with the development, even though the sales, we would like to sell more, of course, in Americas as well going forward. Life Science, which is kind of the smaller segment of medical, is developing, if I may say, very nice, and we are growing that. And we are starting -- we have been investing in that segment with new factories, both in North America and in Europe, and with satisfaction, we see that these investments is slowly, let's say, benefiting us, and that is an area also where we see continued growth going forward. EBIT margin up and also, let's say, in absolute terms, we have EBITDA up. I mean there's higher volumes, as you expect, but also continuous structure improvements, especially starting to benefit from -- continuing to benefit from this acquisition of Baron that was made, let's say, a year ago now. Turning then to Page 8, Sealing Solutions. If I may say, very solid organic growth in the quarter coming from several areas. But I mean, if I should highlight something, it's really that we have underlying kind of industrials, the big kind of industrial segment of TSS is starting to do better. We see now growth in Europe kicking in. Asia continued on a good level, which has been good for us for quite some time. We continue to see some weakness in North America. But overall, these core segments of Sealing Solutions improved in the quarter. Both in sales and also kind of a higher activity level. Automotive for TSS is still below last year, particularly still impacted by, let's say, very soft development, very soft development in the aftermarket business. And we cannot -- I mean, it's not like the aftermarket in itself is down. It's more that we see very, let's say, uncertainty, especially in the North American market, this is -- we see that they are downsizing. In stock, inventories is down, and we do expect it to kick back. But also here, we don't know exactly when, but it is kind of we are supplying substantially below the market demand for a few quarters here, and we do expect that to bounce back eventually. We note in automotive here as well as we also commented on TSS, a very good development in China. We have a good market share for some of the products, in TSS, especially that's our shim business, our brake business has a solid market share in China. And of course, we are benefiting from that as the Chinese market has been developing very, very good in the quarter. Aerospace, very strong all over. We continue to, let's say, get more orders than we sell. So let's say, order book is growing and the activity level is growing. Of course, we note, as a trusted -- the ones of you was following aerospace that's about Airbus and Boeing is very ambitious in the growth plans going forward, and we, of course, do our best to follow that. So good development in aerospace. And overall, this means that EBITDA and margin is improving, higher production volumes kicking in. We have been underproducing for some time. And we see also the benefits from the operational improvements, but we also have to note also here we have a negative impact from acquisitions being made, which is kind of the same dimension as we see in Industrial Solutions, some 0.3%, 0.5% negative impact on the margin if we were trying to kind of adjust for the acquisitions. But we're doing the acquisitions, of course, because we believe they are good for us and they are improving the business overall, but it will take some time to get all business improvements into the margin. Already commented on the Masterseals acquisition in Singapore that is part of small acquisition, but it's part of an overall game plan to strengthen our activity within, let's say, aftermarket for seals and especially related to oil and gas and mining and other segments, which is more kind of project-related where you need, to say, local presence in order to get this business into our books. So that's -- we're happy to be that, and we think it's a good strategic add-on, although once again on a very minor level compared to the overall sales of Trelleborg. Turning to Page 9, some comments on sustainability, continue to improve substantially. I mean, we say here, we are not getting to the end of the game, but we are getting down to levels of CO2 emissions from our Scope 1 and Scope 2, which is kind of becoming very low. We're, of course, going to continue to improve. We continue to do better also in this aspect. But I mean, do not expect these kind of improvements steps going forward. Next page, Page 10 and it's basically the same here, where we have a substantial tick up in share of renewable and fossil-free electricity. We are now up to 92%. And I mean the remainder here is very difficult because in some geographies, you actually cannot get it, and we are getting also here to a situation where we cannot improve that much anymore to you on this because we are, let's say, stopped either but by very major investments to turn it around or that is simply not available in a few geographies. So very good development, very happy to show this. There was continued good development in sustainability, and we are doing good in these aspects. And I mean, once again, the focus -- we cannot improve on this criteria. So the focus going forward will be more smaller steps and more kind of what we call say, energy excellence programs. We'll be working hard with all the factories in order to improve and to do better in more minor aspects. So these big steps, you will not see these big steps going forward, but we're getting to a situation. I don't say it being perfect, but we're getting to a level where we cannot justify the final steps to get it even better. Turning then to agenda slide again, Page 11, financials on Page 12. I'll leave it over to Fredrik to guide us through this section. Fredrik Nilsson: Thank you, Peter. Let's then start on Page 12, looking at the sales development. Reported net sales increased by 1% from SEK 8.442 billion to EUR 8.532 billion. We have organic sales growth in all 3 business areas in total 4%. Structural changes added 3% growth in the quarter. And then as Peter mentioned, we have negative translation effects that reduced growth by 6% during the quarter. If we then move to Page 13, showing historical sales growth. In the third quarter, we were close to our sales growth targets, achieving 7% sales growth at constant FX. Looking at Page 14, showing the quarterly sales and rolling 12 for continuing operations. The sales in the quarter, as I said, reached SEK 8.5 billion at net rolling 12 months, it's reached SEK 34.7 billion. Moving on to Page 15, looking at the EBITA and the EBITA margin, that continued to improve further. EBITA excluding items affecting comparability, increased by 5% to SEK 1.541 billion in the third quarter. We saw profit growth in all 3 business areas. And looking at -- we start with Industrial Solutions, which was up 1% in EBITA due to operational structure improvements, which was partly offset by negative translation effects. And then Medical Solutions, up 10% in the quarter. And then finally, Sealing Solutions was up 6% in the quarter due to higher production volumes and operational improvements. And margin-wise, we rose from 17.3% up to 18.1%, supported by the organic volume growth and the operational improvements. Looking at then the EBITA and EBITA margin on a rolling 12 months basis. EBITA amounted to SEK 6.331 billion with a