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Operator: Welcome to the FirstService Corporation Third Quarter Investors' Conference Call. [Operator Instructions] Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is October 23, 2025. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir. D. Patterson: Thank you, Didi. Good morning, everyone, and welcome to our third quarter conference call. Thank you for joining us. I'm on with our CFO, Jeremy Rakusin. And together, we will walk you through the results we reported this morning. I'll begin with an overview and some segment-by-segment comments. Jeremy will follow with additional detail. Total revenues were up 4% versus the prior year, driven by tuck-under acquisitions completed over the last 12 months. Organic growth was flat overall, as gains at FirstService Residential and Century Fire were offset by organic declines in our restoration and roofing platforms. EBITDA for the quarter was up 3% to $165 million, reflecting a consolidated margin of 11.4%, generally in line with the prior year on a consolidated basis. Finally, our earnings per share were up 8% to $1.76. Looking at divisional results. FirstService Residential revenues were up 8% with organic growth at 5%, in line with expectation. Solid net contract wins versus losses have led to an improvement in organic growth sequentially. We expect similar growth for Q4 in the mid-single-digit range. Moving on to FirstService Brands. Revenues for the quarter were up 1% in aggregate, with growth from tuck-under acquisitions largely offset by organic declines of 4%. Revenues for our two restoration brands, Paul Davis and First Onsite, were up sequentially relative to Q2, but down versus the prior year by 7%. I mentioned last quarter that we were pleased with the level of activity, both day-to-day at the branch level and in terms of our wallet share gains with national accounts. That continued into Q3. Industry-wide claim activity and weather-related damage was very modest across North America and generally down in every region, but we still generated higher revenue sequentially than the first 2 quarters of this year. We believe we're capturing market share gains during this prolonged period of mild weather. We were down from the prior year, as we were up against a very strong quarter, particularly in Canada, that benefited from significant flood and wildfire restoration work. As well, storm-related revenues in the U.S. were minimal this quarter compared to Q3 of 2024, when we generated about $10 million of revenue from named storms, primarily Hurricane Ian. Looking to Q4, absent widespread inclement weather or named storms over the next few months, we expect to be down from the prior year quarter by about 20%. We generated $60 million of revenue from Hurricanes Helene and Milton in Q4 of last year. On average, since 2019, our revenues from named storms has exceeded 10% of total restoration revenues. Based on our visibility today, we anticipate this year's revenues from named storms to land at less than 2%, a big drop that impacts Q4 in particular. Apart from cat storm events, which we all believe will, on average, increase in frequency, we continue to grow and improve our platform and believe we're in an excellent position to capitalize on the long-term opportunity in restoration. Moving to our Roofing segment. Revenues for the quarter were up mid-single digit, driven by acquisitions. Organically, revenues declined 8%, an improvement over Q2, but below expectations. We simply did not convert backlog into revenue at the rate that we anticipated. We continue to see the deferral of large commercial projects and a general reduction in new construction. Our 3 largest operations all benefited last year from several large industrial roof projects that have not been replaced this year. Most of our year-over-year decline relates to these specific operations. Bid activity remains solid, but award activity has been delayed. We're confident that our market position and relationships remain strong. The uncertainty in the macro environment is definitely impacting new commercial construction and causing delays in reroof and maintenance decisions. We continue to believe that the demand drivers in roofing and generally in commercial building maintenance are compelling, and we remain focused on investing in this segment. As evidence of that, we were pleased during the quarter to announce the acquisitions of Springer-Peterson Roofing in Lakeland, Florida and A-1 All American Roofing in San Diego, California. These operations extend our presence and capability in two key markets. The Springer-Peterson and A-1 teams will continue to operate the businesses, and we're excited to have them on board with us. They jumped right in, collaborating and creating value with our existing operations in the regions. Looking ahead to Q4, we expect total roofing revenues to be up modestly from prior year, again due to acquisitions. Organically, we expect continued weakness, with revenues down 10% or more in the seasonally weaker quarter. Moving on to Century Fire. We had another strong quarter, with revenues up over 10% versus the prior year. Growth continues to be broad-based across the branch network and again, is supported by robust repair, service and inspection revenues. Our backlog remains strong at Century, and we expect similar double-digit year-over-year growth for Q4. Now on to our home service brands, which as a group generated revenues that were flat with year ago, right on expectation, and a result we're proud of in the current environment with weak existing home sales and broad economic uncertainty. Consumer sentiment remains depressed and is down from Q2. Our lead flow reflects this trend. Our teams have held revenue steady by driving a higher close ratio this year, combined with a higher average job size. They are executing extremely well in a challenging environment. Looking forward, we expect a similar result in Q4, with revenues roughly matching the prior year quarter. Let me now hand it over to Jeremy. Jeremy Rakusin: Thank you, Scott. Good morning, everyone. Leading off with a recap of our consolidated third quarter financial results, we recorded revenues of $1.45 billion, up 4%, and adjusted EBITDA of $165 million, a 3% increase relative to the prior year period. Our consolidated EBITDA margin for the quarter was 11.4%, down slightly from last year's 11.5% level. Adjusted EPS during Q3 was $1.76, resulting growth of 8% quarter-over-quarter. The growth on the bottom line exceeded our EBITDA performance as we saw the benefit of reduced interest rates on lower outstanding debt compared to prior year. I'll provide more details on our balance sheet in a few moments. For the 9 months year-to-date, our consolidated financial performance includes revenues of $4.1 billion, up 7% over the $3.85 billion in the prior year; adjusted EBITDA at $425 million, a 13% increase year-over-year, with our overall EBITDA margin at 10.3%, up 50 basis points versus a 9.8% margin for the prior year period. And lastly, our adjusted EPS year-to-date is $4.39, reflecting 20% growth over the $3.66 reported for the same period last year. Our adjustments to operating earnings and GAAP EPS in providing adjusted EBITDA and adjusted EPS, respectively, are disclosed in this morning's press release and are consistent with approach in prior periods. I'll now walk through the third quarter performance within our two divisions. At FirstService Residential, we generated revenues of $605 million, resulting in 8% growth over the prior year period. EBITDA was $66.4 million, a 13% increase over the third quarter of last year. Our current quarter EBITDA margin came in at 11%, up 50 basis points over the 10.5% in Q3 '24, extending the year-to-date margin improvement we have realized through ongoing operating efficiencies and streamlining efforts across our property management platform. Our teams have done a terrific job of execution, driving to a year-to-date margin expansion of 60 basis points. For the upcoming fourth quarter, we expect some tapering of these favorable impacts, leading to margins roughly in line to slightly up versus prior year. Shifting over to our FirstService Brands division. We generated revenues of $842 million during the current third quarter, up 1% versus the prior year period. EBITDA for the division was $102.1 million, down from the $105.8 million last Q3. Our margin of 12.1% compressed 50 basis points compared to the 12.6% margin in last year's third quarter. The lower margin was attributable to negative operating leverage resulting from tempered activity levels and declines in organic top line growth at our restoration brands and roofing operations. Our Home Improvement and Century Fire Protection brands continue to deliver healthy margins, roughly in line with prior year. Reviewing our cash flow profile, we generated more than $125 million in cash flow from operations during the third quarter, driving to a total of $330 million year-to-date, a significant year-over-year increase of roughly 65% compared to prior year period's. Capital expenditures during the quarter totaled $34 million, and spending year-to-date sits at a little under $100 million. We expect to be in line with our annual target of $125 million in CapEx for 2025. Acquisition investment during the quarter was approximately $45 million, largely encompassing the roofing tuck-under acquisitions that Scott noted. Our balance sheet at quarter end included net debt of $985 million, resulting in leverage at 1.7x net debt to trailing 12 months EBITDA. Maintaining a strong balance sheet has always been a cornerstone of FirstService's operating philosophy and has been aided by the ability of our businesses to collectively generate strong and relatively consistent free cash flows in any type of environment. This has played out once again over the past almost 2 years since our Roofing Corp of America platform investment at the end of 2023, with the steady quarterly deleveraging bringing us now back in line with our long-term historical trend. We also have more than $900 million of total cash and credit facility capacity, providing us with ample financial flexibility and liquidity. In terms of outlook, to close out 2025, Scott has provided top line indicators by brand, which will aggregate to revenues roughly in line with prior year for our upcoming fourth quarter. This will culminate in mid-single-digit growth in consolidated annual revenues for the full year. We expect that our 2025 consolidated annual EBITDA growth will be in the high single digits, approaching 10% compared to prior year. During our February year-end earnings call, we will provide indicators on our outlook for 2026. And that now concludes our prepared comments. Didi, can you please open up the call to questions? Operator: [Operator Instructions] And our first question comes from Daryl Young with Stifel. Daryl Young: I just wanted to touch on the divergence in the performance between Century Fire and the roofing business. And I would have expected that both of those would have had similar end markets, and so it's just a bit interesting to see the performance delta between the two. Is there a specific end market versus industrial versus data center or something like that, that is maybe driving the difference between the two divisions? D. Patterson: Daryl, there's a few things. I'll start with the fact that Century, close to 50% of the business is service repair and inspection, more recurring in nature. And then you've heard from us over the last couple of years that Century has been very successful in driving consistent growth in this aspect of the business. Century does have a piece of its business, again, close to half, it's tied to new construction. It's been more resilient than our Roofing Corp of America platform, in part based on the verticals that it focuses on, as you alluded to in your question. Century has benefited from the growth in data centers. And also, they have a strong multifamily business that has been -- remained solid through the year. Their strong results are hiding the fact, though, that a number of jobs continue to be delayed, deferred at Century, similar to what we're seeing in our roofing platform. Work is not being released at the same rate as the prior year, although bid activity remains strong. Hopefully, that answers your question. Daryl Young: Yes. That's good color. One more for me, just on margins. The margins in the Brands division were actually, I would say, fairly healthy in the context of the weak restoration and roofing results. So just wondering if you can give me a little bit of color on where the strength is coming from in margins in that platform? Jeremy Rakusin: Yes. Thanks, Daryl. I'll take that. I touched on it, home improvement, a lot of initiatives over the last year or 2, 1.5 years and in a tough environment for the top line have really produced superlative profitability. Century Fire, we have top and bottom line, a terrific performance throughout. We've made great strides in restoration over the last couple of years. And even in periods of mild weather patterns like we're experiencing, just the focus on the brand, the platform, the client relationships, the national accounts that Scott touched on, a lot of efforts around that. And then there has been some streamlining and headcount reductions in appropriate places as we've centralized a lot of functions. So just terrific execution there, and notwithstanding the mild weather patterns that we've seen year-to-date. Operator: And our next question comes from Stephen MacLeod of BMO Capital Markets. Stephen MacLeod: Just a couple of questions I wanted to follow up on. Maybe the first one is kind of in line with what you were just -- or dovetails with what you were just talking about, Jeremy, just on the restoration side. You talked about having gained some share in the market despite the weak backdrop. And I'm just curious if you can point to kind of where that's coming from? D. Patterson: I think it's a lot of the things that Jeremy just referred to. It's the hard work our teams are doing in positioning with national accounts, solidifying the account base. We have evidence that we are gaining wallet share with a number of our larger accounts, and we're signing new national accounts. It feels healthier across the board. We just have more activity across the branch network. We're not relying on any one event or one region to drive results. And I think it sets us up well to continue gaining momentum in mild weather conditions, but also to really benefit during more significant weather conditions. Stephen MacLeod: Right. Okay. That's helpful, Scott. And then maybe just on the margins and looking at the FirstService Residential business, you guided to sort of flattish margins year-over-year for Q4. And I'm just wondering if some of the streamlining that you've seen that's led to the improvements in recent quarters, is that kind of coming to an end? Or is that more reflective of the seasonal Q4 weakness? And I guess, would you expect those kind of benefits to continue into 2026? Jeremy Rakusin: Stephen, I'll take that one. 2026, we'll go through budgets with the businesses, so I'll defer on that point. But in terms of the outlook for Q4, I think we've known all along that the performance should taper. We've been working on these initiatives or the teams have at FirstService Residential for the better part of a year or more. And we saw it carry through. We've had significant margin improvement. There's also some moving parts in the quarterly fluctuations. And so what we're seeing in Q4 between the mix of higher-margin ancillaries, the timing in terms of hiring teams in face of contract wins, when we're going for contract renewals and getting pricing, there's a whole bunch of moving parts in this large enterprise. So it's just what we're seeing, but we're always working on initiatives. And again, I think we'll have more to speak about in terms of margin outlook for '26 on the February call. Stephen MacLeod: Okay. That's helpful. Thanks, Jeremy. And then maybe just one more, if I could. Just maybe more higher level when you think about restoration and roofing, where we're seeing some of the near-term temporary macro headwinds. Do you believe this is just, particularly in roofing, just a delay of work that people are -- your customers are putting off? And I just want to confirm, is that more of a delay that you expect to get back over time? D. Patterson: We certainly expect to get back, but we need some -- we need macroeconomic stability to see improvement in commercial construction and to give buyers more comfort and confidence to release work. It's -- we're in an uncertain environment, and it's definitely impacting roofing. And of course, in restoration, we need some weather. And I said in my prepared comments that this is the lightest year that we've seen since we took the big step with our acquisition of First Onsite in 2019. And -- so we expect both to improve. When we made these decisions, originally, our focus was and remains on the long-term opportunity in both these spaces. There is more fluctuation quarter-to-quarter and year-to-year. But on the flip side, there are more tailwinds and opportunity as well. So we remain focused on the long term in these businesses. We believe that there's a huge opportunity in both of them. And we've got the right teams and the right platforms to capitalize on them. Operator: And our next question comes from Stephen Sheldon of William Blair. Stephen Sheldon: Maybe just starting on the M&A front. Can you talk some about the level of competition you're seeing for tuck-under deals? And is it generally getting tougher to deploy capital towards M&A at attractive valuations in this environment? So yes, just be helpful to get any color on what you're seeing there in terms of competition across the different segments, if you could. D. Patterson: Yes, Stephen, I think it's definitely competitive. Multiples remain high, particularly in fire protection and residential property management. They've been at elevated levels for a few years now. Very competitive environment. Multiples are trending higher in roofing. I've indicated previously that there are literally dozens of private equity-owned roofing platforms that are competing for acquisitions. So similarly, very competitive in that space. The one thing I would add is that activity has actually slowed in roofing this -- in the last couple of quarters, slowed considerably due to the uncertain environment and the fact that most roofing companies are experiencing exactly what we are and are down year-over-year. So there's a number of processes that have been pulled this year or deferred until results improve. But those are all private equity-owned, generally. And they'll be back to market. But to answer your original question, it is very competitive. I don't know if it's increasingly competitive. But as always, we've got to make smart decisions and pick our spots. And we've been in that place the last few years. And we have opportunities in the pipeline, and we'll deploy capital every year. We'll find a way. Stephen Sheldon: Got it. That's helpful. And then just maybe to dig in a little bit more on the slowdown in roofing awards. I guess you kind of answered earlier, it seems like it's kind of macro factors. I guess, any more detail you can give on some of the bigger factors weighing down roofing projects moving forward even with the strong bid activity? And this is not -- this would be a tough question to answer, but just how long do you think it could take for decisions there to be made and activity to move forward, especially on the reroofing side? I mean, I get new construction permitting starts are down. But on the reroofing side, it seems like -- how long could this kind of be a pause in activity? D. Patterson: Yes. I mean, I don't know the answer to that. Certainly going to carry through Q4. I do think we need macroeconomic stability. Some of these reroof projects can be patched and sort of prepared and kicked down the road for a time. So it's -- I would say it's uncertain right now. For us, I mean, the good news is that we have 24 branches, and most of them are performing at approximately year-ago levels or even better. We do have these 3 large branches that last year, were benefiting from significant large new construction and reroof work. And some of these jobs are $10 million to $15 million. So if they're not replaced, it can skew a quarter. But generally, backlogs in roofing are stable. They are weighted towards reroof. As a reminder, we're generally 1/3 new construction, 2/3 reroof and repair and service. Our backlogs are weighted at that even more heavily towards reroof. And so it's going to take some time. We just don't know. But again, I'll just repeat, the long-term demand prospects are excellent. Our thesis has not changed. The aging building stock, increased frequency of weather events, increased legislation around building codes and other drivers. The other thing I would add is that last year in Q4, our Florida operations were benefiting from weather, and we're not seeing that this year. And so that's 1 of the 3 operations that are down. And that is -- they're missing a few of their large roof projects, but it's also being impacted by weather. So weather would certainly help in a few areas for us. Operator: And our next question comes from Himanshu Gupta of Scotiabank. Himanshu Gupta: So just a follow-up on the roofing weakness here. Is there any commercial asset class, specific commercial asset class or geography which is where you're seeing most of the contract deferrals and weakness? I think you did mention Florida, but any other region or within... D. Patterson: One of our larger branches is in Las Vegas, and that market is very soft. And we see that, Himanshu, in all of our other brands. We're weak in Vegas, really across every business that we operate. So that's -- each of these branches has a little bit of a different story. In terms of the asset classes -- I think I can only really speak to new construction, and it's down everywhere except for data centers, and that's not a vertical where we have participated historically in our roofing platform. Himanshu Gupta: Got it. And I mean, assuming that the new construction cycle is further delayed, like without the help of new construction cycle, how much organic growth can you deliver, assuming the strength in reroofing business comes back? D. Patterson: Organic growth in roofing? Himanshu Gupta: That's right, yes. D. Patterson: Well, we've been down every quarter this year, in part because we were surging in a few areas last year. But we'll reset here and get -- and we'll start growing. We'll get to a point. Our branches are strong. The leadership at our branches are strong. It's -- this is market-driven. We're in a good position, and we'll start to see the growth come back. I just can't tell you -- I can't give you dates in time. We need more clarity in the marketplace. Himanshu Gupta: Got it. And is Roofing still a segment where you want to grow from an M&A point of view? Or would you wait for this weakness to pass and then get more active on the M&A side? D. Patterson: We're definitely interested. I mean, our thesis really hasn't changed at all. We're very pleased with the transactions we did last quarter. We continue to look -- we have priorities. We're focused on white space areas to build out the platform. We're very focused on fit with our culture and the people at any business that we'd be interested in. If we find the right opportunity, absolutely, we will participate. Himanshu Gupta: Got it. And then turning attention to restoration business. Can you comment on the backlog? I mean, in terms of the magnitude or directionally speaking, like, how is the backlog today versus last year or versus last quarter? And also, if I exclude the strong activity, how is the backlog looking? D. Patterson: The backlog is about the same as prior quarter and a little off from last year. And it's off from last year for some of the reasons I talked about in my prepared comments, just the strength we had in Canada with -- and some remaining named storm work. And at the end of September, we did start to see a little bit of Helene and Milton get into the backlog. So we're a little off from last year, but solid and healthy based on the environment we're in. I feel good about it. Himanshu Gupta: Got it. And my last question is on FSR, FirstService Residential. I mean, good to see organic growth back to 5% level this quarter. Question is, is Florida also at mid-single-digit level? Or is it a bit slower than the rest of the portfolio? And I remember, you've been talking about budgetary pressures in Florida a bit more than some of the other regions, so just to check how Florida is doing. D. Patterson: Yes. Florida is, I'd say, in line. And the budgetary pressures have been relieved a bit because the insurance market stabilized. It's still a difficult one because there are many communities that are underfunded. So it's our largest region, and it can influence results for the division, and we've seen that. But it's holding its own right now and is up low- to mid-single digit in the prior quarter, Q3. Operator: And our next question comes from Tim James of TD Cowen. Tim James: Just wondering if you could talk about the relationship between sort of pricing and costs in each of the different segments? And I realize that involves kind of different brands to talk about on one side of the business. But I'm just thinking about as we look forward or into next year and beyond, is there -- do you feel fairly confident that kind of your pricing power, if I can call it that, is going to be or is suitable to offset any cost pressures? Or is there potentially an opportunity to push pricing and actually use that as a lever to push margins slightly higher? D. Patterson: Jeremy, over to you. Jeremy Rakusin: Yes, Scott, I can take that. Well, right now, we think we're in a good equilibrium with FirstService Residential. We've always talked about that business being a very price competitive industry, always has been, and currently is in line with historical trends. So we're always needing to look for efficiencies even to maintain margins, and the teams have been very successful with that over time. In terms of the Brand side of the business, the Brands division, Century Fire, I think quarter in, quarter out, year in, year out, has been getting good pricing power in their business, and don't see any pressures there. Home improvement, it's a watch for us. Obviously, the top line, Scott spoke about lower lead flow, but we're converting at a higher rate, and the top line is holding in there. We will flex pricing there accordingly to ensure that we keep revenue -- top line growth and profitability intact. And right now, we're not using promotional activities extensively, with the exception of some local marketing. So we see that holding. I think the one area where we could see it is in roofing, the availability of labor, subcontractors in some of our operations versus self-perform, resulting in a little bit of an uptick in our cost there and perhaps competing more for reroof jobs with our competitors. Pricing and margins could come in a little bit there. But we're going to go through budgets with all of our businesses in November and through the end of the year, and we'll have greater visibility for '26, which we'll communicate in the appropriate fashion with you on the February call. Tim James: Okay. That's really helpful. My second question, and kind of along a similar track. Again, the margins are actually, I think, really good considering the challenges that the business had. But are there any particular initiatives that we should think about on the cost side or on the efficiency side? And I guess I'm thinking more about in the Brands business sort of going forward, where you're looking to focus on -- again, not maybe to drive net margin improvement, but to kind of stand still or to keep just making the business more efficient or making sure that you're keeping as cost competitive as possible. Jeremy Rakusin: I mean -- and that's exactly what we've been doing. I mean, we do it every year, year in and year out. The businesses are focused on healthy profitability. The last year, we pointed out the strides we made in home improvement. Longer term, I alluded to it in one of the earlier questions around the performance in the restoration brands over the last couple of years, focusing on the brand, focusing on accounts, but also streamlining costs. So every brand -- and including FirstService Residential, the strides we've done this year, always looking for ways to be more efficient. I wouldn't call anything major out for significant margin improvement in the Brands division heading into 2026. And if we do -- if any of that surfaces during the budget discussions, again, we'll build that into our thinking and communicate it in February. Operator: [Operator Instructions] And our next question comes from Sean Jack of Raymond James. Sean Jack: Just quickly switching back to roofing. If the short-term macro has been softening for a while, do you expect this to make acquisitions easier in the space coming up, especially and like specifically with mom-and-pops? D. Patterson: I don't see that. And again, it's because of the number of private equity-owned roofing platforms that are in the market. Private equity firms have made a bet on the space. They are all focused on adding to their platforms. And so we need to differentiate ourselves and focus on the long-term brand-building strategy that we have. I don't think it will be -- we'll value it appropriately, based on the results of the business. But I don't see us having an advantage or it being any easier to buy the companies. Sean Jack: Fair, fair. Looking at that brand-building strategy you mentioned, is there any new offensive strategies you guys are employing to position or gain share while the broader macro is weak? D. Patterson: Nothing of note. I mean, we -- the strategy, the focus we have on building iconic brands over time is all focused on people and customer service, building culture and incrementally improving the platform, and that does take time. But we approach these investments with a very long-term focus and timeline. Operator: Thank you. I'm showing no further questions at this time. This concludes the question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.
