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Operator: Welcome to the S&T Bancorp Third Quarter 2025 Conference Call. [Operator Instructions] Now I would like to turn the call over to Chief Financial Officer, Mark Kochvar. Please go ahead. Mark Kochvar: Great. Thank you, and good afternoon, everyone, and thank you for participating in today's earnings call. Before beginning the presentation, I want to take time to refer you to our statement about forward-looking statements and risk factors. This statement provides the cautionary language required by the Securities and Exchange Commission for forward-looking statements that may be included in this presentation. A copy of the third quarter 2025 earnings release as well as this earnings supplement slide deck can be obtained by clicking on the Materials button in the lower right section of your screen. This will open up the panel on the right where you can download these items. You can also obtain a copy of these materials by visiting our Investor Relations website at stbancorp.com. With me today are Chris McComish, S&T's CEO; and David Antolik, S&T's President. I'd now like to turn the call over to Chris. Christopher McComish: Mark, thank you, and good afternoon, everybody. I'm going to begin my comments on Page 3, and I welcome all of you to our call, especially our analysts, and we appreciate you being here with us and look forward to your questions. I also want to thank our employees, shareholders and others listening to the call. To our leadership team and employees, I want to thank you for all you do. These results are yours and you should be very proud. Before my remarks on our performance, I want to take a moment to congratulate and thank Christine Toretti, our former Board Chair, for her years of service at S&T. As you may be aware, Christine is our new U.S. ambassador to Sweden, a well-deserved appointment in recognition of her years of service to our country. I also want to welcome and congratulate Jeff Grube, another long-standing S&T Board member as he takes on the role of Lead Independent Director of our Board. We all look forward to working even more closely with Jeff as we move the company forward. Overall, we feel very good about the quarter as it reflects a lot of the work and strategic focus of our team over the past few years, positioning S&T for long-term success. You will see that focus in the numbers we discuss today, including, first, by strategically repositioning our balance sheet over the past couple of years to reduce asset sensitivity, we've enhanced our ability to drive consistent net interest income growth through the interest rate cycle. Second, while total deposits ended basically flat at quarter end, our continued investment in our deposit franchise delivered a solid deposit mix with noninterest-bearing deposits representing 28% of total deposits. Additionally, average DDA growth in the quarter was over $50 million versus Q2, helping to drive our net interest margin expansion, which was already at a very healthy level. Last, while we did see an increase in NPAs in the quarter, this was over a very low base, and the final numbers remain in a very manageable range. Together, these strategic initiatives have created a solid platform for current strong performance and confidence in our future. Additionally, from a capital standpoint, our earnings drove further tangible book value growth of more than 3% again this quarter, above our already robust capital levels. This capital level gives us a lot of flexibility around acquisitions as well as share buyback opportunities. I will remind everyone again, we have a very clear path to $10 billion and above through organic growth in the coming quarters. In summary, I'm very excited about how we are executing, delivering for our customers and building our company for the future. Looking at the quarter, Q3 was another quarter of strong earnings and returns. EPS of $0.91, net income of $35 million, while ROA came in at 1.42%, up 10 basis points from Q2, and PPNR at a very solid 1.89% was up 16 basis points. PPNR was aided by both NIM expansion increasing to a robust 3.93%, up 5 basis points linked quarter, while net interest income rose more than 3%. Asset growth was a little lighter than Q2 due to some higher payoffs while NPAs did increase over a very low base. Charges remained low and the ACL decreased by 1 basis point linked quarter. Dave Antolik is here with us, and he will add more color in a few minutes on asset growth and asset quality. Again, while customer deposit growth was somewhat muted, DDA balances remained an impressive 28%, while total deposits -- while contributing meaningfully to our net interest income and net interest margin improvement. Expenses were well managed, combined with our revenue growth, the efficiency ratio dropped to 54.4%, another strong number. I'm going to stop there. I don't want to take any more of Dave or Mark's thunder, but -- and I'll turn it over to them for more details, and I look forward to your questions. Dave Antolik: Great. Thank you, Chris, and good afternoon, everyone. Continuing on Slide 4. Total loan balances grew by $47 million or 2.3% annually during the quarter. This growth was largely driven by CRE activities, resulting in $133 million of increased balances in that category. Much of this growth was the result of construction loans converting to permanent commercial real estate loans as projects were completed during the quarter. As a result, commercial construction balances declined by $78 million. Looking forward, unfunded construction commitments grew by $37 million during the quarter, pointing towards continued growth in CRE for the balance of the year and beyond. Asset classes experiencing the most growth during the quarter included multifamily, flex mixed use, manufacturing and retail. Offsetting our CRE growth were declines in our C&I balances of $46 million. These declines were driven by a combination of modest seasonal utilization reductions coupled with higher-than-anticipated payoffs as Chris mentioned, and credits that we chose to exit. During Q3, total commercial loan payouts were higher than the previous 2 quarters and higher than Q3 of 2024. Turning to consumer loan activity. We saw overall growth in line with our expectations at $37 million or approximately 6% annualized. Consumer pipelines were down slightly from Q2 to Q3, but still in line with our forecast and in support of continued growth at the pace that we've seen in recent quarters. Commercial pipelines continue to grow and sit at the highest point in 5 quarters. Given our experience in Q3, and anticipated new loan and payoff activity in Q4, we are guiding to mid-single-digit loan growth in Q4. Turning to asset quality on Page 5. Our allowance for credit losses decreased by 1 basis point and remains appropriate for the level of credit risk in our loan book. Overall, criticized and classified assets were up moderately quarter-over-quarter and are in a range where we expect them to remain for the foreseeable future. During the quarter, NPAs increased to 62 basis points of total loans. It's important to note that this level of NPL follows a period of exceptionally low levels and is well within an acceptable range. I'll also note that we do not have concern with any particular asset class, geography or industry. The increase was primarily a result of 2 CRE credits and 1 C&I credit that migrated during the quarter. We have asset resolution strategies in place for several NPLs and in support of those strategies, recognized charges of $2.4 million in the quarter and established additional specific reserve of $2.7 million. Looking forward, we expect NPLs to stabilize and potentially reduce over the balance of 2025 and into the first quarter of 2026. Taking a broader look at leading credit risk indicators, we see nothing in our credit risk rating stack, credit scoring or delinquency that points to additional downward pressure on our credit results. I'll now turn it over to Mark. Mark Kochvar: Thanks, Dave. Third quarter net interest income improved by $2.6 million or 3% compared to the second quarter, and net interest margin expanded by 5 basis points, and combined with loan growth, that's a pretty good quarterly revenue growth. The net interest margin improvement came from a 1 basis point earning asset increase, combined with a 3 basis point decrease in cost of funds. That was mostly due to CD repricing than the higher average DDA balances of $50 million that Chris mentioned. Fed rate change came very late in the quarter, and we did not see any meaningful impact from that in these results. We continue to expect that our more neutral interest rate risk position and pricing discipline will mitigate any rates down impact, both what has happened so far and what is expected over the next several quarters. Next, on noninterest income. We saw a slight increase of $0.3 million during -- for Q3, with small improvements in our major customer fee categories. Our expectations for fees going forward remains at about $13 million to $14 million per quarter. On the expense side, expenses were more in line in the third quarter, declining by $1.7 million compared to the second quarter. Favorable variances were concentrated in salaries and benefits, primarily in incentives and medical. Additionally, professional services decreased by about $0.5 million, mostly due to the timing of some projects. Our quarterly expense run rate is still expected to be approximately $57 million to $58 million for the next several quarters. Capital to TCE ratio increased by 31 basis points this quarter with AOCI improvement contributing about 7 basis points. Our regulatory ratios increased by about 15 basis points due to strong retained earnings growth. Our TCE and regulatory capital ratios position us well for the environment and will enable us to take advantage of both organic or inorganic growth opportunities. We also have a share repurchase authorization in place for $50 million. Thank you. At this time, I'd like to turn the call back over to the operator to provide instructions for asking questions. Operator: [Operator Instructions] Your first question comes from the line of Justin Crowley with Piper Sandler. Justin Crowley: Wanted to start out on loan growth in the quarter and kind of looking forward. I know you went through some of this, but could you give more of a sense for the puts and takes here between origination activity? And then maybe how impactful paydowns were, which I think you called out? Dave Antolik: Yes. So paydowns were up quarter-over-quarter, and again, higher than what we experienced in Q3 of last year. So the end result was a little lighter than what we had expected. CRE activity remains strong. As I mentioned, the construction commitments grew during the quarter, pointing towards better growth in Q4 and into Q1. Consumer, we believe, will remain at somewhere in the mid-single digit, similar to the 6% that we experienced in Q3. And we're working hard to drive better C&I growth. And we talked in earlier quarters about recruiting teams, they're getting up to speed and bringing opportunities to fruition. So we feel like that mid-single-digit number is appropriate for us especially given the growth of the deposit franchise. We don't want to get too far ahead of our funding sources, but -- and we think that's an appropriate level of growth for our bank. Justin Crowley: Okay. And like taking that mid-single digit versus maybe the mid- to high that's been discussed before, is that a function of the paydowns? Is that primarily what that is? Or is it also what you're seeing on the deposit side, maybe the combination of the 2? Dave Antolik: It's a combination of all those factors, plus demand in the market. There's still a fair amount of uncertainty. If you think about the budget impasse in Washington, we have the double whammy here in Pennsylvania because we've got a state budget impasse as well. So until some of those things get settled out I think the interest rate environment is helping us, and we're hoping to tell that story to our customers around fixed rate borrowings, but there's still enough uncertainty out there that mid-single-digit growth feels more appropriate for us from both a credit and funding perspective. Justin Crowley: Okay. Got it. That's helpful. And then shifting a little bit on the margin. And I hear you on the NIM being able to hold relatively stable. But as we get into next year with more Fed cuts on the way, how do you see that playing out over more the intermediate term in terms of the effect on NIM? Maybe also just any color on flexibility with things like swaps continuing to roll off or anything else? Mark Kochvar: Yes. I mean, I think for the next several quarters, probably into -- through the first half of next year, I feel like we're pretty well positioned to handle any of the potential rate cuts just because of the funding mix that we have, our ability to reduce deposit rates, still CD repricings in the offing and then also the receive fixed swap book that we have that will continue to mature its latter over the next several quarters. Assuming the Fed kind of finishes up by mid-summer, I think that will be a little bit of a reset, and we'll need to look more closely at how customer behavior on the -- especially on the deposit side evens out, what the shape of the curve is. And those things could put some pressure on the margin just on a go-forward basis in a more stable rate environment, but I think a lot of things have to shake out before then. But for the next 3 quarters or so, we think we're in a pretty good spot to handle the rates down should it come. Justin Crowley: Okay. And then on the deposit side, as we get the -- continue to get these cuts, do you have any funding that's -- or any deposits that are indexed directly to Fed funds and would reprice right away? Mark Kochvar: Not on the deposit side. We're pretty -- we've been pretty proactive and have a decent discipline with respect to the exception pricing that we have with our customers. So we act fairly quickly on those, but we don't have any contractually indexed deposits. Justin Crowley: Okay. Helpful. Mark Kochvar: We have a small amount tied to the like a 3-month T-bill, but that's maybe $150 million, very small. Justin Crowley: Okay. And then I know we talk about it a lot, but on M&A and the higher levels of activity we're seeing, Chris, could you give us an update just on that side of things for you folks? Are a lot more conversations taking place? Or how has that all been trending from your side? Christopher McComish: Yes. The conversations in the market is still active. Pennsylvania and Ohio maybe not as much as other geographies, but there's still a good number of conversations that are going on, and it's a key part of the ongoing outreach and engagement that we have. Justin Crowley: Okay. And you hit on the geographies. And I know you've cast somewhat of a wide net in terms of what could make sense. But does that leave areas like in the Mid-Atlantic or D.C., Maryland, is that... Christopher McComish: Exactly. I would think about Mid-Atlantic, West through Ohio. Our marketplace today is Pennsylvania and Ohio, but we certainly are interested in places further south and east. Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Daniel Tamayo: Maybe first just on the deposit side. You touched on it, Mark, with your expectation for your ability to maintain the margins in the next several quarters. But just curious what you're seeing on the competition side kind of recently last few months, and what you're thinking in terms of betas for these cuts that -- the September cut and any future cuts that we have coming? Mark Kochvar: We did -- after the first cut here in September, we -- or last September, we did see a little bit more competitive pressure than we had expected particularly on the CD side. There seem to be a little bit of reluctance on the part of many competitors to reduce some of those short-term rates as much as we had expected. So we made some adjustments in how we handle some of the exception pricing there. We think that with several cuts will actually -- we'll catch up. I think there's a little bit of psychology going through the 4-handle and customers being attached to getting that 4-handle rate. And so I think that will improve assuming that Fed keeps on going with multiple cuts. On the beta side, our loan beta overall is kind of around 40%. So we're targeting right around there or a little bit better over time with the CD repricing included to be able to match that. That's an important part of getting us to have that more stable NIM. Daniel Tamayo: Great. Appreciate that. And on the $10 billion threshold, with the slower growth in the quarter, it seems like you should be able to stay under $10 billion next quarter and then, organically, if that's the way you pass, it would be sometime next year? Christopher McComish: That's correct. Yes. Daniel Tamayo: Okay. And then maybe 1 for you, Chris, on profitability. You guys have been above [ 1.40 ] were in the quarter kind of pretty regularly now for the last few quarters. It seems like that should be relatively sustainable with credit being certainly in a good place. But is that something you think you can stay above that [ 1.40 ] bogey? Christopher McComish: Yes. I think in that range is certainly the way we're targeting things. To your point, Danny, as credit continues to behave, and we stay focused on that. And then as Mark talked about, if margins hold up as we expected in this down rate environment, that's certainly a reasonable number and is something that we are staying focused on. Operator: Your next question comes from the line of David Bishop with Hovde Group. David Bishop: I appreciate the color regarding the operating expense forecast. I'm curious as you budget out into next year, any prospects or plans to recruit or add additional bankers? I'm just curious how much is baked into the numbers and how much of a lift that may influence that on an inflationary basis, if you are successful? Dave Antolik: Well, we certainly expect to add bankers and the expectation is that those bankers pay for themselves. So there's a real focus internally on improving productivity, so things like leveraging artificial intelligence, making sure that we have processes streamlined, become really important to managing operating expenses, but we certainly do expect to add in the customer-facing roles. David Bishop: Got it. And then I think you mentioned capacity for the share buyback. Just curious appetite for share repurchases at the current valuation? Mark Kochvar: Yes. I mean we think there might be some better opportunities. We've seen a downdraft in bank stocks overall, and us in particular, over the past months. So we certainly think that, that's something that we're going to look a lot closer at here as we get into the rest of the quarter. David Bishop: Got it. And 1 final sort of housekeeping question. I know there's been a lot of chatter about loans to the NDFI sector. Just curious if there's any exposure you wanted to call out? Dave Antolik: No. Mark Kochvar: Yes, nothing material. We do have some exposure to some REITs that are technically NDFIs, but nothing that looks like where the problems have surfaced in some of the larger regional banks. That's a space we don't play in. Operator: Your next question comes from the line of Kelly Motta with KBW. Kelly Motta: Most of mine have been asked and answered at this point, but I guess piggybacking on the credit question, you did have the migration, although it sounds like you feel levels are low and you feel overall good. Is there any specific areas understanding you guys don't really have exposure to NDFIs that you would direct analysts to watch more carefully either at S&T or just in the bank space more broadly? Dave Antolik: No. I think, in fact, Kelly, beyond what I mentioned relative to kind of budget crisis, credit is performing as we would have expected. And here in Western Pennsylvania, there are things like a big data center that's being built outside of Indiana here in Homer City, Pennsylvania, that should add additional opportunity for growth and improving credit health in the region as some very large investments are made. And we obviously look through our concentrations relative to commercial real estate. We're very comfortable with where we stand from a diversification perspective, both construction versus permanent, and all the asset classes. And then we are closely managing our C&I book to make sure that we're not getting too far out on our risk scale. So that's some of what led to the decline in C&I balances in Q3 where decisions that we made relative to exiting credit. So I don't know that there's any 1 thing that I would point you towards other than kind of general economic and political environment, specifically the budget impasses in Pennsylvania and at the national level. Kelly Motta: Got it. That's helpful. I guess last question for me would be on the funding side. Your loan-to-deposit ratio sits right just a touch above 100%. As you -- appreciate the color on the loan outlook. As you look ahead, where are you seeing opportunities to raise core funding and the drivers of that? Christopher McComish: Yes. Kelly, it's Chris. As we've talked about, building the growth of our deposit franchise is a key driver of our performance and the area of focus and that entails everything from incentive plans to product mix to adding staff. Dave earlier asked about bankers that includes treasury management professionals and teams. And so it's a critical part of who we are. And we feel really good about our deposit mix, and we feel very good about the process that we use around being proactive relative to exception pricing in ensuring that our bankers are able to be responsive, both in the branches with consumers as well as our commercial and business bankers. So it's a core part of what we think about and focus on every day. And we know improving that loan-to-deposit ratio is really important to us as we move forward to capitalize on our growth opportunities. As Mark talked about, we did see, with the most recent rate cut, some increase in competitive intensity, and we'll have to be able to respond to those things as well. Operator: Your next question comes from Matthew Breese with Stephens. Matthew Breese: The first 1 for me, is it fair to think that the $10 billion crossing will happen either in the first quarter of '26 or second quarter '26 without having to manage the balance sheet below that too strenuously, or is there room to kind of push even further out? Mark Kochvar: No, I don't think so. I think it will be certainly first half of next year. And I don't think there's any -- we're going to be pretty close here at the end of the year, but shouldn't -- I don't think we'll have to try very hard to stay under at the end of the year, but we're not of a mind to do that long term. So I think we just -- we go ahead after we get past '25. Christopher McComish: The other thing, Matt, that we are watching is some of the changes or the proposed changes in Washington relative to regulatory relief for changes and thresholds and that kind of thing. That won't impact the Durbin cost, which we've talked about, which is in that $6 million to $7 million range, but it certainly -- it makes us feel good about the fact that regardless, we're prepared and -- but it might give us some additional flexibility to run the company. Matthew Breese: Got it. Okay. And then I'm sorry to harp on the NIM, but it does seem like, on the back of recent cuts, we could get another 2 to 3 '25 cuts in relatively short order. I think at last count, you have something like 39% or 40% floating rate loans. How do you see the margin -- or I guess, my gut is that the margin has near-term downside before deposits start to catch up and you get some of that back. But I was curious on the timing difference between floating rate loans and your ability to act on deposits, if you could help me on the NIM? Mark Kochvar: Yes. I mean our floating has decreased some, especially when you figure in the swap exposure we have, so it's closer to 30% net. So I think that gives us a little bit of relief. So -- and we run in the models -- I mean, there is some risk if that competitive piece of the deposit side that we've talked about expands beyond CDs and really starts to bore into kind of money market and the interest-bearing demand sector. But the modeling we've done so far doesn't have that sort of air pocket that you alluded to. We think we can still maintain that fairly quickly with the Fed changes. Matthew Breese: Okay. The credits that went nonperforming, could you just give us some insight as to what business lines were behind the C&I credit and what sectors the commercial real estate credits were attached to? And any kind of underlying factor? Was it higher rates and just kind of a strain that way? Or was it more idiosyncratic? Dave Antolik: Matt, I don't want to get into specific details on these credits because they are active workouts. The C&I credit was a manufacturer. The 2 CRE credits were really a function of kind of construction-related risk. But as I mentioned, we've got asset resolution plans in place that we hope to execute on over the next couple of quarters. And again, we don't see anything generally or specifically tied to any industry, geography or asset class that gives us kind of additional heartburn in terms of more downside risk. Matthew Breese: Okay. I appreciate that. Chris, maybe last 1 for you. On M&A, you had mentioned kind of geographic preferences. I guess beyond that, what, to you, makes an attractive target? What business lines or deposit composition are you looking for? I guess I'm looking for some color on the strategy component to M&A beyond geography. Christopher McComish: Yes. So strategically, we obviously -- I mean, I'm a big believer that acquisitions are focused primarily on the deposit franchise. And that type of opportunity would help with the funding mix that we have today as well as give us a core group of customers to expand relationships around. So we think about it in a couple of ways. One, there's geographic expansion that could be into faster-growing areas than where we are today. Then you've got geographic overlaps that would create some potential efficiencies for us. Both of those things could be important to us. But kind of the key driver really is thinking about that deposit franchise. There may be a line of business that may help us expand our C&I capabilities for example, or our focus on small business. Some of that is unique to the -- to a specific transaction. So we think about the balance sheet makeup of the company first and foremost, a heavy emphasis on the deposit side of the balance sheet, understanding credit risk, and then does it represent an ability to grow the company faster. Operator: I would like to turn the call over to Chief Executive Officer, Chris McComish, for closing remarks. Christopher McComish: Okay. Well, listen, thanks, everybody, for your good questions and your engagement. We really appreciate it and your interest in our company and all you're doing to support what we're trying to do. We look forward to being with you again next quarter. In the meantime, we're going to go back to work and see what we can do to grow the bank. Have a great day. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc. that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, the management may refer to non-GAAP measures, which are intended to supplement, but not substitute the most directly comparable GAAP measures. The press release also available on the company's website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Civista Bancshares' website at www.civb.com. At the conclusion of Mr. Shaffer's remarks, he and the Civista management team will take any questions you may have. Now I will turn the call over to Mr. Shaffer. Dennis Shaffer: Thank you. Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our third quarter 2025 earnings call. I'm joined today by Chuck Parcher, EVP of the company and President of the bank; Rich Dutton, SVP of the company and Chief Operating Officer of the bank; Ian Whinnem, SVP of the company and Chief Financial Officer of the bank and other members of our executive team. This morning, we reported net income for the third quarter of $12.8 million or $0.68 per diluted share, which represents a $4.4 million or 53% increase over the third quarter in 2024 and a $1.8 million or 16% increase over our linked quarter. This also represents an increase in pre-provision net revenue of $4.9 million or 45% over our third quarter in 2024 and a $1.9 million or a 14% increase over our linked quarter. Net interest income for the quarter totaled $34.5 million, which is in line with the linked quarter. As a reminder, last quarter included a onetime $1.6 million adjustment stemming from the conversion of our core lease accounting system. This nonrecurring item boosted net interest income and contributed to our second quarter reported margin of 3.64%. As a result, our net interest margin declined by 6 basis points to 3.58%. However, excluding the prior quarter's adjustment, our margin would have been 3.47%, resulting in an 11 basis point expansion in our margin. Our funding cost for the quarter declined by 5 basis points to 2.27%, which is 34 basis points lower than the previous year's third quarter. In July, we successfully completed our follow-on common stock offering, issuing approximately 3.78 million new shares and raising $80.5 million of new capital. This additional capital will allow us to continue growing our franchise by accelerating organic growth, investing in technology, people and infrastructure. More immediately, we used our new capital to reduce overnight borrowings and to strengthen our tangible common equity that we thought might have weighed on our stock. Earlier this month, we also announced that we have received regulatory approval from both the Federal Reserve and the Ohio Department of Financial Institutions to complete our previously announced merger of Farmers Savings Bank into our bank. Farmers will hold their shareholder meeting to formally approve the merger agreement on November 4, and we plan to close the transaction shortly thereafter. Our teams have already begun preparations for a successful system conversion in early February of 2026. We look forward to welcoming Farmers' employees and customers into the Civista family. Earlier this week, we announced a quarterly dividend of $0.17 per share, which is consistent with the prior quarter. Based on September 30 closing market price of $20.31, this represents a 3.3% yield and a dividend payout ratio of nearly 25%. During the quarter, noninterest income increased $3 million or 46.2% over the linked quarter and was consistent with the third quarter of 2024. The primary driver of the increase from our linked quarter was a $1.4 million increase in fees related to leasing operations. This increase was attributable to a $1 million reduction in fee income resulting from a nonrecurring adjustment in the second quarter of 2025 related to the Civista Leasing and Finance core system conversion, coupled with increased leasing activity in the third quarter of 2025, resulting in a $300,000 increase in revenues. Noninterest income for the quarter was $9.6 million, which was consistent with the prior year's third quarter. We did experience a $494,000 decline in leasing fees on fewer originations. However, this decline was offset by increases in nearly every other noninterest income category. We continue to focus on controlling expenses. For the quarter, noninterest expense was $28.3 million, which represents an increase of $845,000 or 3.1% over the linked quarter. However, the primary driver of the increase was $700,000 in nonrecurring acquisition expenses related to the merger with Farmers Savings. In looking at our noninterest expense compared to the prior year's third quarter, while some of the line items fluctuated, total noninterest expense was virtually unchanged. The main category fluctuations for the third quarter comparisons were compensation expense decreased $700,000 for the third quarter of 2025 compared to the prior year's third quarter due to an increase in the deferral of salaries and wages related to the loan originations in 2025. Marketing expense decreased $300,000 for the third quarter of 2025 compared to the prior year's third quarter, mainly due to a shift to lower cost digital marketing and lower promotional expenses related to advertising and product marketing. These decreases were offset by the aforementioned acquisition expenses that increased noninterest expense by $700,000. Our efficiency ratio for the quarter improved to 61.5% compared to 64.5% for the linked quarter and 70.5% for the prior year third quarter. Our effective tax rate was 18.5% for the quarter and 16.2% year-to-date. Turning our focus to the balance sheet. For the quarter, total loans and leases declined by $55.1 million. Loan demand remained strong across our footprint. However, we experienced over $120 million of payoffs during the quarter. Most of these payoffs were the result of businesses being sold and real estate projects leasing up and moving on to the CMBS permanent market. While we view most of these payoffs as good due to their successful nature, it does present some headwinds when a significant number of loan payoffs pay off in one quarter. While loans were flat or declined in nearly every category, our most significant declines were a $36 million decline in commercial and ag loans and a $48 million decline in nonowner-occupied CRE, both were primarily the result of the previously mentioned payoffs. We did have a $27 million increase in residential loans. The loans we originate for our portfolio continue to be virtually all adjustable rate and our leases all have maturities of 5 years or less. Year-to-date, we have grown our loan portfolio by $14 million. As we have shared on previous calls, we've been pricing commercial and ag opportunities aggressively. It had been more conservative in how we price commercial real estate opportunities, attempting to manage our concentration in the CRE portfolio. Post capital raise, we have become more aggressive in pricing CRE opportunities, which has contributed to substantially increasing our pipelines going into the fourth quarter. That said, we are mindful of making sure we have the funding and capital to support our CRE growth. At September 30, our CRE to risk-based capital ratio was 288%. We have established an internal CRE limit of approximately 325% of our risk-based capital going forward. During the quarter, new and renewed commercial loans were originated at an average rate of 7.25%, residential real estate loans were originated at 6.59%, and loans and leases originated by our leasing division were at an average rate of 9.36%. Loans secured by office buildings make up 4.8% of our total loan portfolio. As we have stated previously, these loans are not secured by high-rise metro office buildings rather they are predominantly secured by single or 2-story offices located outside of our central business districts. Along with year-to-date loan production, our pipelines are strong and our undrawn construction lines were $173 million at September 30. This should allow our organic loan growth to return to an annualized mid-single-digit range for the fourth quarter and increase into the mid to high single digits in 2026, as we leverage Farmers' excess deposits and our loan pipelines continue to build. On the funding side, total deposits grew by $33.4 million, which is meaningful given that we were able to reduce our dependence on brokered deposits by $23 million during the quarter. This represents a $56.4 million increase in core deposit funding during the quarter as we continue to focus on our deposit-generating initiatives. This helped us lower our overall cost of funding by 5 basis points during the quarter to 2.27%. We continue to see migration from interest-bearing demand accounts into higher rate deposit accounts during the quarter, which caused our cost of funds to increase 15 basis points. However, as we previously mentioned, our total funding costs declined by 5 basis points as we executed the funding approach that we messaged on last quarter's call. We continue to focus on growing core funding. In July, we launched our new digital deposit account opening platform. We started slowly limiting online account opening to CDs in markets near our current branch locations where we felt we had some name recognition. We plan to begin offering checking and money market accounts during the fourth quarter. We are also preparing to roll out our deposit product redesign initiative during the fourth quarter. The goal of this initiative will be to streamline deposit accounts that we acquired through various acquisitions and align our product set with our new digital channels. Our deposit base continues to be fairly granular with our average deposit account, excluding CDs, approximately $27,500. Noninterest-bearing deposit and business operating accounts continue to be a focus. In addition to those already mentioned, we have several initiatives underway to gather these type of deposits, including monthly marketing glitches and marketing to low to no deposit balance loan customers, which are yielding some success. At quarter end, our loan-to-deposit ratio was 95.8%, which is down from the linked quarter. We anticipate further reducing this ratio into our targeted range of 90% to 95% once the Farmers acquisition closes. Other than the $509.5 million of public funds with various municipalities across our footprint, we had no deposit concentrations at September 30. We believe our low-cost deposit franchise is one of Civista's most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability and look forward to adding Farmers' low-cost deposit base to our franchise. The declining interest rate environment reduced some of the pressure on bond portfolios. At September 30, our securities were all classified as available for sale and had $44.5 million of unrealized losses associated with them. This represented a reduction in unrealized losses of $8.9 million since December 31, 2024. At September 30, our security portfolio was $657 million, which represented 16% of our balance sheet. And when combined with cash balances, it represents 22.3% of our deposits. We ended the quarter with our Tier 1 leverage ratio at 11%, which is deemed well capitalized for regulatory purposes. Our tangible common equity ratio increased from 6.7% at June 30 to 9.21% at September 30 on our strong earnings and successful capital raise. However, post-closing on our Farmers acquisition, we anticipate our tangible common equity ratio declining to 8.6%, which we feel gives us capital to support organic growth, invest in technology, people and infrastructure. Civista's earnings continue to create capital and our overall goal remains to maintain adequate capital to support organic growth and prudent investment into our company. We will continue to focus on earnings and will balance the payment of dividends and any repurchases with building capital to support our growth. Although we did not repurchase any shares during the quarter, we continue to believe our stock is a value. Despite comments made during some of the large bank earning calls, the economy across our footprint continues to show no real signs of concern. For the most part, our borrowers plan for and continue to successfully navigate tariff and other economic issues specific to their industries. Our credit quality remain strong and our credit metrics remain stable. Civista, like most community banks, has no exposure to shared national credits nor we have significant exposure to floor plans, indirect auto lending or loans to non-depository financial institutions, which seems to be the types of credit that have caused much of the recent concern. For the quarter, criticized credits were virtually unchanged at $93.3 million. The continued strong performance of our credits, coupled with significant loan payoffs resulting in a minimal $200,000 provision for the quarter. Our ratio of our allowance for credit losses to loans is 1.30% at September 30, which is consistent with the 1.29% at December 31, 2024. In addition, our allowance for credit losses to nonperforming loans is 177% at September 30, an improvement when compared to 122% at December 31, 2024. In summary, it's been a very busy and productive quarter. We reported strong earnings that were 53% higher than the previous year's quarter. We grew pre-provision net revenue by 45% over the previous year's quarter. After adjusting for onetime items, we expanded our margin by 11 basis points over our linked quarter. We continue to gather new customers, increasing core deposits by $87 million year-to-date. We had a very successful capital raise and our teams are working towards the successful integration of our new Farmers team members and customers. That's a pretty productive quarter and one that I believe sets us up for a strong finish to the year and one that should get us off to a strong start in 2026. I cannot be more bullish for Civista and our shareholders. So thank you for attention -- your attention this afternoon and your investment. And now we will be happy to address any questions you may have. Operator: [Operator Instructions] Our first question comes from the line of Ryan Payne from D.A. Davidson. Ryan Payne: Maybe starting with the margin. How do you see that shaking out on a rate sensitivity basis, if we do see a few more cuts before the end of the year? And any expected impact from further cuts if we kind of think into 2026? Ian Whinnem: Ryan, it's Ian. So the way that we're really looking at it right now is just a cut in October, another cut in December. And then we're still working through kind of that 2026 guidance. At least from a baseline of -- if there's a cut in October and December, also with the addition of Farmers coming in, we are anticipating the margin to expand about another 5 basis points in the fourth quarter from where the third quarter was. Ryan Payne: Got it. Helpful. And moving to capital. So on capital priorities post close of Farmers, it sounds like that will be reserved for organic growth, and you will remain opportunistic on repurchases. But maybe on M&A, how conversations are going? And has the deal kind of brought in more inbounds or interest? Dennis Shaffer: No, I wouldn't say it has. I mean, I think really, we're really focused right now on growing organically, first off, and we want to increase our tangible book value. We want to continue to see our earnings per share grow. M&A can be tough at times. For instance, last year, we took -- looked at 6 deals, and we passed on all 6 of those deals because they just didn't meet our criteria. So we feel we're pretty disciplined when we evaluate an M&A transaction, and we're going to continue to stay disciplined as opportunities present themselves. The Farmers deal checked a lot of boxes for us and gave us some much needed liquidity. So that's why we went ahead and did that deal. There's been other deals announced here even this week in Ohio. That certainly probably does spur some interest. But really, the main reason we raised the capital was to help support our organic growth and allow us to make the necessary investments, like I mentioned, in technology and people and infrastructure. Our real focus is really on deepening our relationships and growing fee income, expanding our digital services and bringing new products and verticals because we want to gain just a greater share of our customers' wallet, and we want to focus on attracting new customers to the bank. So our data tells us that customers with strong relationships bring in about 4x the revenue compared to other customers. So in order to deepen those relationships and bring in those customers, we have to make capital investments in things like artificial intelligence and profitability tools. And I think these investments will enable us to precisely target our best opportunities, improve the effectiveness of our cross-selling efforts improve retention and just optimize profitability by putting these pricing tools in the hands of our sales team. So that's just one example of how we plan to use the capital. I think another example that we've talked about on previous calls is how we've been using it to make investments in the robotic process automation. So we'll continue to focus on just leveraging that type of automation to help us grow the bank while just improving our operating leverage. We've had some success with that, and we're going to continue to make improvements because I think that just makes us a more efficient organization. So again, we will look at M&A if it meets our criteria, but our main focus is really to organically grow the bank and just increase our earnings. There's just a lot of disruption right now in our markets, and we feel there's really a lot of organic opportunity for us as we continue to make the necessary capital investments to take advantage of those opportunities. Ryan Payne: Great. Got it. Last one for me, just a housekeeping item. The effective tax rate coming in higher than historical, anything impacting that this quarter? And would you expect to stay in kind of this range going forward? Ian Whinnem: Yes. We ended up increasing our expected earnings for the remainder of the year. So to balance that out, it did increase in the third quarter. On a year-to-date basis, we're at that 16% to 16.5% range. We anticipate that for the fourth quarter. Operator: Our next question comes from the line of Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on the outlook for loan growth. Hear you loud and clear on the mid-single-digit pace for the fourth quarter and then mid- to high across 2026. Can you just kind of talk about your confidence in achieving that given that year-to-date loan balances are pretty flat. So that's a pretty meaningful ramp. Just talk about why you have confidence in your ability to achieve that. Charles Parcher: Sure, Brendan. This is Chuck. If you look historically, we've always been a great loan generating operation. And with our -- where our real estate concentrations were earlier in the year, we really weren't -- I don't want to say we weren't competitive, but we weren't very aggressive in trying to bring new business into the bank. And it kind of caught up with us a little bit here in the third quarter where we had a bunch of expected payoffs. As Dennis mentioned, most of them what I would call good payoffs, a couple of companies selling and a few projects going out to the permanent market. But our pipeline right now is sitting higher than it was last year, significantly higher than it was earlier in the year. So we feel good with the momentum going into the fourth quarter. We know we've got a few more payoffs that we're kind of staring out in the fourth quarter, but not to the same level that we had in the third. So we feel good about looking out to that mid-single-digit growth going forward. Dennis Shaffer: And Brendan, I would mention that I think it's important to note on the payoffs, that we had several of our business clients that we were really successful in maintaining some of those deposits, both at the bank and at the wealth management level in areas of the bank. So even though we lost some of the interest income from the payoffs of loan, we maintain that relationship, and we're making money in other areas of the bank. So I think that's important to note that kind of -- I sat in our wealth and trust and wealth meeting yesterday and a couple of those loan payoffs, we've got significant wealth related. We're now managing that money that the business owner received. So we are making some money from that. So I just think it's important to note that we didn't include that in our earlier comments. Brendan Nosal: Yes. That's helpful color. I appreciate it. Maybe moving over to the fee income. Gain on sale of loans was up significantly for the quarter. Can you just kind of decompose that into 1-to-4 family gains versus lease gain on sale and how we should think about that line item going forward? Ian Whinnem: Yes, absolutely. So in the third quarter, roughly $1.1 million gain on sale. It's about $850,000 of it was mortgage, $300,000 of it was CLF or our leasing side of things. Of the -- there was an additional $300,000 on that for gain on disposal of equipment on the leasing side. So that's kind of that lumpy stuff that we end up seeing as opposed to the more traditional gain on sale. Charles Parcher: And Brendan, I will say, I think probably like almost every other community bank in the country, we really do feel like we'll see a major uptick in gain on sale if we see the 30-year mortgage refinance rates go under 6%. We've got a -- I think we've got a backlog of what we would consider a lot of refinance opportunity if we do see those rates dip down for a while. Brendan Nosal: Okay. Okay. Good. And then while I have you, just maybe on fee income overall. I know that it tends to be volatile quarter-to-quarter. And this felt like a particularly strong quarter versus earlier in the year. Any thoughts on the overall level of fee income to wrap up the year? Ian Whinnem: Yes. So if we take that $9.6 million that we had in the third quarter, if we back out the BOLI and the security gains, getting us down to about $9 million, we anticipate being about $9.2 million in the fourth quarter, and that would include about $50,000 from Farmers. Operator: Our next question comes from the line of Terry McEvoy from Stephens. Terence McEvoy: Maybe a question on the decline in loan yields in the third quarter relative to the second quarter. Could you just talk about, is that just a mix shift you're building the residential portfolio, some pricing competition? And then looking out into the fourth quarter, do you see an opportunity to expand loan yields kind of on a core basis before the merger just on some fixed asset repricing? Ian Whinnem: Yes. So just a reminder, Terry, this is Ian, in the first quarter -- or sorry, in the second quarter, we had a nonrecurring item that was in the interest income, which is about $1 billion. And so if that gets excluded, then we end up being much more normalized on the yields on loans. Charles Parcher: And Terry, to your point, we just got the 9/30 report. We're watching very closely the amount of loans that will reprice over the next 12 months, and we've got about $225 million that will reprice here over the next 12 months in those adjustable rate most of them 5- and 3-year mortgages. So we do feel we'll see a pickup in yield on that $225 million as we fight a little bit of the probably floating rate stuff going down during the same time period. Terence McEvoy: Great. Thanks for the reminder and the update there. Much appreciated. And then I believe you said the systems conversion early February, could you maybe talk about the timing of the cost saves? And in the back half of next year, do you expect that to be fully in the run rate? Ian Whinnem: Yes. So we anticipate, as you mentioned, the system conversion occurring, that reduces a lot of the contract expenses for processing as well as some of the staffing reductions will take place following that deal. Operator: Our next question comes from the line of Tim Switzer from KBW. Timothy Switzer: Most might have been answered already, but could you -- are you able to tie down at all when in November, you guys are expecting to close Farmers? Is it beginning of the quarter, towards the end? Just to kind of help us with the modeling. Dennis Shaffer: Yes. We hope -- they have their shareholders' meeting on November 4, and we hope to close it shortly thereafter, definitely probably before the middle of the month. So if you're modeling, you're going to have at least 45 days for the quarter. We'll have both banks together. That would probably be fairly conservative. We hope to be a few days ahead of that, but to be safe on your modeling. Timothy Switzer: Got you. Okay. And then the NIM guidance has been very helpful. Are you able to quantify at all what maybe the purchase accounting impact is on the NIM and what you guys expect from like a full quarter basis? Ian Whinnem: Yes. Let me see if I have that handy. I do not have that in front of me actually. Dennis Shaffer: We'll shoot that out to all of the analysts on the call today. Timothy Switzer: Okay. And then I was wondering what you guys are seeing in terms of like loan competition on pricing in your markets, any kind of changes there recently? Charles Parcher: Tim, I think everybody has gotten a little bit more aggressive. We're seeing that the rates kind of fall down below that 6.5% level, probably somewhere between the 6% and 6.5% level on the better deals. So it's pretty competitive across -- I wouldn't tell you there's any one market here in Ohio or Indiana that's any less or more competitive. They're all very competitive right now, both on the deposit and on the loan side. Dennis Shaffer: And I would say, Tim, the disruption in the marketplace is obviously, I think, going to help us. You've got some of the bigger players like Huntington and Fifth Third, who have announced some deals out of state. And their focus is probably -- their attention is elsewhere. And then we still -- the premier WesBanco thing is less than a year old, and we just saw the Middlefield announcement yesterday. All that disruption really helps us, so in that change. So we think that will benefit us both from a loan and deposit standpoint. Timothy Switzer: Okay. Yes, that's helpful. And outside of the disruption that you mentioned, do you have a sense for the loan pricing specifically, how much of that the competition is being driven by either slowing demand from borrowers versus simply the lower rates from the Fed? Charles Parcher: I think the demand has been pretty consistent. I mean, as I said earlier, we weren't quite as aggressive in the first half of the year just based on where we're sitting out on the balance sheet. But I would tell you demand has been pretty consistent in Ohio all year. And we -- knock on wood, the economy here, especially in the 3Cs in Ohio has been really good, and we don't see that changing anytime soon. Dennis Shaffer: Yes. We feel the economy and our customers have really adapted to some of the conditions, as I stated during earlier comments. I think it's probably more driven by rate than anything else. I mean the lower rates by the Fed and stuff, that's going to hopefully spur a little bit more activity as well. Charles Parcher: And I think there's -- I do think -- especially some of our competition, I think there's a lot more confidence around commercial real estate than there was 12 to 18 months ago. I think everybody was a little bit leery of it, which helped us keep rates up on certain things. But now I think that's started to subside, obviously, and rates are starting to shoot back down. Ian Whinnem: Tim, this is Ian. On the accretion question that you had, it would be about $150,000 in the fourth quarter. Timothy Switzer: Okay. So then when we get into the full quarter in Q1, that would be $300,000. Ian Whinnem: Yes, in that range, maybe $280,000. Operator: There are no further questions at this time. I would now like to turn the conference back to Mr. Shaffer. Please go ahead. Dennis Shaffer: Thank you. And in closing, I just want to thank everyone for joining us for today's call and for your investment in Civista. I remain really confident that this quarter's list of accomplishments and strong financial results and just our disciplined approach to managing the company positions us really well for long-term future success. I look forward to talking to you all again in a few months to share our year-end results. So thank you for your time today. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to the O'Reilly Automotive, Inc. Third Quarter 2025 Earnings Call. My name is Matthew, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin. Jeremy Fletcher: Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 2025 results and our outlook for the remainder of the year. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by, and we claim the protection under the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31, 2024, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Brad Beckham. Brad Beckham: Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts third quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer; Greg Hensley, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'll begin our call today by expressing my appreciation to more than 93,000 team members across all in North America for the hard work they put in to deliver the third quarter results we released yesterday. . Team O'Reilly continues to win in each of our markets. In our team's dedication to excellent customer service drove the solid comparable store sales increase of 5.6% we generated in the third quarter. This performance was at the high end of our expectations, and we are pleased with the momentum our teams have been able to sustain on both sides of our business. The combination of our strong sales results with a 9% increase in operating income and a 12% increase in diluted earnings per share demonstrates our team's focus on driving profitable growth. Thank you, Team O'Reilly for your commitment to our culture, and absolute dedication to taking care of our customers. Now I'll walk through the details of our comparable store sales performance for the third quarter. Our professional business continues to be the more significant driver of our sales results with an increase in comparable store sales of just over 10%. We continue to be pleased with the strength in our Pro ticket count growth, which was the primary driver of our professional comp increase and the biggest contributor to our outperformance relative to our expectations. We also saw increased benefit in the quarter from average ticket on both sides of our business that I will detail in a minute. We remain confident that the professional sales growth our teams are delivering is the result of share gains and as we continue to be the supplier of choice for our professional customers. Our share gains have been broad-based with strong contributions from all of our market areas. The strength of our professional business is anchored in the valuable relationship we have developed with our customers who value the end-to-end partnership our team is able to provide to their business through service, availability and business tools that help them be a service provider of choice to their customers. We were also pleased to deliver DIY comparable store sales growth with this side of our business, finishing the quarter with a low single-digit comp, driven by average ticket benefits, partially offset by pressure to ticket counts. Our DIY business was in line with our expectations in July, after having experienced pressure in June as we exited the second quarter. We began to encounter modest pressure to DIY transaction counts midway through the third quarter, which we believe reflects some degree of initial short-term reaction by DIY consumers in response to rising price levels. The contribution to same SKU inflation during the third quarter, which was felt evenly on both sides of the business was just over 4%. As we've anticipated coming into the third quarter, we saw a significant ramp in tariff-driven acquisition cost increases and made appropriate adjustments to selling prices. On a category basis, the pressure to our DIY business as we moved through the quarter was primarily felt in some categories where we could be seeing some deferral in larger ticket jobs. However, we continue to see strength broadly in other DIY maintenance categories, including oil, filters and fluids that have continued the outperformance we have seen throughout the year. We want to emphasize that we are still in the early stages of the consumer response to the ramp-up in price levels. It can be difficult to parse to finally the initial response from our DIY customers, but the pressure we have seen thus far is modest and in line with consumer reactions to economic shocks we have seen in the past. As we've noted the last several quarters, we remain cautious in our outlook on the consumer and expect that we could continue to see a conservative stance from consumers and how they manage spending in this environment. However, even in this environment, our DIY consumers are still showing a willingness to invest in and maintain their vehicles and we believe any potential deferral pressure will be short term. When looking at category dynamics on the professional side of our business, we are seeing very strong performance across both failure and maintenance-related categories and are pleased with the resiliency of customer demand. The customer has taken their vehicle to a professional shop for their repair and maintenance work tends to be less economically constrained than our average DIY customer and less reactive to inflationary pressures on spend in a large -- largely nondiscretionary category of their wallet. Looking at the cadence of our sales results. In total for the quarter, we generated consistently strong comparable store sales growth as we move through the quarter with positive comps on both sides of our business in each month. We would characterize weather as neutral on balance for the quarter as we experienced normalized summer weather across most of our market areas. Now I would like to provide some color on our updated full year comparable store sales guidance. As noted in yesterday's press release, we updated our guidance from the previous range of 3% to 4.5% to a range of 4% to 5%. At the midpoint of our full year range reflects our outlook when factoring in current sales volumes as we progress through September and thus far into October. We have incorporated into our guidance range the current pricing environment. While the broader tariff landscape has the potential to remain fluid, at this stage, we believe we have seen the lion's share of the cost impacts we are expecting as they relate to the tariffs currently in effect. As a result, we anticipate a mid-single-digit same-SKU benefit in the fourth quarter, but have also factored into our guidance a continuation of the pressure to our DIY customers from the dynamics I mentioned earlier. Our industry has continued to behave rationally in response to the pressure tariffs have placed on product acquisition costs and we continue to monitor industry pricing adjustments to ensure we are competitively priced for the value proposition we provide. Our industry backdrop remains or continues to be both stable and supportive. We believe the dynamics of the consumer uncertainty and continued pressure to the DIY business are being felt industry-wide. Most importantly, we believe our teams are winning share on both sides of the business against the current macroeconomic backdrop. In times when spending decisions become more difficult for our customers, having our excellent customer service, superior product availability and professional parts people to guide them becomes an even more important piece of the value we deliver. Before I turn the call over to Brent, I would like to highlight our updated diluted earnings per share guidance. As noted in our press release, we have updated our EPS guidance to a range of $2.90 to $3. This incorporates our year-to-date performance, the revised sales outlook and our expectations for gross margin and SG&A for the fourth quarter, which Brent will discuss next. At the midpoint, our current EPS guidance is an increase of approximately 2% from the midpoint of our previous guidance and a year-over-year increase of 9%. We are pleased that the team has been able to deliver both strong sales and earnings growth even in a rapidly changing environment of economic uncertainty. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for their strong performance in the third quarter. Now I'll turn the call over to Brent. Brent Kirby: Thanks, Fred. I would like to start by thanking Team O'Reilly for their outstanding work during the quarter. Our team continues to outperform and remain steadfast in their focus on our culture and our customers to drive our success. Today, I will start by discussing our third quarter gross margin and SG&A results as well as provide an update on capital expansion and our updated outlook on these items. Starting with gross margin. For the third quarter, our gross margin of 51.9%, was up 27 basis points from the third quarter of 2024 and in line with our expectations. Our team was able to offset the gross margin headwind resulting from our customer mix from faster growth on the professional side of the business with prudent supply chain management and solid distribution productivity. . While the third quarter gross margin rate was above our full year gross margin guidance range, we expected a higher gross margin rate in the third quarter as compared to the rest of the year, which is typical for the seasonal composition of our product mix and consistent with our results in 2024. We are maintaining our full year gross margin guidance range of 51.2% to 51.7% and expect to see a similar progression of gross margin rate from the third to fourth quarter as we experienced last year. Our supply chain teams continue to work diligently, both internally and with our supplier partners to navigate the evolving tariff environment. Our ability to maintain consistent gross margins with the amount of change we have faced during the year is a true testament to their hard work and dedication. As expected, we realized significant acquisition cost pressure from tariffs in the quarter. The impact from product cost inflation in the quarter closely mirrored in timing the adjustments we made in pricing. As Brad mentioned earlier, we have now seen the biggest impacts from the current tariff environment, and our guidance for sales and gross margin does not contemplate substantial impacts from further tariffs beyond what is reflected in our product acquisition costs today. However, to the extent any future tariff revisions result in further acquisition cost increases, we will prudently navigate those in the same way that we have done to date. As the tariff landscape and cost environment has evolved in 2025, we have maintained a close eye on the pricing environment within our industry to ensure that we are making the appropriate adjustments in remaining competitive. Against this volatile backdrop, our goal remains the same. To provide the exceptional service and industry-leading availability, our customers know and expect from O'Reilly Auto Parts to continue to earn their business. Overall, we believe our supply chain is at its healthiest point since we emerged from the pandemic. With the support of a strong supplier community, we have sustained robust in-stock availability across our tiered distribution network, this strong distribution infrastructure is the foundation for our industry-leading inventory availability and a critical factor in how we serve our customers and earn additional share. Our merchandising teams work diligently to maintain our diversified supplier base in order to actively manage exposure and risk on numerous fronts. This risk can range from country of origin to diversification of supply within a single product category. Supplier health and supplier performance can often go hand in hand. So an important part of our risk management process is monitoring our supplier partner health from all angles, ranging from shipping performance, product quality, catalog support, all the way to financial stability. While these processes always involve some level of effort to mitigate risk in a small subset of our supplier base, we would again reiterate that we are pleased with the collective health of our supplier partners. Our goal is always to foster supplier partnerships that are both long-standing and deep as we repeatedly earn our status as the desired priority customer for each of our suppliers. Now I'd like to turn to SG&A and give some color on the quarter. Our SG&A per store growth of 4% was at the top end of our expectations for the quarter. Driving this spend were expenses related to our strong sales performance, coupled with continued inflationary pressures in our cost structure, again, centered around medical and casualty insurance programs. Based on our third quarter results and outlook for the remainder of the year, we expect our SG&A per store growth to come in at or slightly above the top end of our full year guide of 3.5%. We have factored in our updated expectations for comp sales and corresponding incremental SG&A dollars into our guide, and we have been pleased with how our teams are managing expenses while driving sales volumes above expectations. As a reminder, our fourth quarter SG&A per store growth is expected to be below the full year run rate as a result of comparing against the charge we took in the fourth quarter of 2024 and to adjust reserves for self-insurance liability for historic auto liability claims. Based on our SG&A expectations and projected gross margin range we continue to expect our full year operating margin to come within our guidance range of 19.2% to 19.7%. As always, our top objective in managing our expense structure is ensuring that we are meeting our high standard of customer service by supporting our team of experienced professional parts people. Turning to an update on our expansion. We opened 55 net new stores across the U.S. and Mexico during the third quarter, bringing our year-to-date store opening to 160 stores. We are on track to achieve our 2025 new store opening target of 200 to 210 net new stores by year-end, and we continue to be pleased with the performance of our new stores. New store growth remains an attractive use of capital for us, and we see ample growth opportunities spread across all of our North American footprint. In this regard, we are pleased to announce our 2026 store opening target of 225 to 235 net new stores. Just as our 2025 growth has been spread across 37 U.S. states, Puerto Rico and Mexico, we anticipate growth in all of those markets as well as in Canada in 2026. Our store growth in 2026 will continue to be concentrated in the U.S. markets but we will also continue our measured growth within our international markets as we work to develop the teams and infrastructure to support our O'Reilly operating model. Our tiered distribution network continues to help drive our stores' competitive advantage in parts availability, and we are pleased to begin servicing stores out of our new Stafford, Virginia distribution center in the fourth quarter of this year. I would like to express my gratitude to our distribution and supply chain teams for all the hard work that has gone into this state-of-the-art new greenfield distribution center in the Mid-Atlantic market. This distribution center will be an important stepping stone for us to begin adding store count within heavily populated and untapped markets for us in the Mid-Atlantic I-95 corridor. As excited as we are about this new facility, there is no pause for our dedicated supply chain teams as we are full steam ahead with distribution growth and progress at our upcoming Fort Worth, Texas facility as well as future opportunities that will further support our store growth and inventory availability. Capital expenditures supporting both store and DC growth for the first 9 months of 2025 and were $900 million and are slightly below our expectations. Based on our year-to-date spend and fourth quarter outlook, we are reducing our full year capital expenditure guidance by $100 million to a range of $1.1 billion to $1.2 billion. This reduction is primarily the result of timing of spend on store and distribution center growth projects that we now expect to incur in 2026. As I close my comments, I want to once again thank Team O'Reilly for their hard work in driving our company's success. Your commitment to providing consistent, excellent service to all of our customers is the foundation for our long-term growth. Now I will turn the call over to Jeremy. Jeremy Fletcher: Thanks, Brent. I would also like to begin today by thanking Team O'Reilly for another successful quarter. Now we will take a closer look at our third quarter results and update our guidance for the remainder of 2025. For the third quarter, sales increased $341 million, driven by a 5.6% increase in comparable store sales and a $101 million noncomp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. For 2025, we now expect our total revenues to be between $17.6 billion and $17.8 billion. Our third quarter effective tax rate was 21.4% of pretax income comprised of a base rate of 22.2%, reduced by a 0.8% benefit for share-based compensation. This compares to the third quarter of 2024 rate of 21.5% of pretax income, which was comprised of a base tax rate of 23%, reduced by a 1.5% benefit for share-based compensation. As we noted in our press release, during the third quarter, we accelerated the payment timing of transferable renewable energy tax credits that were originally planned to settle in 2026. Our full year income tax rate guidance has been revised to reflect the incremental benefits we expect from the accelerated payment. Accordingly, for the full year of 2025, we now expect an effective tax rate of 21.6% versus our prior expectation of 22.3%. The updated tax rate guidance includes an anticipated benefit of 1% for share-based compensation. We expect the fourth quarter rate to be lower than the first 9 months of the year due to the tolling of certain open tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first 9 months of 2025 was $1.2 billion versus $1.7 billion for the same period in 2024. The reduction in free cash flow was primarily the result of the accelerated timing of payment for renewable energy tax credits that I previously mentioned. For the full year 2025, we have updated our expected free cash flow guidance to a range of $1.5 billion to $1.8 billion, down from our previous range of $1.6 billion to $1.9 billion. This adjustment reflects the headwind from the accelerated tax payment timing partially offset by the reduction in our capital expenditures guidance Brent discussed in his prepared remarks. Inventory per store finished the quarter at $858,000, which was up 10% from this time last year and up 7% from the end of 2024. Our inventory investments continue to generate strong returns, and we've been pleased with the overall in-stock positions of our store and distribution network. We have executed our inventory growth strategy in 2025 at a faster pace than our initial expectations and could see elevated inventory balances above our original 5% per store plan as we finish out the year. We continue to manage the timing of inventory enhancements to capitalize on current opportunities we see to drive our business and are pleased with the productivity of these investments. This incremental inventory investment has been more than offset by our AP to inventory ratio. We finished the third quarter at 126%, which was down from 128% at the end of 2024 but above our expectations. Moving on to debt. We finished the third quarter with an adjusted debt-to-EBITDA ratio of 2.4x and as compared to our end of 2024 ratio of 1.99x with an increase in adjusted debt partially offset by EBITDA growth. We continue to be below our leverage target of 2.5x and plan and prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. And during the third quarter, we repurchased 4.3 million shares at an average share price of $98.8 and for a total investment of $420 million. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance, Brad outlined earlier includes the impact of shares repurchased through this call but does not include any additional share repurchases. Before I open up our call for your questions, I would like once again to thank the entire O'Reilly team for their continued hard work and dedication to providing consistently high levels of service to our customers. This concludes our prepared comments. At this time, I would like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions. Operator: [Operator Instructions] Your first question is coming from Greg Melich from Evercore. Gregory Melich: I wanted to start with I think a comment you guys made on the 4% same SKU inflation that you've seen the lion's share of it. Does that -- does that mean that from here, there's none? Or is there still some residual we flow through the next couple of quarters? Jeremy Fletcher: Yes, Greg. This is Jeremy. Thanks for the question. We still think that we'll see a tailwind from same SKU as we move through fourth quarter and first quarter we talked to the mid-single-digit range. As we move through third quarter, a lot of what we saw was came along pretty early on in the quarter, but there was some ramp during the course of the third quarter. As we look at incremental changes in prices moving forward, there's always a potential for some of that. And obviously, the tariff environment is is a little bit more static now, but has the potential to move and change. But we think from what we've seen so far under the current regime, most of that cost has flowed through to us. The adjustments that we needed to make are mostly behind us, and we don't see the same level of substantial incremental changes in how we go to market to what we've seen so far in 2025. Gregory Melich: Got it. And then my follow-up is really on the price elasticity. I think you mentioned that, that can take some time to play out. What have you seen historically from price elasticity, particularly on the DIY side? Brad Beckham: This is Brad. Thanks for the question. Yes. So in the past, things can always change. But what we've always seen in our industry, at least in my years this year working for O'Reilly and in this industry is when we've seen shocks like this, there can be some deferral, failure, our hardest part categories from a failure standpoint are obviously break fix, but you do have those larger ticket jobs that can be deferred somewhat. You have -- if a great job, if the pads are metal on metal, the most likely it is what it is, and that job has to be made. If it's a chassis job, for example, and there's some more alcohol joints or control arms or something like that, that's something that can be put off normally for weeks, months, but obviously not years. And so kind of what we're seeing right now is what we -- Brent and I talked about in our prepared comments is there's a lot of movement. Generally, we feel really good about what we're seeing on both sides of the business from a repair and maintenance standpoint. But to your question on the DIY side, what we did see a little bit of that we hadn't seen thus far this year, we saw in the third quarter was what we feel like could be some deferral of those larger ticket jobs. And there's a lot of moving pieces. You have not only -- it's not always a direct line just to what we feel like is a little bit of elasticity or what could be deferred. You have different weather patterns. You have 2- and 3-year stacks on some of those categories that have been extremely strong for us the last couple of years. but we still do think that we are seeing customers that are maybe putting some things off, and we'll just have to see how that plays out in the fourth quarter. Operator: Your next question is coming from Chris Horvers from JPMorgan. Christopher Horvers: I wanted to follow up on the elasticity concerns, mid-single-digit inflation for the fourth quarter. That's basically in line with where you're implying comps are in the fourth quarter. So is like as you think about guiding based on what you've seen over the past 2 months is that elasticity function getting worse? Or I guess, why wouldn't your comp be higher than the inflation that you expect in the fourth quarter? Jeremy Fletcher: Yes. Thanks, Chris. This is Jeremy. Lots of different things, obviously go into how we think we'll finish out the full year and that pushes us into I know how you guys read an implied guide in the fourth quarter. When we think about our outlook, just to finish out the year there are a lot of moving pieces. You have to remind everyone that it's our most difficult comparison as we think about where we finished up the year last year. As we look specifically at the question around the benefit from where prices have gone to and where we see in the same SKU, it's clearly a net incremental benefit to us in the third quarter. there's nothing about a potential build within any of those pressures that might impact the DIY consumer that we're implicitly forecasting how we think about fourth quarter to directly answer the question. To Brad's earlier point, you go into the back half of the year for us, there's always a lot of different factors. There can be volatility that we see just from how weather plays out, how some of the Christmas shopping season plays out. And then we do have just, I think, a cautious view to how consumer might might continue to react. But kind of understanding all those component pieces, there's nothing about how we've at least started in the fourth quarter that that really puts us in a changing environment. We're really still early stages on some of how we're viewing where the customer is going to go at these price levels, and we're cautious but still feel good about the overall trends in the business. Christopher Horvers: Makes a lot of sense. I wanted to ask a longer-term question. Can you -- you are accelerating the unit growth next year. It looks like it will be over 4% in 2016 based on you mentioned earlier. Can you talk about your latest thoughts around the U.S. store potential? And maybe Mexico and Canada as well to the extent that you have some thoughts there? And do you think as we look out over the next few years, could international accelerate enough that you bend that 4-ish type unit growth rate higher? Brad Beckham: Yes. Great. Great question, Chris. This is Brad. So first off, we feel extremely good about our new store cohorts. We continue to be extremely pleased with the way that our field teams are opening up new stores, just from the quality of the team, professional parts people putting in place the right store managers, the right district managers that absolutely drives the quality of our new store locations. Obviously, there's a lot more that goes into it than just the teams, but that's primarily how we make those decisions is our ability store count wise to staff them with great teams. We're also extremely pleased with the way our design and development teams have continued to develop here in the corporate office, not just from a U.S. perspective, but how those teams have matured and really understanding what the machine -- how the machine runs, what it really looks like as we ramp up internationally. To your question about where we can go in the U.S. we haven't put a new fine point on that. But I would just tell you, every year that goes on, we continue to ramp that number up of what we feel like our store count could be in the U.S., not just from a really not just from the way we've always looked at it, but as consolidation continues in the industry, which we believe it will continue to do so. We feel really good about continuing to ramp up and and continue to have a higher number in the U.S. and where we feel like that could be in 5 and 10 years. We're very excited about our international opportunities, continue to look at Mexico as such a huge opportunity for us mid- to long term. We lost a little bit of time during the pandemic in terms of our ability to build the muscle that we wanted to build in-country, in Mexico and the inability to really get down there, build the muscle from a people standpoint, a structural standpoint, supply chain systems, et cetera. But we've made a lot of progress over this last couple of years. Chris, and really excited about what the future holds in virtually an untapped market for us in Mexico over the next many years. Really, same thing for Canada. We're early stages in Canada, excited to make the announcement that Brent mentioned earlier in his prepared comments that our expansion is officially going to start in the Canadian market in 2026. And while that doesn't hold the total addressable market that in Mexico or obviously the U.S. does. The car park is very similar in Canada. We feel like that is an untapped market from a retail and DIFM standpoint in terms of our scale and size and ability to build the right teams, especially off that BaaS platform that's such an amazing people platform for us in Canada. So excited about all those markets and really excited about our target for 2026. Operator: Your next question is coming from Scott Ciccarelli from Truist Securities. Scot Ciccarelli: Hopefully, 2 quickies. Any notable differences in terms of geographic performance given some of the weather patterns that we've seen? And then secondly, you did spend a little bit more time than usual talking about supplier health. So can you directly address any risk or exposure you may have to the first brand situation? Brad Beckham: Scott. Yes, I'll take the first portion of that on regional performance and kick it over to Brent brand. So actually, we didn't see a lot of material differences in our geographies and regional performance in Q3. there's always going to be some differences. But directionally, they weren't much different than what we originally had planned with our internal plan month-to-month by region. So no material differences. There was I had bit of difference in our north south and a little bit east and west, but . [Audio Gap] In terms of First Brands specifically, they're a little bit more than 3% of our COGS. So it's not a huge material thing when you think about the fact that we've got we're dual and triple and quadruple sourced on most of our lines. We do that by DC. Again, over 50% of our revenue is in our proprietary brands, which gives us a lot of ability to multisource with multi suppliers. So -- and quite frankly, a lot of the brands that First Brands has acquired over the last several years, we had long-standing relationships with those brands even before they were acquired by the parent company of First brands. And we're still working with a lot of those same teams and feel very confident that in our ability to work with them and with our -- the rest of our supplier base to manage through what we don't really see as any disruption from wherever that may land. So we feel good overall again about the overall supplier health in the industry. Scott, I'll make just follow up really quick for -- Scott, I may just a follow up really quick. We have really good engagement with the new leadership at First Brands and a lot of leaders that have been there for some time. We also have great engagement from their competitors, meaning that to Brent's point, when you think about the majority of the lines that they provide to us, we have our distribution network split up, meaning that whether it be a first brands or one of their competitors in some of these categories, we are dual and triple source, sometimes quadrupled to Brent's point, and so we have our DC split up accordingly. So we're hopeful that first brands really gets where they need to be on fill rates, which we believe they will, but we also have opportunities to fill in with backfill orders, and we also have opportunities with other existing suppliers that compete in those categories to take on another DC or 2 here and there, and we don't feel like we'll have a material impact. Operator: Your next question is coming from Simeon Gutman from Morgan Stanley. Simeon Gutman: First, a follow-up, Brad, you mentioned some of the deferral that's happening in DIY. To what extent is that just price elasticity? And is there any sense that it could be the timing of when prices are moving around in the marketplace. It sounds like you've narrowed it down, but curious if that that's 1 of the potential maybe a head fake that's happened I mean, with some of the demand. Brad Beckham: Yes. Great question. Well, the reason we want to be balanced on that, and we just -- we wanted to characterize as some categories and the potential for some deferral is because it's to Jeremy's point earlier to another question, it's still so early, and there's enough factors with weather, seasonality, the way the weeks played out in Q3. And as we get into Q4, again, just really the first time we've seen some pressure to some of those larger ticket jobs, but it wasn't across the board, Simeon. And it's not always directly tied to the exact categories lines or sublines that we're seeing the tariffs. And so that line is not direct. And where we saw some pressure to some categories, we didn't see it in others. And so really, on the professional side, we continue to have a lot of conviction, even though the DIFM consumer can be a little bit cautious that we're not seeing any pressure there. And when we look at the DIY side, the thing that gives us balance on the other side of it is just the fact that we are seeing it in some categories, not seeing it in others. And again, it's not directly tied to to tariff-driven cost pressures always by line, by category, but also we continue to see strength in a lot of our DIY categories. Like we mentioned, oil changes, oil filters, chemicals, fluids, et cetera. And so we just want to sit back a little longer and really see how the fourth quarter plays out. Our teams are always just focused, as you know, just continue to take share. and just watching that closely. The other thing we didn't say in our prepared comments, Simeon, is we're really not seeing any trade down. We're seeing some pressure to those bigger ticket categories potentially those bigger ticket jobs. But the way we look at good, better, best, we're really not seeing any material shifts. If anything, we continue to see -- while some people may be moving down, so to speak, on the price side, we continue to seek even the lower to middle income consumers on the DIY side, trading up because they're looking for value, not just the cheapest price. They're trading up in areas like batteries and things like that to get a better warranty. And so long answer, I said a lot of things there. But I think the key is we just want to continue to take a balanced look and see how the rest of the year plays out. Simeon Gutman: Okay. And my follow-up is on your investment posture. We've had SG&A per store elevated for the better part of the last, call it, 2 years, and now you're stepping up your store growth. So is there maybe a shift from per store to new stores. And then within that, any different way you're approaching the operating margin of the business, either holding it or even letting it go down to take advantage of disruption or opportunities in the market. Jeremy Fletcher: Yes, Simeon, good questions, and maybe take the second 1 first. There's not been, I think, any fundamental shift as we think about our operating margin, our profile for how we go to market. Having said that, I think it's less of a question or consideration for where we see the potential kind of competitive balance or market opportunities so much as it does how do we run and operate our business, what do we think allows us and puts us in a position to be competitive. And I think much of what you've seen over the course of the last couple of years when we think about the investment profile of how we thought about our business has been really geared around where we see opportunities to continue to strengthen our operating posture to help put our teams in the best position to also support the teams that we've got taking care of our customers within our stores. some of what we've seen candidly in the current year are just more inflation-driven cost pressures in some of the areas of our business that I think have put pressure on us that we were not maybe as anticipated as as being as significant as it was when we came into the year, ultimately, those things from time to time are going to -- are going to move in flex. We will obviously have to take a hard look at that and think about where that sits for the for the next year. But that hasn't really changed our outlook on how we think about the right way to manage the business to take care of our customers and grow our share. Brad Beckham: Simeon, the one thing I'd add to that is really just -- when I think about the controllables within our 4 walls, we're very pleased. Jeremy, Brent and I are very pleased with the way that our internal teams are managing SG&A to sales, walking the fine line between acceptable SG&A profitability and taking our service levels to the next level. . Some of the things we saw throughout the year and for sure in Q3 was just some of that inflation in some of the medical and some of the self-insurance stuff that's somewhat out of our control. There's always things we can do better and different from a safety and health and well-being of our team members, but some of that's out of the control of the team, and we feel really good about the way the teams are managing SG&A. Operator: Your next question is coming from Michael Lasser from UBS. Michael Lasser: You talked about a mid-single-digit inflation benefit in 4Q, which it sounds like that will be the peak of the inflation contribution So, a, is that right? Is that the way we should think about it? And b, overall, is this as good as it gets that O'Reilly can do a mid-single-digit comp under the right conditions. It's just a -- it's a different model than it's been in the past. Jeremy Fletcher: Yes, maybe I can address the question there, Michael. At this point in time, when we think about the current tariff and pricing environment, we would think that most of the benefit that we might expect to see moving forward would be in the fourth quarter numbers. And I think both with Brad and Brent spoke to that. it's always a little bit of a crystal ball exercise to say exactly what happens from this point forward. And we're obviously going to be very sensitive and responsive to making sure that from a market perspective, we're priced right in where we need to be. Ultimately, that -- while it's an important consideration, it's a factor that, obviously, we're all paying pretty close attention to that historically has not been what's driven our business and the ability to grow share. And we feel -- we still feel very bullish about our opportunity over the course of time. to be able to be a consolidator of the industry to pro forma model that's the best within our industry and to be able to gain share over the course of time. . And we feel good about our performance, particularly when you look at it on a 2-, 3-year stack perspective. And so ultimately, it is -- as we've talked many times, a very grinded-out business and and the long-term trajectory of what we can deliver as we consolidate the industry and gain share is dependent upon executing day in and day out and growing faster than the marketplace. We'll see ultimately where those numbers push out. But there have been -- there have been plenty of years within our history where the results that we're producing. This year have been in line with that long-term growth rate, we feel good about it. Brad Beckham: Yes. No, Michael, Well, Jeremy, I think the key is the reason we don't want to talk in absolute if we've seen everything. It's because we don't know what's going to be in the headline next week or next month. It is still fluid. We feel good about what we said about the majority being already in but we don't know what's next. What I do know and this Parley is in the kind of your second part of your question, what I do know is when I look at Brent and our merchandise teams and our pricing teams they are operating at a very high level. I feel very good about the way that they are navigating not only from a negotiation with our suppliers the way we're thinking about pricing. But the overall way that we look at the fine line between walking all those things. And just the way we can continue to compete the value proposition we provide. And we never think internally here teams, the way our supply chain runs, new DCs, hub stores, all the things we do from a culture standpoint, promote from within and supply chain, we really feel good about what we can do over the next many years. Michael Lasser: Got you. My follow-up question, what conditions would be necessary in order for O'Reilly to restore its SG&A per store growth back to the 2% range, that was consistent for a long period of time prior to the last couple of years. And as a management team, how focused are you on deploying technology or making proactive investments today in order to ease some of the pressures from health care costs and other factors in order to restore that level so you can generate the margin expansion that the market has known to from [indiscernible]. Jeremy Fletcher: Yes, Michael. I appreciate that question. It's a little bit of, I think, a challenge for us to to really address a hypothetical around kind of a lot of the other broader conditions that contribute to how we might think about SG&A moving forward. For sure, when we look at where we sit today versus other periods of time, where wage rate inflation was much more muted where we weren't seeing some of the other inflation pressures where we weren't seeing kind of rising price levels, I think more broadly around the economy. Those were some of the, I think, broader macro conditions that we would have seen during the course of time there that I think play into the consideration. I think from our perspective, we've always had, I think, a pretty intense expense control focus as a company. And ultimately, those are all things that we manage for the long-term growth rate and the success and health of our business. While we're always, I think, pushing to be more efficient and more effective, and there are always ways in which you can do that within our business. . It's also important to note that I think one of the core strengths of our business is the ability to provide a high service level in an industry where that's still, I think, a critical factor in how consumers perceive value, how they make buying decisions. And so for us, there's always going to be some level of understanding that the strength of our business is built around running the best model that ultimately our ability to grow operating profit dollars from a long-term perspective means that we're going to want to to manage our business in the right way, and we're not going to view it necessarily as just an offset [indiscernible]. Let's go find cuts and reductions that don't otherwise make sense because some other components of the business have seen inflation. So that's really from a philosophy perspective where we see it. Some of the -- where we've seen lower nominal numbers in different environments still reflected that same philosophy. And ultimately, I think that's the right way to manage the business for the long term. Brad Beckham: Yes. And Michael, I may just real quick add, Jeremy said it very well. We we have a lot of pride in our ability to lever when we have a comparable store sales level that we've had. We have a lot of pride in the operating profit rate that we've delivered over a long period of time, and that's going to continue to be our focus. That said, for the mid and long term back to the 10% share across North America, we are going to continue to invest in our business in a very disciplined way when it comes to technology, when it comes to our teams. When it comes to our supply chain, we are going to continue to play from a position of strength we continue to feel like we have a unique opportunity over the next many years to do all that within the discipline we have with our capital allocation, the discipline we have with our OpEx and we're going to continue to balance the 2 sides of what I just said as good as we possibly can over the next year. Operator: Your next question is coming from Bret Jordan from Jefferies. . Bret Jordan: If you look at the expectations for 4% same-SKU inflation, are supply chains in the industry sort of creating a delta between your expectations maybe versus a peer, I think that NAPA guys were saying maybe 2.5 million, is that because they're sourcing out of different regions and markets and have less tariff exposure? Or is it really sort of a relatively even playing field on a same SKU basis? Brent Kirby: Yes. Brett, this is Brent. I'll start and the other guys can chime in. I think we talked about supplier diversification for years now. And again, the team. Our merchandise team has done a fantastic job continuing to diversify that supplier base. And we've talked a little bit about China, what that looks like specifically for us. We're in the mid-20s. Some others may report somewhere in that range or a little bit less. But generally speaking, we feel like we're very diversified globally and the teams continue to get more diversified. That number is down hundreds of basis points from where it was a few years ago and continues to fall. What's interesting, though, when you look at some of the other countries right now in the tariff environment that we've been operating in, especially in 2025, some of the -- when you think about 25%, you look at some of those other countries, Vietnam, Thailand, India, some of the other countries that a lot of sourcing has moved to -- supply has moved to Mexico as well and some South American countries, that 25% or more is the same rate. So what I would tell you is it's less about what's that China number look like, and it's more about the blend and the ability to multisource from multiple countries of origin and to manage that dynamically and to work with suppliers that are managing that dynamically. And I feel like our team has done a great job with that. . It continues to be a challenge. And Brad mentioned earlier, and we've talked about on the call in the prepared comments about what we feel like the lion's share passed through in Q3 from tariffs, but I think we all know, we all listen to the news. I mean there's still some uncertainty about where that may go in the future with some of these countries until it's all said and done. So we feel like we're very well positioned to respond and react to whatever comes our way. The teams have done a great job with sourcing across the globe, and we're going to continue to do that and work with suppliers that are doing a great job of that. Brad Beckham: Yes, Brett, I may just jump in real quick. In terms of us directly to other competitors, we don't know. I mean we don't we don't spend near as much time frankly, looking at trying to parse the details of anybody else. That would be up to them to explain what we know is our merchandise teams and our pricing teams. Like I mentioned earlier, just doing a masterful job managing through this. We feel good about our scale, our negotiating power, our pricing power feel really good about the way that we have worked with our suppliers to mitigate all of this, I feel really good about where we're at from a pricing perspective versus our versus all our competitors, both small and big. WD independent all the way up to the other big 3, I feel really good about all that. So hard to say in differences of COGS and all those things. But -- we feel really good about where we're at, the way we've negotiated and just so proud of the teams managing through this. . Unknown Analyst: Okay. And then as sort of a follow through on that. And that 10% inventory per store growth is something maybe 4 of that is on a same SKU basis. The other 6, are you buying ahead of expected further price increases sort of getting a lower cost inventory into the DC ahead of additional expansion? Or are you adding units just from a strategic standpoint of a better fill rate and take more share? I guess, what's the growth in inventory ex the price factor? Michael Lasser: Yes, Brett. It's really more just us executing on our inventory strategies and how we think about deploying incremental inventory enhancements. Price has a little bit less of an impact on on the inventory balances just from the standpoint of being a LIFO reporter of this. You really only see inflation have an impact to the extent that you're kind of adding layers on top and there's been some of that, but not the same magnitude of what runs to the income statement. And I think conversely, no real change changes in that strategy as it relates to the broader cost environment, which we think is pretty stable. But obviously, those are decisions that we make based upon upon the objective of being the best in the industry from an availability perspective. Obviously, the cadence and timing of that can change period to period. It's not always does always roll out in the same kind of schedule as you were because we're pretty active about how we think about the right time and where we see opportunities to be able to execute that strategy. Brent Kirby: Brad, yes, just to add on to what Jeremy said too, Brett, specifically speaking we're going to continue to optimize our network. We talk all the time about our -- the strength of our tier distribution network, our regional DCs our hub stores and how we continue to optimize that network of SKU count and depth and breadth by secondary tertiary market, even the ones outside of the reach of our regional DCs. The other thing though is consider and think about for Q3 is we were stocking up our new DC in Stafford, Virginia as well, that's another component that brings more dollars into a system in a given quarter that may prove to be a little bit lumpy quarter-to-quarter with the investments in a new DC. . Operator: We've reached our allotted time for questions. I will now turn the call back over to Mr. Brad Beckham for closing remarks. . Brad Beckham: Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and full year results in February. Thank you. . Operator: Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Welcome to WEG's Third Quarter 2025 Earnings Conference Call. I would like to highlight that simultaneous translation is available on the platform on the interpretation button via the globe icon at the bottom of the screen. We would like to inform you that this conference call is being streamed live and the audio will be available afterward on our Investor Relations website. [Operator Instructions] If we do not have time to answer all questions live, please feel free to send your questions to our email at ri@weg.net, and we will answer after completion of our conference call. We would like to emphasize that any forward-looking statements contained in this document or any statements that may be made during the conference call regarding future events, business outlook, operational and financial projections and goals and WEG's potential future growth are merely beliefs and expectations of WEG's management based on currently available information. Forward-looking statements involve risks and uncertainties and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors could affect WEG's future performance and lead to results that will be materially different from those in the forward-looking statements. Joining us today from Jaraguá do Sul are Andre Luis Rodrigues, Chief Administrative and Financial Officer; Andre Menegueti Salgueiro, Finance and Investor Relations Officer; and Felipe Scopel Hoffmann, Investor Relations Manager. Please, Mr. Andre Rodrigues, you may proceed. André Rodrigues: Good morning, everyone. It's a pleasure to be with you once again for WEG's earnings conference call. I'll begin with the highlights of the quarter on Slide 3, where net operating revenue grew 4.2% compared to the third quarter '24. In Brazil, performance was driven by solid industrial activity, continued deliveries in transmission and distribution projects and healthy demand for commercial motors and appliances. Growth was partially offset by a significant year-on-year decline in wind power generation revenue. In the external market, industrial activity remained strong in our main regions of operation, especially in Europe. In the power generation, transmission and distribution businesses, T&D operations in North America continued to show solid delivery volumes despite some fluctuations in general project deliveries. Our operating result measured by EBITDA reached BRL 2.3 billion, an increase of 2.3% compared to 3Q '24. EBITDA margin remained at a very healthy level, closing the quarter at 22.2%. Along the presentation, Andre Salgueiro will provide more details on this point. As for our return on invested capital, one of our main financial indicators remained at the high level of 32.4%, as we can see in more details on the next slide. Revenue growth and sustained high operating margins contributed to maintaining our return on invested capital at healthy levels despite the decrease compared to the same period last year. The reduction was mainly due to higher invested capital driven by investments in fixed assets and acquisitions during the period. It's important to remember that the ROIC for 3Q '25 or was positively impacted by the recognition of nonrecurring tax incentives in 4Q '23. Now I'll turn the floor over to Andre Salgueiro. André Salgueiro: Thank you, Andre. Good morning, everyone. On Slide 5, we show the evolution of net revenue by business area. In Brazil, demand for short-cycle products remained solid, particularly for low-voltage industrial motors and gearboxes across several operating segments. We also observed positive performance in long-cycle equipment deliveries such as medium voltage electric motors, especially in the oil and gas and mining sectors despite an investment environment that remains somewhat restricted. In GTD, the T&D business continued to perform well, driven by deliveries of large transformers and substations. The decline in revenue in this area was mainly due to the absence of new wind turbine deliveries as the pipeline for 2025 had already been anticipated. There was also a reduction in solar generation revenue this quarter, mainly reflecting the completion of large centralized solar generation projects executed over the last 3 quarters. In commercial motors and appliances, we continue to deliver positive results with growth in sales to key segments such as air conditioning, water pumps and compressors. In coatings and varnishes, sales of our main products remained strong with notable demand for liquid coatings used in the oil and gas segment. In the external market, short-cycle equipment benefited from continued healthy industrial activity across multiple regions with an improvement in the European market standing out. For long-cycle equipment such as high-voltage motors and automation panels, delivery volumes contributed positively, although geopolitical uncertainty continues to weigh on new investment levels. In GTD, we maintained good delivery volumes in T&D operations in North America despite a lower volume of deliveries in another key region, South Africa. Revenue moderation in this area was mainly driven by fluctuations in generation project deliveries in Europe and in India, a typical dynamic for this type of business, even with strong performance from the marathon generator operations in the United States and China. In commercial motors and appliances, demand remained positive, particularly in China and North America, along with contributions from both electric motor operations in Turkey. In coatings and varnishes, revenue growth was supported by strong performance in Mexico and the recent acquisition of the operations of Heresite in the United States. Slide 6 show EBITDA evolution, which grew 2.3%, while EBITDA margin closed the quarter at 22.2%, although slightly lower than the same period last year, mainly due to higher costs of some raw materials EBITDA margin remains strong, supported by the current project mix. Finally, on Slide 7, we show the evolution of our investments, which totaled BRL 673 million with 72% -- in 52% in Brazil and 48% abroad. In Brazil, we continue to modernize and expand production capacity at T&D while increasing capacity and productivity at our Jaraguá do Sul and Linhares sites. Internationally, we continue investments in Mexico, particularly the progress in building the new transformer factory and in the expansion of more production capacity in China. That concludes my section. And now I'll hand it back to Andre. André Rodrigues: On Slide 8, before moving on to the Q&A session, I would like to highlight a few points. First, during the quarter, we announced several important investments, including a BRL 1.1 billion plant in Santa Catarina to expand the energies unit's product portfolio and production capacity and also a USD 77 million investment in the special transformers plant in Washington, Missouri and BRL 160 million investment to further integrate and expand the electric motor production at the Linhares unit in Espírito Santo. In September, we also announced a target to address greenhouse gas emissions reduction in Scope 3. In addition to having our Scope 1, 2 and 3 targets for 2030 validated by the science-based targets initiative. More recently, we announced the acquisition of a controlling stake in Tupinamba Energia, a company with a strong presence in software and services for electric vehicle charging network management, aligned with our strategy presented at the last WEG Day to provide complete solutions for the e-mobility market. Finally, a few words on our outlook for the remainder of the year. Despite mitigation measures already underway, the geopolitical and macroeconomic environment requires close attention and brings short-term challenges. We remain focused on our investment plan to support growth in Brazil and abroad, both to strengthen our market mature businesses and to develop opportunities in new markets. Even amid a complex geopolitical backdrop, we continue to expect annual revenue growth and high operating margins, supported by our international presence and diversified product and solutions portfolio. This concludes our presentation, and we can now move on to the Q&A session. Operator: [Operator Instructions] Our first question comes from Lucas Esteves from Santander. Lucas Esteves: Congratulations on your results. I have 2 topics that I would like to approach, starting with the results acquired from Regal that you did not disclose this quarter. So I'd like you to give a bit more color on this business, how it behaved. Then I ask that because previously, you said that you were increasing capacity with generators. So I would like to understand that this is already reversing in an increasing volume and results or this is to be seen in the coming quarters? Second question, how WEG is positioning itself as a solution provider more than an equipment supplier. I ask that because when talking to stakeholders, we hear more and more that WEG is offering complete solutions, a generator instead of solar panels. So all that said, I would like to understand your strategy, if the company is going to position more and more as an OEM to product, if that can expand your market and if that somehow connects to the company's strategy to expand its footprint in the aftermarket. André Rodrigues: Lucas, this is Andre Rodrigues speaking. Thanks for your questions. It's a long question. If we forget something, please just remind us of the main points. I will start talking a bit about the integration of Regal. It is going on. It is as expected. When we talk about Regal -- Marathon, I'm sorry, when we talk about the businesses of Marathon, we are basically talking about 2 businesses, low-voltage motors and alternators. For low-voltage motors, we saw an accommodation in the market. And I think the main focus now of the entire industrial team of WEG Motors is gains synergies in the stage where we are without many investments in terms of verticalization. So optimizations of products, opportunities to reduce costs, all following as expected. The alternators business, as we mentioned on WEG Day, is a business that is developing very well. João Paulo, right after the acquisition, focused to try and increase capacity the most. We are making investments to increase capacity. This is probably to be completed at the end of this year, beginning of next year to continue developing the business giving the markets that demand this equipment and that have contributed positively for this business. So Marathon businesses have a very strong recognized brand in the U.S. market, particularly. Integration of admin areas, we are also evolving relatively well. We did have a huge challenge in terms of the carve-out of systems. We are talking about more than 150 systems. We're able to develop all the efforts before the deadline of the CSI that we had with them and also in terms of shared services that was provided, especially in the North America region by the Regal organization Rexnord, we also were able before the deadline to migrate to our shared service model, which is called WEG Business Services. So in this migration, we had especially gains in IT and to bring the business to our model. And with this, we had already a reduction of approximately $6 million in annual costs. Consequently, with this, together with all efforts in the industrial area, the good performance of alternators, Regal's margins are improving quarter-on-quarter. And we highlight that it is an integration process that will take 4 to 5 years. But the message is positive, and it is following as scheduled. André Salgueiro: This is Salgueiro speaking. As for your second question, WEG's model of becoming more and more focused on solutions. This is a reality. This was the main focus of our presentations on WEG Day, the last WEG Day that we held recently. And there, we brought 3 major topics: one, solutions for e-mobility. So WEG not only focusing on manufacturing powertrains or recharge stations or batteries for buses, but rather being more and more focused on following a complete solution, integrating it all. And this comes from the service center that we announced in São Bernardo do Campo for support and also the acquisition that we released -- recently announced of Tupinambá to complement the ecosystem. So we have been working to integrate more and more services and solutions. And the 3 main topics of WEG Day was e-mobility, microgrid and network reliability. That is to have more and more complete solutions for the market, not only focused on the product, but on the whole solutions and how we can help our clients on their journey. Operator: Moving on. Our next question comes from Gabriel Rezende from Itaú BBA. Gabriel Rezende: I have 2 questions. First, I would like to understand about the added capacity for transformers in West. I think this is going to be effected by '26, beginning of '27. And the market is more and more thinking of what '27 is going to be like for WEG. So are you selling already the additional capacity that you're going to have in transformers for '27? What is your pipeline for transformers? If you could talk about prices and volumes, that would be very good, especially about the additional capacity. And the second question, we have been monitoring yourself and the competitors and prices are going up in the U.S. because of tariffs and some inflation in the sector. I would like to know if you understand price increases in the U.S. offset loss in competitiveness or if you could have a drop in volume as price increases take place. André Rodrigues: Gabriel, I'm going to talk a bit about transformers, okay? Well, we have been announcing for some time now, 3 years, I would say, every year, a new package of investments of the business given the demand and how the market is heated in several segments, energy efficiency, generative AI. So WEG by the end of '23 made a solution. And in the beginning of the '27, we would have double global capacity for WEG in the transformer business. We are following the investment plans unchanged. Whenever we see a new opportunity, we reinforce the plan. We had a recent announcement, the modernization and increase of capacity in the special transformers plant in Missouri, an investment of $77 million. In addition, we have the new plant in Mexico, a new plant in Colombia, increasing capacity in Gravataí in Brazil to use the opportunities in the market. And when we have visibility, as we are having now of the completion of the project, we start already to have a backlog. So the answer is, yes, we are building our backlog in all the units in where we have visibility of completion. That is going to be by the first half of '26 to the end of '26 for us to seize opportunities as of '27. Of course, perhaps enjoying opportunities in the second half of '26. As for prices in the U.S., Gabriel, I think the whole process when the tariffs started to be discussed, made it clear that inflation would happen, not only for WEG, but for the whole American market as a whole. So it's just natural in our strategy to try and mitigate impacts is to use our commercial strategy in prices in the U.S. And you did say it's not only WEGs, it is WEGs and almost all the players in the market. And so this is a movement, especially the most relevant part that happened more recently that we still cannot measure in terms of details of impacts because in practice, it came into force in October. So we have to see how the activity is going to evolve from now on. So this is something that we'll have to monitor in the coming months how the market will respond to the commercial strategy. But again, it's not only motors, transformers or other products. It is the U.S. economic activity as a whole due to tariffs and price adjustments are being made throughout the industry. Operator: Our next question comes from Lucas Marquiori from BTG Pactual. Lucas Marquiori: I have just one question, but perhaps with some items. Still about tariffs, I was a bit lost in terms of times. Probably you already had an impact of the tariff this quarter. You are saying that you are having an effort of repricing of products. And then you have the waiver of what was shipped until mid-October. So perhaps the full impact in cost and margins is just going to show in Q4. I would just like to see if my understanding is correct. So the full quarter is just going to be in Q4 and how far you are in terms of passing on prices. You mentioned 10% in Q2, then we said mid-teens for the next quarter. Just to understand how long the curve is. And finally, the passing on costs to balance tariffs, this is something that the whole market changed the price dynamics. If you have a decrease in tariffs, you don't necessarily have to return that to clients. You can keep it in margin. So do you think this is standing if and if tariffs are renegotiated next year? So just the question with the same topic, tariffs. André Rodrigues: Thanks for your question, Lucas. I'll try to answer all the parts. The first point, what you mentioned is correct. We are going to have the full impact in the fourth quarter. We did have some impact in the third quarter, particularly the last month of the quarter in the month of October, we did have this impact. But throughout this moment when we had the information of tariffs, we started working on several fronts to mitigate the impact. There is not a silver bullet. You talked about recomposition or realigning prices, WEG's logistics chain to minimize that, and the company continues to work along these lines. Our expectation for the fourth quarter is to have a greater impact because of the tariffs. But again, we have lots of action plans and initiatives to mitigate the impact. In the end of the quarter, we are going to have a clearer view of whatever was possible to be mitigated and the impact. As for price realignment, well, the thing is we have to know what the market is going to be pricing. I cannot say that this is a given because if the tariffs change, if there is a change in process, a change in dynamics, we have to adjust according to the wind. Operator: Moving on. Our next question comes from Alberto Valerio from UBS. Alberto Valerio: A follow-up on tariffs because we are seeing lots of news on WEGs suiting its capacity in Mexico, United States, Brazil, Mexico. What is missing in Brazil for WEGs to eliminate 100% of its tariffs that is not producing anything in Brazil to be exported to the U.S. And second question, the exposure of BESS in WEG. There is an auction now in December, another larger auction for June next year. What should we expect from WEG for '26? André Rodrigues: Alberto, thanks for your questions. Okay. One point that is very important to reinforce is the investments that WEG is making in the U.S. along the recent years, the revenue that is produced and generated in the U.S. is increasing and WEG is doing that. In transformers alone, we expanded in the last 5 years, our 2 existing plants. We had a greenfield project. We are renovating a new one and increasing capacity. So added to everything we mentioned, restructuring, logistic chains and other initiatives that we are talking about, also the increase in capacity in the U.S. will help us to minimize the impact. André Salgueiro: Alberto, as for BESS, we did show on WEG Day our solutions for microgrid, even home use, the monogrid, industrial use, commercial agribusiness, until getting to that. So it's important to mention that WEG has a full portfolio today of products to serve the different segments, and we have been working very hard in this project of the small medium size, which is a good market demand. To give an estimate for the next year, perhaps it's too early because that depends on the development of the market from now on. And it did mention 2 important things, the auctions that are expected to happen this year and next year. And indeed, if they do happen, they may be a very interesting opportunity, much greater than we have today because today, opportunities are concentrated on mid-sized projects. We are seeing people wanting projects perhaps with a greater scale that we are having, but different from utility projects, which are the large projects that generally take place. So if the auctions happen, that can change. The market as a whole can grow, and that will depend on how much WEG is going to capture up this market along the next years. Operator: Moving on, our next question comes from Rogério Araújo from Bank of America. Rogério Araújo: I have 2 questions on my side. The first is the external GTD revenue. It did go down despite the favorable T&D movement. We did some accounts with transformers in North America, some assumptions considering the revenue of generation abroad. It may have dropped from 30% to 50% year-on-year. Does it make sense? Are our accounts correct? And if you could talk about the deliveries in the past until when this comparison basis is going to be kept? So this is my first question. Second, about margins. I do not recall if it was 1 or 2 quarters ago, you said if it weren't for the renewables mix, especially solar farms, margin would have gone up. And now the mix is down, especially solar farms and the margin did not really show the difference. I would like to know what hurt you. You did talk about tariffs affecting October. Was it this? Any other factors? But just for us to understand margins in the short term. André Salgueiro: Rogério, this is Salgueiro speaking. Thanks for your question. I'll answer the first GTD in the foreign market, and then Andre is going to talk about margins. We don't break down in our releases. What I can say is that indeed, generation did have a significant drop this quarter, especially because of somewhat weaker performance in the joint venture that we have in Europe compared to last year. And that, especially for the fact that we did have some important projects and concentration of deliveries last year that were not replicated this year and also because of reduction of revenue in generation in Asia Pacific, especially for projects that are served by the Indian operation. We did mention that in our release. I don't know if it was 100% clear, but in T&D, the quarter was slightly different. T&D had been growing in all operations in the external market this quarter. We continue with positive performance in T&D. North America continued with good performance. But in Africa, it did have a drop in revenue in the quarter. because some large transformers that we delivered last year and that these projects were not replicated this year. So there is an effect of a lower growth in GTD, the external market in generation, but also a portion of T&D in Africa. So what is doing well, positive without changes is T&D, North America and Colombia, altogether in this context. And Rogério, about margins, you were right. I think it was in the first quarter that we broke down how much margin we would have consolidated excluding that movement that started in the last quarter last year about solar farms and continued in the first and second quarters. I don't recall exactly the amount, but we can talk about that later on, but we did mention that, and it is in the transcription of our last call. I think it was the first quarter. Undoubtedly, what we see in terms of margin behavior, it is according expected. We expected a first half a bit more pressured because of the product mix. As the product mix with solar went down, the margin will improve, and it is improving. If you get year-to-date margins of WEG, it is within expectation to fluctuate between what we had in '23 and '24. Remember that when we are monitoring margins, we cannot talk about one quarter. This is very complicated because we have several business dynamics and everything. For instance, we did have the impact of the tariffs this quarter, not all action plans to mitigate that in place. And what we saw this quarter, compared to what we had last year and perhaps it is a bit of the result of the margins is that there was a bit of an increase in prices of the main raw materials, especially steel and copper, which also impacted the margin of the quarter. But again, I would like to stress that margins are improving quarter-on-quarter as expected, and we want to -- we believe that it's going to be fluctuating between what we had in the last 2 years. Operator: Our next question comes from Lucas Laghi from XP Investments. Lucas Laghi: I have 2. Thinking about the performance, I think it was the highlight of the performance this quarter. I would like to know your dynamics for external markets, especially in the U.S. Any concentrated delivery, any anticipation of purchases because of tariffs. So anything out of the ordinary? I'm thinking of industrial activity as a whole, when I take a look at the release of your competitors, you see a backlog that is very strong in the third quarter from the U.S. So in the U.S., some segments are doing very well. Others are doing poorly. I would like to understand if you could have an acceleration of revenues driven by the U.S. So try and understand how you see industrial activity as a whole, especially the U.S. And for internal GTD and perhaps that was the downside in terms of revenues, especially because of the drop in solar, as you had mentioned. So just to understand if we are already on a normal level or if you think that you can still have a decline in solar? How are things going on in [indiscernible] residential other? And do you think that 1/3 would be in T&D? I know that things are changing with solar, but how would you consider the internal GTD? So basically, external GTD and internal GTD, that's my question. André Salgueiro: Lucas, this is Salgueiro. Thanks for your questions. As for industrial electronic equipment, first, I would like to reinforce that we did see the market resuming. That's the upside. Brazil grew by 3.3%. And we do see also growth in the external market of 7.1% in reals and even stronger in dollars, almost 9%. So that shows a market and an industrial activity that's quite interesting. And that is reflected in our numbers. We did highlight the performance of Europe. I think it was the main highlight in terms of recovery because Europe was a region that was not doing well in recent quarters. And as of this quarter, we did see significant improvement. So that's an important point to highlight. And in the U.S. well, the U.S. has a bit of a different dynamic because of tariffs and everything that we have discussed before, but also the performance of industrial activity, especially with motors and projects is going on. It's happening, not at the same pace as before. We did mention in the call last year that the decision of new investment was on hold with the dynamics we still do not see a major change. But an important point that you did mention, and we can talk about that is that when you see orders coming, the performance is better than in the past, which shows that we might have for the future, an industrial activity in the external market with a more positive dynamics and here considering all regions and also the U.S. When we talk about GTD in the domestic market, you did mention 2 important points that justify the drop, the wind power, because we already knew that there was a lack of new projects and that continues. And the news this quarter that we tried to address to you in the comments of last call is that solar would be weaker in the second half of the year, especially for the fact that we no longer had the GC projects. So that was the main reason. And when we look into the performance of the third quarter compared to the second quarter, this is clear. When we compare the third quarter and third quarter, that's not so relevant because in the third quarter last year, we didn't have these projects. They started in the fourth quarter. And that's interesting, considering your question, when you look into the future, we do have a challenge for the fourth quarter, which is when we started centralized generation a bit stronger, and we don't have the projects this year. And another point is that the GTD market distributed generation is not heated either. So we do have projects. They are evolving, but at a pace that's slightly slower than in the past. So putting together the factors, we have a solar dynamics already reflected this quarter with a weaker performance and expectation because of the comparison base of centralized generation of last year, this movement can be even accelerated in the fourth quarter. Operator: Our next question comes from André Mazini from Citi. André Mazini: My question is about the competitive scenario with the acquisition of 50% of Prolec. In yesterday's call of GE Vernova, they talked about commercial synergies. Do you think that changes anything in the North American market? And also in the call, they said 20% of the orders of Prolec comes from hyperscalers and data centers. So if you would have an estimate of how much T&D orders in the foreign market comes from this type of customer? And finally, a follow-up of the last question. I don't know if you did mention that there was a prebuy. I didn't understand that. That's it. André Rodrigues: Thanks for your question. Well, the competitive scenario, what we saw yesterday, I think does not change much. It's a competitor that has already been in the market. They are just acquiring the remainder of the business. And we know that everyone is making investments to expand capacity and to enjoy demand. WEG positioned itself in the past. We believe that we started before the competition if we compare most of the competitors. And we also understand that in '26, we are going to be one of the first in the main markets to add this new capacity. As for supply to data centers, the number that you mentioned to WEG is very close to that in the U.S. So again, we do not see major changes considering the competition. I did not understand the second part of your question. Of course, it's another topic. If there was a prebuy in the third quarter in EEI given the tariffs. If there was a pre-buy people advance their orders. André Salgueiro: Mazini, this is Salgueiro. We cannot say that. The increase in tariffs started in the beginning of the year. The discussions and more concrete effect started with the 10%. Then we had the 50%. So it's important to reinforce that the 50% was specific to Brazil. And obviously, people know that WEG is a Brazilian company. It is based in Brazil, but it is very specific with its dynamics with local players. It can provide matters from different countries, Mexico, Asia. So we cannot say that this movement was relevant or if there was a significant effect on the third quarter. Operator: Our next question comes from Marcelo Motta from JPMorgan. Marcelo Motta: I have 2 questions. First, a follow-up on tariffs. We have a meeting of Trump Donald this weekend. We don't know if it's going to happen. But do you see anything, I don't know, considering information from the Ministry of Industry, what kind of a lobby is going on? Do you have backstage information for something that we should look into? And also your effective tax rate along the year, it has been going down. 15% was the top compared to the 7.5%. Do you think that this rate is going to continue to go down or it was just something that happened this quarter? So just to understand its curve because it's now below what was last year. André Rodrigues: Thanks for your questions, Motta. We would love to have some additional information. But unfortunately, we are also following the information with the same channels that you have. But when there is an opportunity to sit down and negotiate, we see it as a good time. And we hope that when it happens, when the meeting happens, it will help all of us to try and decrease tariffs to a more reasonable level. As for the effective rate, we always say that this is a number that will continue to fluctuate quarter-on-quarter. It's natural that it happens, especially because of the mix of results that are generated in Brazil compared to what is generated in other regions. So I think that's very important to say. When we compare it to last year, there are 2 effects. One, it is a better use of interest on equity for 2 reasons. We had an increase in our profit and loss. We had a capitalization this year and also an increase of PJLP, which is the rate that we use to calculate interest on equity. And in addition to that, we had the mix of growing results in the external market compared to Brazil, which also contributed to the positive fluctuation. For the future, once again, fluctuations are part of the day-to-day. But from what we understand, considered PJLP and others, we don't think we are going to have any significant change, at least in the short term. In the mid to long term, it is hard to elaborate because there are too many variables, too many discussions going on that may change assumptions. So in the future, the scenario can change. But we do not expect major changes when we consider this year, beginning of next year, so more of the short term. Operator: Moving on, our next question comes from Pedro Martin from Bradesco BBI. Daniel Federle: It's Daniel Federle from Bradesco asking. My question is about I, especially long cycles. It seems that past portfolios contributed to revenues, but sales are weaker at the front end. My question is, should we expect a drop in long-cycle products for the coming quarters? And how long does it take from weaker orders to generate weaker revenues? And the second question related to that, should we see a weakness in long-cycle products as an indicator of what's going to happen in short-cycle. That is the projects that are not happening right now would generate for the future a drop in short-cycle products? André Rodrigues: Daniel, thanks for your questions. You are correct when we look into projects, considering Brazil and also the external market. we do see an environment in which products are running at a slightly lower level than what we had in the recent past and abroad more concentrated in the U.S., because of uncertainties related to tariffs, and we did mention that in the last call, we were feeling that clients were postponing projects and in Brazil, because of higher interest rates. Some markets and remember, projects, sometimes they are connected to commodity cycles. And we had a very important cycle of investments in pulp and paper 2 or 3 years ago, and it went down. Now we are seeing some projects being resumed. But mining continues to be okay. Then we had a drop. We're seeing now some resumption. So it depends on the dynamic of each of the markets. When we talk about leading indicators, generally, the normal cycle is to see a deceleration in the demand of short cycle that will impact in long-cycle projects. And quite often when long-cycle projects is being impacted, we see a resumption in short cycle. I did mention that, that the coming of orders in short cycle gives us positive signs for Brazil and the external market. So we already see a resumption in a short cycle. Eventually, we can see a resumption of projects for the coming quarters. We cannot say that because we still do not have hard numbers on that. But perhaps the natural cycle would be like this. So let's wait and see, and we are going to give you updates as months go by to see if the demand and the long-cycle portfolio starts to respond to what we are seeing in recent quarters. Operator: We are now closing our Q&A session. Remember, if you have any more questions, you can send your questions to our e-mail ri@weg.net. I'm going to turn to Andre Rodrigues for his final remarks. Mr. Rodrigues? André Rodrigues: Well, once again, thank you so much for attending, and I wish you all an excellent day. Operator: WEG conference call is now concluded. We thank you for your attendance and wish you a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Hjalmar Jernstrom: Good afternoon, and welcome to Pricer's Third Quarter 2025 Earnings Presentation here at DNB Carnegie. My name is Hjalmar, and I work as an analyst, and we are joined here today by CEO, Magnus Larsson; and CFO, Claes Wenthzel. Welcome, gentlemen. Thank you very much. And we have a lot to speak about. So let's get started right away. The floor is yours. Magnus Larsson: Excellent. So thanks, everyone, for joining. We're going to present now our third quarter for 2025. It's myself and Claes as mentioned by Hjalmar. And as always, let me just start with Pricer in a brief for those of you who don't know us since before. So our vision is to be the preferred partner for in-store communication and digitalization. We work within retail tech. We are a leader within retail tech, and we have been around for nearly 30 years or actually more than 30 years, and we have to date 28,000 stores sold across the world. Looking at market development and the Q3 highlights, of course, the first thing I want to lift is that we managed now in Q3 to have the best net sales so far in this year for a quarter, SEK 598 million. It's better than both Q1 and Q2. We had a very great increase in our recurring revenue. Why is that? So it's partly due to all the SaaS services we sell through Pricer Plaza. But we've also changed our business model and our pricing model for all software services, also older installs to subscription model only. So even if you, for whatever reason, are not able to actually connect your store to Pricer Plaza, you will still need to renew the software for your installed base or your installed server and the new pricing model is recurring. So basically, as of now, we are in principle only recurring when it comes to software sales. And this is why you can see the almost 50% increase in recurring revenue in this quarter compared to last quarter. You will also see that it's a quite high increase versus Q2. It's almost 20% increase versus Q2. This is one of the drivers behind the margin improvement. We're on 23% now for the quarter. And it's, of course, partly part of the recurring revenue, but it's also product mix, and I think Claes will speak a little bit more about it in detail. One of the highlights for me personally is, of course, that we, with our EBIT result, managed to -- it's a positive result, and it's actually not only for Q3, but with the result of Q2, we take the entire result for the full year into positivity. So I'm super happy for that. Something I'm a little bit less happy with is, of course, the order intake, which was bleak now in the quarter. We could see that there are many different reasons, but the key reason is the fact that there is still a lot of market uncertainty affecting the retailers' decision to invest. We have quite a few customers where we know there is a project they want to deploy, they want to get started with, but it's being pushed into the future. So we haven't lost them, and we do expect that there will be -- there will be -- the orders will actually come at a later stage. But it's clear, it's not only ourselves, we see it also for our competitors that this unwillingness to invest is affecting the market growth at the moment. Then on the Nordic side, as you probably know, if you followed us, we have been moving from a partnership sales model in the Nordic and Baltic market into a direct sales market approach. Since August, we have a full team in place. We can actually see that we're now getting traction on the order side. You don't really see it in the Q3 report, but I expect that it will be visible as of Q4 and forward on. And one first example of this new direct [ modes ] is that we got a direct frame agreement this week with Norgesgruppen, who is the -- one of the leaders on the Nordic market, but also then in Norway. Obviously, for those of you that are Nordic, that we announced a couple of days ago. So it's a frame agreement we expect to serve all the stores over the coming couple of years. One thing I would like also to speak about is that we have another customer. It's one of the largest Nordic customers. that we have. They now had their first store on Pricer Plaza and they have an ambition to actually do all their stores as soon as possible. So there will be a couple of hundreds by Christmas and then some more by beginning of next year. So it's a very clear trend also in the Nordic market for Plaza and connecting your stores. Looking at the organization and for those of you that will look more on the OpEx side of our business, we have invested over the last couple of months and quarters in our organization, in the commercial organization very much on the marketing side, on the sales side, on the product management side, all the parts of the organization that will actually help us build the value proposition of today, but also the value proposition of tomorrow and that will more in a larger extent, also engage with our customers directly. This has generated a lot of positive traction. Once again, not visible this quarter, but hopefully visible in the quarters to come. And as mentioned, the fourth quarter has started well from an order intake point of view. What are we actually solving? We've been looking at different industry trends and the macro trends. And today, I'd like to focus on two of them. One, our customers come to us, often it is to help them with improving the operational efficiency in the store. But it's also increasingly more on the in-store experience, how can they make the shoppers buy more, how can they actually get additional revenues from CPGs, so the brands. So I've got two examples. If you think about the operational cost pressure, I would like to take our customer SOK in Finland and the partnership that we have forged with them since 2023. It was a pretty long sales process, but we got a contract during autumn 2023, which we announced to the market. They started with 15 stores in 2023. And by today, they have -- we have deployed more than 6 million labels across 450 stores. So this is way above the initial discussions we had with them, and we will continue to deploy additional stores. They have some, I think, around 1,000 stores in total. Why did they select us? Well, the key reason was to get the operational efficiency in place, but it was also to improve the work environment for the staff and especially looking at replenishment and picking online orders. So they wanted to make sure there would be less time spent, but it would also be easy for the staff. And they can see now that when they did the pilot, they said, well, there was basically only one choice. You're the only one with a solution that works for us as we need. But it was also now we can see afterwards when they started to do employee engagement service that they have an increase in positive answers on the work environment. They can also see that it's faster to actually get an employee fully productive in the store. And I'm really happy for the cooperation and as Jarko Mäkkinen, the Head of Development at SOK says that Pricer has proven to be the partner that they wanted, acting as an extension of our own team. And of course, we feel the same way. It's very inspirational customer to work with. Here -- so this is very much on the store operational side. And if you're more interested in this case, I think you will have it now or it will come very soon, a video actually from SOK where they speak about why they selected us. The next thing would be then addressing the in-store experience. Price Avenue is a product that we conceptually launched in New York in January at the NRF event. We have now come to the place where we are starting pilots. So yesterday, we actually had our first Pricer Avenue aisle live. It's in a store north of Stockholm. It is very much a store where we will let our engineers just verify that everything is working as it should. But if you want to see it, you should go northwest of Stockholm and see if you can like locate the store, it's really nice. What you also see on the picture here is what we call the floating canvas. This is something unique to Pricer. It's a patented way of doing. And actually, we're the only one with the current look and feel of the general ESL on the market where you can do it. We -- unlike everyone else and unlike our old models, we have not made our thin so -- frames are so thin on the ESL that you can easily then build a picture over 2 ESLs or over 3 or 5, any -- actually, any number of ESLs you want, you can build the merchandise in the promotion area. So we're going to do in addition to what we just installed in Sweden, we will do pilots more of a commercial nature in Finland, in France and in the U.K. now during October and November. So there will be more updates on this, but we can see there is a huge interest in Pricer Avenue. And I think it's also fueled by the fact that there's no one else on the market that is actually doing it this way. So having done now the [ shameless ] marketing of Avenue, I hand over to you, Claes. Claes Wenthzel: Yes. Q3 is the best quarter for this year. You see we have a strong gross margin and gross profit, and we see effect in our production cost now from the weaker U.S. dollar. We have had a negative currency effect compared to last year with about SEK 10 million, which affected our EBIT of course. So -- but still, we have a return on sales of 6.5% for this third quarter. If we then look at the cash flow, the operating cash flow for the first 9 months is positive and SEK 16 million. Cash flow has been affected by the high accounts receivables and has actually increased by SEK 120 million in the third quarter. So this is just -- it's a timing effect, and that will be, of course, a positive effect from this now in the coming quarter. Then if we look at the order intake, it's, of course, weak, as Magnus said, but the backlog now when we go into the fourth quarter is higher than last year. On the sales side, it is the best this year, and it's SEK 598 million. Gross profit, it's also the best for the year with SEK 139 million. And even then the total result is, of course, the best for this year. Magnus Larsson: Good. Thanks, Claes. So going to the summary. Well, as I mentioned, the geopolitical situation is still affecting retailers' decision to invest. They believe in digitizing the stores. They are digitizing the stores, but we can see a lot less activity on the market. And I know, of course, there are questions, is the market growing? Yes, we believe that over the coming couple of years, there will be a massive growth. But we can see that this year and actually last year, we had poor growth in the market. If we look at the top 4 players, I would say that we had a standstill in the market last year, and there will probably be something similar here as well. But we still see the same interest from our customers. It's painful. It's, of course, something we don't want, but we actually still have the positive dialogues. And I think that's important to remember, especially when you feel frustrated over the lack of sales or lack of results, it will come back. I'm really happy that we managed to return to profitability this year. It's, of course, painful for everyone when you're actually not making money. We have committed in the Q2 report that we will be profitable for the year, and I think we can repeat that commitment to the market. Clear recovery in net sales. We improved our gross profit a lot versus Q2, but also versus Q3 last year. The Pricer Avenue pilots, I'm super excited to see them in place. The first install looked beautiful. And now when we do them fully for our additional customers, France, U.K., Finland, I expect a lot of interesting dialogues afterwards. The direct frame agreement with Norgesgruppen, very positive. I do expect more frame agreements coming out of the Nordic market within this year. And I would like to also close with saying that we have a strong position to really capitalize the future demand, the future opportunity. And I believe that with our setup, with our current portfolio, but above all, also with what we do now on the revenue side, there will be a lot of opportunities for us to grow into the future. So please bear with us, there will be improvements. Hjalmar Jernstrom: Thank you so much, and let's dive into the Q&A then. First, on the jump then in recurring revenue, which, of course, is very interesting. You mentioned there that you can also have a recurring revenue setup with sort of the non-Plaza customers, if I got that correctly. Could you just elaborate a bit on this initiative and this pricing? Magnus Larsson: So what we've done is we see that, of course, recurring revenue is a solid base for us to stand on. And we want to move all customers over to Plaza to get them connected. But we also see that some customers, they need to do the proper planning, they need to do the setup. And if you have almost 1,000 stores, as an example, you need to plan that transformation pretty carefully. But we do not want to wait for the revenue. So what we have done is that all customers with an old install that will still be installed on a server. We changed the price model and said that now you got the latest version, but it will be a recurring revenue model. So this is the key reason. So all the new softwares that we sell will be sold as a SaaS service. I'm sure there might be some exception, but at large, this is what we do. So this is -- has been one of the key reasons for the impact now in Q3. Hjalmar Jernstrom: Yes. And what does this mean for the prospects of recurring revenue? I mean I know you don't have a recurring revenue target currently, but what is the implications of this? And how much can it grow? I mean, just depending on now addressing also non-Plaza customers? Magnus Larsson: I think the key growth will come from connecting customers, and we have several projects ongoing. If you take Carrefour as an example, I think we've connected -- I can't recall the exact number, but somewhere roughly 500 additional stores this year. And we believe that all stores that we haven't connected so far, let's say, we have -- we sold 28,000 stores. We have a number of Plaza stores today, but there's probably at least 10 to 15 stores still to actually connect. And that will, of course, be one chunk of the forthcoming recurring revenues. The other one will be now as we get stores connected and our software team spend more time on developing applications and functionality rather than the basic Plaza functionality, we see that we will also be able to package and sell much more upsells to our customers and new functionalities that they would need to pay for. And we've come to a point now we have the R&D capability fully in place. We have the Plaza fully developed to the extent that we want. But we also have the product team that is now really good at packaging it in a way that will be easy for our sales team to do it. So I see that there are quite a lot of opportunities to actually grow this continuously. Hjalmar Jernstrom: It sounds like a lot of focus on recurring revenue currently then. Magnus Larsson: Absolutely. It's actually when we communicated internally, it's really the #1 objective is to get more customers and to make sure that every single customer is connected. Hjalmar Jernstrom: Yes. And on the pricing side, you mentioned the Avenue pilots currently running. Could you give us maybe some granularity on the pricing that you're expecting for this model? Is it mainly recurring and -- and what would sort of the margin profile be potentially. Magnus Larsson: You can see with Avenue, we will see a few different revenue streams. One is, of course, selling the ESL, which, we will not take it on our balance sheet. So we will still sell it as a product, but we will sell the software. We -- with the powered rail that we have in the system, we have a unique setup that we actually do expect that we'll be able to license for people that want to use it and sell it for their own IoT devices or for -- in the stores that we have, if they want to use it, they will have to pay a license fee. Then we have the ability to do the merchandising. There we're still looking at the price model, but we see that there is a real chance to actually get some increased revenues, hopefully, more than smaller amounts on the merchandise side. That's one of the things that we really want to test now when we do the new stores, France, U.K. and Finland, how can we actually -- how should we work with the merchandise side, especially. But I see, in essence, 3 different kind of revenue streams. Hjalmar Jernstrom: Is it possible to start up selling the avenue already in early 2026? Or when do you expect to maybe see sort of a ramp-up of... Magnus Larsson: It would be, we will actually have volume or will do small volume production during the first half, mainly because we know that customers that will never go for a full deployment immediately. Typically, when we approach our customers, they want to test it. They test it in one part of the store, then they might do an extended part of the store. But we would say, as of the second half of next year, that's when we're ready to do volumes, and I expect us to do volumes -- it will not be a bulk of our revenue, but I would expect it to be at least on a level where we can speak about it and say it's actually making a difference. Hjalmar Jernstrom: Yes, yes. And then if we move on to the order intake, maybe you mentioned Europe and also one impacting factor being that you're going to a direct-to-market approach here. Could you elaborate just how this is impacting the order intake here in the third quarter and why this sort of like dampens the order intake that you saw in Europe? Magnus Larsson: There are two key reasons. One is actually Nordic Baltic, where we can see that the transformation from distributor sales to direct sales -- now it's -- since all the Nordic customers know that we were doing this, they've been waiting, which means that some of them, they are waiting to invest, but it also means that some of them said that if they were not in a hurry, they probably took the investment and put it into next year's budget. So it's money that will come our way, but it's more of a timing issue. We can also see when we address franchisees. So now we have an organization in Sweden to do franchisee sales. Here, I see on a daily basis that we get store orders in, but it's coming now, and we got the full team in place at the end of August, but we can see that they're all busy, and we have had several orders, both from a store level until then the frame agreement like Norgesgruppen. The other one was Carrefour, where we had a very high order intake from Carrefour in Q3 last year. That order we got in Q2 this year, not exactly the same size, but still the large Carrefour order of the year came Q2 this year. Hjalmar Jernstrom: So it's reasonable then I assume to expect some sort of catch-up and maybe not Q4. I mean some -- you mentioned some budgets, they are taking it into 2026. So a gradual catch-up maybe from here. Magnus Larsson: I think there will be a gradual catch-up. And above all, I think the key message is that there will be a catch-up. This is not lost sales. This is sales that we will get. And we are, of course, in discussions with like Norgesgruppen and others on what are their investment plans for the future. We have a pretty good idea on what will happen and when. Hjalmar Jernstrom: Yes, yes. And then if we move on to the Americas region, could you just give us sort of like the current view of the impact from the tariffs? I mean you mentioned that this has been an issue and of course, maybe an ongoing issue as well. But still, I mean, there is for you some order intake in the Americas, which is sequentially improving even, if I recall correctly. And I mean, maybe this is outside of the U.S., it's Canada, but could you elaborate a bit on the drivers here and sort of like what do you currently see from the tariffs? Magnus Larsson: Yes, I think we can split it in U.S. and Canada. And if I start with U.S., we still -- there is still a slowness to make new investments. There are discussions. They have started again, but they are quite slow. But we can see that suppliers that actually had a contract in place, we can -- it seems like volumes are actually accelerating to make sure that they get things deployed as soon as possible with the rationale. We know the tariffs we have today, but we don't know the tariffs of the future. And I think that is the key rationale where you can see there is some acceleration on the market. But I think the key rationale is that we want to digitize. We had the contract. Let's do it now before it will be way too expensive. But for the rest, we see that there is still cautious. They are still waiting. So there's not a lot -- there are, of course, sales, but not as much as we would expect. It's actually much lower. In Canada, on the other hand, we see a lot of interest. We see that Sobeys deployment, it's progressing extremely well. We see it's catching a lot of interest. So in addition to the order that we got in December, then we're busy deploying it according to schedule. There's a lot of Sobeys franchisees that are constantly placing orders. We can see that there are spillover effects that we have other customers, we have the Metro Group in Canada as well. And of course, they look at all the new stores with 4 color labels. And we see a lot of incoming interest also here where we do believe that Canada will be a really good market for us over the coming couple of years, both Sobeys, Metro Group, Canadian Tire, they're soon fully deployed, but we have now done the first 4 color orders. So they will gradually start shifting their installed base over more and more towards 4 colors. So that will be continued sales as well, maybe not on the same level initially, but eventually. Hjalmar Jernstrom: And how much potential do you see in the Sobeys store network to grow there? I mean, what is the current like sort of penetration rate and I mean if you gain traction there, what's sort of like the potential that we could see? Magnus Larsson: I see it Sobeys and with the different formats, they have, say, roughly 1,500 stores. We -- there's still a lot of upside. Hjalmar Jernstrom: Yes. All right. Magnus Larsson: No numbers, I'm afraid. Hjalmar Jernstrom: No, that's fine. That's fine. Magnus Larsson: But it is same. I expect more. Hjalmar Jernstrom: Yes. You mentioned then some pilots running -- starting in October and November here for Avenue. Could you elaborate a bit on this? Is this new customers or current customers that... Magnus Larsson: So it's existing customers, and it's customers where we said that we will only do a few. We will select the customers we want to work with. We want customers where, of course, they will test it in their store environment and see does it work for them? How well do they like it. But we also want to test the commercial model. We want to make sure it's not just another label. We want to make sure that all the merchandise abilities are in place. We want to make sure that we have either their private brand or that they have another brand they work with as part of the campaign. So they've been -- we've been extremely selective in this process. We will do more promotion around these pilots. That's also been a requirement. We want to talk it and we need to talk about it. Hjalmar Jernstrom: All right. Thank you. Then we got a question on the line regarding the SOK that you mentioned. Could you just clarify a bit? Are you expecting to see additional rollouts here? Or have you already received these orders? Magnus Larsson: We're expecting to see more. So they've been driving it as a structured process. They've been doing a lot of deployment now with 450 stores, but they still have another more than 500 stores. Different formats still. There's been a focus on the large formats, even though we also won the smaller formats, which we were not certain that we would win. I think originally, they were thinking about having maybe dual vendors, but they decided to just go with us because they were so happy with how things were working. But we do expect to get more like store-by-store orders into the future more than like a structured. So I don't think we will have a very large PO, but I think we'll continuously have a good run rate business that will be on a good level. Hjalmar Jernstrom: And then on the U.K., I mean, a lot of questions regarding U.K., we know that it is a market with great potential. We see -- we see some deals being made in this market. Could you elaborate a bit on what you're seeing right now sort of like the current picture of the activity in the U.K? Magnus Larsson: We see a lot of activity. I mentioned many reports that I expect something to happen now during autumn, and I guess it just did. Everyone is looking at it, and we see the investment decisions are either being made or will come within the coming 6 to 18 months, I would say, or maybe as of now and within the coming 18 months, but everyone is looking at ESL. I expect the question to pop up. And yes, we are doing pilots with several of the Tier 1s. So we are in discussions. Yes, we were also in discussion. We were in final stages of negotiations with one of the large funds that were recently won by a competitor, but we actually said no. There were some commercial conditions that were -- I've never seen before actually. So we said this is unacceptable. So we declined. Hjalmar Jernstrom: Okay. Okay. Then we got some questions on the working capital. Could you maybe elaborate a bit on -- I guess, mainly on inventory. Do you feel that the levels that you currently hold are satisfactory? I mean, or do you feel that they are sort of -- maybe they could lean in some direction one or another if we look forward for the next maybe 2 quarters? Magnus Larsson: Yes. The inventory level now is higher than we actually expected. So we expect the inventory to go down. From the levels they are at the moment. And also regarding working capital now, also in the quarter, the accounts receivables has increased a lot. And as I said, it's just a timing effect. So that will also change. Hjalmar Jernstrom: All right. Thank you so much, Magnus and Claes, for coming in today and presenting and answering our questions. And I'll leave it to you for any concluding remarks. Magnus Larsson: All right. So thank you, Hjalmar. Thank you, Claes. Thanks for everyone watching. Thanks for joining. I hope you found it interesting. I hope you got something more out of the call than you could actually read out of the report. I would like to summarize saying that I'm very positive looking at the future, not very happy with 2025, but I see that things are improving. They were improving in Q3. We will make a profit for the full year. We have the dialogues in place to actually make sure that we come back and deliver better into the future. So thanks a lot.
