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Operator: Welcome to the HEXPOL Q3 presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Klas Dahlberg and CFO, Peter Rosen. Please go ahead. Klas Dahlberg: Thank you, operator, and hello to you all, and thank you for joining this call, and welcome to the HEXPOL Q3 presentation. This is Klas Dahlberg speaking, and I'm here together with our CFO, Peter Rosen. If you please turn to Page 2. I will start with a business update. Peter will take you through the financials, and I will summarize the quarter. After that, we are happy to answer your questions. If we then go to Page 4, please. I will start by going through the Q3 performance. We see that most markets continue to be affected by the geopolitical uncertainty, but it's pleasing to see that the European market continues to be rather stable, while the North American market is still challenging. We had only minor direct impact from tariffs, whereas the indirect impact on end customers affected the overall demand, especially in North America. It's also pleasing to see that including acquisitions, volumes were actually higher than last year. And excluding acquisitions, they were in line with last year, but with an unfavorable mix. Looking at our main segments, we saw that the automotive end customer segment continued to be slow, primarily in North America. That was partly compensated for by increased demand in building and construction and also in wire and cable. Our most recent acquisition, Piedmont in the U.S. and Kabkom in Turkey contributed positively to the quarter. Sales prices as well as prices on major raw materials were stable, both versus last year but also sequentially. High uncertainty continues triggered by U.S. tariffs and U.S. trade policy, and that is impacting us indirectly, as mentioned before. In North America, that is the main reason why we could not grow the overall sales and results compared to last year. In the quarter, we delivered sales of close to SEK 4.7 billion with a negative FX effect of some SEK 300 million. Piedmont and Kabkom added some SEK 240 million in sales that was offset by lower organic sales in Rubber Compounding Americas. Compounding Europe showed rather stable organic sales. We reached an EBIT of SEK 688 million and a margin of 14.7%, impacted negatively by FX of some SEK 50 million and an unfavorable mix. The operative cash flow continued on a good level, and we reached SEK 740 million in the quarter. If you please turn to Page 5. If we look into the different business areas, starting with HEXPOL Compounding, the overall organic volumes were in line with last year. The lower sales were impacted by negative FX of some SEK 290 million, but also by the mix. The automotive end customer segment was down primarily in North America, but that was partly offset by increased demand in building and construction and wire and cable. The price on major raw materials were sequentially stable and also versus last year. And the lower operating margin was affected by an unfavorable mix. Rubber Compounding Americas is, as you know, an important part of the HEXPOL Group. And we are very happy to welcome Ken Bloom back to HEXPOL as the Interim President for Rubber Compounding Americas. Ken has a clear mission to take the next step capturing and growing that business. If we then jump to HEXPOL Engineered Products, if we exclude a negative currency impact of SEK 22 million, we actually had a small increase in sales compared to last year and also good development across all product areas, leading to a stable EBIT. We are firmly committed to sustainability and our focus continues. We are on a good path to deliver on the 75% CO2 reduction target that we set for the end of this year. We are also working on the sustainability strategy and the new targets will be completed during Q1 next year. M&A is, as you know, an important focus area for our growth plans. We have the financial resources to accelerate acquisitions. Short term, the geopolitical uncertainty impacts the M&A activity level. There is somewhat a wait-and-see mentality among some companies, and that is affecting that. And last but not least, on November 4, we will have our Capital Market Day in Stockholm, and then we will share more about our growth strategy. If we then turn to Page 6. It's time for the financial update, and Peter will start with the sales development in Q3. Peter Rosén: Thank you very much. So if I can ask you to turn to Page 7, we'll take a look at the sales development in the quarter. And as you've seen, we delivered sales of SEK 4.7 billion in the quarter, which is down 6% compared to the same quarter last year. And if we look on the drivers, we see that organic sales are down 4% in the quarter. And at the same time, the acquisitions of Piedmont and Kabkom added 5% in sales. And as Klas mentioned, there were large negative effects in the quarter, adding up to SEK 312 million. Coming back to the volumes, overall organic volumes were on the same level as last year, but sales were still down, affected by a less favorable mix. Looking at it from a geographical perspective, Europe showed stable sales in the quarter, while we saw a decrease in North America that also translates into the decrease on group level. From an end customer perspective, automotive showed soft demand, which was partly offset by increased demand primarily from building and construction, wire and cable, but also several smaller end customer segments that showed higher sales in the quarter. If I can ask you to turn to Page 8, just taking a look at the financial overview and the P&L. We delivered a profit of SEK 688 million. That includes a negative FX impact of just above SEK 50 million. EBIT margin of 14.7%, which is below what we did the same period last year. And the main reason for this is somewhat less profitable mix, but also OpEx in relation to the lower sales that we saw here in the quarter. Strong cash flow in the quarter with an EBIT of SEK 688 million, we delivered a cash flow of SEK 740 million in the quarter. If I can then ask you to turn to Page 9, taking a somewhat different view of the financial performance here in the quarter. We see that sales came in at SEK 4.7 billion with an operating profit at SEK 688 million below last year, as mentioned, and an operating margin of 14.7%, which is then below what we did last year. If I can ask you to turn to Page 10, looking at the drivers of the operating profit, we see that the lower EBIT is primarily driven by the lower sales, but also impacted by lower gross margin. The lower gross margin is affected by mix. OpEx is somewhat above last year levels, but that is driven by we've added Piedmont and Kabkom to the cost base compared to the same period last year. If I then ask you to move over to Page 11, starting to look at HEXPOL Compounding in the quarter, delivered sales of SEK 4.3 billion in the quarter, which is below what we did the same period last year. Negative FX has a sizable impact of almost SEK 300 million in the quarter. Recently acquired Kabkom and Piedmont added about SEK 230 million in sales, while as mentioned before, organic sales were down some. And these lower organic sales are seen in North America, while Europe showed sales on the same level as last year. And as mentioned, from an end customer perspective, the lower sales is seen with automotive customers, and this was partly offset by higher sales to end customers within building and construction, wire and cable and also some other smaller segments. Operating profit came in at SEK 624 million with a margin of 14.4% for the quarter. If I can ask you to turn to the next page, we take a look at Engineered Products, where adjusting for negative effects in the quarter, sales were up 3%, and this is driven by strong performance by the gaskets products. Operating profit at SEK 64 million with a good EBIT margin of 18.1%, both in line with last year levels. If I can ask you to turn to Page 13, taking a look at the working capital. You can see that we continue to manage working capital efficiently. Despite adding Piedmont and Kabkom, working capital is on the same level as last year, both in absolute terms and in relation to sales. And as mentioned also in last quarter, there are no changes to underlying payment terms. And if I can then ask you to turn to Page 14, taking a look at the cash flow. As mentioned, we delivered a strong cash flow in the quarter, SEK [ 640 ] million with smaller movements across the various items, but well above the EBIT that we delivered in the quarter. And then finally, when it comes to the financial part, if I can ask you to turn to Page 15, looking at the net debt standing at SEK 3.9 billion and a net debt-to-EBITDA ratio of 1.14 at the end of the quarter. This is higher than last year, but this is mainly driven by the acquisition of the minority share of almak as well as the acquisition of Kabkom that we've done this year. So all in all, after the third quarter, we continue to stand with a very strong financial position. And with that being said, I hand over to Klas. Klas Dahlberg: Thank you, Peter. Finally, then just to summarize the third quarter. Europe showed stable sales compared to last year. Engineered Products also showed stable sales with a good profitability. We saw lower demand in North America affected by the high uncertainty related to U.S. trade policy; however, we didn't really see a direct impact from tariffs in Q3. As mentioned, Ken Bloom is appointed as the Interim President for Rubber Compounding Americas. And we consolidated Kabkom as of the 1st of May. And as we've said many times now, wire and cable that they represent is a growing segment for us. We continue to focus on M&A, and we have a strong balance sheet allowing us to act. We continue to focus on sustainability with good progress, both when it comes to our internal targets, but also when it comes to our products. And on the 4th of November, we will have our Capital Markets Day in Stockholm. So by that, we conclude the presentation of the third quarter, and we open up for your questions, ladies and gentlemen. Operator: [Operator Instructions] The next question comes from Joen Sundmark from SEB. Joen Sundmark: So starting with a question on automotive. If I look at the S&P figures on light vehicle production in Q3, it looks like it has improved a bit compared to last year, yet you mentioned that the decline in automotive seems to be present for you guys in Q3. So do you expect that there is some kind of lagging effect here? Or is it rather your particular exposure that's impacting this? If you could shed some light on that, it would be very helpful. Klas Dahlberg: All right. So when it comes to automotive, we always look at the production. And as you say, there is, of course, a certain time difference, those figures compared to our figures. When it comes to the North American market in September, there was, from a sales point of view, an increase, and that was due to the fact they had a subsidy of EUR 7,500 per vehicle. So that triggered sales in that very month, let's say. But other than that, it's a rather slow market. Joen Sundmark: Okay. That's clear. And I know that you have a fairly short order book, but could you share some color on the current discussions on demand that you have with your customers out there and sort of what they foresee demand-wise? Klas Dahlberg: Well, as you say, we have a very short order book. And the trend we have seen is that it becomes even shorter. So we get very late orders from many of our customers. But yes, the overall situation, like I said, it's a rather uncertain situation. So we don't have good visibility when it comes to the order book. Joen Sundmark: Okay. Fair enough. And on the back of that sort of uncertainty in demand and as the margin trend have been quite negative now for a few quarters, do you see any signs of that shifting? Or how are your sort of current discussions going to address that and improve the margin profile going forward? Peter Rosén: Peter here. Just to be clear, we don't give guidance or earnings. That being said, there are a couple of things. One driver of the somewhat lower margin is the mix. And it's no secret that automotive is an important end customer segment for us. So we would prefer to see that automotive production goes up and we get some of those volumes back and which is, of course, something that we are working on. The other part is looking at our cost structures. And there are 2 things. One is looking at the manufacturing footprint. But in the short run, we haven't taken any new decisions on that. Then when it comes to the more -- the other cost side, we're looking both at manning indirect production to bring that down and allocate that according to the volumes coming in. And you will see in Q3 that the number of people were actually lower, about 60 people less this quarter compared to last quarter, Q2 this year. So we're looking at those costs as well to see what can be done to bring down the cost level and manage those. Operator: The next question comes from Henric Hintze from ABG Sundal Collier. Henric Hintze: This is Henric at ABG. So on -- I was wondering if you could give us an update on how you view the M&A landscape at the moment. For example, are potential buyers and sellers closer or further apart on pricing compared to earlier this year? Klas Dahlberg: As I mentioned in my report that what we see right now is some of the companies are also affected by this uncertainty in the market. And because of that, there is a certain wait and see at the moment. So it's not maybe so much about multiples and so on. It's more that if their total result goes down, they are a bit hesitant at the moment to, let's say, to close a deal, if I call it that. So that is what we see. But with that said, we still have quite a pipeline of companies of prospects, so to say. So that's what we're dealing with at the moment. Henric Hintze: All right. And continuing on capital allocation, if this wait-and-see attitude persists among sellers, would you consider buybacks or extra dividends if you're unable to find attractive M&A opportunities? Peter Rosén: Peter here. Priority #1 is to do the M&A, and it's a very high and very clear priority for us. That being said, a while back, the dividend policy was upgraded to be in the range of 40% to 60%. And I think that's where we are right now. So priority #1, M&A. And then we haven't increased dividend policy since I think about 2 years. So that's what we can say at this point. Operator: The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: Yes. It's Gustav here from Nordea. I thought maybe just to build on your comment there, Peter, on the cost side. As you said, you haven't really taken out anything recently. Is that more due to -- you want to wait and see where demand is heading due to the geopolitical uncertainty? Or do you feel that you do have a quite good balance where you are today and with enough overcapacity to be ready to deliver if demand returns? If you can elaborate a bit more on that. Peter Rosén: Yes, of course. First of all, I think just to point out, last -- Q4 last year, we decided to close one site in the U.S., and that project was finalized in second quarter. So I just want to say that to be clear that we've just finished one project to close a production facility. That being said, there's always a trade-off on do we want to close sites in relation to the expected volumes when they come back. Since we are a batch producer, and we also don't work with order stocks, we need to have a flexibility when it comes to production capacity because when customers come and ask for volumes, we need to have that capacity ready to produce. So we need to strike a balance between the cost and having the capacity to meet volumes when they come back. And I would say that's where we are right now. Gustav Berneblad: Okay. Perfect. And then if we move to Europe, I mean, it looks to be quite stable here year-over-year. Is it possible to give a bit more comments there? Is that stability, is that across all end markets? Or are you seeing sort of wire and cable drawing a heavier part here and being sort of a cushion, if you know what I mean? If you can just elaborate a bit there. Peter Rosén: In a sense, it's a similar pattern as we see on the group level just with smaller movements. So automotive, somewhat softer and building and construction, wire and cable and some of the other smaller end customer segment being somewhat positive. So in a sense, same pattern, but smaller movements compared to North America. Gustav Berneblad: That's very clear. And then just one last question there to build on Henric's here on the M&A side. Would you say that you're more open to close acquisitions in Asia today than you were a couple of years ago within compounding? Klas Dahlberg: So when it comes to Asia, that's too early for us to say. And I think that's also part of, as I mentioned, our Capital Market Day to come back to that subject, how -- what opportunities could be there for HEXPOL, let's say. We will come back to that, Gustav. Operator: The next question comes from Andres Castanos-Mollor from Berenberg. Andres Castanos-Mollor: Can you please comment on any impact of the bankruptcy of first branch group if it has had any impact at the [indiscernible] Group level at all? I assume it was a client. Is there any receivable at risk here? Or will you have any demand -- lack of demand, let's say, while the company solves its issues? Peter Rosén: We don't normally comment specific customers. But let's put it this, Andres. We don't expect any material impact at all from that customer. Andres Castanos-Mollor: Right. And also, I was thinking in the changes in the U.S.A., the footprint changes you've been doing there, a few plant closures, also replace the leadership of the business there. What are your priorities or objectives for the region with these changes? Peter Rosén: Sorry, Andres, I didn't hear the beginning of your question. You mentioned change footprint. Andres Castanos-Mollor: Yes, footprint changes. You have closed a few plants in the U.S.A. You have also replaced your leadership there. What are the objectives for the new interim leadership? Peter Rosén: If I'll start with the first one when it comes to the manufacturing footprint. The last 2 years, we've closed 2 sites, one in California. The reason for that was that we had 2 sites in California, and we could see that we could service the customers from one site. So that's an efficiency improvement that we closed that down, and we could maintain all those customers. The site that we decided to close last year was Kennedale, Texas, similar reason there. We saw that we could service those customers from other sites. So it was a redundant capacity that we had, and that's why we closed Kennedale. So both of those plant closures where we said that we could maintain the volumes, but we could service our customers from other existing sites. So that was to improve profitability. Klas Dahlberg: And if I may, Klas here, Andres, regarding leadership in North America, we saw a need for a change to better address the challenges we see and also to capture the opportunities in the North American market. And we think that Ken Bloom is the right person to do that. And he has experience also from HEXPOL. He knows the organization. So we are very positive about that change. Operator: The next question comes from Johan Dahl from Danske Bank. Johan Dahl: Just wanted to dig a bit deeper on the comments you made, Klas, regarding unchanged organic volumes in the quarter, if I got it correctly. I mean, excluding acquisitions, I guess you referred to unchanged volumes in the group. Does that mark a material improvement compared to what we've seen earlier in the year in your view, i.e., the year-on-year progression on volumes? Is that sort of significantly better than in Q3 compared to previous quarters this year? Peter Rosén: Johan, it's Peter here. Just to be clear, again, we're not going to give any guidance on coming quarters when it comes to volume or profitability, et cetera. That being said, if we look at the volume development, we've seen both in Q1 and Q2, we did discuss that we had lower organic volumes. This quarter, organic volumes are in line with last year -- Q3 last year. So in that sense, it's somewhat different compared to the first and second quarter this year. What that will mean -- Sorry, go ahead, Johan. Johan Dahl: Can you hear me? Peter Rosén: Yes. No, I can hear you again. Johan Dahl: That's good. No, it's just -- you have minus 4% on organic revenue growth, right? And you're saying raw material is flat pretty much and also volumes flat organically. It's a fairly massive shift in the top line if you have the average selling price per tonne going down 4%. So what I'm just wanted to pick your brains on is what's your sort of visibility in terms of how this develops going forward? Is it just a function of sort of small variations U.S. versus Europe and auto versus other segments? Or is there something else going on here? Are you selling significantly more bulk volumes, for example, commoditized products? Are you losing market share in that sense? Peter Rosén: No, you're right in your first reasoning. If we look at the 4% organic, volumes are -- organic volumes are basically flat compared to last year. If we are very specific, we're talking very, very low single-digit volume down, percentage. So a very, very small part of the 4%. Then if we look at the other part, it's not sales prices, but there is a mix effect, and it consists of 2 parts. One is a geographical shift. We do lose -- see lower volume and sales in our North American market. And price levels in North America are generally higher. So that has an impact. Then we also see that there is a, call it, a product mix shift, which is the basically automotive. Automotive, as we've said many times before, is a good end customer segment for us. So it's a combination, smaller combinations of those 3 items that make up the organic. So it's not a structural shift in that sense. No, it is not. Johan Dahl: It's just that it's a fairly big number for those sort of variations. But I totally hear your message there. And on to the topic, what you can do to affect this. Is this just a function of the way markets go? Or do you have any visibility, i.e., how you sell more advanced compounds, et cetera? Klas Dahlberg: You mean for the profitability, Johan? Johan Dahl: Well, I guess both in the end, both top line and profitability. I understand that if U.S. is weaker than U.S., it's going to impact your organic growth. But I'm just trying to understand how you structurally can sort of approach this issue to sort of possibly improve mix as we go forward. Klas Dahlberg: Yes. And again, as Peter is saying, I mean, automotive is an important part, and that has not been growing, as you know, and even shrinking as we can see in the S&P figures. And we have found a business, as you can see also in our report within building and construction, wire and cable is a segment that is also growing and where we have also been able to capture business. So I mean that's our day-to-day operation to find new ways because we can change the market conditions in that sense. We have to work on the things we can influence, of course. Operator: The next question comes from Carl Deijenberg from DNB Carnegie. Carl Deijenberg: I came a little bit late into the call, so apologies if this question was already brought up. But I have to ask again, I mean, when I look at the S&P production figures for the North American market for Q3, I think they indicate roughly plus 3% year-on-year. And you're talking about flat volumes, but of course, it sounds like some of the other segments are sort of offsetting with positive growth relative to automotive. And I think when I look at the production numbers for Q2 as well, it seems like there's been a little bit of a discrepancy on, let's say, the production numbers relative to your reported organic growth if I try to back it out on the automotive side. So yes, very simple question. Is there a simple answer to this question? Is the OEMs or your customers bringing this more in-house now when production levels are fairly low? Or is there something else? Peter Rosén: There are at least 2 things that separate the official S&P production numbers from the volumes that we look at. One is the timing. There's normally 20, 25-day timing difference from production of a car and material that we supply. So there's a timing difference. The other part is, which I think is fairly unique for this business is that a lot of our customers have their own compounding business. And we do see that when volumes are down in the market, they tend to bring it in-house. So when you see an S&P production number, that doesn't automatically mean that it's transferable or translatable to ours because we also have customers who sort of shrink the market where we can compete, what we normally call captive conversion or in-sourcing. And that also has... Carl Deijenberg: Yes. Understood. And I think that's fairly interesting. If you can talk a little bit more about that. I mean, what kind of, let's say, in-house levels are we at right now relative to, let's say, a pre-COVID scenario or something like that? I mean just understanding sort of the magnitude, which have fallen into this topic. Would it be possible to give a fairly -- yes, high-level view answer to that would be... Peter Rosén: High level. It's difficult to measure exactly because we don't have statistics where we see the exact movements in the total market and what goes in and out at customers. But our view is that we've probably hit the -- let's call it, maximum in-sourcing at this point. When we see volumes flowing back into the market where we can compete, that is difficult to put a timing on. But our view is -- our current view is that we'll probably hit maximum in-sourcing at this point. Carl Deijenberg: That's very much appreciated. And maybe just finally on that topic rounding it off. I mean, obviously, we don't know what '26, '27 is going to look like. But do you have any sense of what kind of production numbers you would have to see in the industry for that, let's say, in-sourcing to reverse back into your hands? What kind of demand levels? Is it growth of mid-single digits on the production numbers? Or -- because I guess that could be a fairly significant swing factor for you, if I just look at the numbers relative to the -- yes, what we've seen in the production numbers here. Peter Rosén: Very good question. I sort of wish we had an exact number to say that at this point, it will start to flow back. But we -- currently, we don't know. And that's also one of the things that brings uncertainty into future orders, as Klas mentioned in the beginning. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Klas Dahlberg: All right. Thank you, operator, and thank you all for participating in this call. And we hope to see you all at our Capital Market Day in Stockholm on the 4th of November. You are all very welcome to join us there. So thank you very much, and enjoy the weekend.
Operator: Welcome to the Eastern Bankshares, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded for replay purposes. In connection with today's call, the company posted a presentation on its Investor Relations website, investor.easternbank.com which will be referenced during the call. Today's call will include forward-looking statements. The company cautions investors that any forward-looking statements involve risks and uncertainties and is not a guarantee of future performance. Actual results may materially differ from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described in the company's earnings press release and most recent 10-K filed with the SEC. Any forward-looking statements made represent management's views and estimates as of today, and the company undertakes no obligation to update these statements because of new information or future events. The company will also discuss both GAAP and certain non-GAAP financial result measures. For reconciliations, please refer to the company's earnings press release. I'd now like to turn the call over to Bob Rivers, Eastern Executive Chair and Chair of Board of Directors. Robert Rivers: Thank you, Joelle. Good morning, everyone, and thank you for joining our call. With me today is Eastern's CEO, Denis Sheahan; and our CFO, David Rosato. Eastern recently celebrated its fifth anniversary as a public company. Before Denis and David walked through our results, I wanted to take a moment to acknowledge this important milestone and share why I'm excited about our future. As shown on Slide 2, today, Eastern is a $25.5 billion organization with the fourth largest deposit market share in Greater Boston, and we are the largest independent bank headquartered in Massachusetts. Since our IPO, we have very intentionally expanded our footprint across attractive markets and build the scale we need to invest in the business while maintaining the understanding, accessibility and engagement that makes us our regions hometown bank. This strategy and most importantly, our people, our culture and our extensive community involvement are what enable us to expand and deepen customer relationships, attract top talent and capture growth opportunities. This has driven meaningful improvement in earnings, profitability and shareholder returns. One of the keys to our success has been our ability to stay true to who we are while growing and positioning Eastern for the future, that includes bringing in talented people to complement the many long-time Eastern employees who have contributed to our success. I'm so proud of what we've accomplished together. We are well positioned to serve our customers and communities with excellence, which underpins our ability to drive continued shareholder value. Now I'll turn it to Denis. Denis Sheahan: Thank you, Bob. As someone who's been in the Boston market for more than 3 decades, I can attest to how impressive the transformation of Eastern has been over the last 5 years. I'm incredibly proud to be part of this team and I share Bob's enthusiasm about the future and the opportunities ahead. Turning now to the quarter. We are very pleased to have received the required regulatory approvals for our merger with HarborOne which is on track for a November 1 close. This partnership strengthens Eastern's leading presence in Greater Boston and expands our branch footprint into Rhode Island, providing even more opportunities for organic growth. We're excited to bring together 2 banks that share a strong commitment to customers, community partners and employees. I want to thank the teams from both organizations for their outstanding efforts, and we look forward to welcoming our new customers and colleagues to Eastern as we build on the strong legacies of both institutions. We're also pleased to announce today the resumption of our share buyback program, which underscores our confidence in the future. Third quarter operating earnings of $74.1 million increased 44% from a year ago and generated solid returns. Operating return on assets of 1.16% was up 34 basis points from the prior year quarter and operating return on average tangible common equity increased 300 basis points to 11.7% over the same period. On a linked quarter basis, operating income was down from a very strong second quarter, which benefited from higher-than-expected net discount accretion due to early loan payoffs at fee income. Our ongoing strategic investments and hiring talent and commercial lending continued to deliver strong results. Over the past year, we have increased the number of relationship managers by approximately 10%. The Eastern has become an attractive destination for high-quality talent, particularly those with large bank experience. We have the size to matter competitively, yet are small enough for them to apply their trade and provide a sense of ownership in building a business. Our loan growth continues to reflect the impact of this strategy. Total loans grew 1.3% linked quarter and 4.1% year-to-date, driven primarily by strong commercial lending results. The commercial portfolio has grown just under 6% since the beginning of the year, and the pipeline remains solid ending the quarter at approximately $575 million. Wealth management is an important component of our long-term growth strategy, and the wealth demographic and our footprint provides significant opportunities. Beyond strong investment solutions and results, we provide comprehensive wealth services, including financial, tax and estate planning as well as private banking. Assets under management reached a record high of $9.2 billion in the third quarter driven by market appreciation and modest positive net flows. We've been pleased with the integration of the Eastern and Cambridge Trust wealth teams and the strong retention of clients and talent since the merger. We're also enhancing our internal distribution capabilities. Our retail branch network through training and greater awareness is becoming a meaningful driver of referrals. Notably, in the first half of this year, retail generated more funded wealth business than Eastern achieved in any prior full year. On the commercial side, the strengthening alignment between our wealth management and banking businesses is in the early stages, but beginning to produce results. There is still a lot more work ahead, but we are encouraged by the momentum of our wealth business, which was recently named the largest bank-owned independent adviser in Massachusetts for the second consecutive year. Finally, our capital position remains robust, and we continue to generate excess capital. Tangible book value per share at quarter end was $13.14, an increase of 5% from June 30 and up 10% from the beginning of the year. In addition to using capital for organic growth, we are committed to returning capital to shareholders through opportunistic share repurchases and consistent and sustainable dividend growth. As such, we are very pleased the Board authorized a new 5% share repurchase program of up to 11.9 million shares. David, I'll hand it over to you to review our third quarter financials. R. Rosato: Thanks, Denis, and good morning, everyone. I'll begin on Slides 4 and 5. We reported net income of $106.1 million or $0.53 per diluted share for the third quarter. Included in net income is a GAAP tax benefit related to losses from the investment portfolio repositioning completed in Q1 that accrues over the course of 2025. On an operating basis, earnings of $74.1 million or $0.37 per diluted share decreased from a very strong second quarter which benefited from higher-than-expected debt discount accretion and fee income. Compared to the prior year quarter, operating net income increased 44% reflecting margin expansion of 50 basis points and significant improvement in the efficiency ratio from 59.7% to 52.8% driven by higher revenues and thoughtful expense management. We are pleased with the continued strength of our profitability metrics. While operating ROA of 116 basis points and return on average tangible common equity of 11.7% were down from second quarter metrics, both meaningfully improved from a year ago when operating ROA was 82 basis points and operating return on average tangible common equity was 8.7%. We remain focused on driving sustainable growth and profitability and delivering top quartile financial performance. Moving to the margin on Slide 6. Net interest income and margin declined from the second quarter primarily due to higher deposit costs and lower net discount accretion. Net interest income of $200.2 million or $205.4 million on an FTE basis, decreased 1%. Included in net interest income with net discount accretion of $10 million compared to $16.5 million in the second quarter, which was higher than expected due to early loan payoffs. Excluding net discount accretion, net interest income would have increased approximately 3%. The margin of 3.47% was down 12 basis points from 3.59%. The yield on interest-earning assets decreased 6 basis points, while interest-bearing liability costs were up 7 basis points. Net discount accretion contributed 17 basis points to the margin compared to 29 basis points in the prior quarter. Excluding net discount accretion, the margin would have been flat quarter-over-quarter. Turning to Slide 7. Noninterest income of $41.3 million declined $1.6 million from the second quarter. On an operating basis, noninterest income of $39.7 million was down $2.5 million. The decrease was driven primarily by $1.9 million in lower income from investments held for employee retirement benefits compared to a very strong Q2. This decline was partially offset by $1 million in lower benefit costs reported in noninterest expense. In addition, miscellaneous income and fees were down $1.2 million due primarily to a loss on sale of commercial loans from our managed assets group and lower commercial loan and line fees. These headwinds and fee income were partially offset by deposit service charges and investment advisory fees, which both increased $300,000 in the quarter. Turning to Slide 8. We highlight wealth management, our primary fee business. Assets under management reached a record $9.2 billion, driven by market appreciation and modest positive net flows. Wealth management fees, which account for nearly half of total noninterest income were up $300,000 or 2% from Q2, primarily due to higher asset values. In addition, the prior quarter benefited from approximately $700,000 in seasonally higher tax preparation fees. Moving to Slide 9. Noninterest expense was $140.4 million, an increase of $3.5 million from the second quarter due to higher operating expenses and merger-related costs. Merger costs of $3.2 million were up $600,000 from the prior quarter. Operating noninterest expense was $137.2 million, up $2.8 million. The increase was primarily driven by $3.3 million in higher salaries and benefits, primarily due to higher performance-based incentives, one additional pay period in Q3 and seasonal staff. In addition, technology and data processing costs increased $1.4 million, and occupancy and equipment expenses were up $500,000. These increases were partially offset by a $2.3 million reduction in other operating expenses. Moving to the balance sheet, starting with deposits on Slide 10. Period-end deposits totaled $21.1 billion, a decrease of $104 million or less than 1% from Q2. A decline in checking balances was partially offset by higher balances in money market accounts and CDs. On an average basis, deposits were up 1.4%. We continue to benefit from a favorable deposit mix with nearly half of deposits and checking accounts, providing a stable and low-cost funding base. Importantly, we remain fully deposit funded with essentially no wholesale funding which further enhances our balance sheet strength. Total deposit costs of 155 basis points increased modestly from the second quarter as the cost of interest-bearing deposits increased 8 basis points primarily driven by money market accounts. We remain focused on growing deposits to support our funding strategy. As competition for deposits has become heightened in our region, we are disciplined in balancing the needs of our very strong deposit base with that of the margin. Looking ahead, as we thoughtfully integrate HarborOne deposits, we anticipate deposit costs to remain somewhat elevated. However, as the Fed eases, we will work deposit costs down and target deposit betas like our experience during the most recent tightening cycle or about 45% to 50%, with lags relative to Fed actions. Turning to Slide 11. Period-end loans increased $239 million or 1.3% linked quarter led by further strength in commercial. Continued momentum from Q2 and CRE drove balances higher by $133 million, while strong broad-based growth at C&I increased balances by $104 million. Consumer home equity lines continued a steady trajectory of quarterly growth, adding $45 million in outstandings. Commercial has delivered strong year-to-date performance with nearly $700 million of loan growth from year-end. This performance reflects the impact of our opportunistic hiring of growth-oriented talent, continued strength of Eastern's brand and our long-tenured relationship managers. Our combination of meaningful scale, which allows us to offer a broad suite of products and services and deep local expertise and presence is what differentiates us. Slide 12 is an overview of our high-quality investment portfolio. The portfolio yield was up 1 basis point to 3.03% from Q2. In addition, the AFS unrealized loss position continued to decline as it ended the quarter at $280 million after tax compared to $313 million at June 30 at $584 million at year-end. Turning to Slide 13. Capital levels remain robust as indicated by CET1 and TCE ratios of 14.7% and 11.4%, respectively. Consistent with our commitment of returning capital to shareholders, the Board authorized a new share repurchase program of up to 11.9 million shares or 5% of shares outstanding after completion of the HarborOne merger. The program expires on October 31, 2026. In addition, the Board approved a $0.13 dividend to be paid in December. As displayed on Slide 14, asset quality remains excellent, as evidenced by net charge-offs to average loans of 13 basis points and reflects the quality of our underwriting and proactive risk management approach address the issues quickly and previously. While nonperforming loans rose $14 million linked quarter to $69 million, the increase was driven primarily by a single mixed-use office loan which has been in managed assets for some time. A portion of this loan was charged off during the quarter and had been previously reserved. Importantly, we continue to believe the worst of the office loan problems is mostly behind us. We remain cautiously optimistic in our outlook on credit as overall trends continue to be positive. Reserve levels remain strong, as demonstrated by an allowance for loan losses of $233 million or 126 basis points of total loans. These metrics are consistent with $232 million or 127 basis points at the end of Q2. Criticized and classified loans of $495 million or 3.82% of total loans increased modestly from $459 million or 3.6% at the end of Q2. Finally, we booked a provision of $7.1 million, down from $7.6 million in the prior quarter. On Slides 15 and 16, we provide details on total CRE and CRE investment -- investor office exposures. Total commercial real estate loans are $7.4 billion. Our exposure is largely within local markets we know well and is diversified by sector. The large concentration is the multifamily at $2.7 billion, which is a strong asset class in Greater Boston due to ongoing housing shortages. We have no multifamily nonperforming loans, and we have had no charge-offs in this portfolio for well over the past decade. We remain focused on investor office loans. The portfolio of $813 million or 4% of our total loan book decreased $15 million linked quarter. Criticized and classified loans of $138 million were about 17% of total investor office loans compared to $118 million or 14% of total investor loans at the end of Q2. In addition, our reserve level of 5.1% remains conservative. As disclosed last quarter, the investor office loan portfolio includes our relatively limited exposure to the lab life science sector, consisting of 4 loans totaling $99 million or less than 1% of total loans. None of these loans were originated as speculative construction transactions. All loans are accruing, and we continue to monitor these loans as part of our ongoing review of the office portfolio. Before turning it back to Denis, I wanted to give a brief update on the HarborOne merger, which is expected to close November 1. We are reiterating the key assumptions we announced earlier this year and are on track to deliver on our estimated cost savings, onetime charges and gross credit market. We will disclose updated interest rate marks on our fourth quarter call in January. As a reminder, the original announcement assumed 80% stock consideration, the midpoint of the range. Based on the performance of our stock, our current estimate assumes 85% stock consideration. Furthermore, we continue to plan for the sale of HarborOne securities portfolio, the deleveraging of HarborOne's securities portfolio with proceeds intend to pay down FHLB borrowings. HarborOne's period-end loans and deposits at September 30 were $4.763 billion and $4.433 billion, respectively. And it didn't, if approved, we intend to early adopt the changes to the CECL accounting standard designed to remove the current double counting of expected credit losses. I'd now like to turn it back over to Denis. Denis Sheahan: Thanks, David. We are pleased with this quarter's results and are excited about closing the HarborOne merger. We're the leading local bank in Massachusetts, and this merger strengthens our presence south of Boston and into new markets in Rhode Island, providing opportunities for organic growth for many years to come. The continued improvement in our profitability will allow us to return meaningful amounts of capital and enhance shareholder value. This concludes the presentation. I will now open the call for questions. Operator: [Operator Instructions] Your first question comes from Damon DelMonte with KBW. Damon Del Monte: First question, just with regards to -- I know it's a tricky quarter because you have HarborOne closing next week and we're in the middle of the fourth quarter here. But David, as we kind of think about the margin, obviously, a bunch of noise on the fair value accretion side of things. But if you look at the core margin, as you noted, it's flat quarter-over-quarter. Do you think that kind of -- can hold steady here in the fourth quarter and then kind of grind higher into '26? Or do you think that the competitive pressures on deposits will probably weigh on that a little bit? R. Rosato: Let's talk about both sides of that, Damon, and good morning. So the core eastern margin, there's 2 key drivers, right? There's accretion income, which unfortunately, in Q3 was down $6.5 million. That's the wildcard here. The average run rate is, call it, $11 million to $12 million. So last quarter, we were above trend. This quarter, we were a little below trend. And you saw that ripple through asset yields, that's the wildcard. On the other side, on the deposit side, the competition has heated up here. We've talked -- I think we talked about this last quarter as well in retail and government banking. I think that pressure remains in Q4. So that leads me to roughly flat deposit costs with a little bit of a wildcard on the asset side. The -- from a -- and then just as a reminder, we'll have 2 months of HarborOne in our Q4 numbers. Our thinking is that the original margin expansion and numbers that we put out back in April for the combined institution are still good numbers. Damon Del Monte: Okay. Great. And then how about as far as just like on the expense side, it was higher this quarter, you had some elevated comp and benefit type costs and stuff. Again, kind of looking at the core Eastern expenses, do you think that kind of stays at a similar level here going into fourth quarter? Or could it tick even higher just given year-end accrual true-ups and things of that nature? R. Rosato: I think we were a little inflated on the comp line this quarter. I think that will tend to settle down in Q4. There's been a little uptick in tech expense. That is -- will probably be consistent. So I'm not overly concerned about our expense base at this point. And with telegraph roughly flat in Q4 overall to down a touch. Damon Del Monte: Okay. Great. And then with the deal closing here next week, kind of just curious on your updated thoughts on appetite for additional deals over the coming months or in 2026. Is that something you guys are considering? Or I think messaging has also been more about a focus towards organic growth. So just kind of wondering how you balance those 2 avenues. Denis Sheahan: Damon, it's Denis here. And that sort of remains consistent. Look, our focus right now is clearly on continuing to build on the good organic growth that we've had in recent quarters on the important integration of the HarborOne merger. We feel good about that opportunity and are looking forward, as I said in my comments earlier, to working with our new customers, our new colleagues at HarborOne but as you can well imagine, there's a lot of work to do there on that integration. We have no plans in terms of additional mergers in the near term. But that said, we think if a merger opportunity were to arise, it's in our shareholders' best interest for us to evaluate the opportunity. It doesn't mean we would execute but certainly, it's lower on our list of priorities when we think about capital allocation. But as Bob indicated with his opening statements, and you look at the progress at Eastern Bank since we had our IPO, the performance improvement is very material and significant and the opportunity of the new markets that those mergers provided are a meaningful contributor to our operating performance so we think it's -- if the opportunity arises, it's in our best -- shareholders' best interest to consider it, but it's not our focus today. R. Rosato: I would just add to that. It's clear when you think about deployment of capital from our perspective, nothing has changed. It's organic growth. It's now we're excited that with the Board's approval of the share repurchase, so we can be back in the market. It's supported the dividend. And then by far, #4 is anything around M&A. Damon Del Monte: Got it. Okay. Great. And then just lastly, David, real quick. You had mentioned before, like last quarter about the possibility of another restructuring, but it would kind of depend on market conditions and kind of how you felt the best use of capital once HarborOne has closed. Any updated thoughts on that if you're considering that still? Or is it the focus more on organic growth and buybacks only? R. Rosato: It's really -- we're really not focused at all on any type of further portfolio restructuring of Eastern Bank. It is organic growth, where -- which we've had a very good track record of success year-to-date. As Denis referenced, the pipeline is robust, and our brand is resonating in the market. So it's that, it's being back in the market for buybacks. And it's not no contemplation at all right now of any type of further portfolio restructuring. Operator: Your next question comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: David, you had mentioned in your comments earlier on the Wealth Management business. I think there was $550 million increase in AUM this quarter. A lot of that was market driven. Could you break out for us how much of the $550 million was market-driven versus flows? R. Rosato: Yes, it was predominantly market-driven good equity and fixed income markets. The net flows in the quarter were a little over $50 million positive. Mark Fitzgibbon: Okay. Great. And then secondly, are there plans within the wealth management business to hire more people or to acquire other RIAs or wealth businesses? Denis Sheahan: Mark, this is Denis. So yes, we are looking for talent, and we have brought on some existing talent in the wealth area. We're active and engaged in opportunities to bring in talent, whether it be in business development or portfolio relationship management. So hopefully, you'll hear more from us about that in the coming quarters. And in terms of M&A in the RIA space, no, we're not interested in that to any degree. It's challenging for those opportunities to work from a variety of perspectives. One being culture and integration and another being the financially challenging to make them work. So we're not interested at this point in any kind of M&A there. Mark Fitzgibbon: Okay. And then Denis, I guess I'm curious, and I know it's a little awkward, but any comments on the slide presentation that Holdco put out earlier this week. I guess I'm curious do you agree with it? Do you plan to implement any of the things that they've proposed and do you plan to meet with them? Denis Sheahan: Well, Mark, as you know, we're very open to engaging with our shareholders. We do a lot of investor conferences and investor road shows, et cetera, and we're happy to engage with any of our investors and we've -- what we believe is a shared goal, we and our investors of driving the performance of the company even higher than we've already done and to build long-term value creation for our shareholders. So we welcome that dialogue from whomever. But I would say most importantly, I really want to turn our focus to the future and think about -- we're excited about the future of the company. We feel very well positioned here today and even more so with the combination with HarborOne to execute the strategy that we've built to really drive that top quartile financial performance, that's the mantra at the company. That's what we're aiming for. That's our aspiration. And that's what we're really, really focused on. And we think that's going to deliver very, very attractive shareholder returns. So that's our focus. I'm not going to comment on anything in any particular disclosure that someone has made. But rest assured, that this team is focused on driving performance, and that's what gets us up every day. That's what gets us excited. And as I said, we're going to continue to focus on that. Operator: Your next question comes from Laurie Hunsicker with Seaport Research. Laura Havener Hunsicker: Just wanted to go over to Slide 16, your office exposure here. And I just want to make sure I'm reading this right. It looks like your office nonperformers jump linked quarter. But I guess what's also new is you've got $19 million now in nonaccruals maturing in the first quarter there at '26. And so I'm just wondering how we should think about that with respect to the provision just since that's new, can you help us understand that a little bit? Denis Sheahan: Sure, Laurie. So it's one loan that -- just with a little background, that loan was originated in 2016. It's been -- so pre-COVID, we've been watching it since COVID, so for quite a few years here. This is consistent with what we've said all along, there will be a couple of loans in the portfolio that we'll have to deal with. In the grand scheme of things, small numbers, this loan, we started building reserves that will mature next year. That's why it hit the schedule. We will have it probably full resolution, probably not in Q4 but into Q1. It's on our books at what we believe will be the final resolution economics. So there's real -- it is one loan, but there's really no story there or anything different worth mentioning about that loan or about the rest of the portfolio. Laura Havener Hunsicker: Okay. And then just with respect to that loan, I mean, can you share with us occupancy or anything around that? Or if you expect to extend or just how you think about it. Denis Sheahan: I will share one fact. It's 85% occupied. Laura Havener Hunsicker: That's great. That's helpful. Okay. And then spot margin, do you have an update on that for September? Denis Sheahan: Did you say spot margin? Laura Havener Hunsicker: Yes. Do you have a September spot margin? R. Rosato: Yes. So it was 3.48%. So 1 basis point higher than the quarter. Operator: Your next question comes from Janet Lee with TD Cowen. Sun Young Lee: Apologies if I missed it in the prepared remarks earlier, but if I were to interpret your comments around NIM, so basically, as we look into 2026, although maybe deposit costs were a little bit more elevated this quarter because of competition as rates come down, you're able to still sustain your NIM? Or is that the way -- where is that the right way to think about this? R. Rosato: Yes, generally true statement. What I was trying to elaborate on a little bit from Damon's question, is 2 drivers, right? There's the accretion income, which bounces around last quarter is a little above trend. This quarter is a little bit below trend. Hard to predict, as we all know. On the deposit side, we've -- in Q3, we were -- there was one Fed move so far. We were slow in our repricing down. So less than our historical long-term beta of 45% to 50% competition in our market remains intense or heavy. We're 5 days away from seems to be a foregone conclusion the Fed's going to move again followed by another move in December. So we will be pricing down as we get covered from the Fed. Our message is, in the near term, a little slow, a little slower to maintain and eventually grow market share, but longer term through this full cycle we should expect us to achieve our full betas. Sun Young Lee: Got it. That's helpful. And a follow-up on higher -- bigger picture. So Denis, it's been a little over a year since you joined Eastern from Cambridge. So I believe you have assessed Eastern franchise or the business overall. So given its historical roots as a mutual conversion and given a lot of the M&As that you guys have done, I mean growth has been slow or slower versus, I guess, stand-alone Cambridge or Eastern. As you look at Eastern's franchise, like what parts of the business are perhaps underutilized? Or where do you see the most upside to growth or increase in profitability? I get that you guys are seeing acceleration in C&I opportunities, but are there other parts of the business where you think could be improved? Denis Sheahan: Janet, thanks for your question. So I would reflect on it this way. We have seen very significant increase in the company's profitability. That's really riding on the back of the strategy that the team before David and I had, very significant, and it positions us well. In terms of continuing to grow profitability, I think of it about the areas that you hear us emphasizing in our comments, the commercial lending team, it was, frankly, one of the things that attracted me when I was thinking about merging Cambridge into Eastern is the journey that Eastern has gone on for several years, including as a mutual and when it converted to build out that commercial banking division. The talent on the team is terrific. They can execute. They're excited about the growth that we're -- we have and that we're continuing to embark on. So I think the Commercial Banking division is certainly one. Second, and this isn't necessarily an order of priority. All our businesses are important, but wealth management. The market in Massachusetts and New England broadly, from a demographic perspective, we don't have significant population growth, but what we do have is a very good wealth and household income demographic. So our ability to lean into that business, further, over the years, it takes time. I've seen this in my past and how you build out a wealth management business successfully. I think we will significantly improve our performance. It's low capital intensive, very beneficial to ROA. And we have a good -- a really strong capability in that area. I think about our retail and deposit franchise. We have new leadership in that area, a terrific team, and I feel very good about our prospects in that area of the company as well. So that's a lot, Janet, but we're fortunate to have a lot. And it comes down to the talent on the team and our ability to execute in the market, including our newer markets. When I think about our markets, you have to really -- the merger integrations well done take years. If I go back to the Century merger, in my view, is not fully integrated. Have we maximized the potential of our opportunity in this old Century markets, in the old Cambridge markets and the soon-to-be HarborOne markets? Absolutely not. So I think there's a lot of opportunity ahead. The management team is excited. We're pumped. So that's how I would answer your question, Janet. Operator: There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks. Robert Rivers: Well, thanks again, everyone, for joining us this morning. Best wishes for a very happy and healthy holidays, and we look forward to talking with you again in the new year. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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: Hello. Welcome to the Signify Third Quarter 2025 Results Conference Call hosted by As Tempelman, CEO; Zeljko Kosanovic, CFO; and Thelke Gerdes, Head of Investor Relations. [Operator Instructions] I would now like to give the floor to Thelke Gerdes. Ms. Gerdes, please go ahead. Thelke Gerdes: Good morning, everyone, and welcome to Signify's Earnings Call for the Third Quarter of 2025. With me today are As Tempelman, Signify's CEO; and Zeljko Kosanovic, Signify's CFO. I would, first of all, like to welcome As to his first earnings call as Signify's new CEO. During this call, As will take you through the first -- the third quarter and business highlights. After that, he will hand over to Zeljko, who will present the company's financial and sustainability performance. Finally, As will return to discuss the outlook for the remainder of the year and share some first reflections and priorities. After that, we will be happy to take your questions. Our press release and presentation were published at 7:00 this morning. Both documents are available for download from our Investor Relations website. The transcript of this conference call will be made available as soon as possible. And with that, I will hand over to As. A.C. Tempelman: Thank you, Thelke, and good morning, everyone, and thank you for joining us today. As Thelke said, this is my first earnings call in this role, and I look forward to this engagement with you this morning. Now I joined the company six weeks ago at a time when the markets are indeed very challenging. So let's begin with some of the key market developments I have observed in my -- over the third quarter. Firstly, we see the ripple effects of tariffs as Chinese overcapacity is redirected from the U.S. to Europe and other regions. And this is creating additional price pressure, especially in the professional trade channels in Europe and Asia, where competition has intensified. Secondly, in our Professional business, we also see continued softness in important European countries, such as France, the Netherlands and the United Kingdom. And increasingly also in the U.S., where demand is slower or has been slower than expected in the third quarter. And this is especially the case for the public sector projects with government funding. And thirdly, in our OEM business, we see further compression of demands and continued price pressure, particularly in Europe as well. And this has been, again, intensified by the increased imports of Chinese components putting pressure on the market for nonconnected. However, I'm glad to say the market also presents opportunities that fit our strategy well. Our growth in connected and specialty lighting and particularly in consumer is very encouraging. The consumer business grew in all major markets and was particularly strong in India. And this strong performance of consumer was boosted by the expansion of our Hue portfolio, and I'll cover that in a bit more detail a little later. Now overall, connected and specialty lightings grew by high single digits across both the professional and consumer businesses. And worth mentioning is also our agricultural lighting business that delivered a strong seasonal performance, helping to offset some of the weaker areas of the portfolio. So overall, if I would have to summarize, this quarter underlines the resilience and growth potential of our connected and specialty lighting and the price pressure on the more commoditized products in the traditional trade channel. Now let me move to an example that illustrates how our connected solutions are creating value for our customers and wider communities. I mean despite the challenges in the European public sector, there are still great projects. And one of them is presented here. We just completed the street lighting project for the municipality of Montbartier in France. And the local municipality set out to modernize its public lighting with the goals of improving safety, enabling remote maintenance in a sustainable, cost-efficient way. And by implementing our SunStay Pro solar luminaires that are fully integrated with our connected lighting managements and the Signify Interact platform. And this all-in-one solar powered solution allows the municipality to optimize luminaire run time, control the systems remotely and significantly reduce energy costs, while addressing environmental impacts. So it's a great example of how solar and connected technologies come together to support energy transition goals, while delivering meaningful benefits for customers and communities. And we hope to see a lot more of that going forward. Let me move to the second example, second highlights. I talked about this earlier, the exciting new portfolio expansion that supported the strong third quarter performance of our consumer business. And I just installed the Philips Hue system myself, and I have to say, I've been super impressed by it. It's a really cool product. And Hue is truly the leading connected lighting system for the home, with a very strong brand and a loyal growing customer base. And the launch in September exceeded our expectations, creating strong demands with excellent execution, including well-managed availability on our e-commerce sites. And among the new innovations was a new feature that transformed existing Hue lights into intelligent motion sensors that respond to movements. So really, this way, we continue to extend the role of Hue beyond illumination in our customers' home to integrating security, entertainment and intelligent lighting. And also worth mentioning, we introduced the new Essential range that introduces you to customers at a more accessible price point. So these are some highlights. And with that, I'll hand it over to Zeljko, who will continue to cover the financial performance of the quarter. Zeljko? Zeljko Kosanovic: Thank you As, and good morning, everyone. So let's start with some of the highlights of the third quarter of 2025 on Slide 8. We increased the installed base of connected light points to EUR 160 million at the end of Q3 2025 from EUR 136 million last year. Nominal sales decreased by 8.4% to EUR 1.407 billion, including a negative currency effect of 4.5%, which was mainly related to the depreciation of the U.S. dollar. Comparable sales declined by 3.9%. Excluding the conventional business, the comparable sales decline was 2.7%. This is reflecting the continued weakness in Europe's Professional business and a softer demands in the U.S. In addition, the OEM business saw further demand compression and continued price pressure. The adjusted EBITA margin decreased by 80 basis points to 9.7%. We sustained a robust gross margin, particularly in the Professional and in the consumer businesses. But we, at the same time, saw headwinds in the OEM business and conventional, which I will address later in the presentation. Net income decreased to EUR 76 million, reflecting a lower income from operation as well as a higher income tax expense as the previous year included one-off tax benefits. Finally, free cash flow was EUR 71 million. I will now move on -- move to our 4 businesses. Starting with the Professional business on Slide 9. Nominal sales decreased by 6.8% to EUR 928 million, reflecting lower volumes and a negative FX impact of 4.6%, mainly related to the depreciation of the U.S. dollar. Comparable sales declined by 2.1%, driven by different dynamics. First of all, we saw a softer-than-anticipated U.S. market. Europe remained weak, especially in the trade channel, and these developments were partly compensated by the continued growth of connected sales in most geographies and also a strong performance in agricultural lighting during the peak season for this segment. The adjusted EBITA decreased to EUR 97 million with an EBITA margin sustained at a robust level of 10.4%, however, contracting by 40 basis points compared to last year mainly due to the lower sales. The business maintained a solid gross margin, which expanded sequentially, but contracted slightly against the high comparison base in the previous year, and we also retained strong cost discipline. Moving on to the Consumer business on Slide 10. The positive momentum we saw in the first half of the year continued and strengthened in the third quarter, supported by sustained demand across all key markets. Nominal sales decreased by 1.1% to EUR 301 million, reflecting a negative currency impact of 4.8%, partly offset by the underlying growth. Comparable sales growth was 3.7%, driven by the continued success of our connected portfolio, particularly Philips Hue, and the recent new product launches as was highlighted by As a few minutes ago. We also saw a further acceleration of online sales, particularly through our own e-commerce website. Our Consumer business in India also continued to deliver strong performance, particularly in luminaires, further contributing to the segment's overall growth and profitability. Adjusted EBITA increased to EUR 27 million, while the margin expanding by 150 basis points to 9.1%, supported by a robust gross margin and operating leverage. Continuing now with the OEM business on Slide 11. As anticipated, performance deteriorated in the third quarter. Nominal sales decreased by 26.1% to EUR 93 million, while comparable sales declined by 23%, driven by lower volumes and the persistent price pressure in nonconnected components. The impact of lower orders from two major customers highlighted in previous quarters continued to materially affect the top line. Price pressure continued to be intense in this market as in the previous quarters. And overall, we are also seeing a further weakening of the market demand, especially in Europe. Adjusted EBITA decreased to EUR 4 million, with the margin contracting to 4.7%, mainly reflecting the gross margin decline due to the volume reduction and price pressure. Looking ahead, we expect market conditions to remain challenging, with limited recovery in demand in the near term. And finally, turning to the Conventional business on Slide 12. Performance in the third quarter was broadly in line with expectations, reflecting the ongoing structural decline in this part of the portfolio. Nominal sales decreased by 25.3% to EUR 76 million impacted by lower volume and a negative currency effect. Comparable sales declined by 21.5%, consistent with the gradual phaseout of conventional technologies across most regions. The adjusted EBITA margin decreased by 230 basis points to 17%. This was mainly driven by a lower gross margin, which was impacted by temporarily higher manufacturing costs as we are rationalizing our manufacturing sites. Let me now dive into the financial highlights on Slide 13, where we are showing the adjusted EBITA bridge for total Signify. The adjusted EBITA margin decreased by 80 basis points to 9.7% due to the following developments. The negative volume effect was 70 basis points, reflecting the decline of our OEM and Conventional businesses. The combined effect of price and mix was a negative 170 basis points, reflecting the further stabilization of price erosion trends across our business. As mentioned, we see higher the effect of price erosion in some parts of the business, such as OEM and Professional Europe, but also a positive pricing in the U.S. Cost of goods sold overall had a usual contribution year-over-year this quarter, with four main elements within that. First, we continue to deliver strong bill of material savings across all businesses, in line and even slightly higher than in previous quarters, which was including an accelerated price negotiation savings. Second, the overall manufacturing productivity was impacted specifically in the OEM business by significant volume decline, and in the Conventional business by temporarily higher manufacturing costs as a result of the site rationalization mentioned earlier. There were also one-off elements that impacted cost of goods sold positively last year, but did not repeat this year. And finally, the cost of goods sold in the third quarter included the effect of incremental tariffs, which were mitigated through pricing action, and are therefore neutral on the total gross margin level. The indirect costs improved by 130 basis points on adjusted EBITA margin level, reflecting the continued cost discipline across our business. Currency had a negative effect of only 10 basis points as we limited the effect of FX movements on our bottom line. Finally, Other had a positive effect of 40 basis points and related mainly to the outcome of a legal case. On Slide 14, I'd like to zoom in our working capital performance during the quarter. Compared to the end of September 2024, working capital increased by EUR 20 million or by 70 basis points, from 7.7% to 8.4% of sales. Within working