Operator: Welcome to the Enea Q3 Presentation 2025. [Operator Instructions] Now I will hand the conference over to the CEO, Teemu Salmi; and CFO, Ulf Stigberg. Please go ahead. Teemu Salmi: Thank you so much, and good morning, everyone. This is Teemu Salmi speaking, CEO of Enea. And with me in the room, I have Ulf Stigberg, CFO as well. Today's agenda is going to be very similar to the way we have presented the previous quarter since I joined Enea after Q1 this year. A short introduction and summary of the quarter. We will do a more deep dive into our financial results. And then we will talk about the way forward and our outlook as well at the end of the presentation. And obviously, there will be time for questions and answers as well at the end of the presentation. But let's get straight into it and talk about the key numbers of third quarter, where we are reporting a net sales of SEK 213 million, which in reported currency is a decrease with 1.8% from last year, but in constant currency is a growth of 3% year-over-year. Our margin is coming in at 33%. Our net debt is at SEK 212 million and our cash flow coming in a little bit increased year-over-year at SEK 21 million. What I would say that we have spent quite a lot of time on the last 2 quarters is to clean up our balance sheet to ensure that the items that are impacting the financial net in our result is being handled. So the exposure from those have been taken down, and we can also see a clear improvement on our earnings per share with SEK 1.77 as a result in the quarter compared to SEK 0.18 in quarter 3 last year. We're going to come back to these key numbers in depth when Ulf takes you through the financial summary as well. Obviously, last but not least, we continue to invest in R&D, which is the key fundament for making sure that Enea stays relevant and ahead of the curve and competitive on the market. So 25% of our turnover is invested back into R&D. Some highlights from the market and business development in the quarter. I think that we see the continued trend that we reported in the second quarter as well that the geopolitical developments are fueling the need of increased Security Solutions in communication, and that has not -- it has accelerated, I would say, in the quarter, and I'm going to come back shortly to tell you about a couple of incidents in the quarter that actually are also fueling the need for the Enea solutions. We also see a good continued momentum for our traffic management business. The need for increased network intelligence is there and it's accelerating as well. So that's good. So fundamentally, we see traffic management business continue to grow. And then in the short term, at least in this year, year-to-date, the continued strengthening of the Swedish krona with more than 16% stronger currency or exchange rate today compared to the beginning of the year is creating pressure on us when it comes to our top line. So I'm actually very pleased to say that we show 3% growth in constant currencies in the quarter, even though this strengthening of the currency is impacting our reported top line result. On the business side, we have a good underlying business, and we have also a good and solid pipeline, which gives us confidence that we are well positioned to reach our ambitions. We see also from a market point of view that the business in Middle East and North America is developing well from a regional perspective. And those are also the regions where we made 2 press releases of new deals during the quarter for 2 different Tier 1 operators, respectively, and also for traffic management solutions. On top of that, we also see our Deep Packet Inspection developing well in the Security core area according to plan or maybe even a little bit ahead of the same. When we look at the new customers that we have acquired in the quarter, we have 5 in total, and they are all in the Security area. We have 3 new customers when it comes to our firewall solutions, and we have 2 new customers when it comes to Deep Packet Inspection, and they are spread across the world, as you can see on this slide. Then if we continue to look at, as I said on the previous slide, of course, the geopolitical development is just continuing to accelerate, not always in the most positive side. But on the other hand, it's good for Enea and our solutions become even more relevant than they have been before. I'm highlighting here 3 examples of incidents or happenings in Q3 that we see -- where we see an increased trend. For instance, when it comes to massive SIM farms, there are more and more of those out in the world that are being revealed. And of course, these pose a big threat to national infrastructure from many different perspectives and is used for fraudulent activities. Here, our firewalls can counter such threats by detecting and blocking fraudulent traffic in real time. Another thing that we see developing as well is that there's a lot of leaked location data that's been exposed and where users' movements into sensitive areas and private movements can be tracked. And then these movements are tracked by different apps that we all of us download from App Store or from Google Store and where we just accept the terms and conditions. And our location data is being saved when it comes to how we move and how we act. And that data is then in turn being sold to different actors in the world. The third, I would say, trend that we see and that we hear more and more about escalating is, of course, the increased drone traffic and threats in general. I think that we've seen in the quarter, we know the warfare that's happening all around the world. And of course, on that also the hybrid warfare with -- in the Nordic countries, many drones being, so to say, disturbing traffic around major airports in major cities in the Nordics and in Europe. And here, we -- at Enea, we are right now developing fingerprints so we can actually help our customers track drone traffic in mobile networks to make sure that we can help secure those threats in the world that we see emerging. Two other press releases that we've done in the quarter that is not related to new deals. We have renewed our partnership with Suricata. Suricata is an open source, rule-based framework where we contribute with our expertise from Enea, but we also use the Suricata framework for the development of our own solutions and products. We believe strategically and strongly that open source is a good way of developing and contributing to our product development for the future. We have also announced a new customer win with a French AI-based network detect and response supplier, called Custocy. Custocy is using our Deep Packet Inspection engine in their solution. And they have also announced a win with the French region, Haute-Garonne. It's a major department council in France, and they have chosen Custocy's MDR technology to secure their asset base that consists of more than 25,000 different assets and 1,500 subnets in their operations. We are very happy and proud to be part of that journey from an Enea point of view. Last but not least, before I hand over to Ulf and we dive deeper into financials, we continue to be very active on the market, sharing our thought leadership. This slide shares you 4 examples, and I will only comment one of them. I think that we focus very much on together with GSMA to impact and help the development of both existing and future standards when it comes to mobile communication. And we are very proud to be part of that and to help that and of course, also making sure that the products that we develop for the future also support the new standards that are being brought out into the market. We want to stay at the edge. We want to be relevant, and we want to make sure that our thought leadership is seen in different parts of the ecosystem out in the world. With that introduction, I would like to hand over to Ulf, who will take us through the more details of our financials. Please, Ulf. Ulf Stigberg: Thank you, Teemu. 3% growth in fixed currency for the quarter, and we report a 2% decline in reported net sales for quarter 3. Over 9 months, we also reported 3% growth in fixed currency, and we are in line with the 9 months net sales previous year. We reported 33% adjusted margin for the quarter. And for the 9 months result, we report a 30% adjusted EBITDA margin. And this is partly thanks to, of course, the net sales development, but also that our operational expenses are declining compared to previous year. And if we exclude D&A, we are in line with the cost base that we had previous year in quarter 3. We report a 16% EBIT margin for the quarter. Compared to last year, the reported EBIT margin was 13%. So it's a slight increase. But the major difference compared to last year is the development of the earnings per share, which is reported now in Q3, SEK 1.77 compared to SEK 0.18. If we look into our product area, Security Solutions, we report similar revenues in the different revenue categories. We have licenses almost at the same level. We have professional service almost at the same level and support and maintenance almost at the same level as previous year. For Network Solutions, we can see an increase compared to Q3 previous year and a sequential decrease actually in support and maintenance. But giving the increased number of new deals and solid recurring revenue, we foresee a good development of license sales going forward as well. If you look into the different product areas, we can see a growth of 9% within the Network area compared to Q3 previous year. And we are having a slight growth in the Security area, all in fixed currency, and we have a currency impact for the quarter of SEK 10 million. Looking at the 9 months report, we see a slight decline for Security and a 7% growth in Networks, all in fixed currencies. And if we sum up the core, putting Security and Network together, we report a growth of 3% in fixed currency for the 9 months period. Over to cash flow. We have an operational cash flow that's in line with Q3 previous year or a slight increase. We also can see that the investments and the buybacks are also in line. However, we have done some amortizations higher than previous year, and we are utilizing some of our credit facilities. That gives us a net cash flow that's better than last year, but mainly driven by financial items. We reported net debt of SEK 211.9 million, equity ratio of 71.1% and a net debt to EBITDA of 0.78. Coming back here to the improved financial net that Teemu mentioned initially. In the quarter 3 this year, we report a financial net of SEK 87,000. And this needs to put in perspective of that we had quite negative items in the beginning of the year. And an explanation to that is that we have a total impact for currency net of positive SEK 4 million this quarter. It's a combination of bank revaluation -- bank balance revaluations impacting us with SEK 1 million and impact from intercompany loans revaluations of positive SEK 5 million. And in the quarter, we have been active in reducing our dollar positions. We have optimized our cash balance. We also have worked harder with our global treasury to secure optimized operational liquidity. And also, we are reviewing, as we speak, our balance sheet to optimize our currency exposure in all different items in the balance sheet. And this will lead to a reduced exposure when it comes to currency fluctuations in the future. We continued with the buyback program. And in the quarter, we bought 232,000 shares for a total consideration of SEK 17.7 million. And this is part of the program that was decided by the AGM in May, and we are executing on this decision that gives us or that is on a plan of buying back up to 50 million share -- or SEK 50 million of shares until the next AGM 2026. Teemu Salmi: Good. Thank you, Ulf, for that. And we will conclude the presentation with a bit of a short-term outlook. We see that the market for us remains stable to moderately positive. And we also say our portfolio is highly relevant for the markets and the segments that we serve. I have myself spent quite some time on the road meeting quite many of our customers in Middle East and the North American region in the past quarter. And I can confirm that we are seen very strong as a partner to our customers serving both network intelligence, but also Security Solutions. We also expect to deliver on our short-term targets for the full year as we have stated since the beginning of the year. And also, as I mentioned from the first day when I started at Enea, we have been doing updates to our strategy, and we will communicate them now in quarter 4 as promised, and that content will be focusing on an accelerated growth agenda for us as a company. So we will come back with that message later on in quarter 4 of this year. So finally, our guidance stays exactly the same. We have not changed our long-term guidance or our short-term guidance. So we -- in the short term, our guidance for the year is that we will see continued growth in our focus areas, Network and Security, with an EBITDA margin in the range of 30% to 35% and a stable cash flow for the conclusion of 2025. And obviously, we're going to come back also in our strategy update with more information later on in the fourth quarter. That actually concludes our presentation, and we are now ready to take some questions. Operator, please. Operator: [Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments. Teemu Salmi: All right. Thank you for that, operator. We have actually a couple of written questions. We will take them now as we speak. We will start with the first one. How much of cost improvement is driven by FX? Ulf, do you want to comment? Ulf Stigberg: Yes. And round figure for this quarter is that the change in FX has improved our cost level by roughly SEK 5 million. Teemu Salmi: Thank you, Ulf. We continue with the next question. Could you please comment on the organic growth and the weakness seen despite late quarter deals, has there been any deterioration in end markets since Q2? Are deal closing extending further? I would say, well, I mean, our business is very volatile when it comes to kind of single deals that we are signing. They might come in a quarter or they might slip out into the next quarter. I would say that we actually see a stronger market, like I also shared in the presentation that we see a slightly moderate positive market development. That's kind of my and our assessment of where we stand right now. Then if a deal lands in one quarter or another, that can be depending on days, right? So we still report in constant currencies 3% growth. Under these circumstances, we are not happy, but it's an okay result, I would say. So -- and we have a strong and mature pipe that we are currently working on turning into sales as well. So I would not say that we see a weakness in the market, slightly on the opposite, actually. Then we have another question with 25% R&D investments, why are you not able to deliver better growth in the last couple of years now? Is 25% R&D needed to stand still? Well, I think that the answer to the question is that we have a mixed portfolio, right? We don't only have a growth portfolio, we also have a part of our portfolio that is in structural decline that we have discussed and presented many times. I think showing our core areas that we are growing in those, not to the speed that we want and that we hope to see moving ahead that I should be clear about. But we see a 9% growth of our Network business in the quarter, which is one of our focus areas. And then in the Security business, we see a bit of slippage when it comes to signing contracts and closing deals, not necessarily that we are losing. So I think definitely, we are -- we need to spend those money to stay relevant and to continue to grow. And the ambition is, of course, to have an accelerated growth further than we've had over the past couple of years. Do we have any more? I think those are actually the questions that we have in the chat. So with that, then I would like to thank you for listening. Thank you also for your questions, and I hand it back to you, operator. Thanks for today.
Operator: Good morning, and thank you for joining Becle's Third Quarter Unaudited Financial Results Call. During this call, you may hear certain forward-looking statements. These statements may relate to our future prospects, developments and business strategies and may be identified by our use of terms and phrases such as anticipate, believe, could, estimate, expect, intend and similar terms and phrases and may include references to assumptions. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those in forward-looking statements. Before we begin, we would like to remind you that the figures discussed on this call were prepared in accordance with International Financial Reporting Standards, or IFRS, and published in the Mexican Stock Exchange. The information for the third quarter of 2025 is preliminary and is provided with the understanding that once financial statements are available, updated information will be shared in appropriate electronic formats. [Operator Instructions] Now I will pass the call on to Becle's CEO, Mr. Juan Domingo Beckmann. Juan Legorreta: Good morning, everyone, and thank you for joining us today as we discuss Becle's third quarter 2025 results. In a challenging environment, we continue to strengthen our position in key markets, supported by the consistent execution of our strategic initiatives and the strength of our brand portfolio. Consolidated volumes increased by 3.7%, mainly driven by a 5.2% growth in our spirits portfolio. In the U.S. and Canada, Tequila remained the main growth driver, and we continue to protect long-term brand equity while prioritizing premiumization. In Mexico, our core categories continue to gain momentum, and we consistently outperformed the market, gaining share across most segments. Finally, EMEA and APAC delivered double-digit growth, supported by strong execution and healthy inventory levels. On profitability, our gross margin expanded by 300 basis points, reaching 56.1%, mainly reflecting our lower input costs and operating efficiencies. Additionally, EBITDA for the quarter reached MXN 3.5 billion, marking a 63.3% increase year-over-year. As we approach year-end, our priority remains balancing shipments and depletions while continuing to execute our premiumization strategy across all regions. I'm confident in our ability to close the year strongly and position ourselves for sustained growth in 2026. Thank you. With that, I'll turn it over to Mauricio Vergara to discuss our U.S. and Canada results. Mauricio Herrera: Thank you, Juan, and good morning, everyone. Please note that [indiscernible]. During the third quarter, the U.S. and Canada region continued to face a complex and highly competitive market environment, characterized by persistent pricing pressures, cautious consumer spending and evolving category dynamics. Despite these challenges, our team remained focused on disciplined execution. Net sales value declined 10.3% compared to the same period of last year, reflecting a 6.4% decrease in shipments and a 4.4% decline in depletions. This result was mainly driven by continued softness in our Ready-to-Serve portfolio and retail boycotts in Canada, which resulted in approximately 120,000 cases in lower shipments. Encouragingly, our full-strength spirits portfolio outperformed the region's overall trend, led by stronger performance in high-end tequilas, which continue to drive premiumization across our mix. In terms of consumer takeaway, our performance was in line with the overall market. According to Nielsen 13-week data through September 27, our spirits portfolio, excluding prepared cocktails, declined 3.5% compared to a 3.4% decrease of the total industry. Meanwhile, C-stores, which provides one of the most comprehensive views of the industry performance, shows that Proximo outperformed the broader industry within full-strength spirits, including the Tequila category, over the 3-month period ending in August. Our prepared cocktails portfolio continued to weigh on consolidated shipments, largely due to softness in our large-format Ready-to-Serve offerings. But in contrast, our ready-to-drink cans gained momentum versus the first half of the year, signaling a positive turnaround as we align our portfolio with evolving consumer dynamics. Within Tequila, we continue to observe intensified industry-wide pricing competition. Average tequila pricing in the market declined 7.9% versus last year as leading competitors implemented material negative price adjustments. In this environment, we have remained disciplined, focused on selective strategic promotions while maintaining an overall responsible pricing approach. Notably, small format offerings of our super-premium and ultra-premium brands continue to outperform, underscoring that consumers are seeking high-quality products while managing their spending. Our strategy to strengthen the on-premise continues to deliver results. On-premise shipments outpaced the off-premise, driven by initiatives that enhance brand visibility and consumer reach. Looking ahead, we anticipate improving long-term fundamentals in the U.S. spirits market, particularly within our focus categories. Premiumization continues to drive growth in Tequila, where demand for authentic high-quality brands remain robust. I will now turn the call over to Olga Limon to discuss the results for Mexico and Latin America. Olga Montano: Thank you, Mauricio, and good morning, everyone. In a challenging industry landscape, Mexico posted solid third quarter results. Even with constrained consumer demand, we outperformed in our key categories and continue to improve our leadership position. Net sales value increased 24.3% in the quarter, primarily driven by an increase in volume. This was further supported by a favorable product and channel mix as high-end Tequila outperformed the rest of the portfolio. Shipments in the quarter increased 18.3% year-over-year, driven by market share gains and an easy comparison against last year. As you recall, 2024 was a typical year marked by strong industry destocking. Compared to the third quarter of 2023, shipments grew 1%, demonstrating that we have returned to premarket contraction shipment levels, and we have done so with a normalized inventory position. Overall, inventory levels remain healthy and well balanced across channels as we head into the year-end. Our brands continue to gain market share in Mexico, reinforcing our leadership in both Tequila category and the broader spirits industry. According to [ Nielsen ], we grew in value 3.4% year-to-date compared to flat performance for the overall industry, while our volume rose 3.4% versus a 1.1% industry decline. These results underscore the strength and consumer appeal of our brands in the Mexican market. During the quarter, we took a strategic step to further optimize our portfolio with the sale of Boost, reinforcing our commitment to focus on our core spirits business. The fourth quarter of 2025 will serve as a transition period, during which we will continue to operate the brand in close collaboration with the buyer to ensure business continuity. As of January 1, 2026, Boost will no longer be consolidated in our financial statements. For reference, in 2024, Boost sold 938,000 9-liter cases, representing 3.7% of our consolidated volume and therefore, will impact our volume comparables in 2026. In Latin America, performance was strong, with shipments and net sales both increasing. We also achieved a double-digit increase in net sales value per case, reflecting the successful execution of our premiumization strategy. Despite persistent macroeconomic uncertainty, underlying trends continue to improve across the region, and we remain focused on disciplined pricing, protecting profitability and reinforcing our leadership position. I will now turn the call over to Shane Hoyne, Managing Director of the EMEA and APAC region. Thank you. Shane Hoyne: Thank you, Olga, and good morning, everyone. During the third quarter, we operated in a volatile trading environment influenced by macroeconomic uncertainty, aggressive competitive pricing and continued cost-of-living pressures. These factors led distributors to manage inventories cautiously. Even in this context, our premium spirits portfolio delivered solid results, driven by robust growth in super premium tequilas across key Asian markets and emerging EMEA countries. Shipments in EMEA and APAC increased 11% in the quarter. Asia remained a key growth engine, achieving double-digit growth in both shipments and depletions. Tequila remained our primary growth driver across the region with shipments up 20% year-over-year and super-premium tequila shipments accelerating 38%. These results demonstrate the strength of our premiumization strategy and the growing global appeal of our brands. Looking ahead, the fourth quarter will be a pivotal trading period. Through effective commercial execution and agile decision-making, we expect to maintain momentum in the EMEA and APAC region, backed by the strength of our portfolio and our disciplined focus on premiumization. We believe we are well positioned to deliver sustainable growth across the region. I will now hand over to Rodrigo, who will take you through the financial results. Rodrigo de la Maza Serrato: Thank you, Shane, and good morning, everyone. I will now walk you through the financial results for the third quarter of 2025. The company reported a 3.7% increase in volume, driven primarily by a 5.2% growth in our spirits portfolio, marking our first quarter of volume recovery since Q1 '23. Consolidated net sales were flat at MXN 10.9 billion, reflecting the continued impact of price normalization, geographic mix dynamics and unfavorable FX. This quarter marks our seventh consecutive period of year-over-year gross margin expansion, a significant achievement despite unfavorable regional mix and despite the appreciation of the Mexican peso, which represented a modest drag on margins. Despite these headwinds, we continue to benefit from lower agave-related input costs and ongoing cost efficiencies from strategic sourcing and manufacturing operations, resulting on a gross margin of 56.1%, an expansion of 300 basis points. A&P expenses declined year-over-year, reflecting our focus on strategic brand prioritization and disciplined resource allocation amid moderate demand. SG&A expenses also decreased as a percentage of sales as productivity gains and tighter cost controls more than offset inflationary pressures. EBITDA increased 63.3% year-over-year to MXN 3.5 billion, while the EBITDA margin expanded to 31.7%. This increase reflects both strong organic performance across the business and inorganic contributions. Turning to the financial results. We recorded a favorable swing of MXN 3 billion in the quarter, primarily driven by a MXN 2.5 billion gain from asset divestitures as well as MXN 188 million year-over-year foreign exchange gain, as the appreciation of the Mexican peso positively impacted our net U.S. dollar debt exposure. As a result, net income grew at triple-digit rate year-over-year, reaching MXN 4.1 billion. From a cash flow perspective, the company generated MXN 3.3 billion in net cash from operating activities, primarily reflecting strong profitability. Our cash balance increased MXN 5.1 billion relative to the end of the second quarter, mainly due to proceeds from the portfolio optimization activities. Our capital allocation approach remains consistent and disciplined. Every decision aims to support long-term value creation and sustainable growth. Our top priority continues to be investing in organic growth through brand prioritization, targeted A&P spending, innovation and R&D to ensure the continued strength and resilience of our portfolio. At the same time, we remain disciplined in managing our portfolio, acting decisively when brands no longer fit our strategic direction. The recent divestment of the Boost brand is a clear example of this, an action aligned with our ongoing efforts to sharpen our portfolio and exit noncore assets. Looking ahead, we will continue to explore value-creating investment opportunities, being mindful that our portfolio is unique and any acquisitions must be both strategic and accretive to the business. The following chart shows how our company is delivering on CapEx efficiency. The business is generating more EBITDA while requiring less CapEx to do so, demonstrating the success of our efficiency initiatives and our progress towards a more asset-light value-accretive operating model. Finally, our lease adjusted net debt-to-EBITDA ratio improved to 1.0x from 1.7x in the previous quarter, underscoring the strength of our balance sheet and our capacity to create long-term value. Overall, the step-up in underlying operating profit was the main driver behind a 160 basis points increase in ROIC compared to the same period last year. With that, I will now turn the call back to the operator for the questions-and-answer session. Thank you. Operator: [Operator Instructions] Our first question comes from the line of Ricardo Alves. Ricardo Alves: Ricardo Alves from Morgan Stanley. Impressive numbers. I had a couple of questions on the main positive surprise to us came on the gross margin, the 56% number in the third quarter, certainly very impressive. Is it possible to go a little deeper or to quantify any agave impact or raw materials in general that boosted your margin for the third quarter? Any color that you could share? Even if qualitative, in terms of how you're cycling the inventory of raw materials in the portfolio that you're selling today, that would be helpful. We've been talking about going back to that 60% gross margin or so for many years now, and it seems that we are approaching that. So any qualitative or if you're able to quantify in a way how you're cycling through the inventory of agave finished products? I think it would be helpful for us to have a better idea of how your profitability could shape up in 2026. That would be my first question. The second question, really impressive numbers in Mexico and Rest of the World. So I think that we have less concerns there. But I think that the U.S., I believe that one of the comments that you made is that the competition remains tougher in that market. So I wanted to focus on that market. We noticed that your unit revenue on a U.S. dollar terms was down, I believe, 5% in U.S. dollar. And we also assume that your product mix continues to improve in the U.S. So that would imply that there seems to be some discount activity on the spirits category. I just want to pick your brains on that to see if indeed, you're still seeing your competitors more aggressive in pricing. And if there is a light at the end of the tunnel here, maybe things are looking better as we go into the fourth quarter and shipments and depletions could be more aligned. So just trying to see if we are closer to a stabilization of the U.S. market. Rodrigo de la Maza Serrato: Thank you, Ricardo. This is Rodrigo. I will take the first question. In fact, yes, we're satisfied with the progress on gross margin. So far, we continue to cycle all the inventory, as you correctly mentioned. And I want to highlight that most of the benefit on gross margin is coming actually from agave-related input, everything that happens there in terms of the agave, the yields and also the manufacturing efficiencies that have been implemented through manufacturing investments. And so the main driver is that. On the contrary, we have, at least in this quarter, an unfavorable Mexico peso impact, driven by the appreciation of the peso, also mix -- unfavorable mix dynamics overall, given the U.S. results as a percentage of the total portfolio, plus, as you mentioned, the heightened promotional activity resulting in a lower price per case. Overall, that's what's driving the gross margin, which stands at 56%, which is quite positive. Mauricio Herrera: On your second question, Ricardo, this is Mauricio. You're right. The market continues to be extremely competitive. If you look at total Tequila, the overall pricing is down by almost 8%. So what we -- the approach we have had has been to actually indeed have some targeted promotional activity to remain competitive and protect our share in the marketplace, but without chasing competition. So our focus continues to be protecting our competitive position in the marketplace whilst protecting the brand equity for the long term. So we will refrain from chasing competition on the downside. We need to remain competitive, but our focus is really long-term equity growth in what I think will continue to be for the next year or so, a very competitive market environment. Ricardo Alves: That's helpful, Mauricio. Do you see any early indications that maybe the market is going to become more rational anytime soon? Or maybe the trends that we saw in the third quarter did remain the same into the fourth quarter? Mauricio Herrera: Look, based on what we're looking at all the data sources and for me, the most comprehensive one is [ DeepSource ], what we're seeing is a projection of next year of the market of our potentially continue to decline at a rate of 4.5%. So with that projection of the market, I would expect the market to remain extremely competitive as everyone will be focused on share. So I don't see the current dynamics changing at least for the next 18 months. Operator: Our next question comes from the line of Nadine Sarwat. Nadine Sarwat: This is Nadine Sarwat from Bernstein. Two for me, please. First, sticking to the U.S. on RTDs, I know that continues to be the main drag. It's been the case for quite some time. Although I believe in your prepared remarks, you did call out better momentum as you've adjusted your strategy. Could you please flash that out, what is this current strategy when it comes to the subsegment over the coming quarters? And what are you expecting the performance to be there? And then a second question, I appreciate the clarification of calling out Mexico shipments versus 2023. Could you just confirm or clarify that depletion number for Mexico so that we ensure we get the full picture? Mauricio Herrera: Thank you, Nadine. So in terms of your first question, this is Mauricio, on the U.S. RTDs, as I mentioned during the call, what continues to be a drag on our performance in [ RTS ], so which is the large formats, and that -- if you look at the marketplace, that continues to trend down as consumers are shifting to cans or RTDs. So when we talk about RTDs, we're talking mainly about cans. So what we are doing is changing and adjusting our portfolio with a lot of focus in RTDs, both in terms of execution format configuration, driving increased penetration across different channels. And we saw actually a big shift in the last quarter. We're showing growth of around 30% versus last year in our cans. So as we go forward, we will continue to drive not only execution, but also you would see innovation coming from us in that space, which is just pretty much adapting our portfolio to the evolving consumer needs. Olga Montano: As for the Mexico question, as we have already talked about, we had an easier comparable base in terms of shipments in the third quarter. So it's more meaningful to look at the year-to-date performance. In the year-to-date performance, where shipments are and depletions are broadly in line, we are up 4.7% year-to-date in shipments versus 2.5%, respectively, in depletions. So I hope that answer your question. Nadine Sarwat: Perfect. And then could you just remind us your split for -- of your RTD segment? I guess, how much is that large format versus RTS versus the cans, now that you've been implementing these changes? Mauricio Herrera: So still from a mix perspective, we still hold a large part of our mix in RTS, but our focus will then to continue to increase the mix now on RTD. So for now, our mix continues to be larger on RTS. We feel that the market will continue to evolve within the cans. And therefore, you would see in the future, our mix of RTDs/cans continue to increase relative to the large format. Operator: Our next question comes from the line of Froylan Mendez. Fernando Froylan Mendez Solther: Froylan Mendez from JPMorgan. A couple of questions. First, on a follow-up on the gross margin. Just trying to understand how sustainable is this margin gain from agave? Because if we look back in the previous quarters, it has been very volatile, let's say, the margin dynamic into the third quarter, I would have expected more of a headwind from FX, which was clearly offset by the agave. But is there any reason why the fourth quarter shouldn't be at least this 300 basis points gross margin expansion if similar volume conditions remain into the quarter? Or what are we missing to understand the gross margin dynamics into the fourth quarter into 2026? And secondly, into Mexico, I mean, it's very impressive to see the performance, given the weak economic backdrop in general in Mexico. Do you see any difference in the consumer behavior in Mexico versus what we see in the U.S. in terms of consumption per capita? Or what is driving this recovery in volumes in Mexico? Those two questions. Rodrigo de la Maza Serrato: Thank you, Froylan. I'll take the first question regarding the gross margin expectation. We will be facing a much more unfavorable situation from an FX perspective in the short term. Q4 comparable relative to last Q4 is going to be unfavorable as exchange rate was 20.1% on average. Other than FX, which could impact negatively the gross margin in Q4, we don't see any meaningful trend, changes regarding cost components. So besides that, that's the only impact that we, at this point, would be concerned about. Olga Montano: As for Mexico, we continue to see a volatile and challenging market environment and a very cautious consumer. We continue to see a contraction, but the good news is contraction at a slower rate. And also the good news is Tequila remains one of the few categories that is growing, and we are actually outperforming the industry within it. So that's what I can tell you. Fernando Froylan Mendez Solther: If I may just follow up, Rodrigo. So can I understand that the inventory that you are passing through the P&L is now at, let's say, a much lower cost versus what we have been seeing in most of the first half of 2025 and second half of 2024, so we are facing a real advantage on the cost side on agave from this point onwards? Rodrigo de la Maza Serrato: Yes. I think that sounds right, Froylan. Operator: Our next question comes from the line of Antonio Hernandez. Antonio Hernandez: This is Antonio from Actinver. Just wanted to see if you can provide more color on the lower A&P expenses as a percentage of sales, if this at all, maybe this is impacting maybe sales performance? And in which regions are you mostly lowering this expense? And what are your expectations going forward? Rodrigo de la Maza Serrato: Of course, Antonio. I'll take the question first. So A&P investment as a percentage of NSV is simply reflecting the more, let's say, some efforts in terms of efficiency on how we spend the A&P. But definitely, that's not a driver that we perceive is impacting top line performance in any of the regions. Antonio Hernandez: Okay. And these efficiencies are all over the place, I mean, in all the regions? Rodrigo de la Maza Serrato: Yes. Operator: Our next question comes from the line of Ben Theurer. Benjamin Theurer: This is Ben Theurer from Barclays. So I wanted to just understand a little bit and ask if there's more something in the pipeline. I mean, you've been divesting some of these like smaller noncore things. We've seen the Boost divestment. We have the Lalo brand this quarter. And we've seen this in the past by kind of like this review of the portfolio. So I just wanted to understand, as you look at the current portfolio in different regions, et cetera, specifically considering some of the softness also in RTD in the U.S., are there other things that you would consider as an asset for sale or like kind of like a noncore to kind of like really be able to focus and concentrate on the key things within Tequila, other tequilas and those other spirits that have been driving growth and have been doing better? Juan Legorreta: Yes. We -- this is Juan Domingo. Yes, we are continuing analyzing our portfolio and -- to see which brands should we invest more and which less and which brands so we can dispose. So yes, probably there will be more. Benjamin Theurer: Okay. And then I have one follow-up. Just as we look into the dynamics of spending on A&P over the last couple of quarters, it's clearly been, I would say, on the softer side. So as you look ahead, do you think this is a new level and new balance? Or as volume picks up and some of the momentum comes back up as we think into 2026 that you're probably going to be as well a little more on the upper end of what your usual guidance is for A&P? Mauricio Herrera: So this is Mauricio. So for the U.S., what we've been working on is a very disciplined approach to return on investment, making sure that we're understanding more and more what are the activities that are actually having the best impact in the marketplace. We continue to spend ahead of industry standards. So I think that we're actually in a very healthy level of spend, and our focus is more on understanding where can we put the dollars that will have the maximum return so we can drive efficiencies without compromising our -- how we compete in the marketplace. Operator: We have not received any further questions at this point. That concludes today's call. You may now disconnect.