Operator: Good day, everyone, and welcome to the Arca Continental Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Melanie Carpenter of IDEAL Advisors. Please go ahead. Melanie Carpenter: Thanks, Nicky. Good morning, everyone. Thanks for joining the senior management team of Arca Continental to review their results for the third quarter and the first 9 months of 2025. Their earnings release went out this morning, and it's available on the company website at arcacontal.com in the Investor Relations section. It's now my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Arturo Gutierrez; the CFO, Mr. Emilio Marcos; and the Executive Director of Planning, Mr. Jesus Garcia. They're going to be making some forward-looking statements, and we just ask that you refer to the disclaimer and the conditions surrounding those statements in the earnings release for guidance. And with that, I'm going to go ahead and turn the call over to the CEO, Mr. Arturo Gutierrez, who is going to begin the presentation. So please go ahead, Arturo. Arturo Hernandez: Thanks, Melanie. Good morning, everyone, and thank you for joining us today to review our results for the third quarter and to share some important recent developments. Let's begin with our consolidated results. I'm pleased to report another quarter of solid execution and sequential progress across our territories, even as the broader economic environment remains challenging. Our teams continue to navigate market headwinds with agility and discipline, driving robust profitability. Total consolidated volume declined 1.8% in the quarter, while consolidated revenues grew 0.5%, supported by effective portfolio mix and revenue management, partially offset by unfavorable FX impacts. Consolidated EBITDA grew 1.2% in the quarter, reaching a margin of 20.4%. This achievement marks a significant milestone with third quarter EBITDA margin at its strongest point since the acquisition of our U.S. operation in 2017. These results underscore our relentless execution, the strength of our portfolio and our continued focus on driving profitable growth. Let me expand on the results across our geographies. In Mexico, unit case volume, excluding jug water, declined 2.9%, largely reflecting the impact of heavy rains and below-average temperatures across much of our territory. Despite this temporary weather-related pressures, still beverages grew 2.2%, led by tea, juices and nectars and energy drinks, capitalizing on the positive momentum in the supermarket channel. Coca-Cola Zero continued to outperform delivering sequential double-digit growth, supported by the introduction of the new 450-milliliter format, which continues to resonate with consumers seeking convenient and affordable options. Santa Clara brand continues to deliver strong performance in Mexico, achieving double-digit volume growth rates, supported by robust momentum in flavored and specialized milk. We continue to gain value share in the value-added dairy category, reflecting the strength of our innovation and disciplined execution. Net sales grew 2.8%, with average price per case, excluding jug water, up 6.4%, underscoring our strong revenue management capabilities. EBITDA decreased 3% in the quarter, resulting in 23.9% margin, reflecting our disciplined commercial execution and solid revenue management capabilities in a softer demand environment. In South America, total volume declined 0.6% in the quarter, primarily due to softer performances in Ecuador and Argentina. This was partially offset by growth in Peru. Total revenue declined 13.6% and EBITDA was down 1% with a margin of 18%. This quarter reflects a steady though cautious progression of the recovery that began in the first half of the year with meaningful variation across countries. Collectively, our South American operations are advancing through a period of disciplined stabilization, setting the stage for more balanced and sustainable growth ahead. In Peru, total volume increased 2% in the quarter, supported by a stable economic environment and resilient consumer demand. Growth was broad-based across categories, led by sparkling up 1.7%, stills up 1.9% and water at 4.8%. Our core brands, Coca-Cola, Inca Kola and Sprite delivered strong growth, up 1.2%, 1.6% and 8%, respectively. Volume recovery remained consistent across channels with convenience stores leading the way up 22%. Supermarkets showed a sustained rebound while traditional trade maintained solid momentum, supported by our effective price pack and cross-category strategies, further enhanced by our digital capabilities. Turning to Ecuador. Volume declined 1.2%, reflecting softer market conditions and a fragile yet gradually improving macro environment. Even so, our team remained focused on executing our fundamentals and driving performance in the areas within our control. We sustained our value share in NARTD beverages, driven by continued growth momentum in still beverages, up 3.6%. In the sparkling category, Coca-Cola Zero once again delivered solid growth of 2.2%, while Fanta and Fioravanti grew 6.2% and 3.6%, respectively. The water segment rose 3%, showcasing the strength of our diversified portfolio. We also continue to refine our price pack and channel strategies, drive the adoption of returnable packages and invest in targeted market initiatives to strengthen our long-term position. Year-to-date, we have installed more than 17,000 cold drink units, further enhancing our market coverage and reinforcing execution at the point of sale. In Argentina, volume declined 5.6% in the quarter, reflecting the near-term effects of the country's economic adjustment. Nevertheless, we gained value share across NARTD categories, supported by our sparkling portfolio and our continued focus on affordability and returnable packaging initiatives. While volatility remains, our disciplined execution and agile commercial approach positions us well to capture growth as conditions normalize. Our beverage business in the United States delivered another strong quarter, sustaining solid momentum and achieving robust operating results. This marks our 30th consecutive quarter of EBITDA growth. Adding to this momentum, our U.S. team was recognized as the best Coca-Cola bottler in the world, receiving the prestigious Candler Cup. We are proud to be the only bottler to have earned this award twice, underscoring our operational excellence and market leadership. These impressive milestones reflect our team's consistent execution and the strength of our business model. Solid performance this quarter was driven by effective management of our price pack architecture, disciplined cost controls and continued focus on maximizing the value of our most profitable packages. Net revenues rose 3.5% this quarter, with the average price per case up 4.8%, supported by our strategic focus on boosting promotional efficiency through our trade promotion optimization digital platform. Volume for the quarter declined 1.3% and transactions grew 0.1%. Key performance highlights included a 5.9% increase in our low-calorie portfolio led by Coca-Cola Zero, Diet Coke and both Diet Dr. Pepper and Dr. Pepper Zero. In the stills portfolio, Monster, Fairlife, Core Power and Smartwater continued to post sequential growth, supported by robust brand execution. Notably, EBITDA increased an outstanding 9.7%, representing a margin of 17.2%. And an important update on our digital agenda, our e-commerce business continued to deliver strong results, driven by enhancement in our eB2B capabilities and outstanding execution in the e-retailer space. I'd like to close our U.S. update by sharing our excitement for the 2026 FIFA World Cup and our role as whole city supporters for the Dallas and Houston venues. Through this partnership with the World Cup Organizing Committee, we will actively support the city's legacy programs and showcase our brand through targeted initiatives that engage fans and local communities. Our Food and Snacks business delivered a resilient performance posting a low single-digit sales decline for the quarter. While facing top line challenges, our team remained focused on profitability through effective price management, portfolio optimization and operational efficiencies. In line with our broader sustainability objectives, we continue to advance the clean label initiative across our U.S. Snacks portfolio. This includes the removal of artificial colors, flavors and preservatives as well as the simplification of ingredients lists. These efforts exemplify our commitment to transparency, product integrity and long-term consumer trust. And with that, I will now turn the call over to Emilio. Please, Emilio? Emilio Marcos Charur: Thank you, Arturo. Good morning, everyone, and thank you for joining our call. As Arturo highlighted, the same factor that influenced our performance in the first half of the year continued to play a significant role in the third quarter. Macroeconomic environment remained challenging and weather conditions were still unfavorable. Even so, we have a sequential improvement in volume for most of our operations, demonstrating strong team performance despite challenges. The improvement in volume, together with our solid revenue growth management capabilities and disciplined approach to expense control resulted in an expansion of our consolidated EBITDA margin. Let me offer further insight into our financial results. In the third quarter, consolidated revenues increased 0.5%, reaching MXN 62.9 billion. Revenues for the 9 months of the year rose 6.6% to MXN 183.4 billion, mainly driven by an effective pricing strategy. On a currency-neutral basis, revenue rose 3.8% in the quarter and 3% year-to-date. During the quarter, SG&A expenses rose 1%, reaching MXN 19.4 billion. Despite the contraction in volume, SG&A to sales ratio was fairly in line with third quarter '24 at 30.8%, reflecting our continued commitment to operational discipline. In the quarter, gross profit increased 1.2% to MXN 29.5 billion, while gross margin expanded by 30 basis points due to a solid price pack architecture and solid hedging strategy. For the quarter, consolidated EBITDA increased 1.2% to MXN 12.8 billion with a 10 basis point margin expansion reaching 20.4%. In the 9-month period, EBITDA grew 6.1%, reaching MXN 36.6 billion, while EBITDA margin decreased by 10 basis points to 20%. On a currency-neutral basis, EBITDA rose 2.6% in the quarter and 2.2% as of September. Net income in the third quarter reached MXN 5.3 billion for an increase of 3.5%. Net profit margin increased 20 basis points to 8.4%. Now moving on to the balance sheet. As of September, cash and equivalents totaled MXN 32.3 billion, while total debt stood at MXN 63.9 billion, resulting in a net debt-to-EBITDA ratio of 0.62x. In our most recent Board meeting, it was approved to distribute an additional dividend of MXN 1 per share to be paid on November 5. Combined with the ordinary dividend of MXN 4.12 distributed in April and the extraordinary dividend of MXN 3.50 paid in June, we will reach a total dividend of MXN 8.62 per share. This reflects a payout ratio of 75% of retained earnings and a dividend yield of 4.3%. Total CapEx reached MXN 11.8 billion, representing 6.4% of sales. Investments were primarily directed towards expanding our production capacity, ensuring that we are well positioned and sustained future growth. We also continue to enhance our distribution and commercial capabilities, which are key enablers for our long-term strategic plan. Looking ahead, we expect market volatility to continue throughout the rest of the year. We remain confident in our business strength and ability to create value despite challenging conditions. We will continue managing expenses carefully to drive profit and sustainable growth. That concludes my remarks. I will turn it back to Arturo. Please, Arturo. Arturo Hernandez: Thank you, Emilio. As we reflect on this quarter, our disciplined execution enabled us to protect volumes, sustain market share and maintain profitability even in challenging conditions. Furthermore, as we marked the third year of our collaboration agreement with the Coca-Cola Company, this partnership continues to deliver on its core objectives while unlocking new opportunities through a broader portfolio. At the same time, we are staying proactive on regulatory developments and pursuing strategic initiatives, ensuring our readiness to capture growth when market conditions improve. By balancing resilience with agility, we're positioned to deliver a strong and sustainable performance across cycles and continue creating long-term value for our shareholders. We are focused, ready and energized to capture the opportunities ahead. Thank you for your continued trust and support. Operator, please open the line for questions. Operator: [Operator Instructions] We'll take our first question from Ulises Argote with Santander. Ulises Argote Bolio: My question is related to the margins in the U.S., right? So another quarter with positive surprises there. I was just wondering if you could give us some color on what continued to be the main drivers there and the main levers despite that slowdown in top line that we're seeing. And maybe just to pick your brain on how sustainable do you think these trends are going forward? Arturo Hernandez: Thank you, Ulises. Well, first of all, we have to say that we're very satisfied with the profitability in our U.S. business, considering also that we faced many challenges in that market. As you know, third quarter, we grew EBITDA, in dollar terms, close to 10%. And our margin is above 17%, which we -- again, we're very pleased with that. The drivers behind it, as we've said before, our pricing capabilities and also the management of promotions. We're looking forward to combine this premiumization of our portfolio with also a price architecture that would cover all segments, considering, again, the economic dynamics. We've also worked on efficiency projects. And I would say that our OpEx ratio has shown this operational discipline. We expect that also to be sustained. There's some efficiency projects underway. And in fact, one of the most important ones will not be fully captured in '26, the Wild West project that we call, which is the restructuring of supply chain in some of our plants and warehouses in the U.S. We also are looking at input costs in '26. They're expected to rise due to inflation, but we do have also a strong hedging strategy. I will ask Emilio to expand on that part. But in general, I would say that we are very confident for '26 to sustain our current margins. Emilio, why don't you expand on our raw materials and hedging situation? Emilio Marcos Charur: Yes. Thank you for your question, Ulises. Yes, for this year, as we have mentioned, we have over 97% of our LME needs in U.S. and 48% Midwest premium portion for this year and 79% of high fructose needs. And we started to hedge for next year. For 2026, we have 95% of our LME needs next year and 20% of Midwest premium. So that will allow us to together with what Arturo already mentioned, to consolidate the levels -- the margin levels that we have this year, and we expect it to reach those levels -- at least those levels for next year. Operator: Our next question comes from Thiago Bortoluci with Goldman Sachs. Thiago Bortoluci: Arturo, question on you for Mexico, right? How should we read the combination of negative sparkling volumes with returnables losing participation in your mix? And if I may expand, the reason I'm asking this is because the big debate today in the space is clearly how much of the drag is structural versus temporary issues, namely comps, weather and another few. So it would be very helpful to hear your perceptions on how you're seeing underlying elasticity, affordability, price pack performance and overall performance by channel. And again, if we can read anything between your volume print and your packaging performance in the quarter, especially in the context where weather conditions didn't help. Arturo Hernandez: Thank you, Thiago. Let me start by giving the context of the consumer environment in the third quarter in Mexico. As you said, this is a combination of not very favorable weather, increased rainfall, cooler temperatures. It was very, very unusual. Rainfall was probably 40% higher than usual in the North of Mexico, even more than that, maybe in some cases, just doubled and tripled in the West regions for us. So temperature has also affected volumes and consumption and traffic throughout the quarter. There was also the economic dynamics where activity slowed down and any activity really was driven by exports rather than domestic demand. So internal consumption has been reduced and special retail activity and traffic weakened. I would like to think that, that is also temporary, not only weather, which would naturally be different as we think about next year. But in terms of the economic weakness, we believe that as we gain greater clarity around trade rules and tariffs and the relationship with Mexico and the bilateral trade with the U.S. that will enhance Mexico's competitiveness and will provide even formal job creation and with that, domestic consumption. If you look at returnable packages, well, the main reason is that supermarkets were basically the only channel that grew volume in the third quarter, and that was driven mostly by intensified promotion, considering the current situation. But we're going to be pursuing our strategy of affordability going forward in Mexico, which means entry-level packages, both returnable and nonreturnable packages. And the 235-milliliter, 12-ounce 250 ml one-way packages. The 450 milliliter that probably you've seen in the market, one-way, very important for us. The multi-server fillable format, what we call the universal model. All those strategies will continue to move forward as we face these challenges. So that is -- it's hard to isolate the effect of weather and the economic situation, but we are convinced that those are the main factors. Our execution in the market continues to improve and our leadership in the market as well, which we believe that's the most important part. Operator: Our next question comes from Ben Theurer with Barclays. Benjamin Theurer: I wanted to get a little bit of how you think about pricing going forward. I mean, obviously, we know about what's in the proposal in terms of taxes for the different categories. But as we think about raw material inflation you face and what you usually pass on, what is your strategy going to be towards the end of the year and then into next year? How should we think about pricing? How much is needed for the taxes? How much would you do on top of that? And what are kind of like the sensitivities you're looking at as it relates to your volume if you were to raise those prices? Arturo Hernandez: Yes. Thank you, Ben. First, let me talk in general about our pricing strategy, which really has not changed. And I think under this market conditions, it's demonstrated that these capabilities do work very effectively of increasing prices in line or above inflation in every business unit. This requires not only this very advanced pricing tools that we have designed jointly with the Coca-Cola Company, but also leveraging the trade promotion models, which operate at a local level. So I think, for years, we have demonstrated these capabilities, which, as I've said, if there is one fundamental capability that consumer goods companies need to get right now or the future is precisely revenue management. So for us, it's combining affordability and also a premiumization strategy, as I said before. We will continue to monitor those pricing dynamics and make sure that we are competitive in the marketplace. And then going specifically to your point about taxes and Mexico. Well, this tax that we are expecting to be implemented for '26 would require us to pass through the impact via prices. And as you know, we've done that before, actually 12 years ago. And we have estimated that, that increase would be in the range of 8% to 10% probably. And that we would have to add inflation after that, considering that we want to remain competitive in terms of margins in '26. So we don't know exactly what the elasticity would be, but there's certainly going to be an impact in volume for next year. We have some of the learnings of past elasticity patterns following similar adjustments in 2014. But at the same time, we have so many things that work in our favor in the Mexico market going forward. I mean there are reasons to believe that we're going to be able to mitigate part of that impact. And there are many factors. I mentioned before, the impact of unfavorable weather this year. We also face this difficult economic situation. We expect normalization next year, considering the challenges we faced with brand retaliation that you know about some product constraints in our supply chain, particularly Topo Chico in '25 and the opportunities to keep deploying our digital capabilities that are still going to be rolled out, some of the new features and very particularly, the incremental demand that would be driven by the major events in Mexico and the U.S., the FIFA World Cup. In Mexico, we're also going to have the 100th anniversary of Coca-Cola in Mexico. So there are so many things that will work in our favor considering that certainly, it's going to be a challenging volume situation as we pass along these -- the tax that has been imposed, but that's going to be imposed. Operator: Our next question comes from Felipe Ucros with Scotiabank. Felipe Ucros Nunez: A quick question on the taxes in Mexico. Of course, not great news getting this tax increase. I was wondering if you can comment on a couple of things. The first one is the differences between this tax and the one that we saw 12 years ago. No tax for beer were changed. So the gap between soft drinks and beer, I guess, is changing. And I'm wondering if you can comment on what type of impact you would expect through that differential. And whether it's material for us to monitor it or you think the occasions are so different that it's really not a concern. And then the second question related to this is, it looks like there's more serious incentives in place to move the consumer towards no-low options. So I'm wondering if you can talk about how this may change profitability and returns for the business in the long run, if at all. And I'm talking about there's differences on the price per unit of sweetening from sucralose and sugar, perhaps there's a margin differential between the different presentations and concentrating price -- concentrate pricing might also be different. So just wondering if there's going to be like a change on the profitability of the business in the future from the change to no-low categories. Arturo Hernandez: Thank you, Felipe. Well, to the first part, we really don't anticipate an impact from any difference in the tax treatment of other categories really. We're looking at the dynamics within our own industry for sure. And in this case, as you saw, we really have a commitment to reduce the calories in our portfolio going forward. And this is not something that is new or that is improvised by the system. We've been, for years, developing and promoting options with less sugar and with no sugar in Mexico and in other markets. So now what we intend to do is to offer more proactively our broader portfolio, a more balanced and lower-calorie portfolio. And those are part of the commitments we've made with the government as we discussed the implementation of the tax. So as part of that, we also want to promote competitive prices and affordable Coca-Cola Zero packages, particularly. This, as you know, has been a great innovation in our portfolio. Coca-Cola Zero continues to grow, and we will connect that also even to the FIFA World Cup next year. Coke Zero will take center stage in many of the campaigns connected to the World Cup. In terms of profitability, we don't think that, that will really affect overall profitability going forward. Felipe Ucros Nunez: Great. That's very clear. And if I can do a second one on sales in Mexico, they did very well. And it's another quarter with the same categories, tea, energy and juice doing very well. So I was wondering if you could talk a little bit about what you're doing there and why the category is behaving differently from others during adverse weather. Is it that the elasticity for this category is a little different? Or it's more a case of things that you're doing at the micro level? Arturo Hernandez: I think it shows the opportunity that we have to grow these categories. As I said before, energy and juices and sports drinks and tea, they're underdeveloped really in the Mexican market. So we have proved that we can be successful in those categories as well. I think that's very important as you look at the story of Powerade in the last 15 years. And now you see Santa Clara, which I mentioned, also, it's a great success story. Tea grew 22%. Juices grew 6%. Monster continues to grow. So I think it's interesting to see them grow even under very challenging conditions, which means the great opportunity that we have to increase the per capitas of these categories that they don't compare very favorably to more developed markets like our own U.S. market. So it's very promising to see them grow even under a more challenging conditions. So we're excited about those possibilities and especially that we can be leaders in those categories as well as we've also demonstrated. Operator: Our next question comes from Rodrigo Alcantara with UBS. Rodrigo Alcantara: Arturo, Emilio, nice to hear from you. I want to go deeper into some of the comments about the commitments regarding -- with the government, right, ahead of the tax discussion, right, in the conference, the government and the Coke system hosted a couple of days ago. As you mentioned, there were some commitments in relation to this trend of increasing low-carb categories, et cetera, et cetera, right, like namely the reduction of commitment to reduce by 30% caloric needs of your products in a period of, if I'm not mistaken, 1 year or something like that, right, in addition to other commitments, right? So the question here would be how much of a challenge or deal in your view is implementing this, right? How are you implementing this? And possibly linked to the previous question is as a result of implementing this, we may see some impact on margins or profitability, which I think you already said no, right? But I mean just to confirm that, that would be the main question. And the other one, just because this is the one that we're receiving from investors as we speak. We have seen macro numbers in Mexico at the margin not looking as good as we may decide, right? Retail sales in September quite weak. So I mean how would you think 4Q would be shaping up in terms of volumes looking from a consumer demand perspective in Mexico? That would be my question. Arturo Hernandez: Thank you, Rodrigo. Talking about the taxes and also the commitments, as I said, this is really not new for us in terms of the commitments that we made with the government, with Congress. This is part of this plan to strengthen our caloric reduction innovation. And this has been around for years. So plan builds on the calorie content that we've actually been testing in the market for a long time in the Coke portfolio. So here, what we're going to do is just continue the migration. So those commitments are actually part of our own strategy in the last few years and also part of the promotion of Coke Zero that has been our strategy as well. But I think the most important takeaway of those commitments is how we remain committed to be part of the solution and how we've been able to have a dialogue with the government and stakeholders and how this collaboration really highlights our ability to engage constructively with the government and adapt to the frameworks and advance really our journey towards a more sustainable and health-focused portfolio because we really share with the government the need to advance in reducing obesity rates in the country. So we want to be, again, part of that solution. So I think that's main takeaway that we are -- that all this story about tax implementation concluded with a very constructive dialogue and conversation with government. And then talking about volumes and profitability, there is -- our concern is not really that this transition to low-calorie or no-calorie version is going to impact our profitability. Obviously, the impact will come from the volume decline that will be the result of the elasticity in these categories. But again, as I mentioned, looking forward in 2026, we have many things to be positive about as we compare with '25, where we've had so many negative factors combined with -- for the performance that we are seeing so far and that we expect to continue to see throughout the end of the year. So that is why, aside from our ability to pass through the tax and pricing in a smarter way, promoting the packages that we believe are important to protect, I think also we have these mitigating effects that I mentioned before, including our promotional activities, the FIFA World Cup and also the uplift we've seen from the deployment of our capabilities that we've been talking about before. So all in all, I think we're good positioned to mitigate that impact. Operator: We will move next with Lucas Ferreira with JPMorgan. Lucas Ferreira: Sorry to insist on the [indiscernible] topic. And just comparing and contrasting 2014 with the situation guys you will face in 2026, what sort of the tools do you think the company has now enhanced to mitigate the impact and mainly talking about price pack architecture, but also the sort of more developed relationship with Coca-Cola company, better partnership, I would put it this way. And if you can speak about -- generally about your, let's say, market share expectations for next year. If you think this is a situation, obviously, a challenging situation, but at the end of the day, could help you even expand your share. So how to think about that? And also, if I may, a quick follow-up on the very short term, obviously, second quarter for Mexico was already better in -- sorry, third quarter better than second. If you expect to end the year at a better note, how sort of the latest news are coming regarding consumer demand and traffic on the floor, et cetera? Arturo Hernandez: Thank you, Lucas. Well, first of all, talking about the tax and the learnings from 2014, increased prices double digit at the time plus inflation. I guess it was around 12%. We had a 3% volume decline approx, a little less than 3% in 2014 and -- but the volume decline was sequentially better throughout the year. I mean we started with a strong decline in volume in first quarter. By the end of the year, there were -- volumes were pretty flat that year, which means there's kind of a psychological impact as well in that elasticity. Now I think to your point about how are we better prepared. I think we've developed our RGM capabilities in this last 12 years quite a lot. We have a stronger leadership in the marketplace. And as you mentioned, we have a stronger partnership with the Coca-Cola company to jointly navigate through this situation, which is not only about passing along the prices, but also what are we going to do in the market to sustain leadership and increase our presence. So what are the things that works in our favor is that the price -- the tax is designed as a peso per liter. So that means for more premium-priced products, it's going to be a less percentage increase as compared to, let's say, value products out there, brands in the market. And thinking about the fourth quarter, well, the environment will remain very challenging. Again, we are continuing to focus on things that we can control, which are basically 3 pillars: disciplined execution with very targeted campaigns. We have very well-designed campaigns to be implemented in this final part of the year. We're launching especially higher impact marketing campaigns for the Gen Z consumers and also Share a Coke and Christmas that kind of deepens the connection of our brands with consumers as well. We continue to double down on our affordability initiatives, as I mentioned before, with entry packages and with single-serve packages that also provide affordability. And we'll start also deploying all of our efficiency initiatives and playbook in this next quarter and throughout' '26, which means reducing cost to serve as we have redesigned new service models. And a number of other projects like lightweighting, improvement in distribution logistics as well. We have an organizational restructuring that mostly addresses agility and clarifying roles, but also it's going to bring more efficiency. So there are a number of things that will help us mitigate this adverse environment. Operator: Our next question comes from Álvaro Garcia with BTG Pactual. Alvaro Garcia: Arturo, I have a question on Texas. I was wondering if you can comment on potential changes to SNAP benefit in Texas and how that might impact demand for your products. And just general commentary on sort of Hispanic consumer and just the consumer environment in general into next year ex World Cup would be very helpful. Arturo Hernandez: Thank you, Álvaro. Yes. Well, we are currently assessing the potential implications of those SNAP benefit changes in our portfolio. It's not -- we don't anticipate a significant impact, but it's something that certainly we're monitoring and looking at consumer trends and consumer demands and especially paying attention to the segment that this is going to impact the most, which is mostly the take-home segment. So we -- at this point, on the impact, we don't have a specific number to provide. But we continue to believe that's important to give consumers the freedom to choose what groceries they want to purchase for the family with the SNAP benefits, but we're still assessing the implications. What I can tell you about the U.S. market dynamics is that we have seen a sentiment among low mid-income and Hispanic consumers that has declined this year. Rising cost of living or interest rates probably, that's been softening spending. If you look at, for example, our value channel in the U.S., that grew almost 4% year-over-year. It's gained some mix. And also that's related to some of the border tensions we've seen this year, fewer people crossing. And Hispanic traffic has declined more sharply in retailers, even in Walmart Hispanic outlets as compared to the non-Hispanic stores. So total retail traffic did fall in this third quarter convenience stores only. Again, club and value saw traffic growth. So that tells you about how the dynamics are playing out. So what we have adopted is, as I said before, this premium strategy -- this dual strategy of premiumization with brands like Topo Chico or Smartwater for some consumers, for the higher income consumers and the introduction of a packaging architecture that addresses the pressure in that middle and lower-income segments in the U.S. market. And for sure, we're going to capitalize the FIFA World Cup events that are going to start actually this year. These major events include the tournament itself next year, we're going to be hosting 24 of the 104 matches in our 4 cities in Mexico and the U.S. We're the Coke bottler with the highest of matches in the tournament and 16 of those are going to be in our U.S. market. So we'll capitalize on all the activities surrounding the World Cup and also the celebration of the 250 anniversary of the independence of the U.S., we're going to be part of that as well next year. Operator: We will move next with Alejandro Fuchs with Itaú. Alejandro Fuchs: I wanted to shift gears and ask you one about South America, especially Argentina and Ecuador. I know it's a very uncertain scenario, right, but I want to see what your expectations going forward, maybe in the next 12 months. We're seeing volumes coming down, but margins going up. So I want to see how you see the business on the ground talking to the teams and what would be kind of the expectations if we should continue to see volumes being pressured or maybe profitability normalizing a little bit. Arturo Hernandez: Yes. Thank you, Alejandro. Let me start with Argentina. As you've seen, we've been facing a very challenging macro environment in the third quarter, rising uncertainty and some of the indicators deteriorating. And that has impacted the lower income segments of consumers and those provinces with high public employment. Unfortunately, we're in a market with high public employment. So we saw the steepest impact of this situation with consumption falling between 6% and 7% in general as compared to the central regions, which were -- had a less significant impact. So our year-to-date performance was still ahead of last year. But certainly, the trend is not very favorable. What we're doing is we're balancing our pricing discipline and affordability and our operational efficiency to stay competitive in this highly dynamic market. What's been important for that are, again, our pricing tools, our promotional tools to align prices with inflation. Our affordability and our playbook for things like Tapipesos promotions, tactical pricing on nonreturnable formats as well. Returnable is very important in Argentina. As you know, it's the highest mix of returnable in all of our markets. And to protect margins, we've been implementing very strict cost control measures. We are also launching new products and continue to innovate in some of the stills category. So we expect Q4 to outperform the third quarter as we expect a gradual improvement. But certainly, we're going to continue to focus on efficiency initiatives to protect margins. If we look at the context for margins in Argentina, we're going to see some upward pressure in some of the expenses related to payroll, particularly, but we're going to have efficiency in other concepts that will offset these pressures. Raw materials, we expected them to rise, driven by inflation. But we had the acquisition of the second sugar mill in Tucumán that is going to mitigate the impact of input cost for us. And I think that's also going to be very important going forward. If we look at Ecuador, and the dynamics in that market, also a difficult environment, mostly challenged by rising insecurity. The economy actually grew in the third quarter in Ecuador, but declining oil production and increased costs have resulted in some new policies like the elimination of the subsidy on diesel fuel and things like that. So -- but retail remains active despite this complex environment in Ecuador. And I think it's important to see how our business, and this is the same case for, I would say, all of our markets in this very difficult third quarter have demonstrated very strong resilience, improving in the case of Ecuador, profitability in the third quarter and outperforming the industry's volume decline in the year. So here, affordability also is going to be important. The execution of our point of sale with new cold drink equipment. That's also a very important in Ecuador. And how we leverage our new service models to enhance customer experience and also to bring efficiency to our go-to-market strategy. So stills categories is an opportunity and deployment of digital as well in Ecuador. So under this challenging environment, again, we're able to effectively protect the profitability for '26 in Ecuador. We are expecting OpEx to grow above inflation, and this is mainly due to the increased depreciation and diesel costs that I mentioned. And -- but some of the pressures will be partially offset by the optimizations that we have planned for our service models, our go-to-market models and some other adjustments. So PET are expected to rise in '26 with freight cost. Sugar is expected to be in line with the '25. So there's going to be some margin pressure considering all these factors, basically the removal of the subsidy, but our focus will be to protect our '25 margin in '26. Operator: Our next question comes from Renata Cabral with Citi. Renata Fonseca Cabral Sturani: It's a follow-up about Mexico. I would like to ask you if you can give some color in terms of competitiveness and how the brand has been reacting to the current environment for volumes and the company has been sustaining shares? And if you can provide some color on the performance in the channel strategy, the traditional channel versus the modern trade if they are different in terms of one is better than the other in the current environment? Arturo Hernandez: Thank you, Renata. Well, in terms of channels, the traditional channel received part of the impact and the decline in consumption this quarter, also convenience store reduced traffic. The only channel that actually increased volume in the quarter was supermarkets. And as I mentioned, was mostly driven by intensified promotions and more competitive pricing. So I think that's a natural consequence of the economic dynamics. But most importantly, we are strengthening our leadership in the marketplace, even considering that we have a price gap versus our main competitor versus rebrands as well. We did have an impact on our share of market with the first half of the year as a result of the retaliation of our brand that you know about. But that really has been solved, and now we're back to the position of leadership that we've had before. Operator: We will move next with Henrique Morello with Morgan Stanley. Henrique Morello: So I would just like just to explore the margin performance in Mexico. As you saw another quarter of compression on a year-on-year basis and at higher levels if compared to the last quarter, right? So if you could dive deeper on the dynamics behind the margin decline this quarter, perhaps beyond the volume decline? And if anything changed from last quarter? And how do you expect the margin to behave in Mexico going forward when you look at your hedge positions right now? Arturo Hernandez: Thank you, Henrique. I will turn that over to Emilio to respond the question. Go ahead, Emilio, please? Emilio Marcos Charur: Yes. Thank you, Henrique, for your question. Yes. Well, in Mexico, basically, there's several factors that affected the margin -- EBITDA margin being the one, the decline in volume as we have explained already. But there are also some changes that Arturo already mentioned. One is the mix of channels. The traditional trade was more affected by the rainfalls during the quarter compared to supermarkets. So channel mix change and also presentations. The mix of single-serve also declined in the quarter. So that was basically the main impact for the margin -- EBITDA margin in Mexico. . For the rest of the year, we've been working on expense control. You also can see that throughout the year, we've been improving our sales -- OpEx to sales ratio every quarter. So internally, everything that we control, we are looking in every efficiency that we can implement in all the operations. So in Mexico, we've been able to mitigate part of the volume decline impact talking about the margin. So for the full year, we're expecting to maintain -- at least maintain the current levels of EBITDA margins for the region. Operator: We will move next with Axel Giesecke with Actinver. Axel Giesecke: Just a quick one. Given your healthy balance sheet position, are you considering further M&A opportunities? And if so, which regions are you looking forward into? Emilio Marcos Charur: Thank you for the question. Yes. Well, as you know, there's -- talking about capital allocation, that's one of our main priorities. Well, as we have mentioned, number one is investing in our operations, and then we just announced an additional dividend. But yes, M&A, as you know, we continue to evaluate, basically, opportunities in U.S. and Latin America. So we have a very strong balanced position in order to close any opportunities. But in the meantime, we've been able to find another avenues for inorganic growth that we are on line with our core business, such as the recent acquisition that we announced, the Imperial, the vending and micro market business in U.S. But we keep exploring opportunities, basically, within the Americas. Operator: We will move next with Fernando Olvera with Bank of America. Fernando Olvera Espinosa de los Monteros: I just have one, and it's related to Mexico. Arturo or Emilio, how are you thinking about CapEx next year and the potential tax increase? Any insight on this would be helpful. Emilio Marcos Charur: Thank you, Fernando, for your question. Yes, regarding CapEx, well, as I mentioned, as of September, we reached MXN 11.8 billion, representing 6.4% of sales. We were expecting to invest around 7%. That's what we mentioned at the beginning of the year. The [ 6% ] of those CapEx are in Mexico and U.S. But at the beginning of the year, when we saw a slowdown in volume, we have postponed some initiatives this year. So ratio OpEx -- CapEx ratio will be around the same level that we have right now, 6.4%, instead of 7%. So we just adjusted some of the CapEx that we were expecting for this year without compromising our long-term growth strategy. So we remain committed to the strategic investment that we have for our capabilities and expanding our capacity and distribution, but I would say in a slower pace than we expected at the beginning of the year. Fernando Olvera Espinosa de los Monteros: Okay, Emilio. And thinking -- I mean, considering that the increase of the excise tax was just announced, I mean, how do you expect CapEx to behave in Mexico next year? I mean, is it possible that you keep postponing some projects for 2027 or... Emilio Marcos Charur: There are some projects that we started and we need to continue in order to be ready for the volume in the next, let's say, 2, 3 years. So there's some of the CapEx that needed to keep going to be ready in 2, 3 years. But the short-term ones are the ones that we are just postponing and see how the volume behave and then we'll decide if we continue with those next year or if we go and move it to 2027. So we expect around 5% to 6% maybe in Mexico CapEx to sales. Operator: This concludes today's Q&A portion. I would like to now turn the conference back to Arturo Gutierrez for closing remarks. Arturo Hernandez: Thank you. We really appreciate your time today and especially your ongoing commitment for company. So please reach out to our investor relations team for any follow-up questions you might have. Look forward to speaking with you again next quarter. Have a great day. Operator: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Welcome to XVIVO Q3 Report for 2025. [Operator Instructions] Now I will hand the conference over to CEO, Christoffer Rosenblad; and CFO, Kristoffer Nordstrom. Please go ahead. Christoffer Rosenblad: Thank you so much, and good morning and good afternoon, everyone, and especially welcome to XVIVO's earnings call for the third quarter of 2025. First, a quick introduction of today's presenters. This is me, Christoffer Rosenblad, CEO, calling in from Gothenburg, Sweden. And we also have Kristoffer Nordstrom, CFO, calling in from Philadelphia in the United States. And with that we go to the third slide, which shows Q3 financials at a glance. The Q3 shows a plus 6% top line organic growth if adjusted for the U.S. heart trial revenue compared to the same quarter last year. We can note that there was no destocking during Q3 and hence the EBITDA recovered to expected levels during the quarter. In terms of segment growth, the Thoracic sales were affected by lower heart study revenue in the U.S. and a softer Q3 lung market. The Abdominal segment shows great progress for both liver and kidney. Looking a little bit into the future. In the beginning of October, the 3 out of the 4 clinics that acquired an XPS in the United States during H1 or half year 1 are up and running now in the beginning of October, and we also held a Lung Masterclass. I will come back to that later. Yesterday, where it was noted that, that October at least started better than Q3 in terms of lung transplant and in terms of EVLPs to support for the lung transplant if you compare to what we saw in Q3. Going into our Abdominal segment, liver in Europe are now entering the majority market segments with penetrations above 15% in many European countries. The main task for us are now to support with resources for perfusion and data for improved reimbursement. Sales growth is improved in many countries by improved reimbursement, which is based on the carpet of excellent clinical data with better patient survival and more livers used, as well as hospital economic data and health economic data. Kidney, on the other hand, is still below 15% penetration in many countries, including the U.S., and the main task for us is to win account by account. What is good to note is that the feedback we get from kidney customers is that they are very pleased with the product and see that the kidneys are in better condition after being perfused with the Kidney Assist Transport compared to the available alternatives on the market today. And if we go over to Services, we have stated earlier, and we are not pleased with the progress of the U.S. service business. And we reported in the last Q2 report that the analysis was finalized for an action plan and that we see an increased interest for combined procurement and NRP service model. This would fit very well into the heart launch. During the summer it was decided to execute on this plan and invest into service segment, and I will come back later in this presentation with the actions we have taken and how we will execute during the next 5 quarters to become a preferred partner to the transplant teams in the United States. And I also want to again state, as we have said earlier that the service initiative is very strategic and the purpose is to support the future heart business in the U.S. During the year, a cost and cash reduction initiative was initiated to enable better resource allocation going forward. The CFO will come back to that during the financial part of the presentation. And to end this slide, Q3 shows again that XVIVO has a scalable business model in terms of EBITDA. We can see that the recovery of sales in Q3 versus Q2 also improved the EBITDA as a percentage if you compare to Q2 of this year. And with that, we go over to Slide #4, which is the first 9 months at a glance. And it shows a similar picture to the Q3 slide. A good and stable gross margin. We continued investing into field force and scalable production structures. We saw that sales came in at SEK 586 million with again a 6% growth if we adjust for the U.S. heart trial revenue. In terms of gross margins, I said before that we plan to improve Abdominal gross margin to 70% at the latest in '27 or when we reach economies of scale in production. You will hear more about gross margin or EBITDA levels later in the presentation. For heart the main hurdle is regulatory approval. Once the Heart Assist is used the feedback is overwhelmingly positive. We continue to build evidence and more than 500 patients have now been transplanted successfully with Heart Assist. The CAP in the U.S. is now up and running, and we have 6 patients included as of yesterday. I will come into later a little bit more on heart, but we can also see that in Australia, the heart penetration rate last year was approximately 30% and we now see that this year it has increased to 40% for DBD heart, which shows again that the need for this product in the market. We have also stated in early calls that we're running a DCD direct procurement study in the Benelux to show that we -- it's also a great product for DCD hearts. And I think with that results coming out, hopefully next year and the Australian experience, we see a great potential to truly shift the paradigm of heart transplantation. Lastly, and also important to mention is that the projects are progressing according to plan. Regulatory time lines are hard to predict, which we saw this summer for the EU heart approval. But in terms of clinical trials and development projects, they are progressing according to time lines agreed. The production capacity projects, for example, where we invest to scale up volumes 10x of the day volumes for disposables are running in line with communicated time lines. The full-scale production of disposables for heart, liver and kidney will be extremely important to capture future growth potential for all 3 products. And with that, we can go to Slide 5. And I want to remind everybody why we are here. It's a picture in front of us reminds us that Alex is one of the 500 patients that got opportunity to get a heart transplant, thanks to the innovative XVIVO heart technology. And that's why what we work on every day to make sure that those patients actually survive. If we can go into Slide 6 to the Q3 highlights and important information. If we start with the U.S. federal review, so HHS has launched a review of the organ transplant system in the United States and started to take actions towards at this stage, one, underperforming OPO, listening to the conference. And I think it was best summarized by the quote from the FDA Director, Marty Makary, that you see in the middle of the page here. I want to state that XVIVO is aware that many organs go to waste because of bad communication, underutilization of technology that improves organ utilization, patient outcome, et cetera. And this is why we work day and night to improve the situation for both transplant teams and OPOs. Our products and services correctly used will enable more organs to be used and less stress on the transplant system, which we do acknowledge there is a high level of stress right now. But we hope with longer transportation times, more evaluation opportunities and a better service model, we hope that we see us as part of the solution to release that stress and less mistakes will be made. And we can stay in the U.S. and go to Slide #7 and just have a brief view of the U.S. lung market. And as we said earlier, and you can see it also in the slide, we have gotten used to very high growth in the U.S. lung market '22 to '24, double-digit market growth. And it has been driven by improved allocation and EVLP at the ambitious programs who could safely grow their number of lung transplant using lungs that were rejected by other centers. In 2025, we still see growth, but at a lower pace than we are used to. The reasons for the slower market growth are manyfold. But at least we start to see waitlist coming back at a few of the ambitious clinics I talked to. And we have also acknowledged that the lack of resources has impacted growth rate this year compared to earlier. And I will also come back to how we want to improve our service strategy to reduce stress and lack of resources at both clinics and OPOs. And with that, we can go -- continue to stay in the U.S., but go to Slide 8 to paint the picture of what we will do specifically for lungs. As stated earlier, we have seen fantastic results from ambitious lung transplant programs that safely increased the numbers of lung transplant using EVLP with XPS system solution. For Q3, we can start to conclude that we didn't identify any destocking. We continued to see an increasing interest to start EVLP programs with XPS. And as stated earlier, 3 out of 4 of the new accounts that bought an XPS in the first half of the year is now up and running, unfortunately, not in Q3, but in early October, at least. To improve our service to lung transplant clinic and we acknowledge that there is a resource constraint, we entered into a partnership during quarter 3 with a prestigious perfusionist company. By doing so, we've got access to 175 perfusionists and we can together with our organ recovery business and communication system FlowHawk, give our customers an improved experience and support them also during shortage of resources. During the summer, we have also developed an EVLP product service model to better fit the OPO system. We will run the first pilot during Q4. And lastly, we have also recognized that we need to reorganize the commercial organization, and we have done so during the summer to have a greater footprint in the south of the country and on the West Coast of the United States. Our estimation is that the action taken during the summer will show gradual impact during the next 5 quarters. The interest for starting an EVLP program with XPS is extremely high by the most successful lung transplant clinics in the U.S., has proved that that's the way to safely increase lung transplant volumes. And we believe by increasing our support level, we will be able to better realize this interest from customers. And with that we can go over to -- I came home yesterday still running, but I came home yesterday from the -- our Lung Masterclass 2025. And it was a great pleasure for us to welcome the best of the best in lung transplantation to the 2025 edition. So we have got 100 clinicians from 19 countries that could exchange ideas through collaboration, how we can improve lung transplant practices and improve both usage of lungs and patient outcome. The key takeaway for me was that many clinics has experienced a -- or had experienced a tough 2025 with the lack of resources and in some cases lower waiting list, making matching of donor organ patients a lot harder. We see that we need to support our clinicians better. And so far, what I could -- in the conversations I had, we could see that at least the waitlist looks a lot better going into Q4 than they did up until Q3. And with that we go over to Slide 10, sorry, and just have a snapshot of the U.S. CAP study and the PRESERVE study status. We have the first patient enrolled into the study during Q3. At the end of the Q3, we had four patients enrolled still at one clinic. As of yesterday, we actually had nine patients enrolled into the continuous (sic) [ Continued ] Access Protocol still at one clinic. At the end of Q3, we activated five centers that are able to enroll patients. And the focus for Q4 will be to activate more clinics. There is a need for the product, and also support them as much as we can so they can restart enrolling patients into the continuous access protocol so we can strengthen our regulatory file that we aim to hand in to the FDA during the next year. We can also just briefly state on the PRESERVE status that we had last patient in the original trial, so not the continuous access protocol as November last year. We will have the -- go through the data analysis Q1 in 2026, and the study result is expected to be announced in Q2 2026. And with that we can go over to Slide #11 that I said earlier we should deep dive a little bit into the actions taken during the summer. Besides the footprint of our commercial team in the United States we have also taken action on the service side. To start, we've taken mainly 3 actions. One, we have doubled the surgical capacity both in terms of number of surgeons and in terms of active locations. So we've gone from end of Q2 3 to end of -- 6 end of Q3. And we expect that end of Q4 will be 7 active hubs in the -- on the East Coast or east of the Mississippi. As I stated earlier, we closed a partnership with a great partner not only to improve our EVLP capabilities with perfusionist, but also to support clinics with NRP services, which is nowadays in the United States a must to grow our service business that has been asked for and now we can finally deliver on it. At number 3, we have partnership with numerous both aviation and ground transport partners to enable a full-service offering if the clinics want that offering. Some have their own transportation partnering, and we're happy with that. But if they don't, we can offer a great network of transportation to simplify for the transplant teams. So with those actions we will improve our services. We had already best-in-class service in terms of quality, but now we can offer service tailored to customer needs as well. So we hope that we have laid the foundation for growth within this segment, and -- especially then east of the Mississippi. We are aware of the fact that we need to also grow our hubs and service offering west of the Mississippi, and we will come back to that both the progress on the actions taken and the future plan in the next quarters to come. And with that, we can go over to Slide 12, and we leave the United States and we go over to Europe, which we have concluded into one slide. And the reason is that it's slightly shorter is that the business is progressing very well. We have a stable field force. We have very good clinical data, long and strong customer relations and great interactions. But what we've seen so far in Q3 is a continued strong growth for liver in Europe. Q3 it was similar to previous quarter by plus 31%. And we continue to add new accounts every quarter. We continue to work on reimbursement, et cetera. The main hurdle for growth in liver is mainly human resources and reimbursement, which we're working on. And country-by-country, we now see that reimbursement is coming into place. And with an increasing customer-facing organization, we now have the ability to support clinics better with also resources, and especially human resources that support with perfusion services. Kidney is showing growth, 54% in Q3, and that is great. What we can note, as I said earlier, customers that are using the products are pleased with both the performance of the product and -- but especially how the kidney performed after transplant. So we -- but we have a lower market penetration rate, and we are -- it's more account-by-account base where we have to, let's say, fight a fight to increase penetration rates, and we have to convince clinic-by-clinic. But once they had tried the Kidney Assist Transport, they are very convinced of the product and actually increased usage over time. The lung business in Europe grew mainly with EVLP adoption in the U.K. and higher PERFADEX usage per case as -- the last one as a result of evidence that if you flush more with PERFADEX, you actually improve the lungs before transplantation, which potentially improve outcome after lung transplantation. And if we look going into next year and strategic areas for our European business, we are, as we stated earlier, of course, awaiting the regulatory approval for heart. If we benchmark Australia, it's clear that XVIVO Heart Assist has a very good position in the transplant system. And we expect European heart penetration to over time mimic what we have seen in Australia. We're also awaiting the -- as I said earlier, the DCD to have a full coverage in Europe once we launch. We have also acknowledged that in the U.S. as well as in Europe, there is a constraint on resources. So we have a very successful model in Italy, and we will launch that model into a few test markets where rules and legislation allows for that. And with that, we can move over to our regulatory, clinical update. It's a little bit longer than normal this time, but we can start with just the standard slide of Slide 14, which shows an overview of regulatory approval we have. So our lung and kidney portfolio has obtained regulatory approval in all key market, and liver is approved in all key markets. For heart, we are awaiting, as we know, approval for all core markets. And the time line has -- there are some shifts, and I'll come back to those later in the presentation. But the main time line has not changed besides the pending CE-mark in Europe, which we press released during the quarter. And in U.S., we are working very hard to make sure that the file is approval ready as soon as possible. For the liver, we have now obtained everything we need, but I will come back later to the decision we have taken during the quarter regarding the liver U.S. trial. And we can turn to 16, which is a little bit of a repetition, but it's good to clarify here the heart and the strong evidence we see in heart. The heart trial in Europe is not the -- not only the first trial to aiming for showing superiority, it's also the first trial to show superiority for heart. But more importantly, it's also the first trial ever to show a direct link between perfusion of a heart and patient outcome. And we can see that by using XVIVO Heart Assist, we can reduce severe PGD, which is the leading cause of early and late mortality with 76%. And what we know from before and what we've seen in the trial is that, if you get the diagnosis of severe PGD, you have approximately 40% mortality risk within 1 year. If you compare that to -- if you don't have severe PGD, you have only 5% mortality risk during the first year. So -- and this was in our trial directly translated to 6 patients more safe or life saved during -- up to 1 year, which is the first time we can see those direct links between actually perfusion of an organ and better outcome within 1 year. And if we would extrapolate this to the transplants we are doing on standard criteria heart today in the world, it will translate into more than 400 lives saved every year only for the standard criteria heart. And then we're not counting all the extra hearts that we can actually get available for heart transplant using the XVIVO Heart Assist, either if it's long distances or extended criteria heart, et cetera. And with those great results, we go over to Slide 17, where we are looking into more how we want to change the paradigm of heart preservation. And as I stated, we know that we now can increase both patient outcome and we can increase transportation time for heart. To strengthen the evidence and simplify the DCD process, we have, as I said, the Benelux DCD direct procurement study that we are now under inclusion of patients, and it's progressing fine. The study aim to include 40 patients, and it is estimated to be fully included end of this year 2025. And we are really looking forward to the result of this study. With a positive outcome of this study, the XVIVO Heart Assist would fully transform the process for DCD heart, making it safer, easier, less resource-intensive and with improved patient outcome. So then we cannot only, as we have seen in Australia, change the paradigm for DBD heart with a successful outcome, here we would also change the paradigm for DCD hearts and hence the full heart transplant process. And with that, we go over to the last slide of the clinical and regulatory update on Slide 11 or Page 11 (sic) [ Slide 18 or Page 18 ]. And as you know, we previously reported that the Liver Assist has been granted Breakthrough Device Designation by the FDA. We have an approved ID and can start the trial. We have CMS funding approved, et cetera, and we could have started the trial in Q3. However, the company has decided to temporarily pause the activities for the liver PMA process to investigate if an alternative regulatory route is possible. We hope to, as soon as possible, come back with the result from that investigation. The aim of the investigation is to see if we can get a faster route and hence enable patients in the U.S. a better product than what is currently available on the U.S. market, approved faster. And hence, we can see the fantastic results we have seen in Europe also in the U.S. And with that, I go to Slide 19 and hand over to our CFO, Kristoffer Nordstrom, who will present the financial performance of the year and the quarter. Kristoffer Nordstrom: Thank you, Christoffer. Yes. So net sales in Q3 were SEK 189 million, which represents a gradual improvement from Q2. Organic growth, minus 1%. But in reality, organic growth was plus 6% if we set aside heart trial revenue. Besides heart trial revenue, organic growth was again impacted by soft market conditions in the U.S. and lower EVLP activity among a few larger customers. As our CEO has mentioned before in this call, we do see signs of EVLP activity recovery as we have entered into the fourth quarter. Year-to-date, net sales are SEK 586 million, representing also 6% in organic growth, excluding heart trial revenue. And in the following quarters, we will continue to emphasize the impact of this trial related revenue to provide a clearer picture of the progress of our current business for you all. Total gross margin in Q3 and year-to-date were in line with last year, 75% and 74%, respectively, which we are pleased with given the unfavorable currency effect on sales in 2025 from the weakened U.S. dollar. Throughout '25, we have maintained a strong focus on operating expenses, although the organization has grown with new talent and further recruitment, the associated costs were offset by disciplined cost management. And as a result, OpEx was in Q3 this year, 2% less than last year, as an example. Adjusted EBIT in Q3 was 9% and adjusted EBITDA was 19%. Moving over to the respective business areas, starting off with Thoracic. So sales were SEK 115 million. Organic growth was negative, minus 12%, and excluding heart trial revenue, the organic growth was minus 4%. There are two main reasons for the drop in organic growth this quarter. So first of all, less machine sales, XPS sales versus last year and also lower EVLP activity, as I've mentioned, at a few higher volume customers. We have started to see signs of increased EVLP activity in September-October, and we believe in a gradual ramp-up at current customers over the next 5 quarters. Gross margin in Q3 was phenomenal, 89%, positively impacted by product mix. As an example, our global PERFADEX sales grew 17%, and this is the product with our highest margin. And we also have the positive effect of not having any XPS machine sales this year. When it comes to heart, sales were SEK 10 million in Q3 versus SEK 19 million last year. Worth repeating, last year included significant trial revenue, which makes the comparable numbers irrelevant. We will start to see more and more revenue from the CAP study as patient enrollment continues. In Q3, 4 patients were transplanted by one center, and the majority of Q3 heart sales came from Australia, very strong, SEK 8 million. I get some reports, operator, that there are some issues with the sound, especially if you are viewing this conference from the webcast. So could you please look into that? And I will continue in the meantime. Abdominal. So Abdominal performed a record quarter. It was the best quarter in history for us, showing strong performance both in liver and kidney. Net sales, SEK 55 million, translating to an organic growth of 47%. Year-to-date, the organic growth is 31%. Liver sales grew 34% in local currencies, and we're pleased to see that throughout the year, we have successfully expanded and grown our business in larger markets such as Italy, DACH and U.K., which are big markets and will be very important for us in the future. Kidney sales increased 79% versus last year and 49% excluding machine sales, and we saw double-digit growth in both Europe and the U.S. So once again, a very strong quarter for Abdominal. Services. I think most importantly, Christoffer has already shared what we have done, what actions we have taken in the quarter that will lead us to growth in 2026. But from a financial perspective, the quarter was soft. We see good contribution from FlowHawk, our latest acquisition, who added 17% of growth in the quarter. But in terms of the recovery business, we expect to see improvements starting next year. So let's switch to focus to EBITDA and cash flow. EBITDA came in at 19% in Q3 and rolling 12 months we're currently at 19% as well. As mentioned, throughout 2025 we maintained a strong focus on operating expenses. And in the following quarters, we will continue to manage our operating expenses with discipline, ensuring resources are directed towards initiatives that drive clear commercial returns in the short term. Our operations, R&D and administrative functions are well scaled for current ambitions, allowing us to invest selectively. We are a growth company. We're built on a scalable business model and strong gross margins. And as we grow, increased profitability will follow. And my final slide, cash flow, so we ended the third quarter with SEK 280 million in cash and an additional SEK 120 million available under our credit facility, bringing total available funds to SEK 400 million. Operating cash flow was positive SEK 21 million, which is encouraging given the ongoing buildup of inventory during the transition of our new Sweden-based supply chain. While our revolving credit facility remains in place to support working capital needs, our positive operating cash flow meant no additional drawdowns were needed in Q3. Cash flow from investments amounted to minus SEK 61 million, resulting in a total cash flow of SEK 44 million for the quarter. As Christoffer alluded to, during the summer, we implemented strict cost discipline in response to the temporary slowdown in lung sales and the delayed heart regulatory approval. Combined with the completion of important CapEx investments made in 2025, we now approach '26 with a cost base well in line with both our financial resources and our growth outlook. And with those final remarks on cash flow, I will hand back over to you again, Christoffer. Thank you. Christoffer Rosenblad: Thank you so much. I don't know if people hear me. I will try to continue to talk on outlook, and we turn to Page 27. So that's the outlook for this and next year. To start with, we continue to work close to competent authorities in Europe with the aim to obtain a CE-mark for heart, that is priority number one. We will also have a clear priority on -- with the recent reorganization and new partnerships in the United States, we will focus on increasing EVLP adoption through a combination of service models and staying close to customers. In parallel, we will increase our service offering to better tail customer needs, especially offering NRP procurement from an increased footprint in the United States. Liver Assist in Europe saves hundreds of lives every quarter. We will support clinicians to increase that number through this year and next year. And lastly, in the U.S., we will prepare the heart regulatory file for submission to the FDA. And in parallel, we will strengthen the U.S. field force to enable a successful heart launch and enable a strong lung and kidney business until we see that heart launch. And going over to Slide 28, which is the long-term outlook, and it's a repetition from all the quarterly calls. But we have seen a demand of 10x of today's supply. We also see a sales value of machine perfusion that is approximately 10x versus static cold perfusion. Machine perfusion and service model have proven to increase the number of organs to be used for transplantation, especially in the fast-growing DCD pool; and the main growth driver of superior clinical result for machine perfusion. And the fact that service model reduce complexity and time for the transplant clinics. Hence, machine perfusion and service models on normal and DCD growth will drive growth in the near future. And so in conclusion, we see a long-term case that is intact. XVIVO has a unique and proven product platform. We are committed to execute our strategy to one day accomplish that no one will die waiting for an organ. And with that, we turn to Page 29. We hope that you still hear us and that we can hear your question. Thank you for listening. And with that, we open up the lines for questions. Operator: [Operator Instructions] The next question comes from Simon Larsson from Danske Bank. Simon Larsson: First question from my end on the lung business and the sequential dynamic that you're describing here. If I'm understand you correctly, there was no destocking in the quarter. Should we view that as customers having fully burned through their stock at this point? That's the first question. And then the second one relates sort of to the communication around your confidence in a stronger Q4. Is this growth coming predominantly from the 3 new accounts that just went live here? Or is it something else that you're seeing for Q4 lung particularly? Christoffer Rosenblad: Thank you so much for your questions, Simon. To start with, I would say, normalized stock level is probably a better word regarding what we know is that we saw no signs of destocking this quarter. So -- and what from we heard, it's normalized stock levels that's -- that all we can conclude. In terms of going into Q4, it's anecdotal, but we -- and it's not the full picture, but what we have seen is that waitlists have started to build up and those high-performing clinics, which we've seen a higher activity in the first 3 weeks in October in some clinics than we have seen in all of September. So it's anecdotal. But we feel that it's talking to larger clinics in the U.S., we feel that they are more positive now than we have seen at the beginning or especially Q3-Q4. But we don't know where the market growth will go to be truly honest, that's something we have to see at the end of Q4. Simon Larsson: Makes sense. Maybe staying on lung for one more question. Do you expect any type of impact on the U.S. EVLP business from TransMedics and their next-generation OCS lung trial? From what I understand, the recruitment will potentially start here in Q4, and it's a pretty big scope of lungs enroll that they are aiming for anyways. So what do you hear from your customers in the U.S., are they going to participate, et cetera? And what do you hear? Christoffer Rosenblad: To be truly honest, we heard very little from customers regarding the trial. We heard more on the heart side, to be truly honest. It might have an impact. It is to be seen. We don't know that yet. Typically, what we have seen earlier is that an increased interest in machine perfusion will hopefully also lead or has historically at least led to an increased activity as well. So the market has grown further. So it's to be seen. It would be speculative. But we haven't heard -- I haven't heard from one lung customer that they will participate at this stage. Simon Larsson: Okay. Sounds reassuring. The final one from my end on liver. Obviously, you're taking sort of a strategic review here of the go-to sort of pathway forward for the liver trial in the U.S. Maybe sort of provide -- and, of course, you can't really maybe comment at this point, but maybe a 510(k) pathway could be sort of, something that you're looking into. Is that correct way of thinking about this? Christoffer Rosenblad: Yes. I mean there are three main pathways to enter the U.S. market is 510(k) -- 510(k), de novo, PMA and -- typically. So we will investigate and have a dialogue together with the FDA what is the best pathway forward, also talking to our customers what is the most preferred. If we will find that a faster process is possible, we would, in dialogue with customers, decide on way forward. We'll have to come back later when we know more. So we decided today that we owe it to ourselves, we owe it to our patients and our customers to at least investigate this before we walk ahead. Simon Larsson: Yes. So it's not possible at this point to say anything about how this could affect sort of time to market or potential pricing? It's too early, I assume. Christoffer Rosenblad: Correct. It's too early at this stage to know that. Operator: The next question comes from Ulrik Trattner from DNB Carnegie. Ulrik Trattner: And a few questions on my end and potentially starting off where we ended last question there on liver. And just assuming -- now just assuming a 510(k) route, which would be faster, obviously, for you going to market. This is a similar route of you in kidney. But are you seeing a pitfall of going down such a route with not having a sort of U.S. clinical data on the product given sort of the anecdotal evidence that patients or clinics have been reluctant to adopt your device prior to having real U.S. data? Christoffer Rosenblad: Yes. I mean the straight answer to that question is yes. I mean, we learned through experience that we need U.S. data either way. So no another pathway. We need solid U.S. data to be able to convince U.S. clinicians and OPOs. So that's correct. Ulrik Trattner: And if we were to move to the next regulatory filing of heart study results could be announced Q2 '26. And I assume you then aim to file directly and then a 90-day sort of filing process for 510 -- for approval. So that would assume the heart product on the U.S. market by Q4 of next year. Is that a fair assumption? Christoffer Rosenblad: No. And the reason is I expect there to be an expert panel meeting that would add at least 180 days because they have to call for the panel, et cetera. That is our expectation. But this is what I expect. So we don't know for sure. But I would expect this being first of kind and the groundbreaking technology we are putting into our regulatory timelines that there will be expert the panel review from -- for the heart technology. So there will probably be a longer time line than you said due to this reason. Ulrik Trattner: So similar to that of the XPS system, sort of. Christoffer Rosenblad: Yes. Which is also groundbreaking and changed the paradigm of lung transplantation and now we aim to change the paradigm of heart. So then we assume that the FDA want the second opinion. But we'll come back when we know more, Ulrik. Ulrik Trattner: And just on the Continued Access Program updates where you have activated a few centers. Just to clarify, you have approval for 60 transplantations to be performed and then you can renew that. Is your estimation that you will do 60 transplants over -- like including Q3, the next 3 quarters? Or how should we view that? Or is there some misinterpretation on my end there? Christoffer Rosenblad: We see that, that once they get started they get easily used and addicted to the heart technology. So that estimation would depend, of course, how many we get from activated to actually including patients, and we saw that we have one clinic now doing 9 in a very short time frame. But our estimation is that we will get more clinics in to be active in the continuous access protocol, and that will hence lead to a fairly fast inclusion. We knew from the original PRESERVE study that it took 9 months for the study to be up and running and fully up and running, so to say. So we don't know. And also to be clear, it's always up to the FDA if they want to prolong a continuous access protocol. But seeing the interest from our clinicians, I hope that the FDA want to accommodate, but I want to be clear that it's their choice and not our choice. Ulrik Trattner: Sure. And on TransMedics running another sort of U.S. clinical heart trial, is there any sort of competition among patients or this potentially would slow down number of patients that are actually running your heart device? Christoffer Rosenblad: The estimation we see now is no. I mean, 60 patients and hopefully prolonged are very few patients considering the potential of the XVIVO heart technology. So I would say that the cap on the number of patients will be the defining factor on how many we can include into the continuous access protocol and not so much what competition are doing or anything else. Ulrik Trattner: And just to clarify as well, are you allowed under the CAP program to combine your heart device with NRP? Christoffer Rosenblad: Yes, we were allowed also in the original PRESERVE study, including 141 patients, we were allowed to include any extended criteria heart, which is the DCD heart. So we included direct procurement, we included NRP from DCD and long preservation time and other reasons for any heart to be extended criteria. Ulrik Trattner: And last question on my end and potentially the most exciting one, at least what I think. These perfusion technicians, 170-plus, can you give us some more granularity on what this means? Where are they located? Is this a replication of what Lung Bioengineering is doing? How will you support clinics? And we've also heard comments here in the last few quarters on a lot of transplantation clinics taking the XPS program in-house and kind of builds to your comment on high interest of starting up new EVLP programs. But if you can provide us some more granularity on this, that would be great. Christoffer Rosenblad: Yes. Great. Great. No, it's not really Lung Bioengineering having a fantastic service, is not a replication of that just to be clear. But 2 things have happened this year. One is the reduction of NIH grants in the beginning of the year, which has -- there is a resource -- lack of resources in many clinics, especially academic larger hospitals. That has happened. The other thing is that TA-NRP has grown significantly this year compared to previous year, which has damaged a lot of lungs. So this has led to 2 things. One, the interest for clinicians or bigger clinics to start their own EVLP program to actually take care of those lungs that are coming from TNRP or otherwise being marginal or extended criteria. And we also see an increasing interest from OPOs that they have got the contact from their -- yes, nearby clinics and said, can you perform EVLP on all those lungs. Now we are really happy with the hearts when we do TA-NRP, but the lungs are potentially destroyed that we don't know. So those things have happened. In parallel, we have got more and more questions from our organ recovery service that we like you, but can you please include NRP into your service model? So for that reason, we scanned the market and wanted to find a great partner. And I think we found the best of the best with -- they have 175 perfusionists on the roster strategically placed, very much in line with what you saw on one of the slides when we increased our footprint from our organ recovery service. And they saw the same need as we did, but from the other side that they saw an increasing need for EVLP, they saw an increased need for NRP. But they were lacking products and surgeons. So it's really a great marriage if we get this to work. It's a perfect match where we can fulfill our customer needs with a high level of quality and a high level of customized service. So we can support both OPOs who are in need of improving their program and improving the number of allocated lungs, and we can support clinicians with NRP going out, so they don't have to take their really, really good surgeons that should actually do transplants. They don't need to send them out in the middle of the night to do NRP, et cetera. So we hope that this will be -- this is the start of something that can become great, and we hope that it will become as good as it promise right now to be over time. Ulrik Trattner: And just one follow-up there. Are these 175 perfusionists, are they lung specialized? Or are these agnostic to both Thoracic and Abdominal? Because I know sort of the most sort of pressing service here going forward will most likely be in heart in order to expand your footprint in the U.S. Christoffer Rosenblad: True. No, they are typically agnostic to organ. I mean, they are specialized in perfusion and very good in perfusion of all organs, so to say. It should be mentioned that today out of 175, I think it's 75 are fully trained on NRP. And we are, as we speaking, training as many as possible on EVLP. So we have -- so everyone should also be trained on EVLP. Operator: The next question comes from Jakob Lembke from SEB. Jakob Lembke: Yes. First question on heart and the process to get it approved in Europe. If you can give an update sort of is the file at review anywhere right now or is the ball in your court or what can you say? Christoffer Rosenblad: Right now, we are in, let's call it dialogue phase to fully understand what needs to be amended/improved in terms of evidence. So we are trying to fully understand together with regulatory authorities in Europe. So that's where we are right now. Jakob Lembke: But you still feel fine about the previously communicated time line? Christoffer Rosenblad: Yes. That has not changed. Until further knowledge it has not changed. Jakob Lembke: And then if you can also give some more details about the U.S. approval process for heart, sort of what are the milestones or sort of key dates where you need to submit to the FDA and so on in order to sort of assume the time line where you are approved in the beginning of 2027? Christoffer Rosenblad: I think we -- to start with, we need to finalize the clinical file, which will be important. In parallel, we are preparing the animal file and product file to hand in aiming in Q2 next year. Then the time line will be harder to predict from our side, and we need to come back with an update on more expected time lines after that because it depends very much on the route forward that the FDA chooses. So it's partly out of our hands. But they need to review the documents and make sure that they are on par for calling to an expert panel meeting, then they need to call for expert panel meeting and it has to go through that, et cetera. So we estimate from handing in the file that there are at least 12 months process, but that is an estimate from our side, and we need to come back with more granular data when we hear more back from the expectation on process forward from the FDA. But at this stage, it is our estimation and not something the FDA has told us. I want to be clear with that. Jakob Lembke: But you will hand everything in to them by Q2 2026? Christoffer Rosenblad: Yes. That is our aim. And I will come back if there's any change to that time line, but I will come back with more guidance if we change that. But that's our internal time line at this moment. Jakob Lembke: And then just a final question on lung and the EVLP sales in the quarter. If you just could elaborate sort of the trends across the different parts of the business, speaking of the large U.S. customer, other U.S. customers and rest of world? Christoffer Rosenblad: Especially for Q3 or more overall? Jakob Lembke: Yes. What you saw here in Q3? Christoffer Rosenblad: In Q3, we saw, in general, a quite weak quarter. We saw a few customers who had lower EVLP activities, very few of them, so to say. I think it's only 2 that dragged down the overall number. As I said earlier, going forward, we see more customers coming on board with especially the new ones from the first half of the year are now trained and at least 3 out of 4 are fully trained and up and running. So we see -- and we see that from a few that were a little bit lower in Q3, we can see that they have come back now in early October. So that's the picture we see right now at least. I see we are 1 minute past 3:00, so I don't know how many questions we have. Operator: The next question comes from Maria Vara from Stifel. Maria Vara Fernandez: I'll be very quick considering, yes, it's already a long call. All right, so maybe just a quick follow-up on the rate of enrollment and activation of the centers within the CAP program. You mentioned that it took 9 months to get up and running all the centers involved in the pivotal study. But I was wondering why it's taking in a way some time to activate the centers from the CAP? My feeling is like some of them should be part of the PRESERVE study. Could you maybe clarify if that's not the case? And if there is any hurdles that you're seeing in terms of the activation, whether these centers already have, for example, TransMedics technology? And what is the overall demand there? What's happening? Christoffer Rosenblad: Thank you. Great question. I mean many of them, yes, they were part of the PRESERVE trial. So that is correct. I think, unfortunately, the continuous access protocol is viewed as a completely new trial. And what has taken time is mainly after reduction of resources, especially going into research at the beginning of the year, it has taken longer time than we earlier anticipated to get through the red tape in each and every clinic. And everybody has been -- when I talk to surgeons, they are really eager to start. But, let's say, hospital system behind them has had a challenging time adjusting to the new level of resources, especially when it comes to research, which has hampered the uptakes, so to say. But we do expect that -- we do feel there is a great interest, and we do expect that, that will translate over time into -- everybody has to be retrained and recertified, et cetera. But over time that will translate into more and more clinics coming up and running also into the continuous access protocol. Maria Vara Fernandez: Okay. That makes sense. And in terms of the clinical data, do you plan to use this data from the CAP program into the filing of the FDA? Or that's something that is not on your mind at this moment? Christoffer Rosenblad: Yes. I mean, as far as continuous access protocol, let's say, the 1-year follow-up will not be that easy to accommodate to the FDA, but the data will absolutely be used from a safety data point. So it will be used as confirming what we saw in the original trial PRESERVE. Maria Vara Fernandez: All right, that's clear. And maybe just a last question on the liver and redesigning the regulatory pathway. I'm aware that there hasn't been any specific guidance on time to market, but obviously, this will shift things. And based on my estimates, we could have expected some kind of launch maybe in '27. However, that might seem unlikely, even though you could have another route, which could be quicker. Any thoughts here that you could share on time to market for liver? Christoffer Rosenblad: I think to start with, yes, that sounds ambitious. I agree with that. At this stage we don't know, to be very clear and honest. But as soon as we do know, we will communicate with everyone, preferably during one of those calls. And hopefully, we can conclude with the FDA or at least get some guidance from the FDA before the Q4 report in end of January when we release that one. Of course, with the U.S. administration being in shutdown mode, it's hard to predict if we can accommodate that time line, but we will do our best from our side at least. Operator: I hand the conference back to the speakers for any closing comments. Christoffer Rosenblad: Thank you so much for listening in to us today during the Q3 report, and I will just quickly go through to the last page, yes. And I hope to see you for the year-end report 2025 that we will have the conference call on January 27, 2026, and you also see the other interim reports for next year on your screen in front of you. But thank you very much for listening in. Thank you for good questions, and see you in approximately 3 months.