capital, we saw the following developments: inventories decreased by EUR 70 million; receivables reduced by EUR 52 million; payables were EUR 156 million lower; and finally, other working capital items reduced by EUR 13 million. The increase of the overall working capital ratio is mainly driven by 2 factors: the ramping up of consumer ahead of the peak season and the impact of the top line compression on the OEM inventory churn. Now before I hand it back, I would like to touch on our progress toward our Brighter Lives, Better World 2025 commitments. Starting with greenhouse gas emissions. We are ahead of schedule to meet our 2025 goal of reducing emissions across our entire value chain by 40% compared to 2019. That's twice the pace required by the Paris agreements. Next, on circular revenues, we reached 37% this quarter, well above our 2025 target of 32%. The biggest driver here continues to be serviceable luminaires within our Professional business, where we're seeing strong adoption across all regions. When it comes to Bright Lives revenues, the part of our portfolio that directly supports health, well-being and food availability, we increased to 34% this quarter, up 1 point from last quarter and again, above our 2025 targets. Both our Professional and Consumer businesses are contributing strongly here. And finally, on diversity, the percentage of women in leadership positions remained at 27% this quarter. While that's below where we want to be, we are continuing to take concrete steps to improve representation from more inclusive hiring practices to focused retention and engagement efforts to help us reach our 2025 ambition. So overall, we are making good progress, with strong momentum in most areas and a clear focus on where we still need to accelerate. I will now hand back to As for the outlook. A.C. Tempelman: Thank you, Zeljko. So moving on to the outlook. Based on the softer than previously expected outlook, particularly for the Professional business in the U.S., and further demand compression in the OEM business, we are updating our guidance for the full year 2025 as follows. So we expect comparable sales growth of minus 2.5% to minus 3% for the year, which is equivalent to 1 -- minus 1 to minus 1.5 CSG, excluding Conventional. And as a result of this lower expected top line, we are also adapting our adjusted EBITA margin with a guidance to 9.1% to 9.6%. And finally, we expect our free cash flow to land at around 7% of sales. That's on the outlook. Now I wanted to share a few reflections and talk a bit about the priorities as I see them going forward. Almost eight weeks into the role now -- let me do that. There is a lot to be proud of at Signify. I mean we have very committed, capable professionals, a really impressive world-class innovative engine and a strong culture of cost and capital discipline that continues to serve us very well. At the same time, we are also clear about the difficulties that we face as a company. The lighting market remains very challenging. Growth has been lacking and the performance has been volatile. So coming in, I see the following immediate priorities. First, to outperform in what is a very tough markets. So we must focus on commercial and supply chain execution. We need to manage price pressure, continue to win in the connected and the specialty lighting and close efficiency gaps. We also need to maintain strict control and capital disciplines to enhance our profitability and cash flow. And I will make sure that, that discipline, we will stay with that going forward. Secondly, we can, and we should be clearer about our strategic intents and our strategic objectives. And therefore, we are planning to review our strategy. We will organize the Capital Markets Day towards the middle of next year, where we will provide clarity on our portfolio on how we deliver durable growth and on capital allocation. And thirdly, as key enablers, we will focus our R&D resources and continue to invest in accelerating digitalization and AI adoption. Now 18 months, the company launched a new operating model that we will not change, and we will fully leverage to its full potential. And at the same time, we will start shifting the culture, from products, to a more market-led mindset and approach. And from what I've seen so far that by addressing these priorities, I'm confident that we will set up Signify for future success. And with that, I'll hand it back to the operator to facilitate the question-and-answer session. Operator: [Operator Instructions] Our first question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I hope you can hear me well. I will ask one and then the follow-up. But I just wanted to ask on your kind of early thoughts in terms of the OEM business. So it seems to be mentioning intense pricing pressure, lost some customers. Do you see this as more structural or more cyclical when you look at it? And have -- was that anything to do with -- what prompted you to talk about reviewing the portfolio, I wonder. A.C. Tempelman: How do we see the OEM business going forward? Well, first of all, we saw the impact of the loss of two specific customers that was quite significant. That also is explaining a large part of the drop we saw. That, of course, will go away after a year. But going forward, we expect that current conditions will continue to be challenging, both in terms of demand as well as the price pressure. But it's too early to call what exactly that will look like in the next year. Daniela Costa: And then just following up on the topic of tariffs. I mean in the release, they weren't too many references to it, but I was just wondering if you could give us a little bit of what is happening on the ground, given the U.S. market was highly dependent on Chinese imports on lighting. What's sort of the inventory attitude you've seen at distributors. Has there been any restocking of Chinese product? Could this be impacting what you are seeing in the market right now? And ultimately, as you look medium term, if the tariff stand, do you see them as a positive or a negative for Signify? Is it an opportunity to gain market share and put prices through? Or also you are very dependent on Asia and it's not really -- we shouldn't see it this way? Just a little bit more color there would be very helpful. Zeljko Kosanovic: Daniela, so maybe to give a bit of an update and a summary on what we see. So first of all, I think in general, on pricing, the scale players have generally taken price increases to the extent that was needed. Our price adjustment, on the Signify side, were generally in line with the market, and we also saw that prices increase are sticking. Now overall, we've been able, in the third quarter like we did in the previous quarter, and we expect to be able to continue to do so to successfully mitigate the tariff increase with pricing. So with a slightly positive impact on the top line for our U.S. business and a neutral impact on the bottom line. So overall, the strategy we have set up and of course, all the activities that we have taken on the supply chain side to adapt and to reduce the exposure or to optimize our cost base and outsourcing, I think, are really being executed really exactly in line with our plan. So there we are basically implementing what we had. And of course, we continue to maintain the agility to adapt, moving forward, depending on how the situation will evolve. But overall, slightly positive on top line, neutral on the bottom line and implementation in line with our strategy. Daniela Costa: So you don't see it as a market share grabbing opportunity or something a bit more structural medium term is just a pass-through? Zeljko Kosanovic: Look, the answer on that would be probably -- we should go more in detail, depending on the portfolio. Of course, what we are doing in the different portfolios is to find the balancing act between prioritizing market share gain where we do see opportunity and where we are extracting those opportunities very clearly, while protecting the margins. So I think it's really, at a more granular level, let's say, that this is going to be a different answer. But overall, it's to make sure that we can absolutely take advantage. And we have seen a clear example where we've been able to do so, while protecting the profitability, as I just mentioned. So this has actually been our strategy, and we are seeing that, of course, evolving, depending on the landscape of tariffs that has also been changing quite a bit over the last few months. Operator: The next question comes from Martin Wilkie from Citi. Martin Wilkie: It's Martin from Citi. Just coming back to the overcapacity being redirected from China that you referred to, just understand where we are in that process. And obviously, we hear a lot about China's antipollution drive to reduce overcapacity across other industries. You probably hear more about markets like solar, batteries, things like that. But is there a reduction or an anticipated reduction in Chinese overcapacity? Or is that something that you expect to remain like this for the foreseeable future? A.C. Tempelman: Yes. Thanks, Martin, for the question. So indeed, we look also at all the export statistics and what is happening with the trade flows. And indeed, what we see is that you see some of the decline in terms of trade flows from China to the U.S. seeing kind of an equal amount of quantities lending in the rest of the world and in Europe. So -- and that does cause some additional price pressure. To your question around, hey, do we expect that -- how sustainable is that -- in China, we see that is kind of flattening out, that price erosion. And well, to whether we see a significant consolidation in the Chinese market is still to be seen. So I wouldn't want to conclude anything on that at this point. Martin Wilkie: And just related to that, just keen to hear about your first impression of industry dynamics and the side that we might get a lot more detail at the Capital Markets Day next year. But when you consider what's happening with Chinese competition, but also, as you pointed out, you have some great connected products and so forth at Signify, what are your first impressions of Signify's competitive position and in particular, the moat around the business to address some of these competitor challenges? A.C. Tempelman: Yes. So there you really need to -- Martin, you need to really go deeper. What I see is that on the professional side, we play in many, many segments, and each segment has kind of its own dynamics. And equally, if you look at the business by trade channel, the dynamics around projects is very different than the competitive dynamics around the more traditional and online trade channels. So we need to make very explicit in our strategy and we will do that at Capital Markets Day about where we want to focus our efforts. And what is the portfolio that we want to build going forward. So that clarity will be created there. Operator: The next question comes from Akash Gupta from JPMorgan. Akash Gupta: My first one is on North America. So maybe if we can zoom in on U.S. business a bit. One of your U.S. competitors, they reported kind of flattish revenues in U.S. lighting, professional lighting, while you are talking about softness in the quarter, which was weaker than what you expected. Maybe if you can provide some color on what do you see in various categories in Professional channel? And I think you did talk about some weakness in public side. So maybe if you can talk about where do you see growth where you don't see growth in North America Professional. And is there any loss of market share that we should be aware of? So that's the first one. A.C. Tempelman: Yes. Sure. Good question. And indeed, the U.S. market, I mean year-to-date, we are growing in the U.S. We had expected more of the U.S. market in the third quarter, but that was not as high as expected. So we saw more flattish pattern. Now the two key messages on the U.S. market, I think, and you mentioned them yourself. One is that we see project activity is softening, and that is particularly driven by public sector projects. Will that change in the fourth quarter, that is to be seen. It's not that we lost projects, to your question around market share, but we see more of delays, right? So there's clearly a delay there. And then there's the trade channel where there, we see quite tough competition, particularly on the lower end of the product portfolio. So to your question about how are we performing in that context. So I think it's fair to say that we are on par with markets when it comes to professional projects. We are outperforming when it comes to connected and agricultural lighting, and we are probably a bit below par when it comes to the trade and do-it-yourself channels. Akash Gupta: And my follow-up is on organic growth guidance. So for this year, you are now guiding minus 1 to minus 1.5, excluding Conventional. And year-to-date, we are at minus 1.0. So that would imply that for Q4, you have -- the best expectation is flat organic growth. I think you already said consumer -- not consumer, sorry, OEM is going to be a bit weak in Q4. But maybe if you can tell us about the moving parts for both Professional and Consumer in Q4 that we should be aware of? And also on the growth, how much of this is also driven by price/mix compared to, let's say, simply lower than previously expected volumes? Zeljko Kosanovic: Yes. Akash, maybe to give a bit of color on the -- as you said, the building bricks on the dynamic of the top line in the fourth quarter. So first of all, if you look at consumer there, we see, as we mentioned, a strengthening momentum and we expect this to continue, and we have confidence on the momentum to continue with a strong Q4. Of course, this is the highest and the strongest quarter for that business. The Conventional business also is more predictable. Now to your question, I think the two areas where we see the most challenges and where we've looked, of course, at the different scenarios, Professional business. So this is trade as mentioned, in both U.S. and Europe and also the public sector in general as well as OEM business. So look, in the -- what is reflected in the guidance is the translation of what we see out of those scenarios of what could evolve in the fourth quarter in the continuity of our third quarter trends. So as we said, for the U.S. it's softer than what we had previously anticipated, but it's basically a softening of the momentum that we remain resilient in many parts of that business. Now on the price, maybe looking back, what we've observed across all our businesses is a stability in the pricing trends over the last quarters. However, with more price intensity, clearly, in the nonconnected part for the OEM business and also definitely in the trade part in Europe and also to some extent, in the U.S. So look, in terms of the price dynamics, it's not for price and mix dynamic. Of course, the mix will be impacted by our portfolio mix. But overall, no major change. And I think the softer or the update of the guidance is fundamentally driven by volumes. And as we said, mostly linked to professionally in the U.S. and OEM. Operator: The next question comes from Chase Coughlan from Van Lanschot Kempen. Chase Coughlan: My first one regarding the Conventional business, you, of course, talked about rationalizing the footprint a little bit more, which might have a several quarter and had some profitability.Can you just elaborate a little bit on the exact plan there? How much more can you rationalize, for example, how many facilities are you operating at the moment? And what will that be in a few quarters? Zeljko Kosanovic: Okay. Look, yes, the line was not totally right. But if I understood, and please correct me, the question, it's about the further rationalization of our manufacturing in convention. So look, yes, we've been, I mean, consistently, over the last few years, in driving, I think we used to have over 30 factories, now down to 3. So we've been doing proactively adjusting the manufacturing base, and we have a clear line of sight and a clear road map to do so. Of course, as I indicated earlier, in the process of doing so, then you do have adjustments that you need to really manage in the manufacturing process. So this is where we see temporarily, some headwinds or higher manufacturing costs in the process and the transition of doing so, but I think we have a very clearly established road map to drive that further, to the extent that is required to recalibrate the supply chain of that business, which we have been doing consistently over the last few years and for which we had, again, a clear road map for the coming years. Again, in that business, as a reminder, we are three parts. The general lighting or the conventional general lighting part of conventional, which is, of course, the part that is declining at a faster pace. We have the digital projection piece, which has a line of sight, let's say, another few years with very specific customers being served, and we have the specialty lighting, which has within that, growth opportunities. And that, of course, has a different road map of evolution in the future. And that will, of course, as we go along, see those pieces being bigger in the overscale of the conventional business. A.C. Tempelman: Yes. Maybe just to add to that, I was -- I spent some time with the conventional team, and I was very actually very impressed with that multiyear road map, that is really nicely faced with clear milestones and sign posts to bring that business -- harvest that business to the best extent possible. So I think the team is doing an extremely solid job on that. And to the question, is there more to go after? Yes. So we are now single-digit plants, but we also know how the trajectory will -- what it will look like going forward. Chase Coughlan: Okay. That's very helpful. I hope the line is a bit more clear. Now just on my second question, my follow-up, as you spoke about, capital discipline is one of the priorities going forward. And I'm curious on -- we're seeing net debt year-over-year increase. Earnings are, of course, coming down at the moment. Can I get your thoughts on the ongoing share buyback scheme? Is that something that you think should be continued going forward? Or do you have any, let's say, preferences for capital allocation elsewhere? A.C. Tempelman: Well, it's not that we don't have a capital allocation now, and I'll leave it to Zeljko to comment on that. But my promise was more around, I -- coming into this role, you talk to customers, partners, colleagues, but of course, also to investors. And I think what many investors rightly so ask for is, "Hey, what is your road map to sustainable growth"? What about your footprint and your portfolio? But also what about your capital allocation going forward? And I think we owe you that clarity, and we will include that in the Capital Markets Day mid next year, likely June, yes. Operator: The next question comes from Wim Gille from ABN AMRO -- ODDO BHF. Wim Gille: My first question is around Nexperia. Obviously, there's a lot of turmoil around this company at this point in time in terms of supply. And given that both Nexperia as well as you guys are at Philips. Are there any connections left there in terms of supply chain? And should we be looking into this in relation to your business? And the second question is, can you be a bit more specific around, let's say, the market share that you are looking at in the United States in terms of volumes? In particular, when I compare the performance of acuity versus you guys and if I did take into account a large part of the market used to be Chinese, which are no longer welcome there, I would have expected a bit more clarity on kind of your ability to win market share in terms of volumes in the U.S. Zeljko Kosanovic: Yes. Maybe first on the -- your question on Nexperia. So the Nexperia components are used in some Signify products. However, we do not anticipate a material impact to our supply in the near term. It's a very limited impact and mostly in the OEM business. And also at the same time, we do have an active and proactive supply chain risk management, right? So we continue to monitor the situation. And we always consists -- constantly review all the alternative sources. So that has allowed us to, in this specific case, also to apply with a lot of agility, the required mitigation. And yes, I think overall, I think we are seeing limited impact and we do have -- and the teams have been able to, of course, very, very fast, adapt and mitigate. And that's part of the strategy we have of proactive supply chain risk management and multiple sourcing to be prepared for those kinds. So limited impact for us in the near term. A.C. Tempelman: And then on the U.S. questions, are we keen to grow market share in the U.S.? Of course, we are. The -- but we need to make sure it's on strategy, right? So on the project side, clearly, we are doing well, and we are aiming to continue to grow. As I mentioned that we are probably a bit below par in the trade channel, and that is also where you see that dynamic indeed of the Chinese products. We are adding products into our portfolio that better fit that trade channel. So indeed, we see opportunities, right, in the U.S. to continue to grow our market share. Wim Gille: And then lastly, in terms of your priorities at the last slide, you also mentioned that you're looking to rationalize your portfolio. Are we then talking about significant chunks in terms of sales that you might exit or divest or whatever? Or is this more fine-tuning around the edges and it should not have a major impact on sales? A.C. Tempelman: Now let me just emphasize, Wim, that at this point, I say we are reviewing our portfolio. Don't read that as rationalizing because it's too early for me to say, "Hey, we're going to cut this or add that." It's too early. Now that said, I mean, I think, ultimately, the portfolio choices should follow your strategy. So what we'll do is we will create clarity about where -- what is the narrative for the company, where do we want to go on a 3-, 5-year horizon. If this is the company we want to build, then these are logical steps to take in terms of portfolio. And you should not only think line of business level there, but also around, "Hey, we are currently present in over 70 countries." We play in many different segments. But indeed, we also need to create clarity around how the different lines of business hang together and how we want to take that forward. So the answer is it's a review and all is included. I don't want to exclude anything at this point, nor do I want to create false expectations given where we are today. Operator: The next question comes from Marc Hesselink from ING. Marc Hesselink: A question is actually I mean two things related, both, one on gross margin and one on the OpEx. So I think given what you said before, it's likely that the lower gross margin versus previous quarters is here to stay or maybe even increase -- the pressure will increase a bit. In the quarter itself in third quarter, you really offset that by significantly adjusting your -- predominantly your SG&A cost. Is that also the way forward that when the gross margin remains under pressure that you will take more action in your short-term SG&A cost? Zeljko Kosanovic: Yes. Marc, thanks for the question. So I think, look, first of all, on the dynamic of the gross margin, what's very important to see in the dynamic. And as you said, comparing to -- I think we had 7 consecutive quarters with a margin -- gross margin above 40%, which typically would be on the higher end of the -- what we indicated as an entitlement. I think when we look at professional and consumer business in the last quarter and as we expect moving forward, we continue to see a very robust gross margin. So the -- let's say, the sequential decrease to 39.5% is entirely linked to the two headwinds I was mentioning earlier, first on the OEM business. So there is -- there are clearly the implications of the magnitude of the decline we see in OEM business on the manufacturing productivity. So this is really linked to the OEM business. And second, the temporary or transitory increase or headwinds on the manufacturing cost base of the conventional business, which we do expect to normalize by mid of next year. So I think in the dynamic of the gross margin, very clearly, very strong professional, very strong consumer. When we look, of course, at the dynamic for Q4, consumer having it's strongest quarter. And that, of course, will have a positive sequential implication on the evolution of the gross margin. So I think the dynamic on those two key pieces of the business are -- remain very strong and remain very much in line. Actually, we even saw sequential expansion of the gross margin in the Professional business quarter-over-quarter and a very limited, let's say, a decrease compared to last year, which was a very high comparison base with some one-off elements. So look, the trajectory of our gross margin remaining very strong. The two specific elements which are impacting on the OEM business linked to the volume and on the conventional business, which is more transitory. Now to your question on the evolution of the SG&A or the cost base indirect costs. As we indicated earlier, we are, of course, driving and further driving the optimization, making sure that we are deploying the investments needed to support the execution of our strategy, and this is what we are seeing clearly delivering on the connected parts and the specialty part of the business. And then, of course, at the same time, continuing to optimize and to adjust where needed, where we do see the most challenges. So I think this is a combination of those two elements that you see in the dynamic of our indirect cost base and that we expect to move forward. But the most important point is really the robustness of the gross margin absolutely sustained and confirmed for consumer and professional. Marc Hesselink: Great. Clear. And then maybe on the CapEx because also in last quarter and this quarter, the CapEx is a bit higher than last year. Is it a bit of timing? Or do you have -- is there a reason why CapEx would be increasing a bit? Zeljko Kosanovic: So there within the CapEx, I think you have, on the tangible part of CapEx, it's a limited increase, but it's more linked to some of the intangible product development. So there, we do have some -- but again, in the magnitude, I think it remains on a relatively low base, while the business remains a very low CapEx intensity. So you're right, we've seen sequentially some increase, but this is linked mostly to capitalized developments in innovation, R&D and also in the digitalization part. Operator: The next question comes from Elias New from Kepler Cheuvreux. Elias New: Just wondering on your other segment, which has seen strong momentum over recent quarters, but in the current quarter, seen a sequential decline in sales. Could you just perhaps give us some color on what is driving this? And how you would expect this to develop going forward? Zeljko Kosanovic: Yes, maybe to -- what is included in others is linked to the ventures business, and we do have one specific venture that has been developed and positioned on the connected consumer space in China. And as you mentioned, we've seen a very strong momentum. I think this venture that is continuing to perform very well. However, there were some, I think, favorable, let's say, contribution or propelling drivers coming also from the subsidies that were deployed by -- in China that were supporting an accelerated level of growth in the last quarter, which has normalized as we've seen in the third quarter. So this is the main -- the main element behind, but this is one of the ventures that is seeing a very successful traction and very well positioned in one part of the Chinese market, which is overall challenging, but that's one part of the market that has a good dynamic. And indeed, the translation of that has been lower in the last quarter compared to the previous quarters, but still substantially growing year-over-year. Operator: The next question comes from Sven Weier from UBS. Sven Weier: It's just one. And I think we've discussed a lot about relative performance of Signify against other lighting players. But I'm more curious about the relative performance of lighting within construction against other construction segments. And we're obviously seeing quite a bit of an underperformance here of lighting against other segments in the last couple of years. I guess my suspicion has always been around the renovation side that you see the kind of lagging effect of a higher LED installed base and longer replacement cycles, which I think has kind of been a bit denied by the company. I was just wondering if you're also aiming for the Capital Markets Day to provide us more color on that very point because I think it could be an important point to get a sense when does that kind of underperform potentially start to phase out and provide us more visibility on that item. That's my question. A.C. Tempelman: Yes. Thanks, Sven. And it's important so that we always start with market, not ourselves. And indeed, I think we -- the market is at the final wave of ratification, if you want, but we are not at the end of it just yet. So you still see that then having an impact, I guess, on the lighting sector in comparison with other construction-related sectors. On your question, will we create some clarity, yes. I think we'll create some clarity about how we see the harvesting road map for conventionals, but also how we see the market when it comes to ratification. And also where we see the growth opportunities because, clearly, beyond the hardware, we see then, of course, a lot of growth in connected, and that presents us with good opportunities as well. Yes. Short answer is yes, Sven, we will come back to that. Sven Weier: And so you agree that this could be a factor that you especially see on the renovation side out of the longer replacement cycles? Would you agree that this could be potentially one of the drags relative? Zeljko Kosanovic: Maybe what I can say on -- look, when we look at the dynamics of the market, how it translates because we, of course, have leading indicators that to understand exactly what you are pointing out, the look -- in short, I think the way -- the market, and of course, renovation is the most important piece of our exposure. I mean we are higher -- our indexation to the renovation is higher than to the new build in the professional nonresidential space. So to your question, I think, when you look at the different dynamics market per market, I would say, the answer to your -- or at least the conclusion you are taking is not the one that we would have. So I would understand that this has to be probably better articulated on how we see it forward, and we'll take note of your comment. But that's not what our analysis would indicate at least with the data we have. Operator: We have time for one last question, and it comes from George Featherstone from Barclays. George Featherstone: It's just about the capital allocation going back to some of the questions you've had already. Cash on the balance sheet is down about 35% year-over-year. Free cash flow is down 40% year-over-year on a year-to-date basis. You're obviously now guiding for lower cash generation ahead. How concerned are you about these trends? And do you plan to take any proactive actions to conserve cash given the weaker market trends that you talked about already? Zeljko Kosanovic: Yes. Thank you for your question. So first of all, if we look at the -- as part of our capital allocation policy and priorities, I think we've been very clear and that's what we've been driving consistently also over the past year to ensure and to sustain a strong capital structure, a strong balance sheet and a level of leverage that is supportive to an investment-grade rating sustained. So when we look at our leverage year-over-year, it has slightly decreased. So it's in line with what we expected. We have just completed, as was communicated also our refinancing with now a longer tenure for the EUR 325 million that was at maturity in the last quarter. When we look at the dynamic of cash generation versus the implementation of our capital allocation policy defined for 2025, I think there is no change or no concern to your point because we look at -- we are well on track on the execution of our share buyback program. We are able to define the priorities supporting growth as we intended. So look, no, I think the dynamic and the adjustment that we have indicated are not leading to a correction on the overall equilibrium, let's say, on the cash generation versus cash utilization that we defined in our policy for 2025. So no major change there. George Featherstone: Okay. And just specifically on the buyback, do you intend to complete that? I mean I think it's on the guidance you've given is an up to EUR 150 million. Is your intention to go all the way to EUR 150 million at this stage? Zeljko Kosanovic: So for now, we are well on track with the plan for the year. And yes, we are intending to complete, as what was committed again in our capital allocation policy, which still fits totally with the plan we have defined. So there, we are on track and expect to complete as was indicated. So in short, we had given a clear capital allocation policy for implementation in 2025, and we are executing to it consistently and expect to do so for the rest of the year. Operator: And with that, I will now turn the call back over to Thelke Gerdes for any closing remarks. Thelke Gerdes: Ladies and gentlemen, thank you very much for joining our earnings call today. If you have any additional questions, please do not hesitate to contact us. And again, thank you very much, and enjoy the rest of your day.
Aki Vesikallio: Welcome to Hiab's Third Quarter 2025 Results Call. My name is Aki Vesikallio. I'm from the Investor Relations. Today's results will be presented by CEO, Scott Philips; and CFO, Mikko Puolakka. And as a reminder, please pay attention to the disclaimer in the presentation as we will be making forward-looking statements. Hiab's Q3 profitability was affected by lower sales in the U.S. Our orders decreased slightly. Comparable operating profit margin decreased to 11.4% due to lower sales in the U.S., which was caused by elevated market uncertainty due to increased trade tensions. However, our services business continued to grow. Sale of MacGregor was closed on 31st of July, and the business is now separated from the company. Let's then view today's agenda. First, Scott will present the group level topics. Mikko will go through reporting segments, financials in more detail and the outlook. After Mikko, Scott will join the stage for key takeaways before the Q&A session. With that, over to you, Scott. Scott Phillips: Thank you, Aki. And greetings, everyone, from my side. I will start with a few highlights looking towards executing on our strategy of profitable growth for the future. First, I'm pleased to share with you that we announced a partnership with Forterra to further develop automated solutions for our lOad Handling Systems business. So really exciting development there. Next, we launched a new 3.5 ton truck-mounted forklift for the EU, which will enable our MOFFETT forklift -- our MOFFETT branded solutions to be the clear industry leader in this size class of delivery solutions. And I would also like to highlight that we announced the launch of the smartest cable hoist solution in the U.S. market under our GALFAB brand. So really proud of the work the teams have done on both sides of the Atlantic there. And finally, we are pleased to announce the revised long-range climate targets, aiming to be net zero by 2050. Now getting into the financials for the quarter. I'll start first with order intake. Our orders received in the quarter declined by 3% to EUR 351 million versus last year comparison period of EUR 361 million. And then as a consequence, as you see on the left-hand side of the slide, we've gone from EUR 900 million order book to roughly EUR 636 million at this time last year and now stabilizing out around EUR 557 million following this quarter. Now for the period year-to-date, our order intake is up 1 percentage point to EUR 1.1 billion versus last year. And as you think about the last 12 months order intake, we're somewhere around the EUR 1.5 billion level, which has been the case for approximately the last 2 years. Now the decrease in orders received was driven primarily by the delayed customer decision-making in the U.S. Of course, that was partially offset by Defense Logistics, and we won a nice Wind segment order that we announced previously in the quarter. Currencies had a 2 percentage point negative impact on orders received in Q3, which we had highlighted would be the case with last quarter's results call. Now looking further into the geographic distribution of the order intake. Our EMEA market was represented 56% of the orders for the quarter or EUR 195 million versus last year at EUR 155 million. So that's up 26%. Year-to-date, we're at EUR 587 million versus EUR 518 million last year. That's a change of 13% year-over-year, year-to-date. In the Americas, however, a bit different picture. In the quarter, we were EUR 132 million versus last year at EUR 185 million. So that's a 29% reduction. Therefore, year-to-date, we're down 14% versus last year at EUR 435 million versus EUR 504 million the prior year. And in APAC, we were up nicely in the quarter by 11% from EUR 24 million versus EUR 22 million last year. Year-to-date, we're at EUR 84 million versus last year's year-to-date figure of EUR 72 million or up 16%. In terms of the operating environment, we do continue to have positive momentum in our Defense Logistics and Energy segment opportunities. So that's good. We have also a big robust replacement demand that's driving the majority of our business. Of course, on the negative side, we still have the uncertainty of the trade tensions. And this, of course, has impacted the demand curve, in particular, in the Americas and in particular, drilling further in the U.S. market, which, of course, means our U.S. customers have remained quite cautious. Then moving into the sales development. Sales in the quarter were down 11%, so EUR 346 million versus last year's comparison period of EUR 388 million. And year-to-date, we're at EUR 1.16 billion, which is 6% below last year's level at this time, which is EUR 1.235 billion. And then on an organic basis or in constant currencies, we're down 8% in the quarter versus last year and 5% year-to-date. Of course, our services percent of sales grew in the quarter to 34% versus last year's comparison period at 29% year-to-date. Services represent 30% of sales versus last year's year-to-date figure of 28%. So sales have leveled out at the -- approximately the level that we would expect given our prior 11, 12 quarters' worth of order intake adjusted for the seasonality effect. But of course, the big story was the negative impact that we had in the U.S. market, which I'll cover in the next slide. So looking into the geographic distribution of the sales. EMEA represented 51% of our sales in the quarter, down slightly from last year, 5%. Year-to-date, EMEA is at EUR 573 million versus last year at this time at EUR 599 million. So that's a 4% decline. In the Americas, however, is where we had the biggest decline. Americas in the quarter was EUR 140 million versus EUR 177 million last year, a 21% drop year-to-date. We're at 9% down versus last year, EUR 508 million versus EUR 556 million. And in APAC, much like the order intake, we were up slightly EUR 29 million in sales versus last year's Q3 of EUR 24 million in sales, representing an 18% positive variance. Then year-to-date in APAC, we're down 1% or EUR 1 million, EUR 79 million versus last year at EUR 80 million. Our ECO Portfolio sales continues on a positive development. We're at EUR 140 million in the quarter of ECO portfolio sales versus last year comparison period of EUR 114 million, so that's up 23% year-to-date, EUR 437 million versus last year, year-to-date at EUR 354 million, up 23%. So as indicated earlier, our sales decline was most prominent in the Americas. EMEA sales declined slightly, of course, linked quite closely to the order intake development in the region. APAC sales increased slightly, which, of course, is also linked to the order intake development in APAC. And on the positive note, our ECO portfolio sales increased, in particular, in our circular solutions from our service business as well as our Climate Solutions and our Lifting Solutions equipment business. Then looking into the profitability. For the quarter, our comparable operating profit was EUR 40 million versus last year, EUR 52 million. That's a 24% drop on the EUR 42 million drop in sales quarter-over-quarter. That puts our year-to-date comparable operating profit at EUR 166 million versus last year's EUR 176 million, representing a 6% drop. which, of course, all occurred within the quarter. On a percentage basis, our comparable operating profit percentage was 11.4% versus 13.4% last year. And year-to-date, we're at 14.3%, which is on the same level as last year due to our good performance in the first half of this year. We were primarily impacted by the EUR 20 million negative impact from our lower sales in the U.S. as I highlighted on previous slides. Our gross profit margin also decreased slightly by 80 basis points, primarily due to the change in the revenue curve, which we weren't able to fully offset with cost out in line with sales development or the revenue development. However, our SG&A costs were lower in the quarter by approximately EUR 5 million. EUR 1 million lower in sales and marketing, EUR 4 million lower in administrative costs, so well in line with our EUR 20 million cost reduction program that we announced last year. And then as a consequence, our operative return on capital employed improved driven by the nice development of managing the working capital within the team, especially as it relates to the days sales outstanding. So really strong execution in that regard. Then as we've done each of the past few quarters, we want to highlight where we are relative to our long-term targets. So just to remind you, our long-term target was to was to be on a level of 7% CAGR over the cycle, 16% comparable operating profit and above 25% return on capital employed. Our progress as of through Q3 of this year, our rolling 10-year average is down slightly to 6%. Our long-term -- last 12 months comparable operating profit is at 13.1%. This compares to 12.7% where we were at this time last year. And our last 12 months return on capital employed is at 29.8%. So with that, I'll hand it over to Mikko. Mikko Puolakka: Good morning also from my side. Let's first have a look on the Equipment segment's performance in the third quarter. Equipment segment had a slightly positive book-to-bill in quarter 3 with EUR 239 million order intake. Gifting equipment quarter 3 orders were actually flat, while the delivery equipment orders declined. This delivery equipment orders decline came from the U.S., as mentioned already earlier by Scott, and this is very much caused by the trade tensions driven slowness in our customers' investment decisions. Equipment sales was EUR 230 million. This is a 17% decline from prior year. Lifting equipment sales was flat year-on-year. So the decline came solely from the delivery equipment and in particular, from the U.S. market. The Equipment comparable operating profit declined to EUR 20 million, which represents an 8.8% margin. This decline in margin is solely again, attributable to the delivery equipment sales decline and very much attributable to the U.S. market. You can see clearly in the bridge on the right-hand side there, what kind of impact the EUR 46 million decline in Delivery Equipment volumes had in our profitability in quarter 3. The gross profit margin was negatively impacted by lower volumes. So all in all, the Equipment as well as the whole Hiab quarter 3 profitability was impacted by the lower delivery equipment sales in the U.S. Services grew nicely in quarter 3. We continue to increase the number of connected units, and there has been also really good intake for maintenance contracts as well. The growth both in orders and sales came from recurring services like spare parts and maintenance. Services grew even in Americas as there is an installed base, which needs to be up and running every day. Services profitability was on a good level, 23.5%, especially thanks to the higher sales as well as commercial and sourcing actions. When we look at the services profitability bridge, profitability improved by EUR 5 million in quarter 3. The main drivers for better profitability were EUR 4 million higher sales as well as the previously mentioned commercial and sourcing actions, which improved the gross profit margin in services. Also, the services fixed costs were slightly lower compared to the previous year. The foreign exchange or the translation impact had roughly 3% units negative impact in Services quarter 3 orders, sales as well as profitability. Let's have a look then at the total Hiab financials, and I'll focus here more on the right-hand side, the profitability bridge. The comparable operating profit declined EUR 12 million from the comparison period. Here, the EUR 42 million decline in sales is the main factor behind the lower profitability. As described earlier in the call, lower sales impacted also our gross profit margin, as mentioned by Scott earlier, it was 0.8% units lower. It's good to remember that some of the costs above the gross profit margin like factory overheads, those are not fully scalable within a few quarters. So when we have lower revenues like we had in quarter 3 that has a slight negative impact on the gross profit margin. We got some tailwind from the lower SG&A, which were roughly EUR 5 million lower than last year and then EUR 8 million year-to-date September. The currencies, as you can see from the picture, had a minor roughly EUR 1 million negative impact on our profitability in quarter 3. On a positive note, our cash conversion, i.e., the cash flow versus comparable operating profit was 173% for third quarter. Net working capital decline was the biggest contributor to the over 100% cash conversion and the net working capital declined mainly in accounts receivables. The reported cash flow still includes July cash flow from MacGregor, but as can be seen on the chart, the contribution to the overall cash flow was relatively small. When we look at our balance sheet, McGregor has now fully been removed from Hiab's balance sheet at the end of July 2025. Hiab is now EUR 308 million net cash position, and this converts to a minus 32% gearing at the end of September. As you have noted, we have also paid an additional dividend of roughly EUR 100 million in October. This is not yet visible in this September balance sheet numbers. If the dividend payment would have taken place in September, our gearing would have been minus 21% in September. Still a very, very strong balance sheet. On the right-hand side, you can see that we have a couple of outstanding interest-bearing debts, one EUR 25 million maturing this year and another bond EUR 150 million in September '26.. About our outlook, we reiterate our outlook for 2025. Our estimation is that the comparable operating profit margin for 2025 is above 13.5%. And please note that this is the floor for our profitability. This outlook is based on the year-to-date September comparable operating profit margin of 14.3%, as well as the order book that we have in hand at the moment and then also the current situation related to ongoing trade tensions. And then I would like to hand the presentation back to Scott for the quarter 3 summary. Scott Phillips: Thank you, Mikko. All right. Summarizing the quarter, a few key takeaways. Market uncertainty has continued to negatively impact our business. And keep in mind, we're a relatively short-cycled business. So we see these impacts in a relatively short period of time. But despite the market situation, we have been able to improve on our last 12 months comparable operating profit margin, so strong execution on delivering what we've committed to deliver. However, as a consequence in the uncertainty level that continues to be the case, we will start planning for a program which would target approximately EUR 20 million lower cost level in 2026, compared to current levels to give ourselves a bit more resilience and flexibility in dealing with the ongoing levels of uncertainty. However, we continue to execute on our strategy and focus on activating growth opportunities where they exist. And I would reiterate that we have an incredibly strong balance sheet, generating strong cash flow and that continues year-to-date, and that will continue to be our primary focus, moving forward. So I think we're well-positioned to deal with the levels of uncertainties that we face in the future and I feel really positive about our ability to deal with the changes in the demand curve, whether they would be up or down. So with that, I'll hand back over to Aki. Aki Vesikallio: Thank you, Scott, and thank you, Mikko. Now we are ready for the Q&A. Operator? Operator: [Operator Instructions] The next question comes from Panu Laitinmaki from Danske Bank. Panu Laitinmaki: I would have 3. Firstly, starting on the margins. I was a bit surprised to see such a big change in Q3 given that sales has been declining for 2 years already. So basically, the question is that what caused this? Is this mainly under absorption of fixed costs? Or is there an element that the lost U.S. sales had like really good gross margin compared to the rest of the business? Scott Phillips: Do you want to take it? Mikko Puolakka: I can take that. Yes. As we mentioned, basically, this profitability decline is fully attributable to the U.S. market and -- this is stemming actually from the fact that we started to see already in the beginning of the year, basically from February onwards, weaker order intake caused by these trade tensions. And as we have a fairly short lead time from the order to the delivery, we started to see that sales weakness already now in quarter 3. And this is stemming very much from the delivery equipment, truck-mounted forklifts, tail lifts in the U.S. market. This is the reason for the lower margins. As you can see, yes, our SG&A costs went down, but those are not enough to volume impact, which is then in addition to the U.S. market decline then also connected with the low seasonal volumes. Scott Phillips: Yes. Just to add a bit more color there. I think just to reiterate for you, Panu, it was a combination, as you pointed out, of sales decline which primarily happen in the U.S., but also it was more impactful than we would have anticipated from a mix perspective. So both of the 2 businesses that were primarily impacted there, normally have margins that are quite accretive to the overall higher margins. Panu Laitinmaki: Okay. Then secondly, on Q4, so what are you seeing in the -- during the rest of this year in terms of orders, like -- are the trends similar? Or should we expect sequential worsening? And also maybe if you can comment on the margins. So should we expect that the seasonality Q3 was maybe the lowest point of the year and how should we think about Q4 as in the comparison period, you had this restructuring costs last year? Scott Phillips: Yes. As you point out, we certainly tend to have a seasonality impact in Q3, which we've called out previously, anywhere in the 10% to 15% range, which we did see that materialize overall primarily due to the lower working days, both in Europe as well as in the U.S. So similarly, we would expect to see Q4 top line to be -- from a sales perspective, more in line with our trailing last month order intake and similarly follow the pattern of seasonality, whether it's negative or positive. So we expect Q4 to be quite in line with what you typically see in Q4. Panu Laitinmaki: Okay. And then thirdly, could you talk about Europe? So we saw pretty good orders in there. What is driving this? You mentioned defense and the wind order, but is this like an overall market recovery or some single orders? And do you have any kind of improvement in the Construction segment yet? Scott Phillips: Sure. I'd say 4 points that I'd highlight here. One, as we alluded to in the presentation material, primarily the demand is replacement cycle driven, which should follow along the lines of pattern that we would expect to see given the life cycle of our products. Two, we certainly are seeing an uptick in activity on the quote side on the lead generation side. We have seen a mixed picture in terms of lead conversion throughout the period, which has been interesting. Then the third point I'd highlight, as I alluded to earlier in the discussion, the Defense Logistics was a positive within the quarter. But then if you add the Defense Logistics from Q2, Q3, we were roughly flattish with an increasing pipeline of opportunity. And then the last point, we have seen a number of lumpy large key account deals. And in this case, in our Wind Energy segment that converted. So that was primarily the drivers for the increased level of order intake in Europe. Operator: The next question comes from Andreas Koski from BNP Pariba Exane. Andreas Koski: So firstly, I want to try to get your thoughts about 2026. When I listen to truck manufacturers, it sounds like the truck market is not going to improve at least substantially in 2026 or 2025. And now you are planning for restructuring program aiming to lower your cost base by EUR 20 million. So should I read that as a signal that you share the truck manufacturer's view that 2026 is most likely not going to be much stronger than 2025? Scott Phillips: Yes, I can start this one. Yes. Thanks for the question, Andreas. The way we think about 2026 is twofold. One is that we will adjust our cost base on the basis of what our trailing order intake levels are. And on that basis as well as the change in the mix that we've seen now reflected in the sales result, it's obvious that we need to adjust the cost base just to make sure that we're covered relative to the changes we've seen both in terms of the trailing order intake as well as then how that's affected from a mix perspective. And then in terms of the top line development for next year, we haven't typically provided forward-looking comments on the top line development. But of course, we want to plan for a scenario that would allow us flexibility to deliver if the demand curve were to pick up. And similarly, we want to manage our cost base so that we're well covered in the event that the demand curve goes in the negative direction. Andreas Koski: Understood. And then I understand that the tariffs might have impacted the demand for your products, but did it in any meaningful way also impact your your cost levels and in combination with that, what kind of price increases did you see in this quarter? And what should we expect for the coming quarters? Scott Phillips: Yes, sure. I can start with this one and Mikko, you can pick up if I miss a point here. Yes. Thanks for the question, Andreas. So what our policy has been our practice, so year-to-date relative to the tariff responses that we're trying to implement surcharges that we transparently share with our customers. So that we could stay neutral from a cost perspective, and that still remains our view today. So I would -- I couldn't say that we got either a positive or a negative impact relative to the tariffs. And if we did, it'd be just a matter of timing. I think Mikko alluded to in his presentation, though, the impact relative to order intake and to the sales level and perhaps maybe you can reiterate the impacts there. Mikko Puolakka: Yes. In our quarter 3 order intake, we had less than EUR 10 million kind of let's say, price increase effect coming from the tariff surcharges in sales due to the lead times, one could say that the impact was almost plus/minus 0. And the main impact there, I would say, from tariffs is on the demand side. So it's -- like Scott said, we are basically moving the tariff cost to the customer prices. Andreas Koski: I might be mistaken, but if I remember correctly, when we discussed on the pre-close call, we talked about price increases of 10% to 20%, but maybe I'm mistaken there, but was that on the case? Mikko Puolakka: Depending on the product category, the surcharges have been around 10% to 20% depending on the product category. These changes all the time because there are also changes in the tariff regulations and what kind of components are included in the tariffs. We are also doing actively measures how to mitigate the tariffs changing our supply chain so that we could make this as, let's say, bearable to our customers as possible. Operator: The next question comes from Antti Kansanen from SEB. Antti Kansanen: It's Antti from SEB. I will start with the same topic on the U.S. orders and sales going forward, kind of reflecting back to the price increases and the tariff surcharges. I mean, I get to a number that on a volume basis, your orders contracted quite a lot on the third quarter compared to what they were on the first half of the year. So I just wanted to better understand that is -- will the volume impact on profitability be much more severe going into Q4 and perhaps Q1 next year as it seems that the volumes that you are getting into your factories are still on a decline. Mikko Puolakka: Yes. If I take this one, you can complement. So overall, you may remember that in quarter 2, we received a key account order Order in the Home Improvement area. Basically, if one calculates the kind of lead times from the order to the delivery, we would start basically the delivery of that order, let's say, in the beginning of quarter 4. So that would then support the top line development in the U.S. in the quarter 4. That would allow them better loading for our factories, both in Europe as well as in U.S., which are supplying that kind of product during quarter 4, and that should also then improve the U.S. profitability in quarter 4. Antti Kansanen: Okay. And then the second one was on clarification on the previous questions on the difference between the communicated surcharges, 10% to 20%, and they achieved kind of the price impact, which I calculate to be around 8% of the U.S. orders. I'm not exactly sure if I calculate it correctly, but is the delta kind of something that you have given up on pricing in order to secure volumes? Or is there something -- some other dynamic in play here? Mikko Puolakka: Now these are basically this 10% to 20%, these are the surcharges. And then, of course, our, let's say, order intake, it cannot be kind of just simply be calculated from our kind of year-on-year order intake development development. So basically, like Scott mentioned, if there is a tariff of EUR 100 that EUR 100 million is reflected in the tariff surcharge to our customer invoicing or in the order intake. Antti Kansanen: Okay. And then on the development outside of Americas, I guess, mainly in Europe where you are flagging Defense Logistics and Energy Wind orders. Is there something regarding delivery times that we should be taking into account? Are there kind of a bigger deals or, let's say, frame contracts in the Q3 orders that would have a longer delivery times? Or should we just assume that it's a normal kind of a backlog to sales rotation? Scott Phillips: Yes, I can start this here and Mikko please jump in if this isn't reflecting an accurate picture. But we reflected in Q3 Antti, relative to the wind order is a consequence of a frame agreement that will be reflected as order intake over a number of quarters. So it's not a case where the entirety of the order was reflected in one quarter, and then it will be delivered sequentially from there over a period of time, but rather the order intake will also be reflected a bit more in line with the revenue recognition. Antti Kansanen: All right. Makes sense. And then the last one for me is the EUR 20 million cost savings program to be implemented next year. Will there be a one-off cost booked on Q4? And will that be included in the adjusted EBIT that you are guiding for? Or will that be a one-off? Mikko Puolakka: In case based on the initiative planning in case there would be one-off cost. We would report those in items affecting comparability -- so separately below the comparable operating profit depends on the planning and then we would be also opening how much that kind of cost we would have in quarter 4 or in 2026. Operator: The next question comes from Tom Skogman from DNB Carnegie. Tomas Skogman: This is Tom from DNB Carnegie. Did I understand correctly does that if you book an EU item, it is kind of above EBIT adjusted, like last year? Mikko Puolakka: So if we book for this EUR 20 million cost savings program, one-off costs, those would be reported as items affecting comparability below the comparable operating profit. So not included in the comparable operating profit. Tomas Skogman: Why will it be different from last year? Mikko Puolakka: This is very much related to the, of course, weakness in the U.S. market. But the EUR 20 million program would be company-wide. Previous programs have been more related to the kind of general optimization of the business, also in line with the order book. But this EUR 20 million is of course, in the first place, very much driven by the trade tensions. Tomas Skogman: Okay. And then I wonder about -- I mean this is perhaps more kind of a general big picture discussion. So last year, Americas was 45% of sales, and you have painted a picture where the Americas is quite an immature market. You have a lot of kind of white spots in distribution in the U.S. But still, I mean, it's been almost half of your business. So -- and I just remember 10, 15 years ago, Spain was the world's largest market. And that market basically never got back to all levels. It was so overheated. So could there be like just a risk that it will take many, many years before the U.S. market is back to where it has been in the last couple of years? Or do you really feel confident that it's just normal fast breaking, fast accelerating in the U.S. market? Or are there some kind of risk elements there that suggest that it could be that it takes many years to go back to all record levels? Scott Phillips: Yes. I'll start with this one. And thanks, Tom. I take this in pieces. So you mentioned our characterization of the U.S. market. And the way that we characterize it is threefold, if you will. So on the one hand, we were quite mature in our penetration of delivery solutions as it relates to serving primarily the building construction supply market. Two, we've had -- continue to have and did have quite a strong position also in delivery solutions relative to retail and last mile. So those were fairly mature markets, a long ways to go, especially on the retail last mile given the market share position relative to the #1 competitor that we face on a daily basis. Then the way we characterize it is we're underpenetrated both in our knuckle boom loader cranes as well as our hook lift and mountable solutions, primarily in waste and recycling, perhaps somewhat in terms of Defense Logistics that the market was definitely underpenetrated relative to knuckle boom loader cranes in the Construction segment as well. the way in which we wanted to attend to this is, is that we have a lot of geographic white spots because we weren't structurally set up similar to how we are structured in a European country, let alone Europe as a continent. And that was a weakness on our part. So the way that we've been attending to it and we continue to execute on the strategy is, is that we're turning on at scale distribution channel partners to cover the geographic white spots with a focus on shoring up those areas that we both were underpenetrated because of just lack of scale of sales and service excellence to support those products, but then also the geographic lack of coverage that we had as well. So that continues to be ongoing. Now in terms of the comparison relative to Spain, I'd say there's 2 things to keep in mind. Of course, let me start with the really obvious one is that just mirror scale, it's an order of 10x magnitude difference in terms of the GDP of comparing the U.S. versus Spain. But then more importantly, probably is the fact that the growth in Spain was primarily driven by one segment that was Construction. So at one time, it was one of the world's, if not the world's largest construction applied knuckle boom crane markets. And of course, that's the segment that had most been impacted following the global financial crisis. And to your point, hasn't quite recovered or hasn't recovered at all relative to the pre-global financial crisis levels. But definitely 2 different comparison cases and thinking through Spain versus the U.S. because the basket of of segments that we serve relative to our full portfolio, completely different opportunity set, if you will, in the U.S. versus, well, any country in Europe, but especially if you think about a country like Spain. Having said that, we've got a lot of opportunity to grow in Spain as we are underpenetrated there. Tomas Skogman: So what do you think then will be kind of -- what are you looking for in the U.S. is a trigger for customers to start ordering more again. What will be the trigger I mean the interest rate is quite high on the housing and the ABI index is not that strong. For instance, or just that you have this tariff situation with the loads of parts imported from Mexico that is just kind of cooling the entire market and we get the solution to that, then this will be normal again. What are you looking for? Scott Phillips: Yes. Yes. I'll sound like a broken record here, Tom, but I think it's still a factor of I can bifurcate it into 2 parts, right? One on the one hand, you're right, we need to see the macroeconomic costs come down a bit for our U.S. customers that we've talked about a lot, especially last year and a little bit in the first half of this year. in terms of overall inflation as well as the general level of interest expense. But I think then moving to the second piece now, of course, it's a matter of getting some stability in terms of being able to plan the business in the future on what your general cost level is going to be, I think that's a key factor as well. And then I would then add one more point to this scenario is that, once you see the level of stability achieved that no doubt will happen, it's just a matter of when. Then you'll start to see a pickup, I believe, from the stimulus bill that was enacted earlier in the year that I think is characterized as the one big beautiful bill. At the same time, we know that with the aging of our equipment in the installed base, there will be a robust replacement cycle coming as well. Tomas Skogman: Okay. And then finally, on the Defense side, I mean, it's just easy to say that it's a promising market generally. But I would like to understand a bit more. I mean we have seen orders from, for instance, the U.S. army and orders from Rheinmetall or bundle -- to Rheinmetall. But -- is it so that we should kind of perhaps also expect that just kind of national defense forces in different countries will be kind of major customers? Or will it be more like kind of defense companies that will order from you or how will it be? Scott Phillips: Yes, I can start here as well. Yes. Thanks for the question again, Tom. In Defense, we have a 40-plus year history of serving not only the U.S. Department of Defense, but then also the majority, if not all, of NATO countries as well as NATO partner countries, which will continue to do moving forward. And you're right, each of the defense organizations have made commitments to increasing spend unfortunately, due to the geopolitical changes that we've seen materialize over the last 3, 4, 5 years. And we expect that to continue moving forward. The challenge that we have is being able to forecast and model that business because the majority, if not all of these opportunities are typically larger tender opportunities that have quite a lot of variability in terms of time of opportunity to decision in terms of who that deal is going to be awarded to. And it's worked on both sides of the equation for us, if you think through the last year. On the one hand, we've seen more faster-moving emergent opportunities. And then on the other hand, we've also seen delays of opportunities that we knew were there prior to this period of increased geopolitical uncertainty that have pushed to the right. So difficult to model on our side in terms of the timing, both of booking the order as well as then how that will materialize and the change in revenue recognition. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Aki Vesikallio: Yes. We will have a couple of questions from from the iPad, from the webcast audience. So first question is about the service order trends. Is there any lagging impact from that? So what is the profitability trend in the services going forward? Scott Phillips: Yes. So on the Services side, the only real lag would be the nonrecurring revenue that we have. And if you think about the mix within the quarter, we were approximately 74%, 75% recurring revenue. So that's been on a nice trend relative to the overall Service, both order intake as well as revenue. Within the nonrecurring, of course, you have installations that are a factor of the equipment lead times. And so that tends to be the piece that lags behind. But otherwise, the rest of the services order intake, will follow and link quite nicely to the revenue recognition. Aki Vesikallio: Yes. Thanks. And then we have a couple of questions. I'll try to combine them. It's both are related to the tariffs. So we went through quite a lot of the parts of the question already but there was also a question, do we see permanent impact that could be caused by the tariffs. For example, could we lose some of the U.S. customers because of these tariffs permanently? And do we have any estimates how long the situation would last? Scott Phillips: Yes. So I'll start with the easy part first, the last part of that question. Hard to tell, right, how long this will last. One thing that's certain is, is that I myself have lived in 9 countries, and I've had a long career of this type of work and serving 100 to 200 different countries and most countries have some form of tariffs. So we can count on that. There will continue to be some form of tariff. I think really, the core of the issue and the question is then how long will this level of uncertainty last? And that's hard to call at this point. So our job is to be as resilient in our overall cost as well as our ability to deliver and execute as we possibly can. So we need to be prepared that this level of uncertainty may continue indefinitely. Aki Vesikallio: And could you please then still repeat what were the mitigating measures that we do? And do we individually negotiate with U.S. to get lower tariffs? Scott Phillips: Yes. So far, no, we haven't directly negotiated with the U.S. government on the tariffs. That one, we haven't had the opportunity to, and I'm not aware that any individual company has. But what we do, however, is that the way we sell our equipment is a function of market list price, and we sell on value. So therefore, from the tariff perspective, relative to our price positioning, this is more mechanical, if you will. So the contribution of the equipment that is under subject to a tariff, then we transparently share that information with our customers. We link that then to a surcharge that is simply a mathematical calculation and we try to work on other mitigating factors on the market list price to see if we can make this more attractive for our customers or not. But to reiterate, the biggest impact at this point from the change in the trade policies has been on the demand cycle because all businesses have a need to be able to forecast the forward-looking cost in order to then be able to take risk on deploying capital in order to catalyze or to run their business or to grow their business. Mikko Puolakka: Supply also to reduce the, let's say, tariff base as an example yes. And then it's good to remember that a significant part of our U.S. sales are assembled in the U.S., but of course, the ultimate tariff depends on where the components are coming from. Aki Vesikallio: Thank you, Mikko. Thank you, Scott. And that concludes our third quarter earnings call. So we published our financial calendar for next year yesterday. So we will be back in February 2026. Thank you for watching. Mikko Puolakka: Thank you. Scott Phillips: Thank you.