Operator: Welcome to the Ardagh Metal Packaging S.A. Quarterly Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Stephen Lyons. Please go ahead. Stephen Lyons: Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging's Third Quarter 2025 Earnings Call, which follows the earlier publication of AMP's earnings release for the third quarter. I'm joined today by Oliver Graham, AMP's Chief Executive Officer; and Stefan Schellinger, AMP's Chief Financial Officer. Before moving to your questions, we will first provide some introductory remarks around AMP's performance and outlook. AMP's earnings release and related materials for the third quarter can be found on AMP's website at ir.ardaghmetalpackaging.com. Remarks today will include certain forward-looking statements and include use of non-IFRS financial measures. Actual results could vary materially from such statements. Please review the details of AMP's forward-looking statements disclaimer and reconciliation of non-IFRS financial measures to IFRS financial measures in AMP's earnings release. I will now turn the call over to Oliver Graham. Oliver Graham: Thanks, Stephen. We delivered a strong performance in the third quarter with adjusted EBITDA growth of 6% versus the prior year quarter or 3% on a constant currency basis. Our adjusted EBITDA result of $208 million was towards the upper end of our guidance with both segments performing broadly in line with our expectations. Adjusted EBITDA growth in the quarter was supported by shipments growth in Europe and North America, lower operational and overhead costs as well as favorable category mix. Although global volumes were below our expectations in the quarter, on a year-to-date basis, they are up over 3% versus the prior year. The beverage can continue to benefit from innovation and share gains in our customers' packaging mix, underpinning our growth expectations. We continue to progress our sustainability agenda and our recently published sustainability report highlights strong progress towards our targets in 2024, including a 10% annual reduction in Scope 1 and 2 emissions and a 14% reduction in Scope 3 emissions with Scope 3 emissions now 25% below the 2020 baseline. We anticipate further good progress in 2025 and beyond. Turning to AMP's Q3 results by segment. In Europe, third quarter revenue increased by 9% to $625 million or by 3% on a constant currency basis compared with the same period in 2024, principally due to volume growth. Shipments grew by 2% for the quarter, driven by growth in energy drinks and faster-growing categories such as ciders, ready-to-drink teas and coffees, wines and water. This growth offset continued weakness in the beer category, which represents over 40% of our European portfolio. Third quarter adjusted EBITDA in Europe increased by 4% to $82 million, in line with expectation. On a constant currency basis, adjusted EBITDA reduced by 4% due to input cost recovery headwinds, partly offset by the contribution from higher volumes and favorable category mix. Given the continued softness in the beer category, we now expect full year shipment growth for Europe of low single-digit percentage for full year 2025. As we look into 2026, we continue to expect the market to grow around 3% to 4% and for our volumes to broadly match that growth. In the Americas, revenue in the third quarter increased by 8% to $803 million, which mainly reflected the pass-through of higher input costs to customers, including the impact of the higher Midwest premium in North America. Americas adjusted EBITDA for the quarter increased by 8% to $126 million, in line with expectations due to lower operational and overhead costs and favorable category mix, partly offset by the impact of lower volumes in Brazil. In North America, shipments increased by 1% for the quarter, broadly in line with the industry, following stronger-than-expected growth during the first half of the year. Year-to-date, North America shipments are up by 5%, ahead of the overall industry. The slower rate of growth during the quarter reflects some moderation in industry growth rates as well as temporary operational challenges. These included a modest impact related to aluminum can sheet supply as well as some temporary plant and network issues. We continue to monitor the metal supply situation as we progress through Q4. If the supply chain performs as currently projected, we anticipate only a modest impact to our expected Q4 North America performance. Customer demand for nonalcoholic beverages in cans in North America remains strong. And as such, we maintain our guidance for full year North America shipments of a mid-single-digit percentage growth. Looking into 2026, we expect industry growth of a low single-digit percentage. We expect a somewhat softer outlook for AMP following some volume resets largely related to specific footprint situations. We anticipate 2026 being a transition year before good growth in 2027 on the back of some contracted additional filling locations and ongoing market growth. In Brazil, third quarter beverage can shipments decreased by 17%, largely due to a weak industry backdrop across all categories, with industry beer can volumes falling by around 14% due to adverse weather and weak household consumption. Our weaker performance in Q3 follows a strong performance in the first half of the year. Year-to-date, Brazil shipments are down 1% versus a mid-single-digit percentage decline for the rest of the industry. We expect an improved volume trend for Q4 compared to Q3, and hence, full year shipments for Brazil to be broadly in line with the prior year. Looking into 2026, we expect the Brazilian industry to return to growth and for our volumes to broadly track the industry. I'll hand over now to Stefan to talk you through our financial position for the quarter before finishing with some concluding remarks. Stefan Schellinger: Thanks, Ollie, and good morning, good afternoon, everyone. We ended the quarter with a robust liquidity position of over $600 million. The net leverage of 5.2x net debt over last 12 months adjusted EBITDA represents a decline of 0.4x of leverage versus Q2 2024, reflecting adjusted EBITDA growth. It remains our expectation that the leverage ratio at year-end will be around 5x. We reiterate our expectation for adjusted free cash flow for 2025 of at least $150 million. In terms of the various components of free cash flow, our expectations are mostly in line with what we said in July. We expect maintenance CapEx of around $135 million, lease principal repayments of just over $100 million, cash interest of just over $200 million and a small outflow in working capital. We now expect cash tax to be in the range of $35 million to $40 million, growth CapEx to be around $65 million and a small cash exceptional outflow of approximately $50 million. Today, we have announced our quarterly ordinary dividend of $0.10 per share. And with that, I'll hand it back to Ollie. Oliver Graham: Thanks, Stefan. So before moving to take your questions, just to recap on AMP's performance and key messages. Firstly, adjusted EBITDA growth in the third quarter of 6% was at the upper end of our guidance range with both segments performing in line with expectations. Adjusted EBITDA growth was supported by shipments growth in both Europe and North America by lower operational and overhead costs and a favorable category mix. And the beverage can continue to outperform other substrates in our customers' packaging mix, supporting our growth. Reflecting our resilient performance, we are upgrading our full year adjusted EBITDA guidance. Full year adjusted EBITDA is now expected to be in the range of $720 million to $735 million based on current FX rates. We expect full year shipments growth for AMP to be approximately 3%. Having made these opening remarks, we'll now proceed to take any questions that you may have. Operator: [Operator Instructions] We'll take our first question from George Staphos with Bank of America. George Staphos: Congrats on the progress. I guess the first question I had, only have a couple. Can you talk, and Stefan, about what, if any, effects you're seeing from demand elasticity and higher realized or potentially realized aluminum pricing from can sheet within cans, both in North America and Brazil and then, I guess, broadly. And in that regard, with Brazil, the down, I think you said 17% on weak industry trends. Obviously, others have also put up some weaker industry volumes so far during reporting period in Brazil. Do you sense any of that is a pack shift mix back to other substrates because of, in fact, higher aluminum prices? How would you have us think about that? And along with the elasticity question, just can you talk a bit more about what's baked into your guidance for fourth quarter and realize you're not guiding on '26, just the outlook for '26 on can sheet. What operational challenges do you -- are you -- how are you going to -- we know what issues hit the supply chain? How are you managing against that and what's baked in to the extent you can comment? Oliver Graham: Yes. So yes, on the first question, I mean, I don't think we're seeing a huge amount on demand elasticity at this point. Obviously, everybody -- more or less everybody will have gone into 2025 pretty hedged, so a lot of the tariff impact won't come through in North America at this point, probably similar story for Brazil in some respects. So I don't think we're seeing it hugely impacting sales at this point. I think that there's a bit more risk for 2026 for exactly the same reason that hedges will be rolling. And so you would expect to see some higher aluminum costs come into the supply chain. And then it will be down to whether our customers pass those through or retailers pass those through and then how the consumer reacts in the overall consumer environment. So I think we're probably guiding North America for next year at a market level sort of 1% to 2%, and that's partly reflecting some of that caution about potential inflation in the can. I think in Brazil, I don't think we've seen a big reversion back into 2-way glass. I think it stayed pretty much steady the shares of cans. It just seems to be a general weakness on the volume level on the liquid level, and we see that in the reporting of the big brewers. And obviously, it was a pretty poor winter, a very cold winter that's been commented on. And obviously, there is a weak consumer backdrop in the category, particularly in beer, but actually soft drinks wasn't great either. So I think Brazil is just having a tough year. Again, as we look into '26, we'd assume that it reverts more back to its long-term trend. So maybe low to mid-singles. And as we said in the remarks, we'd be in line with that. In terms of Q4, so I think the can sheet, we're cautiously optimistic at this point. Obviously, there's been a lot of disruption in the supply chain. We were having it actually before the fire at that key facility. There was already some disruption in the supply chain, which we mentioned. And obviously, the fire didn't help. At this point, we think we're managing through. And obviously, it gets easier as the quarter progresses because alternative sources of supply can come into the mix, and we're obviously supplied from various domestic and international sources. And we also have 1 of the 2 new mills in North America now coming online, which is obviously very helpful to the situation. So at the minute, we're optimistic that we can get through that, as we said in the remarks, with relatively limited impact on North America performance. But we probably did lose 1 to 2 points of growth in Q3 across all of the operation issues that included a couple of plants that didn't perform at the level we expected and also the network was under some stress with some seismic issues. Operator: We'll take our next question from Matt Roberts with Raymond James. Matthew Roberts: First, on the 2026 growth in North America, it seems like there's a lot of innovation, potential shelf space distribution opportunities within your energy portfolio. So what's behind that transition here? And given your exposure, why in line with the market in North America? Oliver Graham: Yes. Great question. So look, I think we've talked about it on calls. It's been on other calls. There's a lot of contract reset activity in North America over the last couple of years. We're seeing that increasingly settle down now. And we're broadly very comfortable with the outcomes. We see ourselves increasingly strongly contracted through '28 and beyond. We do see some softness, as we said, in 2026, particularly on the 12-ounce side of the portfolio due to some resets within those situations. And as I said on the remarks, it's really about some specific footprint situations. So by -- what I mean by that is, for example, we had a customer with a very long freight lane out of the COVID years. We were at one point, thinking of building capacity. We decided not to with the overall volume situation. So now there is a plant much closer than our plant, and so that naturally reverts. And then another situation example is that one of our competition built a plant during this period of expansion and that plant is now closer to a customer filling location than our plant. And so we're seeing some, I think, relatively natural resets in the market. As you know, I mean, obviously, beverage cans are very susceptible to freight and footprint is critical. So yes, as I say, I think we're very comfortable with where we're coming out now. We do see '26 as a softer year in North America, where we will be behind the market. But if we take '27, we see good growth. We see we're gaining a couple of extra filling locations, and we see the market growing again. And as you say, I think if you look at the innovation that's going into the can and you look at the way energy has performed this year, that's a big part of our portfolio. We actually don't know where that's going to be. It certainly surprised us on the upside this year. I think it's got good potential next year, probably not to the same level, but it's a big part of our portfolio. So yes, we can be optimistic about those kind of categories as well. Matthew Roberts: Right, right. And then speaking of capacity and footprint, last quarter, you noted potential for adds in Europe. I believe it was Southern Europe, but recognizing these projects are long term in nature, has the volume outlook changed either the timing in regard to any potential projects? Or are you still expecting Europe to be pretty tight and needing additional lines in the future? And any early indications that how you think about CapEx in 2026? Oliver Graham: No. No, we don't see any change to the timing. So I mean, I think that the Europe market is pretty tight. We're particularly tight on certain sizes, and we'll address that. That definitely cost us some growth this year. Again, it's sort of specialty sizes in the season. We weren't completely able to follow and that cost us a bit of growth Q2 and probably persisted into Q3. So we'll do some projects around that in the off-season. And then, yes, we're running pretty tight. We've got some room for growth with continued improvement in the existing footprint, but we don't see any change to the timing of needing new capacity. Europe is a long-term growth market. It's been talked about on other calls. We're talking 3% to 4%. Some years, it's been more, some years a bit less, but it's been very consistent as per capita can penetration grows. So yes, we don't see anything. It's obviously had a bit of a weak summer, particularly in the beer category, but we're very optimistic about that market. And as we said in the remarks, we see ourselves growing in line with the market in '26. Operator: We'll go next to Stefan Diaz with Morgan Stanley. Stefan Diaz: Maybe just sticking with Europe. So obviously, the can continues to outperform underlying liquids volumes in the region. But in your opinion, how much more runway does the can have for outperformance? Like, for example, if overall liquid demand sort of remains kind of flat to down in Europe, can the can still grow in 2026, '27 and beyond? Oliver Graham: Yes, definitely. So I think if you look at the things that drive the growth, I mean, there's still significant underpenetration of cans relative to other geographies. Some of that is legacy with the German deposit scheme that took all cans out of the German market. So you still see German can growth at very high levels, obviously, a big market. You have growth out of 2-way and plastic in different parts of the region, Eastern Europe. We have the ongoing sustainability advantages of the can relative to other substrates. And obviously, you have in Europe, particularly the energy cost situation that's impacting glass. So we see a lot of runway for growth for the can in Europe. And I think that view is shared right across the industry and is backed up every quarter. If we look at our performance in the quarter, when we look at our markets that we were in, we were a touch behind, but only a touch behind. So I think there are always geographic and category mix impacts in individual company growth rates. But overall, we're happy with our performance, and we definitely see a lot of runway for can growth in Europe in the next few years, yes. Stefan Diaz: Great. That's helpful. And then maybe just can you -- if you could just touch on quarter-to-date trends by geography and maybe particularly if you could go into detail on Brazil, just given how weak this past quarter was on an industry level and just now how we're in the busy season down there. And then if I could just slip in one more. I might have missed this in the release, but can you quantify the IFRS 15 contract timing benefit? And is this potentially a headwind in 4Q? Oliver Graham: Sure. So I think -- I mean, quarter-to-date, I think trends look good, very much in line with guidance across all geographies. I think Brazil, clearly significantly better where we're guiding. If we're at the top end of the guidance, then we expect Brazil to be flat growth year-on-year, which obviously is, therefore, growth in Q4. And we already see in October significantly better performance than Q3. So we do see improvement. I think it's still a bit on the weak side, and we're still maintaining a cautious stance in our guide, but it's definitely better than Q3. And I think that Europe and North America would just say absolutely in line with where we expected. So it seems that there's a reasonable degree of forecast stability in our markets right now. I think the specific question on IFRS 15 is just a couple of million dollars, right? And maybe, Stefan, I don't know that we anticipate anything particular in Q4, but I'll hand that to you. Stefan Schellinger: No, I don't think we expect a major headwind in Q4 from IFRS. And sort of, yes, it's sort of around a couple of million dollars sort of in the Americas and then also a few more in sort of the European segment. But net-net, yes, we don't expect a major headwind from there. Operator: We'll go next to Josh Spector with UBS. Joshua Spector: I just had 2 questions. One on the cost side is within your comments, you talked about less input cost recovery in Europe. I assume that's non-metals related, but can you talk about kind of what that is and if that is something that can be recovered? And then with North America with some of the temporary network issues you've called out, I don't know if you can size that at all? And is that something that's resolved? Or is this kind of just an effect of a tighter market maybe leading to inefficiencies that persist? Oliver Graham: Sure. So taking the North American one first, I think those issues are resolved as we go into Q4. I think that they were a consequence of our strong growth in the first half, particularly on certain sizes. So we ended up with the network. We're basically pushing the shortage around different sizes across the summer. It landed on 12 ounce in Q3. And I think we mentioned in the remarks -- or I mentioned in one of my earlier replies that we probably lost 1 to 2 points of growth in North America in Q3, which was everything, including metal supply issues and some of our network and plant issues. So yes, we see those as fully resolved going into Q4. And the issue we're really very focused on is the metal supply, but as I say, cautiously optimistic at this point. And then the input cost, yes, we talked about it earlier in the year. Nothing's changed here. This is European aluminum prices. It's really a legacy of the Ukraine war and the energy spike. We managed to hold that off for several years. But in the end, there is energy and aluminum and those prices came through. And I think there has been commentary certainly at least in one of our peers on similar lines. So I think that not surprisingly, eventually, that energy shock translated through into some input cost price rises and that impact came particularly for us this year, it's different for different players depending on their supply mix. So nothing new there, exactly what we talked about earlier in the year. Operator: We'll go next to Arun Viswanathan with RBC Capital. Arun Viswanathan: I just wanted to get your thoughts on EBITDA and I guess, growth as you look into '26. So it looks like you're kind of on a $725 million or so run rate on an annualized basis. If you think about maybe low single-digit growth as you discussed for '26, it seems like you are executing relatively well. So does that translate to, say, maybe mid-single-digit growth on the EBITDA line? And then maybe is there any further leverage as you delever? Or how should we think about that progressing forward as you look at it? Oliver Graham: Yes, sure. Look, obviously, we don't guide '26 until our Q4s, and there's good reason for that. We're still rolling up the budget and all the detail. And also, there's still, at this time of the year, quite a bit of volume still under discussion or moving around. So we won't be guiding specifically. But if I just talk at the highest level, so I think I didn't say we were growing low single digits next year. I think what I said was Europe, we see growing 3% to 4% and us broadly in line. I said I think Brazil will grow low to mid, us broadly in line. And I said I think North America will grow 1% to 2% and will be softer than the market. So we don't yet have a global number. I think we definitely see earnings growth in '26 over '25. So some of those growth positions, particularly Europe, Brazil, we also see good operational cost savings. We've got a lot of opportunity in plants, in freight, in lightweighting, the usual places where can makers make operational cost savings, input costs, we're hopeful for '26 as well at this point. And obviously, we'll be keeping a tight eye as we always do on SG&A. Mix, we'd hope to be a tailwind '26. So we see a number of areas where we see earnings growth in '26, and we definitely see earnings growth over 2025, but we won't guide specifically on that until February. Arun Viswanathan: Great. And then maybe we can just discuss Europe just briefly. So in North America, we obviously saw a nice proliferation of new categories in nonalcoholic beverages. Could you just discuss maybe where we are in that trajectory within Europe? Is there maybe a tailwind that's coming? Or are we obviously already seeing it? And would you expect that to drive your results a little bit higher? Or would you be still maybe below the market because of the beer exposure? Oliver Graham: Yes. I mean we saw a bit of that in Q3, as I mentioned. So I mean, if you look where our Q3 growth came from, it came particularly out of the energy category, a bit like North America, came out of some of these faster-growing categories like ready-to-drink teas, coffees, wines, waters, we're strong in all those categories. So we definitely saw that. But I think the other piece with Europe, I think we also see general soft drinks in growth with substitution of plastic and also some 2-way systems being substituted still. So it's definitely not reliant on those more innovative categories to get growth in Europe. You can get growth fully in the core, if you like. And then I think what we're saying for 2026 is absolutely that this looks like a poor year for beer. There's no particular reason to believe that continues. So assuming beer stabilizes more into normal growth rates, then we would be in the 3% to 4% range, and that would be very good growth for all the can makers in Europe. Arun Viswanathan: If I can just squeeze in one last one. The recapitalization or the new structure -- do you see that at all impacting maybe your operations? Or does it allow for maybe a different way of thinking about capital allocation? Or is it just not really that impactful? Oliver Graham: Yes. I think too early to say anything on it. Obviously, the transaction hasn't closed. It's progressing well from what we understand, but too early to comment on anything, I think, with relation to that. Operator: We'll go next to Mike Roxland with Truist Securities. Michael Roxland: Congrats on all the progress. I just wanted to follow up on a comment you made in one of the prior questions about the growth you lost in Europe. And you mentioned also on the last quarterly call, calling out 1 or 2 points of growth in Europe because you couldn't pivot into smaller formats. You had good growth in soft drinks and energy. But given your existing beer position, which you noted is 40-plus percent in Europe, you couldn't make that transition. So can you just tell us how you expect to make that transition, how do you expect to become a little bit more nimble to target those growth categories to maybe try to minimize beer? Obviously, it didn't sound like you did that -- you didn't make much of a shift in 3Q, but can you tell us how you're going to ultimately do that, be 4Q, early 2026, how you're pivoting your mix to capture stronger growth end markets relative to beer in Europe, please? Oliver Graham: Yes, sure. So look, we're doing a couple of projects in the network, converting lines into those sizes, making lines flexible to allow us to be more agile in the season. So yes, we've got a couple of projects on the books for Q4, Q1 that will then have impact and be -- put us in a better position in Q2, Q3 next year. And then obviously, any capacity we're building out in the next few years, we'll make sure we're covering the growth sizes in the market. So we think we'll be in pretty good shape once we do these next few projects. Michael Roxland: Got it. And when you think about some of the conversions that you're doing or the flexibility that you're adding, when you add new lines, I guess, are you going to build those new lines with this functionality, with this flexibility to be able to switch sizes more easily in case market dynamics change? Oliver Graham: Yes, definitely. I mean, it costs a lot less if you do it at the beginning than when you try and retrofit, especially when you try and retrofit much older lines. So absolutely, I think it makes a lot of sense at the minute. The market is quite dynamic with different products coming to market, and we've seen in different summers, different products doing better or worse. So yes, it definitely makes sense for us as we build out new capacity to put that flexibility into the lines for sure. Michael Roxland: Got it. Okay. And then my last question is on North America. You mentioned the network issue has been resolved, and you remain optimistic on the metal supply issue resolving itself at some point. But fair to say, is there a risk to that 1% to 2% growth that you're targeting for North America next year should these metal supply issues persist into 2026? Oliver Graham: Yes. I guess, Mike, just to be clear, the 1% to 2% is the market growth, right? So we're saying we expect to be a bit softer than that. I don't see a risk to the industry or to ourselves in terms of metal supply next year. So obviously, we have 1 of the 2 new mills ramping up as we speak. That's extremely helpful to the situation. We expect the operational issues that are being suffered by Novelis to be resolved. Obviously, they're working very hard to address them. And then equally, we've all -- anybody that's in the market is sourcing other sources of aluminum and successfully doing so. So I think with the flexibility we all have in our supply chain with multiple sources of supply with the fixes they're doing and with the new mill ramping up, I don't see a risk of industry volumes or AMP volumes for metal supply in 2026. Operator: We'll go next to Anthony Pettinari with Citi. Anthony Pettinari: Ollie, I think you talked about kind of a bad year in beer in Europe, maybe not expected to repeat next year. And I'm just wondering if you can talk a little bit more about sort of the puts and takes there in terms of what you think really drove the weakness in Europe this year, whether it was consumer, weather? And then, I mean, in North America, there's been a lot of discussion around secular pressure on beer, given lifestyle changes, especially with younger consumers. Does that have a parallel in Europe? Or just wondering if you can kind of give us your big picture thoughts on beer into next year? Yes. Oliver Graham: Yes. Look, I think it's definitely too early to call a secular shift in Europe. I mean we don't have the depth of other products that we see in the North American market, other alcohol products with similar drinking characteristics that you have in North America. I think we've had a poor year. I don't think weather has really added. I think there's definitely some consumer weakness, which is hitting the category. We only generally work out later what the players did, were they promoting, not promoting. So we don't have all the data on that yet. So I think my view on this is that it's a big category. It's got some very strong players. And I think they won't be happy with this year at all and that they'll be putting in place strategies to reverse that into 2026. And as I say, I don't -- I think it's definitely too early to call any kind of secular shift in European drinking behavior. Anthony Pettinari: Got it. Got it. That's helpful. And then based on kind of an early view, do you expect that the aluminum conversion cost headwinds maybe continue in Europe next year? Or are there maybe some savings that we should kind of think about that could help you reach that sort of normalized operating leverage? Or just how should we think about that? Oliver Graham: I don't think we think there's necessarily savings, but there's no question that the step-up that we had this year moderates very significantly. So this was our step-up. I think if you look back over '23, '24, we really held it back despite the increase in energy costs that had flowed through. So this is where we took it. I mean the European market is tight on aluminum. So I don't see a huge savings opportunity there until there is more capacity put into the market, it needs that. But fortunately, there are significant import routes that are pretty competitive. And so I don't also see a major headwind, and we'll be exploiting on those routes. But yes, no savings, I think, but a definite moderating of some of the headwinds that we had this year. Operator: We'll go next to Gabe Hajde with Wells Fargo Securities. Gabe Hajde: I think earlier this week was the first time that we had heard that there might have been a little bit of movement in terms of contracts and maybe customers, maybe on the private label side. You mentioned next year that there's going to be, again, for your system, some changes and maybe underperform the market a tad. I'm just curious, as you're going through those negotiations with customers, what are their talking points as it relates to -- I mean, you already called out proximity to customer filling sites, so that makes sense to me. But just price or service levels, quality, et cetera, that's informing some of those decisions. Oliver Graham: Sure. Yes. Look, as I said in the remarks, I think that by far, the dominant factor that we've seen has been this footprint issue. As I said, we had planned back in '21, '22 to put some capacity in the north, and then we had -- people were very tight. So we had a contract that we served out of a long freight lane. And when we chose not to put the capacity in, obviously, we still have the contract for a few years. But then when it runs out, it's naturally going back to a closer can plant. And then as I said, we have the opposite effect where some of the new capacity that's come to North America obviously changes footprint dynamics for customers. So they get a plant that's actually nearer to them than they used to have and that our legacy plant is placed. And then we also had one situation with customer that halfway through the process, they had their own footprint review, which resulted in a filling location that we serve closing down. So I think if we look at the overall reason for softness in '26, its majority is down to footprint. I think the market is competitive, but I think it's normally competitive maybe after a few years where it was so tight through COVID, but I think it's in a normal competitive environment. And we don't hear anything particular on service. We generally get very high ratings on service and very good feedback for relationship management and customer support. So I think predominantly, we're talking about footprint-related changes and the fact that there is some capacity in the market for people to make moves. Gabe Hajde: Okay. Two questions on aluminum. Again, earlier this week, I think it was mentioned that all-in aluminum costs kind of crept up above, I think, all-time highs that we even saw during the pandemic. I think we were talking about maybe penny and a half or so of inflation just from raw material costs. That's maybe closer to $0.03 now if we were to mark-to-market. And again, I appreciate your customers hedge and probably roll that in 3 years in advance. So it's not going to all hit at once. But I'm just curious, when we've seen this type of inflation through the system, is it typically -- do they typically address that on an annual basis with pricing on the shelf? And then maybe relatedly, we observed a decent amount of promotional activity, especially on the carbonated soft drink and energy drink side in the first half of this year, maybe even the first 8, 9 months. Should we be mindful or thinking about anything? You mentioned volumes or sell into the channel decelerating a little bit in the second half here versus the first half. Is there any sort of dynamic in the first half of '26 that we could be mindful of maybe volumes actually -- industry volumes down in the first half and maybe growing in the second half, just given the tough comps? Oliver Graham: Yes. I think it's a good question. Look, I think you can't say there's no impact from that level of increase of aluminum pricing. So I think you have to assume there's some risk of inflation on the shelf and that, that has some impact on volumes because the categories are elastic. I think trying to predict exactly what our customers and retailers do with that is a fool's game. I think it depends a lot on where they are. They've taken a lot of price the last few years. And so they've probably got some firepower, which I think they deployed this year. I think not because of any personally, I don't think it's because of any particular sort of tariff-related insights. I think it's more that they have got that firepower in their margin structures and they can use it to drive volumes. And they are looking to balance cans versus plastic in their portfolios for all sorts of reasons. So I think predicting exactly what happens in '26 is very difficult to do. We're maintaining a 1% to 2% stance on North America growth for next year with us softer. And that's probably because we are being a little bit cautious around that issue. So yes, I think something is flowing through. You can't say it has no impact, but I think that hopefully, we see what we're expecting, which is that sort of growth rate. Gabe Hajde: Well, let's be honest, glass and other substrates are not immune, right? Like everything has embedded energy costs. So I'm curious. Oliver Graham: No -- that's really important -- sorry, Gabe, I was just going to build on that, right, which is that every quarter, we see that the can is outgrowing the other substrates. So then I think you take the sustainability piece, you take the energy cost piece, you take the fundamental cost structure of cans in North America. You look at the recapitalization that we've done as can makers and that our suppliers have done on the can sheet side, I think that the industry is very significantly more efficient than 10 years ago, and that is going to play through into overall cost structure. So yes, that's why I'm very bullish about long-term can growth rates in North America. I think there is a little bit of a headwind potentially from the tariff situation in the next 12, 18 months. Gabe Hajde: Understood. Last one, and it's just sort of digging into the supply chain a little bit. Obviously, it's been, I don't know, maybe 40 years that we've had new rolling capacity here in North America. Does that -- that does not address any sort of the ingot cost, Midwest premium cost that's embedded in. This is just more about localizing that can sheet supply. And so there's better efficiency, I guess, from a logistics standpoint. So then we got to kind of wait to see what happens politically if there's any change for cost structure for aluminum. And then in Europe, we're reading articles about they're frustrated that they're actually exporting scrap to the U.S. because maybe apparently, that's a way to circumvent some of the tariffs. Is that coming up in conversations in terms of cost of aluminum or can sheet over in Europe? Oliver Graham: Yes. So look, I think on North America, obviously, those mills are massively helpful to the industry, both in terms of supply, but also long-term cost structure, very efficient. Obviously, they had to get investment-grade returns to be built. So -- but I think those sorts of costs are built into the supply chain now. And so we don't see major changes. I think they're extremely positive for the industry to have that much domestic supply coming on and stopping a lot of the imports that were needed in North America and generally improving the quality of the industry. So that -- they're hugely positive, I think. And then in Europe, yes, look, I think the scrap situation isn't helpful as a way to avoid tariffs. Obviously, we were already hearing that the U.S. was very short scrap with issues that have gone on in Mexico and related to China, and that was impacting North American can sheet makers. So these flows will have impact, but we don't see them particularly changing what we're seeing in Europe at the moment. So nothing particular to report from that, I think. Operator: At this time, there are no further questions. I will now turn the call back to Mr. Oliver Graham for any additional or closing remarks. Oliver Graham: Thank you, and thanks to everyone on the call. So just summarizing again, adjusted EBITDA in Q3 grew by 6% at the upper end of our guidance with both segments in line with expectations. And reflecting that resilient performance, we're raising our expectations for full year adjusted EBITDA. So with that, thanks for joining the call, and we look forward to talking to you again at our Q4 results. Operator: This does conclude today's conference. We thank you for your participation.