Juha Rouhiainen: Good afternoon, good morning, everyone. This is Juha from Metso's Investor Relations. And it's my pleasure to welcome you to this conference call, where we discuss our third quarter 2025 results that were published earlier this morning. The results will be presented by our President and CEO, Sami Takaluoma; and CFO, Pasi Kyckling. And after that, we will have a Q&A session. And as usually, we try and limit the length of this call to 60 minutes. Before we go, I want to remind about forward-looking statements that will be made in this call. And I think without further ado, it's time to hand over to President and CEO, Sami Takaluoma. Sami, please go ahead. Sami Takaluoma: Thank you, Juha, and good morning, good afternoon also from my side. Without further ado, let's start to look for the Q3 highlights. The market activity was very much in line with our expectations, and that also resulted us then to deliver healthy order growth. We had also strong sales growth for the quarter, and our adjusted EBITA was good, normal strong. And for this quarter, cash generation was very solid and gave us quite a clean sheet for the Q3. Looking more than from the group perspective of the key figures. So orders received growth compared to the previous Q3 last year was 2%. And as we have highlighted in the Q3 '24, we did have significant large minerals CapEx orders that we did not have in the Q3 '25. Sales growth was then 10% compared to the previous quarter last year. And adjusted EBITA grew by 9%. All in all, the EBITA as the second quarter was having this dip, so we are now back in the normal Metso EBITA numbers. Looking for our 2 segments, let's start from the Aggregates. We had healthy orders growth coming in the quarter, EUR 280 million. That is 13% in constant currencies. This growth was mainly driven by the normalized market in North America and then the pickup that we have seen coming from the Europe. Equipment orders did represent growth of 11% and the aftermarket, 2% of the order growth. Sales was also stronger than a year ago. Equipment sales growth was 14% and aftermarket 1%. Aftermarket share now with these numbers was then 32% compared to 35% that it was 1 year ago. And adjusted EBITA improvement by EUR 3 million, so EUR 48 million for the quarter, and that represents then 15.6% margin for the segment. And Minerals had a very solid quarter in many ways. Orders grew 5% in the constant currencies, and aftermarket orders growth was now 12%. We saw in the CapEx side, very solid order intake when it comes to the small and midsized equipment orders. And in the aftermarket side, increase of the upgrades and modernizations as we have commented that they are in the pipeline. Regarding the sales, EUR 1 billion plus compared to the EUR 928 million a year before. Aftermarket was delivering 4% growth and the equipment side was now a 19% growth for the quarter. Aftermarket share of the sales in this quarter was 60%, and the adjusted EBITA EUR 184 million was reported, and that gives the margin of 18.0%, which is pretty much in line from the last year, 18.1%. And now Pasi, the CFO, will go more in detail the financial aspects. Pasi Kyckling: Thank you, Sami, and good day, everyone, on my behalf. I would like to start by reminding that we have restated our comparative figures for 24 quarters and first 2 quarters this year regarding the Metals & Chemical processing business that we decided to retain. And consequently, we have reclassified the comparative information. Let's then look at our group income statement more in details. I mean, sales increased 12% in constant currencies from the comparative period to EUR 1,328 million. Adjusted EBITA, EUR 222 million, which is EUR 18 million or 9% improvement from the comparison period. Net financials slightly up, reflecting the higher debt load that we have in our balance sheet. And income tax rate for the quarter, 24%, and then for the first 9 months or 3 quarters this year, 25%, so very much a standard -- within the standard range that we expect. Earnings per share from continuing operations, EUR 0.17, up by EUR 0.01 from the comparative period. If we then look at our financial position. The average interest rate for the period was 3.4%. Our net debt, roughly EUR 1.1 billion. Liquid funds continue to be solid, EUR 460 million is end of September. And our net debt-to-EBITDA KPI when using rolling 12 months in EBITDA was 1.3x which is below our 1.5x target and also down from 1.5 that we had end of second quarter, thanks to good earnings in the quarter as well as strong cash flow during the third quarter. When it comes to available credit facilities, our position is unchanged. We have our fully undrawn RCF. And then we have also a CP program, which is currently not in use. And then our ratings also, no changes. So a BBB flat from S&P and Baa2 from Moody's. If we then move to the cash flow. So we delivered a healthy cash flow during the quarter, the strongest quarterly cash flow this year, EUR 266 million from operations. And overall, we have delivered during the first 9 months, EUR 609 million. A positive note is that working capital is not a drag for us anymore. Of course, the release, EUR 12 million is small. But given that we -- that the business growth was solid, we are quite happy with this and continue to work with further working capital efficiency improvements. With that, I would like to hand back to Sami to talk about our strategy execution and outlook. Sami Takaluoma: Thank you, Pasi. So in Q3, we also launched our new strategy. We go beyond. We are very happy of the launch, both internally and also externally. And in a nutshell, we are striving for being the best in the customer experience in our industries. We are working for the higher and higher aftermarket share of our businesses, and we also set a target for ourselves to be the frontrunners when it comes to sustainability and safety. And all this combined will then also ensure that we do deliver the financial excellence. This is a growth strategy. We have set the target for ourselves for annual growth, and excellence means everything that Metso does, and that will be resulting then that Metso will be the #1 in our selected areas. We do count a lot to our very engaged employees, Metsonites out there. So the customer-centric growth culture is one of the key success factors and also ensuring that we do have the industry-leading capabilities in our organization to help our customers for the upcoming years. I'm talking about the revised financial targets, just a reminder here. So annual sales growth target is 7%. And, well, starting point now looking for the year-to-date '25 numbers. So 2% we have been able to do. So this is clearly the ambition to accelerate this growth. Adjusted EBITA margin, we upgraded that to 18% from the 17% previously divided by the segments so that Aggregates to deliver more than 17% and Minerals more than 20%. And year-to-date so far, we are in 15.7%. Net debt-to-EBITDA, the target for ourselves is that we will be below 1.5x. And that one currently, we are well on track already, and we are targeting to keep that, that way. And regarding the dividends, so the payout is going to be at least 50% of the earnings per share. And as you all remember, 2024, that was 63%. The strategy execution is already ongoing. We have done investments, acquisitions to improve our selected areas. Screening business, Saimu, was acquired in China that made Metso to be in top 3 in the Chinese market for this business. And then 2 smaller ones, TL Solution, which is sustainability-related, mill liner recycling technology company. And then Q&R Industrial Hoses, which is linked to our pump businesses where we are also having accelerated growth targets. We are currently reviewing some of our businesses. One of them is the loading and hauling business and looking for the next strategic steps regarding that business. Investments we have done already during the last year, some investments, especially to support our intentions to grow our aftermarket share, and one of them, the latest one is screening manufacturing center that we are currently building up in Romania. And when it comes to the market outlook, we expect that the market activity in both of our segments, Minerals and Aggregates, will remain at the current level. And we also want to highlight in this context now that the tariff-related turbulence is not over. We do hear this from our customers, and there is potentially effect then for the global economic growth and also the market activity. Juha Rouhiainen: All right. Thank you, gentlemen, for the presentation. And operator, we are now ready for Q&A. Operator: [Operator Instructions] The next question comes from Michael Harleaux from Morgan Stanley. Michael Harleaux: I have two, if I may. The first one would be on your impressive aftermarket order growth. If you could help us unpack what's underlying and if there are any one-offs in that, that would be very helpful. And then regarding the Aggregates segment, one of your competitors mentioned dealer restocking. So I was wondering if you could tell us if you are seeing any of that happening? Sami Takaluoma: Excellent questions. Regarding the aftermarket growth in orders especially so, we have commented in these calls earlier that one element of the aftermarket portfolio that we have is the upgrades and modernizations. They do have a small cyclic element, and that has affected them so that the comparison period, especially last year, did not see almost any of those coming through. And then our pipeline has been quite solid at the funnel. We know that the cases are there. There has been slight hesitation from the customers to make the decision, the timing of the decision. And now in Q3, they started to come through from the funnel as an order. So that was in line of our expectation in that sense. When it comes to the Aggregates, the distributor network in -- especially in the U.S. had a situation that 2024, the end customers did not purchase machines at a normal pace, and that created the situation that the distributor stocks were quite full. What we have seen from our side is that the normalization of the U.S. market started to happen at the end of last year, beginning of this year, and that's visible for us when we look at the stock levels of our distributors. They have gradually month after month coming down from the very high levels that they were at the mid '24. So from that perspective, there is element of distributor stock has an impact also to our numbers, but we also see that the market has normalized from that behavior during this year. Operator: The next question comes from Edward Hussey from UBS. The next question comes from Christian Hinderaker from Goldman Sachs. Christian Hinderaker: I want to start on Aggregates. At the CMD, you mentioned equipment utilization was down 20% or so from the year before. Obviously, interested then in the OE order growth in that segment at 11% and some of the comments in the release that you're seeing a better demand environment in both North America and Europe. What's driving that? And also, I wonder if you could perhaps give an indication on the average age of the installed fleet on that side of the business? Sami Takaluoma: Yes. So the running hours is having an impact mainly for the aftermarket demand. Then the new equipment need is not always clearly linked for this because the new technology will enable more cost-efficient operation for the customers. So the renewal of fleet is depending on customers' own behavior in his or hers business case. So from that perspective, it varies based on the customer, normal age, we have a very wide portfolio and deliveries every year, and that makes that there is also second owner or even third owner for the equipment normally. So this is how the aggregate mobile equipment business works. And the typical full lifetime, if well maintained, is between 15 and 20 years when the life is fully ended. Christian Hinderaker: That's helpful. Maybe we can turn to working capital. At the CMD, you set out ambitions to take share in the aftermarket. I guess, keen to understand if we should think about this requiring higher inventory levels over the coming years, either in euro million terms or in percent of sales, or whether you think you can unlock some efficiencies that mean you can grow the top line whilst improving that inventory number? Pasi Kyckling: Thanks, Christian, excellent question. And indeed, one of our pillars -- main pillars in the strategy is to grow the aftermarket business. And I mean, it's not a straightforward question to answer. But of course, if we grow the business in absolute terms, it will require more inventory. But then what we also believe is that in relative terms, when it comes to inventory turns or inventory in comparison to our top line. And there is room for improvement across the board, but then also in the aftermarket part of the business. So that's how we are looking at that. Operator: The next question comes from Chitrita Sinha from JPMorgan. Chitrita Sinha: Congrats on a strong set of results. I have two, please. So my first one is just on the Minerals margin, which was broadly flat at 18% despite the aftermarket mix. Could you provide more color on the organic development here? Sami Takaluoma: Yes. I think 18% is something that at this point, we are happy. It's okay. It's in line of our expectation. As we build the road map in the Capital Market Day that how we are going to be reaching the 20% targeted number for the strategy period, so there are several elements. And in this quarter, the aftermarket was having a good contribution for that one. There is a need for the capital equipment sales to be higher in terms of leveraging that part as well, and then we continue to work with our self-help initiatives, and as 75% of the company is Minerals segment, the impact will be mostly seen there when we do company-wide actions. Pasi Kyckling: Sami, I would like to complete or complement a bit. I think what you have also seen or what we have experienced in the third quarter is the strength of our capital business. I mean, relative share of the capital increase overall, but especially in the Minerals. And we have a good healthy business there and then it supports also delivering this kind of margins, and we are quite satisfied with that. Chitrita Sinha: Great, very clear. So my second question is on the Aggregates margin where you've brought back some costs, I think, in Q2 in anticipation for a ramp. So what is the best way to think about the volume threshold where you can comfortably achieve more than 16% again? I'm trying to drive whether we should expect to pick up in Q4? Will it be more 2026? Pasi Kyckling: Yes. So first of all, this cost that we have taken gradually back in Aggregate refers to our Finnish operations there and the fact that the local legislation here enables laying people off on a temporary basis. And during this low period, we have used that opportunity and are now during first half of this year when our order books have been strengthening, we have taken people back to work, and they are busy, currently working with the order book that we have. Then I'm afraid we are not in a position to give you exact volume guidance on when certain thresholds when it comes to margins are reached, but overall, I mean, we delivered a few percentage points below 16% now in the third quarter. And this is also a volume gain. So there is still capacity in the system to deliver higher volumes without, for example, increasing manpower and then the drop-through from additional business comes with significantly higher margins. Operator: The next question comes from Vivek Mehta from Citi. Vivek Mehta: I hope you can hear me well. It's Vivek on behalf of Klas. First question is around the restatement of the Minerals EBITA from discontinued operations. That impact grew in the second quarter. And curious to know what was the uplift to the Minerals EBITA from this in the third quarter? Was it similar to the second quarter? I appreciate that it doesn't impact the organic growth in margin. Just curious about the absolute impact. Pasi Kyckling: Yes. No, thanks, Vivek, for that, and we published the restated numbers with quarterly breakup of '24 and first half of '26 earlier this month. And while we will not provide a specific third quarter numbers and then going forward, we'll not comment specific business lines, what we can say is that the impact was sort of a similar in third quarter as we experienced in average during these periods that we have restated. And I know that in the second quarter with these numbers, it was slightly higher than in average. But what we had was sort of the average from these restated periods. Vivek Mehta: Understood. My second question is just following up on the outlook and your comments around tariff uncertainty and so on. We're seeing very good growth in Minerals, excluding the larger orders. Appreciate maybe the Section 232 and tariff concerns might be more applicable to Aggregates. So curious, given the strong commodity price backdrop, why you've not potentially raised that Minerals outlook? Sami Takaluoma: Yes. It's true that the tariff situation has impact on both of our segments, but it's also true that the impact potentially is higher for the Aggregate. So, tariff, in Minerals side is a little bit related to the U.S.-based customers and projects. And then generally, globally, the uncertainty, which is not helping making the significant decisions of the investments of multibillion for the new projects. But that, hopefully, is stabilizing and not having impact on that side. And then in the Aggregates, it's really all about how the U.S. market will be reacting because the tariff situation is having an impact on, for example, what is the end customer pricing and these kind of elements. So that might slow down the U.S. now normalized the market from that perspective, potentially. Pasi Kyckling: And also when it comes to Aggregates, and you made a reference to this Section 232. So the cross advance screens have been something that have been earlier excluded. Now it seems that they will be included in the tariff. And then certainly, it will have some impact on Aggregates market in the U.S. going forward. Operator: The next question comes from Panu Laitinmäki from Danske Bank. Panu Laitinmaki: I have a couple of questions. Firstly, on the Minerals market outlook, how do you see the kind of likelihood of receiving very large orders still in this year? We haven't seen any so far, and it's a bit more than 2 months left. So do you think it's still likely or is it more like 2016? And maybe related to that, what is the kind of pipeline or sales funnel for these large projects now compared to what it was like a year ago, for example? Sami Takaluoma: Yes. Thank you. A very good question. And this is something that we also are very interested to get the answers, but unchanged situation, how we read the customer negotiations and discussions, meaning that there are these projects, they are there, they are having a lot more tangible way of discussing, meaning that there is already customer organizations for the greenfield projects and so forth. And that's answer maybe for your second question, that this is something that we see as a difference for 1 year or 2 years ago that there is more concrete, tangible actions happening already on the customer side. And then we remain in the same view that we have had, 2026 is almost like guaranteed that these orders start to come through and still staying on a positive that one, two might be even coming at the end of this year, but as you said, the clock is ticking, and there is 2 months to go. So that remains to be seen. But then beginning of '26, definitely. Pasi Kyckling: From a commodity split point of view, these are gold and copper projects that are more advanced in our pipeline. Panu Laitinmaki: Okay. Let's hope for that. So secondly, I wanted to ask about the Aggregates and the European outlook. So you talk about European recovery. Can you talk a bit more about like what you see, which countries are driving this? Is it the German infra package already? Or what is driving this? Sami Takaluoma: Yes. We believe that the German infra package actually had an impact. The orders that we have been receiving in the last 2 quarters, they are not so much from the Germany. But that decision created the trust in the European countries close by for the future. So the orders are coming from multiple countries into Europe and they are related to infrastructure projects in those countries moving forward and then the customers making the equipment orders to be ready to serve what they have promised to serve. Panu Laitinmaki: Okay. I have a third one, if I may. On Minerals aftermarket, so really good growth in orders, obviously, from the service projects. But if you take that out, how has the kind of underlying spare parts. Spare parts business growth developed? Is it like at the same level? Or has that accelerated significantly? Sami Takaluoma: No major changes there. We have seen already a long time, solid, good single-digit growth for that, what we call day-to-day spare parts and consumer pools and service orders. So that continues the same way also in the Q3. Operator: The next question comes from David Farrell from Jefferies. David Richard Farrell: I'll go one at a time. First question relates to Aggregates. I was wondering in terms of the 9% organic order intake growth, what percentage of that is related to tariff-related surcharges on your U.S. business? Can you kind of unpick that element for us, please. Pasi Kyckling: Thanks, David, very, very good question. I mean a small part is from that factor. But I mean, it's not very material. I mean, I'm afraid I can't -- we can't quantify it, but that's the way to look at it. David Richard Farrell: Okay. And then my second question relates to the Minerals margin. It looks kind of -- by the increase in OE revenue and the impact that has on absorbing fixed costs probably played quite an important role in driving the margin up. Yet, if I look at the book-to-bill for OE so far this year, we're below 1x. Is there a risk that, that is a bit of a headwind as we think about 2026 margins that you simply don't have the OE levels that you had this year, and therefore, margins will face an incremental headwind? Pasi Kyckling: David, good question there. I mean we are not thinking that way. I think when it comes to Minerals capital, book-to-bill, we have basically sold similar amount as we have gotten orders this year. And obviously, some of the orders that we are receiving now in the fourth quarter, they will still play a role also in 2026 sales delivery. But under the assumption that we continue to get healthy order book build during the fourth quarter, maybe some of those larger projects moving forward that we discussed earlier. So we don't see that situation. And then obviously, already this year and also going forward, when we look at, within Minerals, there is quite different situation in the underlying business lines. Some of them are more busy than the others. And that's also the reason you may have seen that we announced and started some labor discussions earlier this month just to adjust our capacity in some of the business lines where we have less work currently. Operator: The next question comes from Vlad Sergievskii from Barclays. Vladimir Sergievskiy: Yes. It's Vlad from Barclays. I'll ask 3 questions, if I may, and go one by one. Firstly, could you give us some maybe initial idea what directional sales growth outlook could we have for 2026. On one hand, commodity prices are super supportive. But on the other, book-to-bill slightly below 1 this quarter, backlog broadly flat. Do you think you could grow next year top line in line with strategic targets, which you recently released or it will be some kind of different phasing here? Pasi Kyckling: Yes, Vlad. Excellent question. And you know also that we are not in a position to give such guidance. However, what we can confirm is that our target is to grow 7% CAGR going forward. And with that clock starts ticking 1 January next year, and we are working hard day in and day out to make sure that we can grow. And if I look at across the portfolio from 1 January onwards to end of September, our order book has increased by EUR 200 million, so -- or EUR 180 million to be specific. So that gives us a much stronger starting point for next year compared to the starting point that we had when we entered 2025. Vladimir Sergievskiy: Excellent, and that's great to hear. And if I could ask you on the consolidation point that you -- the changes you have made this quarter. I appreciate you are not giving the precise numbers for Q3. Would you be able to go to give us some idea what was the impact on the orders because orders for this business that you are consolidating has been super volatile. I think in the comparative quarter, it was almost no orders Q3 last year. Any color you can give us here would be very helpful. Pasi Kyckling: Yes, I can comment on that order specifically. So it was a very low order number also in the third quarter this year. So the order growth is certainly not driven by this MCP business. Vladimir Sergievskiy: Excellent. And the final one from me. On the inventories, trade receivables, obviously, they are optically up sequentially this quarter compared to what we saw before. Is it largely driven by the gain, the consolidation scope that you've done? Or there are some underlying changes there as well? Pasi Kyckling: Yes. Thanks, Vlad. And the consolidation change, for example, in inventory terms has some tens of millions impact on our inventories, i.e., increasing when we brought the MCP business back from discontinued to be part of the normal business, so to say. And then what we see overall happening in the underlying inventories is that we continue to decline the Finnish product inventories. And if I look one level below the balance sheet that we published, the Finnish products have continued to decline from end of June to end of September, order of magnitude EUR 50 million. And then we see a bit growth in the other areas, which is work in process and then raw materials. And you may remember that this EUR 200 million inventory program that we completed by end of June this year, that was really focused on Finnish goods. And then we continue on that journey. And overall, both inventory, trade receivables, but then over the larger working capital continues to be a focus area going forward. Operator: The next question comes from William Mackie from Kepler Cheuvreux. William Mackie: A couple of questions. Firstly, could you perhaps talk a little about the pricing environment and the price realization you've achieved across Minerals and Aggregates in Q3 in your efforts to fully offset any other remaining inflationary pressures? And secondly, against the review in Minerals of the backlog up and the orders strong in the smaller and conversion business, can you talk a little to the seasonality of the business revenue realization in the fourth quarter? Historically, there has been seasonality. What should we think about the Q4 versus Q3 in this year regarding your bookings and realization of revenues off backlog? Sami Takaluoma: Thank you, William. I can take the pricing one. Two segments. In the Minerals side, we see a very little pushback for our pricing. So we use our pricing power where we see that applicable. And that part is working okay. There is some discussions with the customers when they are not sure when they will be ready to release the orders for the capital side to get the price validity longer than we usually do. And so far, we have not gone that route. Then in the Aggregates side, it is a little bit more the current situation in the markets under pressure. So there, it's difficult to use our normal way, the pricing power, and that is quite obvious at the moment in the Aggregate market. Pasi Kyckling: And then, William, when it comes to Minerals seasonality. Overall, in Aggregates, we see clear seasonality, for example, third quarter, also this year was a slower period compared to some of the other quarters. In Minerals, we see much less of that. And we are delivering, we are completing the projects from our backlog also during the fourth quarter normally. So we don't expect anything specific there. Then of course, if I compare to third quarter, for example, there is Christmas and there is holiday seasons, and that may have some limited impact, but that's how we see it. William Mackie: One follow-up, if I may. Building on the earlier question regarding the order pipeline in Minerals. Can you talk a little to the discussion around the upgrades and modernization pipeline rather than large, normally highlighted projects? Do you see the ongoing trend that we've seen in Q3 with exceptional strength continuing in the fourth quarter? Sami Takaluoma: Yes, that's an excellent question. And as you might remember, I was responsible of this business area. And typically, we had the funnel of these upgrades and modernizations, 6 months ago, it was the largest ever in the euro value. So a lot of projects in a very good state of the discussions with the customer. And now we have started to see that they are released. And typically, I'm now referring what has happened in the past. They tend to then follow for 1, 2, 3 quarters in a row as a cycle when the customers make these orders. So expectation is that we do see also those orders coming in the Q4 and maybe also Q1. Operator: The next question comes from Tore Fangmann from Bank of America. The next question comes from Mikael Doepel from Nordea. Mikael Doepel: I have a few questions. I can take them one by one. So just firstly on the Aggregates business and what you see there, particularly in the U.S. If I hear you correctly, you seem to expect Europe to continue to recover into the fourth quarter, but I didn't really catch your views in the U.S. market clearly. So is it so that you see distributor inventory levels currently at normal levels? Or do you also expect some restocking effects there? Have you seen any negative impact of tariffs thus far? Or is it just an expectation that it must come? Just a bit of a clarification on how do you see the demand in the U.S. Sami Takaluoma: I'll try to open that a little bit up. We have not seen yet, but what we look is the distributor inventory levels. And from that perspective, it supports that the business that we see coming from the U.S. would be the normal as the levels are not over high as they used to be 1 year ago, for example. Then on the other hand, there is a risk that the new tariff included price levels of equipment and also parts might have an impact on how the end customers are evaluating their investment timing. Are they doing it now or expecting to look a little bit later. And even might have some challenges to fulfill the business plans with the new pricing coming through. So these 2 are both there and giving this a little bit uncertain situation, if I put it this way. The other one is supporting that the business continues normally and the other one is putting a little bit of the dark clouds out there. Mikael Doepel: Okay. No, that's helpful. And then second question relates to the mining business and maybe the project pipeline you're talking about. Just wondering, if I'm not wrongly remembering things, I think there should be a bit of a tail still left, for example, from the Uzbekistan, fairly large copper smelting order you got back in 2024. There might also be some other tails from other bigger projects. I assume when you talk about larger projects, you are not referring to these ones, but if you could maybe just give an update on the ones that you have won but haven't yet gotten all the orders from, the bigger ones. Pasi Kyckling: Yes. So first of all, Mikael, you have understood it the right way. So when we spoke earlier about the larger projects, so we were talking about future orders, which we have not yet seen and our expectation when they will realize, et cetera. Then when it comes to sort of existing pipeline, you are indeed correct that there is the Uzbekistan project, Almalyk, which is ongoing. And then there is also a number of other not only tails, but activities from the past, which are under delivery, and they are moving forward as per the plans. And then from financial statements point of view, we recognize revenue based on the percentage of completion. And typically it takes quite some time from the order until we start deliveries because of either engineering needs to go forward or if that is done, then just manufacturing activities with some of these equipment takes quite some time. And then the local construction projects, also, they are not small by nature. So it could be 24, 36 months from the order until we are complete with our deliveries. But yes, that's part of the backlog realization that we see every quarter. Mikael Doepel: That's fair. And maybe just a follow-up on that. So what is the reason? I mean, why the tails from Uzbekistan is not coming through? It's a question about the progress on site, which is slow? Or is it financing? Or is it anything else? Just wondering enough when we should expect that one to go through? Pasi Kyckling: Mikael, which way are you thinking? Because I mean, the project execution is moving forward, and we are realizing revenue and so forth, or how are you thinking about this? Mikael Doepel: No, I think there should be still some order value less from project. Have you already received everything? Pasi Kyckling: No. I mean, there is further potential on this and some of the other cases, but we cannot really comment single customer cases in such manner. Operator: The next question comes from Edward Hussey from UBS. Edward Hussey: Sami and Psi, can you hear me now? Pasi Kyckling: Yes, Edward, we can hear you. Edward Hussey: Okay, cool. Sorry about earlier. Just sticking to the rebuild and modernization theme. So first question is just on the order side. My understanding is that the comps in Q4 were also extremely weak. So should we expect to see a similar growth rate on the rebuild and modernization side in Q4? Sami Takaluoma: Yes. I said that these ones are those aftermarket orders that are not super critical from the timing perspective. And that's also the reason why they have this cyclic element. So we do have -- now we got the orders. We are happy of those. They were expected that they start to come during this year. We also expect that we see some of a similar way coming through in the Q4, but fully to be able to estimate or quantify the amount is challenging because they do not have this criticality the same way as other aftermarket products. Pasi Kyckling: And you are right that it's a -- sorry, you are right that it's a weak comparison point in the Q4. We did not see these orders last year in Q4. Edward Hussey: Okay. And then maybe just thinking about the mix in orders. I mean, is it -- when you think about these rebuild modernization orders, do they make up a sort of normalized mix in Q3? Or are they still below what you'd consider a normalized mix? Sami Takaluoma: I would say that when looking at the backlog, for example, so they look normal, and then orders that we are expecting once again, difficult to really estimate very accurate way that how much we will get those. But I would say that they are normal, if something. Edward Hussey: Okay. That's very helpful. And then final question just on the theme is just on the revenue side. Clearly, it seems to be margin accretive from the aftermarket business. In terms of the revenue mix, the rebuild modernizations, are these at normalized levels now? Or is there -- I mean could we potentially see a sort of acceleration in rebuild modernization revenues in Q4, and therefore, support from a margin perspective? Sami Takaluoma: Generally, I can comment that much that upgrades and modernizations for us, they are good and very healthy business when it comes to the margins. So they are in a good level from our sales mix perspective. Operator: The next question comes from Tore Fangmann from Bank of America. Tore Fangmann: Sorry, can you hear me now? Pasi Kyckling: Yes, we can. Tore Fangmann: Perfect. Sorry for before. A little bit of tech issues and cut out sometimes. So excuse me if this was asked before. Just one more question from my side. The Aggregates margin has recovered quite nicely quarter-on-quarter despite the lower revenues total and also like in equipment itself. I was expecting before that the main kicker for a margin improvement would be basically the volumes coming back for the cost absorption. So what would you say is the reason now quarter-on-quarter with the margin recovery that we've seen? Pasi Kyckling: Yes, it's a good question. And Tore, you may remember that, overall, we had some extra costs in the second quarter. And while, of course, Minerals is the one carrying larger share, Aggregate was also impacted. And from that angle, situation has normalized. And overall, not only in Aggregates, but generally, we had sort of a good cost control quarter, and that helped also Aggregate to deliver the margins they did. Tore Fangmann: Okay. Then just as a brief follow-up, if I remember correctly, then the main part that could have impacted aside from the ramp-up of the production cost would have been the ERP system rollout in Q2? Or am I missing out something here? And then when you say good cost control, is this something that you would then expect to continue into Q4? Is it like basically structurally now better cost control? Or is it a little bit more by circumstance that we have better cost control in Q3? Pasi Kyckling: I mean, I was mainly referring to the extra costs, i.e., ERP that we had in the second quarter, and like we said 3 months ago, that was one-off costs. Those have not repeated third quarter. And from a cost performance point of view, our expectation is to remain in a similar position going forward. Juha Rouhiainen: All right. There seems to be no further questions. So we are able to wrap up this conference call well in time. Thanks again for listening. Thanks again for asking questions. We will be back with our fourth quarter and full year results on February 12 next year. But in the meantime, we are sure to meet many of you on the road in different events during the remainder of this year. Looking forward to that. And now we say thanks again, and goodbye. Sami Takaluoma: Thank you. Pasi Kyckling: Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to the Colony Bank Third Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 23, 2025. I would now like to turn the conference over to Brantley Collins, Communications Manager. Please go ahead. Brantley Collins: Thanks, Joelle. Before we get started, I would like to go through our standard disclosures. Certain statements that we make on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Current and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance but involve known and unknown risks and uncertainties. Factors that could cause these differences include, but are not limited to, pandemics, variations of the company's assets, businesses, cash flows, financial condition, prospects and other results of operations. I would also like to add that during our call today, we will reference our third quarter earnings release and investor presentation, which were both filed yesterday. So please have those available to reference. And with that, I will turn the call over to our Chief Executive Officer, Heath Fountain. T. Fountain: Thanks, Brantley, and thank you to everyone for joining our third quarter earnings call today. We are pleased to report another quarter of improved operating performance. This is a result of our team members' continued dedication to serve our customers and communities with excellence, and our team's efforts, are driving meaningful results. We continue to see improvement in operating earnings driven by net interest margin expansion for another consecutive quarter. We also saw improvement in our operating pre-provision net revenue, indicating continued improvement in core earnings. This earnings improvement, along with improvements in our unrealized losses led to a strong increase in tangible book value for the quarter. We believe we are going to benefit from the Fed rate cuts on the funding side, and that will help margin, but we do expect the rate of the expansion to be slower than what we saw in the earlier half of this year and to be more in line or slightly more than what we saw during the third quarter. I want to take a moment to reflect on just how much we have improved our margin over the last year. Q3 of 2024 was the low point in our margin. And since then, we've seen our margin expand 53 basis points through disciplined relationship pricing, loan growth and the repricing of assets and deposits. I'm pleased that the majority of this increase after tax has fallen to the bottom line as operating ROA improved from 81 basis points in Q3 of last year to 1.06% this quarter. The team has done a great job of allowing margin improvement to increase our earnings while still making strategic investments for future growth. That will continue to be our plan as we move forward and margin expands. We've been very pleased to see meaningful loan growth throughout the first half of this year. While that pace was exceptionally strong, we're now observing that start to settle into a more normalized and sustainable growth rate, which aligns well with our long-term projections and capital planning. This past quarter was around 9% annualized, which is lower than the first and second quarters of this year, but for the year, still around a 14% annualized loan growth rate. We're seeing customer demand pull back a little, some of which we think is customers being cautious about the economic outlook and some of which is customers waiting for rates to fall further before they borrow more money. Based on the pipeline, we think the fourth quarter loan growth is going to be lower than this past quarter, which for the year should put us right around our long-term target of 8% to 12% a year. Our bankers remain committed to serving our relationship customers and look to deepen our relationships with a consultative approach that can grow core deposits and increase fee opportunities. Noninterest income remained solid despite a little slowdown in our SBSL and mortgage divisions. On an operating basis, noninterest income increased over $1 million from the prior quarter. In the third quarter, we saw a meaningful increase in fee income as well as interchange income. In addition, Colony Financial Advisors, Colony Insurance and Merchant all saw strong increases in revenues as those lines of business continue to grow and scale. Operating expenses were slightly higher this quarter as we expected and mentioned on the call last quarter. As we invest in talent and see more activity in various products and services, we expect to see some expense increase to go along with that. This additional expense was offset by additional noninterest income and our operating net NIE to average assets improved quarter-over-quarter by 4 basis points as we continue to focus on efficiency. While recent headlines have focused on one-off credit events at some larger regional banks, our portfolio continues to perform well. Credit quality remains relatively stable overall. Past due and classified loans both improved quarter-over-quarter, reflecting continued strong credit discipline across our portfolio. While criticized loans and nonperforming assets increased, they remain at manageable levels relative to our overall portfolio. Charge-offs were a little higher this quarter, primarily due to variability in our SBA portfolio, which we've discussed previously. At the bank level, net charge-offs remain at acceptable levels and in line with our expectations. With the federal government currently in a shutdown, we've been closely monitoring potential impacts on our business as well as the impacts to our customers and communities. Our teams are prepared to answer questions and provide guidance and assistance to our customers as needed. We reviewed our portfolio to identify customers who may be affected. And at this time, we do not expect any material adverse impacts or credit concerns as a result of the shutdown. We remain focused on staying proactive, supporting our customers and ensuring business continuity throughout this period. The area of our business that is most impacted by the shutdown is our SBSL group, which does government-guaranteed lending. In anticipation of a potential shutdown, we were able to seek approvals on a number of loans prior to that shutdown. Our team is currently focused on continuing to develop new business and process loans as far along as possible during this time. Our ability to get final approvals and loans sold will be impacted, but we believe that as long as the government gets back open this quarter, the impact should be minimal. Turning to our pending merger with TC Bancshares and TC Federal Bank, I'm pleased to report that everything continues to progress as planned. We filed our regulatory applications in August, and our S-4 registration statement has been declared effective by the SEC. Both companies are well into the process of shareholder approval, which we expect to have at our meetings in November. We continue to expect the transaction to close in the fourth quarter with system conversion planned for the first quarter of next year. Coordination between our 2 organizations has been excellent. The teams are working closely together and integration planning is well underway. We're very excited about bringing our companies together and leveraging the strengths of TC Federal's franchise to expand our market presence and create new opportunities for our combined organization. We have made and communicated employment decisions for the combined company post the merger, and we are on track to achieve the financial metrics of the deal that we laid out at the announcement. As we think about M&A going forward, we are optimistic that there will be opportunities for Colony to participate in further M&A next year. We continue to proactively have conversations with banks that we feel will be a good strategic fit with Colony. We also expect that a smooth integration with TC will be beneficial to those discussions. We are also being very strategic about opportunities to grow our customer base and talent pool from the disruption that is occurring in our footprint with the other bank M&A that we are seeing. In terms of talent, we're very excited to welcome Mitch Watkins, a seasoned and well-respected banker to our Columbus, Georgia team. Mitch brings extensive experience and strong local relationships that will further strengthen our presence in this important market. We remain focused on investing in talent acquisition that supports our growth strategy and helps us solidify and expand our market position across our footprint. We look to make very strategic additions where it makes sense in commercial banking, wealth and mortgage. Lastly, I'd like to take a moment and recognize one of our team members, Hugh Holler, our Director of Homebuilder Finance, who was recently inducted into the Homebuilders Association of Georgia Hall of Fame. This is a tremendous and well-deserved honor that reflects Hugh's deep commitment to this industry and the respect he's earned throughout the homebuilding community. We're fortunate to have Hugh on our team. He exemplifies exceptional customer service, servant leadership and strong relationship banking, and we congratulate him on this outstanding achievement. With that, I'm going to turn it over to Derek to go over the financials in more detail. Derek Shelnutt: Thank you, Heath. Operating net income increased $252,000 from the prior quarter. This increase is attributed to higher net interest income and operating noninterest income, offset some by increased provision and operating noninterest expenses. Operating pre-provision net revenue, shown on Slide 11 and in our earnings release under non-GAAP measures, improved both quarter-over-quarter and year-over-year. This sustained growth highlights the continued momentum and strength of our core earnings power. Net interest income increased $314,000 compared to the prior quarter by continued asset repricing and loan growth. Our cost of funds for the quarter was 2.03% compared with 2.04% in the prior quarter. As mentioned last quarter, we expected our overall funding costs to remain flat. The Fed cut late in the quarter will have more impact in the fourth quarter, and we expect to see that cost of funds number decline. Net interest margin increased 5 basis points from the prior quarter, which was a little slowdown from the increases we saw earlier in the year. We expected this and mentioned it on last quarter's call. Our margin stands to benefit from the September Fed cut and any other cuts we may get in the fourth quarter. With more normalized loan growth expectations, we don't believe it will be a huge jump in margin quarter-over-quarter, and we are anticipating that to be in the single digits going forward. Third quarter operating noninterest income increased just over $1 million. Service charge and fee income increased $425,000 with some of that being activity-based and some being a result of a process we went through late in the second quarter to evaluate and adjust our fees. Other noninterest income increased $788,000, driven by increased interchange fee income, improved income from wealth insurance and merchant services as well as a onetime gain from one of our fintech investment fund partnerships. Slide 20 shows the improvement in third quarter for Wealth, Insurance and Merchant Services. Mortgage and SBSL activity has been a little slower this year, and mortgage was even slower in the third quarter. This is driven by changes in SBA lending guidelines on the SBA side and a slower housing market on the mortgage side. Operating noninterest expenses were up $624,000 quarter-over-quarter, reflecting continued investment in our people and growth initiatives. Compensation and benefit costs were higher in the quarter related to strategic hires to support our growth and business development strategy. A portion of those new hire expenses are short-term salary guarantees for commission-based employees, and those will end in the fourth quarter. Technology and innovation remains a focus for our long-term growth and technology expenses were higher quarter-over-quarter as we continue to invest in ways to improve long-term efficiency and provide for a state-of-the-art customer experience. We remain very disciplined in managing expenses and maintaining our focus on efficiency. We are confident in our ability to balance cost control with the strategic investments that position us for long-term organic growth. On an operating basis, the increase in noninterest income more than offset the increase in noninterest expense. Our operating net noninterest expense to average assets improved 4 basis points from the prior quarter to 1.48%. On a go-forward basis, we still target a net NIE to assets of around 1.45%. Fourth quarter expenses will likely include at least 1 month of TC Federal expenses post merger. Our systems conversion is planned for the first quarter, and we plan to achieve our targeted cost saves in the second quarter and beyond. Onetime merger-related costs during the quarter were $732,000, and that was an adjustment to operating income. Also during the quarter, in our 10-Q last quarter, we disclosed a wire fraud incident where the company was the target and losses totaled $2.9 million. Upon recent new information, a portion of that loss that we believe to have been fully covered by insurance has become disputed. And in accordance with accounting standards, this quarter, we recognized a $1.25 million loss related to the disputed coverage. This is reflected in our adjusted income. All other coverages remain undisputed. We do not expect any other losses related to this matter, and we'll continue to pursue all avenues for recovery. Any recovery will be recognized as nonoperating income in future periods. Provision expense totaled $900,000 for the quarter, an increase from the prior quarter, driven by loan growth and charge-offs in our SBSL division. As we've mentioned before, SBSL charge-offs can have some variability, and that's what we experienced this quarter. Many of these SBSL charge-offs are related to older loans before we tighten credit requirements and often involve lower SBA guarantee percentages. This quarter represents the peak for charge-offs at SBSL. We do not expect them to increase from here. These are primarily variable rate loans, so a declining rate environment should provide some relief going forward. On the bank side, charge-offs remain low and past dues improved quarter-over-quarter. We've seen more activity in loans moving in and out of classified and criticized, and our team has done a good job of working these loans. There's been a lot of recent media attention on credit challenges at some regional banks, particularly related to shared national credits. I want to note that we do not participate in any shared national credits and our exposure to participation loans is very limited. Our lending strategy remains focused on relationship-based locally originated credits where we know our customers and markets well. Loans held for investment increased $43.5 million from the prior quarter. As Heath mentioned, we are seeing that growth rate moderate some from the early half of the year, and that will put us near our long-term targeted growth rate. Slide 34 shows our weighted average rate on new and renewed loans of 7.83% during the quarter. And when you compare that to our repricing schedule on Slide 36, we still have opportunity to gain yield on maturing fixed rate loans as well as investments cash flow even if rates move down some from here. Total deposits increased $28.1 million during the quarter. Part of that growth reflects our strategic use of brokered funding to replace seasonal municipal deposit runoff. We expect those municipal funds to return in the fourth quarter as tax revenues are collected, which is consistent with the historical seasonality we've typically experienced. We remain focused on building and deepening customer relationships that bring in high-quality, lower-cost deposits, which continue to be a core priority for our growth strategy. During the quarter, we sold securities for a pretax loss of around $1 million that netted close to $75 million in proceeds. Under the assumption of using half of those proceeds to fund loans and half to increase liquidity, our modeling indicated an earn-back of less than 1 year. The book yield sold on those investments was close to 3.16%. So there's opportunity to pick up meaningful yield there and increase interest income. We will continue to evaluate the need for future sales as well as consider a larger transaction as part of those evaluations. We did not repurchase any shares during the quarter, but continue to review the need for any repurchases based on capital needs and market conditions. This week, the Board also declared a quarterly dividend to shareholders of $0.115 per share. We're still in the process of filing a new shelf registration as part of our capital management strategy and expect that to be filed very soon. Our TCE ratio at the end of the quarter was 8% compared to 7.43% for the same quarter last year. Tangible book value per share increased to $14.20 from $12.76 a year ago, reflecting consistent growth in tangible capital and our continued success in building long-term shareholder value. Slide 20 highlights our quarter-over-quarter pretax profit for our complementary business lines. Mortgage had a slower quarter with production being down slightly compared to the second quarter. Expenses were a little higher due to some strategic hires of mortgage lending officers and the upfront cost and short-term salary guarantees associated with those hires. We believe these new MLOs will drive profitable growth for our mortgage division. The housing market and volatile interest rates have also caused some headwinds that contributed to the lower production during the quarter. SBSL was flat compared to pretax income in the prior quarter. The increased charge-offs were offset with decreased expenses. And as we see prime rate move lower, that should reduce some of the stress on the charge-off side. Marine and RV lending has had a good year and continues to improve. Pretax income is up $100,000 quarter-over-quarter. Loan balances are now around $90 million and have increased $45 million year-over-year. We are looking into the potential for pool loan sales, which could provide a good source of noninterest income. Pretax income for both the Merchant Services and Colony Wealth Advisors increased meaningfully from the prior quarter as those business lines continue to grow and perform well. We are excited about the performance and the outlook of these 2 lines of business. Colony Insurance closed on the OE acquisition in May and the second quarter was a focus on integration. The team is now focused on growth, referrals and sales targets with income increasing in the third quarter and continuing to scale. And that concludes my overview. And now I'll turn it back over to Heath before we take questions. T. Fountain: Thanks, Derek. And again, thanks to everyone for being on the call today. We're very pleased with our performance this quarter. That's all of our prepared remarks. And with that, I'll call on Joelle to open up the line for questions. Operator: [Operator Instructions] Your first question comes from Dave Bishop at Hovde. How about given the disruption in D.C. seeing any trickle down to your borrowers and local economy? T. Fountain: All right. Well, I appreciate Dave getting that question in. As I mentioned earlier, we are on the lookout for that. We really don't see a lot at this time. We have provided our team and our customers with resources to help out as we see things, and we scrub the portfolio to see if we have any exposures that we're concerned about. But at this time, we don't think there will be a material impact. We don't see any issues arising. Of course, I did mention the SBSL team and the government guaranteed loans and what -- that there could be a potential impact there just as if it drags out longer. But we think if we get a resolution within the next little bit, it shouldn't have too much of an impact on Q4. So we feel pretty good about where that is overall at this time. Operator: Related to loan pricing, what is the average roll-on versus roll rate this quarter and how NIM outlook looks? Derek Shelnutt: Yes, absolutely. I'll take that one. Great question. So when you look at the roll-off yields from our previous repricing schedule or our previous released investor presentation for the prior quarter, we had fourth quarter roll-off yields in the 5% range. And so our put-on yield for the new quarter is also in our investor presentation, and it was -- the new and renewed rate was 7.83% for this quarter. So you can see there we have some meaningful pickup in yield. And even with rates moving down a little bit, we'll continue to see that. That will drive some net interest margin growth. We expect that net interest margin growth to be both on the cost of fund side and the asset repricing side. But ultimately, going forward, we expect a modest growth in the single-digit range, but a little bit higher than what we saw this past quarter as we take advantage of some of those Fed rate cuts. Operator: Any NDFI loan exposure as well? T. Fountain: No, that's a great question. I appreciate Dave getting that question in, and we do not have any meaningful exposure to that. And I know that's been another area that we've seen a lot of concerns about and seen some situations as some other banks, larger banks have reported. And back to our comments that we made earlier, our real focus in our organic growth strategy has been to bank customers that we know, that are in our footprint, that we have a relationship with or even that our bankers have maybe had relationships with at other banks in the past. So we really focus on the customers we know and the kinds of business that we think we can understand and adequately assess the credit risk. Operator: There are no further questions at this time. I will now turn the call over to Heath for closing remarks. T. Fountain: Okay. Well, thanks again, everyone, for being on the call today. We're really pleased with how the quarter went and excited about the things happened in Q4 with TC and continued improvement in our margins. So we're very excited about where Colony is headed, and we appreciate you being on the call today. Thank you. 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: Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2025 Earnings Call. [Operator Instructions] This conference call is being recorded today, Thursday, October 23, 2025. Before we begin, note the matters that the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects, backlog or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-Q for the quarter ended September 30, 2025. Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hanna. Go ahead, sir. Joseph Hanna: Thank you, Dave. Good afternoon, everyone. We appreciate your attendance on McGrath RentCorp's Third Quarter Earnings Call for 2025. It's a pleasure to be here today, and we're eager to share further insights into our performance. I'll begin with an overview of our third quarter results before Keith shares and financial details, and then we will open up the call for questions. For the third quarter, total company rental operations revenues rose by 4% with growth from all 3 of our rental businesses. Project activity remains steady despite ongoing market uncertainties. Mobile Modular rental revenues increased by 2%. The rental revenue growth we experienced in the quarter was primarily due to commercial activity centered around larger infrastructure projects across all our geographies. Smaller projects have been less prevalent, which is consistent with the trend we have experienced year-to-date. We had a busy education season with a good level of new shipment activity. Funding for the education business remains solid as the need for classroom modernization and growth in select areas remains consistent. With higher shipments, volumes for the quarter, we faced higher inventory center costs to prepare equipment for delivery. We used off-rent inventory rather than investing in new product, continuing to manage the fleet with a sharp focus on deploying capital efficiently. Despite challenges in the demand environment, our booked orders increased during the third quarter. This was encouraging and positive for our momentum entering the fourth quarter. Our ongoing efforts with Mobile Modular Plus and site-related services continue to go well. Both experienced healthy growth during the quarter. We continue to be pleased with our year-to-date progress. At Portable Storage, rental revenues increased by 1% year-over-year and by 2% sequentially from the prior quarter. Shipments grew and pricing remained stable. Opportunities in energy, data centers and seasonal retail offset the flat construction market. Overall, we are encouraged by these positive signs that suggest the market may be stabilizing after a challenging demand contraction in 2024. TRS-RenTelco rental revenue grew by a strong 9%. Both our general purpose and communications rental revenues saw strong growth maintaining positive momentum from the first half of the year. Utilization at a healthy 65% improved year-over-year and remained steady sequentially versus the second quarter. Rental demand pipelines remain solid as we enter the fourth quarter, indicating that the business is well positioned to continue its growth trajectory. Turning my comments to the whole company. We do not believe McGrath is currently facing any immediate headwinds due to the ongoing federal government shutdown and any potential impacts from a long shutdown are unclear at this time. With regard to the dynamic tariff environment, the impact of tariffs has been managed appropriately by our teams and has had minimal impact on our results. Looking ahead to the rest of the year, uncertain market conditions persist. Nonresidential construction indicators such as the Architectural Billing Index, or ABI remains soft. We remain focused on our strategic growth priorities dedicated to expanding our modular and portable storage businesses. Over the course of this year, we have taken steps to enter new regions, grow our Mobile Modular Plus and site-related services initiatives and increase our coverage through tuck-in acquisitions. All of these items support our efforts to become a true national modular solutions provider capable of serving our customers with storage units, single-wide units, large multi-floor and multi-story facilities and services to meet all their space needs. I want to thank all our team members for your third quarter accomplishments and steadfast commitment to delivering the highest quality service to our customers. Our culture at McGrath is a driving force behind our growth as we introduce more customers to the exceptional experience we offer. I am pleased with our progress so far in 2025, and we remain dedicated to providing value to our customers and shareholders as we finish the year. With that, I will turn the call over to Keith, who will take you through the financial details of our quarter and our updated outlook for the full year. Keith E. Pratt: Thank you, Joe, and good afternoon, everyone. Looking at the overall corporate results for the third quarter. Total revenues decreased 4% to $256 million, with rental operations increasing 4% and sales revenues decreasing 18% during the quarter. Adjusted EBITDA decreased 7% to $96.5 million. Excluding prior year items related to the terminated WillScot merger process, net income for the third quarter decreased $3.6 million or 8% to $42.3 million and diluted earnings per share decreased $0.15 to $1.72. Reviewing Mobile Modular's operating performance as compared to the third quarter of 2024, Mobile Modular total revenues decreased 5% to $181.5 million. The business saw 2% higher rental revenues and 5% higher rental-related services revenues which were offset by 21% lower sales revenues. The sales revenues decrease was primarily due to lower new equipment sales as we discussed in July, while 2024 sales were more concentrated in the third quarter. This year, we expect a more balanced contribution from sales and related gross profit across the third and fourth quarters. This quarter had higher inventory center expenses to prepare available fleet for new shipment demand, which allowed us to minimize rental equipment capital spending. We also operated with higher selling and administrative expenses to support broader sales coverage. As a result, adjusted EBITDA decreased 10% to $64.6 million. Conditions, we saw a lower average fleet utilization or 72.6% compared to 77.1% a year earlier. Despite the softer market demand, third quarter monthly revenue per unit on rent increased 6% year-over-year to $865. For new shipments over the last 12 months, the average monthly revenue per unit increased 3% to $1,192. As Joe highlighted, we continue to make progress with our modular services offerings. Global Modular Plus revenues increased to $9.7 million from $7.9 million a year earlier, and site-related services increased to $15.6 million up from $12.7 million. Overall, Mobile Modular had a solid quarter as we continue to make progress with our modular business growth strategy despite some challenging demand conditions. Turning to the review of portable storage. Rental revenues for the quarter increased 1% to $17.3 million, which is the first year-over-year growth since the first quarter of last year. We have begun to feel encouraged that market conditions for Portable Storage are showing signs of stabilization despite soft commercial construction project activity. Average utilization for the quarter was 61.4% compared to 62.8% a year ago. Adjusted EBITDA was $9.2 million, a decrease of 14% compared to the prior year. Turning now to the review of TRS-RenTelco. TRS had a strong quarter with total revenues up 6% to $36.9 million, driven by higher rental revenues. Rental revenues increased 9% as the industry continued to experience improved demand across markets. Average utilization for the quarter was 64.8%, up from 57.3% a year ago. Rental margins improved 43% from 37% a year ago. Adjusted EBITDA was $20.2 million, an increase of 7% compared to last year. The remainder of my comments will be on a total company basis. Third quarter selling and administrative expenses increased $3.2 million to $52.5 million as we operated with broader sales coverage to support long-term business growth and invested in information technology projects. Interest expense was $8.2 million a decrease of $4.5 million as a result of lower average interest rates and lower average debt levels during the quarter. The third quarter provision for income taxes based on an effective tax rate of 27.7% compared to 26.4% a year earlier. Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $175 million. Rental equipment purchases were $92 million, down from $167 million last year. Consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. At quarter end, we had net borrowings of $552 million and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.58:1. Wrapping up the financial review. While there is still uncertainty in the demand environment, we are pleased with our year-to-date results, and we have seen some encouraging positive trends as we enter the fourth quarter. As a result, we have upwardly revised our full year financial outlook, and we currently expect total revenue between $935 million and $955 million, adjusted EBITDA between $350 million and $357 million and gross rental equipment capital expenditures between $120 million and $125 million. We are proud of McGrath's third quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Dave, you may open the lines for questions. Operator: [Operator Instructions] We'll take our first question from Scott Schneeberger with Oppenheimer. Scott Schneeberger: I guess, guys, could you address kind of -- you foreshadowed it last quarter the lumpiness of the sales activity, could you speak a little bit about what the run rate in the business is? Keith, you did a good job outlining that it was big in the third quarter last year. It's more smooth across the year this year. But it looks like it will, over the course of '25 grow over '24 -- how -- is that right? And how should we think about it going forward outside of the lumpiness on an annual basis? Joseph Hanna: Yes, Scott, I can answer that. You're right, we did have a big sales quarter in Q3 of last year, and we did telegraph that it would be more balanced this year. So things are turning out the way that we thought they would. Our sales backlog is strong. We had a number of projects in this particular quarter that didn't close by the end of the quarter that will move into the fourth quarter. We did not lose our -- none of those projects were canceled. So overall, we're very positive on our sales outlook for the year. And as you can see from our guidance adjustment, we think that the business is going to perform well, and sales is a big part of that. So we're confident that we'll be able to hit those numbers. Scott Schneeberger: And is this a business on an upward trajectory, would you say? I'm not asking for '26 guidance, but -- this year, I believe it's going to be probably better than last year. Should we continue to anticipate that kind of trend? Or is it safer just to think about it as a flattish business and take it as it comes? Joseph Hanna: No. We anticipate that, that's going to continue to grow. It's an important part of the market. We're well positioned with resources out in the field to take advantage of these projects. And keep in mind that when we go to a customer, they may have a rental need in 1 year that very well could turn into a sales need in the following year. And so we want to be positioned to be able to take advantage of that customer need, no matter what they need. And so our folks are out there looking for those opportunities, and we feel it's an important part of the business, and it's going to grow. Scott Schneeberger: Sounds good, Joe. The -- keeping it on modular. The -- can we speak to -- I've heard you loud and clear and then it kind of echoes what another larger rental company said earlier today that there really is strong demand at the upper end of the market for larger projects. Could you speak to the education sector? And how is funding there? How do you see that as we're looking out to the next year? Joseph Hanna: Sure. We had a decent Q3 in education. We shipped more than we did last year. And we also got a number of returns this particular year that is part of the normal cadence, but muted our results there a little bit. Now having said that, the thing that makes me sleep well at night, and I've been doing this for a long time. What we realize is that each year with education is always a little bit different. Sometimes districts place orders earlier in the year. Sometimes they place orders later in the year. If there's some kind of economic uncertainty, which there was with the administration and the Department of Education and all the things that were going on there. It just makes districts a little bit nervous. Are we going to have the money for the programs? Programs equals teachers, equals classrooms. And so in this particular year, orders were placed a little bit later in the season, but we're getting orders all the way into Q4 here and we're getting orders for next year. But what really is, I think, makes me sleep well at night is the fact that the funding is very, very good. California passed a $10 billion facility bond. Texas passed another $8 billion in facilities bond. It was later in the year. So we won't see that until 2026. And then there's literally billions of dollars that have been passed at a local level that are waiting to be dispersed and used on projects. So I feel very, very good about the status and the solid nature of our education business and think that it's going to be a tailwind for us in quarters to come. Scott Schneeberger: Good, Joe. Thanks for that clarity. Across both modular and portable storage, obviously, the lower end of the market remains challenged. No big surprise there. Could you speak to the rate environment, the spot rate environment across both, please? Joseph Hanna: Sure. I would say for both businesses, our rates are holding in there pretty well. And you can see that we have this -- we're still working on this differential between our fleet average pricing and what units are going out on new contracts now. And so we do continue to have that tailwind, and that's been a positive and will continue to be a positive for a while as the fleet churns. Over in portable storage, rates are steady. And we've been really working hard to not have to lower our unit rents. We have had to give up a little bit on some of the transportation costs to stay competitive, but we'd rather do that than give up on the rental rate. And so contrary to what's happened in the industry in years past, this is a good sign, and I think we're on pretty solid ground. Scott Schneeberger: One more in storage and then just a couple of others, and I'll pass it on. I found it interesting. You mentioned, I think it was energy data centers and then seasonal retail and storage. That's not an area where you've typically competed, but we've heard recently from a competitor of yours that maybe some of the large players in the industry are changing their strategies with how they did business. Is this an area that you're going to move -- is this a onetime thing? Are you moving to this space more so? If you can just elaborate on specifically the seasonal retail. Joseph Hanna: This is not a big part of our portable storage business. I don't anticipate that it is going to be a big part of our business, but we're happy to pick up orders, and we were well positioned with some of the large retailers to get orders if they're available, and we have people out there that look for them, but it's not a strategic initiative in the business for us to really try to grow that because just for the reason, it is seasonal. Those units go out, they come back. We much rather have a much longer term with other types of customers. But any seasonal business we can pick up, we're happy to do it, and we did some this year. Scott Schneeberger: Okay. And then over in TRS, how is your visibility in the next year? 2025 has been a pretty good year for you in that business. How do you feel about heading into next year? Maybe with some discussion across the end markets? Joseph Hanna: Yes. A little bit -- it's tough to predict into next year. We're in the process of putting our plan together for next year. So I can't comment too much on that, but the encouraging thing is that our bookings have been strong. Our rental order volume has been strong. We managed the inventory appropriately. And I think even coming into Q4 here, things are looking good for the month of October. And I think that's momentum that will carry us into next year. We're not seeing anything different in the landscape that we're seeing right now that's going to indicate a big change for next year, but I think we've got momentum. But keep in mind, too, that this was a much shorter term rental business. So it is harder to see out over the hood in terms of what is coming down the pipe. But so far, we're encouraged and we'll know more and be able to share more in the Q4 call. Scott Schneeberger: Great. And last for me, you called out technology spend or investments in projects and technology. Could you elaborate on what you're doing? And is that to a sizable magnitude and what type of returns you're seeking in that investment? Joseph Hanna: Sure. The bright spot, I'm assuming you're still talking about TRS. The bright spot in that business this year is along the wired communications part of the business and the business that we're getting at data centers. That's been a real strong point for us. And that's very technology oriented. We're well positioned to serve that market. There's a ton of testing that needs to be done when you put in a data center, and we're on it, and that's been good for us this year, and I think it's going to continue. Scott Schneeberger: Love it. That's actually not what I was asking, Joe, but that's a -- what I was pitching for. Joseph Hanna: I am sorry, what did I miss there, in fact? What do you? Scott Schneeberger: I'm glad you added that in there because that was well worth hearing. I was just asking general for the total corporation, it sounded like you've been making some technology investments in McGrath itself. So that's what I was asking. I like your last answer, but if we could touch on that as well, too, please. Joseph Hanna: Sorry about that, Scott. I completely missed that. I should have asked for clarification. Yes, the technology investments that we're making are normal course. We always need to update our systems, systems come out of support in years. We need to move things to the cloud. There's just all kinds of work that we need to do to keep our systems relevant and keep them customer-friendly and customer-facing. So that's pretty much what I meant by the technology enhancements. Scott Schneeberger: Got it. I like what I was hearing about the work you're doing in data centers and TRS. Operator: We'll take our next question from Daniel Moore with CJS Securities. Dan Moore: Joe and Keith, I'll start with -- you obviously -- you mentioned some encouraging trends. Can you just speak to the cadence of inquiries as well as order rates over say the last 1, 3, 6 months, start with Mobile Modular, sequential improvement, more stable? How would you describe it? And then the same question for Portable Storage. Joseph Hanna: Sure. Yes, I'll start with Mobile Modular. Our quote volumes have been healthy, and our booked order levels have been healthy, too, and they were healthy for this particular quarter, up double digits. That was fairly consistent with the second quarter and up from the first quarter. And I would say we're seeing a similar trend in Portable Storage. I wouldn't say that the third quarter, we're not seeing any marked increase over the second quarter, but we're seeing a consistent level of inquiries and booked order flow sequentially. Dan Moore: Really helpful. Something that you've described in detail and laid out again this quarter, the shift from CapEx to OpEx over the last few quarters as you refurbish units rather than purchase new ones, dampens your GAAP margins a little, but not necessarily your cash flow. Is that something you expect to continue into next year? And what would cause you to shift back into a little bit more of a CapEx mode? Keith E. Pratt: Yes, Dan, I can help with that. I think, it all goes to fleet utilization. So if you look at the modular fleet, there are more markets where we have equipment available to meet new orders. If you go back 18 months, 2 years ago, utilization was higher. It was more common that when a new order came in, we were already highly utilized, and we would look to invest capital to meet the orders. So that's the dynamic at play. So I think to answer your question, look at where utilization is when we're entering next year. And for businesses where it's low, which is currently the case of portable storage and in many of our modular regions, we've got available equipment and that's how we'll meet demand. So there will be a trade-off there. It may mean those expenses continue to be more elevated. But from a cash flow point of view, it's the right thing to do. So that's how it's looking. I would say at TRS, where we've seen good recovery, particularly over the last 3 quarters and where utilization in the mid 60s is actually very good utilization for that business. That's an area where already, we're looking at selectively spending the capital and adding to the fleet again, to meet demand and we're very happy to do that. Dan Moore: Really helpful. Clearly, we still have a couple of months to go here, and we'll be looking to guide for a couple of months after that. I just wonder if you could maybe contrast the environment today compared to where we were, say, this time last year and whether or not you expect to get back to a more kind of normalized long-term growth in EBITDA as we look out '26, '27? Keith E. Pratt: Yes, Dan, I'll throw in a couple of comments. I'm sure Joe can add to it. I'd characterize the environment as still mixed. We've talked already about things like the Architectural Billings Index which has really bounced along below 50 for all this year and some months a little better, some months a little worse, but consistently below 50. That's a headwind for parts of the business. Smaller projects and portable storage have definitely suffered as well due to interest rate being high and really a slow journey of seeing interest rates start to come down. And then at various points in the year, a lot of it is related to just the policy and governmental topics there's that era of uncertainty. That probably means some customers have either moved with a little bit more deliberation, a little bit more caution. And we've seen examples of projects just take longer to get executed. So that's really the backdrop of how we've managed through this year. It hasn't been an easy year for us. If you then look into next year, the question is, how many of those headwinds start to ease. Do we see interest rates come down enough that people start to act more quickly on starting up new projects. And do we see some of the broader macro indicators like ABI start to move into positive territory and indicate that people are planning to execute a larger number of projects going forward. I think it's too early to tell. I think as we said in our prepared remarks, we've done a pretty good job this year of counterbalancing some of those headwinds with all of our growth initiatives, the services side of modulars getting good revenue per rental unit, which we're continuing to get and grow and in some of the regional expansion where we have been hiring and we're beginning to fund equipment purchases to support growth in some regions, but for us are relatively undeveloped and where we see longer-term opportunity. So those are the things you've got to lay on the scales as you look at the pluses and minuses that will influence next year. Joseph Hanna: So I'd like to just click on that just a minute, too, and what Keith said about the regional expansion. I mean, we hired a number of folks this year, and we're putting them into new markets and also markets that are adjacent to operating areas that we are already in. And we definitely are anticipating that to be a nice contributor to next year's results. So we're really trying to add that horsepower in there to be able to continue to grow the business despite what the market is doing. Dan Moore: That's really helpful. Last one, and I'll jump out. Maybe just talk a little about the 2 smaller acquisitions you made last quarter. I know it's still early days, but 1 in Mobile Modular, Portable Storage. How are they progressing? And more importantly, what does the pipeline of opportunities look like over the next few quarters? Joseph Hanna: Yes. We -- yes, those were relatively small acquisitions. We closed them in Q2. And there was one, was a modular business and 1 was a Portable Storage business located in the Southeast. And so they're integrated, and we're happy to have them on board and they're contributing at this point. And we'll see what the results are as the next quarter or 2 progress. It is a little bit early to really be able to talk much about how they're performing. But there's no red flags there at this point. Keith E. Pratt: And then maybe the pipeline comment. I think we can say that we're very active in our normal process. We have work going on in the field. We know markets that we have a high level of interest in. And I think the pipeline is active and encouraging and it's going to be part of our growth strategy. Operator: We'll take our next question from Marc Riddick with Sidoti. Marc Riddick: So I just wanted to sort of maybe piggyback on the prior question and line of questioning. Maybe give a bit of an update as far as kind of usage prioritization that you're sort of looking into next year and particularly around the acquisition sort of pipeline. Can you maybe talk a little bit about the valuation that you're seeing now, whether that's changed much over maybe over the last 6 months or so? And then I have a follow-up on the personnel side. Keith E. Pratt: Okay. Marc, I'll take a crack at that. In terms of usage of cash, first high-level comment I would make is, this has been a very good year from a free cash flow point of view. And if you look at us year-to-date, we've reduced our debt. We actually had slightly lower leverage than when we started the year. We've managed to pay our dividends, and we've completed 2 small acquisitions. One of the factors that has allowed us to do that in addition to just good operating performance from the business, but it's that lower CapEx that I referenced in the prepared remarks. We spent a lot less on new equipment this year than we did a year ago. So if we look into next year, and I touched on this earlier, based on fleet utilization, we're probably going to be in a position where we can meet a lot of demand from existing fleet. That's a good thing. That may be a positive, again, from a CapEx point of view. That gives us a lot more flexibility with things like M&A. And that's why the pipeline is active. It's an important part of the strategy. Briefly on valuations, it's very situationally specific what you're looking at, what there is on offer from a business that's for sale. We try to be very measured in how we look at things, fleet quality matters to us a lot and the ability to generate future cash from any business that we acquire. But there are opportunities out there. We'll always pay a fair price for a good quality business. But we'll also know what our walkaway is where it doesn't make sense for us and we'll simply approach the market from other angles. Marc Riddick: Great. And then maybe just a little bit of a follow-up on the commentary around adding folks and tech spend for some opportunities that you see. Are those kind of just sort of a short focus as far as things you're going to be executing on in the short term? Or is this something that you see opportunity sets going into next year? And are there some areas there geographically or otherwise that you're kind of targeting for the potential for new additions, both on the assuming capital side as well as the technology side? Joseph Hanna: Yes. Marc, the hires that we've made this year are definitely long term, we hope to have them be long-term resources in the company, no short-term plans there. We want those salespeople to get out into the market and really start generating some business over the next several years. Most of the hires that we made were in the Midwest area and Northeast, but we will continue to add sales people in places that we need them, where we see business potential and in places that we have resources already that we can leverage to be able to serve the market. So very much long-term strategy, very carefully thought out and implemented, and we're anticipating that's going to be very nice to help our growth. Marc Riddick: Excellent. And the last thing, I think, in your prepared remarks and maybe as a response to 1 of the questions. It really did a great job as far as bringing us up to speed on maybe how education funding has really played out through the year. Are there any valid initiatives that you kind of have an eye on or keen next month that we should be aware or should be thinking about as far as -- is there any that are top of mind at the moment? Or do you sort of feel like we kind of already have a lot of the main ones locked in already? Joseph Hanna: Yes. There's no particular valid issues that I'm aware of right now that we're concerned about concerning facilities funding at this point. So I mean I'm very pleased with the amount of funding that's in place in the markets that we operate in. It's very healthy. And that funding typically doesn't grow cobwebs. That stuff gets implemented and put out into the market as soon as districts can get themselves organized and get the projects underway, and we'll be right there with them when they do it. So we're very, very happy about that and think that it's a good positive. Operator: [Operator Instructions] We can pause for a moment to allow any further questions to queue. And ladies and gentlemen, that appeared to have been our last question. Let me now turn the call back to Mr. Hanna for any closing remarks. Joseph Hanna: I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in late February to review our fourth quarter results. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, and welcome to Brunswick Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's meeting will be recorded. If you have any objections you may disconnect at this time. I would now like to introduce Stephen Weiland, Senior Vice President and Deputy CFO, Brunswick Corporation. Stephen Weiland: Good morning, and thank you for joining us. With me on the call this morning is David Foulkes, Brunswick's Chairman and CEO; and Ryan Gwillim, Brunswick's CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave. David Foulkes: Thanks, Steve. Brunswick delivered strong third quarter results, with each reporting segment generating revenue growth over the prior year quarter and overall financial performance exceeding expectations and guidance for the quarter. The sales growth reflected strength across all our businesses despite a challenging, albeit improving macro environment and industry backdrop. Our market-leading propulsion and boat portfolios outperformed their respective markets, and our recurring revenue, parts and accessories and other aftermarket focused businesses, along with Freedom Boat Club, continued to benefit from healthy boating activity. Brunswick's third quarter boat retail sales were flat year-over-year, a notable relative improvement from the first half of the year driven by resilience in our premium and core categories. We continue to drive forward with financial and operational efficiencies through the announced margin-accretive footprint actions in our boat business, continued enterprise-wide tariff mitigation initiatives, prudent pipeline management and excellent capital strategy execution. Our third quarter sales of $1.4 billion were up 7% versus prior year. Our adjusted earnings per share of $0.97 were impacted by the reinstatement of variable compensation and tariffs, but were up year-over-year, excluding those items, and we had another quarter of outstanding free cash flow generation, providing us with the flexibility to simultaneously invest in our business, return capital to shareholders and strengthen our balance sheet. With $111 million of free cash flow in the third quarter, we have generated $355 million year-to-date, an exceptional $348 million improvement over the first 3 quarters of last year. For the first time since the first quarter of 2022, revenue grew in all our segments. The Propulsion business delivered significant sales growth, with revenues in each of its three businesses: outboard, sterndrive and controls, rigging and propellers, up over prior year as OEM order strength continued later into the boating season. Mercury continues to be the clear U.S. outboard market share leader, with 49.4% share of outboard engines sold in the quarter. Given the volume of Mercury competitor engines shipped into the U.S. in advance of the tariffs on Japanese imports, we have not yet seen the full potential impacts of those tariffs on competitive product pricing, but we continue to be well positioned. Strong boater participation in our core markets continues to benefit our high-margin annuity Engine Parts and Accessories business, which posted strong sales growth over the prior year with sales in both the products and distribution businesses up solidly and segment operating margin also up sequentially from the second quarter, reflecting the strong operating leverage in the business. In the U.S., our market-leading distribution business gained 140 basis points of market share year-to-date over the same period last year. Navico Group reported modest sales growth and steady adjusted operating margin over prior year. Growth was led by strong performance in marine electronics product lines, but continued to benefit from investments in technology and new product introductions. While strong boating participation drove aftermarket sales that represents 60% of Navico revenue. Continued restructuring actions, a leaner, more focused organization and new product investments are bearing fruit. And Navico Group's strategic importance to the Brunswick portfolio was recently reinforced by the introduction of the Simrad AutoCaptain autonomous boating system, developed by Navico Group in collaboration with Mercury Marine and Brunswick Boat Group. Lastly, GAAP operating earnings were impacted by $323 million of noncash intangible asset charges for Navico Group. These impairment charges reflect the impact of the current trade and economic environment despite our plans for continued growth and margin improvement in this important part of our portfolio that is an increasing source of integrated solutions and differentiated innovation. Our Boat business grew both revenue and adjusted operating margin over prior year as our premium brands continue to perform well, and our aluminum boat businesses delivered a very strong quarter. Dealer inventory remains historically low, and coupled with flat retail, allowed for steady wholesale shipments. In September, we announced the strategic rationalization of our fiberglass boat manufacturing footprint, exiting our facilities in Reynosa, Mexico and Flagler Beach, Florida by the middle of 2026 and consolidating production from these facilities into existing U.S. facilities. Moving on to external factors. The U.S. Fed cut the Fed funds rate by 25 basis points in September, with expectations for several additional cuts through the balance of 2025 and/or in early 2026. Lower interest rates have a compound benefit in reducing the cost of both dealer floor plan financing and consumer retail financing, which will be a tailwind for both wholesale stocking and the 2026 main selling season. Additionally, while we're still analyzing how best to take advantage of the tax provisions of the One Big Beautiful Bill Act, the cash flow benefits will most likely be realized in 2026. We continue to actively manage our tariff exposure in what is still a dynamic situation and are slightly increasing our estimate to approximately $75 million of net tariff impact for the year, mainly as a result of the expanded scope of Section 232 tariffs. I will again highlight that because of our primarily U.S.-based vertically integrated engine and boat manufacturing base and predominantly domestic supply chain and the fact that we manufacture almost all our boats for international markets within those markets, we remain competitively well positioned in an environment of persistent tariffs. We also stand to potentially benefit from the tariffs of our engine competitors who import their engines from Japan, now subject to a 15% tariff. Dealer sentiment remained stable with historically low and fresh dealer inventory, and boating participation has increased considerably during the third quarter, benefiting our aftermarket businesses and driving Freedom Boat Club trips up 2.5% year-to-date versus prior year. OEM build rates have remained solid, and in combination with lower inventories, have supported strong wholesale engine shipments. Retail incentives remain elevated compared to historic levels, but are lower than in the same period last year. Looking now at industry retail performance, which has steadily improved in recent months after the macroeconomic shocks from early spring. As of the latest SSI reporting for August, U.S. main powerboat industry retail was down a little more than 9% year-to-date, with Brunswick boat brands continuing to outperform the industry and Brunswick's internal retail performing better than SSI. Despite the U.S. outboard engine industry that is down slightly year-to-date, Mercury market share remained stable with a 49.4% share in the third quarter, even in the face of significant competitive promotional activity. Internationally, Mercury drove strong share gains in the majority of its markets. From a global boat retail perspective, our core and premium brands outperformed the market during the quarter, and our value brands performed steadily. Overall, Brunswick's boat retail was down mid-single digits in the first half of this year compared to prior year, while this quarter, overall, we came in flat to prior year, a significant relative improvement. While still down, we saw notable strengthening in our value segment as we took actions to streamline our model lineup and improve profitability through manufacturing consolidation, which we'll discuss on the next slide. Lastly, we continue to drive healthy and very lean dealer inventory pipeline levels. Global pipelines are down over 2,200 units compared to the third quarter of 2024 and down over 1,500 units sequentially from the last quarter. In the U.S., pipelines are down over 1,200 units compared to the third quarter of 2024 and down over 700 units sequentially from the last quarter. While the performance of our fiberglass value brands improved in the third quarter, this has remained our most challenged category. Last quarter, we reported that we streamlined our value fiberglass model lineup by 25% for the 2026 model year, which began in July. And in September, we announced a strategic consolidation of our Reynosa, Mexico and Flagler Beach, Florida facilities into existing U.S. locations. This consolidation will reduce fixed costs, drive improved profitability in our Boat segment and generate a strong return on investment. The transition is expected to be complete in mid-2026, with some inefficiencies during the transition but with anticipated run rate savings of over $10 million a year after completion, even at current volumes, and with the benefits increasing when the industry rebounds and production volumes increase. This quarter, Brunswick has again delivered outstanding free cash flow. With $355 million year-to-date, we have delivered $1.6 billion of free cash flow since 2021 and a record $635 million over the last 12 months in very dynamic and challenging market conditions with a significant contribution from the recurring revenue components of our portfolio, but also with diligent focus on working capital reduction, and we expect this strong performance to continue into the fourth quarter and next year. Our investment-grade balance sheet remains very healthy, with no debt maturities until 2029 and attractive cost of debt and maturity profile and net leverage that continues to improve. We are, therefore, again, increasing our debt reduction guidance for 2025 by $25 million to $200 million for the year, up $75 million since the beginning of the year. By year-end, we are on track to retire approximately $375 million of debt since the beginning of 2023 and are committed to achieving our long-term net leverage target of below 2x EBITDA. We are accomplishing this while maintaining significant financial flexibility. And at quarter end, we have $1.3 billion in liquidity, including full access to our undrawn revolving credit facility. We also anticipate retiring $200 million or more of debt next year while continuing to return capital to shareholders. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook. Ryan Gwillim: Thank you, Dave, and good morning, everyone. Brunswick's third quarter performance came in ahead of expectations, with sales growth in each of our segments versus the third quarter of 2024. On a consolidated basis, sales were up almost 7%, reflecting strong orders from OEMs and dealers, pricing actions taken in recent periods and steady boating participation, driving P&A and other aftermarket business strength, which was helped by favorable late season weather in many regions. Adjusted operating earnings and EPS also exceeded expectations, but were down versus the prior year due to the enterprise-wide impacts of tariffs and the reinstatement of variable compensation, which were partially offset by the positive earnings generated by the increased sales. Lastly, as Dave highlighted, we continue to drive robust free cash flow, up 166% from the prior year. On a year-to-date basis, sales are down 1%, primarily due to planned lower first half production levels in our Propulsion and Boat businesses, mostly offset by P&A and aftermarket stability throughout the year and third quarter sales growth in all of our businesses. Year-to-date adjusted operating earnings and EPS are also ahead of expectations, but remained below the prior year as expected due to the previously mentioned enterprise factors and lower first half production. Year-to-date free cash flow of $355 million remains a continued strength of the entire enterprise, reflecting the overall steady performance of our higher-margin aftermarket businesses and our focused inventory and other working capital initiatives. As noted, while sales were up 7% this quarter versus the prior year, adjusted EPS was down $0.20. However, outside the impacts of tariffs and the variable compensation reinstatement, we would have shown strong adjusted earnings growth in the quarter. The aggregate third quarter EPS impact of reinstating variable compensation back to target levels and incremental tariffs was approximately $0.70. These costs were partially offset by the earnings benefits from the higher sales and positive absorption, primarily in our Propulsion business, along with lower discounts in our Boat business. Now we'll look at each reporting segment, starting with our Propulsion business, which grew sales by 10% in the quarter, reflecting increases for each of its product categories of outboards, sterndrive and controls, rigging and props. Mercury saw strong OEM orders in a low field inventory environment, together with continued robust market share, resulting in their second straight quarter of strong sales improvement. Operating margin was down compared to prior year due to tariffs and the variable compensation reset, but benefited from improved absorption driven by higher production in the quarter. Healthy boater participation continues to drive strength in our Engine Parts and Accessories segment, with sales up 8% overall compared to the prior year. Sales were up solidly for both products and distribution, benefiting from favorable late season weather in many regions, helping to make up for a slower start earlier in the year, and market share gains in our distribution business. Operating earnings were down slightly compared to the prior year solely due to the enterprise impacts already discussed. I'm delighted to share that the Navico Group sales increased by 2% in the quarter, led by growth in its electronics portfolio, with adjusted operating margins decreasing only slightly as compared to the prior year. As Dave mentioned earlier, GAAP operating earnings were impacted by a $323 million noncash intangible asset impairment charge for the Navico Group. As we have previously discussed, driving improved performance in this segment is a key focus for management and the entire Navico team. And while we still have more work to do, we are starting to see the benefits from these efforts and our investments in new products, as reflected in Navico's consistent sales and earnings performance throughout the year. As compared to the third quarter of last year, gross margins improved significantly as we took out almost $5 million of cost from Navico facilities and continue to execute a multiyear initiative to consolidate and optimize our global network of warehouses and distribution centers. This strategic program is designed to deliver meaningful improvements across customer experience, operational performance and financial outcomes. We also continue to improve the balance sheet with lower inventory and increased turns. Lastly, our Boat segment reported sales growth of 4% over prior year, with growth in both boat sales and the business acceleration portfolio. Our aluminum boat brands, led by our premium fishing brand, Lund, had an especially strong quarter and drove strong top line and earnings performance. And Freedom Boat Club continued its growth journey, contributing approximately 13% of the segment sales. With low dealer pipelines, flat third quarter retail pulled through steady wholesale performance as we ended the quarter with lower pipeline inventories, as Dave discussed earlier. Segment adjusted operating earnings benefited from the increased sales, a lower discount environment and focused cost actions, which resulted in greatly improved segment gross margin, which more than offset the enterprise factors and flowed through into a 65% increase in adjusted operating earnings compared to the prior year. My last slide shows our full year guidance, which remains unchanged for revenue of approximately $5.2 billion, adjusted operating margins of approximately 7% and adjusted EPS of approximately $3.25. We remain comfortable with our full year EPS guidance despite the slightly increased estimated net tariff impact, as we believe we can carry forward our slight third quarter beat and continue to drive sales and earnings growth as we close out the year. Given our exceptional free cash flow generation year-to-date, we are increasing our full year free cash flow estimate to in excess of $425 million and our debt reduction target to $200 million, which will continue to progress our goal of lowering our debt leverage to under 2x. I will now pass the call back to Dave for concluding remarks. David Foulkes: Thanks, Ryan. I always like to highlight some of our exciting product launches, Freedom expansions and awards. During the quarter, we enjoyed strong momentum at the European fall boat shows, which provides positive indicators for next year's retail season and reflect the strong market position of many of our brands. In addition to Mercury's strong showing at the Cannes and Genoa Boat Shows, two of our most recently launched boats earned notable awards, with the Bayliner C21 named the 2025 MoteurBoat of the Year in the very competitive under 7 meters category and the Sea Ray SDX270 Surf collecting the MoteurBoat Magazine Innovation Award. These two prestigious new accolades add to many previous product awards this year. Amongst the many new boat models introduced this year, during the quarter, Lund introduced its all-new Explorer model lineup, which combines Lund's legendary fishability with smart functional features. Powered by Mercury and equipped with Lowrance technology, the Explorer lineup is another embodiment of the power of Brunswick synergies. Lund continues to be the leader in the premium aluminum fishing market. Navico Group's integrated and connected solutions continue to drive OEM penetration, and the team worked with several large OEMs to introduce a full turnkey cloud and mobile app solution designed to enhance the boating experience. This end-to-end platform unlocks powerful information for OEMs and their dealers by using real-time telematic data to gather valuable insights to serve their customers. In addition, Lowrance launched the all-new Ghost X Trolling Motor in September as the next evolution in the Ghost lineup. Ghost X delivers 20% more thrust with ultra-quiet operations, GPS anchoring and seamless sonar integration. FLITE debuted the FLITELab brand, which leverages the same innovative FLITE product design and technology to provide foilers with unmatched versatility to customize their ride. And finally, Freedom Boat Club recently reached 440 global locations and announced a new franchise location in Christchurch, New Zealand. Freedom continues to be a key contributor to Brunswick's growth, allowing more people to get on the water through its unique, convenient subscription-based boating model. This quarter, though, we took a genuine step forward into the future of boating with the official commercial launch of the Simrad AutoCaptain autonomous boating system. We have showcased development versions of this technology at some previous events, but formally launched the production system at the International Boat Builders' Exhibition and Conference in Tampa a few weeks ago and conducted demo rides for the media and 9 OEMs. We have scheduled additional OEM demo rides at the Fort Lauderdale Boat Show next week. At launch, AutoCaptain offers fully autonomous and dynamic docking, undocking and close quarter maneuvering, delivered with precision and reliability. The integrated sensor suite counters wind, waves and currents, and with 360-degree awareness, recognizes and reacts to its surroundings, avoiding obstacles and hazards such as passing boats to safely execute maneuvers. Post launch, we are working on expanding the capabilities and features offered by AutoCaptain, with the intention that these additional features will be delivered via software upgrades. AutoCaptain reflects innovation only possible through the combined power and capabilities of our Navico Group, Mercury Marine and Boat Group divisions working together to deliver this seamless integrated solution. It's also a milestone in representing the first commercialized solution under the Autonomy pillar of our ACES strategy, and the final pillar of ACES to be commercialized. Docking is routinely cited as one of the most stressful aspects of boating, and our comprehensive, capable and intuitive system was reported by the media and OEMs who experienced it to be clearly the most advanced and capable system available. Before wrapping up, I'd like to share some preliminary thoughts on guidance for 2026, which I know is top of mind for many investors, especially given the multiple headwinds and tailwinds. While the trade and economic environment remains extremely dynamic, we believe that we are well positioned to benefit from any industry recovery due to the operating leverage inherent in our businesses. Our tariff mitigation strategies are working to reduce our net exposure, and we believe that our substantial vertically integrated U.S. manufacturing base positions us relatively well in an environment of persistent tariffs. Interest rates are coming down, with further cuts expected, reducing the cost of financing for both end consumers and dealers as we approach the fall boat show season and the restocking cycle for what we anticipate at the moment to be a modestly stronger 2026. This is a very early look subject to change. Embedded in these initial thoughts is the assumption of a U.S. retail boat market that is flat to slightly up versus 2025, driven by relative macroeconomic stability, no material negative changes in the tariff environment and continued interest rate improvement. In this scenario, we believe that we can grow revenue by mid- to high single-digit percent, resulting in more than 25% growth in adjusted EPS, with continued significant free cash flow generation. That is the end of our prepared remarks. We'll now turn it back over to the operator for questions. Operator: [Operator Instructions] And the first question comes from the line of James Hardiman with Citi. James Hardiman: So I don't have to tell you guys that sort of over the course of the quarter, a big topic of debate was sort of how you're thinking about retail and what's showing up in the SSI numbers. I don't really care to go down that rabbit hole, I feel like we've been there before. But maybe if you could give us an indication of where you think we are now in sort of a -- from a run rate perspective, most notably as we think about how you're thinking about 2026? If the expectation is that 2026 is going to be flat to up, where are we today relative to that? And how do you see sort of the building blocks to us getting to that positive inflection? David Foulkes: James, yes, thank you for the question. Yes. We obviously had the kind of shocks in early Q2. The tariff announcements and the subsequent kind of capital market impacts that have progressively stabilized, that significantly affected early Q2, particularly. And then towards the end of Q2, we began to see some recovery and stabilization. Through this whole process, as we've noted, the kind of premium and core parts of our product lines have performed better than the value parts of our product lines. And that continues to be the case. In Q3, we're essentially flat year-over-year, with premium and core still outperforming and value catching up a bit, but still underperforming. We're obviously now in a part of the season where we're talking about hundreds of units and not multiple thousands of units, but that strength has continued through the first couple of weeks of October was slightly up through the first couple of weeks of October. So I think last year -- at the end of last year, we were commenting that we thought the shape of the year would be slightly weaker in the first half, strengthening in the back half. We did not know about tariffs at that time, but that has turned out to be the shape of the year. And with interest rates improving and impacting positively both end consumers and our dealers and obviously, their willingness to take stock, we don't see any reason why that can't -- that momentum can't continue into next season. So that's really the background. Obviously, if there are currently a noble exogenous issues, that may change. But just based on a feeling that we're kind of a bit of an inflection point at the moment in a positive way and that we do have a retail momentum, we're feeling that next season should be at least flat and most likely, at least slightly up. James Hardiman: Got it. But just to clarify, as we think about sort of flattish for 3Q, that you guys, it seems like the more relevant number might be the industry. Do you think the industry is flattening out for 3Q? And then, I think just a quick follow-up. Yes, I'm sorry, go ahead. David Foulkes: Yes, I think is the answer. SSI -- you appropriately like -- I think probably, we always have this process of reconciliation with SSI. SSI typically comes up. It typically underreports the Upper Midwest states early on, where we have strength typically because of brands like our Lund brand, which is very strong in the Upper Midwest. . So there is a process of just reconciliation because of partial reporting. I do get a sense though, since we have a broad range of brands that participate in pretty much every sector, that we should be -- our performance is probably representative of a generally improving market. Ryan Gwillim: And I would say, in some of our premium areas, including Lund, James, we are probably taking a little share as well. So you may see at the end of the year where the industry -- we may outperform the industry by a point or 2 in certain places where our share continues to be good for us. James Hardiman: Got it. And then just the inventory question. It seems like you guys are encouraged with where you are. How do we think about sort of the wholesale to retail ratio into 2026? A lot of other industry participants not only talking about maybe weaker trends, retail trends than what we're hearing today, but elevated retail level. How do you think about that heading into next year? Ryan Gwillim: Yes, James, I mean, we have the benefit of having our joint venture with Wells Fargo, our BAC venture. And we get to see a lot of good inventory debt, and we're seeing pretty much what we're reporting, which is people being thoughtful about inventory levels not increasing. And certainly, as Brunswick inventory is about as low as it's been in any non-COVID year since the GFC. So we're going to end the year somewhere about 18,000 global units and probably below 12,000 in the U.S. And again, that is when you look at kind of on a per rooftop basis, that is about as low as we want to be to make sure we have representative samples of our products in the places we need to sell retail. So we're really comfortable with our own inventory. And frankly, I'm not seeing any heavy pockets outside of ours either. David Foulkes: Yes. Inventory freshness continues to be really good. More than 80% of our inventory is less than a year old, which is a very fresh and healthy level. And just on the outboard engine side, we are -- we have been undershipping retail for a long time now and feel like our outboard pipelines are in an extremely good shape. Operator: Our next question is from the line of Craig Kennison with Baird. Craig Kennison: I just wanted to unpack the impact of U.S. tariffs on your competitors in Japan, especially on your engine franchise, of course. Have those competitors attempted to offset those tariffs with price increases? And have you heard from any boat OEMs that are interested in sourcing engines domestically? David Foulkes: Yes. I think yes to both. Yes, we are beginning to hear about some price increases, but we hear these things secondhand at the moment. So I think that's the developing situation. We'll probably hear more. If anybody intends to implement pricing at the beginning of next year, any of our competitors, then we'll likely hear about it in some way over the next few weeks or certainly, a month. I think probably with the challenge to the IEEPA tariffs in -- at the Supreme Court at the moment, there may be some of our competitors kind of wait to see what happens with that, I'm not really sure, before implementing pricing. But yes, we continue to gain share and convert OEMs, in fact. Probably in the last 6 months, we converted to European OEMs. So yes, I think Mercury continues to have very strong momentum. I would say that the Mercury product pipeline is continuing to churn, and there are going to be some really exciting new and very differentiated products coming up from Mercury over the next couple of years, which will only drive forward that momentum. We really are moving very quickly, all Mercury product development, just as we have in the past. I do think as well -- and maybe we'll talk about things like AutoCaptain later though. But that features set, which is genuinely innovative and adds a lot of value, is only available with Mercury propulsion. So we have not just on the propulsion side, but also on the integrated systems side, there are a lot of reasons to suggest that we should be converting more OEMs over time. Craig Kennison: And Ryan, you mentioned cash flow and other benefits from the new tax policy. I'm just wondering if you can help us frame or quantify some of those key drivers a little better? Ryan Gwillim: Yes. I mean, Craig, we have a lot of optionality under the new bill, obviously, in terms of bonus depreciation and some other things. And it's a bit of a P&L versus cash flow analysis that you have to take a look at as to when you take some of the goodness. I think for the end of the year, obviously, you've seen our free cash flow guidance. This year, it's extremely strong. It's guiding to the top, what, 2 or 3 years ever in Brunswick's history at 450 plus. Next year, you saw -- you've seen in our deck, that 125% free cash flow conversion would imply that we're getting some of that goodness next year, but we also have some headwinds that go along with that. So we'll see how we get there. I think we're not making any distinct decisions right now on how we're going to attack some of the benefits in the bill. A bit of it will depend on how we finish the year and the cash needs early in 2026. But it's clear that our ability to generate cash and to generate working capital has become a strength that really differentiates us really from any other company in our space. Operator: Our next question is from the line of Anna Glaessgen with B. Riley. Anna Glaessgen: I'd like to turn to Navico, shifting gears a little bit. Nice to see the top line inflection during the quarter. Understand operating earnings were impacted by tariffs and the variable comp. But could you confirm that excluding those items, you would have seen margin expansion? And if so, should we start to see more expansion as we roll over those or as we lap those headwinds towards mid next year? Ryan Gwillim: Yes. Yes, I can confirm that absent solely tariffs and variable comp reset, the Navico margins would have been up in the quarter. Anna Glaessgen: Got it. David Foulkes: Yes. And on the... Anna Glaessgen: Go ahead. David Foulkes: I just want to say that -- you go on. Anna Glaessgen: I was going to skip to the next question. So if you want to stay on this topic, please. David Foulkes: Yes. I just -- I wanted to say that we don't talk very much in these calls about technology. But over the last 3 years, we've invested a lot. But if you look at the Navico, I mean, we had the strongest gross margins in our business in the low 30s gross margin across the portfolio, but we're spending a lot on new product development. We just introduced AutoCaptain, which took us 3.5 years to develop. We introduced Fathom recently, we introduced a new connected platform that I just discussed. None of our competitors have anything like that out there at the moment. So our path here is to basically do what we did with Mercury, which is to invest in differentiated innovation in a way that other people can't follow or match. And it does take investment upfront, but we will begin to see the benefits of that as we move forward. So I just wanted to add that context. Anna Glaessgen: Got it. Thanks, Dave. Turning to both units, maybe asking the question in a different way. We've seen pretty notable outperformance year-to-date, industry running down high single digits. You guys are putting up a flat 3Q. Maybe expand upon the degree to which that outperformance is being driven by market share gains? And how we should expect you guys versus the market in 2026 and what's embedded in that guidance? Ryan Gwillim: Sure. I'll take this, Anna. Yes, I think there's some share in there. I do think that, as Dave mentioned earlier, as the end of the year comes, you'll see SSI probably get closer to where we think the end of the year will be, which is kind of down mid-single digits, but with us probably outperforming a bit in premium and in core. As we look to next year, I don't know if we believe any of those trends are changing. Our pipelines in all 3 of our segments are down. So premium, core and value pipelines are all down year-over-year as we enter 2026 with good, fresh inventory ready for the winter boat show season. I do think you could see some goodness on the value side, should we get a little interest rate help here in November, October 29, December and February. So we have an opportunity for 3 rate reductions here really before the key part of the season. That could help value, but our premium customer continues to be very strong. And I think certainly looking forward to Fort Lauderdale Boat Show next week, where we anticipate a really nice show where our premium buyer should be out and looking to get a boat for the end of the year. Operator: The next question is from the line of Xian Siew with BNP Paribas. Xian Siew Hew Sam: When you think about next year, I was wondering if you could expand a bit more about Propulsion. I think you kind of mentioned it like lapping, a bit of a destocking. So I'm just kind of curious how much do you think that could be a benefit? And how do we think about market share growth for Mercury over the next year? David Foulkes: Yes. I think a steady trajectory on market share growth. I think we are just seeing really -- we introduced the new 350 and 425-horsepower engines only in July, August, I think, something like that. So if you think about that, usually, people incorporate those things in -- at a model year changeover. So we would expect the -- some tailwinds from those new products coming through into next year and continued steady gains. We talked quite a bit, obviously, about U.S. market share, which is -- in the quarter, was very close to 50%. But the reality is the momentum for Mercury continues in pretty much all its markets. We've had a really strong year in Asia, a strong year in South America, a strong year in Europe. So we would continue to think about Mercury on a global basis, increasing share. Ryan Gwillim: And maybe, Xian, let me just order of magnitude, some of these pipeline numbers for engines. And these are U.S. numbers, which is where we have the best information. But versus the first day of 2024, so a 2-year stack. By the end of this year, under 175-horsepower pipeline is going to be down about 25%. And if you go same time period over 175 horsepower, our pipeline is going to be down 33% since January 1, 2024. So we've put ourselves in a really nice position with our dealers and our OEMs to capture the upside on growth to the market rebound like we believe it will. Xian Siew Hew Sam: Yes. That's super helpful. And maybe just on the 4Q guidance, I think it seems to imply there's a big -- a nice recovery on margins for both boats. At the same time, I think the revenue imply too much, maybe mid-single-digit growth. So I'm just trying to understand, I guess, how are you thinking about boat margins and the evolution in 4Q then maybe beyond? Ryan Gwillim: Yes. I think a bit of Q3, remember, is always saddled with some of the summer shutdowns and fewer production days. And so that often means Q3 is kind of the lowest margin quarter of the year. They're going to be producing kind of at a normal rate here in the fourth quarter. And if you remember, versus Q4 of last year, where they were really taking production days out to ensure a pipeline didn't inflate before the year, this year, they're simply just at a more steady state. So those are the two main drivers. Operator: [Operator Instructions] The next question comes from the line of Matthew Boss, JPMorgan. Amanda Douglas: It's Amanda Douglas on for Matt. So Dave, following the actions that you've taken to streamline the value boat segment, do you see the model lineup into 2026 as rightsized today? Or are there any further changes required ahead? And how would you assess dealer inventory levels across value and premium segments as we look ahead to the 2026 season? David Foulkes: Thank you for the question. Yes, I think the focus on value and kind of scaling back of the model lineup, I think we'll obviously evaluate through the balance of this season and early next season to see if we should take any additional actions. I think we still have a very comprehensive portfolio. But given volumes in that segment, we had too much complexity, and we need to take that down. I think we'll be very dynamic about it. I don't foresee a substantial additional change. At the moment, we've introduced new products, including the award-winning C21 from Bayliner this year, which is going to help us a lot, helps us focus our product development efforts to make sure that the model lineup that we do have is fresh. But of course, we could trim and make adjustments as we go forward. I don't see the same level of rationalization that I saw for this model year, though. And then in terms of inventory levels, I think we're healthy everywhere. Typically, our premium inventory levels in terms of weeks on hand are lower than kind of value. Typically, our premium inventory levels in terms of weeks on hand will be in the typically, mid-20s somewhere, and that's exactly where we are right now. So I really feel like our inventories are rightsized across all of our segments. And I believe that we're extremely well positioned for 2026. Operator: Our next question is from the line of Jaime Katz with Morningstar. Jaime Katz: I just wanted to go back to Navico. I think in the prepared remarks, it was noted that there was more work to do. And you guys have done a ton of work already. So maybe, can you elaborate if there's been maybe some new issues found that need to be remedied? And then what does the road map look like to a steady state in that segment? David Foulkes: No, thank you for the question. Yes, there are no new issues. There's just always more work to do, and we try to make sure that we prioritize our actions and make sure that we do the biggest, most impactful things as far as we can first, but there's a continued march forward in all aspects of the business. We do think about the fact that -- Navico Group is not just Navico. Navico that we acquired in 2021 was about half the business and still is about half the business. It really is the product of a lot of acquisitions over time. And so we're continuing to make sure that operationally, those previous acquisitions are all now working together on the same IT platforms, for example, making sure that we don't have excess distribution, we consolidate distribution. But we have the same systems that we can manage our SIOP processes. So yes, this is really a multiyear effort to kind of wring the last bit of operational efficiency out of the business. And we've done a lot of work, but we have more to go. There's still a good road map there of work that will help our operating margins, help revenue growth, and to be honest, free up some more cash because I think there are more turns in that business than we have right now, inventory turns in that business than we have right now. So the road map includes all of those things, and it's very detailed. Aine Denari, who runs that business now, is a very detailed and strong operator who is working extremely systematically through all of the aspects of the business, all of the processes, all of the systems and making sure that we continue to progress forward. So a lot of heavy lifting done, particularly on the product development side. It just takes a while to get that flywheel turning, but now, it really is turning with a lot of differentiated product. We have rationalized quite a few facilities. Even, I think, earlier this year, we moved European distribution to a 3PL. Those kind of actions individually might not move the needle, but collectively, can be multiple points of operating margin expansion. So yes, we're not in any way complacent on Navico now. It's great to see the business stabilized, but there is such a lot of potential in that business. We are anxious to make sure we move even further forward. Operator: The next question is from the line of Joe Altobello with Raymond James. Joseph Altobello: Just wanted to get some more clarification on 2026 and the initial outlook here. So obviously, as you mentioned, you guys have been undershipping demand significantly on the engine side and I think a little bit on the boat side as well. But as we think about the mid- to high single-digit potential revenue growth for next year, how much of that is simply lapping that destock, if you will? And how much of that is actually potentially coming from a restock? Ryan Gwillim: Joe, I'll take -- I'll go ahead and take this one. Yes, maybe there's a little bit in the first part of the year that is lapping a bit of a slower Q1, maybe half of Q2. But really, it's going to be a combination of a little bit of market, not much relying on the market, maybe a point or 2, some pricing throughout the various business units. Some share gains which continue, not only at Mercury, but in the Boat business and as Navico Group takes back share in some of their product lines. And also probably a bit of a betterment in discounting, right? The discounting environment, we've already seen come down here in the back half of the year, and we intend it's likely that, that will continue. With P&A obviously being a very stable part of the business that continues to trolley along. So you can get yourself, depending on what you assume there, from mid- to high pretty easily. But I would say the lapping of destocking is probably a small part and really just a kind of first quarter, maybe first 4, 5 months phenomenon. Operator: Our next question comes from the line of David MacGregor with Longbow Research. Joseph Nolan: This is Joe Nolan on for David. You talked about the plant consolidation and efficiencies during the transition. Just wondering if you could talk about the fourth quarter impact and maybe give us a sense of what the net impact might be for 2026 from that? David Foulkes: Yes. So fourth quarter, we're probably talking about a couple of million? Ryan Gwillim: That's right. David Foulkes: Yes, just checking with Ryan here to make sure I give you a couple of million. Essentially, we'll be operating 4 facilities and at least 2 at lower efficiency and productivity as we begin to exit them and we move towards fully consolidated by hopefully, a little bit earlier than the middle of 2026. So by the time we get the transition completed, we'll begin to see that kind of annualized run rate saving of $10 million-ish plus. So overall, I would say through next year, we'll see net positive, but it won't be the full $10 million of run rate savings. There are some elements of this transition that we can take ex items and some like just running at lower efficiency that we can and a little bit of a drag in the short term. But the price in the long term is well worth it. That $10 million or so run rate is just that current production rates. The benefit increases substantially as we move to higher production volumes. So we're anxious to get it done as fast as we can. We're very appreciative of the work of all the people who are transitioning and those who are working to help us with the transition. And yes, we'll be a much leaner production organization when we finish with a lot of benefits to the entire Boat Group. Operator: Our next question is from the line of Tristan Thomas with BMO Capital Markets. Tristan Thomas-Martin: I just wanted to look maybe a little bit past next year, just maybe get an update on how you guys are thinking about normalized boat industry retail demand and kind of how long and what's needed to get us there? David Foulkes: Normalized industry, we had -- when we think about the kind of normalized in a number of different ways, I would say -- we had a year this year that was heavily disrupted by the second quarter, which is unexpected, as -- prior to those announcements. I think otherwise, we would probably have had a year that was probably flattish. I'm not really sure. Q1 was a drag. I would say that elevated interest rates are -- have been a headwind in the past several years versus where we were before COVID when retail loan rates are in the 4% to 5%-ish, and we're currently in the 7.5% to 8% range. So that is a headwind that has been present for the last couple of years. And then we frequently also referred to replacement rates in our -- if you look at the boat park or the number of registered boats out there that are relevant to the product lines that we produce, it's in the kind of $7 million range. And if you look at a typical boat life, it implies annual replacements in the 200,000 to 250,000 range, which is obviously well above the 130 to 135 we're at the moment. So I would say a number of factors suggest that we will -- that there should be macro factors that increase both sales over time, and that's what we're anticipating. But we're obviously hesitant to take all of those things into our near-term forecast. So we think flat to slightly up is a prudent forecast at this point in time for next year. Operator: Our final question today is from the line of Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Maybe on the tariff front, I think the expectation ticked up a little bit to $75 million for this year. So just maybe any updates on how mitigation is going? And then any early thoughts on the expected impact embedded in kind of the initial thoughts around '26 would be helpful. Ryan Gwillim: Sure. Noah, thanks. Good question. Yes, listen, the real change from our July call to today was the 232 impact on aluminum and steel, really 3 parts. The rate went from 25% to 50%. The list of applicable ACS codes expanded significantly, which really now involves us looking at any metal contact that's contained in parts or goods that are coming in. And I think most people know it was applied retroactively, meaning it applied to inventory sitting in free trade zones or other bonded warehouses, if you would. So that was really the only change from the guidance. And in fact, I would say our mitigation efforts are -- continued to outpace our expectations. We continue to do better than we thought kind of month in and month out. And so that is good and that gives us good visibility into next year. It's a bit hard to say exactly what the impact is next year. I do think the incremental over this year would be much smaller than the incremental from '24 to '25. And certainly, as we continue to get smarter on mitigation techniques, we'll continue to work that number down. So yes, we're actually pretty happy that we're able to hold EPS for the year. Obviously, it's an extra about $10 million of tariff impact that we didn't anticipate that we're going to go ahead and cover -- that we believe we can cover in the quarter. And we look forward to then moving over to '26. Operator: At this time, I would like to turn the call back to Dave for some concluding remarks. David Foulkes: Yes. Thanks for your questions, everyone. Great questions. I think in a lot of ways, this is a very encouraging quarter. We have improving retail, revenue up across all our businesses, very solid earnings and continued exceptional free cash flow generation. We do -- as a team, we -- I think this just seemed like a bit of an inflection point. There's definitely more -- a positive shift in momentum at the moment. We continue to take bold structural cost reduction actions, though, and continue to do that, which will benefit our earnings in '26, independent of the market. Our major brands and businesses are beating the market. We continue to invest a lot in very well received and award-winning new products across the portfolio. AutoCaptain was a notable highlight though, really the first fully integrated autonomous boating system in the marketplace, a real differentiator, along with a number of other platforms that we've recently launched in a way that I think only Brunswick can produce. So it's very exciting. So as we said, while many things about 2026 are normal, I think late 2025, retail trends, very lean pipelines, further interest rate cuts all suggest the opportunity for top line growth and through our strong operating leverage, meaningful margin and EPS free expansion. All right. Thank you, everyone, very much. Have a great day. Operator: This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to SouthState Bank Corporation Q3 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Will Matthews. You may begin. William Matthews: Thank you. Good morning, and welcome to SouthState's Third Quarter 2025 Earnings Call. This is Will Matthews, and I'm here with John Corbett, Steve Young and Jeremy Lucas. As always, we'll make a few brief prepared remarks and then move into questions. I'll refer you to the earnings release and investor presentation under the Investor Relations tab of our website. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties that may affect us. Now I'll turn the call over to you, John. John Corbett: Thank you, Will. Good morning, everybody. Thanks for joining us. We're pleased to report a strong third quarter for SouthState. Earnings per share are up 30% in the last year, and the company generated a return on tangible equity of 20%. If you recall, we closed on the Independent Financial transaction in January. We converted the computer systems in May, and now we're beginning to realize the full earnings power of the combined company. Loan production was up a little in the third quarter to nearly $3.4 billion, and we saw moderate growth in both loans and deposits. Payoffs were about $100 million higher in the quarter. Loan production in Texas and Colorado is up 67% since the first quarter of the year. And loan pipelines across the company continue to grow, and we feel like net loan growth will accelerate over the next few quarters. Our charge-offs were 27 basis points for the quarter, primarily due to one larger C&I credit acquired with Atlantic Capital that has been in the bank a number of years. Stepping back, however, the credit metrics in the bank are stable. Payment performance is good. Nonaccruals are down slightly, and we've only experienced 12 basis points of charge-offs year-to-date. Our credit team is forecasting that we're going to land in the neighborhood of 10 basis points of charge-offs for the year. We're currently in the middle of strategic planning this time of the year and thinking about the banking landscape, deregulation and the opportunities in front of us. Over the last 15 years, we've built the company in the best markets with good scale and an entrepreneurial business model. And we've done the heavy lifting to build out the infrastructure of the bank. We're now in a perfect position to capitalize on the disruption occurring in our markets. We've calculated that there are about $90 billion of overlapping deposits with SouthState that are in the midst of consolidation in the Southeast, Texas and Colorado. Our regional presidents understand the opportunity, and they're laser-focused on recruiting great bankers and organically growing the bank in 2026. Will, I'll turn it back to you to provide additional color on the numbers. William Matthews: Thanks, John. I'll hit a few highlights focused on our operating performance and adjusted metrics and make some explanatory comments, and then we'll move into Q&A. We had another good quarter with PPNR of $347 million and $2.58 in EPS, driven by $34 million in revenue growth and solid expense control. Our 4.06% tax equivalent margin drove net interest income of $600 million, up $22 million over Q2. $19 million of that growth was due to higher accretion. Cost of deposits of 1.91% were up 7 basis points from the prior quarter and were in line with our expectations. In addition to the cost of deposit increase, overall cost of funds was impacted by the larger amount of sub debt outstanding for much of the quarter. We redeemed $405 million in sub debt late in the quarter. Going forward, that redemption will have a net positive impact on our NIM of approximately 4 basis points, all else equal. Our loan yields of 6.48% improved by 15 basis points from Q2 and were approximately 8 basis points below our new origination rate for the second quarter. And loan yields, excluding all accretion, were up 1 basis point from Q2. Steve will give updated margin guidance in our Q&A. Noninterest income of $99 million was up $12 million, driven by performance in our correspondent Capital Markets division and deposit fees. On the expense side, NIE of $351 million was unchanged from Q2 and was at the low end of our guidance. And our third quarter efficiency ratio of 46.9% brought the 9-month year-to-date ratio to 48.7%. Credit costs remained low with a $5 million provision expense. As John noted, though, we did experience one $21 million loan charge-off during the quarter, which is an abnormally large charge-off for us. This brings our year-to-date net charge-offs to 12 basis points. Absent that loss, net charge-offs would have been 9 basis points for the quarter. Asset quality remains stable and payment performance remains good. Our capital position continues to grow with CET1 at 11.5% and TBV per share growing nicely. As you'll recall, we closed the Independent Financial acquisition on January 1 of this year. Our TBV per share of $54.48 is now more than $3 above the year-end 2024 level, even with the dilutive impact of the Independent Financial merger. Our TCE ratio is also back to its year-end '24 level. As we've noted before, our strong capital levels and healthy capital formation rate provide us with good capital optionality. Operator, we'll now take questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Rose with Raymond James. Michael Rose: I guess I'll hit the margin question since you brought it up, Will. Steve, can you kind of walk us through the excess accretion this quarter? It looks like the core margin ex accretion was down kind of high single-digit basis points. Can you just give some puts and takes here as we think about the contemplation of a couple of rate cuts this quarter near term? And then if you can talk about some of the pricing dynamics, both on the loan and deposit side, new production yields, things like that. Just trying to better frame up the core versus the reported margin as we move forward. Stephen Young: Sure. Michael, yes, just maybe kind of give you some explanation of where -- where we think we're headed on margin, and maybe I can answer some of those questions in the middle of that. As you mentioned, we had higher accretion than we expected. And really, a couple of things around that. We saw the highest accretion in July and then August and September, it kind of tailed off a little bit and really due to some early payoffs of 2020 and 2021 vintage loans that had kind of 3 handle coupons with these big discounts that sold. So those are not economic decisions, but there -- I mean, there are economic decisions in the fact that they sold, but typically, you keep those coupons. Also, we had a 29% decline in PCD loans this quarter. And of course, those have larger marks. So anyway, all of that, we look at prepayments are really not outside of our scope of what we thought. It's just that some of the vintages were different than we thought and therefore, had bigger discounts. So having said all that, as we think about the guidance for NIM going forward, really not a lot of change, a little bit of change, but not a lot. We talk about the size, the assumptions of the interest-earning asset size. The second is our interest rate forecast. The third is loan accretion and the fourth is deposit beta in an environment where rates are going down. Interest-earning assets, we've been saying $59 billion for quarter 4 average. That's no change. For full year 2026, we're looking somewhere between $61 billion and $62 billion. So that's kind of a mid-single-digit growth. Rate forecast, last quarter, we had no rate cuts in our model. This quarter, we're thinking we get 3 rate cuts in '25 and quarterly rate cuts, 3 more in 2026, so that we would get 150 basis point cut in total and get the Fed funds at 3% by the end of '26. That seems to be somewhere where the market is. As it relates to the third assumption, loan accretion, based on our models, we expect loan accretion this quarter for the fourth quarter to be somewhere in the $40 million to $50 million as expected prepayments fall. Our October accretion so far is in line with these expectations. And as I mentioned, August and September came down pretty ratably. So I think -- I think that's a good run rate to use. For 2026, we did certainly pull some forward in 2025. So we expect instead of $150 million of accretion, we're looking at about $125 million based on our prepayment forecast. But of course, it can be lumpy based on these vintage loans. The last part is deposit beta. For the first 100 basis points of cuts, our deposit costs came down about 38 basis points from 2.29% to 1.91%, so 38% beta. In our 2019 to 2020 easing cycle, our deposit beta was around 27%. So our expectation is with the growth plans that our deposit beta would look a little similarly to 2019, 2020 to 27%. Maybe we get to 30% over time with a lag, but I don't think it will be as high as 38%. So based on all those assumptions, we'd expect NIM to continue to be in the 3.80% to 3.90% range with the step down in accretion this quarter in fourth quarter and for 2026 for to be in that range, 3.80% to 3.90% as we kind of move forward. But one of the questions you asked was our pricing dynamics. Our new loan production rate for the total company this quarter was 6.56%. If you look at Texas and Colorado, that new loan rate was 6.79%. So it's a little bit higher in Texas and Colorado, but it's in total, it is 6.56%.. So I know you have a few questions, a few puts and takes, but that's some guidance for you. Michael Rose: No, that's really helpful, Steve. I appreciate it. And then maybe just a broader one for John. I think you mentioned that loan production was up a little bit in the third quarter. I think there's clearly going to be some dislocation in some of your markets from some of the deals that have been announced. I know you guys are obviously leaning a little bit more into Texas and maybe Colorado as well with some of that. Can you just kind of walk us through the loan growth environment at this point, given the fact that I think a lot of banks are kind of upping the hiring plans for loan officers, the pricing dynamics and kind of maybe what we should expect as we move forward? Stephen Young: Yes. Sure, Michael. We kind of guided to mid-single-digit growth for the remainder of 2025. I think we came in at 3.4% for the quarter, so a little bit less than mid-single, but we still think mid-single-digit growth for the remainder of the year feels about right. As I said, we had about $100 million more in paydowns in the third quarter than we did in the second. If we move into 2026, it could move higher, maybe in the mid- to upper single digits, but we have a better feel for that in January. But most of the loan growth is coming in the area of C&I. For the quarter, we had 9% linked quarter annualized growth in C&I. Resi growth was about 6%. And then if you combine C&D and CRE, really, we were flat for the quarter. There was a migration of construction loans that just migrated into CRE upon completion of construction. Our biggest pipeline build is in Texas. We had an $800 million pipeline there in the second quarter. Now it's up to $1.2 billion. So we kind of got past the conversion there, and now we're starting to see the pipelines and the activity building. Florida has got a $1 billion pipeline. Atlanta has got a $900 million pipeline. So those are our 3 probably largest markets. And as I said on the call, with that dislocation in really all the states we're in, we are kind of leaning in on the hiring front, and we see opportunities to recruit bankers. Yesterday morning, I was interviewing one from another bank. So that is where a lot of our focus and effort is right now. Operator: Your next question comes from the line of Jared Shaw with Barclays. Jared David Shaw: Maybe just if we could hit on credit. You were listed as a creditor to First Brands. I'm guessing that's what the large charge was. Was there -- for that charge, was there a prior -- it looks like there was a prior reserve. Was there also a prior charge taken against that? And I guess, how do you feel about the rest of the portfolio apart from that? John Corbett: Yes, you're correct. That's what that charge was. There was not a prior reserve. I mean that news happened pretty fast. But that was our only supply chain finance credit. So as we examine the portfolio, we don't have any more of that type of lending. So unfortunate, we're going to use it as a learning lesson for our credit team and management associates. William Matthews: And I'd say, Jerry, on the reserve question, based on what John just said, we would have had a reserve release, but for that charge-off in the quarter, i.e., a negative provision just based on the underlying economic loss drivers. And just to be clear, we did charge off the full amount of that balance in the third quarter. Jared David Shaw: Okay. All right. And then I guess looking at capital, you just gave some great color on sort of really good growth opportunities over the coming years, but still seeing growth in capital and like you said, Will, just that improving backdrop on credit. Where do you feel like you would like to see CET1 optimally? And how should we think about the buyback and capital management in general from here? William Matthews: Yes, Jared, it's a good question. We're obviously 11.5% on CET1, about 10.8% if you were to incorporate AOCI. So very healthy capital ratio. Not to say we don't articulate a particular target out there, but we do like this 11% to 12% range we're in. And we do like the optionality we've got with the ratios being strong and with the formation rate being so good. So we are hopeful, as John said, to take advantage of some of the disruption in the market through growth, but we also have the ability to use some of that capital to repurchase our shares. It's sort of a quarter-to-quarter decision we'll be making. Operator: Your next question comes from the line of Catherine Mealor with KBW. Catherine Mealor: Just one follow-up back on the margin. It was helpful to have your guidance for next quarter. And is it fair to assume that -- actually, this is the way to ask the question. Is there a way to quantify how much of the accretion this quarter was just accelerated versus just helping us to kind of model what a normal kind of base level would be for accretion going forward versus how much is accelerated from paydowns? Stephen Young: Yes, Catherine, there's a couple of things that I don't want to overcomplicate your answer, but it's complicated. There's a few things that go into it. One is full payoffs. We talked about and there's partial prepayments. So based on our models, when we were looking at it and to give you that forecast in the last quarter, it was based on our expected prepayments. And our expected prepayments actually came in reasonably well. What we didn't get right was the vintage part of it as well as other partial prepayments. So the bottom line is what we saw in July and early August was a little bit outsized. What we saw in end of August, September is much more run rate type of thing. So I think this 40 to 50, that's kind of what we expected in the fourth quarter, the back half of the year. That's sort of what we're -- that's what we're seeing. So that sort of informs us going into 2026. Catherine Mealor: Okay. Got it. That's helpful. And then on fees, any outlook into how you're thinking about fees moving into the fourth quarter and then into next year, it was really nice to see another quarter of higher correspondent and service charges. Stephen Young: Sure. No, it was a really good quarter. Noninterest income was $99 million versus $87 million, so it's nice to pick up 50 basis points on average assets, a little bit higher than our guide of around 50, 55. 2/3 of that was capital markets. A couple of things happened in correspondent. Number one, we have changes in interest rates. And so when you have changes in interest rates, that business typically does a little bit better. It was sort of broad-based. A couple of million dollars was due to fixed income, maybe $3 million, $4 million with higher interest rate swaps, another $1.5 million in sort of other trading. So I think we had -- I don't see that -- that number was around $25 million. So that's a $100 million run rate. So to put it in context, our best year ever was $110 million in revenue. Last year was $70 million. So this quarter was a really good quarter. So I don't expect that to -- we'll see to continue to repeat. But clearly, we had a good quarter, we'll see with the run rate. I think we get a couple of quarters behind us, we'll have a better view. But clearly, it's higher than our run rate of $87 million. I'm not sure we're as high as $99 million. So I'd say it's probably as we kind of think about 2026, somewhere in that $370 million, $380 million run rate, that's probably not a bad place to start, and then we'll just see how it progresses is the way I would think about it. Operator: Your next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: On a core basis, I believe from your second quarter earnings call, you talked about how every 25 basis point cut would be a 1 to 2 basis point improvement overall margin. Is there any change in thoughts on that? Or was that guidance? Or what was that guidance based on the core NIM? Or was that including any accretion? Stephen Young: No. Great question, and thanks for asking it. A couple of things there. So if we get back to 6 cuts and we get 1 to 2, that would be, call it, let's just take the midpoint, that would be 9 basis points. So I think our core NIM is somewhat -- as I think about core NIM somewhere in the mid-3.80s. So what's changed there? Number one is the loan accretion forecast. So if we -- next year, we are $125 million versus $150 million just because we pulled forward that that's about 4 basis points of decrease. And then the other is just on the deposit beta and the lag there of kind of where -- like I mentioned in our other question, our deposit beta so far to the first 100 was 38%. But on the other hand, we didn't grow deposits more than, call it, 2%, 2.5%. So as we contemplate the future and we look back at history at 2019 and '20 during that easing cycle, when we were growing a little bit faster, more mid-single digit-ish our deposit beta was more like 27%. So we're taking that model back down to 27%. We hope to outperform that, call it, there's a lag to CDs and pricing and all that. But by the beginning of '27, our hope would be we'd be in that 30% range. But for right now, what we're seeing in front of us we don't see that really -- we see that more of a lag and we're modeling 27% in our numbers. John Corbett: So Steve, when you translate what you're saying there, to Janet's question about 1 to 2 basis points with each cut may take that away if the deposit beta is not as good in a way down. Stephen Young: Right. And yes, to finish that thought to your point, John, to finish that thought, if our deposit beta -- so we're guiding sort of in the midrange of 3.80% to 3.90%. And so to the extent that the end of the year next year, we go through the cuts, and we start moving our deposit beta from 27% closer to 30%, 31%, that would get us in the high 3.80%, maybe 3.90% at the end of the year of 2026. That's how we're thinking about modeling it. Sun Young Lee: Got it. And just a follow-up. If I -- I'm not making this up, hopefully, I believe that the IBTX bankers that group will start adopting SouthState's business model and in a way, what would be the implication on -- or any implication on the expenses or their incentive to bringing like prioritized lower deposit cost or loans? Or is there any sort of change that could be coming or whether an implication on growth profile there? Could you explain -- could you give us any color on what that could mean for SouthState, that transition? John Corbett: Yes, sure. Janet, it's John. So we went through this transition year in '25 when we did the conversion, and we kind of kept the incentive system at IBTX the same as it had been in prior years. In 2026, it will move to the more of the SouthState approach where we allocate P&Ls to the regional presidents. So their incentive will be based on both loan growth but predominantly on their PPNR growth. One of the things that we're contemplating, making an adjustment for to incent additional recruiting and hiring is not to penalize those regional presidents for the first year compensation of new hires to encourage recruiting efforts into 2026, both with the existing SouthState plant and the IBTX plan. A good question. Hope that helps you. Is there another question? Operator: Yes, one moment please. Mr. McDonald, your line is open. John McDonald: Sorry, I didn't hear anything. Sorry, just one more follow-up, Steve, on the margin. I think your prior outlook was to be in the 3.80%, 3.90% and then drift higher in 2026. Just want to make sure that the '26 outlook 3.80%, 3.90% includes the rate cuts and about $125 million of accretion, if I heard that right. Anything has changed from prior? What are some of the puts and takes? Stephen Young: Yes. No, I think I was trying to answer that in the prior question. It's really the accretion number that from $150 million, it was what we thought in 2026 last quarter to $125 million. That's about 4 basis points of decrease. And then the rate and then on the deposit beta, we have 38%, 2019 was 27%, we were thinking -- we think ultimately, we'll get to somewhere in the low 30s but it just is probably a bit of a lag. So it's probably not going to -- we're going to be very diligent on growing for the loan growth we think is coming. And so we think we should, in 2026, model more in the 27% range. And then hopefully, as the CD's reprice, all those kind of things through 2027, we could see an uptick. So I think back to the guidepost to how this would work is you start out in the mid-380s and then move higher into 2020 -- the end of '26, early '27. William Matthews: And John, this is Will. I would add our margin position is as neutral as we've seen it in years, just based upon the actions we took in 2025, the number one, the merger and marketing that balance sheet properly. And then two, the portfolio restructuring we did in connection with the sale leaseback. So we have a relatively stable looking margin under most reasonable scenarios. John McDonald: Got it. And the delta between having a four handle this quarter and move into 380s next quarter is really accretion going from this quarter and cutting half to 40 next quarter in your outlook? Stephen Young: Yes, that's right, yes. . William Matthews: And that's what we're currently seeing. Yes. John McDonald: Okay. And then one just follow-up again on the next quarter's average earning assets in the 59. It seems like that's kind of where you were this quarter. Are there some kind of puts and takes of what you expect in terms of growth in the fourth quarter? Stephen Young: Yes. Typically, in the fourth quarter, we had some seasonal deposit growth and some of -- depending on how we manage it, we get some of the seasonal wholesale stuff out of the bank at the same time. So we sort of manage it towards that level. But kind of year-over-year, I'd call it mid-single-digit growth is kind of how we're thinking about it from an average earning asset. Operator: Your next question comes from the line of Ben Gerlinger with Citi. Benjamin Gerlinger: I was wondering if we -- kind of stepping back to correspondent banking, I understand that a rate card or rate movement kind of sparks it. But we're looking kind of -- I don't know 3 -- you said roughly 3 to 6 cuts over the next 12-ish months. How long is the tail for that kind of tailwind, I guess, you could say. So there's 2 cuts in December -- or excuse me, 2 cuts in the fourth quarter, would the first quarter also see a benefit? Or is it fairly short-lived? Stephen Young: Yes. I was trying to explain before, as you kind of think about that business that put the highs and lows of it, back in 2020 when things went crazy on rates. I think our best year was $110 million. I think we did that in 2020, 2021. And last year was our worst when rates were the highest and sort of out there. So that was about $70 million. As I kind of think about that business, you're going to have fixed income, we'll do better in rate cuts lower because, particularly for our bank clients, they'll want to take their excess cash and buy bonds because there'll be a yield curve on the interest rate swap side depending on the shape of the yield curve, it may not be as good as it is today. Today, it's deeply inverted. That's really good for that business. So I kind of see those businesses sort of offsetting each other, but maybe trading some stability at that level. Benjamin Gerlinger: Got you. Okay. That's helpful. And then from a follow-up perspective, it seems like you have a lot of opportunity in front of you. I think that's -- that would be hard to disagree, especially with the other disruption in the markets that you operate in. Is it fair to think you're going to think organically like you're hiring individuals, obviously, and growing loans? Or could you potentially see a small bolt-on deal or something like that? John Corbett: Yes, Ben, it's John. With our particular fact pattern, kind of our view is to invest in SouthState is more interesting right now than doing an M&A deal. And that investment in SouthState comes in 2 forms. The first way is just to increase our sales force and accelerate our organic growth because of all this dislocation that's going on in the markets. The second way as Will described, is in purchasing SouthState shares through our buyback authorization. The capital formation rate is pretty strong right now and the valuation is pretty attractive. So that's kind of how we're thinking about priorities on capital. Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I just wanted to go back to the NIM-related discussion for a minute. The big delta as I look at the average balance sheet was really the cost on the transaction and money market accounts, up 11 basis points quarter-over-quarter. Can you kind of talk about the dynamics around that? Is it an effort to bring in some new deposits with the anticipation of stronger growth over the next year? Or just maybe comment on kind of the driver there? Stephen Young: Yes. Back in July, when we had the call, Gary, we've talked about the -- our expectation of deposit costs. And we talked about the range this next quarter for the third quarter is 185 to 190. So we were -- it was 191, so we were on the higher end of the range, missed it by a basis point. But really what drove that was in our expectation was that particularly in the CD book, we -- if you look at the second quarter to the third quarter -- or excuse me, the first quarter, second quarter, our CDs went from, I don't know, 7.1 or 7.2 or something to 7.7, I think. And that was back to funding and loan growth and getting the balance sheet where it needed to be. And so those obviously transacted at a higher rate level than others. So as we kind of think about -- that's kind of what's part of our guidance. It's frankly, a tough environment right now with deposits, but we expect that as we get rate cuts and the curve gets a little bit more steady, we could continue to see better. That's why it's a little bit why we're guiding down on the guiding on the 27% deposit beta because ultimately, we need to fund the loan growth that we think is in front of us. Gary Tenner: Great. And then as a follow-up on that beta since you just mentioned as well, to be clear that 27% to 30% beta is relative to the next phase of easing as opposed to cumulative, including last year's? Stephen Young: Right, that's right. That's a great way to say it. Yes. So you're right. If we had to average them, it'd probably be somewhere in the, whatever, low to mid-30s, but yes, that's right. It's the next incremental. Yes. Gary Tenner: Okay. Great. And if I could sneak in a last question. Just on the NIE, I think you had guided previously to a bit of a step down in the fourth quarter, I think, to the $345 million, $350 million range. Any change to that outlook for the fourth quarter? William Matthews: Yes, Gary, I think our guidance for Q4 is still in that $345 million to $350 million range. There's always some variability that's hard to predict with respect to how some of the commission compensation businesses perform, loan origination volume could impact your FAS 91 cost deferral. But similar in that roughly $350 million range. We're pretty clean now in terms of recognizing the cost saves on independent. If you look at Q3 to Q2 was flat even though we had the annual merit increases for most of the company, except for executives July 1, but yes, things were flat. So we've done a good job of getting costs out, getting them out pretty early. Looking ahead to '26, we haven't talked about that, but I might as well address that. Our planning is obviously still underway. We still think for '26 that mid-single digits is a good guide. Maybe it's an inflationary sort of 3% plus another 1% or so for some of the investments in organic growth initiatives like John addressed. So maybe that's what '26 will look like. We're still, as I said, finalizing our planning there, but that's kind of what we're thinking right now. Operator: Your next question comes from the line of Gary Tenner. D.A. Davidson. Stephen Young: That was Gary we just spoke with. Operator: That concludes the Q&A session. I will now turn the call back over to John Corbett for closing remarks. John Corbett: Sorry. Thank you, Bella. Thank you all for calling in this morning. We, as always, appreciate your interest in our company and if you have any follow-up questions on your models, don't hesitate to give us a ring. Have a great day. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you for joining, and you may now disconnect. Everyone, have a great day.