Baard Erik Haugen: Good morning, and welcome to Hydro's Third Quarter 2025 Presentation and Q&A. We will begin shortly with a presentation by President and CEO, Eivind Kallevik, followed by a financial update from CFO, Trond Olaf Christophersen. And as usual, we will finish off with a Q&A session. [Operator Instructions] When we get to the Q&A, I will then read your questions on your behalf to Eivind and Trond Olaf. And with that, I turn the microphone over to you, Eivind. Eivind Kallevik: Thank you, Erik, and good morning, and welcome from me as well. Safety, as always, is our key priority. It's the most important metric in our quarterly reporting. The health and well-being of our employees is fundamental to the success of the company. And we have had positive development and lowered the number of injuries and incidents for a long period of time. The downward trend continued also over the last few years has continued also this quarter. And I'm pleased to report that both the total number of recordable injuries and the number of high-risk incidents are lower compared to the last quarter. However, we're also well aware that good results and safety cannot be taken for granted. This situation can change rapidly. Maintaining these low numbers demands continuous attention and commitment from all employees across all our locations. Our strong safety culture is rooted in genuine care for our people, ensuring everyone remains healthy and safe while working for Hydro. The commitment to safety is also essential for keeping our operations stable and efficient 365 days a year. By fostering a safe work environment, we are able to achieve our strategic targets and to increase our long-term value creation. Now let's have a look at the key highlights this quarter. We will get back and dig deeper into this also later on in today's presentation. Challenging markets are affecting the results this quarter, leading to an adjusted EBITDA coming in at NOK 5.996 billion. Now despite this, I'm also happy to report a solid free cash flow generation at NOK 2.2 billion, yielding an adjusted RoaCE of 11%, which is above our target of 10% over the cycle. Measures have been taken to meet the uncertainty in the market, and many initiatives are being executed to further increase robustness. And we can already now report progress on our strategic workforce adjustment and the cost reduction initiative announced back in June. On the energy side, we are pleased to have added another long-term power contract to our sourcing portfolio. Alouette has signed an agreement in principle for continued long-term power supply. This quarter, we also received a final judgment in the Dutch court dismissing all claims against Hydro filed by Brazilian Cainquiama and 9 individuals back in 2021, based on both legal as well as factual grounds. And lastly, we can report concrete results coming from our targeted strategic approach to partnerships. We continue to advance our low carbon and circular solutions through close customer collaborations. Executing on strategic workforce and cost reductions as a response to market uncertainty, we did launch a new cost-cutting measure in addition to strategic workforce adjustment measures back in June. The workforce adjustment project aims to reduce white collar manning by 600 people in 2025 and another 150 people for 2026. In addition, we introduced the hiring freeze and limitation on travel and consultancy expenditures. The estimated gross redundancy cost is estimated to be around NOK 400 million this year and estimated cost savings are NOK 250 million. This gives us a net cost of around NOK 150 million in 2025. As we can see from the graph, annual net run rate savings included travel and consulting cost reductions are estimated to be NOK 1 billion from 2026. This gives an adjusted EBITDA improvement altogether for the improvement programs for 2030 of NOK 7.5 billion. Processes like these are always challenging, and we are doing our best to be considerate and to be transparent towards all our employees. And to ensure a professional process, we work in close collaboration with employee representatives. I do want to emphasize that this project is done in parallel with other ongoing performance and capital discipline measures. We still conduct our improvement program with undiminished strength. There is also a parallel restructuring process in Extrusions with large reductions in employees already taking place. And lastly, we have reduced our CapEx guidance announced last quarter. These initiatives aim to strengthen Hydro's ability to navigate global uncertainty. We're not pulling the brakes on our strategy, but we are ensuring that when we grow, we do it with the right structure and with the right priorities. Moving on to some good news on Alouette, where Hydro holds a 20% ownership stake. This quarter, Alouette has signed an agreement in principle to secure supply of power from 2030 to 2045. The agreement is signed with the government of Quebec as well as Hydro-Quebec. This will ensure long-term competitive prices in a market where the energy balance is tightening. As you can see from the graph, our total power consumption in the years to come requires us to constantly explore alternatives for renewable power sources in order to maintain our energy resilience. And this agreement is an important step to ensure stability for Alouette and to further strengthen Hydro's global portfolio of long-term renewable power. Now let's move to another strategic priority. It's been almost a year since we announced the phaseout of Hydro Batteries, a decision driven by persistent market challenges. And I am pleased to report that we have made progress on the phase-out process. We have recently done 2 battery portfolio transactions in line with Hydro's strategic ambitions for 2030. Earlier this month, Hydro Energy Invest entered a transaction to exchange its minority stake in Lithium de France for a minority shareholding in the listed company, Arverne Group. In addition, Hydro signed an agreement to divest its entire ownership stake in a maritime battery company, Corvus Energy, and the closing is expected to happen early November. Hydro continues to remain engaged in the energy transition, but these transactions help us concentrate on core business within energy and step up our ambitions within renewable power generation in line with the 2030 strategy. Another important event this quarter was the final judgment issued by the Rotterdam court in the case for against Norsk Hydro ASA and its Dutch subsidiaries on September 24. The court fully dismissed all claims, including claims of pollution caused by Alunorte following the heavy rainfalls in the region in February of 2018. The court's dismissal was based on both legal and factual grounds. During the proceedings, Hydro presented extensive evidence, including expert analysis as well as empirical data. On this basis, the court confirmed an established fact that there was no overflow from the bauxite residue deposits back in 2018. And consequently, no harm was caused to the environment. And this is an important confirmation supporting our position throughout the years since the lawsuit was filed. Lastly, I will round off my part of the presentation with 2 customer cases from the past quarter. A key priority in our 2030 strategy is to shape the market for greener aluminum in partnership with customers. We are pleased to see the results of our increased efforts in this area. Our strategic partnership with Mercedes-Benz has continued to accelerate over the years, aiming to decarbonize their value chain. This picture is from the last month where the new electric CLA cars produced with Hydro REDUXA 3.0 aluminum from Årdal, drove from Oslo to Årdal. Hydro can provide Mercedes-Benz low-carbon aluminum, ensuring a traceable and transparent value chain. And this is important for Mercedes to be able to deliver on their ambitious sustainability targets. Another exciting collaborative initiative this quarter and in fact, a large milestone for us is a new bridge in Trondheim called Hangarbrua. This is the first aluminum bridge built in Norway since 1995. The pedestrian bridge is made entirely from recycled aluminum sourced from the decommissioned Gyda oil platform from the Norwegian continental shelf. It is built by Leirvik in collaboration with COWI, partnered with Hydro, Aker Solutions and Stena. This project demonstrates that aluminum can be used in producing bridges of tomorrow, contributing to innovative solutions for the infrastructure sector. And it shows how end-of-life aluminum can be transformed into durable and valuable building materials. Although this project is relatively small, it's a tangible example of the significant potential for aluminum in public infrastructure development, a sector where demand is expected to grow substantially in the years ahead. So for me, these 2 partnerships illustrate the growing demand and potential for low-carbon aluminum and our success in expanding the market for circular and sustainable solutions. With that said, let me give the word to Trond Olaf for the financial update. Trond Christophersen: Thank you, Eivind, and good morning from me as well. So I'll start my part with the market side and starting with the bauxite and alumina markets. After an eventful 2024 dominated by refinery disruptions and bauxite supply challenges, the global alumina market balance has been normalizing since the start of 2025. Around 10 million tonnes of new alumina capacity is expected to come online from India, Indonesia and China this year with full impact expected in 2026. After the drop in alumina prices we saw in Q2 this year, alumina traded around USD 360 per tonne for most of Q3. With more capacity ramp-up, especially in Indonesian refineries, we saw alumina prices falling to around USD 320 per tonne at the end of the quarter. The excess supply is putting pressure on global refiners. If prices stay at the current level, we could see curtailments for high-cost refineries, especially in China. We would then expect a future tightening of the alumina market, pushing back prices to a more normalized level. According to CRU, a small surplus of around 500,000 tonnes is expected in '25, down to a 300,000 tonne surplus in '26 in the 58 million tonne world ex-China market. Consequently, the market would remain sensitive to any production disruptions. Moving to the primary aluminum market. Despite the rate increase to 50% of U.S. Section 232 tariffs on aluminum coming into effect in Q2, the LME and premiums continued to digest its consequences in Q3. Looking at the global primary aluminum balance, external estimates suggest that the market will remain roughly balanced in '25. The 3-month LME aluminum price rose during the quarter, starting at USD 2,599 per tonne and ending at USD 2,681 per tonne. The U.S. Midwest premium continued to surge in Q3, starting at USD 1,432 per tonne and ending the quarter at USD 1,631 per tonne, driven by 232 tariffs, the structural aluminum deficit and the need to attract metal into the U.S. In Europe, the quarter opened with a duty paid standard ingot premium of USD 185 per tonne, increasing to USD 258 per tonne at the end of Q3. As in previous quarters, Hydro's main concern remains the broader risk of a global economic slowdown from tariffs, which would weaken demand and challenge current price levels as a consequence. Then moving downstream. Extrusion demand stabilized at moderate levels in both Europe and North America during Q3 compared to the same quarter last year with light uptick in order intakes. In Europe, extrusion demand is estimated to have remained flat in Q3 '25 compared to the same period last year, but decreased by 20% from Q2 due to seasonality. Demand for building and construction and industrial segments has stabilized at historically low levels with some improvements in order bookings. Automotive demand has been negatively impacted by lower European light vehicle production, partly offset by increased production of electrical vehicles. For Q4 '25, CRU estimates that European demand for extruded products will increase by 1% year-over-year. Overall, extrusion demand is estimated to be flat in '25 compared to '24. In North America, extrusion demand is estimated to have increased 2% in Q3 '25 compared to the same quarter last year, but decreased 2% compared to Q2. Extrusion demand has continued to be very weak in the Commercial Transport segment, driven by lower trailer builds. Automotive demand has also been weak. Demand has been positive in the Building and Construction and Industrial segments, while the ongoing impact from the introduction of tariffs are still uncertain, order bookings have developed better for domestic producers due to lower imports so far this year. In Q4 '25, North American extrusion demand is expected to increase by 5% year-over-year. Overall, extrusion demand is estimated to decrease 1% in '25 compared to '24. Looking at our own numbers, Hydro Extrusions sales volumes increased by 1% year-over-year in Q3 '25. Similar to the previous quarter, transport volume developments were negative, but headwinds are moderating compared to previous quarters. Shipments to the U.S. transport market were down 5% in Q3 compared to minus 11% in Q2. Automotive sales in Q3 were still negative in Extrusions Europe, driven by continued moderate production at some car manufacturers. Automotive sales in North America increased 5% in Q3 from a low base than the same quarter last year, as negative overall market development was offset by increasing volume to key customers. Sales volume growth in the Industrial segment was stable in Q3, while sales in the Distribution segment increased by 8% in Q3, mainly driven by increased shipments in the U.S. After a significant increase in volumes in the HVAC&R segment previously in 2025, the trend turned negative in Q3 '25, mainly caused by tighter consumer spending and an inventory offloading at customers. For Q4, total sales volumes in Hydro Extrusions for EU and the U.S. are expected to be in line with underlying market growth expectations. Then moving to the financials. When looking at the results Q3 versus Q2, adjusted EBITDA decreased from NOK 1.8 billion -- from -- sorry, NOK 7.8 billion to NOK 6 billion. The main driver was normalization of eliminations. Realized all-in aluminum and alumina prices contributed negatively with around NOK 300 million. Upstream volumes had a net neutral impact where somewhat higher volumes in aluminum metal were offset by somewhat lower volumes in bauxite and alumina. Raw material costs contributed positively by approximately NOK 700 million, mainly driven by lower alumina costs in aluminum metal. This was partly offset by higher energy costs and a slight increase in other raw material costs. Extrusions and recycling margins and volumes had a negative impact of around NOK 300 million. 85% of the effect came from Extrusions and the remaining 15% from recycling in metal markets. The negative development in Extrusions was largely driven by lower sales, partly offset by positive impact from the metal effect through the higher Midwest premium. In Energy, lower production and lower prices impacted results for the quarter with a net negative impact of around NOK 100 million. Furthermore, fixed costs were around NOK 200 million lower compared to Q2 with positive Extrusions. Currency effects negatively impacted the results by around NOK 400 million with 70% of the effect related to aluminum metal and 30% to bauxite and alumina. This was mainly due to a stronger NOK compared to U.S. dollar. The largest negative effect this quarter was normalization of eliminations, which amounted to NOK 1.4 billion. In the second quarter, realization of previously eliminated internal profit had a positive contribution of the same size. Finally, net other elements had a net negative impact of around NOK 100 million. And this concludes the adjusted EBITDA development from NOK 7.8 billion in Q2 to NOK 6 billion in Q3. If we then move to the key financials for the quarter. Comparing year-over-year, revenue increased by around 1% to NOK 51 billion for Q3. Compared with Q2, revenue decreased by around 5%. For Q3, around NOK 200 million positive effects were adjusted out of EBITDA, mainly related to NOK 206 million unrealized derivative loss, mainly on LME-related contracts and a net foreign exchange gain on risk management instruments of NOK 66 million. The result also included NOK 116 million in rationalization charges and compensation for termination of a power contract, of which NOK 251 million is related to future periods. This results in an adjusted EBITDA of NOK 6 billion. Depreciations were around NOK 2.5 billion in Q3, resulting in adjusted EBIT of NOK 3.5 billion. Net financial income for Q3 was around negative NOK 450 million. This was largely driven by net interest and other finance expenses of around negative NOK 730 million. This was partly offset by an unrealized currency gain on around NOK 380 million, mainly reflecting a stronger NOK versus euro affecting embedded euro currency exposures in energy contracts and other euro liabilities. Furthermore, we have an income tax expense of around NOK 900 million for Q3, and the quarter was mainly impacted by high power surtax. Overall, this provides a positive net income of around NOK 2.1 billion and foreign exchange gains of approximately NOK 380 million are adjusted out together with the EBITDA adjustments mentioned earlier and partly offset by income taxes of around NOK 120 million. And this results in adjusted net income of NOK 1.9 billion in Q3. Adjusted net income is down from NOK 3.5 billion in the same quarter last year and down from NOK 3.6 billion in Q2. Consequently, adjusted EPS was NOK 1.02 per share. And let's then go to the business areas and give an overview of each of the business areas, starting with Bauxite & Alumina. Adjusted EBITDA for Bauxite & Alumina decreased from NOK 3.4 billion in Q3 '24 to NOK 1.3 billion in Q3 '25. This was mainly driven by lower alumina prices, higher fixed costs from a low level in Q3 '24 and negative currency effects caused by a weaker U.S. dollar against the NOK. This was partly offset by higher sales volumes and positive year-on-year effects from the full implementation of the fuel switch to natural gas. Compared to Q2 '25, the adjusted EBITDA decreased from NOK 1.5 billion to NOK 1.3 billion in Q3 '25, mainly driven by negative currency effects caused by a stronger BRL versus the U.S. dollar and lower sales volumes. Alumina realized prices decreased but maintained above market prices indications due to intra-group pricing mechanisms. Raw material costs were slightly higher Q3 versus Q2 and fixed costs remained stable. For Q4, we expect the production volume at nameplate capacity. And compared to Q3, we expect stable fixed costs and raw material costs are also expected to remain relatively stable. Moving then to Aluminum Metal. Adjusted EBITDA decreased from NOK 3.2 billion in Q3 '24 to NOK 2.7 billion this quarter. The main drivers year-on-year were negative currency effects caused by a stronger NOK against the U.S. dollar, partly offset by higher sales volumes and lower alumina costs. Compared to Q2 '25, adjusted EBITDA for aluminum metal decreased from NOK 2.4 billion, and this was driven by lower alumina costs, partly offset by higher energy costs, currency effects caused by stronger NOK against U.S. dollar and lower all-in metal prices, mainly caused by a sales mix pushing premiums to the lower end of the guiding. The raw material cost release was around NOK 700 million, which was lower than we guided for in the Q2 reporting. The reduction was lower than expected, mainly due to intercompany alumina pricing mechanisms, where the opposite positive effect is realized in higher B&A alumina price and result. These effects cancel each other out on the group level. Decrease in fixed cost was above guidance at around NOK 200 million caused by currency translation effects. And this brings me then over to the guiding for the next quarter. For Q4, AM has booked 72% of its primary production at USD 2,597 per tonne, and this includes the effect from our strategic hedging program. We have booked 40% [indiscernible] USD 423 per tonne, and we expect realized premiums to be in the range of USD 310 to USD 360 per tonne. On the cost side, we expect stable total raw material costs and increased fixed costs in the range of NOK 100 million to NOK 200 million, and sales volumes are expected to remain stable. Moving to Metal Markets. Adjusted EBITDA for Metal Markets decreased in Q3 from NOK 277 million in Q3 '24 to NOK 154 million due to lower results from sourcing and trading activities. And those were partly offset by increased results from recyclers. Excluding the currency and inventory valuation effects, the results for Q3 was NOK 174 million, down from NOK 375 million in Q3 '24. And compared to Q2, adjusted EBITDA for Metal Markets decreased from NOK 276 million due to lower results from recyclers and from sourcing and trading activities. Recycling results ended lower at NOK 93 million, down from NOK 136 million last quarter. The decrease was mainly due to seasonally lower volumes, partly offset by positive premium development. For Q4, we expect lower recycling results following continued margin pressure. In our Commercial segment, we also anticipate a lower contribution from sourcing and trading activities in Q4. As always, we emphasize the inherent volatility of trading and currency fluctuations. And given the realized results year-to-date, we have adjusted down the guidance for the commercial area adjusted EBITDA, excluding currency and inventory valuation effects to NOK 200 million to NOK 400 million for the full 2025. Moving to Extrusions. The adjusted EBITDA increased year-over-year from NOK 880 million to NOK 1.1 billion, driven by positive metal effects from increasing Midwest premiums, partly offset by pressure on sales margins. We saw 1% higher sales volumes as well as somewhat weakened sales margin primarily in Europe. Furthermore, lower recycling production negatively impacted the results with around NOK 100 million. And compared to Q2 '25, adjusted EBITDA for the Extrusions decreased from NOK 1.2 billion due to seasonally lower sales volumes, partly offset by positive metal effects and lower costs. Looking into Q4, we should always look towards the same quarter last year to capture the seasonal developments in Extrusions. External market estimates suggest a positive volume development year-over-year of 1% for Europe and 5% for North America. However, we foresee increasing pressure in both Extrusions margins and Recycling margins. We expect further metal effects year-over-year of NOK 50 million to NOK 150 million based on current spot Midwest premiums, reminding that metal effects are strongly dependent on the movements in the Midwest premium. And then moving to the final business area, Energy. The adjusted EBITDA for Q3 increased to NOK 828 million compared to NOK 626 million in Q3 '24. The increase was mainly driven by higher gain on price area differences, partly offset by lower production. Compared to Q2, adjusted EBITDA decreased from NOK 1.1 billion, mainly due to lower production and lower commercial results. The price area gain was NOK 330 million in Q3 at a similar level as in Q2. Looking into Q4, as always, we should be aware of the inherent price and volume uncertainty in energy. For the next quarter, production volumes and prices are expected to increase mainly due to seasonality. Furthermore, price area gains are expected to be lower following seasonal convergence between area prices. And then let's move to the final financial slide this quarter. Net debt decreased by NOK 1.9 billion since Q2. Based on the starting point of NOK 15.5 billion in net debt from Q2, we had a positive contribution in adjusted EBITDA of NOK 6 billion. During Q3, we saw a net operating capital build of NOK 1.4 billion, mainly driven by increasing inventories and receivables related to indirect CO2 compensation, partly offset by a release in net accounts receivables and accounts payables. Under other operating cash flow, we have a negative NOK 200 million impact, mainly driven by net interest payments, settlement of taxes and reversal of net income from equity accounted investments, partly offset by positive mark-to-market reversals and adjustments for noncash effective bonus accruals. On the investment side, we have net cash effective investments of NOK 2.2 billion. As a result, we had a positive free cash flow of NOK 2.2 billion in Q3. And finally, we also had negative other effects of NOK 300 million, and this was mainly driven by payments of new leases, partly offset by positive net currency effects on cash debt. As we move to the adjustments related to adjusted net debt, hedging collateral has increased by NOK 400 million since the end of Q2. And furthermore, during Q3, the net negative pension position decreased by NOK 700 million, turning into a net asset position of NOK 600 million positive. And finally, we had no changes in other liabilities during Q3. And with those effects taken into account, we end up with an adjusted net debt position at the end of Q3 of NOK 21.1 billion. And with that, I end the financial update and give the word back to Eivind. Eivind Kallevik: Thank you, Trond Olaf. Now as we conclude today's session, I'd like to summarize our continued priorities going forward. As always, health and safety remain our top priority, and we are fully committed to safeguarding the well-being of our employees. While we recognize that strong performance metrics can shift in just a moment of inattention, the ongoing positive trend in this area stands as a clear evidence of our dedication. We are navigating an increasingly volatile geopolitical situation that continues to affect our markets, but in response to these uncertainties, we are proactively refining our operational structure to target our most critical strategic priorities. This quarter, we have taken steps to execute on the phaseout of our battery operations in accordance with our strategy. We have several performance and capital discipline programs ongoing to help us better navigate global uncertainty and keep up the attention on profitability. We are seeing positive outcomes in our power sourcing portfolio highlighted by the Alouette recent long-term contract, which strengthens our energy resilience. Continuing to identify and pursue new opportunities in power sourcing remains essential to secure our future energy needs. Achieving tangible results on our 2030 strategy remains critical, and we are proud to see that we are taking steps in the low-carbon aluminum transition. Our market for recycled low-carbon products continues to advance, exemplified by the partnership with Mercedes-Benz and the infrastructure project in [ Tonya ]. We create growing markets through partnerships while we execute on our decarbonization and technology road map. And these concentrated efforts on growth and profitability ensure that Hydro continues to stay relevant. And we are committed to our decarbonization strategy, and we will continue to pursue our 2030 ambitions with unwavering determination. Thank you so much for your attention. And with that, I hand it over to you, Erik. Baard Erik Haugen: Thank you, Eivind, and thank you, Trond Olaf. We will then move into the Q&A session. [Operator Instructions] And we have a few already, so let's get started. First one is from Liam. Can you please give your latest thoughts on CBAM? Do you expect implementation from early 2026 or potential delays? Eivind Kallevik: Thanks, Liam. The way we look at this today, we do expect CBAM to be implemented from 2026. What we are, I would say, excitingly awaiting is any changes or adjustments to CBAM, for instance, around the scrap loophole. That remains to be seen as we get towards the tail end of this year. Baard Erik Haugen: And then there's a second question from Liam. Is it possible or likely that you will underspend versus the NOK 13.5 billion CapEx guidance for 2025? Eivind Kallevik: We are keeping the CapEx guidance at NOK 13.5 billion. Remember that Q4 is typically the quarter with highest maintenance and sustaining capital. Now if we have any updates to that, we will certainly be sure to give it at the Investor Day that we have in late November. Baard Erik Haugen: Then there's a question from Amos. Can you discuss the state of play with the Tomago's energy contract? Is it reasonable to assume that the smelter shuts in 2029? Eivind Kallevik: So Tomago is, of course, placed in an area where renewable power is hard to get in Australia and the power situation is pretty tight, leading to high energy cost. Currently, today, energy costs is roughly 40% of operational costs for the Tomago smelter. We continue to work with the stakeholders to see if there are any opportunities to get renewable power post the end of '28, but it is a challenging situation. And we will make sure that we update the market if and when there are news in this context. Baard Erik Haugen: And another one from Amos. Is there any change to guidance for Metal Markets trading and commercial EBITDA contribution for '25? I think that one was covered already. Trond Christophersen: Yes. So as I said, we have reduced the guiding to NOK 200 million to NOK 400 million, down from NOK 300 million to NOK 500 million, as we said in the Q2 report. So that is the reduction in the guiding. Baard Erik Haugen: And then a question from Matt. Considering the recent volatility in alumina prices and the increase in refinery capacity from Indonesia with potential developments in Guinea, how is Hydro approaching the balance between LME linked and PAX-based pricing for future alumina contracts? Also, could you please provide some more color on the Alba supply agreement in Q3? Eivind Kallevik: Yes. So when it comes to pricing of alumina, PAX remains the predominant pricing parameter and that I suspect you should also expect going forward for the new contracts that we enter into. When it comes to the Alba contract, it's a contract that we are very happy to enter into. It's a long-term partner in the Gulf. Other than that, I really cannot comment on specific commercial details of any contract. Baard Erik Haugen: And then there's a question from Hans Erik. Any news regarding potential tariffs on scrap exports from Europe? Trond Christophersen: Yes. So the commission in the EU had planned for an announcement late in Q3. That has now been postponed until late Q4. So that is the latest information we have. So then again, we expect the news at the end of Q4. Baard Erik Haugen: Question from Magnus. There seems to be a miss versus guidance of NOK 300 million on raw material costs, looking at the group combined. Can you explain the drivers here? Trond Christophersen: Yes. So Magnus, on the raw material costs, I think you need to look at bauxite and alumina and aluminum metal together. And we guided on NOK 1 billion to NOK 1.2 billion. We realized NOK 700 million. But if you add roughly NOK 200 million plus from B&A to that guiding due to the internal pricing mechanism, we are closer to the NOK 1 billion. And then with some slight increases in energy costs and less reduction of carbon costs, both below NOK 100 million. But if you add all that together, you are within the guiding. So that is basically the difference. Baard Erik Haugen: Then we have a question from Bengt. Looking at actual price changes for premiums during the quarter and your expected range of USD 310 to USD 350 per tonne, the midpoint implies lower realized premiums quarter-on-quarter, whereas premiums are up quarter-on-quarter. Are there a temporary change in sales mix that explains this? Eivind Kallevik: So thanks, Bengt. And you are correct. When we've looked to the value-added products market, both in Q3 and when we look into Q4, we do expect to produce somewhat more standard ingots compared to what our normal product mix would be. And that, of course, drags the average premium somewhat down. Baard Erik Haugen: Then there's a question from Ioannis. Market expectations were for a meaningful increase in extrusion volumes in 2026 from through levels. Q1 '26 outlook suggests just 2% to 4% improvement year-on-year. Can you provide some color on end markets and whether you are seeing any uptick in Automotive and HVAC going into next year? Trond Christophersen: So I would say that the overall extrusion market is the market where we see a lot of uncertainty. It is difficult to give sort of additional flavor on the expected volumes going into next year. We use the external CRU as a reference. And as we said this quarter, we roughly followed the development for CRU, which we also expect for the coming quarter. We have been expecting a recovery in extrusion market for quite some time now. But again, as always, it's very difficult to tell when we will see the market turn. Baard Erik Haugen: Then we have a follow-up from Bengt. Follow-up on the standard ingot. Is that normal seasonality or changes in end-user demand? Eivind Kallevik: So I think you need to look at this 2 ways. One is that demand in Europe has been relatively weak, as Trond Olaf has been through. That's part of it. Second part of it is that customers -- our customers is then also drawing down their inventories quite significantly, both in the U.S. and in Europe towards the year-end. And as such, we produce somewhat more standard ingots to get our operating capital also out the door. Baard Erik Haugen: Then there's a question from Magnus. Are we done seeing significant positive eliminations? Our impression was that there was more to come as the Q2 release was smaller than the buildup in the year before. Trond Christophersen: Well, eliminations are unfortunately difficult to predict also for us internally. But if you look at the total accumulation of negative eliminations through the price increase for alumina, we accumulated roughly NOK 2 billion. And now we have released, I think, yes, around NOK 1.76 billion in total. But the remaining level we keep in the balance will fully depend on the development of the alumina price. And I think sort of the positive twist on this is that since we now are generating much better cash flows in bauxite alumina compared to the situation before the alumina price surge we saw last year, we then will have a higher eliminations in the balance if the current market prices stay. Baard Erik Haugen: Then there's a question from Amos. What is your guidance for Q4 working capital movements? Trond Christophersen: Yes. So we maintain our guiding that we gave at the Capital Markets Day last year that we will deliver the NOK 30 billion at year-end. Baard Erik Haugen: Okay. Then there seem to be no further questions, in which case we will round it off here. Thank you all for joining us here today. Please don't hesitate to reach out to Investor Relations if you have further questions. And we wish you all a great day. Thank you.