margin of 18.2% and EBITA has been growing with 6% during the last 12 months. Moving on to profit and loss statement. Looking into some more details in the income statements, items that are affecting comparability, SEK 72 million in the quarter, which was entirely related to restructuring costs for adjusting our cost base and due to the recent acquisition. Financial net I would say, on par compared to last year, SEK 126 million compared to SEK 128 million. This is actually despite that the debt level is higher this year. So that is also a good achievement. Tax rate for the quarter, excluding items affecting comparability, amounted to 26%, a slight increase due to timing. Page 18, earnings per share, excluding items affecting comparability, amounted to SEK 4.20 in the quarter and increased by 11%, and that was due to the higher profitability and the effect of the ongoing share buyback program. And for the group, including items affecting comparability, earnings per share were up SEK 3.94, also 11% up. Moving on to Page 19. As Peter mentioned, we have a very strong cash flow in the quarter, which reached SEK 1.741 billion. On a high level, half of the improvement came from the higher EBITDA and the rest from efficient management of the working capital. CapEx is well aligned with the communicated guidelines for the full year but marginally higher than Q3 last year. Moving on to Page 20, the cash flow conversion. The cash flow conversion was 92%. So we continue to deliver a high cash conversion ratio. Moving on Page 21, the gearing and the leverage development. Net debt at the end of the quarter at SEK 8.280 billion. Share buyback during the quarter was SEK 554 million, ended the quarter with a debt-to-equity ratio at 22%. So small improvement compared to Q2. And then net debt in relation to EBITDA, 1.1, which was slightly higher than year-end. But of course, we have also paid out a dividend during the second quarter, and we have continued the share buyback program. In other words, our balance sheet remains strong. Moving on to Page 22, return on capital employed reached 12% for the quarter, and our capital employed has increased compared to last year mainly due to the acquisitions, but I think also I would like to note that our return on capital employed has sequentially increased for Q2 to Q3. And then finally, the financial guidelines for 2025, unchanged compared to what we communicated after our second quarter CapEx, SEK 1.650 billion for the full year, restructuring costs around SEK 500 million for the full year as well. Amortization of intangibles, SEK 650 million and underlying tax rate for the full year around 25%. And by that, I would like to hand back the microphone to Peter. Peter Nilsson: Thank you. Agenda slide, summary and outlook. Quickly turning to Page 25. Looking at the quarter, organic growth with higher margins, good quarter overall, but it picked out a few highlights. We see in the quarter in improved -- generally an improved demand, higher activity levels or continued high activity level in some areas. We see an improvement in that. And we also note with satisfaction, of course, that all our 3 business areas recorded organic growth in the quarter, which has been quite some time since we saw that the last time. So overall, better activity, although not kind of a big jump upwards. But nevertheless, improvements in most areas. We also note that these higher sales is also improving our margins. We have a fairly sizable uptick in the margin year-on-year. And it then boils down to the strongest quarter -- strongest third quarter to date, both in terms of profit and margin. We also note that we continue to do value -- what we call value-adding M&A, although impact, this is our 10th bolt-on acquisitions since Q3 last year. And of course, this is a high activity level in [indiscernible] we said before, is impacting our margin negatively in Sealing Solutions and Industrial Solutions, but we are, at the same time, improving our overall positions, and we are very certain that this -- when that's fully integrated, there will not be a drain on the margin or rather the opposite, but it takes some time to get there. And we also note that continue buybacks, we continue to have a solid balance sheet, which is, let's say, allowing us both to continue on high CapEx level, continue to do M&A, continue to absorb the growth, which is in the quarter in terms of working capital, but also on top of that, we also continue to do share buybacks. So that was the summary and then turning to -- for the last quarter and then turning to Page 26 and some outlook. We expect the demand to remain on this level. For those of you who have read the reports see that we have this extraordinary sales or project sales within medical, we were not going to kick in. So with this outlook, you should read it that the continued overall demand, we might be -- we don't know exactly, as we otherwise were sitting exactly where we end up. But of course, we believe that this is probably not going to be of north of 4% in the next quarter, but we could be a 1 percentage point or some lower than 4%, but we believe it's going to be on a similar level. And I mean if this continued higher activity level, remain, then we will look with more positivism on the future. But with this comment, of course, also, we all know there is a big year -- still a big, what we call political situation or geopolitical challenges out there and things might happen, which could impact the demand short term. So that is, of course, with this comment on the continued good market, it comes with this kind of comment. And then turning to Page 27 agenda and into the final agenda point and turning to Page 28 and opening up for questions. Operator: [Operator Instructions] The next question comes from Alexander Jones from BofA. Alexander Jones: If I can have two please. The first on Sealing Solutions and specifically the Industrial business within that, you talked about higher growth this quarter. Could you help us understand was that broad-based or the particular end markets within Industrial driving that? And to what extent was that the end market improving or more market share gains and innovation success that you've had as Trelleborg? And then the second question, if I can, just on the Medical business. Can I clarify on the one-off project sales this quarter. Is there any element there have pulled forward that will be reversed in future quarters? Or is that just sort of one-off extra sales that we should not extrapolate in our future numbers? Peter Nilsson: Alexander, talking -- starting with the medical one, I mean that is really a startup of a new program for one of our customers, which is a one-off delivery. So it's not really about impacting the future. So it's not kind of a pull from any future sales. It's simply sales in the quarter due to the [indiscernible] starting new programs. So that is kind of the way it is sometimes, but it's not kind of any forward buying or something, it's simply a one-off sales. So nothing really that we need -- we don't expect it to -- yes, to impact the sales going forward. So that's it. And then if you talk about Industrial, I mean, one thing is also on the industrial sales of Sealing, which you've seen in the quarter, I mean we have been, for quite a few quarters, talking about destocking in these activities. So one of the impacts in the