Operator: Thank you for standing by. Welcome to the Brandywine Realty Trust Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jerry Sweeney, President and CEO. Please go ahead, sir. Jerry Sweeney: Jonathan, thank you very much. Good morning, everyone. Thank you for participating in our third quarter '25 earnings call. As usual, on today's call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Senior Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed on the call today may constitute forward-looking statements within the meaning of federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC. So during our prepared comments today, we'll briefly review third quarter results, provide updates on our '25 business plan and be prepared to answer any questions you may have. Looking at the third quarter, we posted solid operating metrics again, reinforcing the continued flight to quality and our strong market positioning. As we'll review in more detail, we do anticipate performing within all of our business plan ranges. At the midpoint, we have now executed over 99% of our spec revenue target. Our quarterly tenant retention rate was 68%, and we expect to end the year at the upper end of our range. Leasing activity for the quarter approximated 343,000 square feet, including 164,000 in our wholly-owned portfolio and 179,000 in our joint ventures. Forward leasing commenced after quarter end remained strong at 182,000 square feet with most of those leases taking occupancy in the next 2 quarters. Third quarter net absorption totaled 21,000 square feet. And as anticipated in our business plan, we ended the quarter at 88.8% occupied and 90.4% leased. In Philadelphia, we're 94% occupied and 96% leased. In the Pennsylvania suburbs, we're at 88% occupied and 89% leased with a solid pipeline of prospects for the existing vacancies. Boston remained at 77% occupied and 78% leased. We do, as we forecasted before, a large known move-out in the fourth quarter that will drop this region further into about 74% by year-end. Looking ahead, we have only 4.9% of annual rollover through '26 and one of the low -- which is among the lowest in the office sector and only 7.6% through '27. For the quarter, our mark-to-market was a negative 1.8% on a GAAP basis and a negative 4.8% on a cash basis. Both of those metrics, however, were heavily influenced by a large as is renewal in Austin that had a negative 16% GAAP and negative 18% cash, but no TIs were invested. Without that lease, the company would have been a 6.2% positive GAAP and 2.8% positive cash. By way of example, our CBD and Pennsylvania mark-to-market were positive at 6.7% and 3.1% on a GAAP and cash basis, respectively. Our capital ratio was 10.9%, slightly above our '25 business plan range. But based on leases already executed for the fourth quarter, we're maintaining our capital ratio range of 9% to 10%, which is the lowest capital ratio range we've had in over 5 years. Tour activity through the portfolio continues to accelerate. Third quarter physical tours were in line with second quarter, but more importantly, the square footage of those tours in Q3 exceeded the second quarter by 23%. Another positive sign is that as we track our deal status, letters of intent, legal negotiations out for signature is up 170,000 square feet or 25% from Q2 levels. For the quarter, 51% of all new leases were the result of a flight to quality, and we do not have any tenant lease expirations greater than 1% of revenues through 2026. Our operating portfolio leasing pipeline remains solid at 1.7 million square feet, which includes about 72,000 square feet in advanced stages of negotiations. To sum up, operations '25 is characterized by continued strong operating performance, supported by limited rollover risk, excellent capital control, the ongoing strengthening of our marketplaces and an expanding leasing pipeline. Looking at our balance sheet and liquidity, we remain in excellent shape with no outstanding balance on our $600 million line of credit and cash on hand at the end of the quarter. As previously disclosed, we recently issued $300 million of bonds due January of 2031, which generated $296 million of gross proceeds at an effective yield of [6.125%]. We used $245 million of those proceeds to repay our secured CMBS loan that was due in February of '28. That term loan payment leaves us fully encumbered in our operating portfolio, which provides much greater flexibility to lease and manage our assets and then also bought about $45 million into our unencumbered NOI pool. We have no unsecured bonds maturing until November of '27. And to ensure ample liquidity, we do plan to maintain minimal balances on our line of credit. As noted previously, our overall business plan is still designed to return us to investment-grade metrics over the next several years. As such, we will continue looking to reduce overall levels of leverage. And as a point of reference on that, our average cost of bond debt is slightly north of 6%, but we do have $900 million or about 50% of our outstanding bonds with coupons north of 8% which, assuming capital markets remain constructive, provided very good refinancing opportunities for us over the next several years. Looking at the markets from an overall standpoint, the real estate markets and overall sentiment continue to improve. That perspective is supported by the following fact patterns. Our pipeline activity continues to grow. Tour volume remains at very healthy levels. Rent levels and concession packages remain very much in line with our business plan and in select submarkets and buildings, we continue to push both nominal and effective rents. And all of our 2025 key operating goals have been achieved. The demand for high-quality, highly amenitized buildings remains a strong consumer preference. In Philadelphia CBD, as I noted on previous calls, market vacancy remains concentrated in a small number of buildings and high-quality buildings continue to outperform lower quality while pushing effective rents. Our competitive set continues to narrow through buildings being removed from inventory for conversion and several select assets still having financial issues, which essentially removes them from the leasing market. In fact, as an update from last quarter, our numbers now show that potentially 11 buildings totaling 5.1 million square feet of office is in the process of being removed from inventory for conversion to residential uses. As a frame of reference, that's about an 11% reduction in the overall office inventory in CBD Philadelphia. As such, with no construction on the horizon, our quality assets remain in an ever-improving competitive position. The city's life science sector, while still early in the recovery phase, should remain a forward growth driver, particularly with the return of capital as that submarket is backed by a strong regional health care ecosystem that includes over 1,200 biotech and pharmaceutical firms along with 15 major health care systems. Austin also remains in a recovery phase. Leasing activity continues to improve. As of last report, there are over 108 tenants actively seeking more than 3.5 million square feet with the tech sector accounting for 1.5 million square feet of that demand. So a bit of a resurgence from the tech company space demand standpoint. Third quarter leasing activity was 1 million square feet, which was 70-plus percent higher than in Q2. So green shoots are continuing to emerge in Austin, particularly in the higher-quality product. Our FFO for the quarter was $0.16 a share or $0.01 above consensus. We had 2 operating items that Tom will amplify in more detail that did impact our '25 guidance revisions. As previously announced, we will be recording in the fourth quarter an earnings charge totaling $0.07 per share related to the early prepayment of our secured notes. In addition, we did anticipate, as outlined on previous calls, making progress on recapitalizing at least 1 and possibly 2 projects of our development joint ventures in the second half of the year. We did anticipate these recapitalizations would add around $0.04 per share to 2025 FFO. During October, we did capitalize our 3025 JFK properties as the first step in this process. We do anticipate possibly one more later this year or very early in '26. As we talked before, the objective of these recapitalizations, which includes the full retirement of the preferred equity investments is to bring high-quality stabilized assets onto our balance sheet, which will deliver high-quality cash flow, improve earnings, reduce overall leverage and open up additional capital options for us on those properties. Due to several factors, including the slower stabilization of several projects and slower-than-anticipated interest rate decreases, these recaps are occurring a quarter or 2 behind schedule. As such, the full impact will not occur really until 2026. As a result of that, our revised FFO range as we outlined in our press release is $0.51 to $0.53 per share. Optimizing value in these development projects remains a top priority. With 3025 Avira and Solaris both 99% leased and stabilized, our joint venture development pipeline is really down to 1 Uptown and 3151 JFK. The leasing pipeline on these projects is up 700,000 square feet from last quarter. But as you noted in the supplemental package, even with this increase, given the uncertain timing of lease executions, the time to complete tenant space plans and the corresponding build-out time lines, we have slid the stabilization dates on both of those properties. Looking at Schuylkill Yards 3025, that commercial component is now 92% leased. We have a very good pipeline for the remaining space in the building. With leasing in place, the commercial component will stabilize in Q1 '26, immediately after our major tenant takes occupancy. Avira, as I noted a moment ago, is 99% leased and achieved full economic stabilization during the quarter. We're also experiencing that project a very good renewal rate with average double-digit rate increases thus far this year. 3151 was substantially delivered in the first quarter of this year and will be in a capitalization phase for the balance of '25. The pipeline on this project has increased to 1.7 million square feet, broken down to 60% office prospects and 40% life science prospects. They range in size from 25,000 to 200,000 square feet. Discussions with many of these prospects are active. Tour activity remains robust, and the project has been very well received. The life science market, as I noted, remains very much in a recovery mode. It's impacted by a challenging fundraising climate and public policy uncertainty, although we are seeing an increased traffic coming from that sector. Despite the strong increase in both Austin life science traffic, as I noted, we did slide the stabilization date just to be conservative on when leases will actually commence. At Uptown ATX, we're 40% leased, but have another 15% of the project in the final stages of lease negotiations. The remaining pipeline remains strong with tenant sizes ranging from -- between 4,000 to 100,000 square feet, including ongoing discussions with several full floor users. We're also nearing completion on building out some spec space on one of the floors to accommodate the accelerated move-in for several smaller prospects. Solaris, which opened about a year ago, has achieved stabilization during this quarter. So very successful on that with the renewal program well underway. As noted last quarter, our '25 business plan anticipated $50 million of asset sales. We have sold $73 million of properties at an average cap rate of 6.9% and an average price per square foot of $212. At this time, we're obviously not factoring any more sales closings during '25, but we'll certainly identify a target as part of our 2026 guidance. In general, though, from what we're seeing, the investment market continues to improve, both in terms of velocity and pricing. The pricing increase is notable because many asset trades are still on lower quality or underleased assets. For example, over the last 12 months, there have been about $475 million of sales in suburban Austin at prices per square foot ranging from $75 to $470 per square foot, an average occupancy of 67% and cap rates ranging from the low single digits to upwards of 12%. Likewise, in the PA suburbs, there were $242 million of sales at cap rates that range from 7% to 11% and an average occupancy of 85%. So buyers, including institutional buyers are continuing to reemerge. So we anticipate the investment climate will continue to improve into 2026. On the dividend, as noted, our Board decided to -- or previously announced, our Board decided to lower our dividend from $0.15 per share to $0.08 per share. We believe this revised dividend is sustainable and represents a CAD payout ratio much more in line with our historical averages. To the extent we continue to experience progress on the developments and cash flow growth from our operating properties, continued low capital cost and reduced borrowing costs to increase CAD, we'll certainly reassess our dividend going forward. But the idea was to set a good solid floor, give ourselves a position to generate $50 million of internal capital that we can use for reinvestment back into our properties. So with that, let me turn the floor over to Tom to review our financial results for the third quarter and an outlook for the balance of the year. Thomas E. Wirth: Thank you, Jerry, and good morning. Our third quarter net loss stood at $26.2 million or $0.15 per share. Our third quarter FFO totaled $28 million or $0.16 per diluted share and $0.01 per share above consensus estimates. Some of the general observations for the third quarter, our FFO from our unconsolidated joint ventures totaled a loss of $6 million or $1 million higher than our $5 million forecast, partially due to the delayed recapitalization activity during the quarter. G&A expense was below our reforecast by $600,000, primarily due to timing and other income was $600,000 above our reforecast due to various items. Other forecasted quarterly results were generally in line. Looking at our debt metrics, third quarter debt service and interest coverage ratios were 2.0, consistent with the second quarter. Our third quarter annualized combined core net debt to EBITDA was 8.1 and 7.6, respectively. Both metrics were within or below our business plan range. From a core portfolio composition during the third quarter, we made one adjustment to our projections. We had forecasted 250 King of Prussia Road becoming a stabilized core property during the third quarter. However, due to a tenant delay in occupancy, the stabilization date has been moved back to 1Q '26. As Jerry highlighted, we completed a successful 5-year bond issuance that closed in early October, which generated gross proceeds of $296 million. Proceeds were used to pay our $245 million secured CMBS loan, which was due in 2028. Both transactions closed in early October. It is important to highlight that in June of '25, we executed an unsecured bond cap of $150 million at 7.04%. And the recent issuance represents a 13% decrease in our unsecured borrowings since that June offering. In addition, the coupon on our recent bond issuance is slightly below our pro forma 6.26% weighted average effective rate. So we feel the significant increases to our interest expense from future refinancing should come down. We continue to maintain a strong liquidity position and use further sales and refinance proceeds to reduce unsecured debt and to improve our credit profile. We have time to work on this improvement with no unsecured bonds maturing until November 27. Giving effect to the CMBS loan prepayment at the end of the quarter, our wholly owned debt was 100% fixed with a weighted average maturity of 3.5 years. This excludes the 3025 construction loan, which will now be consolidated and matures in July of 2026. As highlighted, we adjusted and narrowed our guidance for 2025. The midpoint reduction is 10% and is comprised of $0.07 reduction from the transaction costs associated with the repayment of the $245 million CMBS loan, a reduction of $0.04 per share is primarily due to the delays in recapitalizing our development projects, which we expected to generate some benefit to our third and fourth quarter results. There is some negative carry from the bond issuance and the CMBS redemption, and we did have a delay in the stabilization of 250 King of Prussia. Looking at fourth quarter guidance, in connection with the October buyout and consolidation of 3025 JFK, the impact to our fourth quarter results will be an increase to GAAP NOI of $1.9 million, an increase to interest expense of $2.9 million through the consolidation of the construction loan and $2.7 million improvement in our loss from unconsolidated joint ventures and a reduction in interest income of about $600,000 to our reduced cash on hand balances. While that is muted to our fourth quarter, the opportunity to buy out our higher-priced capital partner ahead of a final stabilization gives us flexibility entering 2026. The $8 million of annualized NOI for the fourth quarter will increase to over $20 million in the first quarter and grow from there. With the property now wholly owned, we have the flexibility to refinance the above-market debt with lower-priced unsecured, secured or agency debt, and we assess -- as we also can assess the opportunity to find a common equity partner and potentially reduce our equity stake. Turning to the rest of the fourth quarter. Property level operating income will total about $71 million and will be similar to the last quarter results with 3025 being included in the fourth quarter, but lower NOI primarily due to a known move-out in Austin as well as the pushback of $250. Our FFO contribution from our joint ventures will total a negative $2 million, which is sequentially lower than the third quarter, primarily due to the fourth quarter consolidation of 3025, higher NOI at both Solaris and Avira and partially offset by a higher loss at 3151. G&A expense for the quarter will total about $8 million, representing a full year expense of $42.6 million and within our 2025 business plan range. Our interest expense will approximate [$38.5 million], sorry, and the capitalized interest will be about $2.5 million. Sequential increase in the interest expense is primarily due to the consolidation of 3025, lower projected capitalized interest and the negative carry impact of the $300 million of unsecured bonds, offset by the $245 million of CMBS loan repayment. Termination fees and other income will total about $2 million and net management and development fees will also be about $2.5 million. We anticipate no property disposition activity for the balance of the year. We anticipate no ATM or buyback activity, and our share count will be roughly 179.5 million shares. Turning to our capital plan. Our capital plan for the balance of the year totals $388 million and is fairly straightforward, but with some adjustments based on the recent capital markets activity. Our 2025 FFO payout ratio for the third quarter was 93.8%. And then looking at the larger uses, the repayment of the CMBS loan is $245 million. We used just over $70 million to acquire the preferred equity interest at 3025. Our development spend will total $24 million, which includes 165 and 250 King of Prussia Road. Our food hall at One Drexel Plaza is also in those numbers, and we have $14 million of common dividends, $8 million of revenue maintaining capital and $12 million of revenue creating capital. The funding sources are the $300 million unsecured bond issuance, $25 million of cash flow after interest payments and $5 million of a proposed and expected King of Prussia construction loan for our hotel. Based on the capital plan, we are anticipating an incremental $58 million of our cash being used and balance end of the year of roughly $17 million with no outstanding balance on our $600 million unsecured line of credit. While our 2025 business plan net debt-to-EBITDA range is between 8.2 and 8.4 due to the consolidation of 3025 JFK, we project this, will temporarily increase to 8.8x at the end of the fourth quarter. However -- and that is the 8.8x is generated by the consolidation of 3025 or about 0.4 of a turn. However, when 3025 JFK income stabilizes in 2026, that ratio will decrease by 0.3 of a turn for only a net increase of 0.1 of turn increase. Our net debt to GAV will approximate 48%. Our core net debt to EBITDA will also be impacted temporarily by the same EBITDA adjustments we just made for 3025. We anticipate our fixed charge and interest coverage ratio will be negatively impacted by the financing activity and the consolidation of 3025 and will reduce our fixed charge to about 1.8. With incremental income from the development projects, we anticipate that leverage will then begin to improve as we get into 2026. I will now turn the call back over to Jerry. Jerry Sweeney: Tom, thank you very much. Well, to wrap up, the operating platform remains in very solid shape, very limited rollover the next couple of years. We're growing effective rents in many of the submarkets, accelerated some of our leasing programs to make sure that we are doing everything we can to take advantage of both the recovering market and the reduction in our competitive base. We continue to have as a priority focus for the company, stabilizing all these development projects. And while we have great success thus far, we have work to do, and that pipeline has not completely translated to quarterly earnings growth yet. But as Tom outlined, even using 3025 as an example, there's tremendous levels of NOI coming into the balance sheet and P&L over the next year or so. So the groundwork has been laid, and we're building on the continued momentum to drive long-term growth. The operating platform, as I noted, remains stable with very limited rollover and our liquidity is in excellent shape, and we're well positioned to take advantage of continued market improvement. So Jonathan, with that, we're delighted to open up the floor to questions. As we always do, we ask that in the interest of time, you limit yourself to one question and a follow-up. Operator: Certainly, and our first question for today comes from the line of Seth Bergey from Citi. Unknown Analyst: This is Lauren on behalf of Seth. Could you go over in more detail how we should think about the timing and process of the recapitalizations? Jerry Sweeney: Sure. We'd be happy to. In fact, it's a great question because I know the recapitalizations and the timing of them is a big impact. So let me spend a few moments to answer your question. By way of quick background, those preferred structures were put in place as bridge capital for us that would preserve all the upside of these properties accruing to Brandywine. They were fixed payment structures with cost of capital from the high single digits to the teens. The financial reporting treatment of those structures was that we needed to recognize as a current period of expense, the accrued but not paid in cash return on that capital. And those structures were always designed to have the accrued unpaid return paid out of a capital event, which is exactly what just happened on 3025. And as we look at the development pipeline, as I think you all know because many of you have visited the properties, they're all very high-quality, extremely well-positioned assets in 2 mixed-use master planned communities. Two are now stabilized with 3025, which includes both the Avira and the office component. That took about 24 months from completion to stabilize. Solaris has stabilized. We delivered that in the late third, early fourth quarter of '24, and that stabilized about a year later. So good progress on that. The pipeline on 3151 and an Uptown is big enough where we have a clear path to stabilization, albeit with some uncertainty regarding the timing of when those leases will actually kick in place. But while the approach for each of the ones may vary a bit, the goal is to bring on as much NOI as possible onto our P&L and/or recover significant capital. And as we look at the different options, as Tom touched on a little bit, those recaps can be financed with noncore asset sales, lower cost financings, pari-passu ventures on some assets. So we have a fairly wide range of options on each one. But just spend a moment looking at each one, let me walk through. So 3025. We recapped at our highest cost of capital partner there. By the expensing of those preferred returns, we were going to incur in 2026, just shy of $10 million of preferred charges or about $0.04 a share. So that buyout eliminates that drag on earnings. And then the capital options we have are very robust. I mean the rate on the current construction loan is just shy of 8%. So if we did an unsecured financing to take out that construction loan, we can save close to 200 basis points or about $4 million in interest. And if we actually do an agency level financing on the residential piece, that overall cost of debt could be even lower. We also are looking at exploring a pari-passu joint venture, we could recover some capital. And then obviously, always considering whether we sell the residential component or not. So 3025, now with that buy behind us, take away highest cost of capital in the rearview mirror, full control by Brandywine. With the debt coming due, we think we have some positive refinancing outcomes at a very straightforward level. Solaris is stabilized, but cash flow and the NOI is still recovering. As we noted on previous calls, we -- to accelerate the lease-up in that market, we did give concessions burning off. We did give concessions to get that original lease-up achieved at the rate that we did. Right now, the capital markets aren't giving full credit to concession level rents. So we're now in the first wave of our renewals and very pleased with that progress. Our renewal rate on that project is 64%. We're getting about an 8% increase in rates. We're giving out no or very limited concessions on renewals and very limited concessions on new leases. Based on the expensing of that preferred in '26, we had about $4 million or about $0.02 a share of charges on that. So the approach on that project is we're already exploring a recap. That could be a sale or a joint venture on the existing asset. The current debt is just shy of 7% today. So again, agency debt on that would be somewhere in the very high 4s or low 5s. And our target really is in the first half of '26 to kind of achieve that recap once the concessions burn off on the lease schedule, on the renewals and the marketplace recognizes the net effective rents that we're generating on an ongoing basis. For One Uptown, we've clearly some leasing work to do there. We have about 75,000 square feet under advanced lease negotiations that would take that project to 55% to 60% and a really good pipeline behind it. Right now, we're projecting, if we do nothing with that about a $0.025 per share preferred expense charge in '26. And our approach there is get a little more leasing done to more visibility. We are already talking to several potential partners about a pari-passu recap. We have our lead tenant there has an expansion right in midyear that we'll see if they exercise or not. So One Uptown is most likely a late first half, early second half recap event. Looking at 3151, that's our second highest cost of capital. And we're obviously dealing with the challenge of getting that property leased up. The project has been very well received based on the pipeline by a number of select investors and several debt sources. So as the second highest cost of capital in our development ventures, we have about $8 million in expense charges on that property in 2026, just from the preferred. So with the process we have underway, we think that a partner buyout is a near-term event. That could be financed through other sales or much lower cost financing. We own that property without any debt on it. So our hope is to get 3151 across the finish line no later than the first quarter of '26. So hopefully, that road map is helpful. Operator: And our next question comes from the line of Manus Ebbecke from Evercore ISI. Manus Ebbecke: Just wondering if you could touch on a little bit more on Uptown ATX. It was obviously good to hear that the pipeline is up and you have some lease in the later-stage negotiation pass. Could you maybe clarify like out of the total leasing prospects that you see at the asset, how much is for spec suites versus like [indiscernible] users? What type of tenants those are, if those are real net growth in the market or just kind of like relocation tenants? And then on the second one, just like on the broader scope of the development land out there, what should we maybe expect in terms of starts in '26? I assume, obviously, like another commercial part is more kind of further out as we are leasing up the Block A first. But maybe I know there's contemplations for additional residential or hotel projects. So kind of maybe give us an idea in terms of time line or what to expect in '26 there as well. Jerry Sweeney: Okay. Great question. Thank you. And a couple of overview comments as you look at Austin. Look, I mean, Austin clearly has a disequilibrium, particularly in the CBD marketplace. I mentioned the number of tenants in the market looking and the increase in third quarter leasing activity. Any how, about 85% of that leasing activity in the market is being captured by Class A buildings. But when you drill down to the Uptown Domain submarket, which is really our competitive set right now since 405 Colorado downtown is fully leased, that's about 3.7 million square feet. That submarket is about 96.3% occupied. You've got about 68,000 square feet of sublease space in 2 domain buildings in 2 blocks of 35,000 square feet or so, which is down dramatically from just a year. One tenant indeed did put 100,000 square feet on the market for sublease in one of the domain tower buildings. So you've got about 168,000 square feet of sublease space in that submarket. So that's about 7% vacancy. So a fairly tight market. Also, the train station, which we noted in the supplemental package, did, in fact, start construction. That has spurred a lot of additional interest because now it's delivered in the first half of '27. CapMetro through this -- these are their numbers, not ours, projects us to be the second busiest train station along that red line, a real people mover that dramatically improves labor pool accessibility. So we think that's a nice catalyst to get some additional activity. And the other factor is that we have a number of tenants who are in our pipeline who are downtown or doing market-wide searches and we're really amplifying the fact through our team that there's a $23 cost difference between being downtown or being in Uptown. Most of that is -- there's a $5 stone in rent, $10 in expenses. So it's a very solid economic decision. So with that background, and sorry for all that detail, but I want to set the table for why we're still very optimistic about One Uptown success. We have a number of tenants in the pipeline. We have a number, frankly, that are kind of in-market relocations are kind of in the 4,000 to 10,000 square foot range that are kind of spec suite tenants prospects. And then we have a couple of tenants in the 80,000 to 100,000 square foot range. There are multiple floor tenants that have toured the property, and we're in discussions with them. And then we have one full floor tenant that is a lease under negotiation at this point. George, any other color you want to add to that? George D. Johnstone: Yes. I think we've got, like Jerry said, the one -- we have one floor dedicated to spec suites, and we've got either leases in late stages of negotiation and other pipeline prospects for that floor and then a lease out for another full floor user. And then, of course, we have the underlying expansion rights with NVIDIA, who signed last quarter. So again, I think we feel good about the pipeline, the composition of it, the spec suites have been well received. If the market continues to shift in the spec suite direction, we've kind of done that now with 2 floors and are prepared to shift quickly as needed. Jerry Sweeney: Thanks George. And then to answer the second part of your question, look, we're -- major folks at Uptown, make no mistake, is lease One Uptown and recap both projects. So that's #1 absolute top shelf priority. Recognize, I think, the value we have long-term at our Uptown development, we have a number of discussions underway with large users who would be interested in doing build-to-suits at that location. They are still early stage and are not detracting from our core mission of getting One Uptown leased. We are also, as we've noted in the SIP, moving forward with the planning of Block B to the objective there to be submitting site plan -- for site plan approval by the end of the fourth quarter of this year with hopefully getting approvals in late '26. Block B consists of a multifamily property rental, a large retail base and a hospitality component, i.e., a hotel and obviously, parking. We are working with a retail and hospitality partner as we think through the design components of that. And as those plans get finalized and priced, we will be looking for the right capital answer to facilitate that project moving forward. Obviously, with the partners we have involved, they have capital resources. Brandywine has significant embedded value in the land that, that project will sit on. So we think that's a very viable option for us in terms of equity contribution with land value. So we're looking at a number of other, as I mentioned, build-to-suits, but again, very low priority compared to mission-critical of recapping these development projects and getting One Uptown leased. But certainly happy to provide any color on that as the quarters go by. Operator: [Operator Instructions] Our next question comes from the line of Dylan Burzinski from Green Street. Dylan Burzinski: Maybe just first one on -- can you explain why you all decided to issue the unsecured notes and then take out the CMBS debt. If my recollection is correct, I thought the CMBS debt didn't -- wasn't too pricey in terms of the rate. So just sort of curious you guys' thoughts on how you guys approach that. Thomas E. Wirth: John, Dylan, this is Tom. I think the way we approach this is that we've been looking at the CMBS loan and thought about actually prepaying a couple of assets and bringing them out as unsecured for a couple of reasons, one for leasing, one potentially to do something with them on the capital market side. So we were already thinking about it. When the rates came in as much as they did and the differential in rate was only a quarter -- 25 basis points, basically, we thought, let's unencumber the assets. It helps our [UAP], it helps all of our unleveraged ratios, and we thought that was a good execution. We knew there was the charge, $10 million of cash that went out the door with that. But it also thought it was also a good way to reset our rates with the debt capital markets. So the 7.04% we had done -- the 7.04% cap we did in June was at a very high premium. I think it was close to 107% of face. And I think that really was hurtful in us getting that rate any lower. I think doing something at par, bringing our rate down into the lowest kind of helped reset that bar. Since it was issued, it's been trading fairly well, right around par. So we thought that was also a consideration as well. Dylan Burzinski: Maybe just a broader one. I know there's a few assets on the market in downtown Philadelphia. I'm not sure if you guys are sort of interested in buying assets. But I guess just -- as you guys think about your cost of capital today, just sort of long-term plans as it relates to how you think you can close the disconnect between where share trades versus where an NAV estimate might be, especially ours? And maybe you can sort of tie in just longer-term leverage targets and that it might be helpful. Jerry Sweeney: Yes, Dylan, Jerry. Thanks for the question. Yes. Look, I think the -- we think we have a couple of really good ingredients to start to turn that perception around fairly quickly. And that is the leasing up of the development projects and proving out their value proposition and then recapitalizing kind of, i.e., changing the capital stack of those projects that really does remove the earnings overhang. I mean if you really take a look at -- if you took the existing preferred structures without being touched, I mean, there's a significant impact to earnings because of the financial reporting treatment we have on those. So simply by clearing up those recaps, getting control of those assets and then pursuing better cost of capital outcomes for those I think, really winds up putting us in a great position with -- as I look at '26 into '27. So I think that's going to be a very key ingredient for us. Look, the operating portfolio continues to perform very well. We have -- as with any portfolio, there are some soft spots. But I think we're very encouraged with what's happening in each of the different submarkets we're in that really give us some significant ability to continue to drive effective rents across the board. We do have some assets that we have on the market and we will put on the market in '26 that we feel are not great growers for us and actually adversely impact some of our growth objectives going forward. And as we have done in the past, we look at those assets from a net present value standpoint and determine at what point in time we should sell those. So I think the major issue we're focused on right now is proving out the value thesis for these development projects. I think it's generally recognized in the private markets that the land holdings and the approvals we have in place at Uptown and at Schuylkill Yards are incredibly valuable long-term value generators. Our challenge, given our public cost of capital is to determine from a market timing standpoint, when we should move forward with the next phase, but more importantly, how we finance those. I think the objective we had going to this round of development was we did the preferred structures, which had an incrementally higher cost of capital, but left all the residual value to Brandywine. I think as we look forward at some of the future development starts, assessing different capital structures there, I think, will be very important because the ultimate objective is for us to get back to investment grade. We think we have a clear path to do that as we look at the numbers going forward. And one of the impediments for us getting to investment grade has really been the impact on our fixed charge coverage. And the reality, our fixed charge coverage has been impacted because our debt costs have almost doubled in the last 4 years. That's why as I even noted in the comments, when I look at the existing bond pricing, as Tom touched on our bonds are pricing -- are trading pretty well. We have 2 bonds outstanding, $900 million at rates north of 8%. So we think the refinancing opportunities there as the time is right, bring a lot of those financial and operating metrics back into a very good position. So I think the takeaway point, we got some near-term hurdles in terms of getting these development projects leased. We've got to prove out to the marketplace that we can effectively recap these properties and create long-term value, continue driving the operating results of the company as well as we have for the next few years into an ever-improving market and then really focus on how we overall reduce leverage to hopefully improve our overall cost of public capital. Operator: And our next question comes from the line of Upal Rana from KeyBanc. Upal Rana: Could you provide some detail on the Board's decision to reduce the dividend? How should we be thinking about timing of the cash flow ramping up in '26 in order to maintain a CAD payout ratio that's a little more sustainable? Jerry Sweeney: Yes. Look, I think as we took a look at and recommended to the Board a couple of things. One is, as I've outlined before, the Board really looked at what the operating cash flow was, what our refinancing requirements were, when we would expect the development projects to ramp up and what capital was really required for the recaps. And when they took a look at all of that and we looked at the '25, '26 and '27 landscape, the theory was, after we had done some preliminary work on recapping some of the joint ventures, it became very clear that the cost of outside capital was a lot more than our internally generated capital. And the opportunity for the company to save $50 million of cash flow at a time when, as I mentioned with Dylan, our public cost of capital is prohibitive. It simply seem to make a lot of sense. As we looked at the numbers, where we've reduced the dividend to, we feel, as I mentioned in my script, is very sustainable. We do believe that as we start to bring more NOI on to the P&L, we have an opportunity to grow that dividend. And then most importantly, as the last point, we talk to a lot of shareholders. We ask them their opinion on how they view the capital landscape, how they viewed the challenges the office sector faces. And I think a lot of our shareholders are very supportive of a dividend reduction as a pragmatic conservation of capital. So all those factors went into the Board's decision. We had a good discussion and validated that the level that we cut it to is certainly, we think, a floor from which we can grow. And hopefully, as the market conditions improve, the debt markets get more constructive, we can generate more liquidity that we'll be in a position to go back to raising that dividend. Upal Rana: Okay. Great. That was helpful. And then do you have any updates on the strategy to deal with the IBM move-out in Austin coming in '27? Jerry Sweeney: We actually do. Look, IBM is going to be vacating spaces between the end of the -- well, really beginning of the second quarter and through the third quarter of '27. The impact on '27 after factoring what we think will be expense savings because that lease -- we're getting reimbursed for expenses, many of which are variable. So we think it will be about a $12 million hole we need to fill. We're going down a couple of different paths. One is when we take a look at the existing leasing in place in our development projects, excluding 3151, we think the year-over-year growth in that income stream will more than amply cover that '27 loss of revenue. But more importantly, we are spending time looking at renovating the 902, 904 and 906 buildings at Uptown, which is about 500,000 square feet. We have plans underway. Our base in those buildings is very attractive. We are in the throes of pricing those renovation programs through, including thinking through the additional infrastructure that's required. And as it stands right now, we think we're in a very good position to deliver completely renovated buildings, they -- frankly, as you may recall, they have great super structures. It's really new facade, new mechanical systems that will be able to deliver these state-of-the-art newly renovated buildings at a significant pricing discount to existing office rents that we think can really accelerate the absorption there. So one of our hopes if the plan progresses on schedule, is that we'll be able to deliver the first level of renovation in early '27, kind of dovetailing with one of the IBM vacations. And one of the reasons we're able to do that, you may recall, is we were very successful in getting some additional approvals from the city of Austin to increase the density at Uptown from 3.1 FAR to 12.1 FAR and increase the height limits on the buildings from 180 to 491 feet. We also have the ability to transfer density between blocks. So by renovating those buildings, which are lower rise, we're not compromising any future growth density by doing that. And I mean, the maximum density under our zoning is well, well beyond what we're currently planning to build. But having that flexibility to respond to changing market conditions, particularly given that train station and the growth of residential neighborhoods in that marketplace, we think it is a very valuable commodity. So game plan is, I think we can bridge the gap with just incremental income coming through the NOI from these new development projects, again, excluding 3151 and the renovations coming online will help to all deliver better NOI for us looking into '28 and '29. Hopefully, that answers your question? Upal Rana: Yes, that was great. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jerry Sweeney for any further remarks. Jerry Sweeney: Jonathan, thank you very much. And thank you all very much for participating in our third quarter earnings call. Our next call for fourth quarter and '26 guidance will be in early February, and we look forward to talking to you at that time. So thank you very much. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, ladies and gentlemen, and welcome to the Third Quarter of 2025 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Sherry, and I am your operator for today. [Operator Instructions] Please note this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed. E. Nicholson: Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2025. Joining me this morning is Dave Brager, President and Chief Executive Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2024, and in particular the information set forth in Item 1A, Risk Factors, therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I will now turn the call over to Dave Brager. David Brager: Thank you, Allen. Good morning, everyone. For the third quarter of 2025, we reported net earnings of $52.6 million, or $0.38 per share, representing our 194th consecutive quarter of profitability, which equates to more than 48 years of consecutive quarters of profitability. We previously declared a $0.20 per share dividend for the third quarter of 2025, representing our 144th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.11% and a return on average assets of 1.35% for the third quarter of 2025. Our net earnings of $52.6 million, or $0.38 per share, compares with $50.6 million for the second quarter of 2025, or $0.37 per share, and $51.2 million, or $0.37 per share for the prior year quarter. The $2 million quarter-over-quarter increase in net income was primarily the result of growth in net interest income of $4 million that was partially offset by a $1.5 million increase in provision for credit losses and unfunded loan commitments. Pretax, preprovision income in the third quarter of 2025 was $70 million, an increase of $1.2 million, or 2% compared to the second quarter of 2025 and $2.4 million, or 3.5% higher compared to the third quarter of 2024. During the third quarter of 2025 we received a $6 million legal settlement which was more than offset by an $8.2 million loss on the sale of $65 million of low-yielding AFS securities that were reinvested at yields of approximately 5%. The growth in PPNR over the third quarter of last year was the net result of a $2 million increase in net interest income and a $1.5 million decrease in operating expenses that were partially offset by a $1.25 million increase in provision for unfunded commitments. Net interest income for the third quarter of 2025 was $4 million higher than the prior quarter and $2 million higher than the third quarter of 2024. Our average earning assets grew by $315 million between the second and third quarters of 2025, and our net interest margin increased from 3.31% to 3.33%. As a result of our deleveraging strategy that was executed during the second half of 2024, our earning assets declined by $1.1 billion from the prior-year quarter while our net interest margin increased by 28 basis points from 3.05% in the third quarter of 2024. Noninterest income was $13 million in the third quarter, which was $1.7 million lower than the second quarter. Excluding the legal settlement and loss of sale -- loss on sale of AFS, third quarter noninterest income increased by $260,000 from the prior quarter, driven primarily by higher trust and investment service fee income. Noninterest expense was $58.6 million in the third quarter, which was $1 million higher than the second quarter of 2025. Our efficiency ratio remained at 45.6% in the third quarter. At September 30, 2025, our total deposits and customer repurchase agreements totaled $12.6 billion, a $170 million increase from June 30, 2025, and $108 million higher than September 30, 2024. The quarter-over-quarters growth was driven by growth in money market and customer repurchase balances. The year-over-year growth was net $100 million decrease in time deposits. Our noninterest-bearing deposits grew by $108 million compared to the third quarter of 2024, while interest-bearing nonmaturity deposits and customer repos grew by an additional $100 million. On average, noninterest-bearing deposits were 59.8% of total deposits for the third quarter of 2025 compared to 59.1% for the third quarter of 2024. Our cost of deposits and repos was 90 basis points for the third quarter compared to 87 basis points in the second quarter of 2025 and 101 basis points for the year ago quarter. Now let's discuss loans. Total loans at September 30, 2025, were $8.47 billion, a $112 million, or 5% annualized increase from the end of the second quarter of 2025. The quarter-over-quarter increase in total loans was due to growth in nearly all loan categories. Loan growth was positively impacted by increases in line utilization for C&I and dairy and livestock lines of credit. A quarter-over-quarter increase of $27 million in C&I loans reflects an increase in line utilization from 26% at June 30, 2025, to 28% at September 30. In addition, dairy and livestock loans also grew by $47 million compared to the second quarter driven by higher line utilization from 62% at the end of the second quarter to 64% at the end of the third quarter. Agribusiness loans grew by $12 million, while commercial real estate and construction loans grew by $18 million and $12 million, respectively, from the end of the second quarter. Total loans decreased by $66 million from the end of 2024, driven by dairy and livestock loans declining by $139 million as these lines experienced their seasonal high utilization at calendar year end. Excluding small declines in SBA and municipal loans as well as decreases in dairy and livestock loans, our loans grew by $85 million from the end of 2024. We have experienced an increase in loan originations, and our loan pipelines remain strong, although rate competition for the quality of loans we focus on has continued to be intense. Loan originations in the third quarter of 2025 were approximately 55% higher than the third quarter of 2024, and year-to-date loan originations have been 57% higher than the same period in 2024. We had average yields of approximately 6.5% on new loan originations during 2025, but the third quarter average was lower at about 6.25%. We experienced $333,000 of net recoveries for the third quarter of 2025 compared to $249,000 in net charge-offs in the second quarter. Total nonperforming and delinquent loans decreased by $1.5 million to $28.5 million at September 30, 2025. Nonperforming and delinquent loans were $24.8 million lower than the $53.3 million at the end of the third quarter of 2024. Subsequent to the close of the third quarter, a $20 million nonperforming loan was paid off in full. The sale of the building collateralizing this loan resulted in the bank receiving all principal and approximately $3 million of interest which will be included in interest income in the fourth quarter of 2025. Classified loans were $78.2 million at September 30, 2025, compared to $73.4 million at June 30, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans was 0.9% at September 30, 2025. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and our net interest income -- sorry, net interest income. E. Nicholson: Thanks, Dave. Net interest income was $115.6 million in the third quarter of 2025. This compares to $111.6 million in the second quarter of 2025 and $113.6 million in the third quarter Of 2024. Interest income was $150.1 million in the third quarter of 2025 compared to $144.2 million in the second quarter and $165.8 million in the third quarter of last year. Average earning assets increased by $315 million in the third quarter when compared to the second quarter and the earning asset yield increased from 4.28% to 4.32%. Compared to the third quarter of 2024, earning assets decreased by $1.1 billion and the earning asset yield declined by 11 basis points. Interest expense was $34.5 million in the third quarter and $32.6 million in the second quarter of 2025. Our cost of funds increased from 1.03% for the second quarter of 2025 to 1.05% in third quarter of '25. The average balances of interest-bearing deposits and repos increased by $217 million over the prior quarter. Interest expense decreased from the third quarter of 2024 by $17.6 million, primarily due to $1.23 billion decline in average borrowings that resulted in approximately a $15 million decline in interest expense. Interest-bearing deposits and customer repos increased by $53 million over the third quarter of 2024, while the total cost of deposits and repos decreased by 11 basis points. With this reduction in borrowings and lower cost of deposits, our cost of funds decreased by 41 basis points from the third quarter of last year. Our allowance for credit loss was $79 million at September 30, 2025, or 0.94% of gross loans. In comparison, our allowance for credit losses at June 30, 2025, was $78 million, or 0.93% of gross loans. The increase in the ACL resulted from $1 million provision for credit loss and net recoveries of $333,000. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at September 30, 2025, was modestly different from our forecast at the end of the second quarter of 2025. The comparative change from the previous economic forecast reflects lower GDP growth, a slightly lower unemployment rate, and lower commercial real estate prices. Real GDP is forecasted to stay below 1.5% until the end of 2027 and not reach 2% until 2028. The unemployment rate is forecasted to reach 5% by the beginning of 2026 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue to decline through the second quarter of 2026 before experiencing growth through 2028. Switching to our investment portfolio. Available for sale, or AFS, investment securities were $2.58 billion at September 30, 2025. During the third quarter we sold $65 million of securities with an average book yield of 1.3%, realizing an $8.2 million loss, and purchased $214 million of new securities at an average book yield of 5%. The unrealized loss on AFS securities decreased by $31.6 million from $364 million at June 30, 2025, to $334 million on September 30, 2025. The net after tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $20 million increase in other comprehensive income for the third quarter. Our held-to-maturity investments totaled $2.3 billion at September 30, 2025, which is $82 million lower than the balance at December 31, 2024. Now turning to the capital position. At September 30, 2025, our shareholders equity was $2.28 billion, a $42 million increase from the end of June 2025, including the $20 million increase in other comprehensive income. There were 290,000 shares repurchased during the third quarter of 2025 at an average price of $20.30. Year to date we have repurchased 2.4 million shares at an average share price of $18.43. The company's tangible common equity ratio was 10.1% at September 30, 2025, while our common equity Tier 1 capital ratio was 16.3% and our total risk-based capital ratio was 17.1%. I'll now turn the call back to Dave for further discussion of our expenses. David Brager: Thank you, Allen. Noninterest expense for the third quarter of 2025 was $58.6 million compared to $57.6 million in the second quarter of 2025 and $58.8 million in the third quarter of 2024. The third quarter of 2025 included a $500,000 provision for off balance sheet reserves. Excluding this $500,000 provision, operating expenses grew by $500,000 over the second quarter of 2025. This growth in operating expense was due to an $877,000 increase in salary and benefits from our annual midyear salary increases. Noninterest expense, including the provision for unfunded loan commitments, decreased from the third quarter of 2024 by approximately $1.5 million. Almost all expense categories declined, led by a $770,000 decrease in salary and benefit expense. We also experienced a $430,000 decrease in legal expense, and a $380,000 decline in occupancy and equipment expense. One area of expense growth is our continued investment in technology, infrastructure, and automation, which resulted in $440,000, or 11% growth, in software expense from the third quarter of 2024. Noninterest expense totaled 1.5% as a percentage of average assets in the third quarter of 2025 compared to 1.52% for the second quarter of 2025 and 1.40% for the third quarter of 2024. This concludes today's presentation. Now Allen and I will be happy to take any questions that you might have. Operator: [Operator Instructions] And our first question will come from the line of Matthew Clark with Piper Sandler. Matthew Clark: On your interest-bearing deposit costs up a few basis points this quarter caused your beta cycle to date to slow a little bit to, I think, 28%. How should we think about the beta through the cycle from here and maybe remind us what portion of your deposit base do you feel like you can be more aggressive with? David Brager: Yes. So obviously that last rate cut was towards the end of the third quarter. So we didn't get the benefit of -- the big benefit of what we did and had a little bit to do with some of the mix of individual accounts. And in our repurchase agreement sweep, one of our largest depositors had built his deposits pretty good. But we did reduce every rate -- every money market rate and repo rate over 1.25% -- we reduced by a full 25 basis points the day after the Fed moved. So we're just trying to match that off. Obviously it depends a little bit on the mix between some of the higher paying ones and the lower paying ones that still got reduced. But at the end of the day, our plan is to continue to match whatever the Fed funds decreases with decreases in money market rates over 1%. Do you have anything to add to that, Allen? E. Nicholson: No, I think, there's a small portion obviously of our deposit base that has higher yields and there was a little bit of an increase relative to the rest of the deposits in the quarter. But as Dave said, we'll be reducing all of them as the market -- as the Fed goes down. Matthew Clark: Since we're limited to 2, I'm just going to jump to M&A. Any increase in dialog there on the M&A front? I guess where do we stand? David Brager: Yes. A lot of dialogs. Not a lot has happened yet. I feel a little bit like Allen Iverson on the practice thing. We just keep practicing, but we're continuing conversations. I still believe that the dam is going to break here, but at this point, there's not anything imminent, and we're still having conversations. I will say one thing we did in the third quarter, and it was in our investor presentation -- excuse me, subsequent to the third quarter, we did hire a team of 4 bankers from City National Bank and are opening a de novo office in the Temecula, Murrieta area. They actually started yesterday. So we're excited about that. We feel like we got 4 really great bankers, and they all came from sort of different parts of City National, but they all live in that area. And so we're going to open a presence there. So we're excited about that. And we'll see how they do as we go forward. But at the end of the day, we're going to keep looking to bring the right bankers and/or the right opportunities from an M&A perspective. Operator: One moment for our next question, and that will come from the line of Andrew Terrell with Stephens. Andrew Terrell: I wanted to start just on loan growth. You guys had a really good quarter. Dave, it sounded like in your prepared remarks, obviously, originations are up a lot this year. It sounds like the pipeline is still pretty strong. I just wanted to get -- I know you've got a seasonal benefit in the fourth quarter, but just expectations on loan growth over the near term. Do you think you can continue at this mid-single-digit pace? David Brager: Yes. At the beginning of the year and pretty much for as long as I've been CEO, I've said kind of that low single-digit growth. And I think we can still hit that for the year. The pipelines are still strong. I feel pretty confident over the next quarter that, that should continue. We'll see how it plays out. I mean, excluding the dairy, obviously, because the dairy is the seasonal aspect of it. But we're still not back to our normal utilization rate. We still have a lot in the pipeline. We're seeing many opportunities and some larger opportunities as well. So I do feel confident. The mid-single digits might be a little aggressive for the annualized. But I do think that we're in a good spot from that perspective. And we'll see how it plays out, but I'm sticking to my low single-digit growth rate for the year. Andrew Terrell: Very good. I appreciate it. And I did want to ask about -- you referenced just pricing competition in the market. And it sounds like your new origination yields came down a little bit this quarter relative to the first half of the year and rates have obviously come down, so that will influence it. But I'm curious, are you willing to be a little more competitive on the pricing front now, just given where the market is at today? Or has your approach to new loan pricing not really changed much? David Brager: Yes. I mean, look, we're always willing to compete on price for the right relationship. So that's something we've had to do. And I think that's part of the reason why we've continued to see opportunities on the loan front. But yes, it is aggressive. I mean, I just saw a deal -- this was a pretty large equipment deal, but it had a 4 handle that we were competing with a large bank on. So people are out there pretty aggressively and we're trying to hold the line as best we can, but we are definitely willing to compete on price as long as the credit quality is where we want it to be. Operator: One moment for our next question, and that will come from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I wanted to ask on the loan side, it looks like you had a little earlier than typical increase in dairy and livestock line utilization. So just as we're thinking about the fourth quarter and what's usually a pretty large spike there, is that spike muted a bit because you had some drawdown here in the third quarter? David Brager: No. We actually brought on 2 new dairy relationships in the third quarter, so that impacted it as well. It's interesting at the beginning of the year, they were doing really well. Milk prices have come down a little bit. So they're still doing okay, but not as well as they were doing in the first couple of quarters. So I think we'll still see some of that, but I wouldn't necessarily say it's going to be muted. That growth -- that small increase in utilization probably had a little bit more to do with the new relationships than just people doing things early. So we still should see kind of a normal increase in that line item in the fourth quarter. Gary Tenner: Great. And then just a question about the $700 million of interest rate swaps that you kind of updated back in May. I think the kind of outlook for short-term rates is probably points to more lowering over the next 12 months or so than maybe what was contemplated back in May. So any thoughts about that swap arrangement and making any changes there? David Brager: So Gary, you're correct. If the market and the Fed's forecast is true, it will probably become a negative drag on our net interest income next year. But we put those on and continue to look to them as a true fair value hedge and hedging really our equity, our tangible common equity ratio and our large AFS portfolio. So I don't think we have any plans on changing that. We extended them last quarter out for that same reason to be better aligned with the duration of the AFS portfolio. Operator: One moment for our next question, and that will come from the line of Liam Coohill with Raymond James. Liam Coohill: It's Liam on for David. You guys have highlighted the intense rate competition on the lending side. You called out that one regional competitor offering the 4 handle on the equipment loan. Is that who you're seeing the most competition from on both the loan and deposit side today? And how difficult is deposit gathering given this intense loan growth? David Brager: Yes. So the deposit gathering has still been relatively strong. It's not as strong as it was towards the end of -- I'd say, all of '24 and the beginning of the year. It slowed a little bit. But we're going after operating companies and it is a little more competitive, I think. But I don't think it's changed much from the perspective. We're not looking for high-rate CDs or high-rate money market accounts. It has to be a full relationship. So that hasn't changed. But I will say the loan pricing is generally coming from the larger banks and the larger regional banks. It's not as much from the banks that are our size or smaller per se. So I do think that, that will continue. And look, there's a lot of market disruption with some of the acquisitions that have been done. There's a lot of market disruption from the perspective of Wells Fargo's asset cap is removed. I mean, all these things are sort of influencing that. So there are some probably more aggressive competitors in the market. But we're really focused on the operating company and most of our new deposits -- I'd say most of the new deposit gathering, relationship gathering that includes deposits is coming on at a little bit higher percentage of noninterest-bearing than our overall portfolio. So we feel pretty good about it. This last quarter on the deposit side, like Allen and I said, it was more related to just one large customer in the bank that had a little greater mix at a higher rate. But we should start to see the benefit of that deposit cost going down as the Fed continues to lower. So there's competition on both sides, but we we're willing to compete, but we want to do it for the right relationships. Liam Coohill: I appreciate the color there. And I'm excited to hear about the team lift out. What lending verticals do you expect them to focus on? And what are some of the opportunities that you see in that particular market? David Brager: So they've been focused on more operating companies and high net worth individuals. They did not have the opportunity to do investor commercial real estate. So that's an area that they can -- instead of having to refer out or give to somebody else that they'll be able to do here within their group. They all live in that area, and they covered different parts of Southern California from Orange County to Riverside County. So they'll be able to cast a wide net in those markets. And for us, it fills in a little bit of the geography from our San Diego region to our Riverside region. So that's a good thing. And Temecula, Murrieta is really a growing market. So we're excited about the opportunities there, and they're all experienced bankers, and they've been doing it for a long time. So we're excited to see what they can do. Operator: [Operator Instructions] And one moment for our next question, that will come from the line of Charlie Driscoll with KBW. Charles Driscoll: This is Charlie on for Kelly. You guys continue to build cash balances again this quarter. Just wondering if there's any updated message there regarding any potential areas to deploy that? Are you kind of viewing it as dry powder for a seasonally strong Q4? Just any color on how you're thinking of utilizing it? E. Nicholson: A couple of quick things. One, you're right. In the fourth quarter, we'll see a fairly large increase in the dairy. We also see end of the quarter more year-end versus quarterly average impact, but we do see deposit outflows for tax reasons and bonuses, et cetera. So we prepare for that. But we will -- especially if the Fed continues to cut, we do evaluate where bond yields are. They're down from where we were buying early in the quarter. But we may put some of that to work depending on how we look at the bond market in the quarter. Charles Driscoll: Okay. And then if you guys could just touch on expenses, they've been really well controlled. Just looking forward here, if we do get a little bit of growth and with the team lift out, how are you thinking about expense management heading into 2026? E. Nicholson: Not really any change there. I mean, we continue to manage it very closely, low single-digit type of growth is our expectation. Third quarter is always when we do our annual increases. So of course, quarter-over-quarter, that it impact. But year-over-year, actually, salary expense by itself was essentially flat. The one area we'll continue to invest in, as we noted in the prepared remarks, is technology. That includes automation as well as just sort of the standard stuff to keep us safe from cyber and all the other stuff. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Brager for any closing remarks. David Brager: Thank you, Sherry. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 194 consecutive quarters or more than 48 years of profitability and 144 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small- to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and our associates for their commitment and loyalty and would like to thank all of you for joining us this quarter. We appreciate your interest and look forward to speaking with you in January for our fourth quarter 2025 earnings call. Please let Allen or I know if you have any questions. Have a great day. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Greetings, and welcome to the Gentherm Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gregory Blanchette, Senior Director, Investor Relations. Thank you, sir. You may begin. Gregory Blanchette: Thank you, and good morning, everyone. Thanks for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website. During this call, we will make forward-looking statements within the meaning of federal securities laws. These statements reflect our current views with respect to future events and financial performance, and actual results may differ materially. We undertake no obligation to update them, except as required by law. Please see Gentherm's earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other significant assumptions, risks and uncertainties underlying such forward-looking statements. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and investor presentation. On the call with me today are Bill Presley, President and Chief Executive Officer; and Jon Douyard, Chief Financial Officer. During their comments, they will be referring to a presentation deck that we made available on the Investors section of Gentherm's website. After the prepared remarks, we'd be pleased to take your questions. Now I'd like to turn the call over to Bill. William Presley: Thank you, Greg, and good morning, everyone. Our third quarter results showcase improved execution across Gentherm, allowing us to deliver record quarterly revenue and strong operating cash flow. We are committed to the execution of our strategic priorities while focusing on the day-to-day actions required to drive financial results. Now let's turn to Slide 3 to discuss highlights. Third quarter Automotive new business awards of $745 million puts us at $1.8 billion year-to-date and on track to deliver a full year above $2 billion. Momentum for lumbar and massage comfort solutions continued as we secured another important strategic conquest win with Mercedes-Benz on one of their highest volume platforms, which includes the S-Class, GLS, GLE and CLS vehicles. It is important to note that this is 100% incremental revenue for us as we were able to displace a competitor for this award. The platform will include a proprietary pulsating massage system, Puls.A, marking the fourth global OEM to adopt our innovative technology since we introduced it to the market last year. Securing this award demonstrates we have innovative, highly desirable and value-added solutions that customers demand from the OEMs, driving continued market adoption, increasing take rates and revenue growth for our Automotive business. Additionally, we achieved record quarterly revenue of $387 million, driven by high demand for our products and improved third quarter light vehicle industry production versus our prior expectations. Automotive Climate and Comfort Solutions outperformed actual light vehicle production in our key markets by 160 basis points, excluding FX. And we were pleased to see improved performance in China during the quarter. In addition, our operational excellence initiatives are gaining traction, which contributed to operating cash generation of $88 million year-to-date. Before I finish this slide, I want to share my perspective on recent supply chain news. We are keeping a very close eye on the supply chain and the potential impacts across the industry. There will likely be an impact on OEM production, though it is too early to call at this time. Our teams are working with customers and suppliers to mitigate potential exposure and maintain visibility. The situation continues to evolve, and we'll keep you updated as necessary. Now turning to Slide 4. We continue our relentless focus on our strategic priorities to drive long-term shareholder value. We spoke earlier this year about our strategy of scaling our core technologies across multiple end markets to drive profitable growth. We saw success in the second quarter with wins in powersports and commercial vehicles, and we made further progress on this initiative during the third quarter. Our efforts in the past 90 days have generated a commercial funnel of over $300 million of lifetime revenue, and we are still early in our efforts. I'm excited to say that we were selected by a large global furniture brand to supply our comfort solutions and are preparing for production to start in Q1 of 2026. The product we will be supplying utilizes existing plant, property, equipment and installed capacity. We are in discussions with several other furniture brands for our thermal and pneumatic solutions and see this as an attractive adjacent market given the annual volumes, margin profile and limited incremental investment. As mentioned, we are preparing to deliver components in Q1 of 2026, demonstrating that the development cycles and time to revenue in these markets is much faster than our traditional automotive business. Moving to Medical. Our new product development is progressing, and we are on track for a significant product announcement near year-end. The refresh of the product line in Medical is a priority, and we are accelerating plans by leveraging existing automotive intellectual property. Operationally, we continue the rollout of our standardized company operating system across the globe, and we are starting to see early signs of traction. This is the type of foundational work that will maximize utilization of our existing assets, deliver expanded margins, lower CapEx requirements and generate increased cash flows. In September, we brought Gentherm's top leadership together for an in-person summit. We used this time to align on strategic initiatives and key priorities, including the standardization of global business processes. We understand that people are Gentherm's most valuable asset and ultimately drive performance of our business. The leaders left with a clear vision of how we will drive value creation and the sense of urgency at which we must move to deliver the required results. Our global strategic manufacturing footprint realignment plans remain on track to be substantially complete by the end of next year. We have made significant progress relocating and launching manufacturing processes in Tianjin, China and Tangier, Morocco. Customers have been supportive, and we are actively shipping production components from both facilities. As we think about deploying capital to achieve superior financial performance, we believe that M&A will serve an important role for the company in achieving our strategic priorities. We are cultivating a wide range of opportunities that are aligned with our core technology platforms and provide access to new markets and expand our product portfolio. We will evaluate these opportunities as a lever to accelerate our strategy. And with that, I will turn the call over to Jon to review third quarter highlights and results. Jon? Jonathan Douyard: Thanks, Bill. Now turning to Slide 5. In the third quarter, we secured $745 million of Automotive new business awards, one of the highest quarters on record for the company. As Bill discussed earlier, awards were highlighted by a significant win with Mercedes-Benz. Our team did a fantastic job securing this conquest business, which will more than double the annual lumbar and massage revenue with this customer after it goes into production in 2028, and it will also support lumbar and massage growth into the future. Additionally, we had another strategic win with GM for our ComfortScale solution, which is our patented next-generation integrated thermal and pneumatic hardware system. Last year, we secured our first ComfortScale award on the full-size GM truck platform, including the Chevrolet Silverado and GMC Sierra. And in the third quarter, GM expanded this solution to its midsize truck platform, including the Chevy Colorado and GMC Canyon through a mid-cycle change in 2026. ComfortScale is a win-win for all involved as we receive more content and value add, OEMs reduce their labor costs and end consumers get an improved in-vehicle experience. This award highlights our close partnership with General Motors and our ability to provide value-added innovative solutions to our customers. Next, I want to highlight our success in partnering with Japanese OEMs as we look to drive growth and customer diversification across Asia. We secured multiple awards in the quarter, including one for climate control seats on a Honda platform for the Indian market. Although Gentherm has not historically prioritized this market, on our hunt for strategic profitable growth, we are evaluating the broader opportunity India may present for our products, and we'll provide updates as we progress. Moving on to the third quarter launch activity. We again made progress in China as our solutions were included on several new programs with Chinese domestic OEMs, including our thermal solutions with Xiaopeng and our full suite of thermal and pneumatic solutions with Li Auto on the i6, both of which contributed to improved growth over market performance in China. Coupled with a focus on winning new business with domestic OEMs, these launches will shift our customer mix and result in our business being more closely aligned to the overall Chinese market over time. In Europe, we launched thermal and pneumatic solutions on the all-new Jeep Compass. Stellantis first introduced this vehicle to the European market in September, and we will soon launch it with our content in other regions. This vehicle will be offered in a variety of powertrain options, highlighting the powertrain-agnostic nature of our solutions. Finally, our Climate Controlled Seat solution is included on Subaru's high-volume Forester. This is another great example of the success we have had in expanding our business with Japanese OEMs. Please turn to Slide 6 for a more detailed review of the financial results. Overall, third quarter results were above expectations as revenue came in higher, driven by increased industry volumes. We also delivered sequential adjusted EBITDA improvement in the quarter. Overall, revenue of $387 million was up 4.1% compared to the same period last year. Revenues excluding foreign currency translation increased 2.4%. Automotive Climate and Comfort Solutions revenue increased 8.6% year-over-year or 7% ex-FX, which more than offset planned revenue decreases from previously discussed strategic exits. Medical revenue decreased 0.4% year-over-year or 1.6% ex-FX. Turning to profitability. We delivered $49 million of adjusted EBITDA or 12.7% of sales compared to 12.9% in the third quarter of last year. The 20-basis point decline was primarily driven by higher material costs, including a minor impact from tariffs, expenses related to our footprint realignment and higher operating expenses, partially offset by operating leverage and favorable foreign exchange. Consistent with our prior communication, the impact from tariffs has been minimal, and our team has done a nice job of working with customers to mitigate our exposure. Adjusted diluted earnings per share was $0.73 per share compared to $0.75 per share in the third quarter of last year. On cash, we have generated $88 million of operating cash flow year-to-date, further strengthening our balance sheet. Net leverage stands at 0.2x at the end of the quarter, providing us with ample access to capital to deliver on our strategic priorities. Please turn to Slide 7 for a discussion on our guidance for the remainder of the year. Based on our year-to-date performance and current visibility into OEM production schedules, we are increasing the midpoint of our revenue guidance while narrowing our EBITDA range. For the full year, we now expect revenue to be in the range of $1.47 billion to $1.49 billion, with the increase driven by improved second half light vehicle industry production versus our prior expectations. Our outlook for the fourth quarter includes the assumption of seasonally lower revenue versus Q3. This revision does not include the potential impact of supply chain disruptions that Bill discussed earlier. Year-to-date, we have delivered 12% adjusted EBITDA margin and are narrowing our adjusted EBITDA margin range to 11.9% to 12.3% for the full year. The EBITDA range primarily accounts for the impact of volume as well as the potential timing of year-end initiative spending, including expenses related to footprint transitions and new product introductions. On CapEx, we are again reducing our expected range of spend from $45 million to $55 million, which reflects an ongoing focus on optimizing current plant and equipment while also scrutinizing new projects. In closing, we are pleased with the results year-to-date, and our team is focused on finishing the year strong. With that, I will hand it back to Bill for closing remarks. William Presley: Thanks, Jon. Our third quarter results demonstrate improved execution and progress toward our long-term strategic initiatives. We delivered record revenue with strong cash flow and have made notable progress entering into adjacent markets. With innovative solutions and a strong balance sheet, we are well positioned to deliver profitable growth, margin expansion and increased levels of cash flow. We remain focused on these strategic imperatives that will result in long-term value creation for our shareholders. With that, I will turn the call back to the operator to begin the Q&A session. Operator: [Operator Instructions] Our first question comes from Matt Koranda from ROTH Capital Partners. Matt Koranda: Good to see the further conquest award with Mercedes. I'm curious if maybe you can just point to a few of the factors that are giving you momentum in winning that conquest business. Is it technology superiority? Is it sort of having the full suite of comfort and thermal? Maybe just touch base on sort of some of the factors that are at play there. William Presley: Yes, Matt, it's Bill Presley. I would start with it's certainly an innovative edge, right? Our solutions provide the OEMs with an experience that they can pass on to their customer and price for us. So there's a true value-added proposition there, and we have an innovative lead there. Our commercial relationships with our customers are very strong. So I would say our commercial model of interacting directly with the OEMs to impact their product plan versus attempting to sell through a Tier 1 gives us a position with the OEMs, I think, that maybe not a lot of our competitors share. And I think a really interesting one here is, it included Puls.A. So this is the fourth OEM to adopt our Puls.A technology globally since we introduced it to the market last year. So in order, I would say it's the innovative edge, the value proposition it provides to their end users and our customer relationships. Matt Koranda: Okay. I appreciate the clarity there. And then just on the adjacent market opportunity, good to see the $300 million funnel that you guys highlighted. Maybe curious how that breaks out between some of the opportunities that you have mentioned in prior calls, powersports, commercial vehicles, furniture, I believe. And then how do we think about that converting to commercial wins that could impact 2026 or 2027? I know you mentioned there's some shipments on furniture in the first quarter of '26, but I would imagine that it builds into '27. So maybe just level-set us on sort of how to think about that. William Presley: Yes. So that $300 million pipeline, as you mentioned, I mean, that was with just 6 months' worth of work, right? So teams moved very fast there, which is very encouraging. I would say in rough numbers, it would be roughly 1/3 what I would call the furniture, 1/3 what I would call specifically commercial vehicle and 1/3 what I would call other mobility. In order of excitement in that space, the furniture industry seems to be actually growing rapidly. So they're talking exciting adoption rates. Their speed to market is quite impressive. I anticipate further awards in that space that we'll be able to announce, but that revenue will start flowing in '26. On the commercial vehicle side, they're very interested in our fluid systems. So that's a new market that we're quoting with the valve business that came with Alfmeier. So fluid systems is gaining traction there. And steering wheel technology, specifically like heaters, hands-on detection, which we supply in the light vehicle market. And then other mobility, things that we've talked about, like 2-wheelers, construction vehicles, that's the other 1/3. That one, we'll have to see how it develops. But I would say, motion, furniture -- or sorry, furniture and commercial vehicle are really gaining traction. Jonathan Douyard: Yes, Matt, I would just add in terms of time to revenue, I think we did talk about Q1 production on the furniture award. We think that's a $3 million to $5 million opportunity just that one award as we look at 2026. And so to the extent that the team can continue to stack these up, we think it can be a meaningful growth driver, certainly a couple of points here as we get maybe later into '26 and '27. William Presley: And just piling on to that to make sure it wasn't lost in the script, that's capacity that we already have installed equipment we already have installed. So it's incremental dollars on existing assets. Operator: Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Ryan Sigdahl: I want to start on kind of the near-term production environment. I know there's some noise out there. You called it out in your prepared remarks, but Jaguar Land Rover, you have an aluminum supplier. I don't know if there are others, but curious if there are others beyond those 2. And then I guess the question -- second question would be, why you're not including it in guidances. One, are you not expecting it in Q4? Or is there just not visibility on kind of the magnitude to put it in numbers, but curious that decision. William Presley: Yes. I would say -- so you touched on the JLR cyber issue. That seems to be behind us now. They're ramping back up. That was more heavy for us in Q3. You touched on the Novelis fire, which impacts aluminum. I can tell you that that's heavy Ford, maybe Stellantis based on what they've said publicly. We talk to them on a daily basis. Right now, they are working to mitigate the issue. So it's difficult for us to see or say what the impact will be. Certainly, we haven't seen any meaningful impact in the schedules yet with regard to that. And then the third one, which is widely known that we're watching very closely is just the Nexperia issue going on between the Dutch government, the Chinese government and that company and the U.S. trade barriers. Nexperia for us right now, our supply chain team has done a phenomenal job of mitigating any direct Gentherm impacts. So we don't see any near-term Gentherm impacts. We've done a good job of finding alternative sources for what we need. The bigger question there will be who does it impact in the industry because they're widely used components. It's likely that somebody will be impacted, not sure who. You want to talk about the guidance piece? Jonathan Douyard: Yes. I mean I think to Bill's point, the Jaguar piece certainly impacted us. There was a headwind for us in September. There'll be a little bit of hangover from that in fourth quarter. We've contemplated that in the guidance. I think as you look at the fire as well as the Nexperia piece, we're really looking to our customer ADI schedules to adjust our forecast. So there's been a little bit of movement here, I would say, in the last week or 2 that has been contemplated, but we don't want to speculate more broadly than what we have with communication we have from our customers. And so it's really the latter of what you said in terms of just visibility that we have today and the impact on the business. So we're trying to be transparent as to what we see, but we haven't seen any significant schedule shifts to this point. Ryan Sigdahl: Helpful. Then India, I don't know that I've heard that before. I guess as you think about adjacencies, I always thought of adjacent sectors, adjacent market opportunities. Can you maybe provide a little more? I know you said you'll give more color there in the future. But are there other markets around the world, whether you want to be specific or not, but that could be potential pockets of opportunity as you hunt for profitable adjacent opportunities? William Presley: Yes. I mean the Indian market, as you heard Jon say, talk about the conquest win, that was with a Japanese OEM in the Indian market, but that's our first entry into the Indian market. And although we haven't historically looked at the India market, we're actively evaluating that. Look, it's an attractive market to us for a couple of reasons. One is scale, and we have no presence there. Number 2 is if you look at some of the proof of concepts we're developing on what we call alternative markets, 2-wheelers is a huge market in India. And there's a desire there for cooled seats. So that's a market that we're evaluating, and it looks like a very good market for us with regard to our valve technology. So it's something that we're exploring and considering, but it could certainly open up alternative streams of revenue for us. Jon, I don't know what else you want to add? Operator: [Operator Instructions] Our next question comes from Ryan Brinkman with JPMorgan. Ryan Brinkman: I thought to ask first on the strategic footprint alignment plan. Now that you are growing near its completion by the end of 2026, what is the latest in terms of how you anticipate the layering on of the incremental savings with the phaseout of the associated spending to drive those savings? How should we expect the cadence of margin to progress throughout and beyond 2026 on account of both of those factors? Jonathan Douyard: Yes. I think a couple of points there. I mean we talked about the impact in the year being about 50 basis points. I think it will come in a little bit higher than that just based on the timing of where we are. And the fact, frankly, that we've seen higher volumes in the year that's impacted some of the ability to build inventory. I think as you look at 2026, we will start to see some of the legacy costs fall off, but we'll also see the impact of sort of the inventory build that we've had this year. And so the real savings from that is probably late '26, but really more like 2027 in terms of when we see the benefit of the footprint transitions. Ryan Brinkman: That's helpful. And then with regard to the M&A pipeline, given all the traction that you're seeing expanding into nonautomotive end markets in a really capital-light way, should we think about M&A being aimed more at product expansion rather than channel diversification? Or what are the strategic priorities that you're most looking to accelerate through M&A? William Presley: Yes. I mean when we think about M&A, we look at it, I would say, through a threefold lens, right? I mean ultimately, we're trying to build a more resilient company, right? So we're looking for 2 things. We're looking for something that provides access to markets that we're interested in, and we've been very vocal about becoming more than a light vehicle producer alone. So markets are important. Number 2 is it has to fit our core strategy, which means they are products that align with our current mission. So you won't see us take any wild left turns. So product expansion is important as well, right? So more resilient company. So it has to fit the right margin profiles. It has to create value. Number 2 is access to other markets; and number 3 is broadening the product portfolio. Operator: We have reached the end of our question-and-answer session as there are no further questions, which now concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.