Operator: [Audio Gap] our current forward-looking assumptions are described in our earnings release and our Form 10-K. Joining me today are Lee Gibson, CEO; Keith Donahoe, President and CFO, Julie Shamburger. First, Lee will start us off with his comments on the quarter, then Keith will discuss loans and credit and then Julie will give an overview of our financial results. I will now turn the call over to Lee. Lee Gibson: Thank you, Lindsay, and welcome to today's call. I'm going to start by discussing the repositioning of our available-for-sale securities portfolio. During the quarter, as market conditions allowed, we took the opportunity to sell approximately $325 million of lower-yielding long-duration municipal securities. And, to a lesser extent, mortgage-backed securities and booked a net loss of $24.4 million. These securities had a combined taxable equivalent yield of approximately 3.28%. Most of these sales occurred in September. The net proceeds from these sales partially funded loan growth during the quarter with the balance reinvested in agency mortgage-backed pools that had primarily 5.5% and 6% coupons and, to a lesser extent, Texas municipal securities with coupons ranging from 5% to 5.75%. The sale of these securities will not only enhance future net interest income, but it also provides for additional balance sheet flexibility as we grow. We estimate the payback of this loss to be less than 4 years. As previously disclosed, we issued $150 million of subordinated debt at 7% fixed to floating rate notes in mid-August. Linked quarter, our net interest income increased $1.45 million, and our net interest margin decreased 1 basis point due to the issuance of the subordinated debt during the quarter. When considering our net income, earnings per share and other financial results, excluding the onetime loss on the sale of securities, we had an excellent quarter. Linked quarter noninterest income continued to perform well, and loans increased $163 million, with $81 million of that growth occurring on September 30. Keith will provide additional commentary about our loan portfolio and third quarter loan growth. The repositioning of the securities portfolio, combined with the late third quarter loan growth sets up an optimistic outlook for net interest income. If the current favorable swap markets remain, we will look for additional opportunities to enter into swaps. Overall, the markets we serve remain healthy, and the Texas economy continues to be anticipated to grow at a faster pace than the overall U.S. growth rate. I look forward to answering your questions, and will now turn the call over to Keith Donahoe. Keith Donahoe: Thank you, Lee. Third quarter new loan production totaled approximately $500 million compared to the second quarter production of $290 million. Of the new loan production, $281 million approximately funded during the third quarter, including the $81 million Lee referenced, which closed on the last day of the quarter. We expect the unfunded portion of this quarter's production to fund over the next 6 to 9 quarters, likely weighted towards the back end of those quarters given the construction nature of those opportunities. Excluding regular amortization and line of credit activity, third quarter payoffs totaled approximately $116 million, a significant improvement from second quarter payoffs totaling approximately $200 million. Third quarter commercial real estate payoffs included 15 -- approximately 15 loans secured by retail, multifamily, industrial, skilled nursing facilities and some commercial land. Commercial real estate payoffs continue to be largely driven by open market property sales. However, 2 retail properties were refinanced with other bank lenders offering fixed rates using spreads below our target. After back-to-back strong production quarters, our loan pipeline dipped to approximately $1.5 billion mid-quarter but has rebounded to $1.8 billion today. While lower than the prior 2 quarters, it remains elevated compared to the same period in 2024. The pipeline is well balanced with approximately 42% term loans and 58% construction and/or commercial lines of credit. C&I-related opportunities represent approximately 22% of today's total pipeline compared to approximately 30% last quarter. This reduction is largely due to closing a new $20 million C&I relationship which originated in our East Texas market. Credit quality remains strong. During the third quarter, nonperforming assets increased approximately $2.7 million but remain concentrated in the previously disclosed $27.5 million multifamily loan that was moved into the nonperforming category during the first quarter. We continue to expect this to be -- this loan to be refinanced or rightsized before the end of the year. And overall, as a percentage of total assets, nonperforming assets is at 0.42%. With that, I will turn the meeting over to Julie. Julie Shamburger: Thank you, Keith. Good morning, everyone, and welcome to our third quarter call. For the third quarter, we reported net income of $4.9 million, a decrease of $16.9 million or 77.5%. Diluted earnings per share were $0.16 for the third quarter, a decrease of $0.56 per share linked quarter. As of September 30, loans were $4.77 billion, a linked quarter increase of $163.4 million or 3.5%. The linked quarter increase was driven by an increase of $82.6 million in commercial real estate loans, $49.3 million in commercial loans and $49.1 million in construction loans partially offset by a decrease of $10.4 million in municipal loans and $6 million in 1 to 4 family residential loans. The average rate of loans funded during the third quarter was approximately 6.7%. As of September 30, our loans with oil and gas industry exposure were $70.6 million or 1.5% of total loans compared to $53.8 million or 1.2% linked quarter. Nonperforming assets remained low at 0.42% of total assets as of September 30. Our allowance for credit losses increased to $48.5 million for the linked quarter from $48.3 million on June 30. And our allowance for loan losses as a percentage of total loans decreased to 0.95% compared to 0.97% at June 30. Our securities portfolio was $2.56 billion at September 30, a decrease of $174.2 million or 6.4% from $2.73 billion last quarter due to the partial restructuring of the AFS portfolio. The restructuring included sales of $325 million of lower-yielding, longer-duration securities. The sales, along with maturities and principal payments more than offset the purchases of $288 million. As of September 30, we had a net unrealized loss in the AFS securities portfolio of $15.4 million, a decrease of $45 million compared to $60.4 million last quarter. The improvement occurred primarily due to the restructuring of the AFS portfolio and, to a lesser extent, an improvement in the remaining AFS portfolio. There were no transfers of AFS securities during the third quarter. On September 30, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $905,000 compared to $5.2 million linked quarter. The decrease is primarily driven by the unwinding of fair value hedges associated with the restructuring in the AFS portfolio. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio. As of September 30, the duration of the total securities portfolio was 8.7 years compared with 8.4 years at June 30. And the duration of the AFS portfolio was 6.5 years compared to 6.2 years at June 30. At quarter end, our mix of loans and securities was 65% and 35%, respectively, compared to 63% and 37%, respectively, last quarter. Deposits increased $329.6 million or 5% on a linked quarter basis due to an increase in broker deposits of $288.6 million and a $137.1 million increase in commercial and retail deposits, partially offset by a decrease in public fund deposits of $96.1 million. On August 14, we issued $150 million of 7% subordinated notes. Our 3.875% subordinated notes issued in 2020 with an outstanding amount of $92.1 million will begin to adjust quarterly at a floating rate equal to the then current 3-month term SOFR plus 366 basis points in mid-November of 2025. Our capital ratios remain strong with all capital ratios well above the threshold for well capitalized. Liquidity resources remained solid with $2.87 billion in liquidity lines available as of September 30. We repurchased 26,692 shares of our common stock at an average price of $30.24 during the third quarter. On October 16, 2025, our Board approved the additional 1 million shares, authorization under the current repurchase plan, bringing the shares available for repurchase to approximately $1.1 million. There have been no purchases of our common stock since September 30. Our tax equivalent net interest margin was 2.94%, a decrease of 1 basis point on a linked-quarter basis, down from 2.95%. And our tax equivalent net interest spread for the same period was 2.26%, also a decrease of 1 basis point from 2.27%. For the 3 months ending September 30, we had an increase in net interest income of $1.45 million or 2.7% compared to the linked quarter. Noninterest income, excluding the net loss on the sales of AFS securities increased $260,000 or 2.1% for the linked quarter, primarily due to an increase in trust fees. Noninterest expense was $37.5 million for the third quarter, a decrease of $1.7 million or 4.4% on a linked-quarter basis, primarily driven by a $1.2 million write-off on the demolition of an existing branch recorded last quarter and a decrease in software and data processing expense. Our fully taxable equivalent efficiency ratio decreased to 52.99% as of September 30 from 53.70 as of June 30, primarily due to an increase in total revenue. At this time, we expect noninterest expense to be in the $38 million range for the fourth quarter. We recorded income tax expense of $189,000 compared to $4.7 million in the prior quarter, a decrease of $4.5 million, driven by the loss on sales on AFS securities. Our effective tax rate was 3.7% for the third quarter, a decrease compared to 17.8% last quarter. We are currently estimating an annual effective tax rate of 16.6% for 2025. Thank you for joining us today. This concludes our comments, and we will open the line for your questions. Operator: [Operator Instructions] Your first question comes from Michael Rose with Raymond James. Michael Rose: Sorry if I missed this, but I wanted to go back to the restructuring. I know there's obviously going to be some moving parts here just given that the loan growth happened kind of on the last day of the quarter, half of it, roughly, you did the restructuring. Just wanted to get kind of a level set of if I normalize all that, what's a good kind of starting margin that we should be contemplating for the fourth quarter just given, again, the late quarter growth, the benefits of the securities restructuring as we go forward. Just looking for a little color there. And then what your rate expectations are? Lee Gibson: The NIM in the fourth quarter, I expect to be up slightly. We have the sub debt costs in the third quarter that will have the full impact in the fourth quarter. But with -- if loans don't grow at all in the fourth quarter, which we're not anticipating, the average loans will increase $125 million during the quarter. And then we'll have the full impact of the $325 million of security sales restructuring that will take an effect, along with repricing of over $600 million of CDs that we anticipate will have an average savings of around 34 basis points on. The only headwind to the NIM in the fourth quarter is, I mentioned, the full impact of the 7%. And then we also have the repricing of the $92 million that Julie mentioned which today would be a rate of 7.52% compared to the current rate of 3.875%. So overall, I expect the NIM to be up slightly. I expect net interest income to improve nicely. And I think we're set up for a lot of positive things in the future when it comes to net interest income and the NIM. I don't know if that gives you a flavor for what we're looking at. Michael Rose: Yes, it's helpful. There's just obviously, a good amount of moving parts here. Lee Gibson: There's a bunch. Michael Rose: Maybe just moving on, we've seen some deal activity here in Texas over the past couple of months. I know you guys have kind of previously stated wanting to potentially do a deal yourselves. Just wanted to see if there's any kind of update there in terms of what you may be looking for? And then maybe separately, if there's some opportunities for hiring in light of those recent deals or maybe market share gain from clients. Lee Gibson: What we're looking at really hasn't changed. There are a few institutions that we have some interest in that potentially might be for sale. And in terms of hires, that is something we're looking at, and we've made a few hires. But yes, with some of the disruption that's occurring, especially with some of the larger out-of-state banks buying, some of the less than $10 billion banks here in Texas. There's definitely been some disruption, and we hope to jump on that opportunity and make some additional hires there. Michael Rose: Okay. Great. I'll step back. Lee, congratulations on the announcement. Operator: Your next question comes from the line of Wood Lay with KBW. Wood Lay: I wanted to start on loan growth, obviously, a really strong quarter, and it sounds like a lot of that growth actually came on the final day of the quarter. So I was just curious on the pipeline entering the fourth quarter, how it's looking and if there was any pull-through of the pipeline in this quarter? Lee Gibson: Yes. The pipeline is strong. It did take a dip. That's somewhat to be expected given the strong production quarters we've had. As we talk about internally, we have folks that are running hard to catch something when they catch it, they run hard to get it closed. And during that period of time, they get in what we sometimes refer to as bunker mentality, so they're closing the transaction and not looking for the next one. But I was really excited to see that after we took a dip in the pipeline that it bounced back up to $1.8 billion, which I feel is a really strong number. If you go back 12 months ago, I think we were running about $1 billion typically on a on a pipeline. So we're strong. We feel good about pull-through. Generally speaking, we're still seeing 25% to 30% of the pipeline moving through to a success rate. Sometimes that gets a little bit skewed by time because some of these have taken a while. They've been in the pipeline a while. So -- but we feel good. The one thing that's always out there is, especially as you get towards the year-end, there may be some unknown payoffs that occur, but we still feel pretty good about our guidance number today. Wood Lay: Got it. That's helpful. And then based on the current pipeline, are there segments that you're seeing a particular strength in? And just what's the overall pricing competition dynamic like? I feel like most banks this quarter just talking about how intense competition is. So are you seeing that from you all's perspective? Julie Shamburger: Yes. There's a lot of competition out there, both from the CRE standpoint and C&I. So we're not immune to it. We are being disciplined in our pricing approach. And generally speaking, since the second quarter, pricing hasn't changed a lot. We're still looking at term -- if it's a fully funded transaction, those are -- and it's a high quality. You're getting down to a 2% spread over SOFR. We have seen some banks willing to go below -- we slightly dipped below 2 on one transaction, but we are also selling a swap as part of the deal that helped get us back to what we would consider kind of the floor for us. On the construction side, we're still seeing construction debt that is going or moving -- lending at somewhere between as low as 2.50%, but generally speaking, somewhere around 2.65% to 2.75%. Wood Lay: Got it. And then lastly, as it pertains to the securities restructure, a part of those proceeds going to loan growth. To the extent that loan growth remains strong in the future, should we expect additional restructures to sort of help fund that growth? Lee Gibson: Well, 2 things. I spoke to the fact that this restructuring provided us even more flexibility as we have a lot of securities now that are at gains. And so we're in a position now that we can fund loan growth, increase spreads and actually sell securities near our book or above it. If the market allows and conditions are such that it makes sense to do some additional restructuring in the available-for-sale portfolio, we're certainly going to take a look at it. As Julie mentioned, the markets improved quite a bit. Spreads have also tightened there quite a bit, especially in the muni market. So we're going to continue to look at that carefully. But I would say most of the heavy lifting in the AFS portfolio has been done, but there is still some that we will take a look at and make decisions on as appropriate. Wood Lay: Lee, congrats on the upcoming retirement. And Keith, congrats on stepping into the role. Operator: Your next question comes from the line of Jordan Ghent with Stephens. Jordan Ghent: I just had a question on the buyback. So you recently increased the authorization. And just kind of what should we expect with buyback activity going forward? Julie Shamburger: Yes. So we did increase, as you mentioned, the last time we increased was back in July of '23. And since that date, we've purchased 868,000 shares, give or take a few. And so I think we're going to approach it the same way that we historically have. When we see the price dip and it's opportunistic, we will be out there actively purchasing shares. We've historically purchased open market shares and then done several 10b5-1 plans at the quarter end. So we did not do that this last quarter. But that's pretty much our strategy. We just try to -- we want to have it in place when it's opportunistic to purchase. So no strategy just to be terribly active at any one point, but just to watch the market. Jordan Ghent: Okay. And then just kind of going into the fee income. So it looks like trust fees have just had a steady climb over the last year. Kind of where do you guys see that going over maybe the next year or so and as a portion of fee income? Lee Gibson: We have a really good team in place that we've put in place over the last 2 years. and they're having a lot of impact, especially here in East Texas. And so we anticipate seeing double-digit revenue growth in that area next year as well. So we have -- we were expecting continued success. They're extremely busy, and they're taking on new clients all the time. So that's an area of noninterest income that we're really encouraged about and excited about. Julie Shamburger: Yes. And to add to that, Lee, we are -- one of the missing things for us right now is to really go into the metro markets with the wealth management. So we are exploring that, and we think we're going to make some good headway in 2026 on that. We may not attack each metro market with the same vigor, but we've got a pretty good footprint in Fortworth that I think could be a good support and starting point for wealth management in the metro market. So we're -- I'm really excited about that in the future. Jordan Ghent: Perfect. And then maybe just one more question. How many rate cuts are you guys assuming through year-end and maybe even into '26? Lee Gibson: I'm pretty certain that next week, we'll see movement, potential that there's another move, the last Fed meeting this year. Next year, I'm anticipating probably at least 2 cuts. It really just depends -- what the Fed determines. And of course, we're going to have new leadership mid next year. And my guess is that the new leadership is going to be more on the side of cutting additionally based on what the executive branch is saying. So it could be more than 2 cuts next year. A lot of it is probably going to depend on inflation and the employment. And the inflation numbers came in nice this morning, lower than expectation. but it's still above their 2% target. Now whether they change that with new Fed leadership, that's up in the air. Operator: [Operator Instructions] Your next question comes from the line of Anja Pelshaw with Hovde Group. Unknown Analyst: I'm asking questions on behalf of Brett today. I was hoping you could talk about the growth in DDA if it was somewhat seasonal or if you think it was sticky. Julie Shamburger: Yes. I guess the answer is it's not necessarily seasonal what we were just talking internally. So through some Erafile business, we have picked up some large depositors through that process. So we're -- we do think that's going to moderate probably in the fourth quarter. Some of that came in through one particular customer that is ramping up sales right now and getting deposits. So we do think that will moderate some through the end of the fourth quarter. Unknown Analyst: Okay. And you've talked about the loan pipeline, but I guess I was talking -- I was hoping you could expand on the growth so far from the new lenders. Julie Shamburger: So out of the Houston market, is that what you're referring to? So we're seeing good positive traction. One thing that -- just to keep clear, we've had 4 new hires in that market that are specific kind of to C&I business. And one of them came in, I think, December 30 of this past year. We had another one add in the first quarter, right towards the end of the first quarter, and then we've had one added at the end of the second quarter, and then we had another one added right in end of July, early August. So we haven't been able to see truly a full year of production yet, but it's been positive. They are gathering deposits. as well as loan growth right now. The C&I uptick, one thing we've talked about is really pushing our mix on C&I. Right now, we are -- at the beginning of the year, we were about 15% of our book is C&I. We have seen a slight uptick. We're about 16% today. And that -- some of that growth is actually coming out of our existing East Texas market. So we're excited about what's happening in Houston, but we've long been doing C&I in the East Texas and Southeast Texas markets, and we're seeing some good traction with that. Lee Gibson: Overall, in Houston, we've seen really positive loan growth probably in the 15% range this year. Julie Shamburger: And some of that's coming on the back of CRE lending. Operator: This completes our question-and-answer session. I will now turn the call back to Lee Gibson, CEO, for closing remarks. Lee Gibson: ing to be my final earnings call as I'm going to be retiring at the end of the year. So I wanted to take this opportunity to thank the analysts that cover Southside for your thoughtful questions, keen insight and your overall excellent coverage. I also want to thank our shareholders for your continued support and encouragement. And I want to let you know how excited I am about Southside's future as Keith Donahoe takes the helm, assisted by CFO, Julie Shamburger, and an extremely capable senior management team. Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares, along with the opportunity to answer your questions. We look forward to reporting fourth quarter results to you during our next earnings call in January. This concludes the call. Thank you. Operator: Ladies and gentlemen, thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Sika 9 Months 2025 Results Conference Call and Live Webcast. I am Mathilde, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dominik Slappnig, Head of Communications and Investor Relations of Sika. Please go ahead. Dominik Slappnig: Thank you, Mathilde, and good afternoon, everyone, and a warm welcome to our 9 months results conference call. Present on the call today is Thomas Hasler, our CEO; Adrian Widmer, our CFO; Christine Kukan, Head of IR; and Jomi Lemmermann, IR Manager. We are excited to share with you the highlights and key messages for the 9 months. Earlier today, we published our results and made the investor presentation available on our website. With this, Thomas Hasler and Adrian Widmer will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. I hand now over to Thomas to start with the highlights of the 9 months. Thomas Hasler: Thank you, Dominik. And also from my side, a warm welcome to this afternoon call. And let me quickly summarize the publications of today and some highlights underlying that we would like to share with you this afternoon. Sika has delivered a resilient performance in the first 9 months in a market that has -- remains to be dominated by uncertainty of various kinds. We have been able to increase our sales by 1.1% in local currency despite a heavy impact from our China construction business with a double-digit decline. Also this year, we are facing an unprecedented foreign currency impact. It's almost 5% and primarily due to the weaker U.S. dollar. But let me summarize a little bit our regions. And here, starting with EMEA. EMEA has seen for the whole year so far, a very nice double-digit growth in the area, Africa and Middle East. This is in line with the trend we have seen from last year, and it's strong also to continue. At the Eastern Europe business, we see green sprouts of growth. Eastern Europe is moving back to growth. It's mainly coming from the residential, so from the retail side, but it is clear this has picked up in pace and will also support the future evolution in EMEA. The region overall has reached 1.5% organic growth in the first 9 months. Americas on the other side, offers huge opportunities in the U.S. Here, we are collecting everyday data center opportunities that are unprecedented and growing and are not impacted at all by the uncertainties that are influencing other segments. The data center business has become a cornerstone of our direct business in the U.S. Just similar to our infrastructure business, which is doing very well in the U.S. Also here, we see more and more the impact of the Infrastructure Act that is delivering us opportunities from the East to the West Coast. We also see that the U.S. currently has some uncertainty that holds back on the reshoring. But here, plenty of these projects are ready to start, and we are also expecting that soon there will be more clarity and then production or construction start -- can start soon. We also see in the mature market of North America, a huge backlog in refurbishment, which is an opportunity to come soon as this backlog cannot pushed out very long. When I come to Asia Pacific, this is the region which has been most challenged, mainly influenced by the decline in our China construction business. If you would take the China construction business out of the equation, actually, the region, Asia Pacific would have been the region with the highest growth -- organic growth of around 4% in local currency. This comes from Southeast Asia and India with high single-digit growth. But as I mentioned, the China business is challenged and also we have taken here decisive measure to take here the margin and profit orientation above the volume orientation. But let me now move further into the P&L. And here, I would see the material margin increased to 55%, a significant demonstration of the synergies that we have been able to further increase from the MBCC and other acquisitions, efficiencies in our operations, and also a good cost management on the input cost side. This has also then trickles down to the EBITDA margin, which has rise by 10 basis points to 19.2% compared to prior year. Also here, the bottom line impact by the FX is quite significant. It is almost CHF 100 million when we look at the EBITDA alone. As mentioned before, we are taking decisive actions. This is in line with our manage for results key principle. We introduced our Fast Forward investment and efficiency program today, which builds on our leadership position. It will enhance customer value. It will improve operational excellence through digital acceleration and therefore, drive growth and profitability in the future. This program is built on a few blocks like investments CHF 100 million to CHF 150 million in the coming years. It is also coming with a shorter-term oriented structural adjustments in markets where we see ongoing weak momentum. Here, the China construction most pronounced, where we are making adjustments, which come with one-off costs of roughly CHF 80 million to CHF 100 million in '25 and the workforce reduction of up to 1,500 employees. The program overall will drive annual savings of CHF 150 million to CHF 200 million per annum with the full impact to come then implemented in the year of 2028. But now I hand over to Adrian to provide us more details and flavors to the financial 9 months performance. Adrian Widmer: Thank you very much, Thomas, and good afternoon, good morning to everybody attending. After Thomas' highlights, I would like to now put additional insights here to the financial results. In a market environment that remains challenging, as we have heard, we have achieved a modest sales growth in local currency of 1.1% in the first 9 months of the year, driven by acquisitions, while organic growth was flat year-to-date, owing to a minus 1.1% decline in Q3, driven by China. Without China, organic growth year-to-date in local currency was 1.7% or close to 3%, including acquisitions overall. Acquisition growth primarily came from the initial contribution of the 5 transactions we have consummated this year, including some residual impact of last year's bolt-ons, overall adding 1.1% of additional growth in the first 9 months of 2025. Sales were clearly adversely impacted by foreign exchange effects, especially as mentioned, related to a weak U.S. dollar, but also the RMB and the general strengthening of the Swiss franc. Overall, adverse foreign exchange effects reduced local currency growth by 4.9 percentage points in the period under review with a Q3 impact of minus 5.9%, slightly improved from a more significant impact in Q2, but still above the overall run rate. Corresponding growth, therefore, in Swiss francs was minus 3.8% for the first 9 months. Looking at the regions, region EMEA showed a similar Q3 trajectory as in the first half year, growing 2.1% overall, 1.5% organic and 0.6% through acquisitions. As Thomas has highlighted, business performance was particularly strong in the Middle East and Africa, where we recorded double-digit growth, but also with a good momentum in Eastern Europe. Here, foreign exchange effects at minus 3.3% year-to-date remained unchanged in Q3. Sales in the Americas region increased by 2.9% in local currencies, while Q3 growth was in line with Q2. Overall, year-to-date organic growth was 0.8%, while acquisitions continued to add 2.1% of growth in the period under review. While the business year got off a good start, U.S. trade policy measures triggered the mentioned uncertainty in the markets and slowed down momentum. While this caused Sika's growth in the U.S. and Mexico to soften, performance remained solid in Latin America overall, but also in the U.S., as highlighted by Thomas, some strong momentum in several areas. Here, adverse foreign exchange effects were most profound and reduced local currency growth by minus 7% in the region in the first 9 months, driven by particularly here the strengthening Swiss francs against the U.S. dollar of more than 10% starting in Q2, but also the devaluation of the Argentinian peso. Sales in Asia Pacific declined by minus 3.9%, while organic growth was minus 4.3% for the period. This result is mainly attributable to the challenging deflationary market environment in the Chinese construction sector for which we are focusing here on protecting our margins and driving efficiency. If we exclude here the impact, sales in the region would have been around 4% in local currencies. And also here, most -- or the strongest market was in India and Southeast Asia and also in Automotive & Industry, where Sika continued to expand its share in its technologies in both the local as well as international manufacturers. Also here, an M&A impact, namely the acquisition of Elmich contributing here 40 basis points of growth, an adverse foreign exchange impact at minus 4.6% reduced here local currency growth to minus 8.5% in Swiss francs in the first 9 months. Now turning to the full P&L and looking at material margin. Here, we have, as highlighted, driven up gross result by 30 basis points year-on-year due to also a very strong Q3 expansion, 55% of net sales in the first 9 months. This is also in spite of the deflationary environment in China and a small dilution of 10 basis points coming from M&A, but also overall material cost in recent months, also driven by our procurement initiatives showed a slightly declining trend. Reported operating cost this year, including personnel costs as well as other operating expenses, decreased slightly under proportionally in the first 9 months of the year versus the same period of 2024. Here, continued strong MBCC-related synergy trajectory as well as efficiency measures were offset by ongoing yet reducing cost inflation, currency impacts as well as initial onetime cost of around CHF 18 million in Q3 related to our structural cost reduction program. In looking at personnel costs specifically, which were down by minus 0.3% year-on-year on a reported basis, we have seen continued underlying wage inflation at around 3.5% per annum on a like-for-like basis. This is partially and increasingly being offset by cost synergies as well as operational and structural efficiency initiatives, but negatively affected by this initial fast forward severance expenses. Other operating expenses decreased strongly over proportionally by minus 6.5%, driven by accelerated efficiency measures and MBCC synergies. Overall, the integration of MBCC is largely concluded, while strong delivery of synergies is ongoing. Realized total synergies amounted to CHF 130 million in the first 9 months of '25 an incremental CHF 41 million versus the same period of last year, representing an annual run rate of CHF 166 million and therefore, well on track to push towards the upper range of the increased guidance of CHF 160 million to CHF 180 million for this year. Overall, EBITDA margin, as highlighted, increased by 10 basis points to 19.2%, up from 19.1% in the first 9 months. Absolute EBITDA decreased under proportionally by minus 3.3% from CHF 1.702 billion to CHF 1.645 billion due to foreign exchange translation effects, broadly in line with the effect on the top line also here highlighting our strong natural hedge and decentralized cost base in line with invoicing currency. Depreciation and amortization expenses were virtually flat in absolute terms at CHF 407 million or 4.8% of net sales as favorable translation effects were offset by PPA effects on the intangible side as well as a slightly higher depreciation rate. As a result, EBIT ratio decreased by 10 basis points to 14.4%, while absolute EBIT also was impacted by currency translation effects. If we turn below the EBIT, here, net interest expenses decreased and continued to increase significantly by CHF 16 million to CHF 105.5 million in the first 9 months. This compared to CHF 121.6 million in the same period of last year. Decrease is largely related to the scheduled repayment of our first Eurobond in Q4 '24 that was taken out for the financing of MBCC. And in addition, other financial expenses also showed a favorable development, representing a net income of CHF 10.2 million, up roughly CHF 7 million compared to the same period of last year, unfavorable hedging cost development, lower inflation accounting effects and also higher income from associated companies. On the tax side, group tax rate increased from 21.5% to 23.8% in the first 9 months. This is largely related to a positive onetime effect in the previous year. This is primarily the deferred tax benefit relating to a foreseen legal restructuring. And this year, we had also higher withholding tax on internal dividends distributed in the second quarter this year. As a result, net profit ratio was modestly down to 10.1% of sales. This is 20 basis points lower than last year. And also here, absolute net profit of CHF 870.9 million was impacted by currency translation effects. On the cash flow side, operating free cash flow in the first 9 months was CHF 630 million, which continues to be about CHF 220 million lower than cash flow in the same period of last year. However, cash generation in Q3 was strong and in line with last year. And the reduction here is primarily due to unfavorable currency movements compared to last year, particularly impacting here hedging of intercompany financing, but also partially due to a modestly higher seasonal increase in working capital slightly higher CapEx as well as higher cash taxes. For the full year, we expect to partially close the gap in Q4 and full year operating free cash flow in line with our strategic targets of higher than 10% of net sales, additionally supported by group-wide working capital initiatives. With this, I conclude my remarks on the 9-month financials and hand back to Thomas for the outlook. Thomas Hasler: Good. Thank you, Adrian. Yes, let me be short and brief on the outlook. We have published our outlook, and we confirm for '25, our expectation of modest increase in net sales in local currency for 2025. And our EBITDA margin of approximately 19%, including the one-off costs from the Fast Forward program, which I referred to earlier. The medium-term guidance, we confirm our profitability and cash flow expectation with reaching the band of 20% to 23% EBITDA in 2026. And we have created here a new guidance based on the revised growth assumptions for the market of 3% to 6% local currency net sales growth for the period of '26 to '28. Dominik Slappnig: We are -- with this, basically, we are now opening the line for your questions, please. Operator: [Operator Instructions] The first question comes from the line of Ben Rada Martin from Goldman Sachs. Benjamin Rada Martin: I have three questions, please. My first was on, I guess, the annual savings you've introduced today, the kind of $150 million to $200 million amount. Could you maybe break down the source of these between the two programs being the efficiency program and investment program? The second would just be on pricing growth. I assume you're starting to have some conversations around 2026 pricing. Could you maybe just give us a steer on what kind of level of pricing growth you expect at the group level? And then finally, on China construction, thank you for the disclosure today around that business. I'd be interested for our kind of housekeeping side, what share of the China business would be in construction at the moment? And what would be the split between, I guess, the channel side and the project side within China construction? Adrian Widmer: Yes. Thank you, Ben, here for the question. I'll start with the first one. We will provide more granularity here on, let's say, sort of the breakdown and the content of the impacts here then in November. But maybe at this stage, we expect about CHF 80 million out of the CHF 150 million to CHF 200 million to hit the P&L in a positive way in 2026. On maybe the pricing, and I'll take this one here, too, we had about 0.6% price increase year-to-date here, excluding China. China in a negative environment with negative pricing, but about 60 basis points for the first 9 months, which we're expecting to sort of roughly stay at that level for the full year basis. Thomas Hasler: Good. And to the third question in regards to our China business, our China construction business is about 70% of our China business. The remaining 30% is related to the automotive industrial manufacturing business, a business that is growing nicely in line also, let's say, with the transformation to e-mobility and the increased volumes overall. The 70% of the construction-related business, the larger portion, also roughly about 70%, 75% is the indirect business. It's the business that is related to the tile setting business in the residential area. And then the 25% direct business is especially strong with sensitive infrastructure programs and with the foreign direct investments of multinationals building in China. As we all know, the residential business in China has some challenges with huge inventories still being around and the foreign direct investment business has declined this year substantially, roughly 25%. These are the two drivers for the very soft business that we are facing and also then mandating that we take here decisive steps to structurally adjust to this condition as we don't see that quickly to resolve in the near future. Operator: The next question comes from the line of Priyal Woolf from Jefferies. Priyal Mulji: I just got two actually. So the first one is just on the rebasing of the midterm local currency sales growth. Would you mind just reminding us what the contribution was from market growth back when the target was 6% to 9%? Was it around 2.5%? And I'm just asking that in the context that you've obviously cut the midterm target by 3%. Are you effectively now implying that market growth will be flat or possibly even down for the next couple of years? Or is there something else sort of buried in the target cut today in terms of lower outperformance or lower pricing or lower M&A. And then the second question is just on the CHF 120 million to CHF 150 million investments that you're talking about. Is that CapEx? Or is there some sort of P&L cost involved with that? Thomas Hasler: Okay. Thank you, Priyal. I'll take the first one. And here, you are absolutely correct. Our former guidance was built on a 2.5% market expansion. And our current or our adjustment is basically correcting for the current, but also for the foreseeable future and here is more neutral or slightly negative. The elements of the strategy, the market penetration and the acquisition are from our side, unchanged, but the market has changed substantially longer than anybody could have anticipated. And therefore, we made this readjustment, but it's mainly -- or it is the market that really is unpredictable at this point, and we have taken that down to a neutral, slightly negative level. Adrian Widmer: Then the second one here, Priyal, on the investment program, the CHF 120 million to CHF 150 million. This is largely CapEx. There is about a 30% OpEx element as this is also relating to implementation of platforms, ongoing support digitalization, also training activities and so on. So about 30% of this is ongoing here OpEx, which we don't see as sort of onetime costs, but really sort of ongoing implementation and support cost. Operator: We now have a question from the line of Paul Roger from BNP Paribas Exane. Unknown Analyst: It's [ Anna Schumacher ] on for Paul today. I have two. Does the rightsizing China suggests you believe the slowdown is structural rather than cyclical? And will it impact your distribution strategy in the country? And secondly, when do you expect to see any benefits of reshoring in the U.S.? And how meaningful could it be? And what are your expectations for U.S. infra next year? Thomas Hasler: Okay. Thank you. Yes, I think on -- we have to differentiate in China between the two segments. I think the residential market expectation also for the next 1 or 2 years are still on a very low level. So this overbuild is not being addressed and it is also of less a priority for the Chinese government. So here, this is a market that will remain challenged probably for a year or 2 longer. And therefore, our, let's say, adjustments are structural in nature by now serving the reduced volumes with our market leader position that we have in that segment and also adapting the portfolio to the key application, the tile setting and waterproofing area, where we have a dominant position and also, let's say, discontinue low-margin sections of that market. The distribution channels are well established. They are the backbone that we serve. Here, actually, we are adapting that distribution channel to increase the spread and be able to further get closer to the market. So here, actually, we are increasing, and this is also helping to get better coverage and build on our market leadership in the segments where we have very good margins and where we also see possibilities to outperform the market. The construction direct business is a business where we believe that this is cyclical in a way that this foreign direct investment has an impact. But at the same time, we have in China also a more maturing, let's say, base infrastructure in place that requires more refurbishment and renovation. We are working in building up this in China with our competencies. So here, I would say the foreign direct investments, not that speculative how fast that will normalize, but we have there also possibilities to offset. And here, we are structurally adjusting also to be more dominant in the refurbishment, which when you look at mature markets like Europe or the U.S., this is the core of our business in construction. It has been relatively small in China so far, but that's a great opportunity for us to offset some other weaknesses. And then on the U.S., I'm always optimistic about the U.S. market. The U.S. market has seen a great start into the year. It has then been challenged with uncertainties and unpredictabilities, which many projects for industrialization or reshoring have been put on hold, ready to go. These projects have been, let's say, engineered to the level where it can start digging and building. And this is now a bit speculative question when will enough clarity be there. But I think with the tariff discussions, things are more and more becoming, let's say, not predictable, but it is easier for corporations to make conclusions. And I expect that we see in '26 on the reshoring, some nice progression as this holdback of projects as we see at the moment, will probably then be overwhelmed by also serving the increased demand. The consumption in the U.S. is not that bad. And I think this is a bit artificially pushed back. And here, I'm more optimistic that this will take place going into'26. Operator: The next question comes from the line of Elodie Rall from JPMorgan. Elodie Rall: I have three, if I may. First of all, on the China restructuring, you're talking about reducing headcount by 1,500. So can you give us a bit of color about how much that this represent as a percentage of China headcount? And also how much does this represent versus the CHF 80 million to CHF 100 million total cost savings? How much is China from there? And how could we think about China growth in H1, therefore, next year, given still the hard comp, I believe. So all the growth will be H2, I believe. Second, you talk about other weak markets driving this midterm growth outlook cut. So maybe you can elaborate on what they are? And lastly, on dividends, I was wondering if you would aim to protect the dividend level given additional cost savings -- costs this year. Thomas Hasler: Okay. Let me start with the China restructuring. The 1,500 employees and the largest portion from a single country comes from China. And it is a substantial reduction. It's a double-digit reduction of the Chinese workforce that is ongoing. This is something we are implementing without any further delay, but this is substantial. But we also have other markets that are -- or segments of markets is maybe the better way to put it because it's not countries or markets. It is actually segments that have softer performance. And here, this will then, in some, come up with the 1,500 employees. You asked about the China impact in H1 next year. it is clear that we will have some spillover from this year into next year as the effects that you have seen in Q3 and that we also expect to be significant in Q4 will, of course, compared to the base of the first half of '25, still be negative, but it will then also turn in the second half of next year and the impact will also, let's say, reduce. And as I mentioned before, Asia Pacific has a strong performance. It is the strongest if we exclude China. So here, we're also confident that Asia Pacific will contribute to the overall group growth next year, having strong engines in Southeast Asia and India. Then the dividend, maybe. Adrian Widmer: Well, maybe on the dividend, obviously, this is then a decision by the Board. This has not been taken yet, but I'm not expecting here that, let's say, the program will have a negative impact here on our dividend policy. Elodie Rall: And sorry, just to come back on China. How much does this represent in terms of the overall CHF 80 million to CHF 100 million cost savings -- cost this year, cost restructuring? Thomas Hasler: This is a bit too early. I mean we are going to really make an effort then in 4 weeks' time to give you more granularity about the program in regards to the investments, but also in regards to the cost split and so on. But it's clear, it is significant. I mean that's -- but it would be premature now to go into the details, but China is a large portion of the structural adjustment. Elodie Rall: And just to finish up on my previous question, what are the other markets that you have identified as weak? Thomas Hasler: Yes. The point is, as I mentioned, markets are soft. Weak is something I attribute to segments, segments where you see that, for instance, in Europe, we had a very good initiative on energy savings initiative coming from the Green Deal. These are fading. These are implications that we are, of course, considering also in our business. But the markets overall are soft. Europe is soft, but we see Eastern Europe is coming back. We also see that the northern part of Europe. So here, when I look into '26, I'm quite optimistic that we will see positive trends. Operator: We now have a question from the line of Ephrem Ravi from Citigroup. Ephrem Ravi: So two questions. Firstly, given the reduction in the overall growth target to Priyal's point, 2.5% was the market. But does this change your view on the market going forward? Or this is strictly a function of the fact that last 2 years, the growth has been less than your 2023 to 2028, 6% to 9%. So you're just resetting for the -- for what's already happened and your medium-term actual view in terms of how the markets are going to grow hasn't really changed. So it's just mainly a mark-to-market of what's already happened in terms of local currency growth so far? And secondly, China, I thought it was about CHF 1.2 billion of sales last year. And if it is down double-digit percentage, probably goes down to closer to CHF 1 billion. So given the low base, do you expect that to kind of be less of a drag going forward? So in theory, you should see faster growth just because of the mix effect of China not being a drag being on the numbers? Thomas Hasler: Yes. I think what is very important in our adjustment of our midterm guidance, this adjustment is related to our assumptions of the market compared to the original assumption. For us, most important is the outperformance of the market wherever they are. And this is in our strategy clearly outlined with the market penetration. We have not changed our ambitions on the outperformance of the competition and the market. And we also haven't changed our approach to be the consolidator in a very fragmented market through our acquisition activities, which I think also this year, we see with 5 transactions and the full pipeline of prospects. I think we are very confident on those elements where we have it in our hands. The markets, we had to reflect and also consider that there is also not a balancing act between the regions. We have a situation where actually softness is a global topic, with a few exceptions like maybe the Middle East, but not so relevant in the global scheme. So here, it is -- this is the driving factor for the adjustment is that we do reduce the market aspect, but do not change our commitment to outperform organically and then also on the acquisition, we will deliver as we originally have indicated. Operator: The next question comes from the line of Martin Flueckiger from Kepler Cheuvreux. Martin Flueckiger: Martin Flueckiger from Kepler Cheuvreux. I've got three questions. And I suppose I'll take one at a time. Firstly, I'd just like to go back to your statements regarding pricing in the 9-month period. If I understood you correctly, you were talking about 0.6% up year-to-date, excluding China. Now I was just wondering what does that mean for the group overall because that's really the number, I guess, that interests most people. That's my first question. I'll come back with the second one. Adrian Widmer: Yes. I mean, this means overall, it's pretty much a flattish picture for the group overall. Martin Flueckiger: Okay. And then secondly, you were talking about -- I think Thomas was talking about data centers being ramping up pretty rapidly in the U.S. Can you -- if I remember correctly, in the U.S., data centers account for about 8% of sales -- construction sales. Has that number changed in the 9-month period? And what kind of growth do you expect from this vertical in 2026? That's my second question. Thomas Hasler: Yes, you are right. This is about the magnitude. And this is the fastest-growing segment in construction and therefore, also logically, the contribution to the overall construction business in the U.S. is increasing, but it's about 8%. And what makes us very optimistic, I mean, these are also projects that are lined up. They are executed. They are actually rushed in execution whenever possible. So the lineup of projects that we have visibility gives us high confidence for the next 18 to 24 months. So this is a business that we like very much as it is also a premium business. It is driven by customers that buy not, let's say, products or systems, they buy peace of mind. They want to have undisrupted operations 24/7, 365. And that's a key element of our unique position in that market. Not only in the U.S., this spreads all over the globe because the owners of the data centers have very similar names at the end, and they don't want to take risks when they go abroad. And therefore, we are also leveraging that very much into Europe and other parts of the world. Martin Flueckiger: Okay. But sorry, just to clarify, when you say it's the fastest-growing segment in the U.S., I guess that's not really surprising. But I was just wondering whether you could tell us what kind of growth Sika is expecting from data centers in the U.S. in 2026. Do you have any broad idea at this point in time? Thomas Hasler: Of course, I have. And I would sum it up this is double-digit growing and this is significant. So it is not 10% or 11%. It's really a business that has drive and where we also put full focus on. This is the time. Martin Flueckiger: Okay. That's helpful. And then finally, my third question, could you talk a little bit about competitive pressures in construction chemicals this year, what you're seeing on the ground and whether it's intensifying or whether it's stable, whether there are any particular regions apart from China where you're seeing competitive pressures easing or worsening? Thomas Hasler: I think here -- I mean, China is a particular case, and I think Adrian indicated, China is, of course, price is super relevant. And as he mentioned, the overall group is at 0.6% without China. With China, we are at neutral. So China is a market in itself. But when I look at the rest of the globe, you can say -- when you have a booming market, pricing is probably less pressures because it's about getting the jobs done. We don't have booming markets everywhere. Therefore, I would say this is a normal situation where price is of high relevance, but nothing exceptional. Nothing -- would you say this is kind of strange. This is a normal behavior of markets when volume are slow, and this comes from small, medium, large. This is nothing in particular, nothing has really changed. But of course, when you have soft markets, then here, the tendency is that you have more pressure on price. But I think our performance in the first 9 months demonstrates we do have pricing power. We have here a leadership position that we can. This is probably for small players, midsized player, a bit less convenient as they are suffering more in soft times. Operator: We now have a question from the line of Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I've got some follow-ups, please. On the growth for 2026, the exit rate at the end of this year is likely to be breakeven, maybe even modestly negative if trends don't really change in your core markets. I'd like to understand how we get to 3% in 2026. I think Elodie touched on this question, but I'd like to hear explicitly if you actually think 3% is the right number for 2026 based on what you see today, appreciating that things can change or if in 2026, we should actually be anchoring around a number below that range within the potential for growth to accelerate into '27 and beyond. So that's the first question. And then the second question, just in terms of the guidance on year-on-year margin improvement into 2026. So this year, I think it's 19.5% to 19.8% without the costs. And then if I've got the moving parts right, you have CHF 80 million of cost saves from the program next year. You have CHF 40 million synergies still to come if I look at the midpoint of what you're guiding to. So that gives me about 100 basis points of margin improvement. But I'd expect your leverage is still going to be negative. I mean, if I look at that chart on Slide 8, I think it is, you have negative operating leverage this year with growth that's probably not dissimilar to what the growth is going to be like next year unless anything doesn't change. So what other levers should we be thinking about into next year that actually allow us to see margins rise? Is there something we should be thinking about on gross margins improving? Is there some other kind of cost initiative that we should think about beyond this CHF 80 million program, just like sort of ordinary course of business efforts that's sort of coming on top of the CHF 80 million sort of special program? So those would be the two questions. Exit rate on growth is clearly below the 3%. How do we get to 3%? And then how do we actually get higher margins year-on-year even withstanding the 100 basis points or so of improvement that comes from this program plus synergies not yet come through from MBCC. Thomas Hasler: Okay. Thank you, Cedar. And I take the first question, and it's probably the most difficult question because it is clear. We don't know what's going on to happen next year. So let me phrase it in a way. This is not a guidance for next year. But if we assume everything equal, China, Europe, North America and so on, your assumptions are correct, that the exit rate at the end of the year will be low modest growth going into next year. We will still have spillovers from China. We will have benefits from trends that are supporting, but the magnitude to the lower end of our midterm or our adjusted midterm guidance is still there. So this is not yet a guidance, but it's also not a promise that every year of the coming 3 years will be within that range. I think the first year is probably the one that has, let's say, the highest challenge, but we also anticipate that there's a good likelihood in '27, '28, where we can substantially also move on that depending on how markets are evolving. So here, I think we have to be clear. This is not a straight line. This is also a line of recovery, which we can drive to some degree ourselves. I think we have a healthy acquisition pipeline. We see there some opportunities. I think also when we look at the pricing power that we have and also expecting that China is going to, let's say, be less impactful. So we have this element as well. But this is not a guarantee at this point of time that this 3% to 6% will be applicable to every of the consecutive years. Over the 3 years, we are very confident. But going into next year, we will assess the situation, of course, we will assess the markets and then we will establish our proper guidance for 2026. Adrian Widmer: And on the, let's say, the elements here of the margin improvements, and it's essentially the ones we're driving. I think there is also an opportunity on, let's say, the material margin, the gross margin to continue to drive. I mean, you have the synergies, as you mentioned, there will be another 30 to 40 basis points. And our improvement, let's say, bucket, which will clearly be driven here by Fast Forward program here, let's say, the sort of the CHF 80 million impact plus the ongoing activities we have, but there is not going to be an additional, let's say, program on top of it, but really sort of driving the different elements to an EBITDA of above 20%. Operator: We now have a question from the line of Arnaud Lehmann from Bank of America. Arnaud Lehmann: Could we talk a little bit about the gross margin? I guess that was quite a solid performance in the third quarter. I think a 5-year [indiscernible] when there was back in Q3 2020. So is this the new normal? Is 55%, you believe the new normal going forward for Sika and into 2026? That's the upper end of your historical range? Or do you think there could be upside to this? My second question is coming back on the Fast Forward plan. Is it something you've been thinking about in the last years or in the last months, let's say, was it something you were going to do anyway? Or is this more of a reactive move on the back of the recent decline in Chinese volumes or maybe a little bit of both? And the third question and last one on -- you hinted in the previous question around M&A activity. Considering the slower trends in underlying markets, do you think you could ramp up M&A activity while remaining within the criteria of your A- credit rating? Adrian Widmer: Let me take here the first one. Thanks, Arnaud, for the question. I think here, of course, the 54% to 55%, that's is for us clearly sort of also a range where we sort of monitor and steer the business. I mean it's never been sort of a very sort of dogmatic, let's say, hard target. And I think there is several elements obviously impacting here material margin, which, again, for us is an important element to steer the business. I think we're obviously here that the pricing element, selling value, driving innovation, also being able for us to position our solutions at the higher value point is important and an ongoing activity. I think on the input cost side, we have more recently seen, I would say, a more favorable picture also driving here clearly initiatives to improve it. So I think there is obviously a bit of upside here on the material margin, although this is influenced by many sort of different elements. So I think it's obviously something we actively steer as one of our here profitability buckets overall. Thomas Hasler: Okay. Then Arnaud, on the Fast Forward question, it's an interesting question because it has both elements. Digitalization is something we have highlighted as a megatrend in our strategy. And we are doing quite well in progressing. We are doing -- we bring digital solution. We just announced this week our Sika Carbon Compass. You can say, yes, we do. We are implementing SAP across the globe. But honestly, the speed of adoption, the speed of implementation is, in my view, not the speed that I would like to see. Digitalization has a different speed than construction industry and the construction industry is our great opportunity to be here the unprecedented leader in digitalization. So this has been, let's say, something I have observed over a longer period of time than 2, 3 months. And I see this as a great opportunity here to make firm steps, invest into the customer value. The customers are challenged in many different ways. Digitalization can ease, let's say, those complexities, can make business easier to execute and focus on core things. I think this is something that we want to drive, and this is the opportunity to integrate it also into this fast forward program. We have done great. I mean, Sika has a unique data pool. It's the leader in the market, the innovation leader, it's the market leader. We have data all over the globe. We are creating a pool that we can exclusively use to do data mining and leveraging those competencies. So for me, I'm a big fan of this digitalization, and I'm happy that Fast Forward gives us now also the possibility to accelerate substantially, let's say, on the tools, on the solutions, but also upskilling our organization that we also here can adopt much faster than in a regular environment. The other part, let's say, the China, the restructuring in general is something that has become in line with our, let's say, guidance adjustment for the midterm. Markets are soft, markets, we cannot change them. But in markets that are soft, this is the best time to make substantial adjustments. This is the time to act because when you act at this time out of a position of strength, you can then -- when backlogs are worked off, when markets are turning, you are in the strongest position to benefit from a boom in construction that will come, that has to come. The underlying demand is there. It's not served. So it is also a point that came to our realization over the course of this year and then more pronounced in the second half, which ultimately results in this Fast Forward program with the two elements that are super relevant, short term improvements, but of course, then also more midterm, let's say, benefits for the customer, driving our growth and utilizing the unique, let's say, digital footprint that we can have and that we want to have going forward. This is something I consider these digital capabilities, a key competitive advantage that we are going to achieve. Here, size matters. The globalization matters. We have a global input. We have it from Japan, China, India, Middle East, Europe, North and South America. Now all these bundled together gives us huge opportunities, which I want to tackle with our Fast Forward in an accelerated way. Arnaud Lehmann: And on M&A? Thomas Hasler: Sorry, M&A. I think here, I come back to the prior question. I mentioned smaller and midsized companies are more challenged when it comes to pricing power in soft markets. And we see here a clear, let's say, pain level reach for small and midsized player that they are considering selling their companies, even so it is probably not the best time to get the best price, but they hang in there and they consider selling much more now than maybe a year or 2 ago. And yes, we do have here also opportunities to, let's say, to acquire for attractive multiples business that maybe a year or 2 ago would have rejected to entertain. And I do think with our strong cash generation that we also have the ammunition to serve those increased possibilities. But it's also -- I think as always, every challenge has its opportunity. The opportunities on M&A are excellent, and we have the power and the will also to take advantage. Operator: The next question comes from the line of Ghosh, Pujarini from Bernstein. Pujarini Ghosh: So I have a few. So my first question is on the EBITDA margin guidance for this year. So without the restructuring costs, you have not cut your margin guidance. And in 9 months, you've done 19.2%. So to get to the bottom end of the range without the restructuring, you