quarter is no more destocking, and we are kind of supplying in line with underlying demand. I mean, so that is one of the impacts. But we don't see still as an inventory buildup, but we still believe that there is supplying. But we are not kind of oversupplying in the way that they are building stock. And I mean -- and the core driver for this is kind of the biggest subsegment, if I say in Sealing, which is more hydraulics, machinery and this kind of core industrial business. That is where we see the improvements. So we're not surprised, I shouldn't say we're surprised because it's been undersupplying for a few quarters. And now we feel that we're supplying in line with the overall demand. So I don't know whether that is enough for you. Alexander Jones: Yes, that's very helpful. . Operator: The next question comes from Agnieszka Vilela from Nordea. Agnieszka Vilela: So I have a few questions, maybe starting with the first one on the growth trajectory in the quarter, if you could share any flavor of how was development in September? And then also, how is it progressing in October? And then also, Peter, I think before you used to refer to your order intake. So how is that developing right now for you? Peter Nilsson: I mean there was an improvement throughout the quarter, but also the trick on Q3 September is always important. Since the other 2 months is a little bit impacted by vacation period. So it was kind of an acceleration in the quarter, so a stronger ending than beginning in the quarter, but we don't, let's say, put too much emphasis on that one. But it is kind of an improvement in the quarter, if I may say. And October, I mean, we don't see any kind of differences and we don't really want to comment on it. So it's really overall guidance remains that we believe is going to be same growth in Q4 with, let's say, some adjustments coming from this extraordinary sales in Medical. So my read this, I mean it might be 4, it might be 3. But I mean, we don't really know. We have an overall good order intake. We have overall good activity level. I mean, we should say book-to-bill in the quarter is positive. We have booked more orders in Q3 than we have been selling. So we are growing the order book. But we also remain a little bit cautious on this because we know there is inventory focus, cash flow focus on some customers. So we don't really want to read too much into it. But if we simply did the Excel sheet calculation, then of course, we will, let's say, be more positive than negative in that one. I don't know whether that is enough, Agnieszka. Agnieszka Vilela: Yes, yes, absolutely. But then maybe if you could give us some color on the regional development as well. Obviously, you have -- you have had very strong development in Asia, now followed by Americas, Europe also now slightly positive. In the next few quarters, do you expect any changes to this order like any other -- any region taking over? Peter Nilsson: No. I mean I think Asia, little bit, has been a little bit extraordinary strong, especially in automotive since we have this big boost. I can't remember exactly, but I think production levels in China for automotive was up by some 12%, 13%. So that's, of course, since we have a high -- good position with a few of our automotive segment, that is benefiting us, but also the overall industrial development in Asia, especially in China has been good for us, somewhat difficult to fully understand, to be honest, but it's been ongoing for quite a few quarters, and we do not expect that to be -- of course, comps getting more difficult going forward. But nevertheless, a good development in there. Europe is probably more tricky in a way to read. But we see -- I mean, in the core, as I commented before, the core Industrial segments of TSS is improving. And that is more -- part of it is a reflection that no more destocking and more of kind of delivery in line with underlying demand. We do not see any kind of inventory buildup at the moment, and that is, of course, if it turns more positive, we will see that as well. So we've been undersupplying for a few quarters. We do expect as the market -- if the markets turn more positive that we will be oversupplying. But we don't really see that happening short term. But if you go into early next year and this development continues, we're probably going to have some of that. U.S. is probably, for us, a little bit more positive than it should be because we have a few project deliveries in U.S., which is kind of impacting the sales there. But nevertheless, let's say, for us, a good positive territory also coming there from kind of hydraulics and the pneumatic segments, which is also a part of our core business in North America for Sealing. I guess that is -- I don't know, Fredrik, if you want to elaborate. I think that is kind of just to be a little bit more color for that development. Agnieszka Vilela: That's very helpful. And then the last one from me. I noticed that you didn't really mention the tariff impact in your report or in your presentation. Was there any kind of growth tariffs now affecting you in the quarter and how are you mitigating those? Peter Nilsson: We have a few individual businesses where we need to kind of redo the supply chain and working with that. But I mean, overall, this kind of minor activity. So that is why we don't see that as a kind of impacting us. We have a very regional setup. We have as I said, manufacturing in Asia, we have manufacturing in Europe, we have manufacturing in the U.S., and we don't really have a lot of these flows going across. I mean, the challenge here is more the metal content where we need to find out. We have a few products, but we have metal content, and that is something where we need to work. And that is also our question going forward on these tariffs in Europe because some of the export business from Europe into other territories might be impacted by that. But it kind of remains an action point and that is something we're working on. But overall, on a group level, we don't see this at any topic in a way, to be honest. Underlying demand could be impacted, I mean to say. But I mean for our trading and margins, it's not really something that we discuss too much. Operator: The next question comes from Forbes Goldman from Pareto Securities. Forbes Goldman: Yes. One question on the TSS margin, which was quite strong here in the quarter. Is this the start of a sustained recovery there? And how are you thinking about the 23% target from here? What do you sort of need to reach it? Peter Nilsson: No. I mean it is a solid, let's say, step in the right direction. Looking at the margin, of course, once again, you need to remind yourself as well that we have also a negative impact from the acquisitions. Of course, it is a step up compared to last year. And we have always said that we're going to get this back to our levels and is kind of step in that direction. And then I don't want to guide exactly what kind of quarter, but it is coming as expected, as planned, if I may say, this margin expansion coming from a little bit bounce back in our core segments of TSS. I mean that is what we've been waiting for. Once again, we refer to this kind of fluid power, hydraulics, pneumatics, that segment, which is the major part of Sealing Solutions, and that is the area which is going to drive this improvement by extra volumes. And