Operator: Welcome to WEG's Third Quarter 2025 Earnings Conference Call. I would like to highlight that simultaneous translation is available on the platform on the interpretation button via the globe icon at the bottom of the screen. We would like to inform you that this conference call is being streamed live and the audio will be available afterward on our Investor Relations website. [Operator Instructions] If we do not have time to answer all questions live, please feel free to send your questions to our email at ri@weg.net, and we will answer after completion of our conference call. We would like to emphasize that any forward-looking statements contained in this document or any statements that may be made during the conference call regarding future events, business outlook, operational and financial projections and goals and WEG's potential future growth are merely beliefs and expectations of WEG's management based on currently available information. Forward-looking statements involve risks and uncertainties and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors could affect WEG's future performance and lead to results that will be materially different from those in the forward-looking statements. Joining us today from Jaraguá do Sul are Andre Luis Rodrigues, Chief Administrative and Financial Officer; Andre Menegueti Salgueiro, Finance and Investor Relations Officer; and Felipe Scopel Hoffmann, Investor Relations Manager. Please, Mr. Andre Rodrigues, you may proceed. André Rodrigues: Good morning, everyone. It's a pleasure to be with you once again for WEG's earnings conference call. I'll begin with the highlights of the quarter on Slide 3, where net operating revenue grew 4.2% compared to the third quarter '24. In Brazil, performance was driven by solid industrial activity, continued deliveries in transmission and distribution projects and healthy demand for commercial motors and appliances. Growth was partially offset by a significant year-on-year decline in wind power generation revenue. In the external market, industrial activity remained strong in our main regions of operation, especially in Europe. In the power generation, transmission and distribution businesses, T&D operations in North America continued to show solid delivery volumes despite some fluctuations in general project deliveries. Our operating result measured by EBITDA reached BRL 2.3 billion, an increase of 2.3% compared to 3Q '24. EBITDA margin remained at a very healthy level, closing the quarter at 22.2%. Along the presentation, Andre Salgueiro will provide more details on this point. As for our return on invested capital, one of our main financial indicators remained at the high level of 32.4%, as we can see in more details on the next slide. Revenue growth and sustained high operating margins contributed to maintaining our return on invested capital at healthy levels despite the decrease compared to the same period last year. The reduction was mainly due to higher invested capital driven by investments in fixed assets and acquisitions during the period. It's important to remember that the ROIC for 3Q '25 or was positively impacted by the recognition of nonrecurring tax incentives in 4Q '23. Now I'll turn the floor over to Andre Salgueiro. André Salgueiro: Thank you, Andre. Good morning, everyone. On Slide 5, we show the evolution of net revenue by business area. In Brazil, demand for short-cycle products remained solid, particularly for low-voltage industrial motors and gearboxes across several operating segments. We also observed positive performance in long-cycle equipment deliveries such as medium voltage electric motors, especially in the oil and gas and mining sectors despite an investment environment that remains somewhat restricted. In GTD, the T&D business continued to perform well, driven by deliveries of large transformers and substations. The decline in revenue in this area was mainly due to the absence of new wind turbine deliveries as the pipeline for 2025 had already been anticipated. There was also a reduction in solar generation revenue this quarter, mainly reflecting the completion of large centralized solar generation projects executed over the last 3 quarters. In commercial motors and appliances, we continue to deliver positive results with growth in sales to key segments such as air conditioning, water pumps and compressors. In coatings and varnishes, sales of our main products remained strong with notable demand for liquid coatings used in the oil and gas segment. In the external market, short-cycle equipment benefited from continued healthy industrial activity across multiple regions with an improvement in the European market standing out. For long-cycle equipment such as high-voltage motors and automation panels, delivery volumes contributed positively, although geopolitical uncertainty continues to weigh on new investment levels. In GTD, we maintained good delivery volumes in T&D operations in North America despite a lower volume of deliveries in another key region, South Africa. Revenue moderation in this area was mainly driven by fluctuations in generation project deliveries in Europe and in India, a typical dynamic for this type of business, even with strong performance from the marathon generator operations in the United States and China. In commercial motors and appliances, demand remained positive, particularly in China and North America, along with contributions from both electric motor operations in Turkey. In coatings and varnishes, revenue growth was supported by strong performance in Mexico and the recent acquisition of the operations of Heresite in the United States. Slide 6 show EBITDA evolution, which grew 2.3%, while EBITDA margin closed the quarter at 22.2%, although slightly lower than the same period last year, mainly due to higher costs of some raw materials EBITDA margin remains strong, supported by the current project mix. Finally, on Slide 7, we show the evolution of our investments, which totaled BRL 673 million with 72% -- in 52% in Brazil and 48% abroad. In Brazil, we continue to modernize and expand production capacity at T&D while increasing capacity and productivity at our Jaraguá do Sul and Linhares sites. Internationally, we continue investments in Mexico, particularly the progress in building the new transformer factory and in the expansion of more production capacity in China. That concludes my section. And now I'll hand it back to Andre. André Rodrigues: On Slide 8, before moving on to the Q&A session, I would like to highlight a few points. First, during the quarter, we announced several important investments, including a BRL 1.1 billion plant in Santa Catarina to expand the energies unit's product portfolio and production capacity and also a USD 77 million investment in the special transformers plant in Washington, Missouri and BRL 160 million investment to further integrate and expand the electric motor production at the Linhares unit in Espírito Santo. In September, we also announced a target to address greenhouse gas emissions reduction in Scope 3. In addition to having our Scope 1, 2 and 3 targets for 2030 validated by the science-based targets initiative. More recently, we announced the acquisition of a controlling stake in Tupinamba Energia, a company with a strong presence in software and services for electric vehicle charging network management, aligned with our strategy presented at the last WEG Day to provide complete solutions for the e-mobility market. Finally, a few words on our outlook for the remainder of the year. Despite mitigation measures already underway, the geopolitical and macroeconomic environment requires close attention and brings short-term challenges. We remain focused on our investment plan to support growth in Brazil and abroad, both to strengthen our market mature businesses and to develop opportunities in new markets. Even amid a complex geopolitical backdrop, we continue to expect annual revenue growth and high operating margins, supported by our international presence and diversified product and solutions portfolio. This concludes our presentation, and we can now move on to the Q&A session. Operator: [Operator Instructions] Our first question comes from Lucas Esteves from Santander. Lucas Esteves: Congratulations on your results. I have 2 topics that I would like to approach, starting with the results acquired from Regal that you did not disclose this quarter. So I'd like you to give a bit more color on this business, how it behaved. Then I ask that because previously, you said that you were increasing capacity with generators. So I would like to understand that this is already reversing in an increasing volume and results or this is to be seen in the coming quarters? Second question, how WEG is positioning itself as a solution provider more than an equipment supplier. I ask that because when talking to stakeholders, we hear more and more that WEG is offering complete solutions, a generator instead of solar panels. So all that said, I would like to understand your strategy, if the company is going to position more and more as an OEM to product, if that can expand your market and if that somehow connects to the company's strategy to expand its footprint in the aftermarket. André Rodrigues: Lucas, this is Andre Rodrigues speaking. Thanks for your questions. It's a long question. If we forget something, please just remind us of the main points. I will start talking a bit about the integration of Regal. It is going on. It is as expected. When we talk about Regal -- Marathon, I'm sorry, when we talk about the businesses of Marathon, we are basically talking about 2 businesses, low-voltage motors and alternators. For low-voltage motors, we saw an accommodation in the market. And I think the main focus now of the entire industrial team of WEG Motors is gains synergies in the stage where we are without many investments in terms of verticalization. So optimizations of products, opportunities to reduce costs, all following as expected. The alternators business, as we mentioned on WEG Day, is a business that is developing very well. João Paulo, right after the acquisition, focused to try and increase capacity the most. We are making investments to increase capacity. This is probably to be completed at the end of this year, beginning of next year to continue developing the business giving the markets that demand this equipment and that have contributed positively for this business. So Marathon businesses have a very strong recognized brand in the U.S. market, particularly. Integration of admin areas, we are also evolving relatively well. We did have a huge challenge in terms of the carve-out of systems. We are talking about more than 150 systems. We're able to develop all the efforts before the deadline of the CSI that we had with them and also in terms of shared services that was provided, especially in the North America region by the Regal organization Rexnord, we also were able before the deadline to migrate to our shared service model, which is called WEG Business Services. So in this migration, we had especially gains in IT and to bring the business to our model. And with this, we had already a reduction of approximately $6 million in annual costs. Consequently, with this, together with all efforts in the industrial area, the good performance of alternators, Regal's margins are improving quarter-on-quarter. And we highlight that it is an integration process that will take 4 to 5 years. But the message is positive, and it is following as scheduled. André Salgueiro: This is Salgueiro speaking. As for your second question, WEG's model of becoming more and more focused on solutions. This is a reality. This was the main focus of our presentations on WEG Day, the last WEG Day that we held recently. And there, we brought 3 major topics: one, solutions for e-mobility. So WEG not only focusing on manufacturing powertrains or recharge stations or batteries for buses, but rather being more and more focused on following a complete solution, integrating it all. And this comes from the service center that we announced in São Bernardo do Campo for support and also the acquisition that we released -- recently announced of Tupinambá to complement the ecosystem. So we have been working to integrate more and more services and solutions. And the 3 main topics of WEG Day was e-mobility, microgrid and network reliability. That is to have more and more complete solutions for the market, not only focused on the product, but on the whole solutions and how we can help our clients on their journey. Operator: Moving on. Our next question comes from Gabriel Rezende from Itaú BBA. Gabriel Rezende: I have 2 questions. First, I would like to understand about the added capacity for transformers in West. I think this is going to be effected by '26, beginning of '27. And the market is more and more thinking of what '27 is going to be like for WEG. So are you selling already the additional capacity that you're going to have in transformers for '27? What is your pipeline for transformers? If you could talk about prices and volumes, that would be very good, especially about the additional capacity. And the second question, we have been monitoring yourself and the competitors and prices are going up in the U.S. because of tariffs and some inflation in the sector. I would like to know if you understand price increases in the U.S. offset loss in competitiveness or if you could have a drop in volume as price increases take place. André Rodrigues: Gabriel, I'm going to talk a bit about transformers, okay? Well, we have been announcing for some time now, 3 years, I would say, every year, a new package of investments of the business given the demand and how the market is heated in several segments, energy efficiency, generative AI. So WEG by the end of '23 made a solution. And in the beginning of the '27, we would have double global capacity for WEG in the transformer business. We are following the investment plans unchanged. Whenever we see a new opportunity, we reinforce the plan. We had a recent announcement, the modernization and increase of capacity in the special transformers plant in Missouri, an investment of $77 million. In addition, we have the new plant in Mexico, a new plant in Colombia, increasing capacity in Gravataí in Brazil to use the opportunities in the market. And when we have visibility, as we are having now of the completion of the project, we start already to have a backlog. So the answer is, yes, we are building our backlog in all the units in where we have visibility of completion. That is going to be by the first half of '26 to the end of '26 for us to seize opportunities as of '27. Of course, perhaps enjoying opportunities in the second half of '26. As for prices in the U.S., Gabriel, I think the whole process when the tariffs started to be discussed, made it clear that inflation would happen, not only for WEG, but for the whole American market as a whole. So it's just natural in our strategy to try and mitigate impacts is to use our commercial strategy in prices in the U.S. And you did say it's not only WEGs, it is WEGs and almost all the players in the market. And so this is a movement, especially the most relevant part that happened more recently that we still cannot measure in terms of details of impacts because in practice, it came into force in October. So we have to see how the activity is going to evolve from now on. So this is something that we'll have to monitor in the coming months how the market will respond to the commercial strategy. But again, it's not only motors, transformers or other products. It is the U.S. economic activity as a whole due to tariffs and price adjustments are being made throughout the industry. Operator: Our next question comes from Lucas Marquiori from BTG Pactual. Lucas Marquiori: I have just one question, but perhaps with some items. Still about tariffs, I was a bit lost in terms of times. Probably you already had an impact of the tariff this quarter. You are saying that you are having an effort of repricing of products. And then you have the waiver of what was shipped until mid-October. So perhaps the full impact in cost and margins is just going to show in Q4. I would just like to see if my understanding is correct. So the full quarter is just going to be in Q4 and how far you are in terms of passing on prices. You mentioned 10% in Q2, then we said mid-teens for the next quarter. Just to understand how long the curve is. And finally, the passing on costs to balance tariffs, this is something that the whole market changed the price dynamics. If you have a decrease in tariffs, you don't necessarily have to return that to clients. You can keep it in margin. So do you think this is standing if and if tariffs are renegotiated next year? So just the question with the same topic, tariffs. André Rodrigues: Thanks for your question, Lucas. I'll try to answer all the parts. The first point, what you mentioned is correct. We are going to have the full impact in the fourth quarter. We did have some impact in the third quarter, particularly the last month of the quarter in the month of October, we did have this impact. But throughout this moment when we had the information of tariffs, we started working on several fronts to mitigate the impact. There is not a silver bullet. You talked about recomposition or realigning prices, WEG's logistics chain to minimize that, and the company continues to work along these lines. Our expectation for the fourth quarter is to have a greater impact because of the tariffs. But again, we have lots of action plans and initiatives to mitigate the impact. In the end of the quarter, we are going to have a clearer view of whatever was possible to be mitigated and the impact. As for price realignment, well, the thing is we have to know what the market is going to be pricing. I cannot say that this is a given because if the tariffs change, if there is a change in process, a change in dynamics, we have to adjust according to the wind. Operator: Moving on. Our next question comes from Alberto Valerio from UBS. Alberto Valerio: A follow-up on tariffs because we are seeing lots of news on WEGs suiting its capacity in Mexico, United States, Brazil, Mexico. What is missing in Brazil for WEGs to eliminate 100% of its tariffs that is not producing anything in Brazil to be exported to the U.S. And second question, the exposure of BESS in WEG. There is an auction now in December, another larger auction for June next year. What should we expect from WEG for '26? André Rodrigues: Alberto, thanks for your questions. Okay. One point that is very important to reinforce is the investments that WEG is making in the U.S. along the recent years, the revenue that is produced and generated in the U.S. is increasing and WEG is doing that. In transformers alone, we expanded in the last 5 years, our 2 existing plants. We had a greenfield project. We are renovating a new one and increasing capacity. So added to everything we mentioned, restructuring, logistic chains and other initiatives that we are talking about, also the increase in capacity in the U.S. will help us to minimize the impact. André Salgueiro: Alberto, as for BESS, we did show on WEG Day our solutions for microgrid, even home use, the monogrid, industrial use, commercial agribusiness, until getting to that. So it's important to mention that WEG has a full portfolio today of products to serve the different segments, and we have been working very hard in this project of the small medium size, which is a good market demand. To give an estimate for the next year, perhaps it's too early because that depends on the development of the market from now on. And it did mention 2 important things, the auctions that are expected to happen this year and next year. And indeed, if they do happen, they may be a very interesting opportunity, much greater than we have today because today, opportunities are concentrated on mid-sized projects. We are seeing people wanting projects perhaps with a greater scale that we are having, but different from utility projects, which are the large projects that generally take place. So if the auctions happen, that can change. The market as a whole can grow, and that will depend on how much WEG is going to capture up this market along the next years. Operator: Moving on, our next question comes from Rogério Araújo from Bank of America. Rogério Araújo: I have 2 questions on my side. The first is the external GTD revenue. It did go down despite the favorable T&D movement. We did some accounts with transformers in North America, some assumptions considering the revenue of generation abroad. It may have dropped from 30% to 50% year-on-year. Does it make sense? Are our accounts correct? And if you could talk about the deliveries in the past until when this comparison basis is going to be kept? So this is my first question. Second, about margins. I do not recall if it was 1 or 2 quarters ago, you said if it weren't for the renewables mix, especially solar farms, margin would have gone up. And now the mix is down, especially solar farms and the margin did not really show the difference. I would like to know what hurt you. You did talk about tariffs affecting October. Was it this? Any other factors? But just for us to understand margins in the short term. André Salgueiro: Rogério, this is Salgueiro speaking. Thanks for your question. I'll answer the first GTD in the foreign market, and then Andre is going to talk about margins. We don't break down in our releases. What I can say is that indeed, generation did have a significant drop this quarter, especially because of somewhat weaker performance in the joint venture that we have in Europe compared to last year. And that, especially for the fact that we did have some important projects and concentration of deliveries last year that were not replicated this year and also because of reduction of revenue in generation in Asia Pacific, especially for projects that are served by the Indian operation. We did mention that in our release. I don't know if it was 100% clear, but in T&D, the quarter was slightly different. T&D had been growing in all operations in the external market this quarter. We continue with positive performance in T&D. North America continued with good performance. But in Africa, it did have a drop in revenue in the quarter. because some large transformers that we delivered last year and that these projects were not replicated this year. So there is an effect of a lower growth in GTD, the external market in generation, but also a portion of T&D in Africa. So what is doing well, positive without changes is T&D, North America and Colombia, altogether in this context. And Rogério, about margins, you were right. I think it was in the first quarter that we broke down how much margin we would have consolidated excluding that movement that started in the last quarter last year about solar farms and continued in the first and second quarters. I don't recall exactly the amount, but we can talk about that later on, but we did mention that, and it is in the transcription of our last call. I think it was the first quarter. Undoubtedly, what we see in terms of margin behavior, it is according expected. We expected a first half a bit more pressured because of the product mix. As the product mix with solar went down, the margin will improve, and it is improving. If you get year-to-date margins of WEG, it is within expectation to fluctuate between what we had in '23 and '24. Remember that when we are monitoring margins, we cannot talk about one quarter. This is very complicated because we have several business dynamics and everything. For instance, we did have the impact of the tariffs this quarter, not all action plans to mitigate that in place. And what we saw this quarter, compared to what we had last year and perhaps it is a bit of the result of the margins is that there was a bit of an increase in prices of the main raw materials, especially steel and copper, which also impacted the margin of the quarter. But again, I would like to stress that margins are improving quarter-on-quarter as expected, and we want to -- we believe that it's going to be fluctuating between what we had in the last 2 years. Operator: Our next question comes from Lucas Laghi from XP Investments. Lucas Laghi: I have 2. Thinking about the performance, I think it was the highlight of the performance this quarter. I would like to know your dynamics for external markets, especially in the U.S. Any concentrated delivery, any anticipation of purchases because of tariffs. So anything out of the ordinary? I'm thinking of industrial activity as a whole, when I take a look at the release of your competitors, you see a backlog that is very strong in the third quarter from the U.S. So in the U.S., some segments are doing very well. Others are doing poorly. I would like to understand if you could have an acceleration of revenues driven by the U.S. So try and understand how you see industrial activity as a whole, especially the U.S. And for internal GTD and perhaps that was the downside in terms of revenues, especially because of the drop in solar, as you had mentioned. So just to understand if we are already on a normal level or if you think that you can still have a decline in solar? How are things going on in [indiscernible] residential other? And do you think that 1/3 would be in T&D? I know that things are changing with solar, but how would you consider the internal GTD? So basically, external GTD and internal GTD, that's my question. André Salgueiro: Lucas, this is Salgueiro. Thanks for your questions. As for industrial electronic equipment, first, I would like to reinforce that we did see the market resuming. That's the upside. Brazil grew by 3.3%. And we do see also growth in the external market of 7.1% in reals and even stronger in dollars, almost 9%. So that shows a market and an industrial activity that's quite interesting. And that is reflected in our numbers. We did highlight the performance of Europe. I think it was the main highlight in terms of recovery because Europe was a region that was not doing well in recent quarters. And as of this quarter, we did see significant improvement. So that's an important point to highlight. And in the U.S. well, the U.S. has a bit of a different dynamic because of tariffs and everything that we have discussed before, but also the performance of industrial activity, especially with motors and projects is going on. It's happening, not at the same pace as before. We did mention in the call last year that the decision of new investment was on hold with the dynamics we still do not see a major change. But an important point that you did mention, and we can talk about that is that when you see orders coming, the performance is better than in the past, which shows that we might have for the future, an industrial activity in the external market with a more positive dynamics and here considering all regions and also the U.S. When we talk about GTD in the domestic market, you did mention 2 important points that justify the drop, the wind power, because we already knew that there was a lack of new projects and that continues. And the news this quarter that we tried to address to you in the comments of last call is that solar would be weaker in the second half of the year, especially for the fact that we no longer had the GC projects. So that was the main reason. And when we look into the performance of the third quarter compared to the second quarter, this is clear. When we compare the third quarter and third quarter, that's not so relevant because in the third quarter last year, we didn't have these projects. They started in the fourth quarter. And that's interesting, considering your question, when you look into the future, we do have a challenge for the fourth quarter, which is when we started centralized generation a bit stronger, and we don't have the projects this year. And another point is that the GTD market distributed generation is not heated either. So we do have projects. They are evolving, but at a pace that's slightly slower than in the past. So putting together the factors, we have a solar dynamics already reflected this quarter with a weaker performance and expectation because of the comparison base of centralized generation of last year, this movement can be even accelerated in the fourth quarter. Operator: Our next question comes from André Mazini from Citi. André Mazini: My question is about the competitive scenario with the acquisition of 50% of Prolec. In yesterday's call of GE Vernova, they talked about commercial synergies. Do you think that changes anything in the North American market? And also in the call, they said 20% of the orders of Prolec comes from hyperscalers and data centers. So if you would have an estimate of how much T&D orders in the foreign market comes from this type of customer? And finally, a follow-up of the last question. I don't know if you did mention that there was a prebuy. I didn't understand that. That's it. André Rodrigues: Thanks for your question. Well, the competitive scenario, what we saw yesterday, I think does not change much. It's a competitor that has already been in the market. They are just acquiring the remainder of the business. And we know that everyone is making investments to expand capacity and to enjoy demand. WEG positioned itself in the past. We believe that we started before the competition if we compare most of the competitors. And we also understand that in '26, we are going to be one of the first in the main markets to add this new capacity. As for supply to data centers, the number that you mentioned to WEG is very close to that in the U.S. So again, we do not see major changes considering the competition. I did not understand the second part of your question. Of course, it's another topic. If there was a prebuy in the third quarter in EEI given the tariffs. If there was a pre-buy people advance their orders. André Salgueiro: Mazini, this is Salgueiro. We cannot say that. The increase in tariffs started in the beginning of the year. The discussions and more concrete effect started with the 10%. Then we had the 50%. So it's important to reinforce that the 50% was specific to Brazil. And obviously, people know that WEG is a Brazilian company. It is based in Brazil, but it is very specific with its dynamics with local players. It can provide matters from different countries, Mexico, Asia. So we cannot say that this movement was relevant or if there was a significant effect on the third quarter. Operator: Our next question comes from Marcelo Motta from JPMorgan. Marcelo Motta: I have 2 questions. First, a follow-up on tariffs. We have a meeting of Trump Donald this weekend. We don't know if it's going to happen. But do you see anything, I don't know, considering information from the Ministry of Industry, what kind of a lobby is going on? Do you have backstage information for something that we should look into? And also your effective tax rate along the year, it has been going down. 15% was the top compared to the 7.5%. Do you think that this rate is going to continue to go down or it was just something that happened this quarter? So just to understand its curve because it's now below what was last year. André Rodrigues: Thanks for your questions, Motta. We would love to have some additional information. But unfortunately, we are also following the information with the same channels that you have. But when there is an opportunity to sit down and negotiate, we see it as a good time. And we hope that when it happens, when the meeting happens, it will help all of us to try and decrease tariffs to a more reasonable level. As for the effective rate, we always say that this is a number that will continue to fluctuate quarter-on-quarter. It's natural that it happens, especially because of the mix of results that are generated in Brazil compared to what is generated in other regions. So I think that's very important to say. When we compare it to last year, there are 2 effects. One, it is a better use of interest on equity for 2 reasons. We had an increase in our profit and loss. We had a capitalization this year and also an increase of PJLP, which is the rate that we use to calculate interest on equity. And in addition to that, we had the mix of growing results in the external market compared to Brazil, which also contributed to the positive fluctuation. For the future, once again, fluctuations are part of the day-to-day. But from what we understand, considered PJLP and others, we don't think we are going to have any significant change, at least in the short term. In the mid to long term, it is hard to elaborate because there are too many variables, too many discussions going on that may change assumptions. So in the future, the scenario can change. But we do not expect major changes when we consider this year, beginning of next year, so more of the short term. Operator: Moving on, our next question comes from Pedro Martin from Bradesco BBI. Daniel Federle: It's Daniel Federle from Bradesco asking. My question is about I, especially long cycles. It seems that past portfolios contributed to revenues, but sales are weaker at the front end. My question is, should we expect a drop in long-cycle products for the coming quarters? And how long does it take from weaker orders to generate weaker revenues? And the second question related to that, should we see a weakness in long-cycle products as an indicator of what's going to happen in short-cycle. That is the projects that are not happening right now would generate for the future a drop in short-cycle products? André Rodrigues: Daniel, thanks for your questions. You are correct when we look into projects, considering Brazil and also the external market. we do see an environment in which products are running at a slightly lower level than what we had in the recent past and abroad more concentrated in the U.S., because of uncertainties related to tariffs, and we did mention that in the last call, we were feeling that clients were postponing projects and in Brazil, because of higher interest rates. Some markets and remember, projects, sometimes they are connected to commodity cycles. And we had a very important cycle of investments in pulp and paper 2 or 3 years ago, and it went down. Now we are seeing some projects being resumed. But mining continues to be okay. Then we had a drop. We're seeing now some resumption. So it depends on the dynamic of each of the markets. When we talk about leading indicators, generally, the normal cycle is to see a deceleration in the demand of short cycle that will impact in long-cycle projects. And quite often when long-cycle projects is being impacted, we see a resumption in short cycle. I did mention that, that the coming of orders in short cycle gives us positive signs for Brazil and the external market. So we already see a resumption in a short cycle. Eventually, we can see a resumption of projects for the coming quarters. We cannot say that because we still do not have hard numbers on that. But perhaps the natural cycle would be like this. So let's wait and see, and we are going to give you updates as months go by to see if the demand and the long-cycle portfolio starts to respond to what we are seeing in recent quarters. Operator: We are now closing our Q&A session. Remember, if you have any more questions, you can send your questions to our e-mail ri@weg.net. I'm going to turn to Andre Rodrigues for his final remarks. Mr. Rodrigues? André Rodrigues: Well, once again, thank you so much for attending, and I wish you all an excellent day. Operator: WEG conference call is now concluded. We thank you for your attendance and wish you a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good day, and thank you for standing by. Welcome to the Vista's Third Quarter 2025 Earnings Webcast Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alejandro Chernacov, Vista's Strategic Planning and Investor Relations Officer. Please go ahead. Alejandro Cherñacov: Thanks. Good morning, everyone. We are happy to welcome you to Vista's Third Quarter of 2025 Results Conference Call. I'm here with Miguel Galuccio, Vista's Chairman and CEO; Pablo Vera Pinto, Vista's CFO; Juan Garoby, Vista's CTO; and Matias Weissel, Vista's COO. Before we begin, I would like to draw your attention to our cautionary statements on Slide 2. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these remarks. Our financial figures are stated in U.S. dollars and in accordance with International Financial Reporting Standards, IFRS. However, during this conference call, we may discuss certain non-IFRS financial measures such as adjusted EBITDA and adjusted net income. Reconciliation of these measures to the closest IFRS measures can be found in the earnings release that we issued yesterday. So please check our website for further information. Our company is sociedad anónima bursátil de capital variable organized under the laws of Mexico, registered with the Bolsa Mexicana de Valores and the New York Stock Exchange. Our tickers are VISTA in the Bolsa Mexicana de Valores and VIST in the New York Stock Exchange. I will now turn the call over to Miguel. Miguel Galuccio: Thanks, Ale. Good morning, and welcome to this earnings call. During the third quarter of 2025, we recorded a strong performance across key operational and financial metrics, especially on a sequential basis, driven by strong productivity in new well tie-ins in Bajada del Palo Oeste and La Amarga Chica. Total production was 127,000 BOEs per day, an increase of 74% year-over-year and 7% quarter-on-quarter. Oil production was 110,000 barrels per day, an interannual increase of 73% and 7% sequentially. Total revenues during the quarter were $706 million, 53% above the same quarter of last year and 16% above the previous quarter. Lifting cost was $4.4 per BOE, 6% below year-over-year. Capital expenditure was $351 million, driven by new well activity during the quarter. Adjusted EBITDA was $472 million, an interannual increase of 52% and a sequential increase of 70%. Adjusted net income during the quarter was $155 million. Net income was $315 million, reflecting a nonrecurring gain of $288 million from the Petronas Argentina acquisition. Earnings per share was $3 and adjusted earnings per share was $1.5. Free cash flow in this quarter was almost neutral at minus $29 million, driven by higher adjusted EBITDA and a decrease in working capital. Finally, our net leverage ratio at quarter end was 1.5x on a pro forma basis. During Q3, we connected 24 wells, 11 in Bajada del Palo Oeste, 4 in Aguada Federal, and 9 corresponding to our 50% working interest in La Amarga Chica. We recorded solid productivity in the latest well tie-ins, which boosted Q3 production by 7% compared to the previous quarter. Based on robust well performance, improvement in our oil realization prices and financial flexibility award by the $500 million term loan closed in July. We have decided to accelerate new well activity in Q4. We are now planning between 12 and 16 tie-ins in the next quarter, leading to between 70 and 74 connections for the year. We are seeing Q4 production about 130,000 BOEs per day, which leaves us on track to over deliver on production guidance for the year and the second semester. Total production in Q3 was 126,800 BOEs per day, an interannual increase of 74%. Oil production was 109,700 barrels per day, 73% above year-over-year. On a sequential basis, both oil and total production increased 7%, reflecting solid execution of our drilling campaign and robust well productivity during Q3, especially in Bajada del Palo Oeste and La Amarga Chica. Bajada del Palo Oeste also drawn production in our operated block, which increased 50% compared to a year ago and 6% compared to the previous quarter. Gas production increased 87% on an interannual basis and 9% on a sequential basis. In Q3 2025, total revenues were $706 million, 53% above Q3 2024, driven by a strong increase in oil production, which more than offset lower oil prices. On a sequential basis, total revenues increased 16%, driven by 7% increase in total production and 4% higher oil prices. Oil exports increased 84% year-over-year to 6.3 million barrels for the quarter. Realized oil prices were $64.6 per barrel on average, down 5% on interannual basis and up 4% on a sequential basis, in both cases driven by international prices. We captured higher Brent prices and lower discounts, which were around $1 per barrel during the quarter. During Q3, 100% of oil volumes were sold at export parity prices. In Q3, lifting cost was $4.4 per BOE, 6% lower compared to both the previous quarter and the same quarter of last year. This reflects our continuous focus on efficiency. Selling expenses per BOE were down 24% on an interannual basis, driven by the elimination of oil trucking services as of the start of the last quarter. Adjusted EBITDA during the quarter was $472 million, 52% higher on interannual basis, mainly driven by production growth, explained by the 15% in our operated production and the consolidation of 50% of La Amarga Chica. Compared to the previous quarter, adjusted EBITDA increased 17%, mainly driven by oil production growth. Adjusted EBITDA margin was 67%, up 2 percentage points compared to the same quarter of last year as production growth and the elimination of oil trucking offset lower oil prices. Netback was $40.5 per BOE, up 8% on a sequential basis. During Q3 2025, cash flow from operating activities was $304 million, reflecting income tax payments of $179 million, partially offset by a decrease in working capital of $43 million. Cash flow used in investing activities was $333 million, reflecting accrued CapEx of $351 million partially offset by a decrease in CapEx-related working capital of $17 million. Free cash flow during the quarter was minus $29 million, reflecting higher adjusted EBITDA that drove cash from operations and a decrease of $59 million in working capital. Cash flow from financing activities was $195 million, driven by proceeds from borrowings of $500 million, partially offset by the repayment of borrowings' capital of $193 million and the repurchase of shares of $50 million. Finally, cash at period end was $320 million, our net leverage ratio on a pro forma basis reflecting the Petronas Argentina transaction stood at 1.5x adjusted EBITDA. To conclude this call and before we move to Q&A, I will make some closing remarks. During Q3, we recorded a robust well productivity in new well tie-ins, reflecting our high-quality asset base and peer-leading operating performance. This led to a material increase in adjusted EBITDA, both in a sequential and interannual basis, driven by production growth and continued focus on cost control. Q3 production was well within guidance range for the second semester. Production growth in the fourth quarter on the back of solid productivity and more investment in our profitable ready-to-drill inventory leaves us on track to potentially over-deliver on our guidance. I remind you that we will be hosting our third Investor Day on November 12. During this virtual event, we will present an updated strategic plan, focusing on profitable growth, cost efficiency and cash generation. Before we move to Q&A, I would like to thank everyone at Vista for delivering a remarkable quarter. Operator, we can now move to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Rodolfo Angele from JPMorgan. Rodolfo De Angele: Thanks for the time to discuss the numbers presented yesterday. I'm sure we would like -- looking forward to the investor event where you're going to revise the strategic numbers. But for the time being, I think my question to you is on price realization. The numbers were pretty good. And compared to our expectations here, one of the positive surprises came from a realization of prices pretty solid versus Brent. So can you expand a little bit on what drove this? And what should we expect for the coming quarters? That's it for me. Miguel Galuccio: Rodolfo, thank you very much for your question. It's a good one. There are basically 2 factors driving this good realization prices. With our spot export via the Atlantic, we have some flexibility regarding when we trigger the Brent price. This can potentially usually help us to capture some Brent price slightly above what you can see as a quarterly average. In Q3, the Brent averaged around [indiscernible], but the trigger Brent that we use to price the cargo was on average $1 higher. Also, the average discount of Brent was around $1 per barrel during Q3. So this is explained by 3 main factors. The first one is the high oil demand that we saw from West Coast U.S. due to seasonal factor. The other one was the very good demand that we have for Medanito. And the last factor was the lower availability of other type of crude oil that usually compete with us like [indiscernible] crude. So that mainly explains why we have some good realization pricing during the Q3. Operator: Our next question comes from the line of Leonardo Marcondes from Bank of America. Leonardo Marcondes: So my question is regarding the drilling completion and tie-in of the wells since September's figures beat the market expectations, right? So I would like to know if you could provide some color on the rationale of this significant increase in well tie-ins now, right? And also some color on what can we expect from this team for the remainder of the year? I mean, should you keep the rhythm on October, November, December? Miguel Galuccio: Leonardo, thank you very much for the question. And I will explain and give you a bit of context on the rationale on the increase of well tie-ins. So I mean, as a recap, in April, we took on a bridge loan to finance the Petronas Argentina acquisition, as you know. In May, we successfully tapped to the international market and issued a bond of $500 million to take out the bridge loan. And also in July, a $500 million term loan to refinance all our short-term maturities, and that basically give us or regain full financial flexibility. We also consolidate the new assets. We saw very good productivity and production growth, even, I would say, better than our original expectation. And on the top of this, now there is less bearish consensus regarding the oil price. So in summary, due to all these factors, we decide -- we saw that we are aware in a position that we were more comfortable to basically accelerate CapEx. Regarding Q4, the short answer to your question is yes. You will see pretty much, I would say, 11 to 14 wells. And regarding '26, you have to bear with me, I mean we have in a few weeks at our Investor Day in November 12, and I will probably wait to give you a full view of what we're going to do in 2026 and onwards. Operator: Our next question comes from the line of Bruno Amorim from Goldman Sachs. Bruno Amorim: I have a follow-up question on the production outlook. It seems that you ended third quarter on a strong tone. So what does it mean for the fourth quarter, given you just mentioned you're going to continue to drill and tie-in a significant number of wells into the fourth quarter. Can you elaborate on where do your current expectations stand versus your guidance for the remainder of the year? Miguel Galuccio: Bruno. Yes, you can expect that the production for Q4 to be about the 130,000 barrels oil per day that we guide. As always, you will see the typical up and downs that we see month-over-month. As you know, the natural rhythm of how we tie-in the wells sometimes it's not quarterly, but it's changing month-by-month. But on average, Q4 will be similar to September. So this implies that we will likely be above guidance for the year. The guidance was between 112,000 and 114,000 barrels oil per day. And also [indiscernible] we will be about the guidance for the second semester, which was between 125,000 and 128,000 barrels oil per day. So yes, you can you can probably look at Q4 about 130,000. Operator: Our next question comes from the line of Alejandro Demichelis from Jefferies. Alejandro Anibal Demichelis: Congratulations on the quarter. Miguel, one quick question. Could you please indicate how you're seeing the evolution of drilling and completion costs over the next few quarters? We have seen a bit of volatility on the FX. We have seen kind of inflation kind of going up a little bit. So just some kind of direction on how you see those costs go on, please? Operator: [Operator Instructions] Alejandro Anibal Demichelis: Congratulations on the quarter. Miguel, one quick question. Could you please indicate how you're seeing the evolution of cost of drilling and completion costs over the next few quarters given the volatility on the FX, inflation and so on. Miguel Galuccio: Yes, Ale here again. I mean we listened the first one, but thanks for the question. So we announced, I was saying in Q2 that our cost of the well was around $12.8 million. This is drilling and completion cost for well with a lateral length of approximately 2,800 meters and 47 stages. Today, we are slightly below this number and we are seeing very good results from the initiatives that also we announced last quarter that we will implement it. We are currently working on further initiatives on the same 2 verticals that were contracts and technology, so -- which basically, we believe and we feel very strongly that will lead to further savings. So the idea is to comment and to give a lot of color and more color because we have very good news coming on that front on the Investor Day. So I hope you take that answer now, and we will give you more detail when we see you in the [ field ] on November 12. Operator: Our next question comes from the line of Thiago Casqueiro from Morgan Stanley. Thiago Casqueiro: Congratulations on the results. My question here is regarding La Amarga Chica. It's been about 6 months since you acquired the stake in the assets. So looking back on this initial learning period, what would you say are the key challenges and opportunities you have identified in the assets so far? Miguel Galuccio: Thiago, thanks for the question. Look, I mean, we have a very open and contractive relationship with YPF, I will say, at all levels. At my level, CEO and at the level of Matias in the field and everybody. You imagine they have been for many years, co-worker of us. So very good relationship, very good collaboration. We are collaborating in many fronts. First, I would say, sharing technical learnings. We regard ourselves as lead operator. We have learned a lot. YPF has a very extense experience in unconventional. So the sharing of practices has been very rich. Second, in opportunities on services and also in infrastructure, very collaborative and very open discussion also in those both fronts. The performance of the production and the cost efficiency this quarter was very good, I have to say, very good. So we are now focusing and discussing the 2026 [indiscernible] and the budget for that. But overall, it's going very well. Operator: Our next question comes from the line of [ Matteo Tosti ] from Citi. Unknown Analyst: Congratulations on results as well. I was wondering while you may comment on M&A. I mean I remember last quarter, you touched on this, and we -- you said maybe there was still appetite for M&A. And has this appetite continued? Is something that has maybe weighed down a bit? What can you comment on this? Miguel Galuccio: Matteos, well, the short answer is the appetite is intact. So we have a proven track record, as I said before, creating value through M&A. So we are not only good operators, we have been very good M&A wise all the way up to here. And the best example of that probably the Petronas acquisition earlier this year. So that is part of our strategic approach as Vista. So given also that we are increasing our scale and our cash profile going forward, we will continue assessing opportunities. The only thing I will say that you have to take in consideration that we have a very high value in terms of value accretion and also in terms of strategic fit. But yes, the short answer is the appetite to M&A is intact for us, and we will continue looking to opportunities as they come. Unknown Analyst: If I may add a quick follow-up. Are there any open processes today, maybe the opportunities to engage with other companies? Are there any open process, any assets available that you're looking into? Or has the temperature cooled on that front, too? Miguel Galuccio: No, I don't think -- I mean, as we said in a formal process, I don't see any formal process that we are participating. We are having, yes, several discussions as always we have. As you know, the interest in Argentina have renewed a lot during the last few -- during the last year. And also, we see new players coming into the country, I would say, exploring opportunities. So yes, we are maintaining discussion with all of them. But I will not say that we are participating in any formal process at the moment. Operator: Our next question comes from the line of Tasso Vasconcellos from UBS. Tasso Vasconcellos: Great. Miguel, maybe a follow-up question on the discussion on CapEx and production levels. If Vista were to only maintain current level of production is stable without much growth, what would be the level of CapEx required? And in this same sense here, what would be the maintenance CapEx to maintain production stable closer to 150,000 barrels a day. That's my question. Miguel Galuccio: Thank you, Tasso for the question. Yes, these are numbers that usually when we simulate our plans, we look into. I will say using 100,000 barrel per day of production as a reference, we will need around $700 million of CapEx to keep the production flat going forward. And that will imply probably between 50 and 55 wells. If we in [indiscernible] of 130,000 with 150,000 barrel per day, then I think that we should add one rounding the CapEx around $800 million and then the number of wells would be between 55 and 60 wells. So that will be around numbers. Of course, that could change also depend of the context now. Operator: Our next question comes from the line of Michael Furrow from Pickering Energy Partners. Michael Furrow: So there's been a lot of attention on the upcoming midterm election. And for good reason, the outcome could have meaningful implications to the country. Now that said, the Vaca Muerta is an extremely valuable natural resource, and it seems to us that regardless of the outcome, this resource will continue to be developed. So I was hoping that you could maybe take some time to discuss your thoughts on the matter and if you see any outcomes from this weekend's election that would have a material impact on Vista's operations. Miguel Galuccio: Thank you, Michael, for the question. It's a recurring question and a good question. In short, the elections do not change our plan. We've been growing Vista from the scratch to where we are today, participating in 4 different administrations. And even before that, most of us came back to the country in 2012. And as we said, we were part of making Argentina a structural net exporter today and being part of the solution of the country. So the fact that we are holding an Investor Day 2 weeks after the elections is a full reflection of what we feel about the business. Our business model is solid, is dollarized, and we are increasing as we grow the amount of sales to the export market. So also, we said that we have secured the funding to continue growing, and we will discuss that in November 12. And we don't have any large financial debt maturity in the coming years. We also have secured the services, the rigs, the completions, the frac set with flexible contracts going forward. So no, Michael, I don't think, I mean, the elections will affect multiples and other things or the perception of Argentina, but will not affect Vaca Muerta. It doesn't affect our ability to continue growing and to execute our plan. Michael Furrow: That's great. I appreciate such a comprehensive answer. Operator: Our next question comes from the line of George Gasztowtt from Latin Securities. George Gasztowtt: Brent has remained pretty volatile again this quarter. And I was wondering what your EBITDA sensitivity to oil prices was now in 4Q. Miguel Galuccio: Thanks, for the question. Yes, there is a sensitivity. Using 130,000 barrel oil per day production as a reference, you should think that for every dollar per barrel of changing in realized oil prices, the adjusted EBITDA in the fourth quarter will change approximately between USD 8 million and USD 9 million. That's more or less will be the impact. Operator: Our next question comes from the line of Juan Jose Munoz from BTG. Juan Muñoz: Regarding La Amarga Chica, could you provide more color about the production of the 3Q? I understand that you finished on a strong note and also regarding the outlook that you have for La Amarga Chica in the last quarter of the year. Miguel Galuccio: Thank you, Juan Jose, for the question. So in La Amarga Chica, let me do a bit of a recap of La Amarga Chica. In La Amarga Chica, we connect around 18 wells. And we have 50% of that work [indiscernible], so YPF connect 18. This well correspond to 4 parts, Pad 120, Pad 67, and these Pads, if I'm not mistaken, in the south triangle of the block and also the Pad 105 and the PAD 83 that are in the center of the block. All the 4 pads are producing above budget. The well performance of La Amarga Chica was good and the production was for Q2, 38.7 and they took it from 38.7 to 43.5 in Q3. So very good performance for Q3. And we are expecting -- I cannot give you a number, but we are expecting a very strong performance also in Q4. So I hope that gives you a feeling of how we are looking at La Amarga Chica. Operator: Our next question comes from the line of Francisco Cascarón from DON Capital. Francisco Javier Cascarón: My question is what caused the decline in operated production during the first 2 months of the quarter? And if you are looking to accelerate that production going forward like we saw in September? Miguel Galuccio: Thank you, Francisco. So yes, we saw a very good productivity in the wells that we connect during the quarter, specifically Bajada del Palo Oeste where we connect 11 wells that correspond to 3 different pads. Bajada del Palo 35 was connected in July, has 5 wells of around 3,400 meters in lateral length and 57 completion stages on average. Then we connect Bajada del Palo Oeste 36 that has 4 wells, lateral of 3,300 meters. On average, I think, around 50 stages. And then we -- that was -- the last one was connected in August. And then we connect Bajada del Palo Oeste 37 that has only 2 wells, 2,800 meters length and 48 stages on average that was connected in September. So what you're seeing is the solid productivity of this 11 wells is the result of the boost production that you saw from Bajada del Palo Oeste that went from 56,400 barrels of oil per day in Q2 to 60,200 barrels oil per day in Q3. So that are the pads that somehow result in the boosted production. You will see that also continuing in Q4. Operator: Our next question comes from the line of Matías Cattaruzzi from Adcap Securities. Matías Cattaruzzi: Miguel and Alejandro, my question goes on the regard of CapEx guidance. Given the current activity levels and the pulse of -- the pace of well tie-ins, do you see a possibility of this year CapEx ending above the $1.2 billion guidance closer to $1.3 billion or over that number as recent trends in activity suggest? Miguel Galuccio: Matias, yes, thanks for the question. Yes, I mean, we guide 59 wells, and we will be end up drilling between 70 and 74 wells. So you should add 11 to 15 wells to our original guidance. Of course, that will involve more CapEx or some additional CapEx. So you should think that [indiscernible] $1.2 billion. So you should think that we will end up between $1.2 billion and $1.3 billion for total CapEx for the year and Q4, a little over $300 million. So that is how you should look to the actual CapEx numbers. Operator: Thank you. At this time, I would now like to turn the conference back over to Miguel Galuccio for closing remarks. Miguel Galuccio: Well, thank you very much, everybody, for the participation. Of course, we are super happy with the quarter, a fantastic quarter for us. And I'm looking forward to see you all on November 12 in Argentina. Thank you very much, and have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: " Christianne Ibañez: " Marco Sparvieri: " Antonio Zamora Galland: " Alejandro Fuchs: " Itaú Corretora de Valores S.A., Research Division Alvaro Garcia: " Banco BTG Pactual S.A., Research Division Axel Giesecke: " Actinver Fernando Froylan Mendez Solther: " JPMorgan Chase & Co, Research Division Operator: Good day, ladies and gentlemen. Thank you for joining Genomma Lab's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this meeting is being recorded and will be available for replay from the Investor Relations section of Genomma's website following the call. I'll now turn the call over to Christianne Ibáñez, Genomma's Head of Investor Relations. Please go ahead. Christianne Ibañez: Thank you, Daniel, and welcome, everyone. On today's call are Marco Sparvieri, Chief Executive Officer; and Antonio Zamora, Chief Financial Officer. Before we get started, I'd like to remind you that the remarks today will include forward-looking statements such as the company's financial guidance and expectations, including long-term objectives and forecasts as well as expectations regarding Genomma's business, assets, products, strategies, demand and markets. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and the company undertakes no obligation to update them as a result of new information or future events. Let me now turn the call over to Mr. Marco Sparvieri. Marco Sparvieri: Good morning, everyone, and thank you, Chris. I would like to begin today by addressing a clear reality. The company is going through a challenging period, and the results I will present today are not the ones I wish to report nor the ones we are used to delivering as a company. However, I hope that by the end of today's presentation, I can convey the same confidence and reassurance I personally have that our plan to reignite growth is solid, well-structured and entirely focused on rebuilding our top line. My expectation is that after reviewing the next slides, you will share the same confidence that I have. Let me begin with a message of strength. Over the past few years, Genomma Lab has achieved remarkable progress. Sales have grown nearly 70%. EBITDA has more than doubled. Free cash flow has surged 152% and EPS is up 46%. I don't mention this growth only to highlight results, but to demonstrate that we have successfully transformed the company from a deep restructuring phase into high growth, more profitable and more capable organization. We are better than ever positioned to emerge stronger from the current slowdown. This performance is underpinned by 6 strategic assets that we have built over time. Assets that every few -- very few companies possess and which would take any new entrant, decades and hundreds of millions of dollars to replicate. The first is our powerful brand portfolio of over 40 brands, many of which were built during a period when television played a dominant role in influencing consumer purchasing decisions. Today, these brands enjoy exceptionally high awareness and strong positioning in consumers' mind. Brands such as Cicatricure with its medical heritage, Asepxia with its strong dermatological credentials, Goicoechea in leg treatments and OTC leaders like Next, XL-3 and Tukol in Mexico as well as Tafirol in Argentina, where we hold a 40% market share. All these brands form part of this invaluable portfolio. Equally important is our team. Building this leadership structure has taken time and effort of years. Having spent over 20 years at P&G, I can confidently say that our executive and managerial team match and in many cases, exceed those of our multinational competitors. We have also developed an extraordinary distribution network in the highly resilient traditional channel and all the channels across, reaching over 890,000 points of sale across Mexico and Latin America every week. This is a core capability that would take any pharma or personal care competitor decades and a massive capital to replicate. We can launch a product and have it distributed to all the channels and nearly 890,000 points of sales across Latin America simultaneously. This is not only a true competitive advantage, but also a clear growth avenue for the company. In addition, our decision to integrate our own manufacturing facility has proven highly strategic. Despite the complexity of regulatory and operational integration, it now provides us with stronger cost control and greater product quality assurance while allowing for further productivity in the company. Our company culture rooted in speed and agility is also a major asset. While many of our competitors operate with more bureaucracy and slower decision-making, we have a structure that allow us to move faster and respond quicker to consumer needs. Finally, we have established a solid foothold in two key markets with profitable operation, the U.S. Hispanic segment and Brazil. Although current results in the U.S. market warrant review, our presence there represents a valuable long-term asset. Today, our products reach more than 50 million Hispanic households with distribution in major retailers such as Walmart, Walgreens and Amazon, generating close to $100 million in annual sales. Establishing this level of penetration and relationships from scratch would take any company years and significant investment and the same holds true for our footprint in Brazil. All-in-all, this company has penetrated high barriers of entry and is positioned to continue consolidating its position to increase market share in a $3 trillion size industry, the largest in the world, $13 trillion. Let me now turn to the current environment and our plan to return the company to growth. We are operating in a complex consumption environment and navigating a difficult situation, particularly in Mexico, driven by two consecutive failed seasons. A weaker winter season due to unfavorable weather conditions and a summer season that practically did not materialize. These dynamics have affected roughly 50% of our Mexican portfolio, primarily our OTC products during the past winter season and roughly 20% of our portfolio with Suerox during the summer season. Despite these top line headwinds, our EBITDA margin remains resilient with stability around 24%, underscoring the strength of our cost discipline and efficiency programs. I am fully confident that this EBITDA margin level is both solid and sustainable going forward. So what we're doing to offset this slowdown? At a certain point, we were facing two possible path, either we sacrifice margin to invest more aggressively in the business and accelerate the top line or we preserve margins and identify additional resources to fund our growth strategies without compromising profitability. We initially set a productivity target of MXN 1.8 billion in savings by 2027. Given the current top line environment, we challenge ourselves to find additional resources to invest in growth without compromising margins. As a result, we have identified and already secured an additional MXN 1.1 billion in efficiencies, bringing our total accumulated savings to MXN 3 billion by 2026. These resources have been secured and are reinvesting MXN 1.1 billion directly into the business to drive top line growth. Our 2026 investment plan focuses on three pillars: product innovation, go-to-market and distribution and emerging channels. Altogether, we estimate these initiatives could generate up to MXN 5 billion in incremental sales opportunities between 2026 and 2027. While some cannibalization is expected, these projects represent our North Star, a clear road map to reignite growth starting in the first half of 2026. With these actions, I am confident we can restore top line growth to prior levels while maintaining a healthier margin and cash flow structure than ever. Now moving to the third quarter results. On a like-for-like basis, sales declined 2.9%, which is translated to a 12.8% decrease in reported Mexican pesos. Approximately 80% of the impact stems from accumulated noncash hyperinflationary accounting effects in Argentina, following a 53% depreciation of the Argentine peso during the quarter. Our real operating indicator like-for-like performance reflects a 2.9% decline, while EBITDA margins remained strong at 23.7%, consistent with our 24% average target. Adjusted net income, excluding noncash hyperinflation effects declined 3% to MXN 632 million. Free cash flow reached nearly MXN 1.6 billion, down 35%, mainly due to lower net income and three days increase in the cash conversion cycle also related to hyperinflationary accounting effects. As mentioned, we have accelerated our productivity program, delivering the initial MXN 1.8 billion savings by 2025 and adding another MXN 1.1 billion for 2026. These resources are already identified and in execution, not a plan, but a reality. We have already secured resources for our investment projects. We will reinvest MXN 1.1 billion across five strategic areas: product innovation, go-to-market and distribution, communication, e-commerce and pricing. These initiatives represent approximately MXN 5 billion in growth opportunities for 2026 and 2027. While some may overlap and cannibalization is expected, a significant portion will translate into incremental sales and long-term top line expansion. Let me provide a few examples. In innovation, we have a robust pipeline across all key categories. In skin care, we are reformulating and relaunching products with cleaner formulations and more accessible price points. For example, a consumer who today pays MXN 350 in Mexico for a premium hyaluronic acid serum will soon be able to purchase the same product from Teatrical for around MXN 90. In hair care, we are fully relaunching Tio Nacho, strengthening its treatment positioning with second and third routine steps while revitalizing the entire product line with clean formulas, improved packaging, and competitive pricing. In beverages, Suerox will devote a renewed image and expand into new consumption occasions. In OTC, we expect 25 new pharma registration approvals to be launched between 2026 and 2027, allowing us to enter new segments. All of this innovation will be supported by a renewed communication strategy. We are shifting from functional frequency-driven advertising to more emotional storytelling that resonates and engage consumers emotionally. Let me show you an example. [Presentation] The company is entering a completely new communication strategy. We are investing in mass micro influencers, partnerships and brand ambassadors on TikTok and Instagram while driving traffic to e-commerce and direct conversion. Let me show you some user-generated content examples for our Asepxia relaunch. [Presentation] We are also leveraging artificial intelligence to produce high-quality, cost-efficient content. Let me show you an example of advertising spots produced by one person with no actors, no cameras for as little as USD 500 investment. [Presentation] This slide illustrates the depth of our product innovation pipeline, entering new categories, introducing new packaging sizes and formulations, all with clear and ambitious relaunch time lines. On the distribution front, we currently have nearly 3 billion sales operations in the traditional channel, where we plan to expand our coverage from 730,000 to over 1 million points of sales, targeting almost MXN 2 billion in incremental sales over the next two years. Our e-commerce business is set to reach MXN 1.2 billion in sales by 2025. We plan to add MXN 500 million in 2026 and another MXN 500 million in 2027, bringing the channel to MXN 2 billion by 2027, supported by strong communication investments to drive traffic and conversion. In hard discounters and convenience stores, two of the fastest-growing channels in Mexico and Latin America, our MXN 420 million operation is set to coverage from 35,000 to 57,000 points of sales and reaching roughly MXN 1 billion in annual sales by 2027. In summary, Genomma Lab is facing a challenging environment, particularly in Mexico, driven by two consecutive weak consumption seasons. Nevertheless, our EBITDA margin remains resilient. Our resources are secured and our growth plan is clear and fully actionable. We are confident that after weathering the next quarters and by executing this plan, the company will return to growth by the first half of 2026, reaching and potentially exceeding its historical growth rates supported by a stronger, more efficient and more profitable structure. Before turning the call over to Tonio, I would like to thank our investors for their continued trust and the entire Genomma Lab team for their unwavering commitment to driving the company towards its next stage of growth. Tonio, please go ahead. Antonio Zamora Galland: Thank you, Marco, and thank you, everyone, for joining us today. As Marco mentioned, third quarter net sales decreased 12.8%. Results were mainly impacted by ForEx headwinds from a stronger Mexican peso as well as hyperinflationary accounting effects following the Argentine peso depreciation during the quarter. On a like-for-like basis, sales declined only 2.9%, primarily due to the impact of a cooler and rainer summer season in Central Mexico and a softer consumption environment in our country. These effects were partially offset by strong sales growth in Brazil, Chile, Central America and the Andean cluster. Genomma's third quarter EBITDA margin closed at 23.7%, representing a 2 basis point increase year-over-year and reflecting the ongoing benefits from manufacturing cost efficiencies as we deliver our targeted EBITDA margin of around 24%. Pro forma net income for the quarter, excluding noncash FX-related effects decreased 3%, reflecting the strong EBITDA margin performance and lower net interest expenses during the period. Moving on to our regional results, third quarter net sales in Mexico declined 6.4%, mainly due to a weaker summer season that impacted sales performance. This decline was partially offset by strong OTC performance, driven by market share gains in the cough and cold and infant nutrition categories. As you can see in this chart, there is a high correlation between climate and beverage sales in Mexico. Besides this headwind, competition significantly lowered their prices during the quarter, adding more pressure to this particular category. On the right side are the growth initiatives that Marco described earlier. We'll increase our geographical presence to other areas of the country next year, and this effort is expected to drive renewed momentum in 2026. EBITDA margin for Mexico improved by nearly 300 basis points, reaching 27% despite the consumption headwinds and deleveraging pressures previously mentioned. This strong performance reflects the accelerated impact of our company-wide productivity initiatives. Moving on to the U.S. business, the U.S. dollar declined 1.6% versus the Mexican peso compared to the same quarter last year. U.S. sell-in net sales decreased 24% in U.S. dollar terms, reflecting ongoing disruption in the U.S. Hispanic retail market, which continues to weight on sell-in performance. However, sell-out declined only 8%, showing early signs of recovery led by Suerox and Haircare, both of them gaining market share despite the challenging environment. The difference in this quarter between sell-in and sell-out comes from customer returns of some cough and cold products due to the past weak winter season of 2024, 2025, as Marco described earlier. EBITDA margin for the region was 13.6%, down 150 basis points, mainly to the operational deleverage and higher advertising investments during the quarter. Going to Latin America, net sales, excluding Argentina, increased 10.6% for the quarter, driven by strong performance in Brazil, Chile, Central America and the Andean cluster. EBITDA margin, including Argentina, was 21.7%, down approximately 360 basis points, mainly reflecting the impact of hyperinflationary accounting adjustments. However, if we exclude Argentina, EBITDA margin increased by 90 basis points during the quarter. Net sales for Argentina, obviously because of all the hyperinflationary accounting effects, declined 49% in Mexican peso terms, and this is a reflection of a 53% depreciation in the Argentine pesos. However, and this is very important for everybody to know that in local currency terms, sales grew 35% during the quarter in Argentina. This is in line with inflation, actually above inflation and driven by strong unit sales share gains in some of our key brands like IBU 400, Treg, Suerox and among other brands. Just as a reminder of what happened with hyperinflationary accounting, the depreciation of the Argentine peso versus the Mexican peso needs to be taken into account when we report figures in our reporting currency, which is the Mexican peso. Likewise, we also take into account inflation. And while inflation in Argentina has been declining, hyperinflationary accounting is mandatory when cumulative inflation exceeds 100% in the previous 36 months. So we'll have to deal with it for a while. So just to help us understand a little bit better of these IFRS rules, the company's performance in the region has to be reevaluated every quarter. When the difference between accumulated inflation and FX depreciation is negative, this will result in a noncash decrease in accordance with hyperinflationary accounting rules. Last year, however, the effect was a positive 13% difference. But this quarter, we had to cope with a 47% negative delta. Thus, a huge 60% impact on our Argentine results for the quarter and Q1 and Q2. That is what explains, again, what we are reporting. The good news for the future is that historically, high levels of --of inflation tends to follow significant currency devaluations. So we expect this positive effect in the short-term future. Turning back to our financials, cash conversion cycle reached 120 days. And Mexico DSO has been in line with historic averages despite the tough consumer environment that we are facing in 2025. Genomma ended the quarter with a leverage ratio of 1.2x net debt to EBITDA, which is in line with the same quarter last year, and this is notably a historical low in financial leverage, not only for Genomma, but for most companies in the industries where we participate. Free cash flow totaled approximately MXN 1.8 billion over the trailing 12 months, representing a 31% decline, mainly due to lower net income and higher capital expenditures related to our growth projects. It's worth mentioning that during the quarter, we converted 9% of our net sales into free cash flow. Capital allocation during the quarter included our 13th consecutive quarterly dividend payment of MXN 200 million, which is $0.20 per share, and we also repurchased --1.4 million shares. In closing, this quarter highlighted both the challenges and the resilience within Genomma's portfolio as well as our company's strong fundamentals. Over many years, Genomma has been built on a foundation of sustainable growth, and we continue to advance with a long-term perspective. We remain encouraged by the solid fundamentals across our core markets and the traction of our strategic projects that Marco described, and we look forward to capitalizing on opportunities once these challenging conditions ease. With that, let's now turn on to Q&A. Operator: Thank you Marco, Antonio. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Alejandro Fuchs from Itaú. Alejandro please turn on your microphone and proceed with the question. Alejandro Fuchs: Thank you operator. I have 2 very quick ones. First for Marco. I want to see, Marco, if you can maybe walk us through your expectations for next year, right? Maybe a little bit better consumption in Mexico, but we also have some headwinds in terms of now it seems that we have more color on potential taxes for beverage companies. So maybe if you can tell us what do you see and expect for next year in Mexico, that would be very helpful. And then the second one is for Tonio very quickly. In terms of working capital, I saw a big decrease in accounts of days payables -- in days payables this quarter and then an increase in receivables in Mexico. I wanted to see maybe, Tonio, if you can walk us through if there is something unusual that is occurring this quarter, we should expect this to normalize? Or is this just business as usual? Thank you. Marco Sparvieri: Thank you, Alejandro. On Mexico, I would say that my expectation, although I don't have the crystal ball, but I do expect a few more quarters -- difficult few more quarters in a very difficult environment from a consumption point of view. But as I said, regarding of the overall context in the market, categories and competitors, I am very, very confident that the plans that we are currently putting in place, I am presenting the whole plan today, but we have started working and implementing many of these strategies several months ago. So I am very confident that we are going to see a gradual recuperation of the top line at some point in the first half of 2026. And I am very confident that with the investments that we are making in the business, the additional resources that we have secured, the MXN 1.1 billion that I just mentioned, reinvesting that money thoroughly and intentionally in the business to reignite the top line growth. I am very confident that we are going to put this company to grow again at least at the same levels that we have been growing over the past 6, 7, 8 years. You asked also about the EPS. Look, the EPS right now, the way it stands based on all the public information that you all have access to, it's impacting both our competitors, okay, and ourselves. And when I say competitors, I mean all the competitors, isotonic beverages and electrolyte beverages in the same category, okay? But we have an advantage right now because we don't sell our product Suerox with sugar. So the current situation as it stands today based on the public information that we know is that the EPS that will be applicable to Suerox is half of what will be applicable to our competitors in isotonics and electrolytes. So that put us in an advantage. There's two scenarios here that we have fully accounted in the plans for next year is -- one is if our competitors increase prices and do not absorb the EPS, we will follow and the EPS will have no impact in our margins. But if our competitors do not increase prices, we will have to absorb and that impact, it's already in the financials and the plans for 2026. Alejandro Fuchs: Thank you very much Marco. Antonio Zamora Galland: Alejandro, this is Antonio. Thank you for your question regarding working capital. So in terms of days payables, the 93 days that we presented for the Q3 are pretty much in line with the 96 for Q2 or the 94 for Q4 2024. As we all know, when you transition from third-party contracting, the [indiscernible] to our own facilities, the kind of suppliers that we have are different. We are now buying raw materials directly. And so it's a new game. And I would say that this range of around 90-something days for payables at this moment, that's going to be the new normal. Obviously, we are working with suppliers. We're negotiating as they get to know us better and as we can get to better negotiations, we hope that in the future, this is going to improve. But that's part of the reason why in the past, when we were buying finished products, we have better terms. But those products were costlier. I mean that's why the COGS was higher, significantly higher. So I think it's a lot better to have productivity, the kind of productivity in terms of COGS, while we have to work -- we still have to work on payables. But this is going to be around the new normal. And if you see Q4, Q2, Q3, you will see that the numbers are pretty much around mid-90s in terms of DPO. In terms of DSO in Mexico, that's why I presented a chart with the historical DSOs. Yes, in 2024, we were improving our DSO. Obviously, last year, it was a different year. Everything was more optimistic. This year has been more challenging. So there's two reason. One is, obviously, the market is a little bit slower for everybody, and you can see this in most companies in the consumer landscape in Mexico. But also, it's a little bit tricky because it's part of the accounting formula of DSO because you divide the ending balance of receivables by a denominator, which is the past sales from a certain period, whether it's 90 days or 360 days. So if sales have been declining, lately, unfortunately, in the case of Mexico. From a mathematical point of view, that increases artificially the number of days in DSO. If sales start growing faster, it's going to be the opposite. So you will see that effect. So what I can tell you in terms of DSO, I think that considering the very tough consumer environment that we are facing, we are pretty much in line with average and what we should expect this year. Obviously, if for 2026, as you very well pointed out, the expectations for the consumer market is a little bit better. We obviously are going to work to improve that ratio. I don't know if I was able to answer your question, Alex. Alejandro Fuchs: Thank you very much. Operator: Our next question will now be from Álvaro García with BTG Pactual. Alvaro Garcia: One question we've gotten quite a bit is how is it that your EBITDA margin is so stable considering pretty significant sales decline we saw this quarter. So I was wondering if you could kick it off with that one. Marco Sparvieri: Yes. Thank you, Alvaro. This is Marco. It's really the -- a huge amount of efficiencies and productivity that we are generating behind the plan we put in place a few years ago. Most of the impact of the efficiencies we are seeing today of the plans that we implemented like 2 years ago with CapEx, like integrating our packaging, manufacturing and so on. So -- but short answer is its basically that. Alvaro Garcia: Great. And two more. One, bigger picture, just I can't remember a time with so many sort of relaunches sort of renewed images across all your different brands. So I was curious, Marco, how your clients are taking this, especially maybe the larger retailers? How are they sort of digesting all of this? And sort of what's the prospect or what's the outlook for the uplift in sales you'd expect from all of these relaunches? Marco Sparvieri: No, clients, they are like fascinated. I mean they like innovation, and that's what the categories where we compete actually need, not just to drive our growth, but to drive the total category growth. So like the Walmart skin care buyer is really fascinated with all the things that we are doing. And -- so -- and also, you have to remember that this is not just for one distribution channel. When you see like this, all the new sizes and all that, it doesn't necessarily impact just one channel all at the same time. Many of the things that we are doing are some for the traditional channels, some from the modern retail channel, clubs, hard discounters, e-commerce. So it's not that one single customer is going to have to absorb 50 different changes. I don't know if that makes sense. Alvaro Garcia: Yes. That's helpful. And the last one, maybe for Tonio on CapEx. I have seen the uptick sort of year-to-date. I was wondering if you can maybe provide guidance for maybe this year and next year on what that is and what we should expect going forward in the context of free cash flow. Thank you. Marco Sparvieri: Yes. I'm going to take that one, Tonio. I have the numbers pressure. The -- so we have this quarter, the quarter 3, quarter 4 and quarter 1 with some heavy CapEx investments there. We are paying for the new distribution center, which is spectacular. We are taking our levels from $7 million to $10 million and the distribution center is going to bring us savings of around $12 million per year. We are still paying for the second line of Suerox and several other CapEx investments in the plastic plant, okay? So I expect the next 2 quarters to be a little bit heavy on CapEx. But 2026, like overall, based on the current forecast that we have, both in terms of CapEx and operational cash flow, we expect that we are going to return to the levels of free cash flow that we have been reporting in the past few quarters, which is in the round of MXN 2.7 billion, MXN 3 billion per year annually. Operator: Our next question will be from Axel Giesecke from Actinver. Axel Giesecke: Just a quick one regarding the resilience of OTC in Mexico. I just want to know what share gains are you achieving in these categories? And how sustainable are they as we move into 2026 and looking forward? Marco Sparvieri: Thank you, Axel. So first, I mean, OTC in general is very resilient, okay, a lot more resilient than personal care or even beverages, okay? And that is true for not only for Mexico, but also for all the markets. And basically, all the categories or subcategories within OTC. What we are seeing is that, first, from a total sell-out standpoint, regardless of the very difficult environment that we are seeing in general in Mexico from a consumption point of view, we were able to navigate in these categories with a lot more strength, okay? And just to provide a little bit of color in terms of numbers, we are -- recently, it's very early to say, but I think it's important that you guys know that the early signs that we have from the -- both execution and incidents of the cold and flu season for 2025 and 2026, the early signs that we are seeing are very encouraging. We are growing double digits in several of the brands that have to do with cough and cold. And so it remains to be seen what happens. But normally, when a season starts strong, it remains strong, hopefully. But yes. Operator: Our next question will now be from Froylan Mendes from JPMorgan. Fernando Froylan Mendez Solther: Thank you for taking my question. I was hoping you could illustrate on where are the MXN 1.1 billion productivity measures the incremental ones coming from? I'm just curious, I mean, if the weakness in the market is clearly a top-down and even weather-driven, why do you feel the need to invest more in growth levers today if the market is supposed to stabilize at some point? Or am I missing something in any of your markets that will require an extra boost of growth beyond this -- to offset this macro slowdown, maybe some change in competitive dynamics? That's my first question. And secondly, I wanted to understand better the performance in the U.S., the decline of almost 24%. You mentioned something about some returns from -- I guess, from the different channels. But what do you expect these productivity gains being invested in growth to translate into the United States? Should the U.S. react before other countries? Where does the U.S. stand in the recovery path that you foresee? Marco Sparvieri: Yes. Thank you, Froylan. Let me address one by one. Productivity is mainly coming from four key interventions. Number one is a very strong implementation of artificial intelligence across different functions and processes that before required a lot of headcount and now it doesn't. So that's one piece. Second is the strengthening of our COGS reduction original plan. So we had a plan -- a very aggressive plan to reduce COGS, and we strengthened that plan even further. So we stretched all the interventions that we are making even further to get more productivity there. So we expect the COGS to continue to go down. Third, we are eliminating a massive amount of administrative cost that was previously in the P&L. So we are cutting administrative costs by around 30%. And fourth, the fourth pillar is go-to-market spending. And with that, I mean, unproductive spending, okay? So like we made a very thorough analysis of all the money that we were spending in pricing and promotions, point-of-sale execution. We are closing distribution routes that are not profitable. So we made like a very thorough analysis of every spending that we have in that bucket, and we are cutting a huge amount of spending that was unproductive. All that adds up to $1.1 billion. The second question is why investing in the business? And the answer is, well, first, I don't know what's going to happen with the consumption market or environment or context in 2026, and I don't want to wait until the context saves us and we start growing the top line again. So we are deciding to invest a massive amount of money to reignite growth regardless of what's happening out there. And second, we want to be aggressive because we have a very strong portfolio of brands with very strong positioning. We have a very strong pipeline of innovation. And importantly, we have a very strong capabilities to execute, okay? So -- and we have the resources. So we have the pipeline, we have the capabilities, we have the resources, and we want to put this company back to growth. So that's basically the reason. And in terms of the U.S. decline, it's fairly simple. I mean, we -- we -- the sell-out is declining 8%. It's not great, but it's not a massive crisis. We have brands that are relatively healthy in the U.S. like Suerox and Tio Nacho and some of our OTC brands. But unfortunately, we had a very bad winter season across the U.S. as well as in Mexico last year. And what we are seeing now is that we loaded a huge amount of inventory of our winter season brands because we want to play big in the seasons. And the same we did in Mexico with Suerox this year, we loaded big time because who wins is the one with more inventory out there in the stores, and we want to play big and we play big in the U.S. And now after a season that didn't go so well, we are receiving customer returns in those brands that is impacting the top line in sell-in, but the sell-out is not declining as much as the sell-in. I don't know if that provides perspective on the question you asked. Fernando Froylan Mendez Solther: Yes, Mark. Do you think that the channels are, let's say, more balanced today in terms of inventory so that the next season will be, let's say, more correlated to the actual demand? Or how do you see the inventory levels? Marco Sparvieri: It's like moving pieces all the time because it's -- we play a lot in seasons. We play in the winter seasons with OTC and then we play big time in summer with beverages and some of our OTC categories for the summer. So the strategy we follow and has worked really well in the past is that we play very aggressive in terms of both point of sale execution, communication, innovation and also huge inventory at the stores, okay? So we -- it's a bet all the time, it's a bet, okay? And that's how it works. So you load big time upfront and then you expect for the best. And if it works, it's fantastic. And if it doesn't work, then you have to deal with the inventories and the product that you put out there. So for example, you are seeing a strong decline in Suerox this quarter in Mexico, in particular, in sell-in, that doesn't align with the sell-out numbers for the quarter because we had big inventories for the summer season. The summer season didn't work. Now we are not selling a lot of Suerox because customers still have inventory. But at the same time, we are we are playing a big bet for the winter season. And this quarter, we loaded a massive amount of OTC here in Mexico. And we're seeing early signs that this is working and that we are growing market share in some of these categories. And if it works well, we're going to have a great next quarters in OTC behind a good season, and we're all going to be happy. If it doesn't work, we're going to see the same dynamic that we are seeing today in the U.S. and in Mexico with beverages. Fernando Froylan Mendez Solther: Marco, lastly, and thank you for the several questions. When you say that you expect growth to recover into the second half of 2026, do you expect beverage Mexico to come first, then cough and cold U.S. second? What's the timing on the different regions and products that you expect this reignited growth to come? Marco Sparvieri: That's a difficult one. Let me think. I think OTC, we are going to see a better performance in OTC first, beverages second, hopefully, because if we -- if we have a better season in terms of weather next year, which we should because this year, we didn't have a summer, then we're going to sell a lot of Suerox, okay? So with a good winter season that we are starting to see for OTC, that's going to come first, second, Suerox. And third, most of the initiatives that I just presented for skin care and personal care are hitting the market in the second half of 2026. So third will come personal care. That's, I think, the order. Operator: [Operator Instructions] This will conclude our third quarter results conference call. Thank you for your attention.