Brent Arriaga: " Kenneth Neikirk: " Scott Sparks: " Brent Arriaga: " Erik Staffeldt: " Owen Kratz: " Gregory Lewis: " BTIG, LLC, Research Division James Schumm: " TD Cowen, Research Division Connor Jensen: " Raymond James & Associates, Inc., Research Division Joshua Jayne: " Daniel Energy Partners, LLC[ id="-1" name="Operator" /> Ladies and gentlemen, thank you for standing by. Hello. My name is Dustin, and I will be your conference operator today. At this time, I would like to welcome you to the Third Quarter 2025 Helix Energy Solutions Group Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Brent Ariaga. Brent Arriaga: Please go ahead. Good morning, everyone, and thanks for joining us today on our conference call, where we will be reviewing our third quarter 2025 earnings release. Participating on this call for Helix today are Owen Kratz, our CEO; Scotty Sparks, our COO; Erik Staffeldt, our CFO; Ken Neikirk, our General Counsel; Daniel Stewart, our Vice President, Commercial; and myself. Hopefully, you've had an opportunity to review our press release and the related slide presentation released last night. If you do not have a copy of these materials, both can be accessed through the Investor Relations page on our website at www.helixesg.com. The press release and slides can be accessed under the News and Events tab. Before we begin our prepared remarks, Ken Neikirk will make a statement regarding forward-looking information. Ken? Kenneth Neikirk: During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations and assumptions as of today. Such forward-looking statements may include projections and estimates of future events, business or industry trends or business or financial results. All statements in this conference call or in the associated presentation other than statements of historical fact are forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially from our projections and forward-looking statements due to a number and variety of risks, uncertainties, assumptions and factors, including those set forth in Slide 2 of our presentation and our most recently filed annual report on Form 10-K, our quarterly reports on Form 10-Q and in our other filings with the SEC. You should not place undue reliance on forward-looking statements, and we do not undertake any duty to update any forward-looking statement. We disclaim any written or oral statements made by any third party regarding the subject matter of this conference call. Also during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slides of our presentation provide reconciliations of certain non-GAAP measures to comparable GAAP financial measures. These reconciliations, along with this presentation, the earnings press release, our annual report on Form 10-K and a replay of this broadcast will be available under the -- for the Investors section of our website at www.helixesg.com. Please remember that information on this conference call speaks only as of today, October 23, 2025, and therefore, you are advised that any time-sensitive information may no longer be accurate as of any replay of this call. Scott? Scott Sparks: Thanks, Ken, and good morning, everyone. Thank you for joining our call today, and we hope everybody is doing well. This morning, we will review our third quarter highlights, financial performance and operations. We'll provide our view of the current market and update our guidance for the remainder of 2025. Our teams offshore and onshore safely delivered another well-executed quarter. Our safety statistics continue to remain among our best on record. Moving on to the presentation. Slides 6 and 7 provide a high-level summary of our results and key highlights for the quarter. Our third quarter results were better than expected, producing our highest quarter results since 2014 despite the continued low-cost stacking of the Seawell and the lower utilization of the Q4000 in the Gulf of America. Revenues in the third quarter were $377 million, with a gross profit of $66 million and a net income of $22 million compared to $302 million in revenue, $15 million in gross profit and a net loss of $3 million in Q2. Adjusted EBITDA was $104 million for the quarter, and we had positive operating cash flow of $24 million, resulting in positive free cash flow of $23 million. Year-to-date, we have generated revenues of $957 million, gross profit of $109 million and a net income of $23 million with adjusted EBITDA of $198 million. Our cash and liquidity remains strong with increased cash and cash equivalents of $338 million and increased liquidity of $430 million at quarter end. Highlights for the quarter, Brazil operating 3 vessels with strong utilization, all 6 trenches and all 3 IROV Boulder grabs working in the quarter, improved results in Gulf of America Shelf following a later start to the season, execution of a 3-year contract with a minimum 150-day commitment for the key units in the Gulf of America and our entry into a 4-year agreement with NKT for the installation, operation, project engineering and maintenance of the T3600 designed to be the world's most powerful subsea trencher to be operated from one of our trench and support vessels. Over to Slide 9. Slide 9 provides a more detailed review of our segment results and segment utilization. In the third quarter, we continue to operate globally with minimal operational disruption with operations in Europe, Asia Pacific, Brazil, the Gulf of America and the U.S. East Coast. Slide 10 provides further detail of our Well Intervention segment. The Q5000 achieved high utilization working in the Gulf of America in Q3. The vessel is currently working on a multi-well program for Shell and should be highly utilized for the remainder of 2025. The Q4000 completed a multi-well P&A campaign in the Gulf of America. And then due to gaps in its schedule, we pulled forward the 2026 planned regulatory docking into 2025 to facilitate a cleaner runway in 2026. During this period of a softer Gulf of America market, we are experiencing some gaps within the schedule in Q4 with lower rate ROV decommissioning projects for a good portion of the remainder of the year prior to returning to contracted works at well intervention level rates in January of 2026. In the North Sea, the Well Enhancer had 100% utilization during the quarter, working for 4 customers. Due to the well-known market turmoil in the North Sea, the Seawell remained warm stacked and is expected to remain warm stacked at a low cost base for the remainder of 2025. In Q3, the Q7000 completed work on numerous wells for Shell on the 400-day decommissioning campaign in Brazil with 100% utilization. The SH1 had 98% utilization working for Trident and the vessel has now completed the Trident contract and is currently undergoing inspections and acceptance prior to commencing its 3-year Petrobras contract. ESH II had a very strong quarter with 100% utilization for Petrobras. And the stand-alone 15K IRS system was on hire in Brazil contracted to SLB for the quarter, achieving 100% utilization. Moving to Slide 11. Slide 11 provides further detail of our Robotics business. Robotics had a strong quarter. The business performed at high standards, operating 7 vessels during the quarter, working between trenching, ROV support and site survey work on renewables and oil and gas-related projects globally. Robotics worked 6 vessels on renewables-related projects within the quarter and had strong vessel utilization overall with 3 vessels working on trenching projects and 3 vessels working on site clearance. All 6 trenches and all 3 IROV boulder grabs were utilized. We operated 3 vessel trenching spreads in Europe, including the GCIII and the North Sea Enabler with jet trenches and the JD Assister with the i-Plough. The Glomar Wave and the Trym support vessel were working on renewables site clearance utilizing the IROV boulder grabs in Europe. The Shelia Bordelon completed renewables works on the U.S. East Coast, utilizing our third IROV boulder grab prior to transitioning back to the Gulf of America, where she is currently undertaking ROV support works. Also in renewables, we have the T1400-1 trencher working on a longer-term contract from a third-party client-provided vessel of Taiwan and the T-1400-2 working from a third-party client provided vessel for a longer-term contract in the Mediterranean. The GCII in the Asia Pacific region performed oil and gas support work offshore Thailand during the quarter. Our renewables and trenching outlook remain very robust with numerous sizable contracted works in 2025 and 2026 through to 2030 with a solid pipeline of tender activity as far out as 2032. Slide 12 provides detail of our shallow water abandonment business. In Q3, activity levels increased with 100% utilization for the Hedron heavy lift barge and strong utilization for the die vessels and liftboats. In Q3, we had a higher number of P&A spreads working offshore, totaling 790 days of utilization compared to 614 days in Q2. Whilst 2025 continues to be a soft year on the Gulf of America shelf, we continue to believe in the long-term outlook for this segment as well as our agent customers look to reduce their decommissioning obligations. So in summary, whilst we have seen a softer-than-expected U.K. intervention market and some gaps in the latter half of the year for the Q4000, we are encouraged by our strong Robotics and Brazil segments. We expected Q3 to be a very strong quarter, and it was. We executed it well, producing our highest resulting quarter since 2014. I'd like to thank our employees for their efforts, delivering again safely at a high level of execution and for again securing a further backlog and long-term contracts. I'll now turn the call over to Brent. Brent Arriaga: Thanks, Scotty. Moving to Slide 14. It outlines our debt instruments and key balance sheet metrics as of September 30. At quarter end, we had $338 million of cash and availability under the ABL facility of $94 million with resulting liquidity of $430 million. Our funded debt was $315 million, and we had negative net debt of $31 million at quarter end. Our balance sheet is strong and is expected to strengthen further as we anticipate generating meaningful free cash flow in the fourth quarter and have minimal debt obligations between now and 2029. I'll now turn the call over to Erik for a discussion on our outlook. Erik Staffeldt: Thanks, Brent. Our team performed well in the quarter. It's been a challenging year, but our Q3 results provide a glimpse into our earnings potential even with 2 of our larger assets negatively impacting results. As we enter Q4, we do expect seasonal impacts to our operations, particularly in the North Sea, Gulf of America Shelf and APAC. That said, we are tightening our guidance on certain key financial metrics in our forecast. Revenues of $1.23 billion to $1.29 billion. EBITDA, $240 million to $270 million. We have narrowed our EBITDA guidance. Our new range reflects our year-to-date actual results and the expected variability that comes with the winter season during the fourth quarter. Free cash flow a range of $100 million to $140 million. The range continues to reflect the variability in working capital, specifically timing of accounts receivable with 2 of our blue-chip customers. We expect to have this resolved by early 2026. From capital expenditures, we are maintaining our forecast at $70 million to $80 million. Our spend continues to be a mix of regulatory maintenance on our vessels and fleet renewal of our robotics ROVs. Our spend is committed, but deliveries may slip into 2026. These range involves some key assumptions and estimates and any significant variation from these assumptions and estimates could cause results to fall outside these ranges. As discussed, our fourth quarter results will be impacted by the winter seasonal weather in the Northern Hemisphere. The variability in our fourth quarter guidance range is dependent on the length and extent of operations working into the season, namely in the North Sea well Intervention and Robotics business in our Asia Pac robotics operations and in the Gulf of America shelf. Providing some key assumptions for the remainder of the year by segment and region, starting on Slide 16. In Gulf of America, the Q5000 is contracted through the remainder of the year with expected strong utilization. The Q4000 will have gaps in its schedule as it looks to perform lower revenue ROV support work prior to resuming well intervention work in January. In the U.K. North Sea, the Well Enhancer has work into November with the extent of the season being weather dependent. The Seawell continues in warm stack. In Brazil, the Q7000 continues working for Shell into Q2 2026. The Siem Helix 2 continues working for Petrobras. The Siem Helix 1 completed its work for Trident. The vessel is currently mobilizing for Petrobras with work expected to start this quarter. Moving to our Robotics segment. Our Robotics segment will be affected by seasonality with activity levels in the North Sea and APAC expected to diminish in the winter months. In the APAC region, the Grand Canyon II is providing ROV support and hydraulic stimulation offshore Thailand and Malaysia with expected strong utilization. In the North Sea, the Grand Canyon II and the North Sea Enabler are performing trenching projects and are expected to remain utilized for the remainder of the year. The Glomar Wave is forecasted to remain on-site clearance operations into December. In the U.S., the Shelia Bordelon is back in the Gulf, providing ROV support into November with potential for further work. Moving to production facilities. The HP I is on contract for the balance of '25 with no expected change. We do have expected variability with production as the Drosky field continues to deplete and the Thunder Hawk field is still shut in. Continuing with shallow water abandonment, we expect the business to decline in line with the winter weather arrival in the Gulf of America. Our outlook range includes variability depending on the timing and extent of the winter season. Shelf decommissioning is a call-off business, but given customers' needs and continued reversion of properties through bankruptcies, long term, we believe in the solid foundation for this market. Slide 17, reviewing our balance sheet. Our funded debt stands at $315 million with no significant maturities. Our year-to-date share repurchase spend stands at $30 million, in line with our stated target of minimum 25% of our expected free cash flow with 4.6 million shares acquired. At this time, I'll turn the call back to Owen for a discussion on our outlook beyond 2025 and for closing comments. Owen? Owen Kratz: Thanks, Eric. Let me begin with a few macro observations and thoughts where Helix is positioned in the current market. We all know the oil and gas market is cyclical. It's actually composed of a series of cycles depending on market segment and region. Exploration and drilling cycle is the start of the offshore oil and gas investment cycle, usually beginning at a time of high commodity prices or a perceived supply-demand imbalance. This was our market environment as markets rebounded post COVID. The exploration and drilling cycle is followed by the development cycle during which subsea construction services do well. The development cycle usually starts about 2 years or more after the drilling cycle. This is where I believe we're at now. Drilling is currently showing softness with some support from consolidation, fleet rationalization and a remarkable degree of capital discipline relative to past cycles. The subsea construction market is currently strong. As production from drilling and development comes on and/or commodity prices soften, CapEx budgets typically get cut. Remaining dollars freed up get directed to providing OpEx, well intervention gets added to remediation spending and the production enhancement cycle begins. Without getting into regional differences, we feel the industry is currently in the early but strong development cycle. As a consequence, vessel charter rates and asset values are elevated and production enhancement is flat. Abandonment is almost a separate event and is currently increasing due to regulatory pressure, the mature nature of reserves and excess backlog built up with concern over carried liabilities. Bringing this all together, we believe we're in a trough, but at the cusp of an up cycle. As the market progresses, it will move into the production enhancement cycle where we stand to benefit. As we navigate this trough, we've had 3 challenged areas of our business in 2025. Number one, the U.K. North Sea, driven by government tax and regulatory policy combined with M&A consolidations, most spending in the U.K. North Sea came to an abrupt slowdown in early 2025. While we believe 2026 will be marginally better and allow us to reinstate our second vessel, rates will be competitive and work will still be slow. By 2027, we anticipate significant abandonment work will begin as producers leaving the region will be forced to do the work and remaining producers will seek to lessen liabilities. Number two, the Q4000. In 2026, work visibility in the Gulf of America is better than what occurred going into 2025 as 2025 work was getting deferred into 2026. We do anticipate that deferrals or cancellations could again occur. So we're planning to hedge utilization risk by again considering a West Africa campaign for at least part of 2026 for the Q4000, although we have work already contracted in the Gulf of Mexico for Q1. We -- as Scotty mentioned, we accelerated a drydock that was planned for 2026 forward into the softer market of 2025, which should allow for greater availability and flexibility on where she's deployed. This should improve well ops U.S. results year-over-year. By 2027, we expect Gulf of America demand to increase from both production enhancement and abandonment. Third area, we continue to believe the shallow water abandonment in the Gulf of Mexico will be a large market. For 2025, we rightsized the business and are delivering improved results. It's anticipated that 2026 will be a better year, but still a slow year with more work but at reduced rates as competition for the work remains stiff. Indications are that volume of work from boomerang properties out of the bankruptcies will build into 2027, creating a strong market. The performance of our Robotics group has been a positive this year. We're seeing rates improve modestly and visibility on work remains strong, and we continue to establish ourselves as a global leader in trenching as we also support construction and wind farm projects. Even with all these challenges of 2025, we nonetheless delivered our highest quarter EBITDA since 2014, and we're still on track to deliver meaningful free cash flow. So while we acknowledge our results for 2025 will fall short of our expectations that we had coming into the year, we still see the earnings potential in our business. The challenge for us going into 2026 will be to manage the pressure we're getting from to reduce rates while facing rising supply chain and labor costs. We need to maintain our focus on managing our costs. With strong subsea construction and robotics markets, we're seeing upward pressure on support material and labor costs. Emphasis next year will be on savings in our OpEx and marine costs. We believe there's a meaningful opportunity in this area. In addition, we can expect further improved EBITDA contributions from Q7 if we're successful in keeping it working in Brazil without the noise of another transit from region to region at higher rates. On the downside, next year, we do have both SH vessels in Brazil due for their 5-year special surveys, this out-of service costs will meaningfully impact some of the anticipated improvements. By how much will be determined as we evaluate cost and timing during our budgeting process. Beyond this, we have a strong balance sheet with negative net debt and significant cash. We're in a position to opportunistically consider growth by acquisition. We remain a market leader in intervention, decom and robotics. Through the cycles, we're demonstrating our resilience, our ability to deliver results even in a challenging market environment and our positioning for the future. Back to you, Erik. Erik Staffeldt: Thanks, Owen. Operator, at this time, we'll take any questions.[ id="-1" name="Operator" /> [Operator Instructions] Our first question comes from the line of Greg Lewis from BTIG. Gregory Lewis: Owen, congrats on a great quarter. This was really good to see. It kind of shows the potential with the company. I did have a question around the Q4000. You talked about some of the challenges that it faced in 2025, decisions from customers to defer cancel. You highlighted the good visibility in Q1. What should we be looking forward thinking about in terms of -- I think there's a lot of optimism around the outlook for 2026. But I think one of the concerns is, could we see a little bit of a repeat of customers pushing some work right? So just kind of how are you thinking about maybe mid-'26 in terms of what's going to drive those decisions to get that work going or potentially delaying in another quarter or 2? Owen Kratz: Well, I'll start and let Scotty add some color to it. But there's always a potential that in this volatile market right now, there's always a potential that producers will change their planned spending. Going in through a budgeting process, we speak primarily with the operating groups to identify the work and start to build our schedule for the following year. But during that budgeting process, it's possible that corporate gets involved and modifies those plans. We don't always see that. We got caught short this year, and we're sort of still prepared. We sort of figured that the Gulf of America might be soft in 2025. So we took a contract that was supposed to be a 6-month contract in West Africa. That work actually got shortened a little bit. So we wound up coming back to the Gulf a little earlier only to face the budgeting decisions to defer work out of 2025, and that's what sort of caught us up. We just did -- admittedly, we didn't see it coming. Looking forward into 2026, it's a similar situation, but I think the visibility of the work is stronger in '26 than it was going into 2025. The work has been deferred once. So that sort of lessens the possibility that it would be deferred twice. But as I said in my remarks, you can never rule it out, but that's why we're also looking at hedging that risk by entertaining another campaign to West Africa this year. Scott Sparks: Yes. I'll add to that. Thanks, Owen. We have a sizable contract to kick off in -- very early in January that will get us going for a good start of the year. And then we are at high-level discussions with many operators about works into 2026 in the Gulf of America. One of the reasons we brought forward the regulatory dry docking from '26 into '25 is if we do take a West Africa campaign, it would be very difficult to do the docking in the Africa region. And we're also starting to have discussions about potential works in Guyana as well. So a few other workplaces have opened up for us, and we're looking at regional options as well. And you have to also remember, we're not a rig. You never hear of rigs going off and doing construction or decommissioning support work. We're quite a versatile unit. All those rates are lower, we can go off and do other works if the well intervention work doesn't come to us. Gregory Lewis: Yes, that was super helpful. I did have a follow-up around shallow water abandonment. Clearly, I think we share your views that it's going to be a better market over time. But I did want -- if you could elaborate a little bit. You mentioned that kind of your expectations for '26 is that we are going to see a pickup in activity, but maybe at reduced rates. And just kind of curious if you could maybe elaborate on that comment. Owen Kratz: Yes. 2023 was a better year as Apache really absorbed all of the available capacity in the market. That drove rates and utilization to all-time highs. In '24, when they exited the market, the competition did add capacity. So that sort of exacerbated the situation, and we went into a period where there's actually excess supply over demand. We think that's continued through '25. We didn't adjust well in '24 to it. We were expecting a quicker rebound, but there were provisions allowed for producers to defer their work up to 3 years. So that sort of kept the work from rebounding as quickly as we thought it would. Going into next year, we do -- we are seeing an increase in the volume of work, although the competition has added capacity. So I think 2026 will continue to be a highly competitive year on margin, but utilization should be strong for us. And then going into 2027, that's when the hiatus sort of starts to expire and we see the shallow water abandonment market actually returning to what I would call a normal state following these boomerang properties, so a much stronger market by 2027. Gregory Lewis: Okay. And so just so I understand, it sounded like despite maybe some of the softness in the last year or 2 in SWA, you did have some competitors that maybe -- did they add capacity? Or did they -- was it moved to the U.S.? Or was it just incremental stuff that they built into the market? Owen Kratz: No, it was incremental spreads that were actually fabricated and put into the market. The big bottleneck in that market is actually the people. So whoever has the work sort of gets the people. We came up short in 2024. And because of our competition bidding lower rates, the people sort of moved away from us. Throughout this year, we've been very successful in getting the people to come back to us, and we've increased our utilization, of course, by cutting rates. So I think we're pretty well positioned going into next year to be a strong competitor in the market. [ id="-1" name="Operator" /> Our next question comes from the line of James Schumm from TD Cowen. James Schumm: I was hoping maybe you could help me with the bridge to fourth quarter from third quarter in Subsea Robotics. So I guess it looks like you'll have some Q4 seasonality. But it looks like the vessels will all be utilized in some -- at some level, but maybe the vessel days will be a bit lower. And then if I'm reading your slides correctly, I think you had like all 6 trenchers going in the third quarter, but you only have 4 in the fourth quarter. Is that right? Like how just -- or maybe just speak at a high level, like what kind of a drop we're looking sequentially for Subsea Robotics? Scott Sparks: So we did have 6 trenches working in the third quarter. We will drop down to eventually 4 trenches in the fourth quarter. The trencher that's currently working in Taiwan, that will get seasonal, once the weather kicks in, that will get demobilized. However, we are expecting work in Taiwan again for T1400-1 next year. The North Sea trenches, they should be relatively busy through the quarter. But again, you will start getting affected by seasonal weather, which will bring down rates. And then the i-Plough that was on the JD Assister, that project has come to a close in Q3. So that will not be utilized in Q4. James Schumm: Scotty, when you said it will bring down rates, did you mean bring down utilization? Or do rates also soften in the fourth quarter? Scott Sparks: Generally, when we're trenching, we have an operational full rate and then there's a lower weather rate. We still get paid for weather, but it'll at a lower rates. So there'll be less trenches utilized. And as the weather kicks in, there'll be some lower rate coming in. James Schumm: Understood. Understood. Guys, in the North Sea, I think there were 2 large tenders. Is there an update there? Were you unsuccessful? Or we just haven't heard anything? Or what's the update there? Scott Sparks: We're very active on both of those tenders. One of them, there's a lot of technical clarifications going on. And the other one, I'd say we're in quite a good position for. We're just not in a position yet to bring that out to the market, but it's in a good place. I think that next year will be turning into activating the Seawell again at some point. We don't know if it will be a full year or a partial year, but it's looking more and more likely we will activate the Seawell in 2026. We just don't know for what length of time yet. James Schumm: Okay. Yes. That's -- okay. That's where I was going with that. And just lastly, a quick clarification. The well intervention, the new contract that you announced 150 days minimum. Is that a grand total of 150 days over 3 years? Or is it 150 days annually? Scott Sparks: No, the minimum commitment over the 3 years is 150 days. However, in 2026, we're kicking off with that contract with quite -- that's the sizable work for the kick off for the Q4000. [ id="-1" name="Operator" /> Our next question comes from the line of Connor Jensen from Raymond James. Connor Jensen: Like everyone else had great quarter here. So really strong showing for robotics in 3Q and reading the forward commentary. It looks like that should continue to be solid going forward. Just wondering if you could give a high-level overview next year, what you're thinking about 2026 robotics versus what we saw in 2025? Scott Sparks: I think we should see a strong year in robotics for 2026. It should be at least be on par with what we have for 2025. We're expecting a strong trenching season in the Mediterranean, the North Sea and in Taiwan. The site clearance market is looking quite robust for next year as well. So I expect to at least be on par, if not better, as we go into 2026. Our trenching rates will certainly have some very large contracts in place at better rates in 2025. So it should be another good year for robotics. Connor Jensen: Got it. That's helpful. And then any update on the chemical treatment success for Thunder Hawk? I saw you don't anticipate any revenues in 2025, but wondering if you still expect to receive some benefit in 2026 without having to do an intervention? Owen Kratz: We've seen some positive developments on that front that leads us to question whether or not an intervention will actually be necessary, but it's still early days, and we don't know. We have plans that are already submitted into BSEE for what the various optionality of work going forward to get it back online. Our anticipation, though, is that we should have it back online at least by some point in the first quarter. [ id="-1" name="Operator" /> [Operator Instructions] Our next question comes from the line of Josh Jayne from Daniel Energy Partners. Joshua Jayne: First question, you noted rising supply chain costs moving forward into 2026. Where are you seeing the most pressure? And could you just talk about how you're mitigating those increases? Owen Kratz: We're seeing rising cost pressures across the board actually, it began with labor costs. They went up for this year. I don't see any reprieve from the labor costs, but also on the materials and supply side and delivery through the supply chain, we're seeing escalating costs. So those are areas where we're going to really be focusing on trying to mitigate the cost. And that's just working with our suppliers, maybe consolidating our supplier base and just putting a little pressure on achieving a little bit of a margin gain there. Joshua Jayne: Okay. And then I wanted to talk about pricing for well intervention. So although deepwater rig rates have come down for incremental contracts from where we were sort of last summer, there's still a gap between where your assets can work and sort of seventh gen drilling assets. So I'm curious if you've seen any change in pricing discussions you're having on the intervention side? Or is securing backlog just more at this point about stacking programs on top of one rather than really a price-led discussion? Erik Staffeldt: It is also a price-led discussion. We have seen downward pressure on our rates similar to what the drillers have experienced in the marketplace. Having said that, we are also able to tier our rates. So we have well intervention rates. We have rates for carrying out construction support projects and ROV support projects during times of lower utilization of well intervention and similar, but we have seen downward pressure. Scott Sparks: We do have backlog in Brazil on longer-term contracts and for the Q5000 as well at set rates similar to and better to what we have in this year. And it's also a bit of a regional play. Sort of we might have a softness for the Q4000, the Q5000 is tight, but then the rates in the North Sea will be dependent on whether or not we can activate the second vessel. So you might see a bit of rate pressure there trying to get the second vessel into the market. Joshua Jayne: Understood. And then maybe just lastly, could you just speak in general to the market in Brazil, continue to be highly utilized there? And just maybe your thoughts over the next couple of years about that market and the success that you've been having? Scott Sparks: Yes. I mean we have to see in Helix 1 and 2, both on the Petrobras contracts, they're going to be for 3 years plus options. The Q7000 is on a good contract with Shell. We would hope that there's some extensions there. But then we're also starting to see quite a bit of interest in the Brazil market for the Q7000 with Shell. I would say Brazil in general, not just for us, but for the rigs, is the most buoyant market out there at this time. So we're quite confident of keeping our position. [ id="-1" name="Operator" /> There are no further questions. I will now turn the call back over to Erik Staffeldt for closing remarks. Erik Staffeldt: Thanks for joining us today. We very much appreciate your interest and participation and look forward to having you on our fourth quarter 2025 call in February. Thank you. [ id="-1" name="Operator" /> The meeting has now concluded. Thank you all for joining. You may now disconnect.