also in that extra volumes in the right areas, if I may say, because it's also driving kind of a positive mix within Sealing Solutions. So this is a step in the right direction, and we still have the kind of overall objective to get back to this, say, '22, '23, '24. I mean that is where we want it to be. And we are fairly certain that we are moving in that direction. Forbes Goldman: Great. I have a follow-up on that. TSS margins are typically seasonally weaker during the second half of the year. So could you maybe just say anything directionally about Q4? Peter Nilsson: No, we don't want to do. I mean, we are moving in the right direction, and we are -- of course. I mean TSS is more, should I say, consumable where we supply into the supply chains of a large number of industrial customers. And I mean there is always Christmas breaks and all of that. So it's always a bit softer by the end of the year depending on the activity level that they're planning for after the holidays. And that is the same seasonality as we always have. So it's -- I don't know if we can comment any more on that. I don't think so. I mean that is the way it is. Forbes Goldman: Final follow-up. On the restructuring cost, it looks like quite a big step-up here into Q4. Anything in particular happening there? Fredrik Nilsson: No, nothing really. It's more a timing. So there are some projects that we have worked with for a while, and that will be booked as restructuring costs during the fourth quarter. Operator: The next question comes from Hampus Engellau from Handelsbanken. Hampus Engellau: Could we discuss organic growth on the group level and I guess also in Sealing Solutions, if you would remove Automotive, just to get a sense on how the underlying ex autos is moving, given that we have an opinion on autos going forward? Peter Nilsson: Automotive in Sealing Solutions was not positive. So that is something where we -- because they are severely hit, but they are hit by specialist aftermarket dropped for our brake business. So that is kind of negative. So I mean, if you neglect for Automotive, in Sealing Solutions, is actually going to be even better. So that is the one. We are benefiting from the China OE sales, but that is in no way compensating for the drop in the aftermarket business. But for TSS, I mean it's not a major impact, to be honest, but there is a slight positive in Industrial Solutions in this -- what we call our boots business, where we have a very strong market share in China as well. So that is where we are benefiting. But I mean it's neglectable in a way if you look at Industrial because it's not a major business of Industrial Solutions, but it is positive. So that's one. So the underlying kind of non-automotive organic growth in Sealing Solutions is actually slightly better. Hampus Engellau: Excellent. And do you bear giving some indications on how you see autos -- autos part in Sealing maybe for Q4. I guess you presume you're looking at the S&P numbers and also have an opinion on aftermarket? Peter Nilsson: On the aftermarket -- sorry, your... Hampus Engellau: Yes. I guess on fetching for if you're expecting some contribution in Q4. Peter Nilsson: To be honest on that, we are a little bit surprised that it continued on this low level. It's not that people are kind of changing less brakes. And the only thing we can read into this that there is where we have some carriers, we have some metal content in those and some of our aftermarket customers are kind of reluctant to build. Also, when they order from us in Europe, and we are sending to U.S., it takes 6 to 8 weeks. And it seems like they are not buying, they're not speculating. But of course, the stock is going down and eventually, they need to fill it up. So that is -- I mean, where we are a little bit surprised, to be honest, about this rather dramatic drop in aftermarket, which is not -- I mean, it's not that either that they can buy from anybody else. They need to buy from us and because we are specified and we are kind of regional equipment suppliers, and so that is kind of a strange, which we have now seen for 2, 3 quarters -- 2, 3 quarters. So that is something where we don't fully understand. I mean sometimes you try to understand, but sometimes you cannot get the right answers, but it cannot continue on that. I mean, let's put it, you cannot continue on that level, unless people are neglecting, not changing brakes anymore. Operator: The next question comes from Timothy Lee from Barclays. Timothy Lee: I have a follow-up question on margin. So for Sealing Solutions, there's definitely a very good margin development in the quarter. Can I also say that it is implying some synergies that you get finally from the previous acquisition of MRP. Is it something that kicking in the quarter. And also in terms of the -- your previous target of the 20% run rate EBITDA -- EBITA margin by the end of this fiscal year. Is that still something you are looking for? Peter Nilsson: To talk about synergies, of course. I mean we have always said on MRP that I mean some of the major impact is coming from the hydraulics fluid power segment. And as that now we see finally some improvements in that. Of course, we're getting some benefits from that into the figures. But I mean it's -- MRP is getting more into normal business for us. So it's not really synergies as such. It's more that the market segments, which was strengthened by the MRP has been very soft. And now we see these markets getting back. And then, of course, we get the benefit into the figure. But we are not at the end of that one because it still has to go up. It should still -- I don't know exactly the figures, but we are probably still some 15% or something below kind of the levels where we believe it should be in that particular segment. So that is still at a low activity and especially you're talking about the farming in U.S., you look at little bit construction equipment, which is still, especially the agriculture looks still very soft. And that, of course, we're starting -- if you talk to the new administration in the U.S., I don't know -- it's difficult to kind of guess where they're heading. But one of the areas which I have not been kind of supporting yet and which have been suffering is, of course, the farmers in U.S. So if something comes into that area, we should see even better improvements, especially in that segment. About 20% is still within reach, but I mean it's going to be tough to get there, I mean, to be very open to get to that level here already in Q4, but we are moving in the right direction. And we still see that with the reach in a not-too-distant future. But I mean I shouldn't sit here and say that we can get to 20% in Q4, because that has been -- there has been some market development. We know the tariff situation. We know the geopolitical areas and we know this kind of softness still in the construction and, let's say, still -- yes, quite some distance to go before we are back to normal, especially in this fluid power, which is once again the major segment of Sealing Solutions. Timothy Lee: Understood. Very helpful. And my another question would be on your M&A potential. So Continental actually previously mentioned, they could probably look for the divestments of the ContiTech business. I'm not sure whether you can comment on this or whether it is something that you may see interest or if it's in your M&A portfolio? Peter Nilsson: Yes. I mean the overall ContiTech is definitely a lot of interest for us because the majority of the ContiTech business has no -- I would say, we are in the same overall segment. But if you look at their conveyer belts or timing belts or also this what I call surface solutions. I mean it's nothing to do with that. We have some overlap in terms of nonautomotive anti-vibration and some fluid or [indiscernible], which, of course, we will be interested if we could cherry-pick, but I don't think there will be any kind of cherry-pick possibilities. So I mean, we're watching it. We're looking at it. But overall, ContiTech is a not of interest for us. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Peter Nilsson: Thank you. And thanks for listening in our quarterly call. And summary of a good quarter for us, a good organic growth, good margin development and an improved demand throughout the quarter. We still note that there is still a lot of uncertainty in the, let's say, the global arena. And that is, of course, something we're watching, but we feel confident that we're going to continue to improve Trelleborg, and continue to build a better Trelleborg with ambition, of course, to deliver even better figures going forward. So thanks to all of you, and I am happy to support you in individual calls. Christofer is always available and so are Fredrik and myself, if you want any follow-up discussions or get some clarity on other issues not covered in the call. So thanks again, and see you soon and do take care.
Operator: Good day, everyone, and welcome to Kimberly-Clark de México Third Quarter 2025 Results. [Operator Instructions] Please note this call is being recorded, and I will be standing by. It is now my pleasure to turn the conference over to CEO, Pablo González. Please go ahead. Pablo Roberto González Guajardo: Hello, everyone. I hope you're doing well, and thanks for participating on the call. We'll go straight to results, and then we'll make some brief comments about the quarter and our expectations going forward. Xavier? Xavier Cortés Lascurain: Thank you. Good morning, everyone. Results for the quarter were better, with net sales growing and gross and operating profits recovering. During the quarter, our sales were MXN 13.4 billion, a 2% increase versus last year. Hard rolled sales impacted total volume, which was flat and price/mix was up 2%. Consumer Products grew 5%, 1% volume and 4% price/mix, while Away from Home remained flat. Exports were down 15%, impacted by a 32% decrease in hard rolled sales, while finished products grew 7%. Cost of goods sold increased 3%. Against last year, SAM, resins and virgin fibers were favorable. Recycled fibers were mixed, while fluff compared negatively. The FX was slightly lower, averaging 1% less. During the quarter, our cost of goods sold reflected the higher prices of raw materials from prior months and very significantly, the much higher FX, including the hedges as those trickled down the inventory layers. Our cost reduction program once again had very good results and yielded approximately MXN 500 million of savings in the quarter. These savings are mainly at the cost of goods sold level and are generated by sourcing, materials improvement and process efficiencies. Gross profit was flat and margin was 38.7% for the quarter. SG&A expenses were 4% higher year-over-year and as a percentage of sales, were up 30 basis points as we continue to invest behind our brands. Operating profit decreased 4% and the operating margin was 21.3%. We generated MXN 3.4 billion of EBITDA, a 3% decrease, but within our long-term margin range at 25%. As mentioned, the benefits of better raw material prices and a stronger peso take time to show up on the actual cost of goods sold, due not only to inventories, but also to contract transit time and particularly in this case, the currency hedges. Having said that, our gross margin did improve 50 basis points sequentially from the second quarter to the third quarter. That improvement does not go down to the operating profit or EBITDA level because the SG&A remained constant and was, therefore, higher as a percentage of sales because the third quarter sales are traditionally lower than the second quarter sales. Cost of financing was MXN 404 million in the third quarter compared to MXN 287 million in the same period last year. Net interest expense was higher at MXN 401 million versus MXN 290 million last year, despite our lower gross debt because we earned less on our cash investments. During the quarter, we had a MXN 3 million FX loss, which compares to a MXN 4 million gain last year. Net income for the quarter was MXN 1.7 billion with earnings per share of [ MXN 0.56. ] We maintain a very strong and healthy balance sheet. Cash position as of September 30 was MXN 11 billion. We have no debt maturing for the rest of the year and maturities for the coming years are very comfortable. Net debt-to-EBITDA ratio is 1x and EBITDA to net interest coverage is 10x. Over the last 12 months, we have repurchased close to 50 million shares, around 1.5% of shares outstanding, which brings the total payout to shareholders to approximately 7%. And with that, I turn it back to Pablo. Pablo Roberto González Guajardo: So we continue to operate against a soft consumer backdrop, but we managed to increase sales and post EBITDA margin within the target range. Growth in Consumer Products was significantly better supported by innovations and commercial initiatives, together with a strategic decision to reduce spending during the heavy summer promotional season to protect the value of our brands as well as reduce the negative price effects. Volume was slightly ahead of last year, an important improvement, but consumers remain stretched and cautious given the increased uncertainty, job growth deceleration, remittances slowdown and overall lack of economic growth. We see no significant catalyst for this to change in the short term and are strengthening strategies accordingly. Still more relevant and differentiated innovation, more effective engagement with consumers efficient execution hand-in-hand with our clients, and importantly, relentless focus on our most important opportunities by category, channel and brands will guide all our actions. In a market that's not growing much, gaining share and playing in areas where we haven't participated at least not aggressively, will be key to accelerate our growth. We look forward to sharing more details on the strategies as we get into 2026. The same holds true for Away from Home business, and we expect exports of finished products to continue to grow and accelerate in the coming years, behind a concerted effort with our partner, Kimberly-Clark Corporation. With respect to costs, we have yet to see the full effect of lower input prices on results and lower sequential volumes typical of the third quarter meant we had weaker operating leverage. Despite these headwinds, margins remain strong. As we get into the final stretch of the year and particularly into next year, we will see lower costs reflected in our numbers. We expect lower pulp prices, stable recycled fibers, lower resins and superabsorbent materials plus a stronger peso to be tailwinds going forward. In summary, our results continue to improve. And despite an expected continued weak consumer environment, we're