Gerardo Lapati: Good morning, everyone, and welcome to Alsea's Third Quarter 2025 Earnings Media Conference. My name is Gerardo Lozoya, Head of Investor Relations and Corporate Affairs. Today, you will hear from our Chief Executive Officer, Christian Gurría; and Federico Rodríguez, our Chief Financial Officer. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business, and that future results may differ materially from these statements. Today's call should be considered in conjunction with disclaimers in our earnings release and our most recent Bolsa Mexicana de Valores report. The company is not obliged to update or revise any such forward-looking statements. Please note that unless specified otherwise, the earnings numbers referred to are based on the pre-IFRS 16 standards. I will now hand it over to Christian for his initial remarks. Please go ahead, Chris. Christian Dubernard: Thank you, Gerardo. Good morning, everyone, and thank you for being with us today. Thank you. Today, I'll provide an overview of our third quarter results, covering our financial earnings, regional highlights and key brand developments. I will also highlight our progress on digital transformation, ESG initiatives and expansion strategy. Federico, our CFO, will follow me with an analysis of our results, including revisions to our 2025 guidance. Before we turn to the quarterly results, I want to remind everyone of the continued focus on our strategic priorities that will guide us moving forward. As we mentioned last quarter, our first priority is to continue driving disciplined organic growth. We remain focused on expansion and innovation to drive same-store sales growth, prioritizing traffic over price increases. We will also improve our customer experience and advance our digital capabilities. In addition, we will continue rolling out successful commercial campaigns such as Menu Del Dia from Vips in Mexico and Spain, Tres para mi or three for me in Chili's in Mexico, Paradiso Italiano with Italiannis in Mexico and Gourmet Burgers from Foster's Hollywood, among others, other initiatives, which have consistently improved our product offering and reflect our commitment on innovation. Our second priority is to optimize our brand portfolio. We will prioritize return on investment by ensuring that each brand and store format is aligned with the needs of each regional market. Also, scalability and growth across all brands remain a core focus to unlock their full potential. We are also addressing and analyzing potential divestments on non-core assets to concentrate on the business with the greatest strategic and financial value. Our third priority is to enhance profitability. More value is being generated in our existing stores portfolio through consistent operational improvements by leveraging the strength of what we call high-impact operational talent. Organic growth is supported by strategic new store openings and the remodeling of key locations. As mentioned, 2 stores are being remodeled for every opening as refreshing the existing base delivers faster and more efficient returns on capital. Finally, our fourth priority consists on discipline and strategic capital allocation. We will prioritize growth and productivity initiatives with clear return thresholds. Also, vertical integration and long-term sustainability continue to be central to our strategy. Our CapEx plan is being optimized, adjusting long-term investments to become even more efficient and ensuring every peso invested aligns with our capital allocation priorities as well as different G&A efficiencies that we have been consolidating and working through the year. Now I'll provide an overview of our quarterly performance, including our financial results, regional highlights and key brand developments, along with updates on our digital advancement ESG initiatives and expansion strategy. In the third quarter, we reported a 5.7% year-over-year increase in total sales, reaching MXN 21 billion or a 6.7% increase, excluding foreign exchange effects, same-store sales grew by 4.1%. EBITDA increased 1.8% in the third quarter, reaching MXN 2.9 billion with a margin of 13.7%, decreasing by 50 basis points year-over-year. Regarding brand performance during the third quarter, Starbucks Alsea same-store sales increased by 3.9%. For Starbucks Mexico, same-store sales grew by 3.3%, demonstrating solid in-store performance backed by our loyal customer base. For Starbucks Europe, same-store sales increased by 1.6%, reflecting a challenging environment in France, offset by continued strong momentum in Spain, driven by effective commercial initiatives. Given the strong results in Spain and the importance of the brand in the country, we are very excited about the latest opening of our flagship store in the Santiago Bernabeu Stadium, Starbucks Bernabeu. Finally, in South America, same-store sales rose 9.6%, driven primarily by Argentina. Excluding Argentina, same-store sales declined 1.3%. Nonetheless, there is a sequential improvement in Chile despite lower traffic. Domino's Pizza Alsea posted 2.6% increase in same-store sales. In Mexico, Domino's same-store sales increased 1.6%, driven by our continued efforts in product innovation. In Spain, same-store sales increased by 2.9%, reflecting the ongoing effective promotional efforts and positive customer response to product innovation. In Colombia, Domino's delivered strong results. Same-store sales increased by 9.1%, supported by successful marketing initiatives. Burger King's Alsea same-store sales, excluding Argentina, decreased 1.4%. In Mexico, Burger King reported a decrease in same-store sales of 1.7%. This was driven by a shift of mix towards low price and discount items, combined with a decrease in premium innovation and digital coupon. The full-service restaurant segment delivered a 4% same-store sales growth. This segment remains strong and resilient, supported by marketing campaigns that enhance our product offering and demonstrates our commitment to innovation. Full-service restaurants in Mexico increased by 5.3%, with most brands growing at mid-single-digit pace with Chili's and Italiannis, while Chili's and Italiannis stood out by achieving high single-digit growth. The performance was driven by the strength of our value product menu offering, product innovation and launches. Same-store sales for full-service restaurants in Spain grew 2.4% with Foster Hollywood and Gino's delivering solid growth of 5.5% and 4%, respectively. We are focusing on introducing new and premium products to attract new guests, capitalize on existing traffic and strengthening our customer loyalty. Our global expansion strategy remains focused on prioritizing quality over quantity, targeting the most profitable opportunities across our key markets. We remain committed to delivering strong value to our customers, maintaining our pricing strategy and customer loyalty through our resilient brand offering. In the third quarter, we opened 46 new stores, 35 corporate units and 11 franchises with an emphasis on high traffic and high potential locations. We expect the pace of openings to pick up on the fourth quarter to meet our full year goal for net stores. This approach reflects our commitment to long-term brand positioning and disciplined strategic growth through flagship developments and selective market expansion. Given the profitability and payback of store remodeling, such as increased customer satisfaction and higher sales, we will continue prioritizing a refresh and modernized look across all our locations. Our digital platforms continue to be key drivers of growth. By the end of the quarter, loyalty sales increased 7.9%, reaching MXN 5.1 billion, representing 24.6 million orders and contributing 26.1% of total sales. We also surpassed 8 million active users across our loyalty programs, confirming the strength of our digital engagement. Additionally, we served nearly 33.6 million digital orders in the quarter, totaling MXN 7.3 billion, which represents 37.4% of our total sales. This quarter, we continue to strengthen our sustainability model by aligning our purpose with every aspect of our operations. As part of this effort, we made significant strides towards reducing CO2 emissions, installing over 215 solar panels in Europe and installing 159 kilowatt per hour of power in Europe in Spain. In Mexico, Starbucks served over 1 million beverage in reusable cups and granted 3.9 million -- 3.2 disposable cups as part of our efforts to reduce waste. We also continue to strengthen our social impact through Fundación Alsea and Movimento Va por mi Cuenta, supporting vulnerable communities and driving positive change. As we launch new fundraising campaign, we expect to surpass previous year's results, reinforcing our long-term commitment to responsible, purpose-driven growth. Let me now turn it over to Federico, our CFO, who will provide further insight and financial performance. Thank you. Federico Rodriguez: Thank you, Christian. Good morning, everyone. During the quarter, the sales increased by 5.7%, supported by the brand resilience and a strong performance in Mexico, Spain and Colombia. Excluding foreign exchange effects, sales increased 6.7%. In the third quarter, sales in Mexico were up 7.5% to MXN 11.5 billion. In Europe, sales increased by 8.2% to MXN 6.5 billion, while in euro terms, sales increased by 3.8%. Finally, South America sales fell 4.7% to MXN 3.1 billion. The EBITDA increased by 1.8% with a margin contraction of 50 basis points, mainly due to a loss of operating leverage given the lower consumer environment in the month of September. These impacts were partially offset by the resilience of the brands across most regions, disciplined revenue management and improved SG&A efficiency. In this context, we chose to limit price increases to protect traffic and sustain brand competitiveness with consumer demand slowdown. In Mexico, adjusted EBITDA remained flat as there was lower operating leverage given the softer consumer environment in the month of September. In Europe, adjusted EBITDA increased by 6.2% year-over-year, primarily due to an increase in same-store sales of 2.3%, driven by new products and campaign launches that led to improvements in all brands, offsetting higher labor costs. In South America, adjusted EBITDA decreased by 14.2%, reflecting a lower consumption environment in the region, except for Colombia. A slowdown in consumer activity weighted on operating leverage and contributed to the slow recovery in the region. The net income for the quarter increased 559% year-over-year, reaching MXN 512 million, reflecting a positive noncash effect, which reduced the cost of our U.S.-denominated debt in Mexican pesos terms. The next slide, please. The CapEx for the first 9 months of the year totaled MXN 3.8 billion. Of this total, 77% was allocated to store development initiatives, including the opening of 35 new corporate units, the renovation and remodeling of existing locations and equipment replacement across the brands. The remaining 23% was directed at the strategic projects such as the distribution center in Guadalajara, technological upgrades, process improvements and software licenses, all reinforcing the long-term competitiveness and operational efficiency. At the end of the third quarter, the pre-IFRS 16 [Foreign Language] thank you. The pre-IFRS 16 gross debt decreased by MXN 1.8 billion year-over-year, reaching MXN 51.8 billion. The company's net debt, not counting the impact of IFRS 16 was MXN 34.5 billion, which is MXN 2.5 billion more than it was at the same time last year. This increase reflects the bank loans used to settle the minority stake in the European operations, short-term debt for working capital and CapEx needs. Consolidated net debt reached MXN 47.1 billion, including lease liabilities. At the end of the quarter, 74% of the debt was long term with 67% denominated in Mexican pesos and 33% in euros. We remain focused on maintaining a healthy capital structure supported by prudent financial management. At the end of the quarter, the cash position stood at MXN 4.7 billion. Turning to financial ratios. The total debt to post-IFRS 16 EBITDA ratio closed the quarter at 2.9x, while the net debt-to-EBITDA ratio stood at 2.6x. While we are still committed, we have adjusted the 2025 guidance given the negative impact generated by a lower-than-expected consumption dynamics during the month of September and the ongoing impact of the appreciation of the Mexican peso affecting the top line. Now we expect a high single-digit top line growth and a low single-digit EBITDA growth for the year. I will now pass you over to the operator for the Q&A session. Thank you very much. Operator: [Operator Instructions] The first question is from Mr. Ben Theurer from Barclays. Benjamin Theurer: So 2 ones real quick, just following up on some of the commentary you had about the softness towards the end of the quarter in September and obviously, the guidance adjustment as you look now for slightly lower top line. If you think about the weakness, how has that potentially carried into the fourth quarter in October? And are you seeing any difference between the formats? So thinking coffee versus pizza versus burger versus food service across the board? Are there certain areas that are a little more affected versus others? So just a little more granularity as to the weakness in September, maybe over the last couple of weeks to understand what's driving the guidance revision. Christian Dubernard: Thank you for your question. No, the reality is that, as we mentioned, the third quarter was -- we saw July and August pretty balanced. And then we have an important drop in September. And this was across, in general, brands and geographies. It's not specific to a particular brand. Obviously, as we mentioned in the report, some of the South American countries, we have a slower -- a higher impact in those countries due to the deceleration of consumption. But in general, was across all geographies and markets. And as you asked going into Q4, it's too early. It's been 2 weeks in October. We see a similar trend in October. Nevertheless, we have very strong commercial initiatives in all of our brands and across all of our geographies for Q4, focusing on mainly 3 particular aspects. One is product and customer experience innovation. The second one, value. We can share some examples of some of the initiatives that have been paying off across the year regarding value like Tres para mi in Chili's in Mexico, Paradiso Italiano with Italiannis in Mexico, not just Magic Magicas or Magical Nights in Ginos in Spain and Gourmet Burgers in Fosters and many of the day in some of our brands. which have been continued driving traffic and that. Nevertheless, for Q4, we have very, very strong and powerful innovative and customer experience-driven campaigns that we are confident that will help us drive the traffic during this quarter. But something very important to highlight is always protecting this gross margin while we preserve traffic. We know that during these times of lower consumption or slowdown, the brands that remain loyal to their customers are recognized when traffic comes back. So that's what we are focusing on. Benjamin Theurer: Perfect. And then my second question is you mentioned potential asset disposal. Could you just elaborate, is that more like regions you think of not being worth maintaining? Or is it brands in particular? I mean we've seen, for example, the Burger King transaction in Spain. So is that something maybe in other regions to follow? How should we think about this? Federico Rodriguez: We have been very vocal, Ben, regarding divesting processes that we are setting in different noncore units. I would say that is one of the main priorities, not only for this year, but for the future. And we're still dealing with more than -- for potential buyers for different business units. It is not going to be relevant in terms of the contribution to the top line or to the EBITDA -- but obviously, what we want to address us to all the investors community is the focus that we want to deliver to the main brands such as Starbucks, Domino's Pizza, et cetera. We are still moving forward. Sorry, we cannot elaborate on rumors. But once we have said and we have completed this M&A activity, we'll give you more news. Operator: Our next question is from Mr. Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I'd like to understand a little bit more the add up of the revised guidance, right? And this is on top of one very particular moving part that is FX. You cut revenue and EBITDA similarly, which could suggest as your broad expectations for margins are virtually unchanged. Obviously, we know that the stronger currency, the translation from Europe is a headwind, but gross margin could actually benefit from that going forward, right? So this is just to see if you could elaborate a little bit more on how you're seeing FX translation versus transaction FX, how your hedging positions are, how you're thinking about pricing and cost and more importantly, what is your underlying assumptions for margins going forward? Federico Rodriguez: Thank you, Thiago. I will answer the first part of the question regarding the cutoff of the guidance in top line and in EBITDA growth. Obviously, we are losing operating leverage and even what we have -- and we are having some help in terms of EBITDA margin from Europe because of the appreciation of the peso in comparison with the euro. We are losing some kind of operating leverage in Mexico, too. We had a really weird quarter. We have a good July and a strange August with one strongest week and a terrible September. So that's the reason that we are cutting up all the guidance for the rest of the year. And I would say it is only operating leverage. We are having tailwinds from the FX. You know that we delivered a guidance with a forecast of MXN 20.8 per dollar, we're having a good gross margin. And in fact, you will see a lower-than-expected loss of margin EBITDA. But having said this, obviously, we have to bring you the reality of what we saw in the quarter. And as Christian have just mentioned, with 3 quarters out of the 13 weeks of the last quarter, it is pretty early to say what is going to happen. That's the reason of the [indiscernible] of the guidance. So if you want to complement? Christian Dubernard: Yes. And also regarding gross margin, we have seen positive tailwinds regarding COGS. As you know, there was a lot of pressure on cost of goods, particularly with some commodities based on the FX -- now we are seeing that both the internal initiatives that we shared some of them last quarter are starting to pay off. There's normally 3 to 5 months of time when you start seeing the different initiatives to pay off. We are seeing that. And also, on the other hand, the initiatives that we had implemented and consolidated around productivity and labor, we have seen them to start to pay off. So in these terms, we are seeing a steady -- slow but steady margin recovery in our brands through these initiatives and still have had some increments on beef, but we are -- again, it's part of our business, we are managing every year as they come and through different platforms. Thiago Bortoluci: This is helpful. And if I may, a quick follow-up. We have been discussing on our opening remarks and now the drag in September, right? Anything you could share to help us calibrate the magnitude of the pressure that you saw particularly in that month? Federico Rodriguez: We do not disclose the transactions by brand, but obviously, there are some brands where we had a contraction of around 100 basis points in terms of the same-store sales in comparison with the previous 2 months. And that's the reason. As I said before, Thiago, it was only 1 month. Unfortunately, when we take a look at the guidance, we prefer to be really honest of what we're looking for the remaining part of the year. You know the seasonality of this business in November and December, maybe we'll have a positive news. But as of today, I cannot say that. Sorry. Operator: Our next question is from Mr. Alejandro Fuchs from Itau BBA. Our next question is from Antonio Hernandez from Actinver. Antonio Hernandez: Just I mean, very good color that you provided regarding the different performance in the 3 months. Just wanted to see if you could provide more color on September. If there were -- how much of that underperformance was because of external factors, maybe competition or anything specifically that you could provide on that, that will be very helpful. Federico Rodriguez: I would say it's really macroeconomical factors, Antonio. I cannot say that we are dealing with something different from a cost of food point of view or something internal. I would say that we are delivering the same campaigns. Obviously, most of the value coming from traffic. We have been telling you these guys. We are not doing a 100% pass-through coming from ticket. We have positive tailwinds regarding FX. Obviously, we have 30% of the food basket dollar index. And I would say that everything is not from competitors. We know that the competitors are slowing down the pace of openings, especially in coffee and pizza. But having said this, we are not dealing with something different from a commercial point of view. Do you want to add. Christian Dubernard: To avoid being repetitive, it's more -- we have seen, in general, a deceleration on consumption, particularly after the end of the summer, which had the highest peak in September. We know that normally every September slows down. Nevertheless, this was a little bit more -- the peak or the value was higher. So again, this has to do more to a macroeconomic environment. And in general, we see less thrust on the consumers in certain geographies as Europe, certain economy slowdown in South America and likewise in Mexico. But we are expecting to have, as you know, most of our -- almost 30% of our revenue EBITDA comes on the last of the quarter. So we are, as I mentioned, with strong campaigns and strong value-driven and innovation campaigns for Q4 in all of our brands and geographies. Antonio Hernandez: And just to clarify that terrible September or bad performance in September is all over the place. I mean, not only in one specific geography? Federico Rodriguez: Yes, it was in the 3 regions. Operator: Our next question is from Ms. Renata Cabral from Citi. Gerardo Lapati: You opened your camera? Renata Fonseca Cabral Sturani: Yes, I did. Christian Dubernard: No worry. Go forward with your question, Renata. Renata Fonseca Cabral Sturani: Sorry for the problem with the connection. My question is regarding Europe and the improvement that we are seeing there. 2024, we know that it was a challenging year in terms of same-store sales, and we are seeing now a stabilization in the region contributing to the company's results. So my question is, what were the main changes that you have implemented to reach to the current results and still the opportunities that you see to further improve the results on Europe. Christian Dubernard: Thank you for your question. Let me take this one. I believe what we have seen in terms of the recovery that you mentioned, particularly driven by Spain. We've seen very -- the customer reacting to the different campaigns in terms of innovation and value-driven campaigns as well as improved portfolios in terms of core offering like our brands in Starbucks, value-driven initiatives in Vips and Ginos, new very innovative campaigns around chicken and burgers in terms of -- in the case of Foster's Hollywood and particularly Domino's also the first half of the year, they were very much driven in having more, let's say, less traffic-driven and promotional activity which brought us good margins. And now we -- second half for Domino's will be more driven on achieving traffic, obviously, protecting the margin. So I would say to make the answer short, is the consolidation and the understanding and reading of the environment and looking forward of how the customer is behaving that we were able to adjust and adapt our different initiatives to respond to the customer needs. For Q4 and looking forward, as I mentioned before, innovation is going to be one of our main drivers. And likewise, as protecting value and margin for the customer -- value driven -- to protect value for the customer to drive traffic, but at the same time, in a smart way to protect our margins. So I believe understanding what is the behavior and what the customer is looking for is what's been paying off particularly driven by Spain. Federico Rodriguez: Additionally, Renata, in the bottom part of the P&L, we are implementing a lot of different strategies. In the stores, for example, we are increasing the productivity, trying to measure what are the peak hours of the day to have a better deployment of the workforce, and we are having terrific results. Additionally, in all the headquarter offices, obviously, we are stopping with doing non-core activities. We have been growing really -- we had a relevant growth during the last 10 years in Alsea. So we are going back to basis to consolidate synergies, moving different areas to where we are performing the best tasks. So we are having a lot of efficiencies in the bottom. But obviously, when we are losing the leverage as we have seen in September, it is impossible to offset only with these efficiencies, the loss of sales. Christian Dubernard: And to complement this last that you mentioned, Renata, also, we have seen this, let's say, approach where we consolidate the brands and when we are capturing opportunities like in the FSR segment where we are creating and generating a lot of synergies, it's paying off. So in a way, the strategy that we started at the beginning of the year in these terms is maturing, and we are already seeing part of the benefits of this strategy. Operator: Our next question is from Mr. Ulises Argote from Santander. Ulises Argote Bolio: I just wanted to understand a little bit better here on the pace of remodeling. Is this something we can expect going forward for the next couple of years? Or what's more or less the time line that you guys have in mind for this? And also to understand if this is focused on any specific format or region or if it's more across the board. Then a follow-up to that is if you guys have any color that you can share maybe on the sales lift that you're seeing on these remodeled stores. Christian Dubernard: Yes, I will take that one. Yes, as I mentioned in our first call, one of our main priorities is how do we make our existing portfolio more profitable. through driving same-store sales and basically driven by traffic. And remodeling is clearly a very strategic lever that allows us to drive this additional traffic, both one way through having better-looking stores, but also more efficient stores. When you have a remodel a store that has been operating for 5, 7, 10 years, you already know how the store behaves, what type of customers you get in those stores. So when we do these types of renovations or remodelings, we are just adapt to the reality of each one of the stores and the needs of each one of the stores. So as we mentioned in the first -- in our last call, we are in an average of 2: 1, 2 remodelings or renovations for each opening. That shifts between different brands, some brands or some geographies, we are 3:1. In some cases, we are 1:1. But clearly, the renovation of our existing portfolio is one of the key drivers of traffic together with having the best operational talent in each one of our stores, which is also one of our key strategies where we are focusing. Regarding payoff, where we have seen the highest impact in terms of payoff is in the FSR or casual dining segment and in Starbucks because obviously, different from Domino's or the customer doesn't necessarily stay in the store for a long period of time. In the case of Starbucks and our food service restaurant segment in both geographies, we clearly see that the customer really appreciates these types of renovation. So we've seen between mid- to high single-digit growth in some of the segments and to double -- I would say double. Low teens in the case of FSR. So it's a core -- it's part of now a clear strategy for us and a clear priority. Operator: Our next question is from Ms. Isabella Lamas from UBS. Isabella Pinheiro F. Lamas: I have 2 here. So firstly, could you discuss a little bit more about the input costs, particularly in the scenario of the peso appreciation. We were kind of wanted to get a sense of how you're thinking about your cost inflation going forward and how that compares to what you have experienced for this year? And how should we think about the margin setup for next year? And my second one is a quick one, is regarding leverage ratio. You've just reiterated your guidance for this year. So we were wondering if you have any views you could share for next year, any kind of range or what should be aiming for? That's it. Federico Rodriguez: Okay. Thank you, Isabella. Regarding the input costs, we are not having -- I'm talking only regarding Mexico and South America. We are not having more headwinds regarding FX. I would say that at this point of the year is totally comparable and in some cases, better than in 2024. That's from one side. As you know, we have 30% of the inputs dollar index in Mexico and the rest of South America brands. And additionally, for the next year, we are forecasting mid low single-digit input cost for 2026. And regarding the guidance, we changed the guidance for 2025 from a low teens in top line to high single digit and regarding EBITDA growth from a mid-single digit to a low single digit. Regarding 2026, it is too early. We are building our budget with the different variables. So we'll tell you something in the next conference in the month of February. Operator: Our next question is from Ms. Julia Rizzo from Morgan Stanley. Julia Rizzo: I have 3 actually. One, could you -- I noticed a sharp increase in the leasing expense on the cash flow from MXN 4.6 billion from MXN 3.6 billion, 26% increase actually, which is quite high compared to your sales and also to the store base. Is there anything here was a renegotiation in some regions, specific some brand? Is there something that is not perhaps recurring or it is related with some stores that you're already opening under construction and paying but not open. Can you give me a little bit of sense of how we should interpret this, especially looking forward, right? Because it increases from 6.3% of sales to 7.4% of sales in 1 year. Federico Rodriguez: Okay, Julia. Yes, Julia. We have been very vocal from December on regarding the lease change that we do from a post-IFRS 16 perspective. As you know, we manage the business on pre-IFRS 16 figures and -- but the change was because we standardized the criteria of all the leasing contracts across the geographies to have a single one company-wide. For example, we had a different policy in Europe from a bps perspective, that bps here in Mexico, while it's the same business, et cetera. So it is more an accounting perspective than a real change on the lease payment that we do on a monthly basis. This does not imply -- and just to be repetitive, an increase in the rental expense, but in the way that we account these leases. This is an effect we'll have until the last quarter of 2025. And from the first quarter of 2026, it is not going to be a relevant change. I don't know if you had another question, Julia. Julia Rizzo: Yes. Just as a follow-up. I'm not talking about the depreciation and amortization. I'm talking about the cash flow payment on the free cash flow generation. Federico Rodriguez: No changes. From a free cash flow payment, it is pretty much the same. We have around 35% of the lease contracts on a variable base totally linked to the gross revenues and the remaining 65%, 70%, depending on the region is totally fixed and increased with half of the inflation of each one of the countries. So we do not have a relevant change from a cash flow perspective into the lease part. Julia Rizzo: Okay. So we follow up later. And also on the interest expenses, also when we annualize the rate of how much you paid, again, on a cash basis, the MXN 2.9 billion was MXN 3 billion compared to the average net debt of the period. We have kind of a rate around 14% roughly, which is well above the base rate. Is there anything here that is nonrecurring? Again, looking forward, how we should expect the cost of that or interest expenses to be? Federico Rodriguez: Well, unfortunately, it was like that because even while we had -- well, we have the $500 million bonds at 7.750%, it is swap. So we pay a rate above 13% from the dollar bonds. And that's the reason, and I want to link to what are we doing with the LT with the liabilities management for 2026. We are moving forward accordingly to the plan. We are almost ending with the refinancing of the 100% of the liabilities, the financial liabilities in the balance sheet, and we'll have savings above $20 million for 2026. We're still dealing with it. That's the reason I do not want to give you more details, but we will change from bonds in dollars and in euros to bank debt, which is cheaper and that will improve the average duration that we have into the balance sheet. But you will see savings on the 2026. Julia Rizzo: Fantastic. Last one would be on the remodeling, the focus -- the increased focus of the company on the remodeling. Can you -- is there any specific brand or region that are you going to allocate resources more or less? And can you give me a rough sense of how much it costs a remodeling Starbucks versus one opening? Just we can make some calculations here of how that would be. Federico Rodriguez: Regarding the cost, it's around 1/3 of the cost of a new opening and regarding the regions and the. Christian Dubernard: Yes. Regarding the regions and the brands, as I was sharing before, Julia, we are -- the brands where we see that are -- that react most -- the best when we do a remodeling are Starbucks and all the FSR segment. So we also do remodelings in some of the other brands, but we are focusing mainly on the brands where we have the best reaction from our customers in terms of traffic, which are the casual dining segment and Starbucks. Regarding the geographies, it's a strategic approach. It depends on the aging of the portfolio in some cases, depends on the -- if there is a particular region, area, city where we see that we have an opportunity to drive additional traffic. And I can tell you that -- or in the case where we see some additional competition coming in. So there is a different -- a very strategic approach to this. And as I mentioned before, we are privileging remodeling our openings with a much more focused and disciplined growth. Julia Rizzo: So it's mostly Starbucks and casual dining. Region, you don't have a specific targeted. Christian Dubernard: It's in general, obviously, where we have a higher number of store or a bigger portfolio like we do in Mexico with more than 900 Starbucks stores, you will see a bigger number of renovations, likewise, with the FSR or casual dining segment in Mexico and Spain, where we have also an important portfolio there. So that depends more on the size of your existing portfolio. But this is a very -- it's a high priority for us and with a good ROI every time we do, as Federico was saying, it's 1/3 of what we do in a new store and the ROI is very, very good. Operator: Our next question is from Mr. Bruno Ramirez from JPMorgan. Bruno Gabriel Ramírez Fernández: So question would be regarding full-service restaurants. How sustainable is to keep seeing this performance as it has been in the past quarters? And second question would be about the run rate for CapEx levels. Federico Rodriguez: I will go with the second one regarding the CapEx. This year, we will be spending around MXN 6 billion, MXN 6.1 billion for CapEx. We are turning things into the company. So only we have non-[indiscernible] projects. As you know, we have recently opened the facility of the distribution center in Guadalajara. It was on Tuesday, and we'll have a lot of profitability and diversification to all the different routes. So for 2026, I think that the guidance, as I said before, it is too early, but should be in the range of MXN 5.5 billion, at least for 2026. And the openings should be a similar figure to what we have seen during 2025 of around 200 openings, taking into consideration not only corporate stores, but franchisees and sub franchisees too. Christian Dubernard: Yes, I'm taking this one. As you have seen in the past, I would say, 24 months, we have seen a very steady growth in the performance of our FSR segment, both in Spain and Mexico. We continue delivering with a lot of innovation and very disciplined and focused growth on each one of the brands, both our own brands like we do in Europe and with our franchisors from the other brands in our portfolio, where we are working -- we have seen clearly brands like Chili's doing an extraordinary -- with an extraordinary performance in the U.S. So we learn a lot from that. We continue holding hands with our franchisors and seeing how this is really being executed and transferred with some value-driven initiatives in Mexico, likewise with the Cheesecake Factory. So I believe the preference of the consumer of our brands. And I would say the consistency that we have been able to deliver in the last years is clearly paying us and showing us that the customer wants to be in our stores and the quality of our products has continues to be a big differentiator. We have not fallen into this attractive or sexy approach into trying to reduce costs through -- by reducing portions or things like that. We are clearly going the other way. We are very disciplined in maintaining our value-driven initiatives that have been there for more than 3 years now, and we keep refreshing them with innovation and new products. So again, this is a segment that we are very happy with the performance. At the same time, we are very -- obviously, the investment in these types of stores or restaurants is an important investment. So we are always very cautious and careful on going for the no-brainer and locations that we know we're going to do well. And as I said before, Bruno we still have an important number of stores to renovate, and we know that this is going to drive and continue driving additional traffic. And also in some cases, growing through our franchisees is a very important part of our strategy. Our franchisees are very happy and confident with the performance of this brand. So we continue getting demands on trying to continue developing the brand through franchisees, particularly in Europe and in some of our brands in Mexico. Bruno Gabriel Ramírez Fernández: And just a follow-up question in the -- regarding CapEx. So beyond 2026, what percentage of sales should we expect? Is 2026 levels a good proxy between 2026? Federico Rodriguez: I would say it should be around 1.5% as a perpetuity rate, the CapEx. But it is better to have the guidance, and I will deliver both answers what to model in 2026 and what is happening in the next 10 years. Operator: Our next question is from Mr. Nicolas Riva from Bank of America. Our next question is from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I don't know, but I think I'm double counted here. No further questions on my end. Operator: That was the last question. I will now hand over to Mr. Christian Gurría for final comments. Christian Dubernard: First of all, I want to thank everyone for being here today and the interest and for your questions. Thank you very much. Before we conclude, we would like to thank you for your participation and interest in our quarterly conference call. If you have any additional questions or require further information, our Investor Relations team is always available to assist you. We wish you an excellent day and look forward to having you join us for our next quarterly update and the best holidays and the best holiday season and best wishes for you for this last quarter. Thank you, everyone. Thank you. Operator: Alsea would like to thank you for participating in today's video conference. You may now disconnect.
Operator: Good morning, everyone, and welcome to the Horizon Bancorp, Inc. conference call to discuss financial results for the third quarter of 2025. [Operator Instructions] At this time, I'd like to turn the floor over to Todd Etzler, Executive Vice President, Corporate Secretary and General Counsel, for the opening introduction. Todd Etzler: Good morning, and welcome to our third quarter conference call. Please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission. In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. For anyone who does not already have a copy of the press release and the supplemental presentation issued by Horizon yesterday, they may be accessed at the company's website, horizonbank.com. Representing Horizon today are Executive Vice President and Senior Operations Officer, Kathie DeRuiter; Executive Vice President, Corporate Secretary and General Counsel, Todd Etzler; Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber; Executive Vice President and Chief Financial Officer, John Stewart; and Chief Executive Officer and President, Thomas Prame. At this time, I will turn the call over to Thomas Prame. Thomas? Thomas Prame: Thank you, Todd. Good morning, and we appreciate you joining us. Horizon's third quarter results, highlighted on Slide 3, display the successful execution of our previously announced strategic balance sheet repositioning and the continued excellent performance of our community banking franchise. The balance sheet restructuring effort has exceeded our initial expectations, and it is on pace to achieve the top-tier financial outcomes outlined in our plan. The team did an outstanding job on the equity and debt raises as well as the subsequent execution optimizing the securities and loan portfolios as well as the funding sources of our balance sheet. Additionally, our third quarter results further evidence the continued strength of the organization's exceptional core community banking franchise. Our net interest margin continued to expand with the commercial loan engine producing solid results and the core client-driven deposit franchise displaying its strength. Horizon's credit quality remained excellent and the management team remains diligent on managing core operating expenses. A few key items to note within the quarter results. The margin continued to expand for the eighth consecutive quarter with an exit run rate in September above 4%. Loan balances for the quarter reflect the planned runoff and sale of the lower-yielding indirect auto portfolio. Net of these activities, loans would have increased approximately $48 million, led by the efforts of our commercial banking teams. Our relationship-based deposit portfolios remained resilient in the quarter with predicted outflows within higher cost non-core transactional accounts as outlined in our balance sheet restructuring plan. Additionally, the combined relationship-based fee income categories of service charges, wealth, card and mortgage income performed well and an increase from the third quarter, and expenses outside of the transaction-related activities remain well managed and aligned with our internal and market expectations. This provides confidence in our ability to deliver additional positive operating leverage moving forward with a more effective balance sheet. Heading into Q4 and 2026, we are confident in delivering a superior community banking model to our shareholders, consisting of top-tier financial performance and a balance sheet producing peer-leading capital generation metrics. As we move forward in a front-footed position and with significant positive momentum, we will remain steadfast in our disciplined approach to create durable returns and sustainable long-term value for our shareholders. Turning to Slide 4. As I mentioned previously, the team did a great job on the balance sheet restructuring with the majority of the initiatives comparing favorably to our expectations in terms of financial outcomes and timing. Our execution left minimal activities for the fourth quarter, which included the redemption of the previous sub debt that has already been completed and the continued modest reduction of select non-relationship high-cost transactional accounts. As previously mentioned, the team has already seen a significant positive increase in performance in September, and we are confident the fourth quarter will provide a clear outlook of Horizon's top-tier financial performance and peer-leading capital generation model. John will provide additional insight into our Q4 outlook and 2026 guidance during this presentation. Overall, a very solid quarter, reflecting the disciplined execution of the balance sheet initiative, combined with the continued strength of the high-performing core banking franchise. A key element of our go-forward plan will be continued profitable loan growth and excellent credit quality that has been a cornerstone of Horizon's success. I will transition the presentation to our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, who will share highlights for the third quarter on our loan growth and continued excellent credit performance. Lynn? Lynn Kerber: Thank you, Thomas. Net loans held for investment decreased $162 million in the quarter, consisting principally of net growth in commercial loans of $58 million and the $210 million combined impact of quarterly runoff and sale of indirect auto loans. Commercial loans continues to be our primary lending focus at this time, driven by our core franchise and focus on traditional lending products. Net commercial loan growth for the second quarter was $58 million, representing 7% for the linked quarter annualized. Net growth in the quarter also reflects syndication of $10 million in equipment finance instruments with a net gain on sale of $300,000 in the quarter, representing a 3% gain on sale. Overall, our pipeline remains steady and quarterly volumes are consistent with our averages for new origination activity, payoffs and that line of credit activity. As we look forward to 2026, our focus remains on steady diversified growth, disciplined pricing and credit and growing well-rounded customer relationships to drive cross-sell activity in deposit gathering and treasury management services. Residential mortgage lending continues to be a foundation product for the bank, and volume has been predominantly sold in the secondary market to align with our balance sheet strategies and the generation of gain on sale fee income. Balances for the third quarter were essentially flat in alignment with this strategy. Turning to credit quality and the allowance. Credit quality remains satisfactory with substandard loans and nonperforming loans representing 1.31% and 0.64%, respectively, consistent with credit performance over the past year. Net charge-offs were $800,000 in the quarter, representing 7 basis points on an annualized basis, which compares to historical performance over the past year. Year-to-date charge-offs totaled $1.9 million, representing an annualized charge-off rate of 5 basis points. Finally, our allowance for credit losses decreased to $50.2 million, representing an allowance to credit loss to loans held for investment of 1.04%. The reduction of $4.2 million consisted predominantly of release of reserves related to the indirect auto loan portfolio in the amount of $3.1 million as well as the benefit of a reduction in loss rate experience in the portfolio. Provision for credit losses was a net release of $3.6 million, which is a combination of the allowance reduction of $4.2 million, replenishment of quarterly charge-offs, modest changes in unfunded commitments and the release of the prior reserve on the Held-To-Maturity portfolio. We continue to monitor economic conditions and future provision expense will be driven by anticipated loan growth and mix, economic factors and credit quality trends. Now I'd like to turn things back to Thomas, who will provide an overview of our deposit trends. Thomas Prame: Thank you, Lynn. Moving on to our deposit portfolio displayed on Slide 9. Horizon's core relationship balances continue to show the strength of the franchise's community banking model. Noninterest balances remain resilient with planned outflow and higher rate transactional balances aligned with the balance sheet transformation. We are very pleased with the stability of the core client base relationships and optimistic about this segment of our deposit portfolio, fueling our loan growth in subsequent quarters. Additionally, we believe our deposit portfolio continues to be well positioned to benefit the organization moving forward with its granular composition and long-standing relationships in our local markets. The team has made significant improvements in growth, enhancing our go-to-market activities for treasury management services and proven its agility by leveraging our excellent branch distribution and multiple funding options to create shareholder value. Let me now hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional third quarter financial highlights and our outlook for the remainder of 2025 and into 2026. John Stewart: Thank you, Thomas. Turning to Slide 10. Q3 marks the eighth consecutive quarter of net interest margin expansion, totaling 110 basis points from Q4 of 2023. And as I will discuss in a minute, the expansion is planned to continue. That said, these results are the direct result of the execution of a series of intentional initiatives and transactions to reposition the mix and profitability of our balance sheet, which culminated in this quarter's activities. Most notably, we have completely changed the company's risk profile, significantly curtailing both liquidity and interest rate risk through these actions, while establishing a pro forma cash flow profile that should create durable returns for our shareholders. Specific to Q3, the net interest margin increased by 29 basis points to 3.52%. While the margin this quarter was partially impacted by the repositioning of the balance sheet prior to those events, we continue to see the positive momentum in the margin, driven by the same key organic trends we have been experiencing for several quarters now, well-priced commercial loan growth leading the asset remix story, while core deposit balances continue to deliver stable funding costs. Turning to the balance sheet repositioning. There was only a partial quarter impact in the 3.52% margin. The common equity raise closed on August 22, which was the same day all the bond sales were completed. $535 million of the reinvestment settled during the last 10 days of August, with the remaining roughly $45 million in purchases settling over the first 10 days of September. The Federal Home Loan Bank advances were also repaid during the last week of August. The $100 million subordinated debt issuance closed the last week of August and the targeted high-cost transactional funds runoff of about $275 million during the quarter took place over the last few weeks of September. Therefore, while our September margin exceeded 4%, it too, does not capture the full benefit of the balance sheet repositioning. As you saw on Slide 4, there are still a few items yet to make their way through the margin. First, a full month of the $275 million in deposit runoff from September; second, the balance of the $125 million in targeted deposit runoff remaining as of quarter end, which we anticipate will largely take place over the fourth quarter. And finally, the October 1 payoff of the $56.5 million of subordinated debt, which carried a cost of about 9.8%. Therefore, while we are expecting the margin to expand further in Q4 into the range of 4.15% to 4.25%, we should exit the year a bit above that in the range of 4.2% to 4.3%, where it should generally remain through 2026. This view is consistent with our prior expectations following the balance sheet efforts. Slide 11 is a new slide showing an improved return, more liquid and lower risk profile of the securities portfolio in June compared with September. As you can see in the top left quadrant, the mix of the portfolio is significantly different, carrying less credit risk and a greater mix of highly liquid assets, and it is earning more with less overall duration. Additionally, the reliance on investments in our earning asset base has been reduced and notably, the portfolio uses significantly less capital. All that said, the new portfolio was constructed to complement the interest rate risk profile we set out to achieve with the new balance sheet, which is relative neutrality to changes in rates. We intentionally purchased cash flows that are already fully extended with prepayment optionality that is significantly out of the money for the underlying borrowers. Our objective was to build a portfolio of stable cash flows at strong yields that complements the rest of the balance sheet and provides the functional liquidity it is ultimately there for. As you can see on Slide 12, reported noninterest income was materially impacted by the balance sheet actions this quarter and included the $299 million loss on the sale of securities and the $7.7 million realized loss on the sale of the indirect auto portfolio, which includes the write-off of any related unamortized dealer reserve. The auto loss was partially offset by the associated release of the $3.1 million allowance for credit loss against this portfolio, all of which was contemplated in our original planning. Excluding these items, which will not carry forward in our results, our fee-based businesses performed well during the quarter and for the first time, included about $300,000 of gains on the sale of syndicated equipment finance credits. This is a business line we expect will grow in contribution to our fee income throughout 2026. Additionally, service charges and interchange fees reflect our concerted efforts to grow the core client base and seasonally strong market activity. Looking ahead to the fourth quarter, while we do anticipate some normal seasonal headwinds to impact service charges, interchange and mortgage and therefore, expect Q4 fees to approximate $11 million, this result would still express high single-digit year-over-year growth, excluding the securities loss in the year ago period. On Slide 13, here, too, you can see the quarterly expense results were also impacted by our balance sheet activities. Specifically, the quarter includes the $12.7 million prepayment penalty on the repayment of the higher cost $700 million in Federal Home Loan Bank advances. Additionally, the quarter included about $900,000 of expenses directly attributable to these efforts that are not expected to carry forward. Excluding these 2 items, total noninterest expense was roughly flat linked quarter and is trending favorably compared with our previously issued full year guidance. Turning to capital on Slide 14. While each of these metrics was ultimately impacted by the balance sheet activities, in all cases, the outcome exceeded our initial projections. It resulted in better-than-expected execution, resulting in lower realized losses. Just a couple of quick comments on a few of the metrics. First, the leverage ratio is expected to recover back closer to Q2 levels in the fourth quarter as the balance sheet reduction moves its way through the average asset denominator. Second, the total risk-based ratio is expected to revert back lower in Q4, closer to Q2 levels as the September 30 Tier 2 capital balance includes both the new and previously existing subordinated debt issuances. As of October 1, we have repaid the more expensive $56.5 million prior issuance. As we have previously communicated, we are comfortable with the company's current capital position, particularly against what is a significantly derisked balance sheet. Additionally, as our outlook suggests, our peer-leading levels of profitability will accrete capital very quickly, which you will see in the coming quarters. To provide some clarity on the other side of the balance sheet transition, we have provided an outlook specifically for the fourth quarter on Slide 15. Overall, we are pleased with the progress and the outcome of the balance sheet efforts, some of which will continue here in the fourth quarter. More notably, the strength of the core community banking franchise remains intact, and we are well positioned to deliver durable top-tier performance metrics starting in the fourth quarter. There are a few items I'd like to highlight. Growth in loans held for investments is expected to remain in line with what we experienced in Q3 on a normalized basis, which is for mid-single-digit growth on an annualized basis. Most of the growth is expected to come from our organic commercial growth engine. Deposit balances will decline in Q4, primarily related to the remaining targeted reduction of high-cost non-relationship balances. Non-FTE net interest income is expected to grow in the high single-digit range from the reported Q3 figure. This will be driven by the continued expansion of the net interest margin into the range of 4.15% to 4.25%, while average earning assets will decline from Q3 to slightly below $6 billion from the impact of the planned deposit runoff and the subordinated debt redemption. This outlook does include two 25 basis point rate cuts in October and December. Total reported expenses should approximate $40 million for the quarter, but will include about $700,000 of nonrecurring expense from the write-off of the unamortized issuance cost from the previously existing sub debt position. The Q4 effective tax rate should be in the range of 18% to 20%, which is attributable to overall stronger pretax income and a significantly smaller tax-exempt municipal exposure. Given the reduced tax-exempt exposure, it should also be noted that our fully tax equivalent adjustment to income is expected to be about $1 million per quarter going forward or about half of the prior run rate. As our fourth quarter outlook illustrates, we are pleased with the performance levels Horizon will achieve going forward. Additionally, while we are currently finalizing our budget for 2026, we would like to provide a few comments on our initial view for the year. Overall, we are in alignment with the current consensus estimate for earnings per share at approximately $2 per share. Our initial look at full year non-FTE net interest income is for growth in the low double-digit range. Our FTE adjustment for 2026 should approximate $4 million, as noted earlier. The net interest margin on an FTE basis should remain relatively consistent in the range of 4.2% to 4.3%, which is in line with our prior projections following the balance sheet repositioning. Our current view on fees and expenses is generally consistent with current consensus expectations. Similar to Q4, the effective tax rate is expected to approximate 18% to 20%. Overall, 2026 should be a strong year for Horizon, steady growth with durable peer-leading returns on assets, returns on tangible common equity and internal capital generation. With that, I will turn the call back over to Thomas. Thomas Prame: Thank you, John, and I appreciate the summary of the third quarter outlook for Q4 and initial guidepost for 2026. As you can see from our financial results, we are an organization that will quickly realize top-tier financial metrics and peer-leading capital generation performance. We expect that the well-executed balance sheet restructuring, combined with Horizon's long-standing and high-performing community banking model will deliver durable returns and sustainable long-term value for our shareholders. As we move into 2026, we will be front-footed in our optionality to create further shareholder value through a disciplined operating model, focus on profitable growth and smart stewardship of the positive capital generation platform we have created. The third quarter was an excellent performance on many fronts for the team, and we look forward to continuing to deliver on our promise to create significant shareholder value moving forward. This is the end of our prepared remarks, and I welcome the operator to open up the lines for questions for our management team. Operator: Our first question today comes from Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just kind of starting at a top-level strategic view here. It's just -- it's a vastly different company today than it was 1, 2, 3 years ago. And in recent years, the narrative has just been so focused around the securities book and capital. And now that you finally kind of put that issue to bed, can you just kind of update us on what you think the new narrative for Horizon is and the next major areas of strategic emphasis? Thomas Prame: Thanks, Brendan. Thomas. I appreciate the question very much. We're very pleased with the organization as it exits Q3 and goes into Q4. And I think our financials are showing what we consider a new horizon heading into 2026. What you'll see with us is that we're going to be very consistent about the positive stewardship of capital that we're going to be delivering to our shareholders on a go-forward basis. Our new balance sheet is positioned well to generate capital at a significantly greater pace than before. We're also going to be very pleased with the optionality that this is going to present the organization, different than perhaps what you said before, we are a little bit more focused on the securities positioning. But again, we're going to be very measured in our deployment strategies and don't feel like we need to go out and quickly do something, but rather take a very measured approach on profitable deployment options going forward. That could be, for us, as we move into '26, very logical and accretive M&A that's additive to the community banking platform that we just created, expansion or lift of teams or acquisition of fee income platforms that create durable and franchise value earnings profile. And also, we're going to be very front-footed position moving to '26. But again, we'll be very respectful of capital deployment strategies and making sure that we enhance shareholder value. Brendan Nosal: Okay. Maybe just as a follow-up to that on capital specifically. I guess, first, are there any other potential outlets for capital outside of organic loan growth and M&A? And then second, now that there's a potential M&A element to the story, just kind of take us through some of the criteria, whether it's size or geography or business mix that you would be interested in? Thomas Prame: Sure. Thanks for the follow-up question. Specifically in M&A, Horizon has a great history of M&A success over -- for many decades. It's really been built on the fact of our great brand reputation in our core markets and also being just a really good company to transact with. As you look over the last couple of years, we have not been as well positioned in the space because of some of the earnings power that we had at the time and also the risk elements within the balance sheet. Heading into 2026, we have a significantly different and more efficient and derisked balance sheet that's going to be producing peer-leading financial metrics and top-tier capital generation. Successful M&A for us is going to be consistently focused around franchises that add to the current franchise that we have that we feel is extremely profitable. The size will probably be between $300 million, $400 million up to several billion dollars. But again, it's going to be logical and very accretive to the franchise from a space. We think there's great opportunities for us in Michigan and also in our core markets of Indiana. And again, from a positioning standpoint, Horizon will be in a stronger position and very much more front-footed. Again, the profile of the organization is significantly different and more optimistic. And also the balance sheet is more attractive towards potential partners, who would look at Horizon as an opportunity for them to be a long-term partner with us. Operator: Our next question comes from Terry McEvoy from Stephens. Terence McEvoy: Maybe start with a question for John. You mentioned the balance sheet being pretty rate neutral in terms of changes. When I just look at the mix today, a little more commercial heavy, fewer higher beta deposits and probably less fixed rate assets, which would tell me more asset sensitivity. Could you just kind of tell me where I'm wrong and how you can -- how you support that rate-neutral position? John Stewart: Yes. Terry, thanks for the question. I appreciate that. Yes, I think as you look forward, I mean, the changes in the mix of the balance sheet would certainly lean us to be very modestly asset sensitive. We do a lot of -- obviously, the shock analysis, a lot of non-parallel shifts. And we really just don't see much change if we get a steepening or a flattening of the curve. We've got about 25% of loans are going to be floating on the asset side, a very modest amount of the securities portfolio is going to be floating. And then on the other side of the balance sheet, we do have some callable CDs in the structure and some really good deposit positioning such that we don't think that there'll be much of an impact from changes in rates either way. Terence McEvoy: And then maybe, Thomas, a follow-up question for you. There's the legacy bank in Michigan where generations of families and businesses have banked, that's going to be changing names. I guess my question is, how do you play more offense? And how do you balance that with some of the expense outlook that John talked about? Thomas Prame: Thanks, I appreciate it very much. First, I agree. I think the opportunity for growth in Michigan is going to be very optimistic going forward. There are some transactions that are happening in the marketplace that are giving us some opportunities. I think we also need to remember, over the course of the last 2 years, from an offensive standpoint, specifically in commercial and treasury, we've made some really good human capital decisions there and some great teams in Grand Rapids, Lansing, Detroit in those growth markets and also Southwest Michigan. Those teams are in place and many of those individuals are now coming off their non-competes. Lynn has also done a really nice job with the treasury management franchise. We've added about 40% more salespeople. A lot of those individuals are in the Michigan market. So from an expense base, I don't think we're really looking to add a lot to our expense base in the franchise versus more take advantage of the expenses that we've already taken and really be able to open our stride on new growth. Operator: Our next question comes from Nathan Race from Piper Sandler. Nathan Race: Congrats on all the progress coming out of the quarter. Just going back to the margin discussion, John, I wonder if you could just help us just in terms of with the securities portfolio repositioning, how much cash flow coming off each quarter over the next 12 months or so? And also kind of what the back book repricing tailwinds look like on the commercial real estate portfolio that's fixed. Thomas Prame: Sure. Thanks, Nathan. I'll pass the second question over to Lynn and answer your first question first. In terms of the cash flows coming off the securities portfolio, honestly, very minimal. That was part of the repositioning efforts. As you could see on the slide, we bought a lot of discounted cash flows. So those are bonds with underlying coupons kind of in the 2s and 3s. And so that's what I was referring to when I said the optionality for the -- the prepayment optionality for the borrowers underlying those are de minimis. So as we look out over the next year, it's probably only, call it, $10 million to $15 million worth of cash flow coming off that portfolio each quarter, not much. Lynn Kerber: Yes. In regards to commercial real estate repricing, I don't have the prepared dollars for you this morning. But when we've done that analysis in the past, it's a fairly minor portion of our book. As I recall, it was less than 5% per year for 2026. So a pretty small amount. Nathan Race: Okay. Great. And then, John, I think you mentioned about 17% of the portfolio is floating on the loan side of things. Is there managed deposit rates that you can kind of reprice kind of in lockstep with Fed rate cuts at a similar proportion, just given some of the changes in the deposit portfolio in 3Q? John Stewart: Sorry, just repeat the question again one more time. I was -- the number I quoted on the repricing on the loan side was about 25%. If you could just repeat the second question? Nathan Race: Yes. No, I'm just trying to understand kind of where the short-term rate-sensitive deposits stood at in terms of what you can reprice kind of lockstep with what you have repricing in terms of those floating rate loans. John Stewart: Yes, sure. I mean we do still have a core public funds business within the balance sheet. So the transactional -- higher cost transactional balances that we were intentionally running off does leave us with -- we do still have some public funds exposure that will reprice lower. We've seen some of that recently. We do still have some commercial betas that we can bring down or commercial deposits with some nice betas that we can bring down. In those assumptions, we actually don't assume much repricing downside beta with the consumer balances really at all, but that should be enough to get us there. As I also mentioned, we do have some callable brokers in there that will give us some really good optionality if that market continues to cooperate. Nathan Race: Okay. Great. And then maybe one last one for Thomas. Just going back to your M&A commentary. Curious if you're just seeing any kind of increase in dialogue or opportunities to maybe consolidate some of those subscale institutions across your footprint or is still somewhat of a slower pace of conversations these days just relative to the increase in activity we're seeing across the industry these days? Thomas Prame: Thanks for the question. I think starting end of last year, beginning of this year, the increased dialogue was definitely evident. I think there was a little bit of uncertainty at the time of whether or not you should transact from a seller perspective. As you've seen, there's been a couple of activities here in the marketplace on footprint, [ e-commerce ] activities we've been involved in, which is great from a brand reputation and also individuals looking for Horizon as a potential partner. But as I mentioned previously, our former balance sheet probably didn't position us as well to get us to the finish line. We anticipate that these activities will still continue in '26. I think as you're seeing out in the overall environment as a whole, it's a good market to transact. I think folks are -- if they're looking to sell right now, it's probably a good time to have that consideration at their Board level discussions and our footprints in Michigan and Indiana. We feel like we've positioned ourselves at a higher level and a more attractive position for execution on those. Operator: Our next question comes from Damon DelMonte from KBW. Damon Del Monte: Just had a question on credit and kind of, if you, Thomas, give a little bit of color on maybe some of the trends you guys are just seeing. NPAs were up $5 million quarter-over-quarter, not a big amount. But just wondering, are there any areas of the portfolio where maybe you're starting to see some signs of stress that are requiring a little bit more attention? Thomas Prame: Yes, I'll pass this one over to Lynn. She can walk you through some of what we saw in NPAs and how our commercial credit is looking. Lynn Kerber: On commercial portfolio, if you turn to our slide, Page 8, where we have our asset quality metrics, first of all, you can look at our substandard loans, and those have been very consistent and actually went down just a bit this quarter. So when you see the increase in nonperforming loans, it's really just a migration in that bucket. We had 2 commercial loans that moved to nonaccrual. One, we have payment arrangements on, and we expect that to be brought current. The second one, just a series of misfortunate events for that particular customer. We have an SBA 75% guarantee, real estate based. So really nothing that we're losing sleep over. Commercial non-accruals, I think we have 6 or 7 customers, roughly $11 million. So very modest number for our portfolio size. Thomas Prame: Okay. Great. Just real quick follow-up on that question. From our transaction in the third quarter, what we consider the highest risk portfolio we have was indirect auto, that consistently was $2 out of every $3 of our charge-offs. And also as we go into a period where we may see more stress on the consumer side, exiting that portfolio, I think this really truly enhance our overall credit profile and will keep us in the ranges that we historically performed. Damon Del Monte: Got it. Okay. And then with the improvement of the profile, as we think about the provision in the coming quarters and kind of growth, I mean, is it fair to kind of assume that maybe the provision will kind of be more like the average of the first 2 quarters of this year? Or should we expect it to be a little bit lighter just given the removal of those indirect auto loans? Lynn Kerber: Yes. So in regards to the provision, as you see, we did have a release this quarter that was predominantly related to the indirect portfolio as well as just the overall calibration of our loss rate because of that. And so we pulled out roughly $200 million in indirect loans, which dropped the -- reduced the current allocation requirement. And then the long-term loss rate for the portfolio also goes down. And so I would expect that it's going to be more similar to an average, like you said, in the first and second quarter, but it's going to be reflective of predominantly just growth rate and credit trends and charge-offs. Damon Del Monte: Got it. Okay. Great. And then I guess just lastly, I think it was mentioned -- I think John mentioned that you guys had about $0.3 million of a gain related to the syndicated sale of equipment finance. Can you just talk a little bit about that strategy and kind of where you see that progressing over the next couple of quarters? Lynn Kerber: Sure. This quarter was really our first quarter in piloting that. It's gone extremely well. We've established relationships with 8 to 10 purchasers and with kind of identifying and formalizing the purchase agreements and identifying their credit box. For us, it's not going to be a significant portion of our business, but it is an opportunity for us to manage our outstandings and fee income and just gives us more flexibility, again, with our balance sheet strategies. [indiscernible], I don't think it's going to be significant. I think this year, so far, we've done $10 million. As we move forward to next year, it might be $20 million, $30 million at most, maybe more. Operator: And our next question comes from Brian Martin from Janney. Brian Martin: I just wanted to -- one of my questions was just asked there, but the -- just on the loan growth outlook, can you just talk a little bit about just the loan growth outlook for maybe more 2026 and just kind of where you expect the growth to come from? And then just are there plans to add some additional staff? Are you good with the talent you've got in place right now? Or just kind of -- I know you've talked a little bit about M&A, just kind of more on the organic side. Do you really -- do you need to add people to kind of pick up the growth rate? Or do you have the staff now and there's not really plans to do that? Thomas Prame: Yes. It's Thomas. Thanks for the question. I think if you look through this year, our growth rate was very solid in the core franchise. If you take out the indirect auto, our commercial growth rate was probably in the low double digits number on a consistent basis. As we move into '26, this will be the main part of our growth rate. And as John highlighted in his comments, we're anticipating that to be in the mid-single-digit level. The main difference is that Horizon isn't having an opportunity finding options to lend. We're just being very disciplined in our credit profile and also our margin management. So from a need to add additional -- significant additional headcount, we don't see that in the marketplace. We've entrenched ourselves in the growth markets and also of our core markets and are doing very well. We'll just be very selective on a go-forward basis, but making sure that we still continue to grow, but grow in a very smart and profitable way and make sure we hold our credit profile. So very confident in our ability for '26. This isn't a need for us to do a hockey stick on growth. It's more for us to be just measured in the approach and continue what we do best and be part of our local communities. Brian Martin: Got you. No, that's helpful. And in terms of the -- just the full quarter impact, I mean, getting to the ROA level, kind of that 1.60 type of level, I mean is that something you can achieve with kind of the full quarter impact we should start to see that in fourth quarter here? Or is that -- I guess, is that maybe a first quarter type of event kind of getting to that run rate on the ROA target? John Stewart: This is John. Thanks for the question. I think if you kind of work your way through the guidance we gave specific to Q4, I think you'll find a result that's approximating the numbers you quoted or what we had quoted in the pro formas with the announcement of the balance sheet transactions. And then it's incumbent upon us, which we think will be the case to make sure that, that's durable and sustainable and view that to be the case as we look at 2026 at this point, too. Brian Martin: Got you. And just last one, maybe you mentioned this, I didn't think the capital outlets and just the capital accretion here, I guess, are buybacks part of that equation? I know you talked about M&A and organic loan growth. Just remind us where -- if you already talked about it, I apologize. Thomas Prame: No, I appreciate the follow-up question on it. As we look at buybacks here in the near term, we just -- as you know, we just raised capital. We always will keep buybacks as one of the opportunities for us to create shareholder value in the near term, or I wouldn't put that as our first option. Operator: And ladies and gentlemen, that will conclude today's question-and-answer session. I would like to turn the conference call back over to management for any closing remarks. Thomas Prame: Thank you, everyone, for joining us today, and I also appreciate the very thoughtful questions. We appreciate your time and interest in Horizon. And as we look forward to sharing our quarter -- our fourth quarter results, which we will do in January, I hope you have a great week, and thank you very much for your time. Operator: The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.