would need to do something like 20.5% in Q4. And looking at the historical trends, we've never seen such a big jump between Q3 and Q4. So could you explain why this year might be different and the various levers that you could pull in Q4 to get close to your target? And my second question is just a housekeeping. So what is your current guidance on the tax rate for the full year and for future years? And finally, coming back to the China restructuring plan. So could -- so of the CHF 150 million to CHF 200 million cost savings, could you give the split between how much of this would come from the restructuring in China and how much from the investment program that you're going to do? Adrian Widmer: Thanks, Pujarini. I'll take here the question one by one. On the 2025 EBITDA guidance here, I think a couple of points. On the one hand, you're right, the 19.2% here in the first 9 months. As I mentioned here before, we have about CHF 18 million of here one-off costs already included in Q3. So that's one element that basically puts here, let's say, the anchor at 19.4% and also in terms of, let's say, the one-offs we're guiding for the CHF 80 million to CHF 100 million, not everything is EBITDA relevant. We have about 25% to 30%, which is more sort of write-downs and impairments overall, which obviously then for Q4, yes, means, of course, a solid profitability quarter to, let's say, get at least here to the lower range here of the 19.5% to 19.8%. On the tax rate, here we had in previous years as reported, also one or the other positive impact, one-off effect. I'm expecting here for this year sort of around 23% in terms of the overall tax rate, which is also the level here of the next years to be expected roughly. And thirdly, on the question here of, let's say, sort of the China impact and the breakdown, again, I would like to defer here the answer and more granularity then to our November event where we will provide more sort of granularity on the various aspects of the program. Operator: We now have a question from the line of Patrick Rafaisz from UBS. Patrick Rafaisz: Two questions. One is on your cash conversion targets. You confirmed the 10% plus for this year. I was just wondering with the extra spending for the Fast Forward program, both on the cost and the CapEx, would you already fully commit to a 10% plus cash conversion also for '26? That's the first question. Maybe related to that, can you also talk a bit about the phasing of these investments? And then the second question would be on China and the portfolio adaptation you talked about. Can you add some color around the share within the China business that we are talking about that you are exiting due to the maybe market conditions or too low profitability? And also how long that will take to implement? Adrian Widmer: Good. Well, let's -- thanks, Patrick. I'll take the first two on the cash conversion, yes, clearly also confirming for '26 here, the targets to remain in place in terms of the cash conversion of at least 10% of net sales. Obviously, here, there is an additional element of CapEx, but that will be within that threshold. Second one on the phasing, again, I'll try again to convince you that we will provide more granularity then on the various sort of elements of the program, also the impact and the phasing then at the end of November. Thomas Hasler: Good. And then Patrick, on the China business. Our China distribution business is built on exclusive distributors all over China. And with the start of the softness of the market, our China team has tried to introduce, let's say, lower-margin trading products to support our distributors so that they can take a bigger share of wallet. And this came, of course, at the backside that the top line was then still showing some progression, but dilutive on material and profit margin. And this came then to a level where we had to say this needs to be reversed. So this has been a rather short-term element that has been introduced, and it is also something that we can flush out relatively soon. But it will be visible this year and next year as we -- some part is still in this year from the first half, and it will be out in the second half next year. So we will have some comps there that are maybe not so clear to read, but this is rather something that has been used tactically, but had to be revised. And that's what I mean with the core range. The core range, which is our tile shaping range and waterproofing range, which we produce ourselves and not tolling products that are adjacencies. Operator: The next question comes from the line of Alessandro Foletti from Octavian. Alessandro Foletti: Just on the automotive business, maybe we don't speak much about it. Obviously, it has been growing strongly in China, but how is it doing in the other regions, particularly also, yes, Europe and the U.S., I would guess. Thomas Hasler: Yes. I take that lately. I think, yes, we haven't talked much. But as you have seen, our growth in the industrial area is at organically 0.8%. It is doing better than our construction organically. It has here support from China, but also our business in Europe and in North America is holding strong despite a declining volume situation. And also, especially in Europe, we have still, let's say, a bigger, let's say, variation of models in the market, which means we are carrying more complexity serving, let's say, our customers. And despite that, we can still have above the build rate top line and especially also maintain a very healthy bottom line in that business. It is having a different direction. I think in Europe, we see also going forward, probably a comeback of the incentives for the electrification. This will be very positive. Germany is considering this for the years to come. So I'm on the automotive side in Europe, with the conversion, we will have more contribution. We have more opportunities. So I think we will see a positive trend in Europe. And in North America, we have there a bit the holdback with the tariffs. The automotive business in North America is highly, let's say, linked between the three countries with the supply chain. We serve the market out of Mexico and of the U.S. But also here, there's a different demand. The electrification is less of a relevance. It is truck and SUVs, pickups are relevant. These are for us higher contribution vehicles anyhow. But we also expect that when the new North American trade agreement is finalized, which hopefully takes place by the beginning of next year, then there will be also clarity and investments in automotive so that they can come back with competitive offerings to the end market, which at the moment is hesitant to buy in North America. I'm optimistic. I mean the business also in Brazil is doing very well. The business in Southeast Asia is doing very well. They are, of course, of smaller volumes than the three main markets. But I think we will have year-over-year, nice contribution from the automotive or industrial side. Alessandro Foletti: Right. But I'm not sure I get it right. It seems from your talk that maybe both in Europe and the U.S. is maybe still slight negative or flattish? Thomas Hasler: Yes. Yes. I mean the build rates are minus 3%, minus 4%, the car build rates. And we are flattish in Europe and slightly below in North America. Operator: We now have a question from the line of Yassine Touahri from On Field Investment Research. Yassine Touahri: Just two questions on my side. We've seen oil prices coming off over the past couple of months. Does it mean that we should see limited raw material inflation in -- at the beginning of 2026? Or -- and also a relatively muted pricing environment? Should we think of the coming quarter being close to what we've seen with relatively prices up a little bit and costs broadly in line with this pricing? And then my second question would be on the competitive landscape. Do you see -- I think some of the largest building material company in China, CNBM and [ Conch ] have started to invest in mortar, in construction chemicals. Do you see competition in China being tougher today than it was 5 years ago? And another one on this -- on the competitive landscape. I think Kingspan in the U.S. is planning to open a PVC roofing membrane next year. Do you think it could have an impact on your activity? Or do you believe they will target different segments? Thomas Hasler: Okay. I think the first question was on oil prices, right? Yassine Touahri: Yes. And whether it means that we should continue to -- we could continue to have an environment with limited price increase and limited cost inflation. Thomas Hasler: Yes. I mean we -- this is quite volatile. It is low at the moment. This is, in general, for us a positive. But I would say it's limited. I mean, this is also what we have talked about this year. There is -- some commodities have some softening, but others are still increasing cement, for instance. So I think on the input side, I think we are having here as far as we can predict, we have a relatively stable environment. So that is giving us also the possibility to make our price adjustments in line with our margin expectation. So I'm not concerned. But of course, things can change if one source comes unavailable and prices could rapidly move upwards. But at the moment, it's not a major concern. The -- and the second question was on the competitive landscape in China. I mean, here, you have to see that we are the only remaining sizable international construction chemical player in China for years. This is not just yesterday or the day before. This is our position in China. We have an exclusive position in the direct construction market. This is -- these are the higher-end construction. I talked about the multinationals, but I also talk about, let's say, sensitive infrastructures, nuclear power plants and others, airports and so on. So we have been able -- I mean, there are thousands of players in China and super aggressive in all aspects, but we have been able to hold strong in this market. And I believe our possibility to benefit through our, let's say, global excellence in a market that is maturing in a market that is also demanding higher building codes. The government is pushing for higher building codes as they see the adversal effect of cheap, let's say, infrastructure built 10 or 20 years ago. And we have a reputation in China that is outstanding, and we can also enlarge our addressable market in China through this trend. So this is on the direct side. On the indirect side, I talked about our distribution. I talked -- but you have to see that this is an application where our company has a market-leading position in China. Our brand, our international brand stands for reliable products to the homeowners. Homeowners, they buy, let's say, expensive tiles from Italy and homeowners do care that they are installed with a brand of trust. That's our unique -- of course, our products are up to the highest standards. But it is also our network that involves not only the applicator, but also the owner bring across this value. And this is very difficult for, let's say, the mainstream Chinese competitors to attack us. They attack themselves. So it is Oriental Yuhong and Nippon Paints that are crossing each other's way left and right and through brutal price war try to steal each other's market. Our market is much more protected through our unique positioning with our brand in China. And then... Yassine Touahri: Kingspan, yes. Thomas Hasler: I think -- I don't know if I should comment. I mean, I don't see it as a threat, not at all. I mean the North American roofing market is huge, and it has sizable players. I mean, sizable. And we are active in a very, let's say, clear designated area with large commercial buildings, where we have a reputation, where we have specifications, where we have applicators, I feel well protected. I have no fear. But if you go in such a market where there are the big boys playing, I would say I have respect for the courage to go into that market, but that's not me to comment and it's not me to make assessments there. It is an attractive market. I agree. It is for us, a fantastic market. But I think we have here also a unique position with our focus on the high end on durable and sustainable solutions with owners, with the focus on clear commercial large-scale roofs. Dominik Slappnig: Thank you very much. I think this brings us to the end of our call. We take this opportunity as well to highlight the date of our Fast Forward Investor and Media Conference on November 27. The conference will be held in Zurich, Tüffenwies, and it will start at 10 a.m. CET. So for all these who would like to fly in and out the same day, I think this will be possible. With this, we thank you for listening to our call and for your interest in Sika. We wish you all the best. Thomas Hasler: Thank you. Adrian Widmer: Thank you very much. Bye-bye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Welcome to Sdiptech Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Anders Mattson and CFO, Bengt Lejdstrom. Please go ahead. Anders Mattson: Hi, everybody, and welcome to our Q3 presentation and Q&A. I am Anders Mattson, CEO of Sdiptech, and I will be presenting the results together with CFO, Bengt Lejdstrom, here today. I will start with the highlights of the quarter before we go into the more general content with the financial results. So in the quarter, we have implemented and streamlined our portfolio and Sdiptech will become a more coherent and better aligned group going forward. Until today, we have consisted of 41 companies in our 4 business areas. We have historically been growing our adjusted EBITA at a good level, but we have, at the same time, been quite volatile. Our portfolio has partially been based on installation companies, companies with exposure to cyclical end markets like construction and quite a few companies with a margin around 10% in the group. And these companies were usually or most of them required before our strategic shift into. So if we look at the financials here for this total portfolio in Q3, we had approximately 19% in adjusted EBITA margin and 12% return on capital employed. If we look in the middle, so what have we done? We have assessed on our key strategic priorities. We prefer product-based companies. We like markets with strong underlying growth drivers. And we would like to see a clear niche, which is usually protected a good way and that's also the reason why we [Technical Difficulty] in many of our business units. So based on this assessment, we have made a decision to divest 11 companies from the group. We have already started the process of finding new homes to these companies, and we have good progress with several of divestments so far. As these 11 companies only stand for roughly 3% of the year-to-date adjusted EBITA, their P&L effect is minor. On the balance sheet, the result will be a write-down of SEK 500 million in goodwill and other intangible assets. And Bengt will come back to this later in the presentation. So if we look to the right here, from today and going forward, we will consist of 30 companies and a better aligned portfolio. We believe we will be able to more proactively drive organic growth with this portfolio. And from our point of view, it's also a better allocation of capital towards our strategic priorities going forward. Financially in the quarter, as I said, is a minor effect. Adjusted EBITA will be reduced by SEK 7 million from SEK 242 million to SEK 235 million. but our adjusted EBITA margin will go up from 19.4% to 21.3%. And return on capital employed will increase from 12% to roughly 13%. So in the presentation going forward now, I will present numbers according to the core portfolio. So summary of the quarter from a financial perspective, net sales increased with 9%. That was 4.5% organic growth and roughly 9% due to acquisition. We were glad to see solid demand from all our business areas. It was positive to see a slow recovery from some larger business units where orders have been pushed forward in the year from Q1 to Q2 and now in Q3, we finally got some sales realized. Adjusted EBITA increased with 9% at 2.4% organic and rough from acquisitions. The increase in sales made EBITA grow as well. So it's not only because of cost adjustment. And year-to-date, we are still behind last year's numbers, but positive with the organic growth in the quarter. We have also been able to maintain the margin of 21.3% in the quarter, which has been quite challenging due to tough market conditions, both on price and also actually to getting the customer to commit to the orders. We had a strong cash flow generation in the quarter as well of 94%, which resulted in SEK 255 million in cash. And that was primarily a result of improved inventory levels from a high level in the last quarter. If we're going into the net sales, the net sales increased with 9% to SEK 1,102 million. And as I said, there was a good demand, solid demand from all our business areas. And the 4.5% organic growth is something we are, of course, satisfied with in the quarter. As I also talked about previous quarters, we have experienced a slow first half of the year, especially from some larger business units in the group. So it's a positive sign that I mentioned as well that we have been able to deliver and recognize sales in the quarter. We have also had a strong contribution from acquisitions. And some of the acquisitions is influenced by strong growth drivers linked to security around data center as one example, and that is in our smallest business area, Safety & Security. In the graph to the right, we have separated the core portfolio since 2023. And from this date, you can see we have achieved a CAGR of 13% in sales growth. If we're looking at the sales split, the sales split of the portfolio looks now a little bit different. After the separation of the core, Sweden has decreased in size and now it's only between 5% and 6% in total sales from the portfolio. U.K. is still our biggest market. We believe we are successful in the U.K. We like the trend with the long-term investments in infrastructure assets. Other Europe is now roughly at 20%. This is a geographic area we foresee to continue to grow in. If you look to the right, turnover by type, proprietary products is the dominant type of revenue for us as a group. Installation has been reduced as a result of the core portfolio. The installation and service that you still hear -- you still see now is primarily on our own products. And we have several companies with a strong service offering that enables stability in the earnings. And that's usually both service on hardware, software and manual labor hours as well. But again, on our -- primarily on our own products then. Coming into the adjusted EBITA. Adjusted EBITA increased by 9% to SEK 235 million. That is, for us, a stable profit growth with 2.4% organic growth. We also had a strong contribution from acquisitions with 10%, and it's coming primarily from companies within Safety & Security and also from companies within Energy & Electrification. And again, that's the trend around security for data center that has been driven this acquisition quite good in the quarter. The margin at 21.3%, we have been able to maintain from last year. As I mentioned before, it's been a price pressure in the market. So being able to maintain this margin is a result of a good cost control, both from activities within purchasing, but also from overall overhead cost development. If we look at the diagram to the right, we see a stable and high level in adjusted EBITA in percentage since 2023. If you also then look at the CAGR, the CAGR of the EBITA is at 11%, and we know we can do better than this. But in this graph, it's affected by a slower pace of acquisitions since last 1.5 year and it's also a weaker, as we know, organic growth since the beginning of 2024. So looking at the development in our 4 business areas, I think it's important to mention that we believe our 4 business areas serves us well as a group. They are broad enough to enable good M&A opportunities within each and every business area. And they also align our focus to the markets with strong underlying growth drivers, which is very important for the long-term development for us as a group. In Q3, all 4 business areas had solid demand. It's also positive to see that our smallest business area, Safety & Security, had a strong development in the quarter. If you look at Supply Chain & Transportation, we have begun to recover in this one after a weaker first half of the year. Several customers in this business area postponed their orders, actually from Q2 during the summer into Q3 and some into Q4. But in Q3, we released some sales, and it was also a good scalability, which led to margin improvements in the business area. Safety & Security, as I already mentioned, had a strong quarter, and there was several smaller units benefiting from favorable market trends, the one I already mentioned around data center, but also around emission control, pollution control, which is a strong area for us. And the new acquired companies in this business area also affected positively. Within Energy & Electrification, performance was mixed. A few units were driven by continued strong demand from energy efficiency, while some units were still affected from some very tough comparison from last year. That was from Q1, Q2 and also now in Q3. In Water & Bioocconomy, several units performed well, although margins were impacted in this business area by some cost pressure. And we are working to -- but we also need to be balanced to foresee future opportunities and future growth in regards to our cost base. And with that said, I hand over to you, Bengt. Bengt Lejdstrom: Thank you, Anders. Yes. And let's have a little bit deeper look into the cash flow and cash conversion for the whole group. As Anders was mentioning, we had a very good cash conversion of 94%, much of that coming from the inventories that were built up during the summer for seasonal sales that have started now and will continue into Q4. Improved the whole situation with inventory levels. We also saw some lower tax payments compared to last year. So all in all, a good quarter. And as you can see there on the chart that typically, we are between 70% to 90% in cash conversion. That's from operations and from working capital ups and downs. And we're now on a last 12-month basis, right in the middle at 81%, comparable with last year's 83%. We also start to show in our reports now the free cash flow per share. We haven't reported that for a very long time, but we report it now. And we had a very good free cash flow. That means all cash coming in from the business and also after the working capital adjustments, but then deducting the amortization of different leasing contracts as well as deducting the capital expenditures for different type of investments in the companies. So really, the only thing not included is when we acquire companies or pay earn-out debts to already acquired companies. So that cash flow was very good. And apart from the good cash flow from the operations, we saw a lower CapEx level in this quarter as we have done also for the full year. We work very closely with the companies, of course, to decide what type of the investments they should do. And we do that by looking at a classical DuPont chart, you could say that we -- where we look at both their EBIT margins and their capital turnover and see what kind of return on capital employed they have and from that decide what's most prioritized. So yes. And also the free cash flow for the last 12 months, as you see here at the last bullet is also very strong coming then both from the operations and from lower capital expenditures. Looking then at some additional metrics. We have the profit after tax, of course, an important measure. And -- but this quarter, it's a bit affected quite heavily actually by this write-down of goodwill when -- and it's all of SEK 500 million, this write-down of goodwill and other immaterial assets. When we moved these companies that will be divested out of the business areas, we could then make a full impairment test of their values. As you know, we do our impairment tests on goodwill, et cetera, based on our business areas because they are our cash-generating units. And all our 4 business areas have been able to defend very well the values that are in there. There is no risk for write-downs of the business areas. But when we then subtract out these specific companies, we have enabled them to look at them individually and in fact did total write-down of SEK 0.5 million. But if we exclude that more bookkeeping exercise, it's not cash generating anything, not affecting the cash flow, then we see that the profit after tax was a little bit lower. The difference is mainly because of the currency effects. We had SEK 14 million of currency loss in the quarter. And as you could see and hear from Anders previously that it affects both top line and profit, of course, this 4%, 5% all in all FX effect. But in our finance net, it affects us with SEK 14 million in the quarter. And that also affects us on the last 12 months. Then total, the finance net is affected with SEK 50 million, most of that coming from currency effects. And as you saw on the chart on our distribution of sales that currency effect could, of course, be quite substantial as the Swedish currency becomes stronger as we have more than 90% of our revenues kicking in from other currencies. Then another measure then taking that profit after tax and take it per ordinary share after dilution, you see then a very hefty minus in the quarter, minus SEK 11.14 per share. But if we then exclude this write-down, it's 2 -- a little bit more than SEK 2 per share, and it's of the same reasons as I just explained. And that also goes for the last 12 months compared with last year. Then taking a look on the leverage. We saw a quite big increase in the financial debt leverage compared with last year and also compared with the year-end last year. And that's because we have paid out earn-out debts. These earn-outs have been provided for in the balance sheet ever since we acquired the companies. So the payout of earn-outs do not affect the net debt in total, the bottom line, but it affects the financial net debt. So that has -- we have paid out about SEK 150 million in the quarter and almost SEK 400 million in the year, year-to-date. So that's, of course, a lot of money going out, but it's going up and it's having performed very well since we acquired them. So it's a good thing to pay earn-outs. The total net debt compared with the adjusted EBITA has decreased since new year since we haven't made so much acquisitions, but it increased from last year September because we have acquired SEK 85 million of profit in the last 12 months. And of course, that affects the balance sheet and since the organic growth hasn't been top notch during that period. That affects the profit and results in an increased -- slightly increase in the net debt leverage. Then as the last financial metric here presented, we look at the return on capital employed, the ROCE. And as Anders mentioned, it was 12% now. It's counted as, of course, on the average capital employed for the last 4 months and then compared with the EBITA profit we have had. And that decreased because we have increased the capital employed from the acquisitions and the organic growth, as I said, has been -- last 12 months have been slightly negative. If we just look at the outgoing balance of capital employed after the write-downs of goodwills, we are at almost 13%. And if we only look at the core businesses, taking their capital employed and their profits, then we're at 13.5% now. So as we divest these companies one by one, then, of course, then the capital employed is reduced and this ROCE will increase slowly, but steadily. If we look upon the operational return on capital employed, that is the average from our operating units, we're at 51%, which is, of course, very good, we believe. Okay, with that, back to Anders. Anders Mattson: Okay. Thank you, Bengt. So coming into acquisitions, which is a very important aspect of our business model. Year-to-date, we have acquired SEK 40 million in EBITA, and we hope to close one small deal before year-end. We have some ongoing discussions that is quite far in the process. So that's the aim for the year. I think it's important to mention our guiding principles here in regards to M&A. Regarding the pipeline, we continue to build the pipeline to meet the customers and customers -- sorry, companies to come to the discussion about the final acquisitions, and we do that, and we have a strong, solid pipeline in place continuously building that one. In regard to valuation, we're disciplined here. We know that it's easy to go away in valuation. And we have -- during this quarter, we have stepped away from 2 deals that I was part of as well due to the valuation was going too high for us. And on the leverage side, as we have said, our aim is to reduce the leverage in the future. So of course, that together with our disciplined evaluation is affecting as well the numbers of acquisition and the number of EBIT we have done so far in the year. I can also add here that we have started to look into Germany. We did it already last quarter, but it's a good progress and a lot of exciting companies in that region for us now and also for the future, we believe. Okay. So last slide before we go into the Q&A, a little bit of the takeaways from the quarter from us. I think the solid underlying demand is positive. A majority of our companies had a stable demand in Q3. It is still uncertainty out there in the market. And the condition for many of the businesses in Q4 is unstable. We see that 2026 is a positive sign for us, but it's still uncertain. And that's what we see right now. And we don't want to say anything more about 2026 than that here today. On the second bullet here, on our strategic actions for the long-term value creation, we have taken some very important steps in the [ quarter line ], our portfolio. We have been talking about that for quite some time, and it's -- I think it's good for us for Sdiptech to finally have done this decision now going forward. Many of the companies, we will divest. We have ongoing discussions with and progress in a good way. We have not set any strict deadline when it needs to happen, the divestment. But both from our perspective, from the company's perspective, we would like to be efficient and fast in the process. So that's what we are driving at. We have -- during the autumn as well, we have looked into our strategy, and we have made some adjustments, and we will present that on a Capital Market Day in end of November. And on the last note then, the acquisition pipeline. It is a solid pipeline that we have. Discussions ongoing, but we keep a strong discipline in our valuation and also around our investment criteria, especially with our aim to decreasing the leverage over time in the future. So that was, I think, everything from us as a presenter, and I think we can open up for our Q&A session as well now. Operator: [Operator Instructions] The next question comes from Max Bacco from SEB. Max Bacco: Well done in the quarter. Three questions from my side, 3, 4 questions. Perhaps starting with the cash flow. As you said, very strong here in the quarter, partly due to lower tax, but also lower CapEx and then quite neutral impact from net working capital. So the first question on cash flow, I think you mentioned this, Bengt. But here in the end of 2025 in Q4, do you see potential for further support from net working capital in terms of the cash flow? Or yes, what's your thought on that, if you start with that one? Bengt Lejdstrom: Exactly. Now typically, Q4 could be quite good from a working capital perspective since we have some seasonal oriented comp. There's no moving equipment and heat work and so on. And they have been building stocks during the summer and starting now then to sell it and turn it into accounts receivables, of course, but then also get the cash in from those invoices. So -- last year, it was actually above 100%, the cash generation. So it's not that high this year, but still Q4 is typically good for net working capital. Max Bacco: Okay. Sounds promising. And then you actually touched upon this also during the presentation that in the quarter, CapEx was a bit lower and that you have a very strict process with the subsidiaries when deciding how to allocate capital. And perhaps thinking a bit more long term than just next quarter, but historically, Sdiptech has been at some 4% of sales in terms of CapEx. Do you see a potential to reduce that number going ahead and perhaps allocate more into acquisitions instead and deleveraging? What's your thought thoughts on that going forward? Bengt Lejdstrom: Yes. I mean it's typically perhaps difficult to say the exact number for the future. But I think if we have been sometimes around 4 and even above, I think we're more around of sales now in CapEx spending. So -- but as I said, it's always depending on the actual situation and what's most profitable for that company, for example. But yes -- but we have tightened up the process quite a bit. Anders Mattson: I can add to that as well, then. Yes, I think what Bengt said there, it's important for us to see the CapEx and the need for the total portfolio and to prioritize in the coming years in a better way. And that's something we have looked into ourselves in our strategic work as well. Max Bacco: Okay. Sounds good. And then changing topic. I mean as you have explained yourself, quite a lot of things going on right now in Sdiptech, I mean, everything from improvement measures in several core subsidiaries. You still have an active M&A pipeline, you have ambitions to divest several companies. And I guess you're preparing as well for Capital Markets Day here in the end of November. Just curious how you allocate responsibilities internally? And do you consider yourself to be able to execute on all parts without, I guess, losing momentum and/or sacrificing quality? What's your thoughts on that? Anders Mattson: Yes, I think from -- I agree, it's a lot of -- on the agenda, but I think we have structured it quite good. The M&A team is not responsible for the divestment. So they are focusing on building the pipeline and meeting and executing on the M&A side. We have other internal individuals responsible for the divestment. And it's going quite good actually with -- we are not going on big broad processes. We are identifying smart, we think, key potential buyers to the businesses, and we drive that process quite efficiently. And from the other perspective is that we are still working on establishing the new business area organization. In August, Daniel started as the new Head of Supply Chain & Transportation. And we are quite far in the process to recruit somebody in the U.K. as well for Energy & Electrification. And I think that will, of course, be very important going forward to have that stable organization in the business area side as well. But so far, it looks -- feels good on that side. Max Bacco: Okay. Perfect. And then one final question, turning a bit more short term again, Just if it's possible, if you could help us how we should think about Q4 here in the next quarter in terms of comparable numbers, both for core and noncore? I mean at first glance, it looks like that noncore or other operations seem to have a quite weak Q4 last year. I guess it's some seasonality into it as well, whereas core had a more -- it looks like more decent quarter Q4 last year. Did you share that view on things? Anders Mattson: Yes. Yes, I can -- definitely, it's correct. In our situation, we look at the divestment process. So it might be that some of the companies might be divested now during Q4. And then, of course, it's going to affect that comparable numbers then. From the core, I think Bengt was touching upon that as well, that it's important that our companies with a bigger seasonal effect deliver now. And it's a little bit -- as we said, it's a little bit unsecured at the moment. We have some more slight negative, so to say. But overall, it's a positive sign for the future. But it's -- right now for Q4, we have said not to guide anything more than this at the moment. Operator: The next question comes from Simon Jönsson from ABG Sundal Collier. Simon Jönsson: First, just I want to say, it's a nice addition with the free cash flow per share KPI. Things like that are appreciated. And then I also have a question, like Max, on the acquisition pace. You -- it sounds like you expect maybe one more smaller acquisition this year. And it sounds like you remain quite active in new deals. So I just wonder how you think about new acquisitions versus your preferred gearing levels sort of what you're comfortable with and where you think your limits might be in terms of gearing and how much you can do on the acquisition side in near term. So I guess that's maybe not Q4, but in coming quarters or so. Anything on that would be helpful how you're thinking? Anders Mattson: Yes. So I think on the first perspective of this, it's important to be active. We prefer to say no to deals than not having the deals to not sit at the table. So we are, yes, definitely building the pipeline and meeting the customer and trying to get to the deal, so to say. But regarding the exact numbers, we will touch upon that, and we have discussed that internally in regards to our Capital Markets Day that we will come up with targets, I think, around some potentially new financial targets there. But right now, we are at 3.2%, as Bengt showed you, but I think we would like to go down from there and not to go up. So that's the balance. We still would like to acquire those value companies that are out there when we can get them at a good valuation, but still ambition is to drive down leverage. But we don't want to make it too fast and not make any stupid decisions when we have the good targets out there. Simon Jönsson: All right. Good answer. Then I just have a follow-up on the margins on the segments, specifically on Water & Bio. You commented briefly on the margins in that segment were impacted by cost pressures. Could you maybe elaborate a bit more specifically due to the margin decline year-over-year and how we should expect that those pressures going forward? Anders Mattson: Yes, we have a company, which is having a lot of big workforce. So from a salary perspective, salary increased quite significantly in the beginning of the year in -- especially in the U.K. And we are having some longer contracts with insurance customers, which is very hard to adjust for those kind of compensation or salary conversations. So there's a tough year for that company specifically in the U.K. And then -- but that's really the majority. And then we have also in other companies, we have been taking some decision to build up a little bit more because it's -- we need that for -- to be able to deliver for a possible upside in the coming quarters. It looks good from a revenue side in projects and orders. Operator: The next question comes from Martin Wahlstrom from Redeye. Martin Wahlstrom: The first one is related to the dynamic you say, where you postpone orders from H1 to H2. Could you give any more color on the split between kind of what lands in Q3 and what lands in Q4? Anders Mattson: I think we have a good -- let's say, part of that was actually now coming into Q3. But yes, it's still -- some of those orders, it's -- I'm thinking specifically of the 3 companies in the group. They have been promised orders. It didn't come in Q3. So yes, potentially, it will come in Q4. The good thing when we have the U.K. companies that they have the budget year in actually end of March 2026. So it's still on the right side in the budget, so to say, for some other companies. But no, it's difficult to say that, specifically how much of it came in Q3 and how much is going to be realized in Q4. Q4 is more about what I think we answered before as well, the seasonality in some of the winter needs to come, and we need to be able to deliver for the season or in season as well. Martin Wahlstrom: I see, I see. And then one final question is related to if you could give some more color on the distribution in your acquisition pipeline when it comes to kind of the split between business areas and geographies going forward? Anders Mattson: So from business area perspective, it's, let's say, it's equally among the 4 business areas. We have had some good discussions within supply chain, but also in Safety & Security in the recent quarter. So I think that's good. It's important that we work with all 4 business areas in acquisitions. From geography, it's actually nothing special there. It's our main geographies. It's U.K., it's the Nordics, it's Italy as well. And then as I said as well, we are going into Germany, and we have some good discussions with German or Dutch as well companies. So the DACH countries. It's -- so that's new and fresh into the pipeline, but nothing more or more significant than other geographies at the moment. Operator: The next question comes from Linus Alentun from Nordea. Linus Alentun: Just a quick couple of questions here from me. Starting off in Water & Bio, what would you say is a normalized margin here once we see a rebound? Bengt Lejdstrom: Well, I could perhaps step in there. Anders Mattson: Yes. Bengt Lejdstrom: Yes, we have seen -- typically, they have been around 24%, 25%. And then as the companies we now count as the core companies in that business area. Now it was 21% in this quarter for the reasons that Anders mentioned. So we're working to get it up there again. So whether it will be 23% or 24%, 25%, that's, of course, still to be seen because there are many different unique situations to take care of. But at least we're working to improve from the current 21%, that much we can say. Linus Alentun: Okay. And on '26 here, you mentioned in the report that, that is when you see a broader recovery. What makes you confident in that? Is there anything -- any indicator you've seen turning more positive or... Anders Mattson: No, I think it's the discussion with the companies. We are in a budget process as well, and we've been asking -- or in our discussions with the companies, it is positive momentum for business areas or business units and orders and they are looking into projects for next year and new potential customers. So no, it's from that perspective, talking to the companies and seeing there what they see for the orders and for the potential in the coming year. Linus Alentun: Okay. Super. That's super clear. And just one last question here. If I remember correctly, you had some swaps here that are contributing negatively in the net financials. What's the time line? When will they stop affecting here? Bengt Lejdstrom: Yes, we have 2 types of hedging arrangements. One is for interest and those interest swaps are right now negative. They were positive before when the interest rates were higher. Right now, we pay an extra 0.2 or so percent on the debt. But they will be closed from end of next year. And so 1, 2 years, you could say. So it's not a very big downside, but still, we pay about 20 basis points more than we should because of those hedging. But they have been giving a good return because they were better before. The other side, we have hedging arrangements on currencies. And there, we tried to hedge our currency exposure in the balance sheet to some extent. And not -- we're still net asset positive, which means that when, for example, British pound sterling is weakening towards the SEK, all in all, we get then a cost in the P&L, but not as much as we would if we hadn't those FX swaps and hedges. Linus Alentun: Okay. Super. So 20 bps there. Operator: [Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions or closing comments. Bengt Lejdstrom: Yes. And I could kick off then with the questions. We have received 3 questions in the chat here. I think one we have already answered that was regarding the EBITA margin in the Water & Bioeconomy business area. And the second question was that some of the companies we are now intending to divest among the other companies. They have quite well-performing companies with good margins and product based to some extent. Why divesting such companies? Anders Mattson: Yes. I think I can add to that question is that -- so what I said, what we look for in the companies we would like to buy in our strategic priorities is around 3 things. We would like to have a strong promise that actually have their own products. They sell and they make service to them. We also want to have not cyclical end markets. It has been a challenge with some of the companies, which is very cyclical and working, trying to proactively work with organic growth is quite difficult if you don't have the mindset, that's what it is with those companies. And the third thing around the niche. If you have niche, you can protect it and you can drive growth from that niche. And all of these companies that we're giving examples of here, they have some aspect or they are not meeting that criteria. So it's been -- for us, been challenging, and we would like to allocate that money into more our prioritized businesses and future businesses. And we believe many of these businesses, as we said, it's not because they are performing financially bad, it's more that -- to allocate that capital to something that we believe in the future is better according to us. Bengt Lejdstrom: Thank you, Anders. And then the last written question, as I see, it's regarding the write-down if -- was that a one-off? Or could that potentially continue to be more write-downs Q4 and also next year? But what we have done now is to the best of our knowledge, as it's typically called and also to write down the value. So we don't foresee that we need to do any more write-downs. And of course, it's depending on how much money, high considerations we will get for the companies once we divest. But we believe at least that the value of these companies represent their market value and potential than consideration that we will get. So it shouldn't be any major at least. It could be -- go both ways. We could both have some profits or we could have some smaller losses when we divest, but it shouldn't really be any big numbers. But no write-down of goodwill as such because of any impairment. I think that was all of the written questions. So back to you, Anders. Anders Mattson: Yes. I think then thank you for the written question and asked question. And yes, thank you all for listening in, and we are looking forward. And hopefully, we will meet some of you at the Capital Markets Day in November, which will be held here in Stockholm, and we are looking forward to that. So with that, thank you, everybody, for today.
Operator: Good morning, and thank you for standing by. Welcome to Booz Allen Hamilton's earnings call covering Second Quarter Fiscal Year 2026 Results. [Operator Instructions] I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg. Dustin Darensbourg: Thank you. Good morning, and thank you for joining us for Booz Allen's Second Quarter Fiscal Year 2026 Earnings Call. We hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. With me today to talk about our business and financial results are Horacio Rozanski, our Chairman, Chief Executive Officer and President; Matt Calderone, Executive Vice President and Chief Financial Officer; and Kristine Martin Anderson, Executive Vice President and Chief Operating Officer. As shown on the disclaimer on Slide 3, please note that we may make forward-looking statements on today's call which involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our second quarter fiscal year 2026 earnings release and slides. Numbers presented may be rounded and as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on Slide 4. Horacio Rozanski: Thank you, Dustin. Welcome, everyone, and thank you for joining today's call. This morning, Kristine, Matt and I will share our financial results for the second quarter of fiscal year 2026. The headline for our call today is that the reacceleration of our business will take longer than we expected when we spoke last quarter. As a result, we are lowering top and bottom line guidance for the year. As I will describe in a moment, this is based on continuing friction in the overall procurement environment and fundamentally different dynamics within our civil and national security portfolios. By national security, I mean the combination of our increasingly integrated defense and intel businesses. At the same time, and despite these near-term headwinds, we continue to see strong performance in our most exciting growth vectors. This success fuels our optimism for the medium term. In a few moments, Matt will take you through our quarterly results in depth and cover how they differ from our original expectations. Before that, I would like to describe the market and how it impacts our business differentially, where we see growth coming from in the near and medium term and the actions we are taking to compete and win in the current environment and to set us up for long-term strategic and financial success. Beginning with the market. This is the most bifurcated environment I have seen in my decades with Booz Allen. Our civil and national security portfolios are experiencing completely different dynamics, and we believe both face different prospects over the coming quarters. Our civil business is operating in the most challenging market in a generation. Over the past 9 months, the pace of change in civil agencies focus on funding has moved at extraordinary speed. As we shared in May, this resulted in run rate cuts in some of our large technology contracts. Since then, the business base has stabilized and we have seen some growth in pockets. However, the procurement environment and our near-term pipeline in civil have not recovered. Our second quarter is typically the most active as it coincides with the end of the government's fiscal year. This year, we saw no major procurement actions nor plus ups or cuts on any existing contracts. And we also did not see nearly the typical pace of tactical selling. Given this environment, we expect our return to growth in civil to be delayed by several quarters. When exactly that happens, will depend on how funding and contract activity evolves. For our part, across all levels of government, we're discussing potential opportunities that align to the administration's highest priorities, from critical minerals to border security. These are excellent and very promising conversations. There are also several large RFPs in our growing medium-term business pipeline including new work and recompetes. Looking ahead, our focus in the civil business is to maximize our AI capabilities and commercial technology partnerships to revolutionize delivery and reignite growth. The dynamics across our defense and intelligence markets, broadly speaking, our national security portfolio, are fundamentally different from civil and are much stronger. There remains some friction in the funding process, characterized by shorter funding increments and slower ramp-ups in new contract wins. Despite this friction, the pace of awards in international security portfolio has been encouraging. Of our $7.2 billion of gross bookings in the quarter about 90% were in national security. This includes the almost $1.2 billion [indiscernible] task order, where Booz Allen will help the Air Force Research Laboratory to increase for fighting lethality through adoption of advanced technologies. We also won 3 other notable awards valued at over $800 million each, including a competitive takeaway win with the United States Army National Guard, Intelligence and Security Directorate and 2 wins at the Defense Intelligence Agency, where we will modernize military intelligence and deliver new AI/ML capabilities in global no fail missions. Booz Allen continues to win in national security because we bring our unparalleled technology and our depth of mission expertise to the fight. Looking more broadly across our national security work, our leading positions in cyber, AI and war fighting tech are highly relevant to the Trump administration's technology and mission priorities. Our cyber business is increasingly differentiated. Our Thunder Dome product is becoming the standard for Zero Trust. We met all the government's milestones 2 years ahead of schedule. And just last month, it won the 2025 Cybersecurity Breakthrough Award. We also continue to be the largest provider of AI to the federal government as [ Deltek ] recently reaffirmed. And cyber, AI, a new hardware and software [indiscernible] converge, we are building the tech that makes Booz Allen unbeatable at the edge. Some of you actually had the opportunity to see our edge technology at AUSA and our recent investor event. From our modular detachment kit or MDK, to attack [indiscernible] solution, and our exquisite tactical gear, we are combining our own tech with the best commercial products to empower and protect our nation's war fighters. As we look at this year and beyond, we continue to see top line growth in our national security portfolio and the potential for expanded margins as the transition to fixed price and outcome-based products and solutions takes hold. Now reaggregating our portfolio and looking across the entire company, we did not see the normalization of the procurement and funding environment that we originally assumed. I am disappointed in our results this quarter and that we are lowering guidance across all key metrics. Simply put, the strength in our national security portfolio cannot offset the current year decline in our Civil business. This has led us to reassess our market assumptions and to take bold and significant action immediately. We are well prepared to operate in a highly fluid and dynamic environment for the foreseeable future. There are significant opportunities ahead. For example, in the funding of priorities from the One Big Beautiful Bill, the prioritization of AI adoption across all aspects of the federal government and the increased pace of converting contracts to [indiscernible]. But there are also headwinds like the government shutdown, the decrease in the acquisition workforce and the continued reevaluation of civil agency priorities. Booz Allen's goal is to remain focused and nimble in this environment so we can accelerate into the more clear and proving growth vectors in our portfolio, areas where we have clear technology and mission leadership. And to do so, our strategy is threefold. First, we are reducing costs by accelerating the use of AI in our internal operations and simplifying our operating model. We're also making the difficult decision to reduce layers and numbers in our senior ranks. These actions will allow us to continue to invest in our priority growth areas and accelerate decision-making. Matt will describe the impact and timing of this program shortly. Second, we are focusing our investments by doubling down on our strengths. This means flowing investment and talent to a few key areas where we are currently experiencing strong growth and that we believe can be accelerated further. Our primary areas of focus for the near term include cyber, both in the government and commercial markets; artificial intelligence, including growing areas like Agentic, physical and adversarial AI; war fighting tech, especially in edge technologies and mission systems; critical national security programs, specifically scaling our work in ongoing missions supporting the war fighter both at home and abroad; tech ecosystem partnerships, including existing partnerships like NVIDIA, AWS and Shield AI, our own venture portfolio; and new concepts and ideas with the best companies in Silicon Valley. And of course, continued emphasis on new tech from Quantum to AI-native 6G. Booz Allen will lead in the next waves of technology as well. And third, as the administration accelerates the transition to outcome-based contracting and commercial solutions, Booz Allen is leading the way. We are working with our customers to convert existing contracts and procure new work using these models. We are working diligently to productize more of our including our breakthrough ground systems and fire control solutions proposed for Golden Dome. These approaches will provide greater cost savings and certainty for our customers and provide us with margin expansion opportunities as we gain greater flexibility in how we deliver. I believe that these steps, taken in combination, we'll expand our market leadership in key areas, accelerate the implementation of VoLT and importantly, strengthen our financial performance. In short, we are making bold moves in the areas we can control. Every period of adversity has made us stronger, and this one is no exception. We are transforming ourselves at breakneck speed. And I am deeply committed to ensuring Booz Allen is an essential player in driving America's technological superiority. Thus, I remain very optimistic about the future of our company. And with that, Matt, over to you. Matthew Calderone: Good morning, and thank you for joining us today. As Horacio noted, our business performance remains bifurcated. Our second quarter performance and revised guidance for the full fiscal year reflect this dynamic. In large portions of our business, we have real momentum, and we have a number of reasons for optimism about our medium-term financial performance. Most important, significant portions of our business are growing, and are positioned for continued growth. We anticipate that for the full fiscal year, our national security portfolio, inclusive of our Defense and Intelligence businesses will grow revenue in the mid-single-digit range. We won $7.2 billion of new work in the quarter, including 4 programs of over $800 million in our national security portfolio. We continue to build the technology that our nation needs and are rapidly expanding the network of commercial tech partners with whom we innovate. We have the ability to adjust our cost structure to meet near-term demand patterns, ensure we are cost competitive and create capacity to invest for the future. And finally, our balance sheet remains strong, and we continue to generate significant cash flow. This is a real strategic and financial asset. That said, we clearly experienced more disruption in the first half of our fiscal year than we anticipated, particularly in our civil portfolio. This is due to a number of factors. First, with the amount of change we are seeing in government, procurement cycles are stretching. New initiatives are seeing longer lead times and funding is coming in smaller increments. While the pace of contract funding improved over the course of our second quarter, it still lagged the prior year by 3%. And as a result, our funded backlog was down 6% year-over-year. Second, while our civil business has stabilized, and we have not experienced any negative contract actions beyond those discussed in the first quarter, there has been a substantial gap in procurements in the broader civilian space. We expect to see pricing pressures on large procurements, including a few notable recompetes. As a result, we now anticipate that our Civil business revenue will decline in the low 20% range for the year. Third, as stated previously, our Civil business has a proportionally larger share of fixed-price contracts and therefore, has historically generated higher profit margins than Booz Allen on the whole. Thus, our overall mix shift away from Civil is putting downward pressure on our margins in the near to medium term. And finally, the duration of the government shutdown has introduced an additional layer of friction into the system. We expect this will have a modest negative impact on our revenue and profitability for the full fiscal year. Echoing Horacio's earlier remarks, we previously stated that our FY '26 guidance was predicated on a normalization of the funding environment, particularly in our second quarter. While funding did pick up over the course of the quarter. In fact, September funding was consistent with the year prior. The overall pace of funding was meaningfully slower than the prior years. As a result, our business did not reaccelerate as we had forecast, and we now anticipate that our return to growth in the business overall, will require a few quarters. Due to these factors, we have revised our fiscal year 2026 guidance down across all key metrics. In our revised outlook, we assume that current funding and procurement trends persist through fiscal year-end, and therefore, they're on contract and new award growth relative to bookings will remain slower than in years past. Make no mistake, this is not the year that Booz Allen wanted to deliver, and we are taking significant actions in response. As Horacio stated, our focus going forward will be on 3 areas: doubling down on areas of our business where we see significant growth potential, working with our customers to convert how the solutions we build are bought in a more commercially oriented outcomes-based approach and restructuring our business to take out a net incremental $150 million of cost on an annualized basis. We have identified where this cost will come from and have already begun to take action. This will provide a modest benefit to our bottom line financial results this fiscal year. The full impact will be felt next fiscal year. We expect that these actions will support our margins returning closer to historical levels in fiscal year 2027, while having a modestly negative impact to revenue on our cost-plus contracts. Critically, these actions will also create room for continued investment in core technology and talent, allow us to be more competitive and increase our speed and agility to match the pace of the market. These are meaningful actions and are taking real effort. Some have long been in the works, some are painful, but necessary in a time of rapid change. Collectively, they support our VoLT strategy and our long-term vision for Booz Allen. And ultimately, they will position Booz Allen for an exciting new wave of growth and to deliver superior value for our shareholders. With that context, let's take a deeper dive into our second quarter results. For the quarter, gross revenue was $2.9 billion, an 8% decline over the prior year period, roughly a 9% decline on a revenue ex billable basis. Adjusting for the onetime reduction to our provision for claim costs in the second quarter last year, gross revenue was down about 5% year-over-year. Inside of these overall numbers, our market performance was not uniform. Our national security portfolio of defense and intelligence programs continues to grow. For the quarter, this portfolio was up 5% year-over-year, exclusive of the discrete items from the prior fiscal year. And we anticipate this portfolio will grow in mid-single digit range for the full fiscal year. In contrast, revenue in our Civil business was down 22% year-over-year, exclusive of the prior year discrete item. We anticipate that our Civil business revenue will decline in the low 20% range for the full fiscal year. Moving to demand. We had a solid sales quarter, both in volume and in quality, particularly in the context of a complex macro environment. Gross bookings totaled $7.2 billion in the quarter, including 4 awards in our national security portfolio with a value of greater than $800 million. These were partially offset by 2 distinct items: one, a typical in nature and the other consistent with seasonal patterns. In the quarter, we recorded about $1.1 billion in contract ceiling reductions, the majority of which pertained to fiscal year 2028 and beyond. These stemmed from our engagement with the new administration to identify out-year cost reduction opportunities, particularly as we shift to more outcome-based contracting. We believe this is a nonrecurring event, and it has had minimal impact on our run rate on these contracts. Second, about $1.3 billion of backlog expired during the quarter. This reflects the routine expiration of contract ceilings and is in line with historic Q2 levels. As a result, our net bookings for the second quarter were $4.8 billion. This translated to a quarterly book-to-bill ratio of 1.7x and a trailing 12-month book-to-bill of 1.1x. Excluding the out-year ceiling removal, book-to-bill was slightly greater than 2.0x for the quarter and 1.2x for the trailing 12 months. Total backlog at the end of the quarter reached $40 billion, up 3% year-over-year. Funded backlog grew about 34% sequentially to roughly $5 billion but was down 6% year-over-year. At the end of the second quarter, our qualified pipeline for the remainder of FY '26 stood at nearly $25 billion. This is roughly on par with the prior 2 fiscal years. In summary, we continue to see solid demand signals in a market that is bifurcated in the short term. We remain confident that as the macro environment stabilizes and we lean into our proven growth vectors, Booz Allen will be well positioned to return to growth. Pivoting now to headcount. Booz Allen ended the first half with roughly 33,000 employees. Our customer-facing staff was down about 3% sequentially in the quarter and is now down 10% year-over-year. These declines largely reflect lingering effects from contract run rate reductions in our civil business as well as deliberate actions to improve utilization of existing staff. We are running the business efficiently. Our customer-facing staff utilization in the second quarter was meaningfully above the prior year period. Operationally, we continue to align our workforce with our key growth vectors, including accelerating hiring in critical mission and technology areas. We continue to hire aggressively in meaningful portions of our business to support new wins and other growth opportunities. I will now turn to profitability. During the second quarter, we delivered $324 million in adjusted EBITDA, down 11% from the prior year period. This translated to an adjusted EBITDA margin of 11.2%, 40 basis points lower than the same period a year ago. Through the first half of the fiscal year, our adjusted EBITDA margin was 10.9%. We expect margins to decline in the second half of the year due to 3 factors: the timing of contract write-ups and award fees, seasonal spending patterns, and continued mix shift away from [indiscernible]. This will be offset to some degree by the part year impact of our cost restructuring actions as well as our shift to outcome-based sales. Moving down the P&L. Second quarter net income was $175 million, down 55% year-over-year. Adjusted net income was $183 million, down 21% versus the prior year. Diluted earnings per share was down 53% year-over-year to $1.42 per share, and adjusted diluted earnings per share decreased 18% year-over-year to $1.49 per share. The year-over-year declines in diluted earnings per share and ADEPS were driven by 4 factors: lower overall profitability with an unrealized investment gain and tax planning initiatives that benefited the prior year quarter and higher interest expense. These were partially offset by a reduction in share count compared to the prior year period. Transitioning now to the balance sheet. Our balance sheet remains strong and allows us to be proactive and opportunistic in how we allocate capital to create shareholder value. We ended the second quarter with $816 million of cash on hand, net debt of $3.1 billion and a net leverage ratio of 2.5x adjusted EBITDA for the trailing 12 months. Free cash flow for the quarter was $395 million, the result of $421 million of cash from operations plus $26 million of CapEx. Turning to capital deployment. In the quarter, we deployed a total of $279 million to generate value for shareholders. This included $208 million in share repurchases at an average price of $107.15 per share. We repurchased nearly 2% of outstanding shares in the quarter, $68 million in quarterly dividends and $3 million in strategic investments made through Booz Allen ventures. Today, we are pleased to announce that our Board of Directors has approved a quarterly dividend of $0.55 per share, which will be payable on December 2 to stockholders of record as of November 14. Our Board has also approved an increase of $500 million to our share repurchase authorization, bringing our available capacity to approximately $880 million as of September 30. Finally, please turn to Slide 7 for our forward outlook. As we have discussed, our original FY '26 guidance is predicated on a normalization of the funding environment. While funding and awards picked up over the course of the quarter, this pace remained meaningfully slower than in prior years. As a result, our top line and bottom line performance for the second quarter was below our forecast and we are reducing our fiscal year 2026 guidance across all key metrics. We now expect to deliver revenue between $11.3 billion and $11.5 billion. We now expect adjusted EBITDA margins in the mid-10% range. This translates to an adjusted EBITDA dollar range of between $1.19 billion and $1.22 billion. We now expect ADEPS of between $5.45 and $5.65 per share. Lastly, we expect free cash flow to be between $850 million and $950 million. As we forecast our growth cadence for the second half, we now assume that current funding trends will persist through fiscal year-end, and therefore, the on contract and new award growth relative to bookings will remain slower than in years past. Also, at the midpoint, our revised guidance range incorporates the loss of approximately $30 million in revenue and $15 million in profit related to the government shutdown. These estimates assume the shutdown extends through October 31. Although not contemplated in our guidance, if the shutdown does continue for the month of November, we estimate the impact would be roughly within the same range, assuming no material changes in government scope or Booz Allen policy. So to sum up, our market remains bifurcated and funding levels have not normalized as we had hoped. We are disappointed in our results this quarter and that we are lowering guidance across the board. We are winning significant new programs particularly in our national security portfolio, where we are pleased with our growth trajectory. We are taking significant actions immediately to adjust our cost structure and prepare us to reaccelerate growth and profitability. We are doubling down on the key growth sectors where we have real traction in the near term, primarily our differentiated positions in cyber, artificial intelligence, war fighter tech, and critical national security programs. Our focus is on positioning Booz Allen to accelerate performance into next fiscal year and beyond, and we are confident that we will be able to do so. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Louie DiPalma with William Blair. Louie Dipalma: given the shutdown in your high exposure to the federal civilian agency. Many investors were anticipating a guidance reduction. Horacio and Matt, you both used the term bifurcation several times and you also mentioned how funding in the month of September was actually consistent with last year's September. I'm drilling into that, are you receiving signs and indications that the funding environment for the defense and intel business is actually improving and getting back to normal? Or is this funding environment expected to be strained for your defense and intel business even after the government restarts and the shutdown? Horacio Rozanski: Louis, why don't I start? Thank you for the question. I think the notion of bifurcation is an important one as we look at the business, as we understand the business, I hope you will understand it as well. As I said in the prepared remarks, we see our Civil business operating in the most challenging market in the generation. To give you a sense of what Matt described as a gap in funding, we saw essentially every procurement slide to the right in lockstep and that's not something I have ever seen before. And as we look forward, we're not trying to predict the future as much as react and anticipate what's right in front of us. And so that's how we're thinking about it. By contrast, in our national security business, it's a much stronger environment. There's still friction though. The government shutdown certainly backs things up. If we end up in the continuing resolution environment, how the CR is written will have an impact on this. But as we think about it, we have these very significant wins. We're very happy to share with you this morning about we are not anticipating a very fast ramp-up on those wins. We're anticipating the ramp-up on those, in fact, to be below historical levels. It will ramp up but simply more slowly. And I think that's everything that we are talking to about this morning is predicated on the notion that there's -- that this friction is going to continue, not impede our growth, but continue. Now having said that, I think the key for us, as we're trying to describe this morning is to stay very nimble and to stay very focused. Staying nimble means not trying to predict long term but really trying to anticipate the short -- medium term and react as quickly as we can. Part of the cost actions that Matt described to you are a part of that in both to secure our financials and give us more capacity to both invest and react to pricing more nimbly but also to streamline our operating model so we can make the issues faster and move faster. And the second part is to be very focused. I am personally very excited about what I'm seeing in our cyber business, both in government and commercial our AI capabilities are in greater and greater demand. I think you saw, and hopefully, we're impressed by the war fighting tech day that we hosted last week, which is really becoming a crown jewel in our portfolio, some of this critical national security contracts -- or we support such important missions and do such great work there. And then the partnerships with the tech ecosystem which are really both giving us access to new opportunities that are more commercially focused and enhancing our go-to-market and our capabilities because we can move faster when we build on top of their tech. So when we take it all, obviously, we're not pleased with the results or the near-term guidance lowering, but that's how we see the environment. Louie Dipalma: And for the rest of the year for the civilian guidance of, I think, negative 21%. What is assumed year -- what is assumed there in terms of the government shutdown and further cuts to existing programs? Are you assuming that other programs are throttled or what is baked in the assumptions because investors are -- they want to know whether there's going to be another cut to the federal civilian business and if this is going to be in a perpetual cycle. So what gives you confidence that this is the last guidance reduction for the [indiscernible] civilian business? Matthew Calderone: Yes, I'll start, and then Kristine may want to provide some color as to what's happening in the Civil business. As we said in the prepared remarks, we didn't actually see any actions positive or negative in civil last quarter. So we didn't see any additional cuts. We also didn't see any plus-ups or new awards and new procurements and what have you. So if you look at our civil portfolio, outside of a number of large programs that we've talked about, that portfolio is going to be essentially flat, both at the top and the bottom for the year. I think which just sort of indicates sort of the state of where we are in many of those agencies. But those large programs matter, and that's why we're guiding down to in the low 20% range at the top. So we aren't anticipating any further cuts. We are anticipating a very competitive procurement environment with some pricing pressure, particularly on the large program side. We also are having great conversations with folks in the administration about some of our key priorities. So we've used the word stabilized in civil, and that's what it feels like, but stabilized after a fairly significant run rate on our pretty large programs in an environment where things just aren't moving very quickly. But Kristine, I'm sure you want to chime in there. Kristine Anderson: Thanks, Matt. Yes, the business is stable, as Matt said. The environment itself still continues to be very slow with very few new large bids and not much ramp-up in funding. But I think that reflects the administration's rethinking how they want to prosecute some of those missions. And the work that we do in civil is impressive technically, and it is aligned to the administrative priorities. For example, we have one of the largest Agentic AI software implementations in the world and it's in civil and we're leading in Agentic AI. And we do expect work to grow there again. And we are having lots of productive conversations with the administration leaders on some of -- some new approaches to the core missions where we're bringing commercial solutions and combining it with our IP and IC, their outcome-based commercial offerings that we're talking through. But again, it's just hard to predict exactly when those will launch -- and so as Matt said, we're just assuming the status where we are now continues through the rest of the year, but we do see growth over the medium term. Louie Dipalma: Thanks, Kristine. So was there stabilization in the Civil business from the -- in the September quarter relative to the June quarter? Kristine Anderson: I'd say, yes. Yes, it's been pretty steady since the reductions that we had a while back in the year. Matthew Calderone: Yes. But stable, it means we didn't -- again, there were no new decrements, but we also didn't see some of the on-contract growth in plus ups and typical velocity of tactical selling in Q2 that we would -- that we'd anticipated. Horacio Rozanski: Yes. Louie, when we talk about bifurcation, another way to think about it is if there's upside and downside in -- across all of our business, there always is. I would say, as we sit here right now, maybe a little more downside potential in the civil business, a little more upside potential in the national security business. But as I said before, I mean, the things change very quickly. And we could -- what we're trying to do is, like I said, it's flow of resources, flow investment to where we see the opportunities and not be married to a particular outlook, but rather just ensure that when there is an opportunity to grow, we double down on it. Operator: Our next question come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe 2 questions. The first one, a bit shorter term and bigger picture for this next one. So first, I guess, I think you guys have previously talked about the civil portfolio being 13% margins or so, which implies defense and intel is in the 8% to 10% range. Is that still the right way to think about the profitability for [indiscernible] customers? Matthew Calderone: Yes, that's in range, Sheila. We never quantified it that way, but we've talked about how Civil has a significantly higher proportion of fixed-price contracts. So that's roughly in range. Sheila Kahyaoglu: Okay. Got it. And then maybe a bigger picture question, Horacio, for you. How do we think about the business model for Booz longer term, just given pendulums clearly shift and maybe 3 years from now, it will shift back where we're scrubbing our models for national security exposure and saying Civil will grow again double digits? So how do you think about aligning the sales force and the workforce and your management team as you restructure the business a bit? Horacio Rozanski: One of the hallmarks of our operating model is the notion that we operate in a single P&L, and that gives us the ability to respond to the market across any arbitrary lines really fast. We always have. We -- every time, as you point out, an administration transitions, they refocus their priorities. As I said before, this is perhaps one of the most significant or the most significant refocusing that I've seen. But we're going to continue to make sure that we are taking advantage of our broad footprint to go where the opportunities are. The other piece of it is I do believe that because of the way technology has evolved more broadly, this idea of injecting commercial technology into missions, moving to outcome-based as opposed to input base models, and those big trends are going to continue well into the future. They were somewhat underway before. I think there's an accelerant right now as the Trump administration doubles down on a lot of this. But I don't see us going back. And so that's why we've invested so much time, so much effort and resources on building partnerships from the very largest tech companies to small startups with promising technology and everything in between. I think our position in this tech ecosystem I think gives us a long-term edge that we're just beginning to see realized just beginning to exploit. There's a couple of opportunities right here right now that we are chasing. One in civil and a couple of national security, that would be impossible without the strong partnership that we have with some of these companies. And the more people see Booz Allen as somebody who builds tech but also leverages tech that others build to create the right answer, I think the more power we're going to have in the market. Operator: [Operator Instructions] It comes from the line of Colin Canfield with Cantor Fitzgerald. Colin Canfield: So it sounds like the [indiscernible] reduction, Matt suggests there may be a little bit of downside in terms of the cost plus nature of the business. So as we do the building blocks on '27, if we assume Civil's down another, call it, 10% and Defense and Intelligence is accelerated to call it mid-single digit. We think the building blocks probably suggest something like 0% to 2% organic that should notionally accelerate and '28 off of that base. So, a, does that math make sense at a high level; b, fundamentally can you grow next year; and then, c, if not, when do you expect this business to return to growth? Matthew Calderone: Yes. Thanks, Colin. Look, I think a couple of things. One, as we talked about, we had a lot of momentum in our national security portfolio. Two, the Civil business is stable, right? And unfortunately, we saw a significant decline in the first half of this year. But obviously, our comps will get proportionately easier given where we are. I'm not going to get into next year. We got a lot of medium-term optimism. There are some significant building blocks. As Horacio said, the nature of this market is such where things are happening fast. And we've got some exciting opportunities in the fire. So I would not necessarily straight line the math exactly how you did, Colin, but I'm sure we have in this conversation over the next couple of quarters. Horacio Rozanski: The only thing I would add to that is, as we described the growth vectors that we're talking to you about, clearly, the national security market is more robust. And so we'll see those growth vectors play more strongly there. But the number of things we're talking about around cyber, around AI, around some of the tech that we're developing that is highly applicable to border security, to large event security to the upcoming World Cup and so forth, we are looking for opportunities to leverage and grow in the parts of our civil business that are most aligned with the administration's priorities and we're -- we will continue to do that pretty aggressively. Matthew Calderone: Colin, if I could just jump back in here. Two other thoughts for you. One is we are seeing an increasing pace of contract conversion to outcomes based. While small, the portion of our -- our natural security portfolio at fixed price did increase quarter-over-quarter, and that's certainly the direction of travel and in part because of that, but also other dynamics. I do think going forward, our growth will be not as linearly connected to head count growth for a handful of reasons. If I can just give you a couple. The vast majority of our FTE loss this year was in Civil, and that's where we have more of our fixed price contracts. And that revenue is not as "headcount" dependent. Second, we're driving up utilization. And then third, the mix shift that I just described. So I understand we've had a fairly stable business model and that's relatively easy to model for you externally. Those dynamics are changing, consistent with the kind of pace of change that Horacio was talking about, and we'll continue to engage with you over the coming quarters. Colin Canfield: Got it. Got it. So margin trough this year gets better over time and then growth is [indiscernible] is kind of my takeaway. I appreciate that the businesses have managed on a quarter-to-quarter basis, but putting an investor hat on for a bit. As we think about the next quarter, what would you fundamentally tell an investor that wanted to go short again next quarter? And then kind of why are the reasons would you expect that to be a bad idea? Matthew Calderone: [indiscernible] business is giving investment advice Collin. Operator: Our next question is from Mariana Perez Mora with Bank of America. Mariana Perez Mora: When you guys think about the new guidance, I'd appreciate some color around like how much is already in backlog, how much you have to go and like win and is still depending on like some contracts that could be delayed? Like could you give us some kind of like measure of how strong is that backlog coverage and also the pipeline and like if you have like any amount of like how that pipeline appears to a year ago or something? Matthew Calderone: Yes. Mariana, I think we're in the main anticipating that the current sort of burn rates and trends largely persist, that head count remains essentially flat obviously absent the cost reduction initiative that we described. And it's not really based on any significant new wins. But that does require some on-contract growth, do wins to ramp up and a handful of other factors. So we've -- in this current guidance, attempted -- there's not any material things that need to happen for us to land in this range, but it is a volatile situation. Mariana Perez Mora: And you mentioned on contract growth. How is your conversation with your customers right now about like certainty about like them needing that kind of growth or still like there is a lot of uncertainty if that's going to happen or where it's going to trend? Horacio Rozanski: I mean I'll start and I'm sure my colleagues are going to want to add. But we're having very productive conversations, especially in the national security side and especially in these growth vector areas that are talking about. So if you take cyber, for example, we expect ThunderDome, as an example, to continue to grow ThunderDome become really both a standard and a product that everybody wants, and we expect to see some level of growth there. A number of other areas in the national security space are -- we are seeing significant pickup. As Matt pointed out, we have not made any heroic assumptions about that happening in the back half of the year in recognition of the fact that our there is friction in the environment that we're still in the middle of a shutdown and all of that, and we've tried to incorporate that into the way that we're thinking -- on the one hand, on the other hand, we are as aggressive as we've ever been in terms of trying to accelerate past that. So that's sort of the thought process right now. Kristine Anderson: I would add that the administration really wants to push speed in some areas. So those conversations are extremely productive. And so that continues as well. Mariana Perez Mora: So you mentioned cyber, and the expectations were for that portfolio to actually grow like at speed. How large is that right now? And what do you expect for that portfolio? Again, like the near term has been volatile, but in the next like 2 to 3 years? Horacio Rozanski: I am as bullish about our cyber business as I've ever been for a couple of reasons. First of all, we do occupy a unique position in cyber in the national security space, that is both well recognized internally in the government, and it's a real strength of ours. Second, I always talk about convergence. If you think about what's happening in terms of AI and Agentic and how it affects cyber, 3 ways just to name a couple, right? I mean the attack surface has grown because the AI models themselves have grown -- are now becoming in their own attack surface. Second, adversaries are using cyber much more effectively by leveraging AI into it, and therefore, defense needs to move in that direction. And third, we are seeing across the board, interest in us bringing these capabilities, including in our commercial customers that are both under siege by a number of cyber actors and see us and what we do as being a key player in helping them move past that. So I think, unfortunately, cyber risks are everywhere, cyber risks continue to grow. And Booz Allen, I believe, has, in essence, the most powerful -- one of the most powerful cyber businesses in the world. Operator: Our next question comes from Gavin Parsons with UBS. Gavin Parsons: I just wanted to unpack the disconnect between awards and funding a little further, if we could. Is total backlog still a good leading indicator of demand and growth? Horacio Rozanski: Yes. Long term, but I think, obviously, short-term funded backlog matters, right? And our funded backlog -- our funding was down in Q1, 9% year-over-year, in Q2, 3% year-over-year, which nets out to 6% for the first half. So I think it shows the direction of travel, the funding environment has improved, but in no way normalized over the first half. Now there's a lot of noise in there, particularly in the current environment, as Kristine said, we're seeing shorter funding come in shorter increments. It's a little more episodic. So it's not a linear relationship as it used to be. But obviously, 4 words of scale, that's going to drive growth. I think one is a pure recompete, one was a recompete with increased ceiling, one was a new award and one was a takeaway. So again, we are less comfortable that it's going to ramp as quickly as we've seen in the past, and we built that into our guidance, but backlog absolutely matters. Operator: And our last question comes from the line of Tobey Sommer with Truist. Tobey Sommer: Could you discuss your process for determining how much growth investment to allocate and how you balance that against where you were targeting near-term profitability and head count cuts that's sort of a tight rope and there's tension there? And maybe you could discuss how you arrived at your decisions? Horacio Rozanski: I guess I'll start. Look, I mean, as somebody pointed out earlier, we do not manage this company for the quarter. We managed the company for the medium and long term. And we are making the investments that we believe are both prudent in terms of long -- short-term profitability, but important and exciting in terms of long-term growth at both the top and the bottom line. And look, that's always been the case. It is the case now. We're undertaking a difficult decision of doing some significant cost reduction in some ways to ensure that we can both deliver in the short term, really more focused on our FY '27, given where we are in the year, but also so that we have the capacity to stay nimble and invest in the areas where we see the most opportunity. And I think that, that is what's exciting about Booz Allen Hamilton. I mean I can talk to you about things that are growing now. I can talk to you about things that are -- we believe have significant growth potential in the short term, and I can talk to you about the things we are doing like Quantum and like AI-based 6G that I believe will fuel growth in sort of in the third horizon. And so that needs to continue, while at the same time, recognizing that we have work to do in order to drive the short-term financials to where we want it to be. Matthew Calderone: [indiscernible] I mean, we're an interesting spot because obviously, we're disappointed with our performance and our guidance. And as I look inside of our portfolio, there are actually more demand and more opportunities to invest to drive medium- and long-term growth than I remember in a long time because as Kristine and Horacio said, it's an incredibly dynamic environment. This administration wants change. We're seeing significant opportunities, not just in the U.S. government, but even in commercial and with similar allies. And so part of the internal dialogue and part of the reason we're taking these painful actions to free up $150 million worth of cost is precisely because we see these investment opportunities. So we're prioritizing the growth vectors that we've all described, but there's real opportunity here. And that's, in many ways, more of a driver of us taking these cost actions than hitting short-term set of financial results. Tobey Sommer: If I could ask another question on SIML. Amita once in a generation change to the top line and demand. Do you assume that the margin holds because it's relatively unusual for significant sort of TAM changes not to be accompanied by margin compression? Kristine Anderson: Yes, that's a great question. I mean, overall, yes, but there is competition for price that we're expecting because there'll be fewer bids, there will be more bidders, there will be much more aggressive pricing. But that's at the same time that we are able to use a lot more technology to innovate how we deliver, which would still preserve margin. Operator: Thank you. And this concludes our Q&A session for today. I will pass the call back to Horacio Rozanski for concluding comments. Horacio Rozanski: Thank you, everyone, for joining us today. I hope this discussion gave you a deeper understanding of the factors that underlie our performance, how we see the market, how quickly we are responding and our reasons for optimism about the future of Booz Allen, which include both our leading position in advanced technologies by how we apply them to critical missions in a way that we build things that work, our agility, our willingness to move fast and our capacity to invest and accelerate our growth vectors. And really, most importantly, the people of Booz Allen and the quality of our team, which continues to be extraordinary and it's a source of optimism for all of us. And so together, we are moving forward, and we want to accelerate both our mission impact and our financial performance, and we are focused on doing so. Thank you again, and have a great day. Operator: And thank you. And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Greetings, and welcome to the OMA Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Emmanuel Camacho, Investor Relations Officer for OMA. Thank you. You may begin. Emmanuel Camacho: Thank you, Melissa. Hello, everyone, and welcome to OMA's Third Quarter 2025 Earnings Conference Call. We're delighted to have you join us today as we discuss the company's performance and financial results for the past quarter. Joining us today are CEO, Ricardo Duenas; and CFO, Ruffo Pérez Pliego. Please be reminded that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our control. And now I'll turn the call over to Ricardo Duenas for his opening remarks. Ricardo Duenas: Thank you, Emmanuel. Good morning, everyone, and thank you for joining us today. This morning, Ruffo and I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. In the third quarter of this year, OMA's passenger traffic totaled 7.6 million passengers, an 8% increase year-over-year. Seat capacity increased by 11% during the quarter. On the domestic front, passenger traffic grew by 7%, driven primarily by the Monterrey Airport, which saw increases on routes to the metropolitan area of Mexico City, mainly to Toluca Airport, Bajio, Puerto Vallarta, Mérida and Querétaro. These routes collectively added over 300,000 passengers during the quarter, representing 68% of the total domestic passenger growth. International passenger traffic increased by 11%, mainly driven by Monterrey on the route to San Francisco, San Luis Potosi with higher traffic on the routes to Atlanta and Dallas and Tampico on the route to Dallas. Together, these routes added more than 47,000 passengers during the quarter, accounting for 46% of the total international passenger growth. Moving on to OMA's third quarter financial highlights. Aeronautical revenues increased 11% with aeronautical revenue per passenger rising 3% in the quarter. Commercial revenues grew by 7% compared to the third quarter of '24 and commercial revenue per passenger stood at MXN 60. Commercial revenue growth was mainly driven by parking, restaurants, VIP lounges and retail, mainly as a result of higher penetration and an increase in passenger traffic. Occupancy rate for commercial space stood at 96% at the end of the quarter. On the diversification front, revenues increased 8%, with Industrial Services contributing most of this growth, mainly because of additional square meters leased in our industrial park as compared to the third quarter of '24 and contractual increases to rents. OMA's third quarter adjusted EBITDA increased by 9% to MXN 2.7 billion with a margin of 74.8%. On the capital expenditures front, total investments in the quarter, including MDP investments, major maintenance and strategic investments were MXN 472 million. Finally, in relation to the negotiation process of our next Master Development Program discussion with the AFAC remain underway. We submitted our proposed Master Development Program for the '26-'30 period at the end of June, and the process remains on track. During the quarter, we continued addressing AFAC's technical observations and advancing the validation of investment projects in accordance with the schedule agreed with the authority. We continue to expect the final resolution and publication of results during December. Our expectations regarding the overall investment level remain at committed levels of MDP investment similar in real terms to the level of the previous '21-'25 MDP and maximum tariff increase in the low single digits. I would now like to turn the call over to Ruffo Pérez Pliego, who will discuss our financial highlights for the quarter. Ruffo Pérez del Castillo: Thank you, Ricardo, and good morning, everyone. I will briefly go over our financial results for the quarter, and then we will open the call for your questions. Aeronautical revenues increased 10.6% relative to 3Q '24, mainly due to the increase in passenger traffic as well as higher aeronautical yields. Non-aeronautical revenues increased 7.3%. Commercial revenues increased 7.0%. The line items with the highest growth were parking, restaurants, VIP lounges and retail. Parking grew by 9.4%, mainly as a result of higher passenger traffic. Restaurants and retail increased 9.8% and 8.2%, respectively, both driven by higher passenger traffic as well as the previously opened or replaced outlets. VIP lounges rose 9.9%, mainly due to higher market penetration, primarily in Monterrey as well as the increase in passenger traffic. Diversification activities increased 8.2%. Industrial Services, which relates to the operation of the industrial park contributed most to the growth in the quarter, increasing by 53%, resulting from higher square meters leased as compared to third quarter of '24 as well as contractual rent increases. Total aeronautical and non-aeronautical revenues grew 9.8% to MXN 3.5 billion in the quarter. Construction revenues amounted to MXN 382 million in the third quarter. The cost of airport services and G&A expense increased 14.4% versus 3Q '24, primarily due to the following line items: Payroll grew by 10.7%, mainly as a result of annual wage increases as well as higher headcount as compared to the third quarter of '24. Other costs and expenses increased by 22% due primarily to higher IT-related requirements and transportation services. Contracted services expense rose 16.4%, mainly due to higher cost of security and cleaning services following contract renewals in prior quarters, reflecting the inflationary pressures and tight labor market conditions in Mexico. Minor maintenance increased 19.8%, primarily due to timing effect of the works performed. Concession tax increased by 10.4% to MXN 290 million, in line with revenue growth. Major maintenance provision was MXN 28 million as compared to MXN 75 million in the same quarter of last year. OMA's third quarter adjusted EBITDA grew 9.0% to MXN 2.7 billion and adjusted EBITDA margin reached 74.8%. Our financing expense increased by 9.8% to MXN 299 million, mainly driven by higher interest expense as a result of higher average debt levels. Consolidated net income was MXN 1.5 billion in the quarter, an increase of 9.1% versus the same quarter of last year. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN 1.9 billion and investing and financing activities used cash for MXN 480 million and MXN 365 million, respectively. As a result, our cash position at the end of the quarter stood at MXN 4.4 billion. At the end of September, total debt amounted to MXN 13.6 billion, and we maintained a solid financial position, ending the quarter with a net debt to adjusted EBITDA ratio of 0.9x. This concludes our prepared remarks. Melissa, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Pablo Ricalde with Itaú. Pablo Ricalde Martinez: I have one question regarding your traffic expectations maybe for the fourth quarter and maybe your early thoughts on 2026, taking into account the World Cup. Ricardo Duenas: Yes. Thank you, Pablo. So we're looking for the rest of the year to finish in our traffic overall for the year between 7% and 8% growth. And our expectation at this point in time for next year, it's traffic to be in the low to mid-single digits for next year growth. Operator: [Operator Instructions] Our next question comes from the line of Enrique Cantu with GBM. Unknown Analyst: I have a quick question. Commercial revenue per pass declined this quarter, the first contraction since early 2023. Could you elaborate on the main drivers behind this softness? And how do you plan to reaccelerate this [ known ] area of growth? Ruffo Pérez del Castillo: Enrique, so yes, commercial revenue per passenger mainly reflects -- in the quarter reflects the impact of onetime revenues recorded in the previous year. And in the following quarters, we expect commercial revenues per passengers to gradually increase in line with inflation from current levels. Unknown Analyst: Okay. Perfect. And just another one, if I may. SG&A and utility costs rose this quarter, eroding margins despite strong top line growth. Do you view these cost pressures as temporary? Or should we expect a structurally higher cost base heading into 2026? Ricardo Duenas: Sorry, could you repeat that? Maybe you're too close to the microphone. Unknown Analyst: Yes, sorry. So it's regarding SG&A and utility costs. We saw that this quarter they erode margins. Do you view these cost pressures as temporary? Or should we expect this higher cost base heading into 2026? Ruffo Pérez del Castillo: So yes, as we mentioned, there are some specific line items that are facing some pressures like cleaning and security, where the total level of cost in the following quarters should be similar to the level of cost that we are facing right now. However, we do have started to analyze different alternatives to continue maintaining cost at check, and it's part of the history of the company to be very cost conscious, and we expect pressures not to be permanent. Operator: Our next question comes from the line of Gabriel Himelfarb with Scotiabank. Gabriel Himelfarb Mustri: A quick question on capital allocation. First, for the next MDP, I think you have mentioned that almost all the capital will go to Monterrey. It will be focused on, perhaps, increasing the capacity of the airport or developing more the commercial spaces, the commercial portion of the business? And my second question, are you seeking or have you considered expanding gap -- sorry, OMA's portfolio towards outside Mexico? Ricardo Duenas: Yes. Thank you, Gabriel. Regarding the last part, we're always looking for opportunities to expand internationally. At this point in time, we don't have a concrete transaction that we could share. In terms of the MDP, it's around half of the MDP will be allocated to Monterrey, given that half of the traffic is allocated in Monterrey. We're looking to expand in most of -- in capacity that will generate commercial opportunities as well. There's pavement, there's technology, there's environmental and sustainability projects as well. Operator: Thank you. There are no questions at this time. I'll turn the floor back to Mr. Duenas for any final comments. Ricardo Duenas: We would like to thank you, everyone, for participating in today's call. We appreciate your insightful questions, engagement and continued support. Ruffo, Emmanuel and I remain available should you have any further questions or require additional information. Thank you once again, and have a great day. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by, and welcome to the First Financial Bancorp Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I'd now like to turn the call over to Scott Crawley. You may begin. Scott Crawley: Thank you, Rob. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter and year-to-date financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the third quarter 2025 earnings release as well as our SEC filings for a full discussion of the company's risk factors. The information we will provide today is accurate as of September 30, 2025, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn it over to Archie Brown. Archie Brown: Thanks, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the third quarter. The third quarter of '25 was another outstanding quarter for First Financial. Adjusted net income was $72.6 million and adjusted earnings per share were $0.76, which resulted in an adjusted return on assets of 1.55% and an adjusted return on tangible common equity of 19.3%. We achieved record revenue in the third quarter, driven by a robust net interest margin and record noninterest income. We have successfully maintained asset yields while moderating our funding costs, which combined to result in an industry-leading net interest margin. In addition, our diverse income streams remained a positive differentiator for us with our adjusted noninterest income representing 31% of total net revenue for the quarter. Expenses continue to be well managed. Excluding incentives tied to strong performance and the record fee income, total noninterest expenses were flat compared to the second quarter. Our workforce efficiency efforts continued during the period. And to date, we've successfully reduced our full-time equivalents by approximately 200 or 9% since we began the initiative 2 years ago. We expect further efficiencies subsequent to the integration of our pending acquisitions. Loan balances declined modestly during the quarter, falling short of our expectations. Lower production in our specialty businesses along with a greater percentage of construction originations, which fund over time drove the modest decline. Loan pipelines are very healthy as we enter the fourth quarter, and we expect to return to mid-single-digit loan growth to close out the year. Asset quality metrics were stable for the third quarter. Nonperforming assets were flat as a percent of assets and annualized net charge-offs were 18 basis points, which was a slight improvement from the linked quarter. We're very happy that our strong earnings led to continued growth in tangible book value per share and tangible common equity during the quarter. Tangible book value per share of $16.19 increased 5% from the linked quarter and 14% from a year ago, while tangible common equity increased 47 basis points from June 30 to 8.87% at the end of September. I'll now turn the call over to Jamie to discuss these results in greater detail. And after Jamie is done, I'll wrap up with some additional forward-looking commentary and closing remarks. Jamie? James Anderson: Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The third quarter was another exceptional quarter with outstanding earnings, robust net interest margin and record fee income. Our net interest margin remains very strong at 4.02%. Asset yields declined slightly while we managed deposit costs to a modest increase. Loan balances declined slightly during the quarter as production slowed in our specialty lending areas and slower funding construction originations increased as a percentage of the portfolio. Average deposit balances increased $157 million due to higher broker deposits and money markets, offset by a seasonal decline in public funds. We maintained 21% of our total balances in noninterest-bearing accounts and remain focused on growing lower-cost deposit balances. Turning to the income statement. Third quarter fee income was another record, led by our leasing and foreign exchange businesses. Additionally, we had higher syndication fees and income on other investments. Noninterest expenses increased from the linked quarter due to an increase in incentive compensation, which is tied to fee income. Our efficiency efforts continue to impact our results positively and remain ongoing. Our ACL coverage increased slightly during the quarter to 1.38% of total loans. We recorded $9.1 million of provision expense during the period, which was driven by net charge-offs. Overall, asset quality trends were in line with expectations with lower net charge-offs and nonperforming asset balances remaining flat. Net charge-offs were 18 basis points on an annualized basis, while NPAs and classified assets were both relatively flat for the period. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value increased $0.79 to $16.19, while our tangible common equity ratio increased 47 basis points to 8.87%. Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $72.6 million or $0.76 per share for the quarter. Noninterest income was adjusted for a small loss on the sale of investment securities, while noninterest expense adjustments exclude the impact of acquisition and efficiency costs, tax credit investment write-downs and other expenses not expected to recur. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.55%, a return on average common equity of 19% and a pretax pre-provision ROA of 2.15%. Turning to Slides 9 and 10. Net interest margin decreased 3 basis points from the linked quarter to 4.02%. Asset yields declined 2 basis points from the prior quarter, while total funding costs increased 1 basis point. Slide 12 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances decreased $72 million during the period. As you can see on the right, the decline was driven by decreases in the Oak Street, ICRE and C&I portfolios, which outpaced growth in Summit and consumer. Slide 14 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $157 million during the quarter, driven primarily by a $166 million increase in brokered CDs and a $106 million increase in money market accounts. These increases were offset by a seasonal decline in public funds. Slide 16 highlights our noninterest income for the quarter. Total fee income increased to $73.6 million during the quarter, which was the highest quarter in the history of the company. Bannockburn and Summit both had solid quarters. Additionally, other noninterest income increased $2.8 million for the quarter due to higher syndication fees and elevated income on other investments. Noninterest expense for the quarter is outlined on Slide 17. Core expenses increased $5.7 million during the period. This was driven by higher incentive compensation related to fee income and the overall strong performance by the company. Turning now to Slides 18 and 19. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $180 million and $9.1 million of total provision expense during the period. This resulted in an ACL that was 1.38% of total loans, which was a 4 basis point increase from the second quarter. Provision expense was primarily driven by net charge-offs, which were 18 basis points for the period. Additionally, our NPAs to total assets held steady at 41 basis points and classified asset balances totaled 1.18% of total assets. We continue to believe that we have modeled conservatively to build a reserve that reflects the losses we expect from our portfolio. We anticipate our ACL coverage will remain relatively flat in future periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slides 20 and 21, capital ratios remain in excess of regulatory minimums and internal targets. During the third quarter, tangible book value increased to $16.19, while the TCE ratio increased 47 basis points to 8.87%. Our total shareholder return remains strong with 33% of our earnings returned to our shareholders during the period through the common dividend. We maintain our commitment to provide an attractive return to our shareholders, and we continue to evaluate capital actions that support that commitment. I'll now turn it back over to Archie for some comments on our outlook. Archie? Archie Brown: Thank you, Jamie. Before we conclude our prepared remarks, I want to comment on our outlook for the fourth quarter, which can be found on Slide 22. As we close the year, we expect origination volumes to increase, which should accelerate our growth. Specific to the fourth quarter, excluding Westfield, we expect loan growth to be in the mid-single digits on an annualized basis. We expect core deposit balances to increase and combined with seasonal public fund inflows to result in strong deposit growth. Our net interest margin remains among the highest in the peer group, and we expect it to be in a range between 3.92% and 3.97% over the next quarter, assuming a 25 basis point rate cut in both October and December. This includes a modest bump in margin from the addition of Westfield in early November. We expect our fourth quarter credit cost to approximate third quarter levels and ACL coverage to remain stable as a percent of loans. We're estimating fee income to be between $77 million and $79 million, which includes $18 million to $20 million for foreign exchange and $21 million to $23 million for the leasing business revenue. This range includes the expected impact from Westfield. Noninterest expense is expected to be between $142 million and $144 million and reflect our continued focus on expense management. This range includes the impact from Westfield, which is expected to approximately -- to be approximately $8 million for the month of November and December. While we remain confident that we will realize our modeled cost savings, we expect the majority of those savings to materialize in the middle of 2026 once Westfield has been fully integrated. With respect to our pending acquisitions, we have received formal regulatory approval for the Westfield transaction and anticipate closing in early November. Our initial preparations for the BankFinancial close are underway, and we are more excited than ever to expand our reach into the Chicago market. We have filed the necessary applications and expect to receive approval from the regulators in coming months, eyeing a close during the first quarter of 2026. We're very excited to have the Westfield and BankFinancial associates join our team. In summary, we're very proud of our financial performance through the first 9 months of the year, which resulted in industry-leading profitability. We expect to have another strong quarter to close 2025 and build positive momentum as we head into 2026. With that, we'll now open up the call for questions. Rob? Operator: Your first question today comes from the line of Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on a topic that's of interest today, NDFI loan exposure. I think if I look at your reg filings from last quarter, it's a little over $450 million or 4% of loans. I know that it's not huge, but can you just kind of walk us through that book and let us know whether that exposure falls into any of the known commercial verticals that you already have today? Archie Brown: Yes. Brendan, we'll have Bill Harrod cover that. All right. Great. We've got, as of the end of the quarter, about $434 million in the NDFI portfolio. It's a diversified, conservatively managed and anchored in high investment grade tier with currently no adversely rated credit. The bulk of the portfolio is made up of traditional REITs of about $304 million across 46 notes, averaging about $7 million, consisting of a variety of public traded or privately held entities with investment grade or equivalent. We do have a securitization book within that portfolio of $73 million across 7 relationships with loans structured using S&P methodology to high investment-grade ratings. And we monitor those on a monthly basis with borrowing bases and independent third-party exams on a routine basis. And that makes up the bulk of what we have in that NDFI portfolio. Brendan Nosal: Awesome. That's really helpful color. Maybe turning to the net interest margin. I totally get the guide for next quarter, no surprise given recent and forthcoming rate cuts. I'm just kind of curious, so if we get those 2 cuts in the fourth quarter, how should we think about margin early in next year? I think in the past, you said that each cut is 5 to 6 basis points of near-term pressure before it grinds back up on lag funding costs. So any color there would be helpful. James Anderson: Yes, Brendan, this is Jamie. So on the margin, and again, so the other thing you have to keep in mind is we have Westfield coming into the mix. So that's going to create a little bit of noise, and it actually helps us going forward here, mitigate a little bit of our asset sensitivity. So -- but if you look at kind of the legacy, the legacy company and the margin, the way that it reacts to those 25 basis point cuts, like I said, and you mentioned it as well, we get about 5 basis points of margin pressure for each of those 25 basis point cuts. And the way -- the timing of that, the way that will kind of fold in is that you get a little bit more pain immediately from the cut. And then as deposit costs catch up, we start to actually move that back up. So -- but really 5 basis points of pressure. So if you think about our margin right now in that 4% range, if we get those 2, then we kind of start the year in that [ 3.90-ish ] range. But then when you factor in Westfield and with the purchase accounting and how that will work, we get a little bit of improvement in the margin from them. So it starts to help mitigate some of that pressure if we have those expected rate cuts here at the end of the year. Operator: Your next question comes from the line of [ Mark Shootley ] from KBW. Unknown Analyst: Maybe one more on the margin. I'm trying to think about on the asset side, loan yields were strong and actually ticked up in the quarter. So I was just curious like what new loan originations are coming on today with you guys sort of returning to growth and what you're expecting for the total sort of portfolio yield in the near term? Archie Brown: Yes, Mark, this is Archie. I'll start, and Jamie, you can kind of comment on me if you want to amplify. But the rate cut certainly that we had affects origination yields as well. And so we were probably before the cut around 7% on origination yields, and it's closer, I guess, high 6s. So you said 6.80%, 6.90% and it's going to come in closer to the mid-6s you look at the month of September, it was probably right around 6.50%, maybe 6.50% and change. So we'd say sort of right now in that range, maybe drop down a little bit more with some more rate cuts because, again, a lot of we do is commercial oriented tied to variable rates. James Anderson: Yes. And Mark, I mean, like we've talked about in previous quarters, if you -- again, looking at the legacy First Financial portfolio, absent Westfield, we still have about 60% of our loan book that moves on the short end. So obviously, those cuts will impact the yield on the loan side. Unknown Analyst: Yes, that makes sense. And then maybe just on the growth -- so you mentioned the pipelines are strong, and I was just curious like what specific verticals or markets you expect to drive that growth over the next couple of quarters? Archie Brown: Yes, Mark, this is Archie again. Yes, maybe talk about loan growth kind of overall. Our production, if you just look at total commitments, Q3 was on par with Q2. So pretty strong. I would argue it's the strongest of the year in both cases. But we saw the actual fundings from that drop compared to what we saw in prior quarter. So lower fundings, primarily construction related. And then we did see a dip in line utilization on the commercial side that accounted for a little bit of the -- little bit of lower overall growth in the quarter. As we look in Q4, strong commercial is the biggest driver. We've got different verticals within commercial, but strong commercial is the big driver. Summit funding, this is always their peak quarter for production. So that will be another big driver. Commercial real estate will have a little bit of growth is what we're projecting in Q4. And probably the only vertical that has a little bit of pressure is in our Oak Street Group. Just it looks like they've got a lot more payoff pressure that we're expecting here in Q4. But the combination of it all gets you to the number that we're projecting of 5% annualized growth. Operator: [Operator Instructions] your next question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe just one on the fees and expenses. So the 4Q guide pulling out Westfield just for a second was higher than what we were looking for and certainly what the 3Q number was. Just curious if there's something seasonal, unusual, unique in the fourth quarter? Or maybe if you can kind of give us some indication of what the run rates would look like going into '26. James Anderson: Yes, Danny, it's Jamie. Really, the big impact from the third quarter to the fourth quarter in that -- like again, I think you're looking at just ex-Westfield kind of the legacy First Financial numbers is really coming from Bannockburn. The forecast that we're getting from them for the fourth quarter is a little higher even than what we had in the strong third quarter. A little bit of bump as well as the Summit related to the operating leases. And then our wealth department, especially on the M&A and the investment banking side, up just a little bit from that division that we have there. So it's really those 3 areas, primarily though, driven by Bannockburn. And like we have talked before, Dan, I mean, they can -- that can bounce around a little bit. So I mean, to kind of talk about that long, long term, we look at that business kind of year-over-year now is growing in that -- generally in that 10% range. Archie Brown: Yes. And Dan, those are all commission-based kind of businesses. So when they do well, you're going to see more commission paid out, which drives the salary costs. James Anderson: Yes. Daniel Tamayo: That's great. That's very helpful. And my other question, I guess, on the credit side. So a good quarter from a credit perspective, guiding to similar credit costs. Just curious how long you think those play out? I think in the past, we've talked about a little bit higher run rate on the charge-off side. Any read-throughs in the near term past the fourth quarter on credit? Archie Brown: Yes, Dan, this is Archie. I don't -- I mean, I think it's kind of steady as we go. We've, I think, been saying all year, 25 to 30 basis points, kind of mid-20s seems to be the run rate for us in the current environment. And I think over a period of quarters, that's what we would expect. Daniel Tamayo: Understood. Okay. And then lastly, on the capital front, so you got the 2 deals closing here in the near term, take a little bit of a hit to capital. But curious, you'll still have pretty strong CET1. How you're thinking about buybacks? You probably think the stock is a little undervalued right now. Once we get past the deals, like if there's a bogey you're looking at on the capital side or any color there would be great. James Anderson: Yes, Dan, this is Jamie. So yes, I think you said it well. What we'll do here over the next really probably 2 to 3 quarters is let the deals flow in and kind of see where we're shaking out in terms of capital ratios at that point. I mean we are building TCE relatively and tangible book value relatively quickly at this point. And we will take -- so the TCE takes about 120 basis point hit in the -- once we close the Westfield deal just because of the all-cash nature of it. And then -- so we'll let the next 2 or 3 quarters kind of play out and then see where we are and see where we're trading in terms of multiple at that point. If we're trading anywhere in that 150% of tangible book value or below, we would potentially look at buybacks at that point. Operator: Your next question comes from the line of Terry McEvoy from Stephens. Terence McEvoy: From talking to some of the other banks that are in your metro markets in your footprint, kind of surprised with the deposit competition a bit stronger than I would have guessed. And your cost of funds up a few basis points quarter-over-quarter. So can you maybe just talk about deposit competition? And you didn't have loan growth this quarter. Next quarter, you're guiding towards that. Does that kind of drive those deposit costs higher as you look to fund that growth? Archie Brown: Yes, Terry, this is Archie. I'll start. It was modestly up for the quarter. I mean I would argue it is flattish. And with the rate cut that occurred, we did take some, I think, decisive actions on the deposit side that went into effect really this quarter. So now we have more -- of course, more short-term rate cuts coming. But we would expect a reduction in our deposit cost going forward in Q4. I mean it was pretty -- did a pretty aggressive cut. And yes, I mean, the market is competitive, but if you look at our current loan-to-deposit ratio, and we felt even with some loan growth, we felt we could take a little bit more aggressive actions. And we'll look to do more here with more Fed cuts. And then I think one of the things we like about BankFinancial, again, one, they have lower deposit and funding costs than we do. And that market from what we can see, still has a little more rational pricing than what we're seeing here kind of in Southwest Ohio. James Anderson: Yes. The other thing, Terry, to keep in mind, I mean, we do have the a little bit higher -- some loan growth in the fourth quarter and then going forward. But we don't think that puts a lot of pressure on our deposit costs because of the liquidity that we get coming in -- especially in the BankFinancial deal. If it closes in the first part of '26. So they already have a relatively low loan-to-deposit ratio, and then we're selling the multifamily portfolio, which will then create even more liquidity for us to utilize for loan growth or to pay off borrowings or to reinvest. Terence McEvoy: That's great. And nice to see the FX trading and the 4Q guide higher at $18 million to $20 million. I just want to make sure that run rate looking out into '26, do you think that is more consistent of next year? Or is this more of just a couple of strong quarters and next year we will go back to some of your prior comments on the outlook for that revenue line? Archie Brown: Well, certainly, Q4 would be a peak for them, Terry, if they hit the numbers that are being projected. And as Jamie said, it sort of bounces around. We look at it more on kind of an annual kind of 4-quarter basis rolling even. They will -- we've owned them now for quite a while. And what we've observed is they grow, they may flatten out a little bit, then they hit another growth spurt. But if you think 5% to 10% kind of growth rate I think you're in the ballpark for what we would expect them to do. James Anderson: Yes, Terry, this is Jamie. As we get into -- as we look out kind of into '26, I mean, that will -- I wouldn't annualize this fourth quarter number that we're talking about. So I would look more into '26 at like a $65 million to $70 million type of a run rate for them. Operator: Your next question comes from the line of Jon Arfstrom from RBC. Jon Arfstrom: Jamie, in your prepared comments, you touched on the workforce efficiency efforts. And can you talk a little bit about where you are in that journey? And then when you look at the 2 acquisitions, what kind of opportunities do you see there? Because it seems like you're going to apply this framework over the top of those 2 deals. Archie Brown: Yes, Jon, this is Archie. I'll start. We're probably 90% of the way through the company, the First Financial legacy company now. So there's a little bit left in some areas, but it's probably going to be a couple of quarters more to get a little bit of opportunity out of those areas. So as I think we alluded to in our comments that we think the opportunity to continue to get efficiency comes from the 2 acquisitions. And I think in the Westfield case, we had said around 40% expense reduction from the combination. And we're -- I think we're well on our way to achieve that, maybe slightly exceed it. BankFinancial was maybe just a little bit less because there's bigger branch count. But what we had modeled, again, we're well on our way to exceed that. And that includes us in both those markets, adding back roles to drive more revenue. Some of the businesses we have that maybe those banks didn't have, we're adding the appropriate people to help us grow in those markets. And even with that, we would still achieve the expense that we've -- reductions that we modeled in those deals. Jon Arfstrom: Yes. Okay. That makes sense. Yes, some good opportunities there, obviously, for production. And Terry took a couple of my questions on deposits. But Jamie, can you just remind us of the typical seasonal flows on deposits that you see in the fourth quarter? James Anderson: Yes. So we -- just -- yes, to remind you and everybody else, we get a seasonal bump in public funds, mainly from Indiana, where property taxes reduced. So we get those in May and November. And so typically, we will get, call it, around $150 million to $200 million kind of extra of deposits in those quarters on average. And then they -- a little bit more skewed, I would say, to the second quarter, but call it, $150 million to $200 million in both of those quarters, and then they run out in the subsequent quarter and kind of go back down to the base level. But that's pretty much like clockwork. I mean it happens pretty much every quarter. And then so that's what you saw here in the third quarter where those public funds running down by $100 million to $150 million. And then we just replaced those with -- sometimes we just replace those with brokered CDs or borrowings. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Archie Brown for closing comments. Archie Brown: Thank you, Rob. I want to thank everybody for joining us today. We really feel great about the quarter we had and are excited about fourth quarter and the momentum we're building for 2026 with the pending acquisitions. We look forward to talking to you again in a quarter. Have a great day and weekend. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, everyone, and welcome to Grupo Televisa's Third Quarter 2025 Conference Call. Before we begin, I would like to draw your attention to the press release, which explains the use of forward-looking statements and applies to everything discussed in today's call and in the earnings release. Please note, this event is being recorded. I would now like to turn the call over to Mr. Alfonso de Angoitia, Co-Chief Executive Officer of Grupo Televisa. Please go ahead. Alfonso de Angoitia Noriega: Thank you, Elsa. Good morning, everyone, and thank you for joining us. With me today are Francisco Valim, CEO of Cable and Sky and Carlos Phillips, CFO of Grupo Televisa. Before discussing our third quarter operating and financial performance, let me share with you what we believe are the key milestones achieved this year, both at Grupo Televisa and TelevisaUnivision. At Grupo Televisa, let me touch on 4 major achievements. First, our strategy to focus on attracting and retaining value customers in cable has allowed us to grow our Internet subscriber base in the first 9 months of the year compared to the end of 2024. Second, we keep executing on implementation of OpEx efficiencies and the integration between Izzi and Sky to extract further synergies. This has already contributed to expanding our consolidated operating segment income margin by 100 basis points in the first 9 months of the year to 38.2% driven by year-on-year OpEx reduction of around 7%. Third, we continue to keep a disciplined CapEx deployment approach to focus on free cash flow generation. So far this year, we have invested MXN 7.5 billion in CapEx, which is equivalent to 16.8% of sales. In the fourth quarter, CapEx deployment should remain at similar levels to those of the third quarter. Still, our CapEx budget of $600 million for 2025 implies a reasonable CapEx to sales ratio of less than 20% for the full year. We have been able to achieve this mainly because we have had successful negotiations with suppliers, resulting in more favorable terms. And fourth, during the first 9 months of the year, we have generated around MXN 4.2 billion in free cash flow, allowing us to prepay a bank loan due in 2026 with a principal amount of around MXN 2.7 billion. This debt repayment comes on top of the $220 million principal amount of our senior notes already paid on March 18. Additionally, at the end of the third quarter, Grupo Televisa's leverage ratio of 2.1x EBITDA compared to 2.5x at the end of last year, mainly driven by our free cash flow generation. And at TelevisaUnivision, I will mention 3 key milestones. First, engagement and growth for ViX remains solid with strong momentum across both our free and premium tiers. Moreover, the Gold Cup semifinals and final and the compelling entertainment in sports slate that included the third season of La casa de los famosos, Mexico and our broadcast of Liga MX and the NFL helped drive a high single-digit increase in MAUs and robust demand for advertisers and ViX. Second, the efficiency plan to reduce operating expenses at TelevisaUnivision by over $400 million in 2025 is delivering outstanding results. In the first 9 months of the year, our total operating expenses have declined by around 12% year-on-year for total savings of around $300 million. This shows a disciplined execution of our cost savings initiatives, including lower content, technology and marketing costs and the normalization of our DTC related investments. And third, looking at TelevisaUnivision's leverage and debt profile, the company ended the quarter at 5.5x EBITDA an improvement from 5.9x in the fourth quarter of 2024, driven by growth. Moreover, so far this year, TelevisaUnivision successfully refinanced $2.3 billion of debt. As discussed in our second quarter earnings conference call, the company successfully issued $1.5 billion of new 2032 senior secured notes and refinanced over $760 million of term loan A now due in 2030. In addition, more recently, TelevisaUnivision extended its $500 million revolving credit facility and its $400 million accounts receivable facility. These transactions strengthened TelevisaUnivision's balance sheet, enhanced its liquidity and extended its maturity profile with its nearest maturity now almost 3 years away. Deleveraging remains a core strategic priority for TelevisaUnivision and management remains committed to further strengthening the capital structure of the company over the coming quarters. Having said that, let me turn the call over to Valim as he will discuss the operating and financial performance of our consolidated assets. Francisco Valim Filho: Thank you, Alfonso. Good morning, everyone. As Alfonso mentioned, we had an excellent quarter in this third quarter. First, let me walk you through the operating and financial performance of our cable operations. We ended September with a network of almost 20 million homes after passing around 20,000 new homes during the quarter. Our monthly churn rate has remained below our historical average of 2% for 2 consecutive quarters as we continue to execute our strategy to focus on value customers while working on customers' retention and satisfaction. Our broadband gross adds continues to improve on a sequential basis, allowing us to deliver 22,000 net adds during the third quarter compared to net adds of around 6,000 in the second quarter and disconnections of about 6,000 in the first quarter. In video, we also experienced a strong gross adds than in the first 2 quarters of the year and managed to reduce churn. Therefore, we lost about 43,000 video subscribers during the third quarter compared to 53,000 cancellations in the second quarter and 73,000 disconnections in the first quarter of the year. Moreover, we expect the improving trends to continue going forward, influenced by our recently announced multiyear partnership with Formula 1 to provide live coverage of all Grand Prix via Sky Sports channels available through Izzi and Sky. Beginning in the fourth quarter of this year until 2028 season, Formula 1 is the one of the fastest-growing and most passionate sports events in Mexico and around the world, and we definitely see this as a competitive advantage relative to our peers. Moving to mobile. Our net adds of 94,000 subscribers during the quarter continued to gain momentum, beating the 83,000 net adds of the second quarter and doubling those of the first quarter. Our innovative MVNO service developed by ZTE, offering enhanced user experience is already making our bundles more competitive and allowing us to increase our share of wallet from our existing customers. During the quarter, net revenues from our residential operations of MXN 10.6 billion, which accounted for around 91% of total cable revenue decreased by only 0.7% year-on-year. This marked the best quarter of the last 2 years at our residential operations from the revenue growth performance standpoint and compares well to a decline of 3% in the first half of the year. On a sequential basis, net revenue from our residential operations grew by 0.4%, potentially signaling an ongoing gradual recovery. During the quarter, revenue from our enterprise operations of MXN 1.1 billion, which accounted for around 9% of our cable revenue increased by 7.7% year-on-year. This also marks the best quarter of the last 3 years of our enterprise operations from a revenue growth performance standpoint and compares favorably to growth of 3% in the second quarter and a decline of 4.5% in the first quarter of this year. Moving on to Sky's operating and financial performance. During the third quarter, we lost 329,000 revenue-generating units, mostly coming from prepaid subscribers that have not been recharging their services. In addition, beginning in the second quarter, we started to charge an installation fee of MXN 1,250 to all satellite pay TV subscribers to increase the return on investment for this service. This translated into a slowdown of video gross additions for Sky that has been steady over the last 2 quarters. Sky's second quarter revenue of MXN 3.1 billion declined by 18.2% year-on-year mainly driven by a lower subscriber base. To sum up, segment revenue of MXN 14.7 billion fell by 4.4% year-on-year, while operating segment income of MXN 5.7 billion declined by only 0.7%, making it the best quarter of the year as we appear to be very close to reaching operating segment income stabilization. Our operating segment income margin of 38.5% extended by 140 basis points year-on-year, mainly driven by the efficiency measures that we have been implementing and synergies from the ongoing integration between Izzi and Sky. Regarding CapEx deployment, our total investment of MXN 3.6 billion account for 24.3% of sales during the third quarter. This shows a material sequential increase in CapEx deployment, but it is in line with our updated CapEx budget for 2025 of $600 million. Finally, operating cash flow for Cable and Sky, which is equivalent to EBITDA minus CapEx was MXN 2.1 billion in the third quarter, representing 14.2% of sales. Alfonso de Angoitia Noriega: Thank you, Valim, best quarter of the year indeed. Now let me take you through TelevisaUnivision's third quarter results. The company's third quarter revenue of $1.3 billion declined by 3% year-on-year, while adjusted EBITDA of $460 million increased by 9%. Excluding political advertising, revenue fell by 1% year-on-year, marking a sequential improvement compared to both the first and second quarters of this year. On the other hand, also excluding political advertising, adjusted EBITDA increased by 13% year-on-year, underscoring the scalability of a profitable DTC business and the sustained impact of cost reductions initiatives launched at the end of last year. Moving on to the details of our revenue performance. During the quarter, consolidated advertising revenue decreased by 6% year-on-year or 3% excluding political advertising expenditure. In the U.S., advertising revenue was 11% lower as growth in ViX continued to partially offset linear declines. Within ViX, the Gold Cup, semifinals and finals helped drive a high single-digit increase in MAUs and robust demand from advertisers. In Mexico, advertising revenue increased by 3% year-on-year, primarily driven by private and public sector ad sales that powered ARPU growth for ViX. Results this quarter benefited from a compelling entertainment and sports slate that including the performance of the third season of La casa de los famosos Mexico, dramas such as Monteverde and Amanecer and our broadcast of Liga MX and the NFL. During the quarter, consolidated subscription and licensing revenue increased by 3% year-on-year, driven by ViX's premium tier and higher content licensing revenue. In the U.S., subscription and licensing revenue grew by 11%, supported by ViX and results included a mid-single-digit increase in linear subscription revenue and higher content licensing revenue due to timing of content delivery. In Mexico, subscription and licensing revenue fell by 17%. Excluding the impact of the renewal cycle, subscription and licensing revenue in Mexico grew by 5% driven by ViX. To wrap up, Bernardo and I remain confident that our focus on value customers, efficiencies and ongoing integration between Izzi and Sky at Grupo Televisa and further integration and operational optimization at the TelevisaUnivision now that our DTC business has gained scale and achieved profitability will allow us to create greater value for our shareholders throughout this year. Now we are ready to take your questions. Operator, could you please provide instructions for the Q&A. Operator: [Operator Instructions] Our first question comes from Marcelo dos Santos with JPMorgan. Marcelo Santos: The first question is if you could comment a bit the CapEx outlook for 2026. How do you see this trending? And the second question is regarding the insurance claim you received. Was that related to Hurricane Otis? And is there something left to be received? Alfonso de Angoitia Noriega: Thank you, Marcelo. I'll ask Valim to answer both questions. Francisco Valim Filho: We gave -- Marcelo, we gave a guidance of around $600 million, and we should be within that range. Regarding the insurance claim, I think that's the last portion of the claim on the Otis Acapulco situation. So we shouldn't be seeing anything more from that event. Marcelo Santos: Valim, just one question. The CapEx for 2026, so for next year you're... Francisco Valim Filho: 2026, no 2026 is so far away, Marcelo. No, no, no. Alfonso de Angoitia Noriega: Let's finish 2025, then we can talk about '26. Operator: Our next question comes from Matthew Harrigan with Benchmark. Matthew Harrigan: You've actually reached a point in the U.S. when you look at the entire TV industry, there's more consumption on streaming than on linear. And I know your linear is much more durable than your English language peers. But you've got tremendous local programming positions, particularly in news and some of the largest U.S. EMAs. Are you really taking a lot of our -- hopefully, eventually almost all the news content on local stations and the distinctive content on the local stations and moving that to ViX over time because it feels like it would be a shame to lose the local identity. You have those stations because eventually, linear is going to fall off even for Hispanic audiences. And then secondly, clearly, a very dynamic situation in the U.S. and Mexico right now. Are you doing anything more on the BC side in relation to advertising for investments? And also, I can't help but ask, what's your general perspective on the U.S. and the imaginations with the administration on the tariff side and the prospects for near-shoring and everything going on. I know this is kind of ridiculously open-ended question. But just any thoughts on the stability of the economic relationship with the U.S. Alfonso de Angoitia Noriega: Yes. Thank you, Matthew, for your questions. I think, as to your first one, local news is very important for us. We are very strong in the local places where we produce news and local programming. We are exploring the possibility of including that in our streaming platform. We haven't yet included all of that content, but we're exploring that. The good thing is that, as I was saying, the local content is very strong. So very popular. As to your second question, we have made media for equity deals with great companies with great startups. We have assembled a great portfolio, I would say, and more companies are coming to us as they realize the importance of our platforms. And this is because of the strength of our platforms, we can position and grow their products and especially their brands when they're launching. Companies like Kavak, like Rappi, have become our ambassadors. At the beginning, we had doubts about the strength of linear television and most specifically in Mexico. But now they have become ambassadors of ours. We will continue to do these deals as we generate value with unsold inventory. And these companies become regular clients. So it's basically a funnel for these start-ups to grow, to position their brands, to position their products. And we take equity, which is great at very good valuations, and then they become regular clients and this is basically unsold inventory. So we're very happy with the portfolio we have been able to put together, and we'll continue to do this. As to your last question, I think that the Mexican government President, Sheinbaum has done an extraordinary job in dealing with the negotiations, the trade negotiations. I think that Mexico and the U.S. are key partners. If you look at the border region, it's one of the largest economies in the world by itself. The border, the legal border crossings that happened every day are in the millions. So I mean it's an integrated region. It's an integrated economy. So I believe that eventually, we'll be able to get to the right deal for Mexico and for the U.S. Operator: Our next question comes from Alex Azar with GBM. Alejandro Azar Wabi: Few ones on competition, Valim, on cable. If you can share a little bit of color on short-term and medium-term dynamics, especially when seeing how competitors are adding 1 million, 1.5 million net adds per year. It seems that in 2, 3 years, the market is going to be fully penetrated. So that would be my first question. And the second one is on Sky. With the levels of net disconnections you have year after year, how should we think about the EBITDA contribution in the next couple of years from Sky? Alfonso de Angoitia Noriega: Thank you, Alex. Valim? Francisco Valim Filho: Thank you, Alfonso. Well, I agree 100% with you. With this amount of net adds on a yearly basis, the market is very close to being fully penetrated. That's why our strategy is not going after volume because we know that we will be fighting for prices at the lower end of the pyramid. So our aim is to focus on the higher-end clients. That's why we have -- we are the only company in Mexico increasing ARPU consistently across the board. So I think that's the focus. So we think there's obviously a diminishing returns of this fight for the volumes of subscribers. And that's why our strategy moved away from that, and we have been successful in doing that. Regarding Sky, Alex, the way I see Sky is very straightforward. This is a business that will eventually disappear. Why? The penetration of the fiber networks and the amount of OTTs and the availability of a linear TV through cable and fiber operators is something that will obviously position Sky to only subscribers that are outside of those covered areas. So it will by definition then keep on declining. So how we perceive it, we perceive it as a cash flow from existing subscribers minus the programming cost, minus the technological cost of the satellite and all that is involved in that and then it generates a positive cash flow. That's the business and it has been generating positive cash flow and for the foreseeable future, we'll see positive contribution from Sky as a cash flow perspective. Obviously, it has this negative optics on our revenue, but just the way we see it is we've kind of segregate that from everything else and see that as an inflow of cash flow and everything else is more a stable growing businesses. Alfonso de Angoitia Noriega: Yes. And to add to your first question, to add on what Valim was saying, in Mexico, we have a 4-player market, but it's a pretty rational market, except for Telmex, which has kept its entry price unchanged for, I guess, more than 10 years, while also increasing Internet speeds and offering Netflix now for 3 -- for 6 months. They don't seem to be really interested in the profitability of Telmex as they extract value from the lease of fiber owned by other subsidiaries of theirs. And the other Megacable raised prices by around MXN 30 per month from the beginning of the year. So there, you can see that the industry is raising prices, except for Telmex. Totalplay also announced price hikes from April particularly from broadband customers that are heavy data users. So even though it's a 4-player market, it's a rational market and if you look at the prices and ARPU, we feel comfortable, and we feel confident that this will remain like that. Alejandro Azar Wabi: If I can just add a follow-up on Sky remarks. When you say Sky probably will disappear. I'm just thinking that there must be some part of the population that where fiber is not around, and they -- if Sky becomes the only thing that they can use, especially for video. Do you guys have an approximate of that? I don't know. Alfonso de Angoitia Noriega: No, you're absolutely right. I mean there are rural areas where a satellite provider makes sense. I don't know. Francisco Valim Filho: No, I don't think they will disappear per se. It's obviously a diminishing volume like we have been seeing and we'll keep on seeing. But just to give an example, in Central America, we have close to 100,000 subscribers basically flat because in those areas, there are less competitors offering a fiber network or a cable network. And it is very stable. And like Mexico, where we are all deploying network and expanding our infrastructure. So yes, I don't think it will disappear, not just there will be a day that will be just shut down. I think it will still have -- and I think there are just several hundred thousand people living in areas where there's no other option for entertainment and Sky will keep on being a solution. But that's why we don't see this as a -- I understand some people see this as a problem. We actually see this as an upside given the fact that we're generating positive cash flow. Alfonso de Angoitia Noriega: Yes. I think Valim is absolutely right. We see Sky as a cash flow. And the more we extend, we prolong the life of the subscribers, it's going to be an amazing driver for our cash flow. Operator: Our next question comes from Ernesto Gonzalez with Morgan Stanley. Ernesto Gonzalez: Look, I know it's early but going back to the discussion on broadband penetration in Mexico. Do you have any -- or can you share any expectations for cable growth rates next -- sorry, next year? Do you believe that you can accelerate growth for the unit. And the second question is on the sustainability of margins for Cable Sky but also TelevisaUnivision. They were strong in the third quarter. So I wanted to get a sense of how much more room they have to grow going forward. Francisco Valim Filho: Well, I think that -- back to your point Ernesto, I think that it's key to understand that obviously, as penetrations go higher, the level of net adds will diminish for every player in the market. And you have already saw that. As you see quarter after quarter after quarter, we already see a diminishing number of net adds being added to the different players. So that's a diminishing return in other countries like Brazil, for example, where the penetration is significantly higher even than Mexico. You see there's this dynamic as well and companies find ways by selling more products to the same existing customers to keep revenues growing but obviously, you're not going to be seeing high double-digit numbers because of the dynamic of the market. So like Alfonso just said, this is a very rational market. Nobody is flashing, prep is down. The promotions are very reasonable. And everybody is actually making money in this market like our cash flow generation that we have just presented. This is significantly -- is very significant. So I think that's a dynamic in mature market that you'll see. And what happens is you add more products, better products, more speeds and that's how you keep on increasing ARPU. And that's why we think the strategy of going after the high-end customers, they have more disposable income available as opposed to the other end of the pyramid. And I think regarding margins of cable... Alfonso de Angoitia Noriega: No. I think he asked about TU... Francisco Valim Filho: No, no, no. The answer is not over. Alfonso de Angoitia Noriega: Okay. Go ahead. Francisco Valim Filho: So the idea here is we think that we keep on improving margins. This is an ongoing, never stopping exercise that will go internally. And we find that through many different ways, mostly through technology. Obviously, we still are collecting a few synergies from Sky mostly through technology and improvement in how we provide services and processes. So there is an ongoing effort to increase margins. I'm talking about cable. Alfonso de Angoitia Noriega: Yes. Yes. And about -- I mean, TU amazing margins. I think that was a result of the cost cutting and all that we did in terms of costs and expenses in the fourth quarter of last year, which are being reflected in this year. We believe that we have the highest margins in the industry. And that has to do with that cost cutting, $415 million. And also, it has to do with owning the largest library of content in Spanish in the world, more than 300,000 hours of content. It also has to do with the very efficient way in which we produce content, especially in our studios in Mexico. And that allows us to have these amazing margins. So I think those margins in the mid-30s are sustainable. Operator: This concludes our question and answer session. I Would like to turn the conference back over to Mr. Alfonso de Noriega for any closing remarks. Alfonso de Angoitia Noriega: Well, thank you very much for participating in our call. And if you have any questions, please give us a call. Have a great weekend. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Van: Thank you for standing by. My name is Van, and I will be your conference operator today. At this time, I would like to welcome everyone to Nikolay Bancshares Inc. Merger Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Mike Daniels, Co-Founder, Chairman, President, and CEO. Please go ahead. Mike Daniels: Thank you, and good morning to everyone for joining us today to discuss Nikolay Bancshares' acquisition of MidWestOne Financial Group, Inc. My name is Mike Daniels, I'm Co-Founder, Chairman, President, and CEO. Also joining me on today's call from Nikolay are Phil Moore, our Chief Financial Officer, and Brad Hutchins, Executive Vice President, Chief Credit and Risk Manager. In addition, Charles N. Reeves, CEO, and Barry S. Ray, CFO of MidWestOne Financial Group, Inc. are on the call with us. After market closed yesterday, we issued a joint press release announcing Nikolay's agreement to acquire MidWestOne Financial Group, Inc. We've also provided an investor presentation that can be accessed either on the Investor Relations section of our website or as part of our 8-K filing on this announcement. I would like to start off by saying how excited I am to announce this partnership with MidWestOne Financial Group, Inc. As you know, MidWestOne Financial Group, Inc. is a strong, growing, and well-run community bank headquartered in Iowa City, Iowa, with 57 locations throughout Eastern and Central Iowa, the Twin Cities, parts of Wisconsin, and Denver. As of 09/30/2025, it had $6.2 billion in assets and adds over $3.4 billion in assets under management to the combined franchise. Page seven of the investor presentation provides an overview of MidWestOne Financial Group, Inc. and the markets it serves. Before we discuss the details of the transaction, I want to take a step back to where Nikolay was after our last acquisition in mid-2022. We had then completed three acquisitions in eighteen months and had doubled the size of our balance sheet. Shortly thereafter, interest rates began to increase sharply and quickly, and within six months, everyone was questioning the viability of community banking following a few high-profile regional bank failures. This period shined a light on unrealized losses in the vast majority of banks' investment portfolios. While this period impacted Nikolay as well, we were one of the very first banks to reposition our balance sheet. In 2023, we recognized then that to get back to the business of being who Nikolay truly was—a growing, highly profitable community bank—we needed to act quickly, which we did by selling $500 million of U.S. Treasuries. That action, coupled with paying down higher-cost funding, positioned Nikolay in the best way possible. At the time, I said that this move was consistent with Nikolay's long-term thinking mindset and that it should quickly get us back to our position of producing top quartile shareholder profitability metrics. I even spoke to The Wall Street Journal about this. While we did not know this at the time, we ended up being right. The repositioning resulted in ten straight quarters of improving or holding our net interest margin and ten quarters producing an ROAA and ROATCE that placed us in the top quartile, if not top decile, of publicly traded community banks. Also, during this period, we took a pause from M&A to integrate our past acquisitions and prepare for the next challenge of crossing the $10 billion in assets threshold. Granted, the market helped with that pause as bankers were trying to understand how to deal with unrealized losses as well as the volatility in the markets. However, knowing our balance sheet was rock solid and we were on an upward trajectory, we were able to integrate these banks into our culture as well as make a number of investments to prepare us for the next acquisition that would likely bring us over the $10 billion mark. During this period, a number of you would ask us about our M&A strategy, knowing it wasn't a matter of if but when. We were consistent in our message that we wanted to be very intentional about the next bank we partnered with. We were not looking to acquire to just get bigger, but we wanted to find a bank that also made Nikolay better while also providing us with the needed scale to offset some of the costs and revenue hurdles that came with passing the $10 billion mark. At the same time, we didn't want to use our currency just because we could, as many investment bankers reminded us. Investors have long rewarded Nikolay with a well-earned premium valuation compared to many of our peers. This premium is a result of top quartile to top decile profitability, consistent asset quality, and a core funded and transparent balance sheet. Our shareholders earned this premium, and we were not going to just give it away for the sake of doing the deal. I am pleased to say that our collective patience has paid off, and we are thrilled to partner with the team at MidWestOne Financial Group, Inc. I got to know Charles N. Reeves shortly after he became CEO three years ago. We have stayed in contact since then, often seeing each other at conferences and events. As many of you know, MidWestOne Financial Group, Inc. had many of the same challenges that banks around the country had, and that they had a robust investment portfolio that had significant unrealized losses, which was dragging on margins, profitability, and ultimately their stock valuation. I applaud MidWestOne Financial Group, Inc.'s Board of Directors, Charles N. Reeves, Len D. Devaisher, Barry S. Ray, and the entire MidWestOne Financial Group, Inc. team for steering the company through this period and making a difficult decision a year ago to raise the necessary equity to then reposition the balance sheet. You saw over the past several quarters, this action vastly improved MidWestOne Financial Group, Inc.'s profitability, and we believe they are in the upward swing going forward. What you have now are two banks with very complementary and transparent balance sheets that, when combined, will be positioned to be one of the largest and most profitable community banks headquartered in the Upper Midwest. Page 12 of the investor deck shows our loan and deposit portfolios side by side. You will notice very little difference between the two. What you see combined is a diversified loan portfolio and a core funded deposit base. The combined loan-to-deposit ratio of 85% allows us to continue to focus on organic growth while we integrate the two banks and cultures. It also positions us well for future M&A going forward. As you can also see from the investor presentation, the deal is financially attractive to both shareholders of Nikolay and MidWestOne Financial Group, Inc. From Nikolay's standpoint, the pricing aligns with past acquisitions we have completed. It offers full-year fully phased-in EPS accretion of approximately 35% to 40% and is only slightly dilutive to our tangible book value per share, resulting in a negligible earn-back period. Additionally, the pro forma company is expected to produce peer-leading profitability metrics, as you can see on page 10. While there is significant accretion math in those figures, I expect the combined core profitability of the company to keep us well within the top quartile of publicly traded banks we've been accustomed to being part of on a quarterly basis. While our 2026 expectations do not account for the impact of Durbin, which is estimated at roughly $8.5 million, future expectations only assume 25% cost savings, a number that we think is conservative by industry standards. Likewise, we do not model any revenue synergies yet have identified several, including throughout wealth, commercial, and ag. MidWestOne Financial Group, Inc. will double our branch footprint and bring us in Eastern and Central Iowa. The markets of Iowa City, Dubuque, and Muscatine are all markets where we have a number one or number two deposit share position. They are very similar to our current markets like Green Bay, Eau Claire, Appleton, and Marquette, Michigan. They are all vibrant markets with growth potential, but also markets where we can easily matter in something that is at the foundation of why we exist. Now, some of you may question the position in the Twin Cities, as to date we have largely avoided larger metropolitan markets. However, we have always stated we wanted to be in markets where we can matter, and that we struggled to enter larger metro markets without a sizable acquisition that will allow us to matter. Well, MidWestOne Financial Group, Inc. does that in the Twin Cities. With over $1.2 billion in loans and deposits and 15 branches, we have the perfect opportunity to matter in the Twin Cities. Now, there is plenty of room for growth in that market, and M&A may play a part in that growth. But in the short term, we are excited to introduce the Twin Cities to community banking the Nikolay Way. Denver also presents an opportunity and remains one of the fastest-growing markets in our footprint. Mattering in Denver will require additional scale, it is something we have talked with the MidWestOne Financial Group, Inc. team about and are excited to evaluate going forward. Let me highlight our diligence, as Page 13 of the investor deck has much more details about that process. As we have been in one-off negotiations with MidWestOne Financial Group, Inc. for the past couple of months, we have been able to complete a comprehensive and exhaustive due diligence process. Specifically, as it relates to our credit diligence, we reviewed in excess of 70% of the commercial and ag credits, including over 95% of criticized and watch balances. As a reminder, we do all our own credit diligence during this process, and as such, we do tend to be tougher graders on credits we didn't originate. Lastly, I want to touch on our integration plan, as it will deviate from what we have done in past acquisitions. In the past, we closed and converted all systems the same weekend. This allowed us to achieve cost savings much quicker as well as begin the cultural integration from the start. Given the timing and size of this merger, we expect to follow the script of most other companies. At this point, we are targeting a legal closing in 2026, followed by a systems conversion during the summer or early fall. As a result, we have only modeled 50% of the cost savings in 2026. In closing, I want to emphasize how excited I am by this partnership. I have gotten to know Charles N. Reeves, Len D. Devaisher, Barry S. Ray, and several other members of the MidWestOne Financial Group, Inc. team and Board over the past months. From the start, our discussions have been collaborative and transparent, and both sides have kept employees, customers, and shareholders in mind with their actions. There are many cultural similarities between us that allow me to believe Nikolay Bank's shared success model, which is built on the mutual benefit of its three core groups—customers, employees, and shareholders—will continue going forward. I'd now like to turn it over to Phil Moore, our CFO, to share some thoughts on the deal metrics. Phil? Phil Moore: Thank you, Mike. I echo your sentiment and excitement for this merger. Let me highlight a few of the financial metrics of the transaction as well as the forecasted financial results based on current analyst estimates. The transaction structure can be found on Page six of the investor presentation. MidWestOne Financial Group, Inc. shareholders will receive 0.3175 shares of Nikolay for each share of MidWestOne Financial Group, Inc. in this all-stock transaction. Based on Nikolay's Wednesday's closing price of $130.31, the implied per share purchase price is $41.37 for a total transaction value of approximately $864 million when you include MidWestOne Financial Group, Inc.'s outstanding shares and restricted stock that will fully vest. The purchase price is approximately 166% of tangible book value and 11.5 times MidWestOne Financial Group, Inc.'s consensus estimated earnings per share for 2026. And while the one-day stock premium appears high by comparable standards, I should point out that the pay-to-trade ratio of roughly 0.71 is among the lowest of transactions this size over the past several years and is also consistent with the handful of past transactions reflecting Nikolay's premium valued currency. We believe the pro forma financial metrics are compelling to our existing shareholders. As noted on Page nine of the investor deck, on a pro forma basis for 2026, we are modeling fully phased-in EPS accretion of 37%. There is very minimal dilution to our tangible book value, and as such, the earn-back period is largely negligible. This includes all merger-related charges. Clearly, the pro forma earnings include significant accretion from the interest rate marks that will be amortized over the next few years. However, we still anticipate core EPS accretion in the high single digits, which excludes the accretion math. On a pro forma basis as it stands today, Nikolay shareholders will own approximately 70% of the combined company, with MidWestOne Financial Group, Inc. shareholders owning the remaining 30%. We expect the combined company to have a higher percentage of institutional ownership and believe all shareholders will benefit from greater liquidity in our stock going forward. Let me quickly address some of the significant financial modeling assumptions that you'll find on Page 16. We are modeling approximately $38 million of pre-tax cost savings, or roughly 25% of MidWestOne Financial Group, Inc.'s core non-interest expenses, with 50% of that being realized in 2026 given the likely later integration date. We are expecting deal-related costs of approximately $60 million on a pretax basis, which include many larger ticket items, like change of control contracts, contract cancellation costs, and professional fees. We expect to take a 1.65% all-in credit mark on MidWestOne Financial Group, Inc.'s loan portfolio and exclude the CECL double count that was eliminated by FASB earlier this year. Our other fair value marks include a $125 million interest rate mark to the loan portfolio that we will accrete back into earnings over 2.25 years, $73 million in unrealized available-for-sale investment loss portfolio already accounted for in equity to be accreted over 3.5 years, and approximately $9 million in interest rate marks on funding liability amortized over the remaining lives of those instruments. Finally, as Mike mentioned, we estimate an $8.5 million negative impact to our interchange income going forward beginning in 2027 as a result of crossing the $10 billion threshold. Approximately 80% of additional expenses associated with crossing the $10 billion threshold are already included in our core expense run as we've been preparing for this transition. So we don't believe we have any remaining significant investments to prepare to make that hurdle. Finally, let me address capital. Our pro forma CET1 ratio is forecast to be 10.5%, with a TCE ratio of 8.4% at close. Our strong earnings on a standalone and pro forma basis allow Nikolay to grow its capital quickly, so there will not be any need to raise subordinated debt or equity as part of this transaction. However, we are evaluating our options given the excess liquidity the combined company will likely have and may use that to pay down some higher funding costs, thus shrinking the balance sheet and nominally boosting our capital ratios. With that, now let me turn it over to Charles N. Reeves for some remarks. Charles N. Reeves: Thank you, Phil and Mike. First, I want to thank and express my extreme gratitude to our MidWestOne Financial Group, Inc. team for their commitment to our customers, to one another, and to getting better these last few years. We transformed our organization for the good while maintaining our award-winning culture. And on behalf of our team, we are extremely excited to be joining Nikolay Bank. As Mike mentioned, we've known one another for three years, and we and our organizations share similar mindsets and values. We both have an extreme focus on team and customer as we create shared success. And we both absolutely abhor mediocrity. It's rare to have two organizations, both in an upward performance trajectory, come together. Well, that's what we have here today. We cannot wait to help build the combined Nikolay into the best midsized bank in the Upper Midwest. We look forward to making that a reality for our team, our customers, and the communities that MidWestOne Financial Group, Inc. has served so well for decades. Mike Daniels: Thank you, Charles N. Reeves. As you can tell, we are all thrilled about this combination and what the future holds. We pride ourselves in our long track record of seamless and timely closings and integration and fully expect the same experience with MidWestOne Financial Group, Inc. Our plan is to continue to remain opportunistic yet disciplined when it comes to future M&A. Both legacy Nikolay and MidWestOne Financial Group, Inc. shareholders can rest assured that we don't take your investment in our company for granted. Our combined Board and management team remain committed to keeping Nikolay who it always has been—a strong, growing community bank that matters to its employees, customers, and shareholders. That concludes our prepared remarks. Now we welcome your questions at this time. Van: Your first question comes from the line of Brendan Jeffrey Nosal from Hovde Group LLC. Please go ahead. Brendan Jeffrey Nosal: Hey, good morning everybody. Hope you're doing well. Maybe just to start off here, Mike, one for you. I think over the years, I've probably lost the count of the number of times you've said the words, lead local to me and how Nikolay asked the are in your communities. It sounds like for the Twin Cities, there's a definitive commitment there. Denver sounds like it's a little bit more up in the air. Maybe just unpack your thoughts on Denver a little bit. And how you evaluate the potential investment needed there versus maybe stepping back from that market? Mike Daniels: I think it's the second inning of a baseball game. We look forward to looking at it. Don't really have a lot to unpack there yet. But what I can tell you is consistency matters. And lead local matters and mattering matters. And look forward to looking at all of that, but I don't have by any means at this time, set a set direction or expectation other than what has been the consistent team, as you mentioned, to our history. Brendan Jeffrey Nosal: Okay. That's fair. Maybe turning to a little more conceptually, just the idea of culture. I think this is the first time you've done a deal where you had to hop on a plane to visit the markets that you're acquiring and getting into. Do you guys go about maintaining your culture let alone export it to some extent to places like Iowa City, Des Moines, and the Twin Cities just given that increased distance? Mike Daniels: It's five hours and fifteen minutes by car to Iowa City. It's about three point five hours to Minneapolis. Maybe four by car, but yes, can get there via airplane too. I think as in every deal, right, I it's a long way to Sault Ste. Marie, Michigan and Traverse City, there was a big bond in the way. When we did that. So it's intentionality and transparency in all we do in our communication. Right? And it's at every level of the organization. It's a commitment as to why we show up across the footprint. Wherever that footprint is, every day to matter to customers, matter to community, matter to one another and create that shared success which are belief has been, if we do that, do that exceptionally well, we'll produce top quartile, if not top decile shareholder results and performance. We've proven that thesis over the over our history and continue to do it again. It requires intentionality, right? But more than words, it has to be seen in our actions. But as with anything we've done, that is as big as the systems part a critical piece of the integration. Having people understand what that means and living that I think the two cultures align in certain ways, but never our two cultures exactly the same. But I think we have a really good start basis to start from and how they approach relationship banking and mattering in the markets in which they operate. Okay. All right. Thanks. Brendan Jeffrey Nosal: I'm going to sneak one more in there. Just to Nikolay, your own results for the quarter, which were quite strong. I think margin expansion was a big driver of this quarter's strength. Can you just offer a little color on how you expect your core margin to behave over the next few quarters? With coming rate cuts in store before you layer on the impacts of MidWestOne Financial Group, Inc.? Mike Daniels: Sure. Think when we talked at the end of the second quarter, my thought would be be we expected doing our back book repricing and our deposit deposit positioning, to continue to go up. I didn't see 14 basis points for the quarter, but we had we had really nice deposit growth back end repricing was solid that got us there. There's no real there's no real additional accretion from anything in there that that's a pretty solid quarter number. With a couple of rate cuts, And I would hoping to stay flat. We might get a give a bip or two back here at year end. And then it'd be shampoo effect, Brendan, where I think the typical margin movement we have seen over the last couple of years depending on the deposit outflow in the first quarter, and what that looks like. Year over year. This year, it wasn't as bad. So our margin was stronger and held in there. But I don't expect I definitely don't expect us to give a lot of ground back. New asset generation remains solid. But I definitely think a win for us is to try to deliver a fairly flat margin in the fourth quarter. Brendan Jeffrey Nosal: Okay. Fantastic. I appreciate you guys taking the questions. Van: Our next question comes from the line of Terence James McEvoy from Stephens. Please go ahead. Terence James McEvoy: First off, Mike, congrats to you and your team and same to you, Charles N. Reeves. And thanks for addressing the questions on culture, that topic. Definitely came through your earnings release last night. Couple of questions, maybe first one on the MOFG side, there's been an upgrade of talent within commercial banking, private banking and I'm sure others. Could you just talk about retention of some of those new hires? Then MidWestOne Financial Group, Inc. has also invested in digital. Any of those tech or digital upgrades kind of complement Nikolay going forward? And then the last one there, any lines of business kind of especially lending businesses come to mind? Any of those maybe don't complement Nikolay on a pro forma basis? Mike Daniels: Yes. I mean, I'll jump on that in Charles N. Reeves can jump in. I think retention of people is key. The lack of overlap definitely helps in that matter. So I would expect us to I don't know if you're here and on the revenue side, given the opportunity on what this combination provides, why you wouldn't want to be a part of it. But we're very focused on that, both on Nikolay and MidWestOne Financial Group, Inc. side. Talent is the key. That's the first one. The second one, I think the technology improvements they've made are areas that we are we're just looking at. So the ability to look at those and see how those marry up are part of the integration process and plan. The teams have already started looking at I mean, there are more like vendors that unlike vendors. And providers in this deal that that are being looked at and examined. So I don't think there's a lot of upheaval or disruption there. It feels good. What was the fourth one? What was the third one, Terry? Yes. Terence James McEvoy: Business ones. Mike Daniels: I mean, I think both companies are fairly chocolate and vanilla, right? I mean, we do common things uncommonly well across our footprint. So there's no national real national line of business that that either of us do. We do things that matter in the markets we serve and take advantage of the opportunities in those markets to bring a relationship banking focus. So I don't expect any major any major changes there. I think the approach to C&I lending and relationship banking regardless of the asset classes, first and foremost. Right? And you've heard me say it, all of you have heard me say it time and time again, it's not about the loan, it's about the relationship. We don't make loans. We invest in relationships regardless of the asset class. Or what we do. And I expect that message to carry the day and carry through in the combined company. I don't know, Charles N. Reeves, if you want to jump in and add anything to those. Charles N. Reeves: Yes. You articulated well, Mike. Terence James McEvoy: Okay. Thanks, Mike. And maybe a quick one for Phil. When I pulled the call reports, see $25 million of pre-tax interchange revenue over the last year and that's at both banks. Just so I'm clear, $8.5 million of pretax Durbin impact a, that's both companies and that's the non-credit card interchange revenue part that I'm unable as an outsider to separate? Phil Moore: That is correct, Terry. That is the reason that your number may have thought differently at first, but that is correct. Terence James McEvoy: Okay, perfect. Thanks for taking my question. Back into the math there. Phil Moore: Perfect. I'll do just that. Thanks. Thanks for taking my questions. Van: Good to talk to you. Our next question comes from the line of Nathan James Race from Piper Sandler. Please go ahead. Nathan James Race: Hey, guys. Good morning. Thanks for taking the questions and congrats on the deal as well. Mike, going back to your comments around the Twin Cities, obviously, MidWestOne Financial Group, Inc. has invested in some production talent, given some of the M&A related disruption within that market recently. Curious to what extent you can accelerate some opportunities to gain market share in the Twin Cities by deploying the model that's obviously been really successful in Green Bay over the last two point five decades or so at your franchise. And just how you see the overall kind of organic growth of the company trending on a combined basis? Mike Daniels: Yes. I think I look forward to that and think that's the opportunity, right? But as I said, earlier, in the context of how we do it and how we look at the world relationship. Relationship based, what's the opportunity, what's the depth of relationship, how can we matter. I think that we can and will. I think the talent that MidWestOne Financial Group, Inc. has been able to add across its footprint things that way. So I look I look forward to that. Okay. I look forward to hearing from them and the teams as they pull it together to say, this is what we think we can do. As you know, the primary and driving focus from a commercial standpoint is always on C&I. If it's CRE, it has to be relationship based. Transactions don't work. Not a fan of them. We never have been. But where there's a relationship, we want to matter and will. So I think the two aligned nicely and look forward to what we can do across the footprint. Right? Not just there. Throughout Iowa, Denver, and the Minnesota marketplace. Got you. Then Well, as long as continue to do what we do in Wisconsin, and Michigan. Understood. Makes sense. And then is there any anticipation that some of the cost saves from the integration could be reinvested in some production hires, whether it's in the Twin Cities, Denver, and some of the Iowa MSAs that you'll be adding? Or do you feel pretty good about some of the production capabilities that are coming over? From MOFG. I feel really good where we are. Right? I think I think we're positioned well. I think we I think I mean, we did want to come in with some big hairy cost save number that made the deal look we did things in typical Nikolay fashion as real as they can be transparent. But I feel good about talent across the footprint and the leadership. Delivering that talent and have high expectations as I do for for our legacy legacy revenue and relationship people. Got you. And if I could just sneak one last one in. Obviously, it's a pretty big integration here. Adding one of the biggest retail franchises that you have in your previous deals. And the Nikolay brand probably isn't too well known across Iowa. So just curious if there's any changes or differences in kind of your integration playbook as you look forward in terms of how to integrate MOFG and just ensure kind of seamless retention across the deposit franchise in Iowa? Mike Daniels: Yes. I think as with everything, I think that's people focused, that's people delivery. Right? There's not a lot of overlap. But the matter to customer, to community, matter to one another and share success environment, they only works if it's real and it's got to be real on the street. So the introduction and retention about shared success has got to be delivered by the folks in the markets. I know you've heard me say there's not much I can do from Green Bay, Wisconsin. To make us matter in the footprint if our people don't believe that they matter. That they can't prove that out in the relationships and in the communities. I think it's very solid across the Nikolay legacy footprint as well as the MOFG footprint. And I fully expect that's a challenge to the people. I expect them to carry the day on the relationship because that's what matters. Okay, great. I appreciate all the color. Congrats again guys. Thank you. Van: Thanks, Dave. Thanks, Dave. Dave. Our last question comes from the line of Damon Paul DelMonte from KBW. Please go ahead. Damon Paul DelMonte: Hey, good morning guys and congrats on a very exciting announcement both organizations. Just wondering, Mike, are there any like products or services, either on the Nikolay side or the MidWestOne Financial Group, Inc. side where you see opportunity to leverage the expertise from one side or the other to create greater synergies? Mike Daniels: I mean, the revenue enhancement, the largest opportunity might be on across the wealth book. And across the customer base. We do as you know, employee benefits are part of our makeup. And across the MidWestOne Financial Group, Inc. platform, they don't have that offering. We look forward to bringing that to the customer base, the C&I customer base and enhancing that rollout. That's a $9 million under management I think there's tremendous amount of upside. But I think both companies do common things uncommonly well, right? I mean, it's relationship banking and relationship focus at its finest. How can we matter across the whole wealth of revenue lines to each customer and at each community. So I don't know that there's any special, special sauce other than what both companies do really well. And then show up, get after it matter in their markets and deliver top notch relationship based service with the customer always the focus and mattering in the markets. And the customers understand that and look at it in the same lens of shared success that business is personal. It is personal to our customers. We know that, so it's personal to us. Damon Paul DelMonte: Got it. Okay. And then could you just go back to your comments from a previous question on the Denver part of the footprint. Were you saying that you're evaluating the strategy there? It's like you're going to maybe look to invest more way of like de novo or potentially future M&A? Or is this an area that you may ultimately decide is not the best fit for the footprint? I didn't quite hear what was said there. Mike Daniels: That's exactly what I said. All of those things, right? I mean, what I said maybe in a convoluted way is I don't know, and I look forward to looking at it. I think it's an exciting market. And we just got to look at how it fits in, right? I mean, probably the biggest thing that can't get lost everyone gets all excited is first and foremost, relative to the and communities showing up and getting after it mattering, But secondly, I mean, what it means to the shareholders, we are always going to look at this from the lens of the shareholder, right? I mean, it's I sound lost on you, Damon, that we're still a founder driven organization and it's still you know, 95% of my of my of my family's worth and wealth. So everything we do and every way we look at it, on both sides is through the lens of the shareholder. And what is the best course of action and I think some of that's part of the reason we don't let median slip in our conversations. Right? We expect top quartile, top decile, and we expect to deliver that as a result of the reason and why we show up every day and what we do. And the reason isn't to produce the shareholder results. That's our responsibility. Reasons to matter in the markets and as a result of the depth of that, we will deliver those top quartile, if not decile results to the shareholders. Because it matters and we understand that. So we'll always take a look we'll always look at every opportunity in the in in the lens of the three circles. And as you know, we want those circles to have as much overlap as possible. But it's not bigger. Bigger isn't better. Better is better. And we'll always look at what better means. Damon Paul DelMonte: Got it. Okay. And then just lastly, just from a modeling standpoint, believe the slide deck to the illustrative example there was a three thirty one. Is that that's reasonable for us to assume in our our models when we go to layer in the transaction? Mike Daniels: It is she. Yeah. Her Rezak's telling me yes. Damon Paul DelMonte: Okay. Got to be right then. Okay, great. That's all that I had. Thank very much for Mike Daniels: I mean, we're going we're kind of vague there, but I mean, know us. We're going to do things in Nikolay Way and try to get this thing to and roll and to the extent we can and but we also understand we're not in control of everything, but I mean, the goal is that, Damon, is to get it closed by then. Damon Paul DelMonte: Okay, great. Okay, that's all that I had. Thanks a lot. Appreciate it. Van: I will now turn the call back over to Mike for closing remarks. Mike Daniels: Thank you. I appreciate everyone who attended the call today and can't tell you how we look forward to bringing these two companies together in the success that I think it provides across our footprint. As I just finished saying, be focused on the three circles of customers, employees, and shareholders and the overlap in the shared success environment. It sounds simple, yet it takes focus and commitment to make happen. And and and I think our track record speaks well for what we've been able to do. But our expectation at the end of the day is this combined entity will be a top quartile, it's not just out performing company delivering exceptional shareholder returns. Hopefully, you've seen it if you've been a Nikolay shareholder. Over the past ten quarters as to where we're headed. There is absolutely that expectation that, that will happen here again. We don't take the work involved for granted. We take the cultural integration or the systems integration for granted. But we will get after it and we appreciate your investment. We take it seriously. And if there's ever any questions or additional follow-up, please reach out. On behalf of Charles N. Reeves, Barry S. Ray, and their entire organization, as well as Nikolay, thank you for being part of the call and we look forward to talking to you more. Van: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Greetings, and welcome to the OMA Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Emmanuel Camacho, Investor Relations Officer for OMA. Thank you. You may begin. Emmanuel Camacho: Thank you, Melissa. Hello, everyone, and welcome to OMA's Third Quarter 2025 Earnings Conference Call. We're delighted to have you join us today as we discuss the company's performance and financial results for the past quarter. Joining us today are CEO, Ricardo Duenas; and CFO, Ruffo Pérez Pliego. Please be reminded that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our control. And now I'll turn the call over to Ricardo Duenas for his opening remarks. Ricardo Duenas: Thank you, Emmanuel. Good morning, everyone, and thank you for joining us today. This morning, Ruffo and I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. In the third quarter of this year, OMA's passenger traffic totaled 7.6 million passengers, an 8% increase year-over-year. Seat capacity increased by 11% during the quarter. On the domestic front, passenger traffic grew by 7%, driven primarily by the Monterrey Airport, which saw increases on routes to the metropolitan area of Mexico City, mainly to Toluca Airport, Bajio, Puerto Vallarta, Mérida and Querétaro. These routes collectively added over 300,000 passengers during the quarter, representing 68% of the total domestic passenger growth. International passenger traffic increased by 11%, mainly driven by Monterrey on the route to San Francisco, San Luis Potosi with higher traffic on the routes to Atlanta and Dallas and Tampico on the route to Dallas. Together, these routes added more than 47,000 passengers during the quarter, accounting for 46% of the total international passenger growth. Moving on to OMA's third quarter financial highlights. Aeronautical revenues increased 11% with aeronautical revenue per passenger rising 3% in the quarter. Commercial revenues grew by 7% compared to the third quarter of '24 and commercial revenue per passenger stood at MXN 60. Commercial revenue growth was mainly driven by parking, restaurants, VIP lounges and retail, mainly as a result of higher penetration and an increase in passenger traffic. Occupancy rate for commercial space stood at 96% at the end of the quarter. On the diversification front, revenues increased 8%, with Industrial Services contributing most of this growth, mainly because of additional square meters leased in our industrial park as compared to the third quarter of '24 and contractual increases to rents. OMA's third quarter adjusted EBITDA increased by 9% to MXN 2.7 billion with a margin of 74.8%. On the capital expenditures front, total investments in the quarter, including MDP investments, major maintenance and strategic investments were MXN 472 million. Finally, in relation to the negotiation process of our next Master Development Program discussion with the AFAC remain underway. We submitted our proposed Master Development Program for the '26-'30 period at the end of June, and the process remains on track. During the quarter, we continued addressing AFAC's technical observations and advancing the validation of investment projects in accordance with the schedule agreed with the authority. We continue to expect the final resolution and publication of results during December. Our expectations regarding the overall investment level remain at committed levels of MDP investment similar in real terms to the level of the previous '21-'25 MDP and maximum tariff increase in the low single digits. I would now like to turn the call over to Ruffo Pérez Pliego, who will discuss our financial highlights for the quarter. Ruffo Pérez del Castillo: Thank you, Ricardo, and good morning, everyone. I will briefly go over our financial results for the quarter, and then we will open the call for your questions. Aeronautical revenues increased 10.6% relative to 3Q '24, mainly due to the increase in passenger traffic as well as higher aeronautical yields. Non-aeronautical revenues increased 7.3%. Commercial revenues increased 7.0%. The line items with the highest growth were parking, restaurants, VIP lounges and retail. Parking grew by 9.4%, mainly as a result of higher passenger traffic. Restaurants and retail increased 9.8% and 8.2%, respectively, both driven by higher passenger traffic as well as the previously opened or replaced outlets. VIP lounges rose 9.9%, mainly due to higher market penetration, primarily in Monterrey as well as the increase in passenger traffic. Diversification activities increased 8.2%. Industrial Services, which relates to the operation of the industrial park contributed most to the growth in the quarter, increasing by 53%, resulting from higher square meters leased as compared to third quarter of '24 as well as contractual rent increases. Total aeronautical and non-aeronautical revenues grew 9.8% to MXN 3.5 billion in the quarter. Construction revenues amounted to MXN 382 million in the third quarter. The cost of airport services and G&A expense increased 14.4% versus 3Q '24, primarily due to the following line items: Payroll grew by 10.7%, mainly as a result of annual wage increases as well as higher headcount as compared to the third quarter of '24. Other costs and expenses increased by 22% due primarily to higher IT-related requirements and transportation services. Contracted services expense rose 16.4%, mainly due to higher cost of security and cleaning services following contract renewals in prior quarters, reflecting the inflationary pressures and tight labor market conditions in Mexico. Minor maintenance increased 19.8%, primarily due to timing effect of the works performed. Concession tax increased by 10.4% to MXN 290 million, in line with revenue growth. Major maintenance provision was MXN 28 million as compared to MXN 75 million in the same quarter of last year. OMA's third quarter adjusted EBITDA grew 9.0% to MXN 2.7 billion and adjusted EBITDA margin reached 74.8%. Our financing expense increased by 9.8% to MXN 299 million, mainly driven by higher interest expense as a result of higher average debt levels. Consolidated net income was MXN 1.5 billion in the quarter, an increase of 9.1% versus the same quarter of last year. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN 1.9 billion and investing and financing activities used cash for MXN 480 million and MXN 365 million, respectively. As a result, our cash position at the end of the quarter stood at MXN 4.4 billion. At the end of September, total debt amounted to MXN 13.6 billion, and we maintained a solid financial position, ending the quarter with a net debt to adjusted EBITDA ratio of 0.9x. This concludes our prepared remarks. Melissa, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Pablo Ricalde with Itaú. Pablo Ricalde Martinez: I have one question regarding your traffic expectations maybe for the fourth quarter and maybe your early thoughts on 2026, taking into account the World Cup. Ricardo Duenas: Yes. Thank you, Pablo. So we're looking for the rest of the year to finish in our traffic overall for the year between 7% and 8% growth. And our expectation at this point in time for next year, it's traffic to be in the low to mid-single digits for next year growth. Operator: [Operator Instructions] Our next question comes from the line of Enrique Cantu with GBM. Unknown Analyst: I have a quick question. Commercial revenue per pass declined this quarter, the first contraction since early 2023. Could you elaborate on the main drivers behind this softness? And how do you plan to reaccelerate this [ known ] area of growth? Ruffo Pérez del Castillo: Enrique, so yes, commercial revenue per passenger mainly reflects -- in the quarter reflects the impact of onetime revenues recorded in the previous year. And in the following quarters, we expect commercial revenues per passengers to gradually increase in line with inflation from current levels. Unknown Analyst: Okay. Perfect. And just another one, if I may. SG&A and utility costs rose this quarter, eroding margins despite strong top line growth. Do you view these cost pressures as temporary? Or should we expect a structurally higher cost base heading into 2026? Ricardo Duenas: Sorry, could you repeat that? Maybe you're too close to the microphone. Unknown Analyst: Yes, sorry. So it's regarding SG&A and utility costs. We saw that this quarter they erode margins. Do you view these cost pressures as temporary? Or should we expect this higher cost base heading into 2026? Ruffo Pérez del Castillo: So yes, as we mentioned, there are some specific line items that are facing some pressures like cleaning and security, where the total level of cost in the following quarters should be similar to the level of cost that we are facing right now. However, we do have started to analyze different alternatives to continue maintaining cost at check, and it's part of the history of the company to be very cost conscious, and we expect pressures not to be permanent. Operator: Our next question comes from the line of Gabriel Himelfarb with Scotiabank. Gabriel Himelfarb Mustri: A quick question on capital allocation. First, for the next MDP, I think you have mentioned that almost all the capital will go to Monterrey. It will be focused on, perhaps, increasing the capacity of the airport or developing more the commercial spaces, the commercial portion of the business? And my second question, are you seeking or have you considered expanding gap -- sorry, OMA's portfolio towards outside Mexico? Ricardo Duenas: Yes. Thank you, Gabriel. Regarding the last part, we're always looking for opportunities to expand internationally. At this point in time, we don't have a concrete transaction that we could share. In terms of the MDP, it's around half of the MDP will be allocated to Monterrey, given that half of the traffic is allocated in Monterrey. We're looking to expand in most of -- in capacity that will generate commercial opportunities as well. There's pavement, there's technology, there's environmental and sustainability projects as well. Operator: Thank you. There are no questions at this time. I'll turn the floor back to Mr. Duenas for any final comments. Ricardo Duenas: We would like to thank you, everyone, for participating in today's call. We appreciate your insightful questions, engagement and continued support. Ruffo, Emmanuel and I remain available should you have any further questions or require additional information. Thank you once again, and have a great day. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: 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.
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, 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.