executing strategies that will translate into stronger results in 2026 and the years to come. With that, let's turn to your questions. Operator: [Operator Instructions] We'll take our first question from Ben Theurer with Barclays. Benjamin Theurer: Congrats on the results despite the challenging environment. So I wanted to follow up a little bit on just the consumer sentiment and what you've been seeing across the different categories. So maybe help us understand and kind of like getting a bit closer into that 4% price/mix change. How are you able to kind of like implement that and at the same time, actually get about a 1% volume growth, just given the consumer is weak, but it felt like a very good execution on price mix with volume growth. So that would be my first question. Pablo Roberto González Guajardo: Sure, thanks for the question. Look, as I mentioned, we see a stretched consumer. And this is [ not news of ] uncertainty. And as I mentioned, job growth has decelerated, remittances have slowed down. I mean overall, the economy is pretty slow and consumers' sentiment is not at its best, if you will. So consumers are being very careful in how they are spending. We do see a fork, if you will, with consumers that continue to spend on premium products, but there are those who are trending down from value to economy products, not at a very marked rate, but there's certainly something happening there given the -- how the consumer is stretched. So the way we were able to put all of this together -- and let me say, by the way, the growth in our categories is pretty muted. Some of them, the categories that don't have such high penetration like kitchen towels and others are growing at higher rates. But even those the rates have slowed down a little bit. And the more, if you will, mature categories are flat or slightly growing when it comes to volume. So what we did is, one, Remember, we decided not to play as aggressively on the summer promotional season. Because what we were seeing over the past couple of years is that when you did that, the price would take a hit not only within the promotional season, but then beyond that, because consumers ended up with some inventory on their hands. So then it was a little harder to move volumes forth. So we were very careful on how we manage that, and I think we were successful in doing so. Plus the fact that we are through our revenue management -- revenue growth management capabilities found certain instances where we could adjust pricing and move forth. So that's how we were able to keep prices going and then volume really helped because of innovation and all of our commercial activities during the third quarter. So it was really a combination of executing on price and innovations that allowed us to put together both growth in price and for the first quarter in the year, growth in volume. Benjamin Theurer: Okay. And then just one quick follow-up. You've called out the softer hard roll sales volume. Was there a technical issue? Is it a demand issue on the export side? What's been driving that? Pablo Roberto González Guajardo: Really, I think what's happening there is that there's a lot of supply of hard rolls in the U.S., a combination of companies with excess capacity sending it to the U.S. and then maybe a little bit of companies buying before some of the tariffs came into effect. So there's paper out there that I think the system is going through. And hopefully, that will become more normalized, if you will, in the fourth quarter, certainly, I think by the first quarter of next year. But overall, just oversupply in the market of hard rolls in the U.S. Operator: We will move next with Bob Ford with Bank of America. Robert Ford: Pablo, I also was impressed by the growth in consumer given your intent to stay away from some of the summer promotions. Can you give some examples maybe of some of the more successful innovation and execution of efforts that are enabling you to improve pricing and take share? And with respect to the export mix between hard rolls and finished products, can you give us a sense both in volume and value in terms of the breakdown of those exports? And then how should we think about current capacity utilization rates for both pulp and finished product? Pablo Roberto González Guajardo: Thanks, Bob. Thanks for your question. Yes. Look, I mean, when it comes to innovation, as I mentioned earlier in the year, we have strong innovations for all of our categories throughout the year. And by the way, we have a very, very strong pipeline for the coming years. So we're very excited about that. And a couple of particular examples are on the diaper front, where we pretty much improved on every single tier of our offerings. And when you take a look at our shares, we're -- even though the categories, as I said, pretty flat, we're gaining share in pretty much all of the channels given the -- all of the channels and all of the tiers, given the innovations that we were able to put into the market. And again, those have to do with better observancy core, better fit, better stretch, better softness. So depending on the tier, again, we improved every single one of them, and that's a category where we see our shares improving nicely. Also, for example, in bathroom tissue in the premium tier, where we've introduced a couple of new features and new sub-brands under Kleenex, Cottonelle, and we're absolutely convinced we have the best product in market and products that can compete with products anywhere in the world. and they've been very, very well received by consumers. And as well, we also made some innovations to our economic product, particularly Vogue in the -- or [ Vogue ] in the wholesale channel, and we've been able to gain ground with that product consistently and significantly. So again, innovation at the core of everything we do and very, very excited with what we see for the coming years when it comes to innovation. With respect to the breakdown of our exports, I mean, hard roll sales represent 46% of the sales and finished product, 54%. And hard rolls, as I mentioned, hopefully, volumes will stabilize here in the coming quarters, and we expect that to continue to be -- hopefully, be a tailwind and if not, certainly not a headwind going forward. And on the finished product, we're excited. I mean we've had a couple of meetings with our partner, and we're looking at opportunities in the coming years to further integrate our supply chain. We've done a good job here in the past couple of years, but many more things that we can do, and we're working very closely together to make that happen, and we're excited with the opportunities we see for it. And as we move and are able to turn more of our capacity into finished product, then certainly, our hard roll sales will decline accordingly because, as you know, what we do is our excess capacity is what we turn into hard rolled sales and sell outside. So as this plans with our partner materialize, a little by little, we'll start to see lower hard roll sales, but finished product sales increase hopefully significantly. Robert Ford: And that was actually the idea behind the question on capacity utilization is we agree. We see this massive opportunity in exports of finished product. And as a result, we're a little curious in terms of where you are right now in terms of capacity utilization, both for pulp? And then how