Henrik Høye: Hello and welcome to the presentation of quarter 3, 2025 results for Protector. As always, I want to start with who we are and a small recap of what we do, this morning with all employees. The topic has for some time been the challenger. And it's, to us, very relevant with new technology and AI and a more uncertain future when it comes to what we -- or how we should do what we do. So what we have done lately is to involve all employees in exploiting the opportunities with AI. And we've done that through giving access to an enterprise model through Google to absolutely everyone. So it gives the opportunity to generate agents and use AI as we know it through ChatGPT and other types of platforms. But what we want from it is to make sure that everyone understands the value of data because when you use AI with poor or little data, then you get the wrong results. And data is our currency. It is 1 out of 2 targets we have for 2025 for the company. And we say -- we practice saying that it is our job to invest that data and create value by understanding our risks and making profits out of that. And some of the activity we've done is, as you have most likely heard, challenging to quantify in an actual return. But obviously, there are efficiency gains that you get immediately from usage of AI. But our focus is more to see if we can solve the more complex tasks. So focusing on really challenging AI and the creation of agents and support to solve what we either have seen as too capacity requiring or too complex to solve ourselves. And what we see is that we get these efficiency gains. So we can -- we've made some agents and some functionality that reads through health documentation for personal lines or employee benefits in Norway. It takes 5 hours normally to read through it and get something out of it. Now it's a few minutes. We do that for incoming e-mail. It makes it a lot more efficient. And that's interesting but that's something that will happen. So in our opinion, that's not where our focus should be. Our focus should be in seeing if we can get better results. And it is something interesting around the fact that you will accept a poorer accuracy from a human than what you will accept with AI. And what we can see is that we get very high accuracy with very little effort, for instance, on what we call preunderwritings, we get a tender, get lots of information from the broker and then we run it through a process that evaluates 7 criterias. And in order to decide whether we should spend time on it and evaluate it further and price it and quote it or not. And it is obviously also a start of the underwriting process. And we had one target and that was to increase the quote rate. So meaning that we should actually quote more than what we have done because sometimes it is noise in the decision of whether to quote or not and some kind of assumption from an underwriter that this is going to take a long time or since I've seen it previously, it is a bad risk, which is not necessarily the case. It needs to be based on data. And we've increased the quote rate in the U.K. from 38% to 44% through using an application that we've designed on AI. And that's to us being the challenger. And then this -- what we do becomes old very quickly as the technology develops. And we are not spending any time in predicting what this will look like in the future because I don't think that we are any -- or have any edge in that. But what we do know is that we're not taking advantage of a fraction of what we can do today. So we still have a lot of investment to do when it comes to utilization of AI and actually using data or investing data as our currency. And we've discussed different ways of investing that time. We could have set up some expert center of excellence groups and see if we could find something genius through those groups of people who know the technology and know the business. But we have decided that Protector is -- and we get some kind of -- I've never used our -- and I've used our values and our culture a lot in my decision-making every day but I've never used it as much as now because it is more uncertain. And due to who we are, people who have a common set of values who should make decisions all of us because that's what best-in-class decision-making is. We have decided that we will include absolutely everyone in it but also that the only focus of our leadership development program that starts now in the first quarter of 2026 is AI. The previous decision, not too long ago, was data because that has been a focus. But then we have realized that now it is about AI because it will include data. And we need to make all our leaders, there are 140 leaders in Protector today, responsible for taking that ownership of utilizing AI because the fact is it is here and we are not utilizing even a fraction of it. So that's been part of the topic. And in order to do those things, we have also decided that for the first time in many, many years, all Protector employees will get together. So in March, we will get all Protector employees together in Norway at a place that is big enough to house close to 700 people. And we will have workshops to decide together with everyone and prework before we go there, who we will be and where we want to be in 2030. So -- which could be an exercise that we did in the management group and we did as leaders but we want to include everyone in that. It's a complicated resource requiring -- task to do that well. And I don't know if we're going to do it well but at least we have decided that going forward, both because we are growing, becoming more people, more countries and getting a bigger risk or having a bigger risk of becoming like everyone else, which is, in my opinion, the biggest risk of Protector. We need to invest more in this and in our people. So that's how we -- that's the angle that we take to AI. And unfortunately, we don't have a lot of exciting demos and value creation documentation to share with you. But a lot of it is happening. And we are investing, which you have also seen in our cost ratio and which I will come back to. But then let's get over to the results. So the quarter 3 results are very strong on the profitability side. As always, I get back to normalizing that and explaining the underlying realities. We have a weak growth in quarter 3 and I'll get back to that as well. So -- and then the investment result is in absolute terms, poor and also that I will explain further when I get into that. On the side of that, the transfer deal of the portfolio on Danish workers' comp that we previously expected to be finalized in quarter 3 is -- and it was due to subjectivities and that is mainly the authorities in the different countries is now expected to complete in quarter 4. So volume. And I think that this is, in many ways, where we have spent more time this quarter because this is not anything close to what we have had previously in percent. It is the smallest quarter. It's 12% of the volume totally in Protector. So there is some volatility in it. But the composition is some underwriting discipline, which we should have. Profitability comes first. So we've lost some large clients, some of which we wanted to lose. So we actually priced them out. Some have been -- we haven't managed to match the price, which is fair. And then there is this normal churn where we don't manage to renew all the clients. And then there are some technicalities in this where inception dates moved from -- it was -- the volume incepted quarter 3, 2024 and then they've moved the inception date to another. We mentioned this in the quarter 1 presentation that we had some volume there that moved to quarter 2 and quarter 4. And there's some of that. But it's also -- so it's a mix of that, discipline and some technicalities but also some realities. And the reality is that, in particular, in the U.K. market, we don't get support from high inflation -- inflationary increases on the prices anymore. So the property market, which is our biggest product, is in a softening cycle. So the rates are going down. And then we don't get that -- and we get very high churn if we continue to increase prices and we don't need it, as you can see on the profitability side in the U.K. So that's a reality and we have talked about that before as well. I forgot to say that it's better if we have questions during the presentation then all of them are saved for the end. So please raise your hand and I guess you'll get a microphone if you have questions along the way here. So -- and the market situation in the different areas is interesting to say something about in quarter 3. And there is not anything very special from what we have communicated previously. So the softening property market in the U.K. and that's both corporate and public sector and housing makes it harder to retain the clients at the same rate levels and makes it harder to win new business. In the Nordic countries, it is no real change in the market situation. So it's still a rational market. But obviously, we don't get that support from the same inflationary increases also there. And our new sales in quarter 3 are on the low side. We've missed out on also some of the larger opportunities that sometimes come our way and now not -- I wouldn't read too much into that part of it because it doesn't look like a trend. So that's quarter 3. Any questions to quarter 3? [indiscernible]? Unknown Analyst: [indiscernible] I guess, I have 2 questions, Henrik. First, could you give a bit more flavor on the U.K. real estate statement you have on one of the bullets here to make us understand a bit more. And the second question is that you have seen so far EUR 460 million in France. Will that figure increase through quarter 4? Or is it kind of the final volume that you will see in entering January 1? Henrik Høye: Yes. I can do that. So I was just wondering if there were any more questions on quarter 3 because I was going to get to those 2 about France. Get the microphone and can run a bit now. Thomas Svendsen: Thomas Svendsen from SEB. So questions to the U.K., it has been -- the combined has been stable at around [ 80% ] for several quarters. So what is your assessment? What is sort of the new level of combined ratio there? Henrik Høye: On new sales? Thomas Svendsen: On new sales. Henrik Høye: No, I think that on the corporate, so commercial sector, we basically target below 91% and have been doing that for some time but we've been able to get rate increases in renewals. And so not a lot of difference on the corporate commercial sector. We've been quite stable there. But obviously, in the public sector and housing, where we haven't had a lot of competition, we have not targeted a lower combined but we have been able to increase our margin and still win business. So then I think that for new sales, I would say that we will close in towards 91% combined ratio on our new sales over time. But that market will fluctuate and have volatility. Ulrik? Ulrik Zürcher: Ulrik Zürcher, Nordea. You say that it's softening a bit in the U.K. Should we read anything into that into the renewal next year, has an impact on growth expectation? Henrik Høye: Yes. It has been softening for some time on the property side. If you read the big reports of property and property rates in the U.K., you'll see that there was quite significant rate reductions in that market. But that doesn't mean that we come from those extremely high levels on everything. So I wouldn't read too much into it. We see that we can be -- we can still be competitive in the U.K. property market. But the kind of 2023 -- 1st of April 2023 situation is not the case anymore. So it's more like a normal... Ulrik Zürcher: Yes. But we have to counter like something is the same, borough, like public market but then we also need to the new market, the real estate. So I'm just -- they're -- you're not saying there's any reasons why you shouldn't have very potentially high growth in U.K. next year in new business or... Henrik Høye: No. So -- and then I can come to that because that's interesting. In a market like the U.K. So we've -- we're in the corporate sector clients with GBP 50,000 and more annual premium and that's where we started. And we're in -- we've also entered what we call the mid-market between GBP 20,000 and GBP 50,000 approximately annual premium. So we're starting to get some kind of traction in that market. And then we've had public sector and housing the whole time. And that's where we have a fairly high market share. So we are a top 3 player there. There's still opportunities but the real opportunities lie in the commercial private space. And there, we will find pockets and segments that are fairly big pockets because it's the U.K. and the U.K. real estate is one of them. And there's 2 reasons why we are entering that market now. One and the most important one is that we have hesitated entering that market because of extremely high commissions. So there's been commissions between 30% and 40%, not only to the broker but also to the property administrators. And the value chain is not very transparent. We don't want to be part of that type of a value chain. And in addition to that, the volatility in those -- or fluctuations in those commission levels means that cost ratio -- cost advantage is not that important because it's -- a lot of it is with the brokers and the administrators. Now the authorities have put a focus on it. So the commission levels are coming down. So that market is more professional. It suits Protector in a better way. And then we have achieved the A rating, which is important in that sector because the banks who finance the properties, they require it in their contracts. So then we get an access to that market. So we've spent some time getting to know the brokers who operate in that market. So the large players -- the largest broker players in that market gathering data. And it's always a milestone to win the first client in the segment that has a new product. So the new terms and conditions and it is accepted by the market when you win the new client. So this is a big market. It's bigger than GBP 1 billion. That's our risk appetite. So that's basically what we will -- what we think we will quote on. So that's a big opportunity. And then on France, it is the same thing. We need to say something about what we know and what we know is the tender volume. It will [indiscernible] not stop there. So there is still volume coming out but we know -- this we've known for some time that the tender volume is quite -- is a high number for 1st of January '26 because we do pipelining together with the brokers. But then the ones that they don't know about will come out throughout quarter 4, especially on the motor side, which is 50% of this and -- but also on the public sector and housing side. In France, they have something they called failed tenders. So if a tender doesn't meet the criteria, then they put it in a failed category and then they can go out and negotiate those contracts. And they have budgets on -- so they -- most of them fail because of a budget that is too small on the premium. So -- and if it doesn't meet, then they have to, so they're required to cancel it. So they will come out. A few of those will come out as well. Ulrik? Ulrik Zürcher: Just one follow-up. You forgot a bullet point because you forgot to put in your expected win rate. Henrik Høye: And you can estimate and guess as much. I'm sure that we could probably be slightly more accurate than you but we don't know what the market is. And there is actually a -- so there's actually a reason for why we -- why I don't even want to indicate anything there because we -- from the beginning, which is right to do, we have been a bit more restrictive on terms and we have slightly higher margins on what we quote in the beginning. And it should be like that because we both need to get confidence in what we look at. And the first ones that come out have had slightly poorer data than what we require. And then we need to test the market. So we know very little about the quotes that are out in the market now because the ones we have sent out and have some feedback on, they are not representative for the majority of them. [indiscernible]? Unknown Analyst: Regarding the U.K. real estate market, you have won the first client now in the third quarter. Last time you presented, you said that you expected the first client to be on board at the earliest April 2026. I have in my notes. What has happened and has the process speed up? Henrik Høye: I think it's a combination of things. We -- so the reason why we said 1st of April was that we didn't believe that we were able to -- we were going to be able to collect this -- enough data to quote in that market before that batch 1st of April inception. And then we also know that we needed a different kind of process -- underwriting process and using technology has made it easier to create those models. So we have, in our IT systems today, 60% of the code is AI generated. But on the underwriting side, I'd say that probably at least 2/3 of the code is AI generated on our modeling. And that gives a huge advantage in developing these models. So we can make one version, benchmark it with another one. And then so we can create a lot of different models and benchmarks them with each other without being delayed in the process. So that's that. And then we've also got -- managed to get traction with at least one of the brokers earlier than what we expected. They were a bit skeptical in the beginning because there are many competitors in this market and it's a commodity and it's a -- so -- but then they've understood that we have an edge and have something to bring to the table. So then they have started to send us. So it's actually a case where we've said no to quote cases because we are not ready. Unknown Analyst: But is 1st of April also very important in this segment as the other in U.K.? Henrik Høye: 1st of April is because of some kind of a strange financial year setup there, is important in all segments but not at all like public sector. So it's more spread out in the real estate. But we don't have all the data. So we don't exactly, know exactly know how it's spread out. But it's less dominant 1st of April in real estate. Okay. So that's, volume. Again, so if you look at it, on the face, adjust for large losses and runoff compare the quarter 3 figures there to quarter 3 last year, you see a very similar number on the loss ratio. But the underlying realities are slightly better than that in '25 relative to '24. We have had large losses on the property side only in U.K., Sweden and Norway in quarter 3, not in the other countries. So then you understand that they are artificially low in Denmark, Finland and France to a certain degree. But France, as I said last time when we had black figures on the combined ratio, it's very early and I wouldn't read much into the loss ratios in France for quarter 3. So that's on the large loss side. Runoff gains in all quarters. We had a question around our practice of best estimate reserving, which we follow and which is correct, both on the case side and on the actuarial side. But obviously, following a period of time when there's been more uncertainty on the inflation, which I have mentioned before, there is a higher probability of some runoff movements and uncertainty sometimes makes us a bit more conservative. So I think that it's slightly higher probability that you get gains than losses for some time after a uncertain inflation period. So that shouldn't be too much of a surprise either. And then there was a big storm that mostly hit in Norway but also a little bit in the U.K. and Denmark. And for the Norwegian part of this, this is quarter 4 numbers. It is -- it doesn't make a big difference, as you can see, if you try to calculate those numbers and especially with the reinsurance side of it. So we get our share but the Natural Perils Pool is reinsured with a quota share this year. So it's not a very large number, some few tens of million Norwegian kroner approximately is what that will have an effect. So one large loss. Yes. So any questions on the claims development? I've touched upon some of these points that you could potentially see here, both on the runoff but also on the volatility for large losses. I think that still it's important not to kind of look for trends in large losses because this is about very few losses and it's very volatile. So I would still look at around 7% as a normalized level. When it comes to the cost ratio, it is up exclusive of commissions by a bit more than 1 percentage points for quarter 3. And there's been a development in the share price. We've talked about this before. And only that is -- so if you correct for that relative to quarter 3, this is real cost. So it's about the salaries for some key people that have been part of a bonus scheme for some time that follows with synthetic shares that follow the share price. And when there is a lot of movement there, it does affect. But if you correct for that, you're basically at the same level. And then France was booked on the other expenses row before. Now it's in the cost ratio. And so that's a bit more. So it's slightly lower if you correct for those 2. I don't think it's very important to correct for any of them because the important message I want to give and what we talk about with the employees is that we are in a position now where we have a lot of development opportunities on the volume side. So we've opened a new market. U.K. is still -- there's a lot of opportunities. And even in the Nordics, there are a lot of opportunities on facilities and the property side. So we're investing in creating. It's a great time to invest in creating better data and preparing ourselves for the future in utilizing AI. So let's do parallel processes where we create AI functionality that can do exactly the same as the process today and then we benchmark. That costs some resources and we could have been more efficient today and I've talked about that before. I still mean that. We have overcapacity and we're not stressing in taking out those efficiency gains at the moment because that's probably the wrong decision. Any questions on the cost side? [indiscernible]? Unknown Analyst: Not on the cost side but on AI. You are using a lot of time talking about AI and I understand you are putting a lot of effort on this. Regarding your competitors, how are they using the same tool? Do you have some indication or... Henrik Høye: Right now I think it's much better that we spend our time on how we can utilize it. But obviously, we should learn from successes and mistakes out there. So we need to look out, out the window as well. And -- but I think what we do see is that lot of our competition, they focus that on their customer experience and because of the consumer -- the weight of the consumer segments in their companies. So it's a lot about improving the customer journey or whatever they call it, which is not very relevant for us. And I also -- what I do hear and see is that it is a lot about efficiency. So it's automation, which is not what AI is -- that's not our focus at least. That's a bonus and it will happen. So let's not stress about getting some efficiency gains because we're all becoming more efficient every day and you are, I'm sure. So that's not the main aim of this. It's the quality. And automation and robots and that is something we could have done a long time ago. So that's not really about AI. But I think the focus is -- we hear that the focus is a lot around that. So to the investment side, I'm not planning on spending a lot of time here but please come with questions. So in absolute terms, poor equity results. And then we've done a -- so we've accumulated profits or own funds in the different currencies and countries as that has come in. And now we've moved that equity home. That increases the running yield on the interest rate, the bond portfolio slightly because we get better yield in the Norwegian bonds than what we have on average for the rest. And then on the underlying realities for our papers or the companies in the equity portfolio, it is a -- so we have some IT consultancy where there is some poorer underlying development. And other than that, it's a good development. So in total, we characterize that as okay. So it's not like it's just volatility there but we haven't changed any strategy. And 1 quarter is a short time. A year is a short time, as we've said many times on this area. No losses in the bond portfolio. Capital position is -- so, yes, so there's no -- if you look at the other income expenses row here, you see that it is a high increase. That is due to the increased debt that we have, the Tier 2 debt that we have increased during 2025, so the interest rates there. Other than that, nothing special. And then this is slightly new in how we present it. The biggest element that you can see here is on the market risk, on the solvency capital requirement on the market risk, the [NOK 558 million that is on the orange box is due to the -- to moving the equity from the branches to Norway that decreases the requirement on the market risk. But on the other side, we get less diversification. So -- but there is an effect there on the solvency, which takes the requirement down. And the solvency position is very strong. And we still see obviously some geopolitical uncertainty in the world. And then in spite of what you see on the growth side for quarter 3, we see a lot of opportunities. When that volume will come in, that I don't know because that's dependent on the market. But we see a lot of opportunities and we have the data and we are quoting and we're comfortable with the quotes we send to the market. So we still believe that over time, the growth journey of Protector will continue. And therefore, it's good to be on the solid side since there is some volatility in that. And so that we don't have to do stupid things or the wrong thing either on the insurance or the investment side in the future. Yes, Ulrik. Ulrik Zürcher: You have a Tier 2 bond that's up in December, right? Henrik Høye: Yes. Ulrik Zürcher: Will you refinance that? Or will you cancel it? Henrik Høye: So we will continuously look to what we can utilize because there is a -- so now we're not able to utilize and partially because the requirement has reduced, right, from taking the equity on. So we'll continuously monitor how much we can utilize. And there are also limitations on how much we can take in. So it may be that we wait. But most likely, we won't renew it in December. December is also a poor date. So it's better to have it at a different date but that's a small part of it. But we'll assess that going forward. And then we'll most likely renew it or fill up with something in 2026 on that. Is that an okay answer, detailed comment? Ulrik Zürcher: Yes. Because it's a bit important when we judge your like actual solvency now. It's like that bond is that, [ i.e.,] because now you're not utilizing, so you could pay that back and then you can utilize what you have or you're very forward leaning on growth, so you need... Henrik Høye: Also that's, so in general, what we will aim to do is to have what we can utilize. So that's where it will be. And then you probably in a good market, be a bit ahead of that curve rather than behind it. So I spent more time here on this than I usually do and we do that in the organization as well. But when it comes to the quarter 3 results, this is the same slide as I started out with. So any further questions outside of what we have covered so far or anything that we have online? Unknown Executive: Yes, we have a couple of questions. Some of them have been dealt with already. But continuing on the capital situation, which is assumingly very strong and the potential for high growth in France, given the numbers. Could you say something about how much of that volume we will win, how much that will kind of consume of capital? So how much will NOK 1 in growth consume January 1? Henrik Høye: I can't give an exact answer. But today, we -- I guess it's about 30%. So 1 unit is 0.3%. And then there is something on the -- especially on the cat side, natural catastrophes that will make a difference because France is a different geographical area. So we will get diversification. So a property will -- in France consumes less because we have a lot of property pounds and property kroners. So that's -- so yes, it consumes slightly less on the property side, not on the motor side. Any other questions? Thanks for coming. Thanks for listening. Unknown Executive: Thank you.