Johan Andersson: Good morning, everyone, and welcome to the presentation of Saab's Q3 Report for 2025. My name is Johan Andersson, and I'm honored to have been appointed Head of Investor Relations here at Saab. With me here in Stockholm, I have our CEO, Micael Johansson; and Anna Wijkander, our CFO. Anna and Micael will present the report, and thereafter, we will start the Q&A session. And you can either ask your questions over the phone or you can enter them in the web interface, and I will read them out loud here in Stockholm. So with that quick intro, I will hand over to our CEO, Micael. Micael Johansson: Thank you so much, Johan, and thank you all for joining us this morning for the quarterly 3 report and the first 9 months. I want to welcome Johan as well as Head of Investor Relationship. So you're most welcome to the company. And I also want to thank Merton Kaplan for an excellent job during so many quarters and back old -- looking backwards. And then I wish him luck, of course, in his continued journey within Saab. Before I go into the highlights of this quarter, I just want to say a few words about the day we had Wednesday in Linköping, where we the had honor of receiving President Zelensky and his delegation and also our Prime Minister and his delegation to host them for this important statement and letter of intent that they signed in the direction of creating a strong air force in Ukraine going forward. This was, of course, a unique day and it was an important statement which we have been waiting for to now continue our journey in exploring scenarios and planning for how an establishment and delivery so quite a few aircraft will look like in Ukraine. And it also adds to our assessment of investments that we need to do looking into that. With all due respect, I mean, there's no contract yet. Still a lot of work to do. You heard the President Zelensky and also Prime Minister Kristersson talking about sort of the financing solution and what needs to be established there. And then, of course, there are a couple of other things. But we will start doing our work to sort of support this going forward. And it was great to see our employees in Linköping spontaneously applauding and sharing when President Zelensky stepped out of the car, and we're so much committed as a company to support Ukraine going forward. That was a unique and fantastic day. And now we will work hard to sort of make this happen as well, of course. So with that, I just want to go into a few highlights then of the quarter. It has been a strong demand in the market. We still have lots of geopolitical tensions, of course, around us and strong demand from many countries in all avenues of our portfolio and we develop contracts really well. We had a strong quarter when it comes to order intake, as we've seen. But it's also timing. It's sort of on the same level as the quarter last year. But in October, only after the closing of this quarter, we have SEK 16 billion in order intake. So we're looking toward a really strong year when it comes to contracts as well. We have a number of campaigns apart for our product sort of demand in the market that we are running, of course, both when it comes to the Gripen side, and we'll come back to that; and also GlobalEye, where a number of countries have a huge interest in our system. As you know, we've been selected by France, and now we're just waiting to sort of -- them to sign the contract in that country as quickly as possible. And then we have interest actually from NATO and from Germany and from Denmark, and a number of other countries is looking into our GlobalEye system. So there is still a need to continue to invest in capacity, which we're doing in a diligent way, I think. And looking at the execution this quarter, which has been solid in sort of a normally weaker quarter, but it's really been stronger this quarter. And as you've seen, I mean, the first 9 months is now an organic growth of 21%. So we've done really well also adding the third quarter to the first two ones here. And we will continue to look at our development of our profitability, which has also been good. But we'll also never trade off versus sort of investing in capacity to sort of meet the demand in the market, of course, but also being relevant when it comes to new technologies that we have to invest in going forward. All in all, it's been a strong quarter, and we have, as you've seen now, upgrading the outlook for '25. I will come back to that in the end. But we're now sort of raising our guidelines on top line to 20% to 24% from 16% to 20%. So back to the numbers. As I said, almost SEK 21 billion in order intake, a good increase in the medium-sized story. It looks a bit different between the quarters. And I think, as I said, we added SEK 16 billion only in October, which we have press released. So it looks really good going forward as well. We have a book-to-bill of 1.3x and a very strong organic growth in this quarter, the strongest quarter we've ever had on top line and also in absolute numbers when it comes to EBIT. So the margin is now 8.7% in the quarter but 9.3% looking at the first 9 months. Cash flow is on the same level. If you look at the first 9 months, sort of minus SEK 1 billion roughly. We have still the same view as last year. We will generate a positive cash flow. We have a number sort of important payments coming in now during the fourth quarter. So I'm confident that we will meet our guidelines on that as well. A few statements about the different business areas as usual. Yes, of course, a big interest in the Gripen conversion now. We have contracted Thailand during the quarter, the first 4. And they are looking into further contracts as well, of course. The batch 2 and batch 3 of their contract is being discussed already. And then, of course, we have been selected by Colombia and we are negotiating a contract there. We have no contract yet but we are moving ahead in a good pace in Colombia. And then, of course, the interest now from Ukraine is something we will sort of take into account and start planning for, as I mentioned. We have a good strong quarter from Aeronautics. They have gone 34% up sort of compared to the quarter last year. So they had really good project execution in the Gripen program mainly. But still, the profitability level is affected by ramp-up costs that we have mainly in the T-7, the trainer aircraft in the U.S. in West Lafayette. So that is still sort of a burden to Aeronautics, but they're moving in the right direction definitely. Dynamics, again, good growth. A quarter that is normally quite weak for Dynamics has been quite strong actually. If you look at the first 9 months of Dynamics, they have grown 34% or something, maybe even 36%, if I remember correctly now. It's an extremely strong year for Dynamics. They have had a number of medium-sized orders but also a large one from the Czech Republic when it comes to the medium, short-range air defense system RBS 70. So there is still a big demand in the market and we are investing heavily, as you know, to increase capacity in this area. I think we have only in the Karlskoga sort of 40 projects ongoing to expand everything and building factories in the U.S. and in India, as you know. And they have a huge backlog now of almost SEK 90 billion as we speak. Surveillance, also a very interesting portfolio. I said that the campaigns for the GlobalEye are a number of them now. So we are intensifying that, of course. I hope that we will see this GlobalEye system, which is the state-of-the-art system, most modern one, taking a bigger position also within the Alliance with multiple countries going for GlobalEye. So that's what we're working. And the first one that we were selected upon is, of course, France that you know all about. So there is not only on the GlobalEye side, but the surface side, the surface sensors, the sensor side of Surveillance is really strong and getting more and more contracts. And they deliver quite well as well, growing 8%. And honestly, the quarter 3 of Surveillance is the strongest ever top line-wise. So they are doing well also when it comes to project execution, and they have a huge potential going forward, I would say. I also want to mention that we are divesting TransponderTech, which is communication and automatic identification system type of entity, as we have also already press released. And we will close that deal now in quarter 4. Also a very big backlog on the Surveillance side, as you can see, SEK 55 billion. Saab Kockums also have a big interest in many segments. We're working campaigns now on the submarine side with Poland, and that we're putting a lot of effort into, of course. And it makes lots of sense to have Sweden and Poland work together to protect the Baltic Sea. But also on the surface side, we have the Swedish corvette/frigate program coming out, which is called Luleå class, which we are also seeing as a big potential going forward. But there are many other export contracts where we are involved. And we have also now invested but also got the contract to look to design and test a large underwater unmanned vehicle with the Swedish Navy, which is great to see that we're moving in that direction. Because also on the Navy side, it's not only in the air you will see collaborative combat entities working with manned entities. That will also happen on the surface and subsurface going forward. We also got a task, which is a fantastic honor, to lead the project within NATO when it comes to underwater battlespace project, connecting and creating interoperability between manned and unmanned systems. So that, we look forward to execute. And the growth is really good, 17% year-on-year when it comes to the quarter, and they are really moving in the right direction. And they have a substantial backlog. I need to mention, of course, that after the quarter in October, we got an additional contract, as you've seen, on the submarine side for SEK 9.6 billion, adding to the backlog now going forward. And then finally, when it comes to our business area, Combitech. We have, of course, a very well moving forward Combitech, our technical consultant entity. They are growing also rapidly year-on-year 17%. It's all about sort of employing new people, of course, and getting utilization into the operations that create these numbers. And I think we've employed 200 people up now only in this quarter from the Combitech side, and that adds to the growth, of course. We're doing well as a consulting company. We're absolutely in the right areas, in the right niches right now, cybersecurity, critical infrastructure, critical communication, creating security operation centers for many type of industries and also from the -- in the public side, the authorities. And everything connected to total defense in terms of resilience is something that sort of generates business now for Combitech going forward. So they had a good quarter as well, definitely, and they're growing quite a lot over the year as well. So I just want to say a few words about something that's been discussed every day, every week in terms of what's happening in Ukraine when it comes to drones and what kind of drone capability do we need going forward and counter-drone capability. And also the EU Commission have launched projects now during the last few weeks, which is sort of a drone wall, making sure that we have resilience versus big drone capabilities coming from the East. And I just want to mention that this is something we really are investing in, and we already have solutions in place. We don't talk so much about this, but we have already used these solutions in NATO missions in Poland. We call one system -- the way we approach this, I say, is to make sure that we are quite agnostic when it comes to what effectors or interceptors do we use. We can use everything from Bushmaster Gun to an electronic warfare type of effectors to nets or kamikaze drones or actually RBS 70, and we are now investing in a new missiles that you've heard about called Nimbrix, which is in a segment between the guns and the RBS 70. So that's sort of agnostic. We can sort of integrate the system that would manage different types of threats. And the Loke system is sort of a brand name of the system includes, of course, a sensor capability with the Giraffe 1X, which is excellent and the most state-of-the-art radar, that you'll find everything from micro drones to larger drones and cope with many threats at the same time, a commander control system, which is really compact and then an interceptor vehicle that would have sort of the chosen effector on it. That -- a counter UAS system already established in Sweden and used in NATO missions. The loitering munition side or actually having a known swarm technology capability. We have already released that we have something that is self-organized in terms of software and using AI to have swarm of drones during different types of missions. And I think we are focusing, among other things on not only surveillance but also loitering munition. That is important because of how you would manage an aggressor going forward, not only with support weapons that called Gustav and anti-tank weapons, but you can also use drones to accomplish part of the mission and work together with support missions. So we are involved in this area and ramping up our capabilities, and we already have existing systems. A couple of highlights from the sustainability area, a very important area to us. We have this quarter established a biogas facility in our site, which is the Barracuda entity in the Gamleby, which is doing camouflage and signature management. which reduces our energy dependence on fossil fuel, of course, dramatically. And if you compare year-to-year in the first 9 months to last year, we have reduced 4% on the CO2 emissions. And we are on a good track now to support our SBTi targets, where we have said we will be 42% down 2030. And if you look at the base year compared to where we are now, we are 33% down. We have a good progress on operational health and safety. We really make sure that we have a safe operational environment within the company, and we measure this all the time. And we must report every incident to mitigate everything that could happen. And another thing is, of course, diversity and inclusion. We are happy to see that we are now moving up when it comes to our female employees in the company, now at 27%. That is a very good step, and we want to go further also, of course, when it comes to female managers. But we are moving in the right direction. And since we have employed 2,700 people net up during the first 9 months, 34% of that employment is actually female. So we're going in the right direction. I'm really happy to see this. So last but not least, I already said that at my first slide that we have -- because of the good progress this year, the first 9 months, organic growth of 21% and also good visibility, of course, into the backlog which is now over SEK 200 billion, and we know what we need to deliver the remaining part of the year, we have now said that we will take this step from 16% to 20% growth rate to 20% to 24% instead. So that's our new guidance. And we still retain the other portion, saying that EBIT will grow more than the organic sales growth. And we will generate a positive cash flow and we are confident doing that going forward. I just want to thank all our employees for doing a fantastic job during the first 9 months and supporting this growth and the commitment to creating societies and having people in societies safe is a strong sort of purpose of the company, which is supported by our employees. I'm really pleased to see that. With that, I think if I have not forgotten anything, I will hand over to Anna, our CFO. Anna Wijkander: Thank you, Micael, and good morning, everyone. Yes, as you have heard, we are delivering a strong third quarter especially from a sales growth and EBIT growth perspective. So I think now it's time to dig more into the financial numbers. And we start with the order backlog. We left the third quarter with a strong backlog, increasing it to SEK 202 billion. In particular, it was the medium-sized orders that increased during this quarter. They more than doubled actually this quarter. So we booked SEK 21 billion. And we have, since the quarter closed -- we booked additional SEK 16 billion in order intake. So the start of Q4 looks promising. 73% of our orders in the backlog are international, and its Dynamics and Surveillance that is the majority of the order backlog, 71%. If you look at to the left in the graph, you can also see that we are increasing our deliveries from the backlog for the fourth quarter with 35% compared to the last year. And we can also see that we're increasing the deliveries from backlog the year 1 and 2, that is '26 and '27 compared to last year. So that really shows that we have -- we are in a growth journey and that we are also expanding our production capacity to deliver on our commitments. Let's turn into some more comments on the drivers of our sales and profitability then. And yes, as you have heard us saying, this was our highest sales and EBIT ever in a third quarter. And we have strong sales growth, 17% reported or 18% organic for the group. And the EBIT grew 16% in the quarter. What's also good to see is that the gross margin is increasing in all business areas in the quarter due to high project activities. And looking in then to more in each business area, Aeronautics, 34% growth this quarter, driven very much from the Gripen deliveries and high activities in the business areas. Also, we see improvements in the commercial business in the sales growth. However, the EBIT is still impacted by the startup costs that we have in the T-7 factory as well as a bit higher marketing cost for all the Gripen campaigns, and also we're starting to do amortization on a capitalized R&D that's impacting the EBIT. Dynamics, again, continued the strong growth from Q2. It grow 12% this quarter and also delivered a higher EBIT margin, 19.3% in the quarter. And that is a result also of project execution, several deliveries, a mix situation. You know in Dynamics, we had a lot of delivery projects. And in this quarter, lots of deliveries from ground combat that is impacting the margin in a positive way. Also, Surveillance grew 8% in the quarter. Good project execution and EBIT level at the same level almost as last year. Here, it's very much deliveries from also the Giraffe 1X radar production that's impacting in a positive way, but also good project execution in the business area. However, on Surveillance, we can mention that there are still negative impact from the Civil business impacting their margins. Kockums, also a high activity level and a very significant growth in their EBIT margin year-over-year. That is very much driven this quarter from both high project execution and, in particular, in their export business. To mention also Combitech, they grow 17% in the quarter. High utilization, high activity, and as we heard, that they are in -- working very much in an area which is growing as well. And their EBIT margin was on par with their EBIT margin last year if we deduct the divestment that we made in the Norwegian operation last year. And from a group perspective, mentioning also that on a corporate level, we have some corporate costs that are SEK 200 million approximately higher this quarter, and that is something that we expect to continue. It was driven very much of these share-based incentive program but also somewhat higher costs for IT and security as we're growing the company. The financial summary then. I think I mentioned all items above EBIT. So I think focus more here on the financial net that turned negative this quarter. And the reason for that is mainly because of the revaluation of shares in a financial investment of around SEK 50 million that impacted the financial net, and we had also a lower result from currency hedges related to the tender portfolio if we compare it to last year. This revaluation that I talked about impacting also the tax rate this year. So compared to last year, it's a bit higher. And then all in all, the group net income is in line with last year and as well as the EPS. Let's zoom out then to 9 months and look how it looks for us after 9 months has passed. On a group level, the sales increased 20% or organic 21% related to effect on currencies. All our business areas have double-digit growth year-to-date. So that's very positive to see. Also our gross margin is improving 70 basis points, and it's all business areas that are contributing to this gross margin increase, but in particular, its Dynamics and Surveillance where we see the improvements. So after 9 months, our EBIT is up 30% and we delivered a margin of 9.3%. Year-to-date, the financial net is positive. And here, it's supported by the appreciation from currency hedges related to our tender portfolio. And following that, we also have a lower tax rate decrease due to lower share of taxable income from foreign operations. So net income and EPS improvement driven by the EBIT growth and also the improvement then in the financial net. Next, our cash flow. I think we can say that we have a strong cash flow from operations despite increased working capital that is driven by our business growth. After 9 months, we have generated SEK 7.3 billion in cash from operations. That's SEK 1.9 billion more than last year. Also in line with our sales growth, we are building working capital, and we're doing that in line roughly with the same amount as we did last year. So if you look at the operational cash flow and deduct the change in working capital, we actually have a positive cash flow of SEK 3.9 billion after 9 months. But as you know, we need to do our investments. That's something that we have communicated earlier in the Capital Markets Day and continue to communicate. It's important for our growth. And we have increased our investments. SEK 4.9 billion is the amount now. That's SEK 1.7 billion more than last year. And so we end up with a negative cash flow year-to-date. But we expect the operational cash flow to be positive this year since we are expecting several large customer payments by the end of the year. Finally, on this slide, I just want to mention also that it's very positive to see that we are improving our return on capital employed, it's now almost 15%, and that's driven both by our profitability but also by increased return on capital turnover. Finally, our balance sheet. We have a strong financial position and a solid balance sheet. Our net debt-to-EBITDA is on a healthy level, 0.1x. This quarter, we have a net debt of SEK 700 million, and that was mainly due to that we have a new -- the lease of our newly opened office in Solna here in Sweden, and that's impacting around SEK 1.3 billion in the third quarter. We have cash and liquid investments of SEK 12.2 billion. And during the quarter, we had issued total bonds of SEK 2 billion additionally. Additional to that, we have an unutilized revolving credit of SEK 6 billion. So all in all, that puts us in a strong position to capitalize on future growth opportunities both through increased investments and also enable us to do potential acquisitions. So in summary, I think a strong quarter both in sales and EBIT across the business. The group has a solid financial position and we have a strong order backlog to deliver on. So with that, I hand over to you, Johan, to open the Q&A. Johan Andersson: Thank you very much, Anna and Micael, for a great presentation. So let's start the Q&A session. And we will start with the questions from the phone conference. [Operator Instructions] So please, operator, do we have any questions from the telephone conference? Operator: [Operator Instructions] The first question comes from Daniel Djurberg with Handelsbanken. Daniel Djurberg: Then I will go to Aeronautics, I think. You had a good quarter, nice growth. A little bit lower EBIT margin versus last year's quarter, [ 30 basis point ] I believe. But it's still the -- as you mentioned, the T-7A program lingering. Can you both give us an update on this in terms of both the cost or margin impact and also how -- for how long we should expect this to linger and if it will increase in size or the opposite. Micael Johansson: Thank you. No, I think when you look at Aeronautics, I would say that a normal Aeronautics with a reasonable scale of Gripen contracts and what have you should be sort of in -- I don't guide, but we talked about this before, sort of high single-digit numbers. So the effect is still there from T-7, absolutely. We've turned around the commercial business in a good way. We're not sort of adding lots of profitability really yet, but it's still okay. So I would say still a couple of years, it don't -- it won't go in the wrong direction, it will go in the right direction. But before it's actually a good addition to our Aeronautics business, it will be sort of 3 years ahead from now, roughly, I would say. But it will go in the right direction over time, of course. Operator: The next question comes from Ian Douglas-Pennant with UBS. Ian Douglas-Pennant: So I've got several questions but I'll limit myself to one on Gripen, please. Could you expand on the comments that we've read, I think, in the press this morning that you could expand Gripen capacity very rapidly if required? I wonder if you can just educate us on this group as to what we said there and how quickly that could happen. And in order for that to happen, do you need to see deposits coming in before you consider making those investments? Or would you consider investing elsewhere? Micael Johansson: Well, as I've said, I mean, we still need sort of set a scenario, that is, if we now get sort of the financing in place, if the politicians sort that and you get support refinancing Ukraine to go into contract on the Gripen E and expanding the production will be important. The way I see it is that, and I've said that this morning that right now, we are looking at expanding production with investments that we've taken to somewhere between 20 and 30 aircraft a year. And of course, as you know, with the numbers that was stated in the Wednesday's meetings, that sort of would add a lot to that. So that we're looking into that now, how quickly can we take another step because this investment we're talking about is sort of look to be implemented sort of next year and the year after that, roughly get to that level, and then you can take another step, of course. It will be adding more to the Linköping production lines if we do that, and that's sort of a few years ahead. But it would also mean that we would sort of expand our hub in Brazil. And we are initiating, as we speak, other sort of partnership discussions in countries that would have an interest for the Gripen, of course. So this will mean that we would need another hub beyond sort of the hub we have in Brazil and expanding in Linköping as well. Well, we said that, okay, if Ukraine push the button, we would deliver the first one in 3 years' time, and that is sort of what we commit to. And then it depends on what is the stretch of the delivery schedule with Ukraine and when we have to have this capacity in place. Normally, it takes like 2 to 3 years to get sort of improved capacity in place, I would say. That's sort of the view I have on how quickly we can do this. But there is absolutely an opportunity to implement this. Will we -- yes, I would like to see sort of a more solidified financing solution in place before we take the big step to start sort of adding huge sort of investment to this. But since we're already moving in the investment direction, we can add a little bit more maybe at risk to actually make sure that we keep the lead times. That's the way I see it without quantifying exactly. Operator: The next question comes from Aymeric Poulain with Kepler Cheuvreux. Aymeric Poulain: Clearly, the demand outlook is great. And it's the third year you're going to be growing at 20% or 25%. So the question is, do you expect that rate to be maintained? Or are the supply chain challenges, especially regarding the staffing or specific material that are starting to emerge given the very strong demand situation? Micael Johansson: Well, it's a bit sort of premature to sort of talk about sort of the next years beyond, I would say, this year right now. You know we've committed to a midterm target of 18% CAGR over the time period of '23 to '27. We will come back and refresh -- revisit that, not refresh it, in the year report quarter, I would say, in February next year. And then we will have a new view from our perspective on how quickly we can continue to grow. So that's where we are right now. If you look at what is the pain points, what's the limiting factors to grow, you are touching upon the right things. We need to bring with us the supply chain and maybe sometimes invest in supply chain. But they have to invest also. To find a whole ecosystem supporting us is absolutely necessary. And there are a few pain points there but manageable, I would say, going forward. And then I am assuming long term, of course, that we will resolve the rare earth elements discussions we have with China and also start to invest to have sovereign capacity on that side. But then we're talking years ahead because that will affect every industry, I would say, if that is not sorted. But yes, that's the way I see it. Johan Andersson: Excellent. Thank you. Let's take a couple of quick ones from the web. One is, what's the difference between Gripen and E and F? And when can we see the first Gripen F? Micael Johansson: Okay. Yes. We are maybe a bit of nerds using all these acronyms. But as you know, we have the Charlie, Delta version in operations right now. And yes, we have delivered an Echo version as well. The C is -- the E is a single-seat version. The F is a dual-seat version. And we will deliver this dual-seat version to Brazil in '27. So that's where the first aircraft is being manufactured right now. This has been a design that's been done together with the Brazilian industry and Brazil and that is in line with the plan that we have. Sweden has not contracted any dual-seat versions of the Gripen F. I hope I was not too complicated here. It's simple, actually. Single seated version, dual-seated version. Johan Andersson: I think it was pretty clear. Another one. You talked a lot about your drone capabilities in your strategy there. How much are you doing and developing by yourself? And how are you looking and doing things with partners? How do you think strategically there what's important? Micael Johansson: That's a really good question. I think from a software-defined perspective, we're doing everything ourselves and then, of course, when it comes to sensors and effectors, we have also things in-house. Then we are looking into how can you scale something quickly either yourself, lots of 3D printing or storing, parts that you can actually assemble quickly and how many partners do we need there. So I think on that side, when it comes to platforms, there will be more partnerships. But it's a bit different depending on what kind of drone you're talking about, of course. Johan Andersson: Good. Excellent. And we had a quick one for Anna. Do you expect your backlog to continue to increase going forward? Anna Wijkander: With our growth that we're foreseeing, I think that is something that we can assume that today's backlog will increase going forward. Yes. Operator: The next question from the phone comes from Björn Enarson with Danske Bank. Björn Enarson: Yes. On Dynamics and the super solid backlog and -- but the mix is very, very important. Can you give us some color on how you look upon the mix situation in the backlog? As profitability can swing quite a lot. We have seen that over the years depending on what Dynamics you have. Micael Johansson: In the Dynamics area, you mean. Björn Enarson: Exactly. Micael Johansson: Well, I think I won't go into exact details on the mix as such, but of course, it's quite dominated today by support weapons and missiles. Both have a substantial backlog in that and both will add good profitability numbers. I will sort of -- we have always talked about what's the ambition level in terms of sustained EBIT level on Dynamics side. And I've always said that depending exactly on the question you asked, the mix between the different portfolio entities in Dynamics, but it should be always sort of in the mid-double digit numbers, around 15%. Now we've had good quarters now. So we are above that. And of course, that's very nice to see. But it will always be on that level, so to say. But I won't go into exactly a part of the SEK 87 billion, what's what there. But the main parts are absolutely support weapons and missile capability, and you can probably sort of draw that conclusion from contracts that we have received. Anna Wijkander: And it varies, of course, between different contracts, also within the same business unit within a Dynamics. So it differs. So that could also impact. But I think it's a good, as you say, Micael, in the mid-teens mid-15s, what you say... Micael Johansson: Mid-double digit numbers, the number between 10 and 20, not sort of between 10 and 100. Operator: The next question from the phone comes from Carlos Iranzo Peris with Bank of America. Carlos Peris: I just want to ask on the GlobalEye because it looks that it's having a strong commercial momentum recently. So can you help us to understand how big the GlobalEye opportunities could be for you midterm? Micael Johansson: Well, I mean, this is one of the mega deals that always will take sort of a Prime Minister or a Defense Minister to decide in the end. But I mean, we have campaigns ongoing. As you know, France have selected and they will start with 2. We have 3 in production for Sweden. There is an interest for a number of aircraft when it comes to Germany and NATO. We have a couple of interest also in the Middle East. So it adds up to a number of platforms with a strong potential. But I would hesitate to sort of bring too much of mega deals into our growth. And this is not part of our growth this year or sort of a big portion of our business plan going forward. We look upon mega deals in a careful way. They are adding substantially when they happen. But it has to be continuous growth anyway. So I just want to say that, yes, there are many platforms that could come into play, but I wouldn't sort of jump into conclusions because they are megadeals campaigns. And political decisions will also be involved in that. But I look very positively upon sort of the future of GlobalEye. That's what I can say. And I mentioned a few countries now that have an interest. Operator: The next question comes from Tom Guinchard with Pareto. Tom Guinchard: A question on the risk guidance here. Any changes in delivery pace across the different business areas? Or what's changed since your last guidance? If you could break that down, please. Micael Johansson: Well, I think everyone is actually picking up nicely when it comes to expediting deliveries and pushing sort of things from the backlog into sales. And also some of it is connected to that we get our capacities coming into place. And also seeing, yes, that we have added 2,700 people to the company net up this year adds lots of push into this. And we are sort of optimizing our way of working and automating production. So it's a number of things that comes together that sort of had lacked visibility in the beginning of the year. But now we are more confident that we have actually succeeded in many things that we put ourselves forward to do. So it's actually in all areas. And of course, I mean, Dynamics is growing dramatically. You see 36% growth over the first 9 months. So it's an engine in this. But also the other business areas are growing, and there's lots of potential in Surveillance, and Aeronautics have now really stepped up in terms of growth. So I wouldn't sort of point something specific, but you can see from the numbers 9 months now what's driving this and what comes into play first. Operator: The next question comes from Sasha Tusa with Agency Partners. Sash Tusa: It's Sash Tusa here. I've got a couple of questions. First is just to R&D. On a 9-month basis, it's doubled over the last 4 years. Going forward, if you have investments, particularly in counter-UAS, do you expect continued growth in R&D? Or is there just going to be a shift in the mix probably towards the counter-UAS area and away from other areas? I wonder if you could just give some color on how the R&D is expected to develop. Micael Johansson: No. What I can say is I want to grow the R&D investments as much as I can but still keeping to the guidelines that we have, the trade-off between sort of here and now, top line growth, increasing our profitability but still having the strength to grow our investments in R&D. And we need to do that when it comes to AI, autonomous systems in all domains and also, of course, in the way we develop software. We have established a common tech organization that is pushing sort of software out on the business unit in a different way with sort of solidified architectures and stuff. So we need to continue to invest, make no mistake. So if we continue to grow, it will not only be a mix and shift in that, so to say. We have to do a number of things going forward in all core areas both when it comes to sort of autonomous systems in the air, which we call collaborative combat aircraft, the unmanned underwater vehicles. We have, as you know, a collaboration with General Atomics to do an autonomous sort of airborne early warning capability. So there are a number of things that we have to do and which I look forward to do. So it will continue to grow. But I won't quantify it how much. It is always this trade-off between the different pieces I mentioned. Anna Wijkander: Just maybe I can add. We have also some capitalized R&D that we have started to depreciate now that is also impacting. And that's something positive because we are delivering in our projects and, therefore, we can -- we depreciated the capitalized R&D. So that's also going to increase during the year. Operator: Excellent. Thank you. The next question -- sorry, did you have a follow-up there? Sash Tusa: Yes, please. That's helpful. Yes, I just wondered if you could elaborate on the Luleå frigate program, which seems to be in a degree of flux. You clearly said that it's now more of a frigate than a corvette. Corvette was probably a bit of a euphemism anyway. But could you just give us some color on where that program is? And in particular, the reported bid by France to export frigates directly to Sweden, possibly as part of the offset for the GlobalEye program, how do you see that developing? Micael Johansson: I think it's a question you should ask to Swedish customer mainly. And I want to underline it's probably -- I mean, it's probably corvette, of course. I mean, maybe it's my ignorance. But listen, we have put forward a very strong offer together with Babcock, our main partner here. And I hope that, that will prevail and be the selected thing. Yes, the Swedish customer has opened up, as I know, for other sort of proposals. And it's up to them now to select. But I still think we and Babcock have the strongest proposal. Now it's up to the Swedish Navy, Swedish FMV, the defense material organization to make a selection. And exactly when that is going to be done, I'm not sure. But time is of essence, of course, since they want the frigates to be operational sort of '29, '30 something. Operator: The next question comes from Marie-Ange Riggio with Morgan Stanley. Marie-Ange Riggio: The question that I have is on your current capacity expansion. Clearly, we see that 25 is quite a record level for you. you announced some capacity expansion at your last CMD mainly for Dynamics and Surveillance. I'm just wondering, given the level of backlog that you have today and the demand that you are seeing in the coming years, are you already increasing further the capacity compared to the guidance or like compared to the indication that you gave at your CMD? Or you are still expecting basically the orders before like moving forward from those targets? Micael Johansson: I would say for the year, we are in line with what we talked about at the CMD. It's not sort of a walk in the park to get everything executed. So that is really sort of a high ambition to invest all that money into capacity increases that we talked about. And we're looking into what do we need to do next year, of course. And we'll come back to that next year. But we will continue to invest in capacity increases, obviously, because of the demand in the market. But what are we doing right now is supporting what we talked about in the support area going from sort of below 100,000 units to somewhere in between 400,000 and 500,000 units when we get all the capacity in play. And I look forward to getting the factory in Grayling, Michigan up and running in the end of next year and also then India, of course, to add to this. So we'll come back on that, but we will see more -- again, we stick to our guidelines. But we will not compromise, making sure that we have the capacity to support the demand in the market and not compromise to make sure that we invest in the right technologies to be relevant all the years to come. And this is the sort of the puzzle that we work with all the time to make that sort of really efficient going forward. But we will need more capacity investments, absolutely. But we'll keep to the CMD statements that we had. Marie-Ange Riggio: If I may, on that, I mean, are you afraid about the lead times for your policy? Because like -- are you afraid basically that the lead time about increasing the capacity can limit further growth going forward given the fact that, I mean, it will take time. If I'm correct, you have drone combat where you can increase the capacity pretty quickly. But for the rest, I think that takes a bit more time. So that's why I was saying like if you are trying to be ahead of the curve in terms of adding capacity because clearly, the backlog would support further growth or not. Can you probably just remind us a bit the lead time for any other projects that is not ground combat if you increase the capacity? Micael Johansson: If you talk about the lead times to get increased capacity into play when it comes to ground combat, it's like roughly 2 years. So we started early, fortunately. But there are different movements. As I said, there are 40 building projects ongoing in the Karlskoga area only. So they are not in the same sort of schedule as we speak, all of them. But it's roughly to get to full-fledged sort of big step-up on the capacity of support weapons, I would sort of simplify it to say it's roughly 2 years. Johan Andersson: Excellent. Thank you very much for the questions. I think we need to move on to some of your colleagues. But just take one question from the web here. Micael, in your CEO statement, you write right that Colombia has selected the Gripen and that you are in negotiations. Do you dare to set a time frame here? Or how should we view that? Micael Johansson: As I said before, I hope to conclude that during this year. That's sort of what I've said before. I'll stick to that. I won't give a week or a month or so, but we've been doing good progress and I'm pleased to see that. So I hope we will conclude this year. Johan Andersson: Good. Another one is on your drone capabilities. Should we start to see that, that also can be some larger orders here? Or will it be more of test and trials and so forth? Or in the future, would you see that this can also grow to more products and bigger-sized orders? Micael Johansson: No, I anticipate that to happen because I think also looking at what capabilities the commission has stated as flagship projects, if you want to implement that, of course, you need plenty of counter-UAS systems. And if you want to have another capability sort of more aggressively, you also need quantities. But we're not really there yet, but we're seeing contracts coming now. So I think that's an avenue that will grow, absolutely. But exactly how and when it's -- I can't say. But we're in that race. Johan Andersson: Good. Okay. I think we have a number of more questions over the telephone conference so let's spend the last 5 minutes there. Please, operator, next question. Operator: The next question comes from Renato Rios with Inderes. Renato Rios: This is Renato of Inderes. Congratulations on very good results today. Great work. It's similar to the question that was just asked regarding drones and AI. Looking ahead to, say, 2026 to 2030 or even beyond, how do you see drones technology and AI-driven unpowered products and systems moving from development to sort of recurring revenue and contracts? How significant a share do you think this could become in the medium to long term? And would be interesting to hear your view on the revenue mix, how it could look like across the ground, air and marine domains and the largest product categories. Micael Johansson: Good questions. I think looking into the crystal ball and trying to understand how quickly AI and autonomous capabilities will take an operational role and great quantity is really a difficult one, I must say. It's all connected to also the end user, how quickly are they prepared to change a bit of their concepts of operations from doing what they're doing now to using these capabilities in a new way. I mean, it's different looking at Ukraine, which are moving really quickly ahead with short iteration cycles, upgrading the drone capability on a weekly, daily basis, very decentralized to keep trying winning the war. And they take a bit of a risk, of course. It's different in an environment where you change the CONOPS of a defense force or an army to do things. It will take a little bit of time, I think, but it will definitely prevail and be there going forward. Technology was developed much quicker than I think we understand. And how much you can do on an autonomous basis and how much support you will have from AI agents, agentive AI going forward will be tremendous. But to quantify the share is -- I can't do that today. I have to make sure that we are part of that journey and that we invest in that going forward. Between the domains, I think the land domain will continue to grow and will be substantial if you look at the company from our side. Maritime and air is a bit sort of dependent on the mega deals, of course, a bit different in that domain. But then it will be a sustained business, of course, in the background as well. So I think land domain is more sort of sensors and products and weapons will continue to grow. And also, we hopefully will continue to grow a lot in the air domains as well. But that will be a bit dependent on the mega deals, honestly. Johan Andersson: Excellent. Operator, do we have a final question from the telephone conference? Operator: Yes and It comes from Afonso Osorio with Barclays. Afonso Osorio: I just wanted to come back to this Gripen deal with Ukraine. I mean the 100 to 150 jets is a massive potential order here. So firstly, what will be the total length of these contracts, assuming the delivery starts 3 years from now, as you just said? And then what would be the profitability of that contract compared to the other contracts you have within the Gripen family? Micael Johansson: Good questions that I'm sure you understand I can't sort of nail that down completely. But I mean, I've said before, I mean, that size of the contract would of course create scale and improve the profitability of the Aeronautics domain. Then it depends on many other things, what kind of availability do they need, what kind of flexibility and agility do they need, ground support equipments, training and all of that in terms of the whole contract. But you can sort of look at Brazil and then you do your mathematics on what sort of 100 or 150 contract. It's in that ballpark, but it depends on the number of things that we haven't nailed down yet to look at the size of the contract. But everything that adds that scale to the operation would, of course, add profitability. That's for sure. But I won't sort of say how much today. That's not sort of possible. We will start working this now and look what the expectations are from Ukraine comes to schedule, delivery rates and when the first aircraft needs to arrive and then offer them something that needs to be discussed. And apart from that, all these things around financing must come into play as well. So we will work that diligently, of course, no question about it. And I look forward to it. Can I say one thing before we end, which I forgot actually. You've seen probably the press release that I just want to say that we have now appointed a new position in our corporate management, strategy and technology. And it is Marcus Wandt, who is a great technology guy and a visionary guy, a good leader that will take that role. And we do this because there are cross-company initiatives that we have to have a thorough discussion about in corporate management and all the initiatives that comes from me or NATO, of course, as well. But technology is moving so fast. So we need to be sure that we have the right discussion in corporate management. So I look forward to welcome Marcus Wandt 1st of November to my corporate management. Johan Andersson: Thank you very much, Micael. And with that, good ending. We finalized this call for the third quarter, and very much look forward to the Q4 call that we will have then in beginning of February. So thank you again very much for listening in and also joining over the web. And if you have any further questions, do not hesitate to reach out to us at the Investor Relations department. And have a really, really nice day. Thank you. Micael Johansson: Thank you. Anna Wijkander: Thank you.
Operator: Good day, and thank you for standing by. Welcome to the Alpine Income Property Trust Q3 Earnings Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jenna McKinney, please go ahead. Jenna McKinney: Thank you. Joining me in participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team that will be available to answer questions during the call. As a reminder, many of our comments today are considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's Form 10-K, Form 10-Q and other SEC filings. You can find our SEC reports, earnings release and most recent investor presentation, which contain reconciliations of the non-GAAP financial measures we use on our website at www.alpinereit.com. With that, I will turn the call over to John. John Albright: Thank you, Jenna, and good morning, everyone. We are pleased to report another strong quarter highlighted by AFFO per share growth of 4.5% compared to the same quarter last year and meaningful investment activity, both during and shortly after the quarter end. We believe this investment activity has set a foundation for continued earnings growth through the remainder of 2025 and into 2026. Starting with our investment activity. During the quarter, we acquired 2 properties ground leased to Lowe's for $21.1 million at a weighted average initial cap rate of 6% and a weighted average lease term or WALT of 11.6 years. Investment-grade rate at Lowe's is now our largest tenant by AVR, surpassing investment-grade rated DICK'S Sporting Goods, which now ranks #2. Year-to-date, through the third quarter, property acquisition volume totaled $60.8 million at a weighted average initial cap rate of 7.7% and a WALT of 13.6 years. Regarding the property dispositions during the quarter, we sold 3 assets for $6.2 million, including an Advance Auto Parts, our vacant theater arena in a vacant property formerly leased to a convenience store. Year-to-date, disposition volumes through September 30 was $34.3 million, of which $29 million, excluding vacant properties was sold at a weighted average exit cap rate of 8.4%. As of quarter end, our property portfolio consisted of 128 properties totaling 4.1 million square feet across 34 states with approximately 99.4% occupied, with 48% of ABR derived from investment-grade rated tenants and a WALT of 8.7 years. Additionally, after the quarter end, we acquired a four-property portfolio for $3.8 million with a weighted average initial cap rate of 8.4% and went nonrefundable on a sales contract on 1 of our 8 remaining Walgreens for $5.5 million. Now moving to our loan investments. As a result of our long-term reputation and deep relationships, we continue to see and capitalize on exciting opportunities to originate high-yielding quality loans with strong sponsors at compelling risk-adjusted returns. During the quarter, we originated 2 loans and 1 upsized loan totaling $28.6 million at a weighted average initial yield of 10.6%. This included a first mortgage loan for industrial redevelopment and a seller financing note related to the sale of our former theater in Reno. Year-to-date, through September 30, we originated $74.8 million of commitments for loan investments at a weighted average initial cash yield of 9.9%. Additionally, as disclosed in our earnings release, we have originated 3 loans since the quarter end. Most notably, a first mortgage loan secured by luxury residential development located in Austin, Texas metropolitan area. Under this loan agreement, we have funded $14.1 million at closing related to a Phase 1 loan with a total commitment of $29.5 million. The loan agreement also provides for Phase II loan with a commitment of up to $31.8 million, all additional funding is subject to the borrower satisfaction of certain conditions. Currently, we anticipate funding the balance of the Phase 1 loan by year-end and the Phase II loan in early 2026. The 36-month loan initially bears interest at 17% inclusive of 4% paid-in-kind interest for the full loan term, stepping down to 16% for month 7 to 12 and 14% thereafter. The loan will be repaid as collateralized home lots are sold with such sales anticipated to begin as early as late 2025. We believe this loan as all of our loans is secured by strong real estate backed by high-quality sponsor. As is often the case with our larger loans, there is institutional interest in pursuing a purchase of a senior tranche of this loan, and we currently anticipate participating in a portion of it out to reduce our net hold and further enhance our yield. In summary, we believe that our recent investment activity across both property and loan investment positions Pine for continued growth through the remainder of 2025 and into 2026. With that, I'll turn the call over to Phil. Philip Mays: Thanks, John. Beginning with financial results. For the third quarter, total revenue was $14.6 million, including lease income of $12.1 million and interest income from loan investments of $2.3 million. FFO and AFFO for the quarter were both $0.46 per diluted share, representing 2.2% and 4.5% growth, respectively, over the comparable quarter of the prior year. Year-to-date through September 30, total revenue was $43.6 million, including lease income of $36 million and interest income from loan investments of $7.4 million. FFO and AFFO were both $1.34 per share, representing 3.9% and 3.1% growth, respectively, over the comparable period of the prior year. Regarding our common dividend, as previously announced, during the quarter, we declared and paid a quarterly cash dividend of $0.285. Our dividend represents an annualized yield of approximately 8.25% and remains well covered with an approximate AFFO payout ratio of 62% for the third quarter. Moving to the balance sheet, we ended the quarter with net debt to pro forma adjusted EBITDA at 7.7x and $61 million of liquidity, consisting of approximately $1.2 million of cash available for use and $60.2 million available under our revolving credit facility. However, with in-place bank commitments, the available capacity on our revolving credit facility can expand an additional $31.3 million as we acquire properties, providing total potential liquidity of more than $90 million. Regarding our property portfolio, we ended the quarter with annualized base rent of $46.3 million on a straight-line basis. As noted before, this amount includes approximately $3.8 million of ABR related to 3 single-tenant restaurant properties acquired in 2024 through a sales leaseback transaction. Under GAAP, we are accounting for these specific sales leaseback transactions as financings. Accordingly, the current annual cash payments of approximately $2.9 million are reflected as interest income in our statement of operations as opposed to lease income. Given the level of loan activity after quarter end, let me provide a current update. Our loan portfolio as of today, reflecting the activity John discussed and some other recent activity, is now approximately $94 million at a weighted average interest rate of 11.5%. Notably, of this amount, approximately $21 million at a weighted average rate of 10.4% is scheduled to mature in 2026. We currently expect to utilize proceeds from these 2026 maturities, selling a senior tranche of 1 or more loan investments, property dispositions and existing capacity on our revolving credit facility to fund loan commitments. One quick note, the $1.9 million impairment charge recorded this quarter related to Walgreens that is currently under contract to be sold. Now turning to guidance. As a result of our recent elevated investment activity, we are increasing both our FFO and AFFO outlook for the full year of 2025 to a new range of $1.82 to $1.85 per diluted share from the previous range of $1.74 to $1.77 per diluted share. With that, operator, please open the call to questions. Operator: [Operator Instructions] Our first question comes from Michael Goldsmith with UBS. Michael Goldsmith: A lot of investment activity, both during the quarter and subsequent to quarter end. So can you just provide a little color on how you're thinking about funding all of this activity? John Albright: Michael, it's John. Thanks. Look, we -- as you know, we've been very busy on the recycling side. So some of that's going to come from asset sales as we keep on continuing to increase the credit quality of our portfolio. And then a little bit of this is our loans maturing. And then basically a little bit going to be net growth in anticipation of additional sales so a little bit of balance on both sides. Michael Goldsmith: Got it. And then all this loan activity, you're seeing really nice yields on that, I guess the way it cuts the other way is it can generate lumpiness in the quarters as they come due. So can you talk a little bit about how you're thinking about managing that and these loan expirations just to ensure the AFFO doesn't move around too much. John Albright: Yes. So obviously a good question. I mean when we started this kind of loan program about 3 years ago, that was a little bit of the pushback was, well, you can't replace these loans at these rates. But here we are. We are doing it with really existing relationships without even trying and so certainly, as we see more opportunities, part of that funding mechanism that Phil mentioned is selling off senior pieces of these loans. And these loans are very -- are very bite size, and there's a lot of capital out there. So there's a lot of opportunities. So I would -- I'm not worried about replacing these and having kind of earnings coming down because of these are onetime sort of opportunities. We're seeing a strong pipeline of super high-quality kind of assets and sponsorships. Michael Goldsmith: Got it. Well, if you're doing this without really trying -- excited to see what you do when you put some effort into it. I'm just kidding. Thank you very much, good luck in the fourth quarter. Operator: Our next question comes from R.J. Milligan with Raymond James. R.J. Milligan: John, with the recent activity now in residential development, I think you guys have a loan in Industrial. Just can you tell us how you're thinking about other property types and if you're going to continue to pursue things outside of retail? John Albright: Yes. It's not by design, kind of going out here just these unique opportunities with very strong sponsors and very strong assets. The industrial property that we did in Fremont outside of San Francisco, that was actually a retail property that the sponsor is basically converting to industrial to a higher and best use. So part of our underwriting on that is if it was -- if we ever had to foreclose it's roughly 50% of the acquisition, it could still be retail and work on our basis. So to answer your question, we're going to stay more focused on the retail side for sure. But not -- but if we see unique opportunities in that short duration, we're not opposed to taking on those opportunities. R.J. Milligan: Okay. That's helpful. And then, Phil, you talked about some of the sources of capital next year, some of the loan maturities, potential asset sales. Should we expect that to get reinvested? Or will those proceeds be used to pay down debt, lower leverage? Philip Mays: A little bit of both, but I think, first, they're going to get reinvested into a lot of the loans that were recently done, R.J. So the maturity is coming back from the '26 loans are going to -- we're just kind of proactively redeploying that capital a little early with the loans going out first. The new loans going out first. So a lot of that is going to just recycle into that. But on the margin, you could see leverage tick down a little bit. Operator: Our next question comes from Alec Feygin with Baird. Alec Feygin: So on the luxury residential development in Austin, can you talk about how you got comfortable with the loan and what stage of development it currently is at? John Albright: Yes. So we're familiar, if you think back at our origins of CTO and when I got here 14 years ago, we had 14,000 acres of land in the Daytona Beach to sell. So we are very familiar with residential lot development through that experience. So with regards to kind of where this project is, it's really at the kind of finish line of delivering lots and actually, there'll be some lot sales starting next week, in fact. So it's really kind of coming in at the late stage and not on the early stage. Alec Feygin: Nice. And kind of on that loan, how much of the loan are you looking to sell? John Albright: We'll probably look to sell potentially 50% of it. It really depends on how fast the proceeds come back. So it could be less, but potentially up to 50%. Alec Feygin: And then switching gears a bit with the vacant assets that were sold in the quarter, how much do we need to remove from operating expenses that you're carrying? Philip Mays: Yes. This is Phil. So the 2 largest vacant properties we have are the theater in Reno, which was sold, that had an annual run rate on the expense side of about $400,000. And the one that we have left at large is the former Party City and that also has a run rate of close to $400,000 on an annual basis. So you can -- if you were to run rate the current quarter, that will come down another about $400,000 on an annual basis once Party City is sold. Alec Feygin: And Party City wasn't sold this quarter that... Philip Mays: It was not. Reno was sold in the quarter. It was sold early in the quarter. So pretty much the full impact of that is reflected. But Party City is not sold yet. Alec Feygin: Okay. There were 2 vacant assets sold in the quarter. So is the other one just minor? Philip Mays: Yes, there was a little -- we have -- those are the 2 largest, Reno and Party City. We have a few. We had former convenience stores that are really small. There's sold one during the quarter, there's 2 left. Altogether, those don't even come up to $100,000 on an annual run rate. So they're very small and on the margin. Operator: Our next question comes from Rob Stevenson with Janney Montgomery Scott. Robert Stevenson: Is the sale large loan interest that you may do, is that in the disposition guidance or dispositions just properties in terms of the guidance? Philip Mays: It's -- if we were -- it's not -- it would be on the high end, Rob, that happened or exceeding the high end if it happens before the end of the year. The timing of it is a little hard every day. It could be just before the end of the year or it could be a little bit after the end of the year. If that were to happen before the end of the year, that would put us on the high end or over the high end of guidance on the dispose side. Robert Stevenson: Okay. But you would classify that as a disposition? Okay. Philip Mays: We historically put dispositions of loans with properties there. And if you look at the guidance, we kind of added the line for that a little bucket when we put year-to-date actuals and there was a line that had loan sales and it showed 0 just to kind of help clarify that we do kind of look at that as a disposition, but if the loan 1 were to happen, we would probably be just over our high end. Robert Stevenson: Okay. Because the reason why I ask is, if I look at the year-to-date investment in disposition volumes versus the guidance, they are sort of implying between $50 million and $65 million of net investments in the fourth quarter. You got $27.5 million in terms of rough numbers from the proceeds from the repayment of Publix and Verizon. Just trying to figure out how you're going to finance that especially given where the stock price is. I don't know, John, if you're comfortable issuing equity here or whether or not you guys just use the line, but was sort of curious as to like how you guys are thinking about the sort of incremental there and where does sort of leverage peak out at here in the fourth quarter if you do decide to fund any of those net investments on the line? Philip Mays: Yes. So just before -- and then I can -- I'll let John answer. But on the investments, we always put the full amount for the properties, obviously. And for the loans, we put the origination or the initial amount committed. So today, we're sitting at almost $200 million if you include all the subsequent activity on investments. And of that $130 million, $135 million is loans, Rob, but only 72 have funded so far. So we also, in the guidance, put in brackets there kind of on the loans just to help clarify, because it's a great question, how much of the loans are funded year-to-date. So the full amount of that won't fund because the loans won't fully fund by the end of the year. Robert Stevenson: Okay. So the net would wind up being lower than that sort of $50 million to $65 million that you're implying because that's including the full value. Philip Mays: Yes. I mean there could be $50 million, $60 million of that, that's loans that are not funded. Robert Stevenson: Okay. That's helpful because it was looking like that leverage was going to peak out at something more substantial here if you guys did it all on the line? Philip Mays: Yes, yes. So there could be $50 million to $60 million of that number that's loan related, that's unfunded by year-end. And then on top of that, you could also see like an A note sale prior to the end of the year that would further help lighten that load for the funding. Robert Stevenson: Okay. And then I guess, John, what is sort of left within the property portfolio that you want to sell? I mean, is this going through in sort of cleaning up anything remaining? Is it whittling down some of the dollar stuff? How are you thinking about when you look at dispositions, not only in the fourth quarter but in 2026, like what are you sort of thinking that you're going to wind up selling and where is the market for those type of assets today? John Albright: Yes. So as we discussed previously, we still have some Walgreens that we definitely are moving through and with dollar stores, as you hit on certainly will be something we'll trim back on. And then there's some other -- we've sold Advance Auto Parts and that sort of things in Tractor supplies and so those sort of assets will continue to kind of grind through, if you will, as we see good pricing. So it's just really using that as a way to kind of reinvest in some of the high credits that we put on this quarter, Lowe's and so forth. So you'll see us be active at the end of the year here with continuingly bring in some real super high-quality type credits, and we're looking forward to kind of what this company looks like starting next year. Robert Stevenson: And then I guess given the acquisition of the Lowe's, was that opportunistic? Or just from your standpoint, is the property acquisitions going forward going to be more targeted towards the higher credit quality and basically investment grade and above quality tenants? Or are you still looking to acquire stuff across the spectrum on a property-specific basis? John Albright: Yes. On the Lowe's, that was off market. It was a relationship driven. We had seen these assets before a couple of years ago, and they're pulled off the market. So we're extremely excited about having those in our portfolio. With regards to -- so you'll see more of the high-quality credit, big box sort of assets coming in. You probably won't see us be active in buying a generic Tractor Supply. Clearly, we don't have car washes. So we like that distinction that no car wash is in the portfolio. So we feel like we're set up pretty strong to kind of offer investors something a little bit different, getting the Lowe's and DICK'S in the top 5 just gives investors an exposure that they can't get at other locations? Robert Stevenson: Okay. Then last one for me. Is all of beachside open and producing at this point? Or is there still some of that stuff that's down and that you're getting insurance payments on? John Albright: No, it's all been open for a while. I mean they opened those up less than 4 months after the hurricane last year. And interesting enough, I mean, they still -- when they open, they weren't obviously as polished looking as they were previous to the hurricane, but they did better sales than they did pre-hurricane. So a lot of pent-up demand from customers and unfortunately, some of their competition did not reopen. So it just kind of drove more traffic to those restaurants. Robert Stevenson: Okay. So rent coverage today is actually higher than where it was pre-hurricane? John Albright: Yes. Robert Stevenson: Appreciate the time, and have a great weekend. John Albright: you, too. Operator: Our next question comes from Gaurav Mehta with Alliance Global Partners. Gaurav Mehta: I wanted to ask if you had any update on your properties that are leased to At Home. John Albright: Yes. So those properties as we kind of -- the one is in Concord, North Carolina, that could be sold in the not-too-distant future. And the others are the same situation where we're monitoring kind of what At Home is doing. But if they come back, we have -- we're working on replacement tenants. So the idea would be if At Home vacated 1 of the properties, we would have a replacement tenant in and then we would sell it at a better cap rate than as At Home. So it's a manageable exposure and potential upside. Gaurav Mehta: Okay. Second question, I want to go back to the 2 loans that you did after September, the interest rates on both of them are higher than the year-to-date loan activity, can you provide some color on why the rates were higher at 17% and 16%. John Albright: Phil, do you want to handle that? Philip Mays: Yes. So he was just asking about why the interest rates on the residential and the mixed use are significantly higher than the blended rate for the portfolio. John Albright: Yes. So on that, basically because it's such short duration loan that so kind of give you more background than maybe you want. Is that the competition for a loan for that sort of product would be mainly from an opportunity fund or a credit fund and those funds really aren't looking to invest where the duration is less than 2 years in order to kind of get a multiple. So we're able to give highly flexible loan, but for that we charge a much higher rate. And so just the flexibility of our loan in the short duration gives us that higher interest rate investment. Operator: Our next question comes from John Massocca with B. Riley Securities. John Massocca: So maybe given all of the investment activity on the loan front, in particularly subsequent to quarter end. Do you view that as maybe kind of the max level you want to be at in terms of a loan balance if this all kind of blends out? Or could you kind of pursue more of that and become, I guess maybe more of like a mixed loan net lease type 3. It feels like the amount of loan investments are starting to -- certainly in terms of the investment activity outweigh the net lease transactions. John Albright: I would say that the -- it just kind of really kind of came together here this last quarter. But the loan activity could tick up from here for sure. But as it's a little bit in anticipation of things burning off, paying down, paying off. And then we are super active on the core net lease side with larger type assets. So you'll see the similar balance, but we think we're delivering -- we know we're delivering really strong free cash flow and high earnings and there's other net lease REITs out there that do the loan program as well. And then you have REITs like VICI that have a balance of net lease and loans. So it's not like we're in a new frontier here. John Massocca: I just remember thinking and maybe I'm misremembering, the loans are kind of an opportunistic thing a couple of years ago, and now it feels like they've become a bigger part of the investment strategy. I'm wondering if that's something you view as like permanent on a go-forward basis? Or if it's still something that's temporary where you found this kind of opportunistic way to kind of accretively deploy your capital even in a challenged equity market? John Albright: No, it's definitely a good point. Yes. So when we are opportunistically thinking that it was like a onetime opportunity. It's become repeat, customers are coming back to us because of the flexibility and the speed that we can transact on. They're willing to pay a higher rate. And then as you know, we get right of first refusal on acquiring these assets. So if the market stalls and cap rates tick up, we have an opportunity to bring these into our portfolio. And so like I've said before, we're getting paid a much higher yield than going out and buying some sort of generic net lease property in the middle of nowhere. We're basically in Austin with very opportunistic type yields with very high-quality sponsor and high-quality asset. And then the Publix that we had payoff in Charlotte, Publix in Charlotte, I think that paid off because they sold it at 5.25% cap. So these are we're getting double-digit unlevered yields on assets that will sell for really, really low cap rates. So it's great to see the opportunities that we're able to kind of -- it's become more of a permanent fixture as the sponsors are still very active in the development side on these credit tenants and the banking system just really is slower, less proceeds, and this is -- we're just basically providing an answer to their capital needs in a much more efficient fashion. John Massocca: Understood. And then maybe on a very like micro level, with Cornerstone Exchange, pretty significant jump up in the amount you're kind of lending on that project. Why -- I guess maybe why did it increase by so much? John Albright: It's basically -- they ended up signing some additional leases. So as they've proven out their development with leases, we weren't alone on it until they have a signed lease and so that's what happened. The development has gotten larger as they've signed leases. Operator: Our next question comes from Craig Kucera with Lucid Capital Markets. Craig Kucera: John, I want to circle back with a few questions on the Austin loans. It sounds like you're not taking any entitlement or approval risk at least on Phase 1. Is that a fair assessment as Phase 2 need to be approved? John Albright: It's a fair assessment on both. The entitlements are there for both phases and everything needed to basically deliver. Craig Kucera: Okay. Great. And what is the current LTV at those loans? John Albright: I would put that one in kind of the -- on a discount NPV basis, we're in the 70s. Craig Kucera: Okay. And if you were to sell the senior tranche or a portion of those loans, and I think Phil mentioned it might be upwards of 50%, what would your yield be if you're holding the junior piece? John Albright: I don't want to like go out there with -- I mean it will be higher. I don't want to give you specific numbers. Craig Kucera: Fair enough. All right. Changing gears to Lake Toxaway mixed-use development. Is that just raw land now? Or has the developer started or kind of where in the process of that development? John Albright: Yes. The developer has started. So kind of we're coming in like when they really need to really start doing some additional work and delivering pads and that sort of thing. Operator: Our next question comes from Barry Oxford with Colliers International. Barry Oxford: John, real quick, a couple of questions on the dividend. Given what I'm hearing on the conference call, you want to retain as much capital as possible. Is it fair to say that even though you could raise the dividend for lack of a better word, substantially, any dividend increase will probably be minimal because you want to retain as much capital from an asset allocation. John Albright: That's right. I mean -- so as we progress here and earnings grow, there will be pressure to freeze the dividend just based on what we need to pay out as a REIT. Barry Oxford: Right. So you don't run afoul of the REIT rules. John Albright: Well, we don't want to pay a check to the IRS. We'd rather give it to our shareholders. Barry Oxford: Right, right, right. And then one thing that I noticed in the press release was the credit rate at tenants. Now your investment-grade tenants, the percent of the portfolio was still roughly the same, but you had a fairly good drop with the credit rated tenants. What was going on there? Philip Mays: Credit rated as a percent of the total portfolio. So at the end of the last quarter, it was 51%. Barry Oxford: Yes, it went from 81% to 66% and the credit. Yes, the credit is fine, but... Philip Mays: Yes. That was more -- Barry, that's more the Walgreens and the like that used to have a credit rating dropping them that were very, very low and h ad gone from credit rate to not from investment grade to not investment grade, but we're still carrying a rating. It's more related to a couple of tenants like that, like At Home, Walgreens and such dropping the credit rating altogether, and that's what caused that decrease. Operator: And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.