should we think about where you are today on finished product and we can make some estimates in terms of what you need to add. Pablo Roberto González Guajardo: Yes. And it's a great question, Bob, and we -- let me put it this way. We have enough capacity to grow on finished products aggressively together with our partner in the coming years. And not only what we're producing right now, but we're putting plans together so that we can get more throughput through our equipment or through our machines. So we will be able to support growth with them. And I think we will still continue to be able to put a decent amount of hard roll sales out there in the U.S. So I think the combination over the coming years will certainly be a support our growth and support our margins going forward. Operator: Our next question comes from Alejandro Fuchs with Itau. Alejandro Fuchs: I have 2 very quick ones. Pablo, maybe I want to see if you can discuss a little bit about competition, right? How do you see competition today in Mexico, given the increase in price and sales mix, are maybe the competitors following? Are they being more aggressive promotionally? And if you can also discuss maybe your expectations into next year, hopefully, with a better consumer environment in the country. Maybe you can talk us about what do you expect going forward? Pablo Roberto González Guajardo: Sure, Alejandro. Look, when it comes to competition, I mean, you know our categories have always been very competitive. And we maybe are seeing a little bit more from some participants, not all when it comes to their promotional aggressiveness. I wouldn't say it's something that it's radically different, but a little bit more as, again, the pie is not growing, some are losing share. So they're trying to recoup some of that and are being a little bit more aggressive on it. But not -- again, not something that it's too surprising or too different from other instances. And the fact also that our retailers are, one, continuing to keep inventories and overall working capital under control, they're putting a lot of pressure on that. And two, trying to keep prices, it seems to me a little bit more consistent. I mean that helps in terms of the aggressiveness of promotions not being even more so that it could have been in other instances when the economy is not growing. So a little bit more, but really nothing marked, if you will. Coming into next year, I mean, we hope that a lot of the -- or at least some of the uncertainty that is hanging over the economy can be resolved or at least we get a clear direction as to where it's going. Certainly, the uncertainty that's coming from the USMCA revision or renegotiation and what will happen with that. I mean, you've heard -- we've heard that in a couple of weeks, we'll be hearing from our government as to some of the agreements they've come to with the U.S. administration. So hopefully, that will start to settle down, and we'll know a little bit better where it heads. Hopefully, as we get into the first -- or the workings of the judicial reform, we start to see how it how it works, and we start to see some decisions that support, again, giving more certainty to investment. And again, just hopefully, some of this uncertainties start to play out and we start to get a better sense of what's going on. We know then what to expect. And if that happens, I think the economy will be able to start growing again at a faster clip, maybe come back to what we were doing before all of this uncertainty, about a 1.5%, 2% rate, which at this stands would be pretty good. Not what we need certainly as a country. I mean, we really should be working hard to take all of the obstacles away from investments so that we can start growing at 3% or higher rates, but that's going to take some time and uncertainty is key for that certainty. So that will hopefully play out by '27, but at least by '26, if we can get some uncertainty out, we'll see greater economic growth and then we might see a consumer that feels a little bit better about things and then domestic consumption can start to pick up again. That's our expectation. But let's see how quickly we can -- how quickly it unravels and happens. Operator: Our next question comes from Renata Cabral with Citibank. Renata Fonseca Cabral Sturani: Congrats on the results. So my first question is still about the consumption environment, but specifically to understand if consumers are making the trade downs and if you see a bigger penetration of private label in the categories that the company has? And the second question is related to cost. In the initial remarks, I understood that the company expects that the raw material prices should maintain for the upcoming months. I would like just to confirm if that's the view. And for the fourth quarter, if the company has any hedges or the effects? Pablo Roberto González Guajardo: I hope I can answer your questions. You were not coming through too clearly, but if I don't, please let me know. Again, when it comes to consumers, we're seeing a divergence. Those that buy premium products continue to do so. Those consumers that are used to buy either value or economy products, we see a little bit of trade down to the economy segment. not a big trade down, but a little bit of trade down given how stretched they are. And tied to that, we are also seeing growth in penetration of private labels in the country. And it's a combination of the economic situation and retailers being a little bit more aggressive when it comes to pushing their private label. When it comes to costs, again, we already have seen in our purchases lower costs of most of our raw materials, excluding fluff. And that's just taking a little bit of time to reflect on our cost of goods sold, but we expect that to continue to -- start to happen certainly in the fourth quarter. And no doubt early in 2026. And our expectations for costs in the 2026 is that we will come in with, again, most of them on a downward trend and that will certainly be tailwinds for our cost together with the exchange rate, which will compare very favorably in the first half of the year. So that should be very, very helpful going forward. And when it comes to hedges, no, we have no more hedges during this quarter, and we don't expect to hedge going forward. Operator: We will move next with Antonio Hernandez with Actinver. Antonio Hernandez: Just following up on [ Renata's ] question, should we expect given that because of the tailwinds from FX and maybe raw materials and so on, that maybe EBITDA margin, at least in the short term has already hit rock bottom. Is that like you see basically upside on going forward? Pablo Roberto González Guajardo: Yes, absolutely. And it's interesting how you put it rock bottom when it's 25%, and it's still one of the best EBITDA margins out there for any Consumer Products company in the world. But yes, we probably have hit rock bottom. And going forward, we should expect better margins, no doubt. Antonio Hernandez: Exactly. Yes. I mean, rock bottom considering the 25% to 27%. Pablo Roberto González Guajardo: I understand. I just -- quite frankly, I just used it to make a point, sorry. Antonio Hernandez: Exactly. It's all relative in the end, but yes, pretty good margins. Just a quick follow-up. In terms of innovation and how you're also treating these consumers that are willing to buy these premium