Operator: Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's conference call and audio webcast to discuss the company's 2025 third quarter results. You can register for the conference call or log into the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mrs. Andrea Kopp, Senior Vice President, Finance. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in a whole or in part without permission from the company. I will now hand the word over to Mr. Richard Blickman, Mr. Rich Blickman, go ahead. Richard Blickman: Thank you. Thank you all for joining. I'd like to remind everyone that on today's call, management will be making forward-looking statements. All statements other than statements of historical facts may be forward-looking statements. Forward-looking statements reflect Besi's current views and assumptions regarding future events, many of which are, by nature, inherently uncertain and beyond Besi's control. Actual results may differ materially from those in the forward-looking statements due to various risks and uncertainties, including, but not limited to factors that are discussed in the company's most recent periodic and current reports filed with the AFM. Such forward-looking statements, including guidance provided during today's call speak only as of this date. Besi does not intend to update them in light of the new information or future developments nor does Besi undertake any obligation to update the forward-looking statements. For today's call, we'd like to review the key highlights for our third quarter and 9 months ended September 30, 2025, and update you on the markets, our strategy and outlook. First, some overall thoughts on the third quarter. Besi reported Q3 '25 revenue and operating results within prior guidance in an assembly equipment market showing early signs of recovery. Order levels improved significantly Q3 '25 with bookings of EUR 174.7 million, increasing by 36.5% and 15.1% versus Q2 '25 and Q3 '24, respectively. For the quarter, revenue decreased by 10.4% and 15.3% versus Q2 '25 and Q3 '24, respectively, reflecting continued weakness in mainstream assembly markets, particularly mobile and automotive applications and lower hybrid bonding revenue. Operating income was at the high end of guidance, reflecting higher-than-anticipated gross margins and operating expense developments, slightly better than forecast. The improved order outlook this quarter was principally due to a broad-based increase in die attach bookings by Asian subcontractors for mostly 2.5D data center applications and renewed capacity purchases by leading photonics customers. We also noticed improvement in more mainstream electronics and automotive applications. A push out to Q4 '25 of certain anticipated hybrid bonding bookings limited even stronger order development during the call -- during the quarter. Besi's results for the first 9 months of 2025 reflected similar trends experienced in Q3 '25 with revenue of EUR 425 million and orders of EUR 434.6 million, decreasing by 6.4% and 6.5%, respectively, versus the comparable period of the prior year. In general, weakness in mobile and automotive applications this year has been partially offset by significantly increased die attach orders by Asian subcontractors for AI-related computing applications. Year-to-date '25, net income of EUR 88.8 million decreased by 27.6% versus the comparable 2024 period, primarily due to lower revenue, lower gross margins realized principally due to adverse ForEx effects, and higher interest expense net related to our senior note issuance in July '24. Liquidity remained strong with cash and deposits of EUR 518.6 million, at September 30, increasing EUR 28.4 million or 5.8% versus June 30 this year, due to cash flow from operations more than doubling versus the second quarter of this year. In addition, we completed our EUR 100 million share buyback program, October '25, and authorized a new EUR 60 million program with an anticipated completion date of October 2026. Next, I'd like to discuss the current market environment and our strategy. TechInsights currently forecasts assembly market growth of 1.8% in 2025, which is below last quarter's forecast of 9%, driven by a push out of the anticipated assembly upturn to 2026. Forecast growth is focused primarily on AI and data center logic and memory applications. TechInsights now expect cumulative growth in the period 2026-'29 of 42% based on continued advancements in AI use cases, new product introductions in the 2026-'28 period, and a cyclical recovery in mainstream assembly applications. We expect to exceed market growth rates given our leadership position in advanced packaging. The semiconductor market has shown signs of normalization with inventory to booking ratios improving from above 2 in 2022 to below 1.5 currently. In addition, interconnect unit growth has also rebounded, improving from a low of roughly minus 20% in October 2023 to approximately plus 7% currently. These indicators point to a more positive assembly equipment environment as we look ahead to 2026. Besi continued to make progress in its wafer-level assembly activities in the third quarter, securing new customers and orders for both its hybrid bonding and TC Next systems. Hybrid bonding adoption expanded with the placement of orders in the third quarter '25 by a new foundry customer. Progress also continues on integrated hybrid bonding production lines with internal operating 6 Kinex lines with 30 hybrid bonding tools. Future hybrid bonding demand is also supported by recent announcements from AMD and Broadcom in collaboration with OpenAI. In addition, high-level discussions with major memory players are ongoing as HBM4 assembly processes start to take shape. TC Next progress continued with the new order received from a fourth customer. The outlook for Besi's business in the second half of this year has improved based on third quarter order trends and continued order momentum to date in the fourth quarter. The improved outlook reflects increased demand for advanced packaging capacity necessary to support the rapid expansion of data centers, software and next-generation semiconductor devices required by the industry-leading AI players. Advanced packaging is one of the key ways to achieve AI system differentiation, develop innovative consumer edge AI devices and provide the most energy-efficient data center performance. Now a few words about our guidance. For the fourth quarter this year, we anticipate that revenue will increase by approximately 15% to 25% versus the third quarter of this year, due to increased bookings levels. Besi's gross margin is anticipated to range between 61% and 63%. Operating expenses are expected to increase by 5% to 10% versus the third quarter due primarily to higher R&D expenses. That ends our prepared remarks. I would like to open the call for questions. Sorry, operator. Operator: [Operator Instructions] Our first question comes from Didier Scemama from Bank of America. Didier Scemama: I just wanted to ask you a bit more about 2 things. The usual questions really. On the hybrid bonding and TCB Next side, maybe just give us a sense of your conversation with foundry customers, but also DRAM customers. How you're thinking about the bookings for those type of tools in the fourth quarter? And then also related to the point you made earlier on this recent announcement by OpenAI and AMD. We know that AMD has been a major customer of your hybrid bonding systems via TSMC. Can you tell us a little bit more about that whether the capacity is in place or whether you expect a material improvement in orders from TSMC to support that ramp? Richard Blickman: Thanks, Didier. If you allow me not to go into specific customers, I'm very happy to answer a bit more in general terms. First of all, the hybrid bonding adoption for logic is continuing quarter-by-quarter. And we see that with adding another customer with several machines. And also as we guide for the fourth quarter, we expect orders. One is a larger one, as we have discussed also in the previous call and that may be related to those end products, which you just referred to. At the same time, the adoption for HBM stacking is all pointing towards a critical evaluation year 2026. The big 3 in that market -- all 3 of them have publicly announced that hybrid bonded devices should be available in their program by the end of next year. So that will be, as we have expected for many years, 2026-'27, that should be the adoption time using this hybrid bonding technology with all its advantages versus the TC solutions, so reflow and clarity, we will share as quarters go on, and that should result in probably first orders for some initial capacities. The orders received so far, as we shared in previous quarters are from 2 of the 3, who are evaluating in many different designs using the hybrid bonding technology stacking the 12 and 16, and they even go up much further, simply to achieve data on a comparable basis, on performance and of course, on cost. So that's the bigger picture in those 2. Then the chiplet architecture, adding more different devices and different structures is also continuing. And we see ever more customers. So if you look at the total count now, around 16, having hybrid bonders for different type of applications, and all developing applications in early stages apart from the major volume in Taiwan and what we also discussed the capacity having been set up in the U.S. by one customer, but the others are testing, qualifying and publishing data on using the hybrid bonding. So that's for the hybrid bonding. If we look at TC Next, the key issue in TC are basically there are 2 issues. One is going to a fluxes solution. Our system is prepared for adding that to the system. And at the same time, more accuracy required for bond pad pitches below 20 micron. Recent additional data has been published by IMEC in Belgium, that on our system, successful products have been refloat down to below 10-micron bond pad pitch, even 7-micron bond-pad pitch. So that should fill the gap between the necessary hybrid bonding and the reflow process as the world is using today above 20-micron bond pad pitch. And as you can see, another customer has been added, they all prepare for those 2 criteria required for next-generation TC. Didier Scemama: Very well. As a follow-up, I just wanted to check also another thing. So my understanding is that this OpenAI AMD chip and let's forget the name of the customer, but it's 3, if not 2-nanometer design. So are you ready to ship your 25-nanometer accuracy system in support of that customer? And I've got a quick follow-up as well. Richard Blickman: Well, for hybrid bonding, the current, let's say, the majority of systems shipped so far is 100-nanometer accuracy. And the 50 will be shipped for evaluation, qualification towards the end of this year. And that is in preparation for design structures below 2 nanometers as we understand from customers. So that's still some time out. Today, it's all 100-nanometer basically the benchmark technology used for many applications and not just for 1 customer. So we will see in the course of the coming quarters, a broader adoption for different types of devices and one of them has been announced publicly and the MI450. There's also a next one above 500, and they all use hybrid bonding as far as we are informed. Didier Scemama: Perfect. And then my final question, Richard, at this time of the year, it depends sometimes it's in Q4, sometimes it's in Q1, you start to get a feel for some flagship smartphone design upgrades, which typically leads to orders for you guys? Any feel for what it could mean for the new models that come in the later part of '26. Could that be orders for you in Q4 or in Q1? Or is it too early to say? Richard Blickman: No. The typical pattern for these new models is ordering Q4, Q1 with then market launch in September. So delivery of systems in June, for qualification July, August. So we should understand much more in Q4 and when we released the numbers in Q1 end of February, where this is heading. So if you follow the public domain, there's a lot of information about what will happen in this next generation, probably different cameras, also foldable. That means different design of the infrastructure in these units, and that could lead to a next round. But also this year in the generation for 2025, many let's say volume related, but also slightly new versions in these modules in these phones have led to a very positive business, albeit at lower levels than at the peak years 2021, '22. So the key is to understand what really changes, our new machines required. And as soon as new machines are required, that means an extra round. Currently, you can simply conclude that a lot is being manufactured on systems already installed. And in many cases, retrofits have done the job in bringing successful the latest models to market. Operator: Our next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: My question is regarding your business with older customers, such as in the smartphone market, the autos market, et cetera. There seems to be some signs of life in the smartphone market. But the question I have is that will those signs of life translate into orders for you given that sometimes your orders are very much related to next-generation product and whether that needs to wait until the new product comes out next fall? Or is it likely to happen because of the volumes? Or is that too early to say because it can happen because of the volumes. And I have one quick follow-up. Richard Blickman: Some are related to volume. So with the success which we have read in the public domain recently, that means, yes, more volume and that means shortages in certain areas and that is definitely helping. But as you said rightly, the key is to understand what are the real changes for the next model. And that typically becomes more clear towards the end of Q4, Q1, and then we have a much better understanding is there next year, going to be a ramp in those applications? Or is it at similar levels? That's typically how it has developed over the past many cycles. Automotive, the developments in automotive are mostly at new power modules also quite complicated modules. They're all for hybrid cars. That's what we hear. Volume is still, yes, let's say, moderate, not any expansion to mention, but that is also clear from the announcements of the major customer in that space. So there you can say still the turn of tide is to be expected early next year. Let's hope so. But yes, our success is always in these new technologies. So automotive, we mentioned also last quarter, we don't see further decline. We see a stabilization, and we see new products where we are included also new technologies for instance, in soft solder in bonding those high-powered devices. So that's typically what the status is in automotive. Sandeep Deshpande: One quick follow-up on the comment you made in your opening remarks on TC Next. You said you've got -- you've got an order for another customer in TC Next, I mean can you help us understand totally how many customers you have on TC Next? And is this, I mean, based on how you are seeing it play out. I mean clearly it's early days yet, but could this become a major new revenue stream for you? Richard Blickman: Yes. Well, let's hope so that, that will be the case. That's what we are aiming at. There are 2, again, markets. You can say the logic markets, and that is where you first reach the smaller bond pad pitches, so below 20 micron. And that is where the concept the TC Next is aiming at the first place. But at the same time that system is uniquely capable to stack those dies in HBM application. And also it's prepared to add the units required for fluxless application. The development is in both directions. So time will tell. And as I said earlier, '26 is going to be a critical year for adoption of hybrid bonding in HBM stacking, depending on what -- how that split will be at some point for HBM4. Most will be as everyone expects in refill process DC, but there are different variations in those processes. As we all know, the 3 use a different process, but that's less critical. So the machine typically for HBM3 is not -- that's why it's in an early stage, but an important year ahead of us to see where these applications can lead to major volumes. Operator: The next question comes from Ruben Devos from Kepler Cheuvreux. Ruben Devos: I had one on photonics. These orders, are they tied to I guess optic pilots? Or are they for, let's say, the pluggables inside the AI data centers? And... Richard Blickman: Sorry, you had more part to your question or... Ruben Devos: Yes. Well, just a follow-up on the photonics like these customers have resumed capacity purchases, I understood. Like is it for new platforms? Or is really expansions on the installed base? Yes, that's the first one. Richard Blickman: Well, it's for pluggables. So the connectors in the data centers. And it's partly add-ons, but it's 5 customers as we explained in the previous quarter and they're all ramping up and very much on our systems. So we have a major market share in that area. So -- yes, we expect that also to continue in Q4 because it's all tied to data center expansions. Ruben Devos: Okay. Just thinking about sort of the mix shift that has taken place since, let's say, 2021 when you sort of had the peak in mobile, I think it was 40% of your business and 20% compute and now approaching the end of '25. How do you think of that mix from what you've seen already so far? And particularly now in Q3, you see more momentum with orders obviously up particularly the OSATs ordering. Like how would you characterize maybe that shift mix today? And do you see, in general, like how do you assess the investment appetite basically from the OSATs now for compute as what it was maybe a decade ago in mobile? Richard Blickman: That's a very good question. In a big picture, the world clearly for the last decade was very much focused on mobile. Every year, next generation, every 3, 4 years, a major, let's say, new, whether it's from 4G to 5G and before that 3 and then also the cameras and the movies and all that has been a constant driver. And that still is today. So you can expect the 6G, but also the connection to wearables. And what we haven't mentioned yet is the increasing development in wearables in the glasses. It started with Google glasses, now Meta glasses, where we are also very much involved. So you see that developing along -- yes, let's say, the development I would sometimes characterize in mankind using those devices. Now we are in an AI phase, and that's more data using, again, yes, data in whatever more intelligent ways. And that is shifting then the percentage of revenue. Already last year, 43% was related to computing and data center high-power computing as opposed to many years before that, it was somewhere in the mid-20s. So that's all a very positive development. We were, for many years, characterized that we were very much dependent upon the high-end smartphone cycles. Currently, that is far less. We have more -- we have major drive in the whole AI world and with different technologies. So we look upon it in that sense with continued engagement in the forefront of the development of communication devices. And then we have automotive, which has dropped to below 20%, which was the average level, somewhere between 15% and 20%. So that's in a broader brush how our business is developing. Operator: The next question comes from Charles Shi from Needham & Company. Yu Shi: Congrats on the pretty strong guidance for fourth quarter. Maybe I want to go back to the major hybrid bonding order you expected that could arrive in Q3, but now it looks like it's going to be a little bit later, given the push out. So the question was -- question is this, how much confidence you have in getting that particular large order in the current quarter because last time, I think, quite frankly, we were a little bit disappointed by the push out, but really hope that this time it's real and it's coming. Richard Blickman: Well, you can also qualify that a bit in our own success in building machines. So at the very beginning, the throughput time to build these machines was over 9 months, closer to a year. And now since these 100-nanometer machines have become more standardized, we can turn them around in a 6-month period, which has the benefit for customers to align that more closely with their end customer demand and also the logistics. So what we understood is that the initial delay because of certain manufacturing or building construction issues at that customer. And that is why the placement is somewhat delayed. That is our current view supported by all the information directly from the customer. Yu Shi: Got it, Richard. So it sounds like 2 factors there, customer clean room delay and also the fact that you will improve the manufacturing cycle time. So they are not really -- they don't really need to place order well in advance, did I understand correctly. Richard Blickman: Yes. So we are currently installing machines at that same customer and those machines have been built in 6 plants. And that is also one of the factors. Yu Shi: Got it. So maybe a little bit of a more technical question. Regarding the Gen 2, the 50-nanometer accuracy tool, well, you have been very consistent. I think over the last 2 years that you expect to deliver the tool, maybe the end of 2025, that time line hasn't really moved. But at the same time, people have high expectation about Besi and probably were wondering why the schedule didn't move up. And was that more of a customer road map issue or more of a little bit of technical challenges on your side? Can you kind of shed some light on what's happening there with the 50-nanometer tool. And I think on a related question, I think when your schedule didn't really move in, do you worry about a little bit increased competition. I think on the HBM side, competition -- the landscape -- competitive landscape is well-known, lots of regional players there. But in logic side, do you see any increased competition there, especially at the leading foundry customer? Richard Blickman: Well these are very good questions. The first question on the timing of the 50-nanometer requirement, that's purely customer road map. And that road map has not changed. The road map is '27 onwards. And so that tool has to be ready by the end of '26 as we have shared, that is not being pulled forward. The adoption of hybrid bonding is ever more confirmed and we see that with additional orders, additional customers. It's definitely logic oriented because that is where the most critical and the smallest geometries are requiring this technology. On HBM stacking, it is a bit less in a sense, the bond pad pitch is not that of a great issue. But there, it's more the heat factor, so the performance of the device, which is driving using hybrid as opposed to a reflow process. On the competitive landscape, let's -- there from the beginning, a Japanese competitor has been already for 8 years sort of side by side. So far, our concept is certainly leading with a market share of over 80%, even some people say 90%. There has not been a change in that landscape. We have successfully moved the generation from 1 to 1 plus, so 150, 200-nanometer down to 100-nanometer. As far as we know, also from a cost of ownership, throughput, our system is certainly in the lead. On the HBM, it's a different competitive lens, more Korean based. Exciting will be in the course of this year, how the evaluations will, let's say, develop in terms of side-by-side comparisons that will take place in Korea at the 2 major Korean customers. So that will give us a better understanding of the competitive landscape. So that's in a nutshell, Charles, where we're at. Yu Shi: Got it. So in logic, no real change. In HBM, it's always a little bit of -- in some flux. But thanks for the color. Operator: The next question comes from Andrew Gardiner from Citi. Andrew Gardiner: I wanted to come back to the market slide that you put up every quarter in your deck. You've highlighted that tech insights have reduced expectations for this year. And I can see as well for next year, those have come down. I fully accept Besi is going to outgrow the market given your positioning in some of these areas. But expectations are pretty high out there at the moment for your revenue growth into next year. I'm just wondering if you can shed a little bit of light on how you are seeing things. You've talked about orders in the near term, but any indications from customers as to their thoughts into next year and what could help you to drive such outsized revenue growth into next year? Richard Blickman: Well, always a very good reference is the order run rate. So if you look at the last quarter, third quarter, also our guidance in broad terms for the fourth quarter, that leads to levels, which, yes, quarterly run rates give an indication on a yearly model. If you look at our revenue, let's say, if you take the guidance for revenue Q4, you take the midpoint and you add it up with the first 9 months, and then you look at the run rate in orders. And also, let's say, where those orders are coming from and you -- I think you also shared it in that sense. Then we are benefiting from a part of the market, which grows significantly more than the average assembly equipment market. So the TechInsights numbers are for the overall markets, and it could very well be that the mainstream market for less, let's say, complicated devices is growing far less than for the advanced, which has always been the case. So based on -- yes, the current run rate, one -- yes, should see that development. And also with the adoption of hybrid bonding gaining more traction more broadly, and also TC for that matter. Yes, that's a bit different than the forecast, which you see from the TechInsights. But in this industry, I've never seen any forecast, which is on the dot. It's usually either much too high or it is too low, it's a difficult time. If you also see this in respect of what's happening in the whole industry, and that in relation to the world, there -- yes, it's not that straightforward. Well, it's never been that straightforward. But anyway, so my message is our statements, we expect based on the current evidence and trends that we should be able to outgrow what is currently forecasted for the market. Operator: The next question comes from Timm Schulze-Melander from Rothschild & Co Redburn. Timm Schulze-Melander: Maybe just the first one. You talked about a new foundry customer to whom you've shipped a hybrid bonding tool. Could you maybe just provide some color about the application and just kind of how meaningful that might be? And then I had a follow-up. Richard Blickman: We are not -- let's say, we don't know the end customer in particular, but it looks like it's more in the mobile space. So that is as far as we know. Systems are ordered. They will be delivered in Q1. So then we may well know more, but customers are pretty careful in sharing end customer and end product details. Even for many, we are not allowed to see it. It's usually with code names. So our service engineers also are not able to track that, and one can understand also the reason why in IDMs, it's a bit more yes, let's say, easy because they typically have their end products, but in foundries that is a high level of -- yes, let's say, secrecy, confidential. Timm Schulze-Melander: That's really helpful. And then just you referenced an order booking that slipped and looks like it's going to track into Q4 in terms of just the readiness of the customer. Could you just maybe -- is that an existing customer? Is it a chip maker? Or is it a packaging subcontractor? Richard Blickman: Well, it's a chip-making foundry, and it's an existing customer. So that's as much as we can share. Timm Schulze-Melander: Okay. Okay. That's helpful. Because I think maybe one of the -- my last question. If we look at where the strength of sort of hybrid bonding engagement has been, it's been at those customers who are front-end chip makers and you've referenced a couple like TSMC and Intel. What would be the indication that the market is extending into subcons who don't -- the packaging specialists who don't naturally have sort of chip-making front-end capabilities. Is that something that we can anticipate sort of being in the 2026 time frame? Or is that really sort of a much longer-term kind of target that maybe follows whatever happens in high bandwidth memory? Richard Blickman: The largest subcon in the assembly space has taken ownership of hybrid bonding about a year ago and is in the process qualifying devices for end customers. It is very likely that you will see that trend, which has happened forever. And also, you can see it, for instance, 2.5D modules. 2.5D modules are now built at a whole range of subcontractors, the typical, the higher-end ones, and that is where the growth in our orders in the third quarter was very much coming from. So for hybrid bonding devices, you can expect a similar trend. It may take a few years, but it's all a matter of cost, and that is a normal trend. And as I said, you see already preparation because for those subcons, the high-end devices also offer the highest margin potential. So there's a clear win situation on both ends in reducing cost and that's the trend in many of our products. It starts at IDM and it moves gradually into the subcontracting arena. Operator: The next question comes from Martin Jungfleisch from BNP Paribas. Martin Jungfleisch: Yes. I have 2 follow-ups from some earlier questions, please. The first one is on the hybrid bonding order. I mean would you stick to your comments that you made during Q2 results where you anticipated H2 hybrid bonding order to increase significantly compared to H2 '24? Or is there -- do you see now some orders to slip even into Q1 '26? Richard Blickman: No, no, no. That's a very good question. It's very much as we said a quarter ago. So there are more we expect in Q4 to come in. So it's not just the big order, which slipped from Q3, hopefully, to Q4. But there are several other customers where we expect orders in Q4. Martin Jungfleisch: Okay. That sounds great. And then just secondly, on the 2.5D orders, I mean, you flagged this for the big increase in Q3. Just wondering, how sustainable are these order levels? I mean, is this driven by a single customer? Or is it multiple customers? And also what do you expect kind of this trend to continue into 2026? Richard Blickman: It's multiple customers. We mentioned several times that it is a group of 5, which we have been -- several we have been engaged in since over 10 years. So it started off with [indiscernible] already a decade ago, routers. And that has developed in our smaller geometries now into data center connectors. So that is a business which is growing and it's not a -- we don't expect that to be a onetime. But in capital goods, there's always this cyclical behavior. So you have a growth period, and then you have capacity absorption. But as we guided, we expect some continuation of this trend on the short term. But with the adoption of AI, and if you look at this in a broader perspective, again, what the world is expecting in the next couple of years, to do with the AI in every different form, these data centers is expected to grow significantly. And in case we are able to maintain our market position that should lead to continued business, albeit not in a straight line, but typically in a growth pattern. Martin Jungfleisch: That makes sense. Can you just tell me the lead time for the 2.5D tools? Is it similar to the mainstream market? Or is it more closer aligned to the hybrid bonders? Richard Blickman: Somewhere in between. So we have -- that's also a good question. We can turn around equipment for mainstream in -- yes, some even in 6 weeks, 8 weeks. But this is typically 12, 16 weeks. That's why we cannot turn around the orders received in Q3 in the quarter. That's why the guidance 15 to 25 and up. So a major part will be shipped in Q1. So that's how it works. So we have machines which are more than a year -- or more than 6 months, sorry, with new developments, it's more than a year, but then it varies between the purchase lead times is 6 weeks. And yes, usually to 12 to 16 weeks, that is what the pattern. Next question, please. Operator: We have time for one last question, and the question will be from Adithya Metuku from HSBC. Adithya Metuku: Firstly, I just wondered if you could help us get some more clarity into 2026. When I look at your revenue run rate that you've guided to for the December quarter or the orders run rate that we've seen in the third quarter,and annualize that, I get to around 20%, 25% below consensus in terms of revenues for 2026. So I just wondered if you expect orders to pick up further in the December quarter, or will it kind of plateau the high levels you've seen in the third quarter? Any color you can give and also any color you can give on how any other drivers we should keep in mind when we think about 2026 growth and that would be helpful. And I've got a follow-up. Richard Blickman: Excellent. Well, first of all, we try to share in the press release that the order momentum continues into Q4. So Q3 is not the highest level. We also indicated that we see renewed drivers for growth in '26, which are linked to mobile, for instance, but also in the careful mainstream recovery where we see the early signs. But on top of that, we have the hybrid bonding continuation based on further adoption, and that could lead to a much -- yes, let's say, stronger growth in '26 than what we have so far in '25. So those are the -- and don't forget the TC Next. So those drivers could result in, as I also answered to an earlier question, in a business model more focused towards the high-growth AI arena. And at the same time, recovery for those applications where we have had in previous cycles, significant growth in new model usually applications. So that's in a broad brush what the market could develop in '26, albeit in an environment which we all know is under -- yes, let's say, also different. China what we see is many customers are building next-generation capacities outside China. With the current geopolitical situation, you can expect new capacities built in countries like Vietnam, but also India. India, there are 5 major customers setting up assembly capacities, starting with direct product moves from what is currently built in China then built in India. That also offers additional growth in the change of infrastructure. So there are many aspects which can have an influence on how '26 will look like compared to '25. But we don't guide further than a quarter out. But since you ask what could be different in '26, then those are the aspects you can take into consideration. Adithya Metuku: Understood. And then just as a follow-up. I know last quarter, you talked about price negotiations in light of the recent adverse FX moves. I wondered if you could give some clarity on how those negotiations are going and when you might be able to get back into your 64% to 68% target range that you've previously provided? Richard Blickman: Well, interesting enough, if you look at the dollar decline versus the euro with about 12% and a margin impact of around 3% gross margin. So we have been able to offset that partly in new features, which always allow higher pricing, but also in carefully managing our supply chain. And in that sense, the -- those developments will continue in an environment where the market is, you could say, soft. So -- and if this is the low part of the cycle, then you have a significant upside potential. Also, if you look at revenue levels, EUR 134 million this quarter, what was it exactly, which is -- our peak was above EUR 200 million. Capacity utilization is, of course, at a different level currently. And that all has an impact on the gross margin overall. So if you compare this gross margin to peak levels, yes, the delta is larger than the 3%. I think once we reached 66%, we haven't reached 68%, it also depends on the order mix. There are certain new developments, which always have a somewhat lower margin. And over time, that improves because of, yes, the full qualification of systems. So those are all impacts on those gross margins. But still gross margins well above 62% is a reasonable margin at this time. Any last question? Operator: I think we do not have any more time for any last questions, but I will hand the word back over to you, Mr. Blickman for any closing remarks. Richard Blickman: Well, thank you all for taking the time. And if you have any further questions, don't hesitate to contact us directly. Thank you for attending. Bye-bye.