products. Maybe if you could provide any color on how much do they represent or innovation in terms of sales? Anything like that would be helpful. Pablo Roberto González Guajardo: Look, I think most of our growth really is coming from products that -- where we've innovated. And again, we're very, very excited with what we've done, but even more so with what we have coming. And early in 2026, we hope to share a little bit more of our strategies when it comes to areas -- main areas of focus and opportunities by category, channel and brands and also the -- what we see would be some of the very exciting innovations that we're going to be putting into the market. So let's hold on that until the first quarter of '26, and we'll be able to provide you more insight and details into what it's done and how we expect it to contribute to our growth going forward. Operator: [Operator Instructions] We will move next with Jeronimo de Guzman with INCA Investments. Jeronimo de Guzman: Start with a follow-up on the cost side. You mentioned that there's no hedges impacting the fourth quarter, but I just wanted to understand how much did the FX hedges impact the third quarter? Pablo Roberto González Guajardo: I would probably say they did impact about 50% of our purchases for the second quarter and for the first part of the third quarter. So assuming that what we saw on the third quarter was mostly based on those purchases. You could say that approximately 50% of our dollar-denominated purchases were impacted by those hedges in the quarter. I don't know if that made sense. Jeronimo de Guzman: But only half -- but only for half of the third quarter... Pablo Roberto González Guajardo: Yes, because of the -- no, I would say for the full quarter, about 50% of our U.S. dollar purchases, which are about 50% of our costs were hedged. Jeronimo de Guzman: Got it. Okay. And what was the average FX for those hedges? Pablo Roberto González Guajardo: [ 20 70 ] something. Jeronimo de Guzman: That will be a big improvement. And then just want to understand, given the much better cost outlook and the fact that these hedges are less of a headwind going forward or not a headwind going forward, how are you thinking about pricing going forward? Pablo Roberto González Guajardo: Look, we continue to take a very close look at each category and each tier and each channel to see where there are opportunities for pricing because, yes, we see tailwinds when it comes to costs of raw materials. We see headwinds in other costs, for example, on labor costs, which have been increasing in Mexico for quite some years. And when you compound their impact over the years, it's becoming a little bit more impactful, if you will, and some other issues. And plus we want to continue to generate important margins and profit so that we can further invest behind our brands. So pricing will not be as maybe in the past where you would just [indiscernible] we're going to increase 4% in the diaper category in March and period. It's going to be more of a strategic analysis, again by tier, by channel, et cetera, to determine where the opportunities are together with a very important push behind mix for our brands given the innovation we have. And so we will continue to look for opportunities to price and opportunities to improve our mix going forward. Jeronimo de Guzman: Okay. Yes, that's helpful. So the 4% that you had this quarter year-on-year, how much of that was mix versus actual price changes? Or was it just less promotions versus a year ago, I guess, which is kind of a... Pablo Roberto González Guajardo: It was about half and half. It was about 2% price, 2% mix. Jeronimo de Guzman: Okay. Got it. Great. And just one other question on the competitive environment. I wanted to get your sense on market share trends in general, kind of where -- in what areas are you seeing maybe more pressure on the market share side and where you're seeing more more of the market share gains that you're having? Pablo Roberto González Guajardo: Overall, I think we have a very stable market shares, maybe except on diapers, as I mentioned, we see that share growing. When you take a look at bathroom tissue, we're fairly stable. Napkins, we're growing share. kitchen towels, we're growing share. Wipes, we're growing a little bit on value, not on volume. But that's a category where we have lost a little bit of ground to not only private label, but a whole bunch of offerings coming from Asia and other parts of the world at very cheap prices. So we've got plans to attack there and recoup some of the share. And I would say about that, I mean, facial tissue is is flat at about 92%. I mean, our shares are pretty stable overall. Jeronimo de Guzman: Okay. Sorry, one more question on the new JV, the penetration, any updates on that? Pablo Roberto González Guajardo: On what, sorry? Jeronimo de Guzman: The new business, the pet, animal [indiscernible] Pablo Roberto González Guajardo: Pet business. No, thanks for the question. Yes, we continue to make inroads. I mean we're getting cataloged in more retail chains and improving our reach within them. So getting more SKUs in there and getting into more stores. And again, the consumer reaction so far has been very, very good. The retail reaction has also been good. So right on track where we wanted to be, and hopefully, that will accelerate in 2026. Again, this is a long-term play, but we should be this -- we absolutely should see this business accelerate in 2026. Operator: We will move next with [ Miguel Ulloa ] with BBVA. Miguel Ulloa Suárez: It could be regarding the CapEx for next year and any changes in the repurchase program. Pablo Roberto González Guajardo: Miguel, CapEx will remain very likely in the $120 million range. Could be a little bit more if some of the opportunities for exports capitalize, but nothing that would change significantly the capital allocation. For buybacks, this year, we will complete our EUR 1.5 billion program. Still too early to talk about next year. We will definitely have retained earnings from the net income this year to grow the dividend. And as usual, whatever we have left, we will devote to to buybacks. So that we'll have to see after we end the year. Miguel Ulloa Suárez: That's helpful. And just one, if I may, is regarding further investments or big investments in line for capacity in coming years? Pablo Roberto González Guajardo: Right now, it doesn't look like we need to do anything beyond that 120 average CapEx. Again, if we see more opportunity, we could see a couple of years of ramp-up. And even if at some point, we need a tissue capacity, which at this point, it doesn't look like, but hopefully, that changes, then we would see a couple of years of 150, maybe somewhere around that. Again, nothing that should change significantly the capital allocation. Operator: And this concludes our Q&A session. I will now turn the call over to Pablo González closing remarks. Pablo Roberto González Guajardo: Thank you. Nothing else to say just thanks for participating in the call. I hope you all have a terrific weekend. And since this is our last call before the year-end, I know it's early, but I hope you all have happy holidays and a terrific New Year's and look forward to talking to you early in 2026. Thank you. Operator: And this does conclude today's program. Thank you for your participation. You may disconnect at any time.