Operator: Hello, and welcome to Banc of California's Third Quarter Earnings Conference Call. [Operator Instructions] I'll now turn it over to Ann DeVries, Head of Investor Relations at Banc of California. Please go ahead. Ann DeVries: Good morning, and thank you for joining Banc of California's third quarter earnings call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information is available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would also like to remind everyone that today's call may include forward-looking statements, including statements about our targets, goals, strategies and outlook for 2025 and beyond, which are subject to risks, uncertainties and other factors outside of our control, and actual results may differ materially. For a discussion of some of the risks that could affect our results, please see our safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation as well as the Risk Factors section of our most recent 10-K. Joining me on today's call are Jared Wolff, Chairman and Chief Executive Officer; and Joe Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared. Jared Wolff: Thanks, Ann, and good morning, everyone. We're pleased to report another strong quarter for Banc of California with double-digit earnings per share growth and continued momentum across all of our key performance drivers. These results once again demonstrate the strength of our franchise, the consistent growth trajectory of our core earnings and the disciplined execution of our teams. Strong Q3 earnings per share growth of 23% quarter-over-quarter of $0.38 reflects our success in generating positive operating leverage and continuing to expand our net interest margin. Since the start of the year, our return on tangible common equity has grown 231 basis points to 9.87%, while EPS has increased nearly 50% since Q1. During the quarter, we also continued returning capital to shareholders in a meaningful way. We repurchased 2.2 million shares of our common stock in Q3. And overall, under our program, we bought back 13.6 million shares, more than 8% of our outstanding shares at an average price of $13.59, well below our tangible book value per share. Repurchases have totaled $185 million, more than half of our $300 million repurchase authorization. And even with this activity, our continued earnings growth has built CET1 to 10.14% at quarter end and tangible book value per share has also increased 3% quarter-over-quarter to $16.99. We will continue to be prudent with the remainder of our share buyback program and use it opportunistically while remaining focused on maintaining strong capital levels. Core deposit trends were positive with noninterest-bearing deposits up 9% and now represent 28% of total deposits. It was driven by both higher average balances and steady inflows of new business relationships. This strong core funding enabled us to further reduce broker deposits, which declined 16% from the prior quarter and lowered our total cost of deposits by 5 basis points to 2.08%. As noted in our investor deck, core interest-bearing deposits also increased when runoff of interest-bearing broker deposits is excluded. Our deposit strategy is both dynamic and flexible. While we continue to grow our core deposits, we will choose to shrink or expand other sources of deposits as needed, depending on pricing, our loan production and other liquidity needs. Loan production and disbursements remained healthy at $2.1 billion, with broad-based production from our business units. We purchased fewer SFR loans this quarter, down about $346 million from Q2 as yields contracted due to strong secondary market demand. Total loans declined about 1.6% from last quarter, mostly due to elevated paydowns and approximately $170 million of proactive payoffs of criticized loans, consistent with our strategy to maintain high-quality credit and exit credits that we believe are not meriting of long-term strength and support from us. Excluding that deliberate activity, our core loan portfolio was essentially flat. Pipelines remain strong, and we expect loan production activity to remain high. This strong loan production is one of the keys to the ongoing incremental growth in our earnings per share. The rate on new loan production remained healthy at 7.08%, well above the rate of loans that have been maturing. As a result, with strong loan production, even with elevated payoffs in the quarter, our balance sheet remixing accelerates our margin expansion. The loan sales we announced last quarter continued to proceed well. In Q3, we liquidated $263 million of held-for-sale CRE loans, largely through the execution of strategic sales within our targets and some proactive paydowns. We currently have $181 million of CRE loans remaining in HFS, and we expect to sell those over the next several quarters. Credit quality remained stable with criticized loans down 4% quarter-over-quarter and special mention loans down 24%. Classified loan balances increased this quarter due to a timing issue related to a $50 million CRE loan for which the borrower executed a contract for sale after quarter end as well as a revision to our risk rating framework for certain loans in the Venture Banking portfolio. It's important to mention that all of those loans are performing and on accrual status with no delinquencies greater than 30 days. The updated framework was procedural and not indicative of any incremental underlying credit weakness. Our allowance for credit losses increased to 1.12% of total loans or 1.65% on an economic coverage basis, reflecting our continued discipline to reserving and the strength of our credit profile. This was another great quarter for the company, a quarter that reinforces the positive trajectory we've established and the consistency of our performance. With a strong capital position, a valuable core deposit base and a proven team that executes with discipline, we believe Banc of California is well positioned to deliver sustainable high-quality earnings growth for many quarters to come. Now let me turn it over to Joe for some additional financial details, and I'll certainly be back to answer questions. Thanks. Joseph Kauder: Thank you, Jared. For the third quarter, we reported net income of $59.7 million or $0.38 per diluted share, which was up 23% from the adjusted EPS of $0.31 in the prior quarter. Net interest income rose 5% from Q2 to $253 million, and net interest margin expanded to 3.22% driven by higher loan yields and lower deposit cost. Our exit net interest margin at quarter end was 3.18%, which is normalized for excess accretion income in the quarter. We expect our margin to continue to expand from this level in the fourth quarter. Average yield on loans increased 12 basis points to 6.05%, reflecting the benefit of portfolio mix shift towards higher-yielding C&I loan categories, including Warehouse, Lender, Venture. Our loan yields also benefited from higher accretion income, which was up approximately $3 million from Q2 due to loan payoff activity. The spot loan yield at the end of the quarter was 5.90%, reflecting the impact of the September rate cut on the variable rate loans and normalization for accretion income during the quarter. Total loans ended the quarter at $24.3 billion, down slightly from last quarter, largely due to the intentional payoff activity and elevated paydowns that Jared mentioned. Excluding that, underlying core loan balances were stable. Deposit trends were strong as we saw favorable mix shift towards more noninterest-bearing deposits and reduction in broker deposits. As a result, cost of deposits declined 5 basis points to 2.08%. Our spot cost of deposits at 9/30 was 1.98%, and our cumulative beta in this down rate cycle for interest-bearing deposits is approximately 66%. The interest rate sensitivity on our balance sheet for net interest income remains largely neutral as the current repricing gap is balanced when adjusted for repricing betas. From a total earnings perspective, we remain liability sensitive due to the impact of rate-sensitive ECR cost on HOA deposits, which are reflected in noninterest expense. We expect fixed rate asset repricing to continue to benefit net interest margin as we remix the balance sheet with high-quality and higher-yielding loans. We have approximately $1 billion of total loans maturing or resetting by the end of 2025 with a weighted average coupon of approximately 5%, offering good repricing upside. Our multifamily portfolio, which represents approximately 25% of our loan portfolio has approximately $3.2 billion repricing or maturing over the next 2.5 years at a weighted average rate that offers significant repricing upside. Noninterest income was $34.3 million, up 5% from last quarter, primarily due to higher fair value adjustments on market-sensitive instruments. Normal run rate for noninterest income remains at about $10 million to $12 million per month. Noninterest expenses of $185.7 million were relatively flat across most expense categories as we continue to maintain disciplined expense controls while supporting our growth initiatives. The combination of stable expenses and higher revenue drove a more than 300 basis point decline in our adjusted efficiency ratio to 58%. We continue to make progress on expanding positive operating leverage while still investing thoughtfully in technology and talent to support future growth. We expect 4Q expenses to be consistent with prior quarters and be at or below the low end of our range as we continue to make progress on managing core expenses. As Jared mentioned, credit quality remained stable with net recoveries of $2.5 million and declines in our criticized loan balances. Provision expense of $9.7 million was largely related to portfolio growth and updates to risk ratings and the economic forecast. Our allowance for credit losses ended the quarter at 1.12% of total loans or 1.65% on an economic coverage basis, consistent with our prudent approach to credit management. Looking ahead, we remain on track with our 2025 guidance. We continue to expect loan growth for the full year to be in the mid-single-digit range and net interest margin to remain within our 3.20% to 3.30% target range for the fourth quarter. We also expect to maintain our strong capital and liquidity position while delivering steady high-quality earnings growth. With that, I'll turn it back to Jared. Jared Wolff: Thank you, Joe. This was another excellent quarter for Banc of California, one that highlights our strong performance, positive operating leverage and the consistency of our results. Since completing our systems conversion in the third quarter of '24 following our merger with PacWest, we have been building core earnings while improving the balance sheet, managing expenses and efficiently deploying capital. With 4 quarters of high-quality earnings growth under our belt and foreseeable EPS growth in sight, the track record and the path ahead should be very clear. Our teams continue to execute with discipline and focus, driving growth and continuing to build one of the best franchises in California and everywhere else we operate. We have a proven business model that is delivering high-quality earnings through a diversity of lending channels, a valuable and growing core deposit base of deep client relationships and a culture of performance and accountability. We believe the opportunity in our markets remains significant as we capitalize on the dislocation in the California banking landscape and win new relationships. We continue to add high-quality talent to support our growth as our teams continue to win new business and bring new relationships to the bank while serving our clients and keeping safety and soundness front and center. The consistency of our results, the strength of our balance sheet and momentum in our business demonstrate why Banc of California is well positioned to continue our success and why we're so confident in the long-term trajectory of our franchise. Thank you to our employees for their dedication and commitment to serving our clients and community each and every day. With that, operator, let's open up the line for questions. Operator: The first question comes from Jared Shaw with Barclays Capital. Jared David Shaw: Just to start off, the credit trends this quarter were really good. And Banc of Ca was pulled into sort of a story of the Cantor loans and I think, just sort of broader concern around NDFI lending and structure. And clearly, from the numbers you put up, you must feel that there's not a lot of loss there, and it feels like you have good collateral protection. Can you just give a little color on how you structured that exposure and why you feel that there's not loss there? And is that sort of reflective of the broader view of how you're going after some of the non-mortgage NDFI lending? Jared Wolff: So thank you for the question, Jared. When you say how we structured that, you're speaking specifically to what was mentioned in the articles? Jared David Shaw: Yes, in terms of like being able to get additional commercial real estate collateral and being sure that you have the senior lien position. Jared Wolff: Yes. So this is a really important distinction. The frauds that were mentioned with Zions, with Fifth Third, with Western Alliance fundamentally had to do with NDFI lending. And they were generally lending with collateral pools. We were mentioned because we had a loan to a related borrower. But our loan to that borrower was not an NDFI loan. It was a pure real estate loan. So we weren't lending on any collateral pool. This is a loan that was made -- we made a loan many, many years ago to -- on a hotel on the beach in Laguna. That loan has been on nonaccrual, has been classified, and we filed a lawsuit many quarters ago. It's been in our numbers. But that was not -- that had nothing to do with our NDFI lending. That was just a simple real estate loan. And so I would just say it was a real estate loan that the partners got into a business dispute. Clearly, some of the drama that was going on there affected what was going on elsewhere. But it's real estate. We're collateralized. We have a guarantee from the [indiscernible], but we're relying on the property to pay us back, which we think we're well secured, and we think there's plenty of collateral there. So it's important to distinguish that. When we look at our -- and I think Zions mentioned in their lawsuit that we were in first position, again, they were looking at loans that were in a collateral pool that we had lent on purely as real estate loans. And in fact, they were 2 single-family loans that are no longer in our portfolio. They were sold as part of a pool of single-family loans that was sold in connection with the transaction. So we weren't lending to these groups that seems to be caught up in the fraud and certainly not Tricolor or First brands, but as it relates to Cantor and the related entities, we never lent to any of those on an NDFI basis. Just that wasn't what we were doing. So let me just put that to bed. We're a real estate lender fundamentally to those folks, and we think we're well secured by real estate. And you perfect a first priority interest in the mortgage deed when you make a real estate loan, very easy. In terms of NDFI, we put a chart together in our investor deck, it's on Page 14. A significant portion of our NDFI lending is in mortgage warehouse and fund finance, which I think people have a strong understanding of. Our mortgage warehouse loans are -- we have a great team. It's really well done. We've had it for years. We put -- but we think we do all of these credits well, including our lender finance loans that are business credit, consumer credit and other mortgage credit. And when you strip out mortgage warehouse, fund finance and other mortgage credit, which is 11.6%, 13.7% of our 18%, you're left with less than 5% of our loans having NDFI exposure. But across the board, we've had a history of no losses over -- and I ask people to put in the 10-year historical loss rate so that we could go back as far as we can because PacWest has been doing this for a long time and mortgage warehouse at Banc of California has been in place for a long time. It's negligible. That's not to say you'll never have a loss, but I think that the way that we do it is very specific. One thing that's important to mention that we put in our deck, and I had our team go through what happened at the other locations without being critical of our peers who are very good lenders, but things happen. I said, what do we do that's different to protect ourselves? And they highlighted one of the things that we do is we have an in-house audit team that conducts anti-fraud measures, frequent testing of underlying collateral, cash collections, payment history, mortgage title checks. When we do -- when we take a collateral pool, we look at it ourselves, we sample it, we check the trustees, we check the perfection and make sure that we know what position we're in through a broad sample. So look, I don't want to be critical of my peers. They're all good lenders. I can only speak to our history, what we do and how we do it, and I feel very comfortable with what we do. Happy to -- let me pause there, Jared. Happy to answer more questions. Jared David Shaw: Yes. No, that was great color. I think good insight into how you're structuring it. Maybe just as a follow-up, shifting over to the margin. When we look at the guide for the margin of 3.20% to 3.30%, is that a good normalized level? Or as we sort of end the year and start looking into '26, how should we be thinking about margin, especially with the likelihood of some cuts? And I think your guidance does not assume cuts. Is that right? Jared Wolff: Correct. It doesn't assume cuts. So I'll start, and I'll let Joe chime in. So we -- certainly with -- we are liability sensitive when you factor in the ECRs. And so we do expect our margin to expand. The accelerated accretion we had last quarter was in the middle of the quarter, which is why it affected -- and it was -- it affected our overall margin. It took it to 3.22%. But when you strip it out, we were at about 3.18%, which is still a nice expansion from the prior quarter. So we see our margin continuing to expand. The question is at what pace. I'm pleased that our teams have been able to realize, I think, a pretty high level of beta as we're really being disciplined in terms of managing our deposit costs. So I expect whether we're going to achieve 66% or 50% is going to matter on a whole bunch of factors, but we certainly expect to achieve at least 50%, if not higher, going forward on our deposit beta. Our margin will continue to expand. And Joe and I were talking about this before the call. I mean, the biggest driver of our margin expansion seems to be our increased loan production, whatever it is in the quarter and how that is really replacing loans that are at much lower rates. One of the big shoulder bags we're carrying is this $6 billion multifamily portfolio that it will -- half of it matures or repays in the next 2.5 years. But that portfolio is at 25% of our balance sheet and it's -- of our loan portfolio, and it's at 4%. So even with rates coming down, our loans coming on are coming on at much higher rates. And even a lot of those loans happen to be floating rate loans, but they're still coming on at much higher rates. And generally, we'll have floors on those loans as well. Joe, anything to add there? Joseph Kauder: No, I think you captured it, Jared. As we look out into the future, your original question, I think, Jared, was, is it a solid run rate looking at 3.20% to 3.30%. I think that's a starting point. And then as Jared Wolff mentioned, I think we intend to grow it from there. And the loans -- obviously, the loan -- the remixing of the loans is a powerful accelerant to that. But then we also -- as we did this quarter, we're continuing to focus on growing noninterest-bearing and getting our cost of deposits and cost of funding down. And then you'll occasionally see some lumpy upside related to the accretion, which we had this quarter. So I think we're feeling pretty good about it. Jared Wolff: Jared, I think as we get to the fourth quarter, it's going to be easier -- get through the fourth quarter, it will be easier for us to give you a range guidance for the margin for next year because I imagine you're starting to look at that. I expect if we're 3.20% to 3.30% right now, we're going to end up -- obviously, we're going to end up there given that we are at 3.18% in the fourth quarter, and we don't even have a full quarter of rate cuts. And so we'll end up low 3.20s in the fourth quarter, most likely. And then I would expect the jumping off point for '26 is going to be 3.25% to 3.35% or whatever it is, that gives us some flexibility. Look, we're earnings first and margin second, but I think the margin will certainly continue to expand, and we should have more guidance as we get closer to the end of the fourth quarter. Operator: The next question comes from Timur Braziler with Wells Fargo. Timur Braziler: Maybe just back on that margin discussion. I guess just looking at margin kind of not the combined effect with the ECR reduction, just are you still liability sensitive from a margin standpoint or relative to the comments you just made, rate cuts are going to be punitive maybe upfront and then you get that ECR benefit on the back end? Jared Wolff: They're definitely not punitive to us. We are, at worst case, neutral with rate cuts when you take out ECR. And I'll let Joe correct me if I'm wrong there, but we believe that we really are fundamentally neutral that our deposits and loans are kind of repricing in balance and then ECR gives us that liability benefit. But our margin expansion is really being driven by this loan production that we're seeing. Joe, do you agree with that? Joseph Kauder: Yes, that's correct. We're -- right now, as we stand today, we're a neutral balance sheet if you were just to -- if you were to exclude the HOA deposits with the ECR benefit. Jared Wolff: And Timur, we kind of debate this internally. When you do these models, as you probably know, these IRR models, they rely on a static balance sheet. And nothing is ever static in a bank. So I always think that they're off in some way. And it's -- they're directionally accurate, but they're never truly accurate because the balance sheet is not static. And so the question is, which way is it off? I think we can drive more benefit because I guess that's the way my brain works, and that's where I'm going to drive results. But I tend to think that we can even on a static balance sheet or a slightly dynamic balance sheet without production, I think I can get more movement on deposit costs because that can drive cost down. We have to put in assumptions about what deposits are going to reprice and how they're going to reprice. And I tend to think that we can be pretty aggressive as long as we're doing well on our growth initiatives. So -- but the technical answer is we are completely neutral. Timur Braziler: Okay. That's good color. And then just looking at the third quarter deposit growth, particularly in DDA, I guess how much of that is tied to warehouse? There wasn't really an increase in related ECR costs. Was that more back-end driven and we might see the higher average balances impact 4Q numbers? Or was a lot of that growth kind of ex ECR driven? Jared Wolff: It wasn't -- you said warehouse, I think you meant HOA. It wasn't, if I understood your question correctly about whether it was HOA related, right? Timur Braziler: I mean just ECR-related deposits. Jared Wolff: Yes, the ECR is primarily in our HOA business. No, it really wasn't. We tend to see inflows of HOA at the beginning of a quarter and then they flow out through the quarter. And so you won't see kind of average balances grow tied to ECR. Also, our highest ECR cost is really associated with some larger depositors in HOA, and we have not been growing balances from them because we don't want to increase our cost and concentration. And so even if we were to grow HOA, we wouldn't see the same level of ECR cost come up. But -- so that's just some color on how we're growing our balances is the level of ECR that we're paying is not the same at new balances we're bringing in from HOA. Our team has done a great job of making sure that our ECR costs are not what they were historically. And we have some larger relationships that have some more expensive deposits, and we just don't want to grow those, right? And so we've been -- I would say that the deposit growth was pretty broad-based. I've been -- as I've said, I expect deposits over time to grow. We're working really hard at relationships. If people have been tracking kind of the ample reserve conversations at the national level and with the Fed policy, I mean, liquidity is tightening nationwide, and it's expected that the Fed is probably going to have to engage in some [ TOMO ] activity to kind of put some liquidity back in the market. That's consistent with what I've been saying for many quarters is that if we're flat when liquidity is coming out of the system, that we're winning because in many cases, deposits are down and your customers don't have more to give you. I would say this quarter was a great quarter. It was pretty balanced. We brought in a lot of new relationships. We did see some good activity from some existing clients as well. We'll see what shows up -- I'm sorry, in the Q3. So we'll see what shows up in Q4. But over time, I expect that we're going to continue to win on bringing new deposit relationships in. Operator: The next question comes from Matthew Clark with Piper Sandler. Matthew Clark: Just on the loan and deposit growth for the year, targeting mid-single-digit growth, it implies a decent step-up here in 4Q. Maybe just speak to the pipeline on both sides of the balance sheet and maybe mid-single digit is 4% to 6%, so 4% would kind of be in that range on the loan side. But on the deposit side, it just implies a steeper step up. Jared Wolff: Yes, you're right. I mean what we don't do is we don't pull away from goals. We'll measure ourselves and see how we did at the end of the year. But you're right, it would suggest that we'd have to have some outsized growth this quarter, and we'll see if we hit it. We're -- our teams are working hard. We might not, but I'm comfortable being measured against what we do. I think our shareholders are being rewarded by our growth in earnings. And I'd like to put out there all the initiatives that we have and how we're driving results for shareholders. And the market is what it is, the dynamics are what they are. I think on a core basis on the loan, when you strip out the loans that were sold, when you look at kind of core loan growth, we'll probably hit the 4% to 6% range. I think that's fair. Deposits are going to be a lot harder. So we'll see where we end up. But I just didn't feel like pulling back our goals. Our teams know what they are. They're out there working hard to try to deliver. Production has been fantastic. I've been really pleased with the production of our teams. Payoffs happen. But like I said, earnings are continuing to grow, notwithstanding that. So I'm very pleased with what we're doing so far. Joseph Kauder: Jared, I would just add also that we calibrate our deposits to our loans, right? So we don't want to have too many deposits. If we end up with excess deposits, we'll occasionally take measures that will optimize our balance sheet. But we can -- there's a spectrum of deposits. And if loan growth -- to the extent loan growth is robust in the fourth quarter, we can scale those deposits to fund that. Jared Wolff: Yes. No, Joe, that's -- I'm glad you mentioned that. It's one of the comments that I had in my prepared remarks, which is that we are pretty dynamic in managing the balance sheet to optimize earnings and not carrying cash at levels where we think we can get a better return somewhere else. And so -- and we'll let -- depending on what we see in terms of our flows, keeping our loan-to-deposit ratio and our liquidity levels in balance. Our team does a great job. Our treasury team does a phenomenal job with our finance team of really optimizing in a very dynamic way when we bring on broker deposits at what cost, for what duration, what do we need right now, depending on other deposit flows. And so I'm glad you brought that up, Joe. Matthew Clark: Great. And then just the other one for me on the Venture business, can you just provide a little more color on what changed in the way you're risk rating those loans that may have caused a little bit of creep in the classified? Jared Wolff: Yes. Sure. So we -- I mentioned this many quarters ago that we were going to get stricter on how we were internally grading ourselves because I feel like it's the best way to have an early warning system. So you can downgrade credits based on a new methodology, but it has nothing to do with the experience that you've seen to date of the credits, but it might mean that you're watching them more closely because we decide the environment or just our risk tolerance may have changed. And so the way that we're looking at venture credits fundamentally has to do with a matrix of a number of factors. It has to do with fundamentally, just to remind everybody what we do in Venture generally. So fund finance is capital call lines of credit. I think people are familiar with that. In Venture, where we have a disproportionate amount of deposits relative to our loans, we lend discretely. And generally, what we're doing in the Venture space is lending to give somebody a line of credit that bridges around of funding. When we bring in a relationship, they're giving us all of their -- let's say it's a company that has some great software and they just did a round of $20 million at a $200 million valuation. That $20 million is going to come into our bank and let's say, we bid on a line of credit and we won. That $20 million is going to sit in our bank. It's probably going to be $2 million or $3 million in their operating account and the rest is going to be in a money market account where they're getting some earnings because they need it because they're not profitable. They might have asked for a $5 million line of credit. That line of credit is going to not be used. It's a bridge facility that would only be used when they go out to raise capital if they need additional time. And what we monitor is the RMC, the remaining months of cash as they burn and make sure that we never have what's called crossover, which is when the debt is in excess of cash. As long as our debt remains less -- greater than the cash level and most of the time our debt is 0, we're fine. And we're benefiting from these deep relationships of treasury management and cards and all the other services we provide and the expertise that we provide that they certainly value. But they may say, "Hey, we're going to go to a round C. We've got lined up investor support. We're going to -- we need a little bit more time. We have 9 months of cash, and we think it's going to take us down to about 4 months of cash. Okay. And they're asking us and they're talking with us about whether or not they're going to borrow on that line of credit. And then it's a conversation, and we go in with our eyes open based on what we see there. And 99% of the time, it works out fine, but there have been circumstances when it doesn't. So what we've done is to tighten the requirements that we have for what we're looking at. We're looking at the sponsor support, the support of the VCs, we're looking at how they're doing relative to their business plan. We're looking at the remaining months of cash. We're looking at the cash to debt levels. We just tightened up the matrix, and that caused us to rate credits in a different way, and there's about 8 or 10 things that we look at. And it's hard for me to go deeper than that, Matthew, but I just want to give you some color. And so the credits could be the exact same credits and performing the exact same way, but under this new matrix. We might be looking at it a little bit differently, and it might trigger another conversation with the sponsor and the VC firm and that's just what we decided to do to tighten up our standards. Operator: The next question comes from David Feaster with Raymond James. David Feaster: I guess maybe touching on the loan growth side. If we think about the growth dynamics, obviously, payoffs and paydowns have been a headwind. If I was reading between the lines, it sounds like you're expecting production -- improving production to drive growth rather than really a deceleration in payoffs and paydowns. I guess, first, is that a fair characterization? And then secondarily, what do you see as some of the key drivers of that increase in production? And how is pricing today? Jared Wolff: Yes. Let me start at the back end of your question. So we see a very strong pipeline this quarter. It's looking really good. The fourth quarter tends to have good activity. It's obviously economy dependent. But right now, people seem to be doing well enough and active. And I think rate cuts generally will stimulate activity as well. So I think that probably bodes well for a good quarter. Pricing is holding up at 7.08% of new production. Yields is a little bit lower than prior quarters, but it's still really, I think, really, really good. And if I look at the yields that we got on production in our individual lending units, which I have right here, production yield really held up pretty well. I mean construction was flat, was almost -- was a little bit up. C&I was up, Venture was up. Warehouse was up. SBA was a little bit down. Equipment Lending was slightly down. Fund Finance was relatively flat. Lender Finance was down. So Lender Finance was down about over 50 basis points, and that's because it is -- those are floating rate credits pretty closely tied to SOFR. And so we were very active in the quarter. And so that would have brought some of it down. But overall, I think yields were pretty good in the quarter. We had 7.29% last quarter, and it was 7.08% this quarter. So -- but in the first quarter, it was 7.20%. So there was kind of a spike in the second quarter and then third quarter came down a little bit. And also rates tend to lag a little bit. So this quarter, we'll see where they are based on rate cuts last quarter. But overall, I think production levels are strong. It's hard to know where payoffs are going to be in any given quarter. Stuff just happens. It's a very dynamic active. Our clients are very active. We had one client that won a lawsuit. They brought in tons of deposits, and then they paid off a big loan that they had with us. And so it happens. We didn't know that, that was going to happen, and it did, that's fine. It's just normal. But we really try to save loans when we can see things that are going to pay off. If it's a multifamily payoff, we certainly want to bid on it. If it's a construction payoff, generally, we're happy with it, and we'll find new construction because some of those longer-term mini perms at low rates, we're just not going to do. And sometimes they're too large. Even though we're going to do the construction, that doesn't mean we're going to do the mini-perm. It's just there's much higher debt on the mini-perm, and it's just not something that we're necessarily prepared to do even if we did the construction. Sometimes we are, but not always. It just depends on the project. And so David, let me ask you to reframe -- I want to make sure I'm answering all of your question. Can you restate... David Feaster: Yes, the other part was just with the increasing production that you were talking about, what are some of the key drivers of that? Jared Wolff: In terms of the areas where we're lending, I mean, I think C&I overall is doing really well. So in California, across our commercial and community bank, we're seeing broad-based good production. And generally, in our middle market area, which is to companies that are a little bit more experienced, a little larger, we're seeing good production locally and even more broadly across California, we're getting referrals from our business units that -- for businesses that are all over the country, which is great. Lender Finance continues to shine. And one of the things that Ann mentioned in a note to me was that we provided back leverage for the loans sold last quarter that were Lender Finance, and that might have brought down the loan yields a little bit, too, because we provided good rates on those loans for the back leverage for the loans that were sold, but it was still well above the rates of loans paying off. So that might have contributed to Lender Finance rates being down a little bit. Let's see. We're still seeing a lot of construction demand in terms of low-income housing tax credit. That stuff just takes a while to pay up, but it's -- that's doing very, very well. And I would say that Warehouse, there's always people that are refinancing and buying homes even up or down, we seem to have good demand in Warehouse. So that's growing as well. So I'd say those are the drivers right now. Fund Finance is always pretty -- the other thing I would mention would be Fund Finance. It was not a big quarter for Fund Finance. It was one of their slowest quarters after really 3 really strong quarters. So we'll see what happens in the fourth quarter. I know they have some good fundings expected this quarter and Fund Finance could have a good quarter this quarter as well. But it was not a big contributor last quarter. David Feaster: Okay. And maybe shifting back, I mean, you guys have been very proactive managing credit. That's been a part of what the payoffs and paydowns that you're seeing, some of which you're pushing out. The industry is obviously hyper focused on the credit outlook today, just given some of the recent issues that we've seen in the industry. I think you kind of put the NDFI issue to bed. But outside of that, I mean, is there anything where you're seeing any pressures or that you're watching more closely or that maybe you're pulling back from just that risk-adjusted returns don't maybe make as much sense just given competitive dynamics or underlying issue? Just kind of curious if there's anything you're seeing. Jared Wolff: Yes. As strong as the market is, I would say the areas where we have been very cautious have been -- certainly, we have not backed off any of our office comments about. We still think that, that is -- I was at an event with one of the investment banks held with Blackstone, and Jon Gray was there speaking to a room full of CEOs about what they were seeing, and they're like doubling down on San Francisco right now, the San Francisco office market. Obviously, Midtown Manhattan has come back pretty strong. That said, we don't feel the need to be an office lender. We just don't. And let others do it. And so we have -- we're backing off that, even though we just signed a big lease downtown in Downtown Los Angeles, where we're moving in. And we're -- we have 2 offices that we consolidated in Downtown Los Angeles, got the same square footage a little bit more, got rooftop signage for less than we were paying for the other 2 buildings combined. So we're trying to be proactive and take advantage of it, notwithstanding that, and maybe because of that, I feel like I don't want to be a lender on office right now. And so we're not doing that. And I would say that anything that has government in it, any type of property with government, we're staying away from. And some of the things that we moved out of, we forced exits of properties where the government was a tenant, and I said, just get rid of it, tell them we're not going to renew the loan and just move it out. And that was some of the credits that went out in the quarter, at least one of them had a government tenant, and I said, just get out of it. It was a large tenant in the property, and I said, let's just move out of that property, but it was completely stable. So that's where we've been proactive as well. Operator: The next question comes from Chris McGratty with KBW. Christopher McGratty: Jared, on the -- I know you touched upon it in your prepared remarks, the buybacks, the opportunistic buybacks partly from private equity. How are you thinking about CET1 levels given the earnings improvement ramp, the growth you talked about and just in light of regulation? Jared Wolff: Yes. I mean I think the right number is between 10% and 11%. And I think more people are coming -- as I've said in prior quarters, I think more people are coming down to us than going up to above 11%. I had said before, I thought 10.5% was totally fine. And so we're between 10% and 10.5% now. And I think we've got plenty of capacity, and we're building up CET1 at faster than we're growing earnings due to some benefits that we have on the tax side that Joe can walk through. And so we're able to continue to grow CET1 while buying back stock. And we're completely undervalued, in my view, by a meaningful amount. And we've got to solve that by continuing to drive earnings growth. I think the market gets it, and we're going to continue to build on this track record. But I think we now have a track record. And I think the margin expansion is there. So -- but I don't want to lose the opportunity to take advantage of buying back our stock. And I think we're going to be plenty of opportunistic and be able to maintain capital levels in the right range. Christopher McGratty: Okay. Continuing to buyback. Got it. And then on the ECR betas, maybe a question on for Joe. I guess what are you assuming for betas on the ECR deposits? I may have missed that. Joseph Kauder: So it is approximately -- the way the contracts work is approximately 75% for every 100 basis -- for every basis point move. Christopher McGratty: Okay. And then, Joe, I have you, that Jared tease the tax -- the fund tax item. What should we be thinking about in terms of tax strategies, tax rates? Anything unusual? Joseph Kauder: No, I think 25% is probably a good tax rate for us moving forward. We do have a big DTA generated from net operating losses that have occurred in the past, also have a fair amount of tax credits, which have been built up through our low-income housing activities, et cetera. As we use those up, as we make money and we use those up, those -- the way the tax law works is there is a -- you're kind of restricted in the benefit of that deferred tax asset in your CET1. So as you use up the deferred tax asset, it comes back in, it gets recycled back through CET1. So our CET1 is probably growing a little -- is growing a little faster than our earnings as the amount of pullback from the NOL dissipates over time. It's pretty complicated, and we can get into it more if you want to get into it. Jared Wolff: Yes. I'm just interested if I think about utilization of it over the next couple of years, like how much of a CET1 benefit are we talking? Because I think it plays right into the buyback narrative. Joseph Kauder: Yes. Well, I think as part -- maybe as part of our earnings guidance for -- at the end of the year, maybe we'll put something together on that. Operator: The next question comes from Andrew Terrell with Stephens. Andrew Terrell: I had a question just around the classified loans. Jared, I heard you mentioned in the prepared remarks, the $50 million of the pickup sequentially was more of a timing issue. So I guess, one, should we expect classifieds moving down in the fourth quarter? And then I appreciate all the color on the venture business and the loan portfolio there. Any other areas left across the loan portfolio that you feel like you need to review kind of the matrix on risk rating? Anything we should expect incrementally there? Jared Wolff: I don't think so. So classified, the $50 million loan, they signed the contract to sell it for well above our loan amount post quarter end. So that will come out this quarter. I think the conservative thing to say is that classifieds will remain flat. But of course, I hope they go down. And I would want them to go down. But I have to -- things always pop up, and it doesn't mean you're going to have a loss, but stuff just happens. So Andrew, I want to be careful to say -- all things being equal, if we didn't have a dynamic balance sheet, yes, it would go down. I don't know, stuff happens, I don't know. It could go up. It could stay flat. But hopefully, it doesn't. I think our team is doing a really good job. And to your second question about are there other areas where we're doing reviews that could kind of impact our credit metrics? I don't think so. I think our team has kind of gotten through it all. And this -- we had been rolling out this venture thing over several quarters. And so this was just kind of the one that -- the quarter that had the most impact as we got through it and we started applying it. So I don't think there's going to be anything else. There's nothing else I'm aware of right now is what I would say. Andrew Terrell: Yes, I know it's been a focus for a while. Operator: The next question comes from Gary Tenner with D.A. Davidson. Gary Tenner: Most of my questions were asked, but I wanted just to ask about the timing of the buyback through the quarter. It looks like just based on the average purchase price, it was kind of weighted towards the last bit of the quarter after the stock had run up a little bit. Was that kind of delay just more of a function of getting visibility over where kind of growth in capital was going to go over the course of the quarter before you became more active later in the quarter? Or were there other... Jared Wolff: I don't know if I can confirm that, Gary, not because there's anything confidential there. It's just because I don't know that that's right. I'd have to go back and look at it. These are average prices that we're giving you and it affects how much was purchased when versus purchased elsewhere. And then also we had a block that we purchased from Warburg. So it's hard for me to confirm that. Joe, I don't know if you have any... Joseph Kauder: Well, in the deck on Page 24, we show how much we purchased and the average price. I'm not sure I understood the question. Gary Tenner: Well, the average price I think was [indiscernible], right? Joseph Kauder: Yes. Gary Tenner: And if I look at just kind of where the stock generally was over the course of the third quarter, and you didn't get kind of over [ 16 ], call it, until late August. And then it was kind of -- the stock was there through September. So that's what drove the question. Jared Wolff: Okay. So we -- your question was whether or not it was driven by making sure we had the right capital levels. I think that was the heart of your question, though, right? Gary Tenner: [indiscernible] Jared Wolff: Yes. So let me try to address that. We absolutely want to make sure that when we buy back our stock, our capital levels are going to be sufficient. And we -- so we definitely look at where do we think capital is going to be when we buy back stock. So that is part of our calculation. That is part of our analysis. So let me just say without saying when we bought stock, I will tell you that we definitely look at that. And that's probably a fair conclusion to make, but we obviously ended comfortably above. It's also pretty hard to calculate because of what Joe said about our dynamic range of our taxes and the NOLs that we have and how it impacts our CET1. And it's a little bit iterative how that calculation works and sometimes you don't have all the feedback. But I think what we experienced last quarter coming out of -- we were at 9.90% or 9.95% or wherever we were on CET1. Now that we're comfortably above 10%. I mean I think that, that might have been a 1 quarter kind of item that isn't really a concern going forward. Yes. And also, let me just say, look, we're always going to be looking at a variety of uses of our capital. We have $115 million left on our share repurchase authorization. It is unlikely that we will use all of it because we will retain some of it, but we do intend to be active when we believe that our shares are undervalued relative to other -- but we'll always be looking at other opportunities of what we could be using our capital for at any given time. And so they're not mutually exclusive, but our shares are, in our view, meaningfully undervalued. We're growing tangible book value at, I don't know, the past couple of quarters, it's been $0.25 plus per quarter. So it seems like knowing where we're likely going to end up, we can figure out like if we're not trading at $1.25, $1.30 or more of tangible book, which we should be given kind of our clear earnings path and the solid balance sheet that we have and the quality of the franchise and how big a footprint we have in California and how unique this is, I just think our stock is undervalued. So we'll be opportunistic. Operator: The next question comes from Anthony Elian with JPMorgan. Anthony Elian: Jared, just a direct follow-up to your comments you just made on the buyback, right? Why not be more aggressive here given the stock is still trading near tangible book value before you potentially get to that $1.25 or $1.30 of TBV. Is it just because you don't want to get below 10% CET1 and you want to retain some capital? Jared Wolff: Well, we might do exactly what you just said. I don't think it's prudent for us to tell the market exactly what we're doing and when we're going to do it because that generally tends to work against us. So just -- I'm sure you can understand that dynamic. I don't think we should be -- I want to make it clear that we will be opportunistic without saying exactly when we're going to do it. And I think we've done a really good job to date. If you look at the average prices that we bought at, I think people can say that we've been pretty effective at it overall with an average price of $13.59 for the total program. So you pick your spots and you pick your dynamics. But strategically, Tony, what you're saying is accurate, but I want to be careful about what I commit to one. Anthony Elian: That's fair. And then my follow-up, Joe, on the NIM guide, the 4Q NIM guide, I know you don't assume rate cuts. But if we do get a cut next week in December, could you quantify the impact that would have to the 3.20% to 3.30% guide? And then if we assume the forward curve next year, how would that impact the jumping off point of 3.25% to 3.35% you mentioned earlier? Joseph Kauder: Yes. So as we mentioned earlier, the -- our core net interest income is neutral, but we have the liability sensitivity in our HOA ECR book. The way the ECR deposits for HOA ECR deposits work is that they kick in the first day of the next quarter after the rate cut. So if there was -- if there's a rate cut upcoming here in the fourth quarter, we will not get benefit of that until January 1. So I would not assume that we would get much benefit in the fourth quarter from that rate cut. Jared Wolff: And then Tony was asking about how rate cuts affect our margin guidance. Anthony Elian: Specifically on the 3.20% to 3.30% NIM guide. Just if we do get the cut next week, I mean that's going to be more impactful coupled with the September cut. So how would that change? Jared Wolff: I think we have -- hold on, Joe, just one second. I think we have to see because so much of our NIM -- since we're kind of neutral, but for the ECR, which doesn't -- which is HOA, I think a lot of our NIM depends upon our loan production. Tony, so we -- and there's a little bit of a lag, right? And so we just have to see how that flows through. Joe, what do you think? Joseph Kauder: No, that's exactly right. It gets complicated because we can -- as the point or the discussion that Jared had earlier about the technical answer, the technical answer is pretty straightforward, which is that a 25 basis point rate cut for our ECR -- HOA ECR, it relates to about $6 million a year of pretax income. But there's other factors that factor in. If rates go down and there is -- economy stays strong, that should boost lending, that should have a benefit to us. Some of our loans -- a lot of our loans have floors in them. So when do we hit those floors and whatnot. So it's a little bit more complex than just saying that it's -- how fast can we bring down deposits, what kind of deposit beta can we get with our customers. It's a little bit hard, but I think the technical answer is what I said earlier. Jared Wolff: And Tony, the nontechnical answer is I expect that our margin will expand as rates go down because of our production and loans are coming on at higher rates than deposits are going -- and deposits are going down given stuff paying off. And so if we're at 3.20% to 3.30% now, and we think we're going to end the year in the low 3.20s, right, have a -- I don't know what it's going to be for -- whether it's 3.20%, 3.21%, whatever it is for Q4. And then off that 3.18% that we ended the quarter at. And then -- so that's your starting point for next year. We generally don't model rate cuts. We just -- we will a little bit, but we are slightly sensitive to them. So if the guide next year is 3.25% to 3.35% or whatever it is, I think we'll just kind of be updating it as we go from there. Operator: The next question comes from Tim Coffey with Janney. Timothy Coffey: Jared, if we were to look at your noninterest expenses and back out the earnings credit rates, they've been essentially flat the last year. And not to say that it hasn't been something that you've been paying attention to, but has something changed with your philosophy of cost control in the last year that has become more of an emphasis? Jared Wolff: I'll start, but Joe can provide the details. So first of all, I give a lot of credit to not only our finance team, but our entire company for being very thoughtful about how we manage expenses. I think there were a lot of expectations about the timing of hiring that changed. We've been adding bodies, adding great, great talent at all levels, but the timing has been more spread out as our teams have figured out ways to drive efficiencies. We're asking as we're budgeting for next year, we've asked everybody to think about where they're going to realize their benefits on gearing ratios as we've spent a lot of money on technology. And we've said to people, unless you're seeing a benefit of this technology, why are we doing it? So you need to factor into your hires for 2026. What benefits you're getting from technology and how you're gearing ratios, which we think about as the -- it's the number of portfolio managers you need for every lender. It's the number of relationship managers you need for every new client relationship you're bringing in. Whatever the ratios are, whatever the gearing ratio is, what benefits are we seeing from technology. It has to do with how we monitor and manage BSA, how we're using Copilot and ChatGPT, both of which are deployed company-wide. And our IT team has done a great job of training people on and making sure that we are using tools that can allow us to do things faster. I've told our teams like we're not looking to lay people off, but hiring might be slower because we don't need as many people as quickly. So I think some of it is timing, but our teams have really done a good job. Joe, I'm sorry for that long introduction. What's the actual answer? Joseph Kauder: No, I think you pretty much nailed it, Jared. We've been very disciplined about the headcount and about projects, and those are really the 2 drivers that move the needle in cost for us. And the -- on headcount, people have just been really thoughtful in the way they've gone about in areas where we needed to add people, maybe we found efficiency somewhere else to offset that. And on the projects, we start at the beginning of the year. We have a list of projects we want to do and it's detail and everything. But then as we get into them, we spend a lot of time and focus going through and sharpening our pencils and saying, okay, what do we really need to do? How can we do this in the most efficient and effective way? What are things that might be nice to have but not has to have that we can drop off of this project? And how do we get this done in a way that is the most effective for shareholders and for the bank. And we've done that and the team has done a really good job, as Jared pointed out, doing that. As we get into 2026, you'll see some step-up in cost for the normal wage inflation and those types of things and that some of the project spend investments we've made this year will start amortizing. But we think we're going to continue to focus on this and keep a really tight rein to make sure that our expenses don't grow in a way that is out of line with our revenue and we continue to increase our operating leverage. Jared Wolff: Tim, just another thought there. We have an initiative in the company called Better Bank. And we ask our employees to submit recommendations for improvement of anything that they see that they think is suboptimal. And we have a team that reviews those submissions, evaluates them, ranks them and then gives a response to the person that submitted it. And this is online for everybody to see in the company. So we're constantly improving the company. And I believe to my core that, that has actually created a ton of efficiencies in our company. When we have people that don't have to fill out the same forms that a third form when they've already filled out 2 others, they have the same information or they can get 2 forms down to 1 or we can do something faster for our clients so we can eliminate steps or get rid of things that just aren't necessary anymore because of our thoughtful employees who are on the front lines are saying, I can see a better way to do this and you actually listen to your team, you can create a lot of improvement. And I wouldn't look past that as also a reason why we've been able to keep costs in line. Timothy Coffey: Okay. That was great color. And then my next question has to be on the expense guide. I mean it's -- I don't think you're getting credit for your expense the fact that they've been flat for the last 4 quarters. So I'm kind of curious, it seems to me the guide for expenses is conservative. Is there -- are you expecting big investments in the business this next quarter, next year? Jared Wolff: Joe, go ahead. I mean... Joseph Kauder: Well, I think we just changed our guidance in the fourth quarter to say that we expect to be either at the low end or below the low end of the range. And I think we also further say somewhat consistent with what we've seen. So we're beginning to lean into that. And yes, I think it is fair to say maybe we've been a little conservative to date. Jared Wolff: Look, the project spend is real, Tim. Like if you ask people for a wish list of projects, it's pretty long, but our team is pretty mature, and they understand that like let's do a couple of things really, really well and not try to do everything. And like we'll tackle the next thing when we're done doing the first 5 things really, really well. And I've been at a couple of different companies and seen this managed. And generally, if you add up the number of projects, there are not enough man hours or people hours in the company to get it done in the time you want to get it done. And so if you're honest about it, you really don't have the people to get more than about 5 projects done in parallel and do them really, really well and on time that are significant. There's always small stuff going on and fixes here and there, but major projects, you got to -- it takes a smart dedicated group of people to do that, and they generally have day jobs as well. And so that's how we're trying to manage ourselves right now. Timothy Coffey: No, I can definitely understand that point. And then on the multifamily book, I mean, we talked about it earlier in the call, right? $6 billion, average yield around 4%. What strategies have you implemented to maybe bring forward some of those repricing time lines? Jared Wolff: Well, it's very hard to encourage somebody who's got a rate at 3.5% to reprice sooner, okay? What -- because market rates are much higher. Just taking one example. It could be 4%, whatever it is. But what we do look at is when loans -- we know which loans are coming off of their fixed rate period or are about to mature because oftentimes, these are 10-year loans with 5-year fixed rates or they're 5-year fixed rate loans. We will approach those borrowers and ask them if they are interested in working with us on a refi. And the benefit to working with us is they can do it with much lower documentation and lower fees and certainty. Fannie and Freddie are between 5.75% and 6% for a -- maybe 5.50% and 6% depending on the loan for a 5-year fixed rate loan. We're offering between 5.90% and 6.1% for a 3-year fixed rate loan with a different prepay. Fannie, Freddie will have a prepaid 54321 or something like that. They'll have lower fees, lower cost. They won't need a new appraisal. So there's a benefit to doing it with us even on a shorter duration. We've been successful about 1/3 of the time of the ones that we've gone to. Operator: And we have a follow-up from Chris McGratty with KBW. Christopher McGratty: Of course, I want to ask this respectfully. There's not a lot of banks at book value today, and we're in an M&A environment where good assets have bids. So can you balance buying your own stock versus partnering and bridging that gap to the 13% ROE a little quicker? Jared Wolff: Look, I understand why we're attractive and why people mention our name. We have a very valuable franchise that's scarce. We're growing like crazy in one of the most dense and attractive markets in the country. We've got a really talented team of people. So I get why people might say, but I've heard that forever wherever I've been. I think the most important thing that we can do is put our head down and run this company well like we're going to run it forever and take care of our shareholders and put our heads down and keep growing earnings and everything else seems to take care of itself. So that's what we're focused on. We're focused on growing this franchise and being really successful. And I don't think you're going to see any secret where we are, but our teams are doing a fantastic job, and we're really focused on delivering excellent results for our shareholders. Operator: This concludes our question-and-answer session and Banc of California's Third Quarter Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.
Denise Reyes: Good morning, everyone, and welcome to Nemak's Third Quarter 2025 Earnings Webcast. I am Denise Reyes, Nemak's Investor Relations Officer, and I am pleased to host today's call along with Armando Tamez, Nemak's CEO; and Alberto Sada, CFO, who are here this morning to discuss the company's business performance and answer any questions that you may have. As a reminder, today's event is being recorded and will be available on the company's Investor Relations website. Armando Tamez, our CEO, will lead off today's call by providing an overview of business and financial highlights for the quarter. Alberto Sada, our CFO, will then discuss our financial results in more detail. Afterwards, we'll open for a Q&A session, which participants may join live or submit written questions via the Q&A function. Before we get started, let me remind you that information discussed on today's call may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions you not to place undue reliance on these forward-looking statements. Nemak undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. I will now turn the call over to Armando Tamez. Armando Tamez Martínez: Thank you, Denise. Hello, everyone, and welcome to Nemak's Third Quarter 2025 Earnings Webcast. This quarter, our top line remained stable compared to the same period of last year, supported by the continued resilience of the automotive industry. EBITDA declined 15% year-over-year, ending the quarter at $143 million. This change is primarily explained by a high comparison basis in the same quarter of last year when we benefited from one-time commercial adjustments as well as the typical seasonality of the third quarter, when summer shutdowns and major maintenance activity take place. While these dynamics were particular to this quarter, for the full year, we expect to achieve the high end of our EBITDA guidance, at $600 million with capital expenditures totaling $290 million. Our focus remains firmly on executing our strategic priorities and positioning the company for long-term value creation. In line with this commitment, we recently announced the agreement to acquire the Georg Fischer Casting Solutions' automotive business, a milestone that will mark an important step forward in strengthening Nemak's capabilities and a significant advancement in our strategic journey. Georg Fischer is an outstanding player in the industry and its capabilities are expected to be highly complementary to Nemak. This transaction is well aligned with our strategic focus and technical strengths in lightweighting. It will enhance our business profile and be accretive from both a commercial and operational standpoint. It will also expand our innovation platform and extend our reach in R&D, particularly in high-pressure die casting technology. Additionally, we will be able to broaden our product offering, particularly in high complex aluminum and magnesium parts for the e-mobility, structure and chassis application segment, which continues to offer ample potential for future growth. From a geographic perspective, the integration of Georg Fischer Casting Solutions will increase our footprint in Europe and China. The transaction perimeter includes: 2 manufacturing plants in Austria, 2 in Romania, a tool shop in Germany, an R&D center in Switzerland, 3 plants and a tooling shop in China and 1 facility currently under construction in the United States. This new plant will be dedicated to highly engineered structural components, and it is expected to begin operations during the second half of 2026. In addition to footprint diversification, this transaction will provide a valuable entry point to serve important Chinese OEMs, including BYD, Denza, Geely, Hongqi, Li Auto, Nio, Xpeng and Zeekr among others. Beyond the opportunities with new Chinese customers, this acquisition will also positively impact business with our existing Western customers. This includes Audi, BMW, Jaguar-Land Rover, Mercedes Benz, Porsche, Stellantis, Volkswagen and Volvo, among others, reinforcing our commitment to serve a diverse and globally-recognized customer base. As part of this transition process, we're eager to welcome a highly skilled and experienced management team, along with a dedicated workforce of approximately 2,500 employees. We look forward to the integration phase ahead and the opportunity to combine the strengths of 2 competitive and complementary cultures. The transaction remains subject to customary regulatory approvals across the various regions involved. While we expect to close by the end of the year, the timeline continues to follow the procedures established by the respective regulatory bodies. Moving on to commercial activity. During 2025, we have secured $250 million in awarded business across all our regions, 80% in the ICE powertrain segment and the remainder in the e-mobility, structure and chassis applications segment. These new programs will mostly reuse existing assets, deploying capital efficiently while continuing to deliver high-quality, cost-effective solutions to our customers. The new contracts also highlight the ongoing relevance of the ICE powertrain segment, whose lifecycle has been extended due to the current electric vehicle adoption trends. In line with this, we have also experienced robust demand for V8 and I-6 engines in North America. In other recent developments, I am proud to share that 4 of the 10 vehicles recognized in the 2025 Wards Auto Best Engines & Propulsion Systems include components manufactured by Nemak. This recognition reflects the trust that leading OEMs place in our technology as well as our ongoing contribution to efficient, high-performance propulsion systems. Notably, this year, hybrid powertrains dominated the list, underscoring the growing relevance of electrified solutions. Moving on to innovation. The integration of artificial intelligence is becoming increasingly essential to our efforts in this area. At Nemak, we are successfully embedding AI into our business practices to enhance decision-making and operational efficiency. A clear example of this is the evolution of our patented NORIS system, which stands for Nemak Online Realtime Information System. This system has been running successfully for over a decade as [indiscernible] information system. Recently, we introduced NORIS GPT, a new AI-powered layer that significantly enhance the system capabilities. Our manufacturing processes involve managing a wide array of variables and parameters. NORIS GPT enable us to quickly turn data into actionable insights, combining this enhanced information with domain expertise to deliver real business outcomes. This advancement reflects our ongoing commitment to innovation and our ability to leverage cutting-edge technologies to heighten our competitive position. Turning to our sustainability agenda. We continue to make meaningful progress in advancing responsible practices across our operations. Our commitment to the Aluminium Stewardship Initiative remains strong. And this quarter, we achieved 2 additional certifications under the performance standard at sites in Europe. In addition, our melting center in Mexico was certified under the Chain of Custody Standard. This is a key milestone in producing certified alloys for our casting facilities in the country. These milestones demonstrate our continuous commitment to integrating sustainability across our value chain. Moving forward, we plan to have the majority of our sites certified in the near future. This concludes my remarks. Thank you for your attention. I will now hand the call over to Alberto. Alberto Sada Medina: Thank you, Armando. Good morning, everyone. I will begin with an industry overview of the regions where we operate, followed by a discussion of our consolidated and regional financial results for the third quarter of '25. During the third quarter, the top line remained stable at $1.2 billion, on the back of sustained pricing and a favorable product mix. EBITDA decreased by 15% due to the effect from commercial negotiations in the third quarter of 2024, which elevated the comparison basis and extraordinary expenses during the period. During the quarter, we generated positive free cash flow on the back of operating results and a prudent approach to capital expenditures. In turn, this allowed us to maintain our net debt-to-EBITDA ratio at 2.5x. Turning to the automotive industry. During the third quarter, light vehicle sales in the United States showed a 5% year-over-year increase on a SAAR basis to 16.4 million units. This was mainly due to a pull-ahead effect prior to the phase out of the Inflation Reduction Act EV incentives and tariff potential impacts. Light vehicle production grew 3% year-over-year to 3.9 million units, driven by sustained demand. On a SAAR basis, light vehicle sales in Europe grew 2% year-over-year to 15.7 million units. OEMs continue to introduce less expensive trims, therefore, improving affordability. Light vehicle production in the region remain at 3.4 million units, similar to the same period of last year. In China, light vehicle sales on a SAAR basis increased 7% year-over-year to 28.6 million units, propelled by trade-in programs and government incentives. Light vehicle production increased 2% year-over-year to 7.4 million units, driven by stable domestic sales. In Brazil, light vehicle sales decreased 1% year-over-year and production increased by 3%, driven by export activity. Moving to Nemak's results. During the third quarter, Nemak's volume was 9.6 million equivalent units, in line with the same period of last year. Volume was driven by stronger production in North America and partially offset by lower production in Europe. Revenue was $1.23 billion, stable when compared to the same period of last year as updated pricing and the appreciation of the euro offset the absence of the one-off effect from commercial negotiations in '24. During the quarter, EBITDA was $143 million, a 15% decline year-over-year. This was due to the lack of commercial negotiations versus the same period of last year and launching expenses associated with the ramp-up of volumes and mix changes in certain platforms. In turn, the unitary EBITDA margin was $15 per equivalent unit. Operating income decreased to $26 million from $73 million in the same period of last year. The decline was mainly attributable to lower EBITDA and impairment charges of $17 million related to non-operating assets, primarily in North America. Net income increased to $25 million from $5 million in the same period of last year, reflecting lower net financing expenses and a favorable tax effect from foreign exchange movements, particularly the appreciation of the Mexican peso against the U.S. dollar, which more than compensated for lower operating income. The combined effect of disciplined execution and reduced financial expenses and capital expenditures allowed us to generate during the quarter, a free cash flow of $18 million. This is aligned with the business seasonality and our expectations for the year, and places us in a good position to continue reducing our leverage. In turn, by the end of September, net debt was $1.59 billion, $173 million lower than in the same period of last year. This is a testament to our disciplined capital allocation and operating efficiency, which more than offset the foreign exchange impact on our balance sheet from euro-denominated liabilities. Looking forward, debt reduction remains a key priority. At quarter end, the net debt-to-EBITDA ratio was 2.5x compared to 2.9x at the end of the third quarter of last year. Conversely, the interest coverage ratio was 4.9x compared to 5.0x in the same period of 2024. Our cash position at the end of September was $328 million. Capital expenditures during the quarter totaled $70 million, 27% lower than the same period of last year, in line with our disciplined investment strategy that prioritizes projects with adequate profitability. Moving on to the regional results. In North America, revenue rose 2% year-over-year to $651 million, supported by higher volumes. EBITDA decreased 14% to $67 million, mainly due to the absence of prior year commercial negotiations and additional costs associated with the volume ramp-up of specific platforms. In Europe, lower volume drove the 4% decline in revenue to $401 million. This decrease was partly offset by improved pricing and depreciation of the euro. In turn, EBITDA decreased by 26% to $50 million, mainly due to the lower volume and the absence of one-off customer payments following commercial negotiations on inflation compensations in 2024, which more than offset the benefit from the appreciation of the euro. In the Rest of the World, revenue increased by 3% to $175 million as lower volume was more than offset by an improved product mix. EBITDA of $26 million was 11% higher, driven by performance and product mix improvements. In relation to the acquisition of Georg Fischer Casting Solutions' Automotive Business, the enterprise value is $336 million. At closing, we will cover a payment of $160 million with existing cash. The remaining of the enterprise value is structured through a combination of holdbacks not related to performance, but subject to the absence of contingencies as well as a portion of assumed operating and financial liabilities. This portion of the transaction will be funded by a vendor-financing agreement. Overall, we continue to focus on maintaining profitability even when facing a very dynamic landscape in the automotive industry. We believe the diversification and potential synergies of the Georg Fischer acquisition will lead us to strengthen our value proposition. In conjunction with our customary disciplined execution, we believe these measures will enhance our business profile, delivering value to our stakeholders as we continue to make strides in our commitment to deleverage and create sustainable value for the future. I will now turn the call back over to Denise. Denise Reyes: Thank you, Alberto. We are now ready to move on to the Q&A portion of the event. Denise Reyes: [Operator Instructions] The first question is from Jonathan Koutras from JPMorgan. Jonathan Koutras: So, I have 2 questions on my side. The first one is on the recent developments on the supply chain side. There was the fire at the Novelis aluminum plant in New York last month, impacting Ford, which is an important client for Nemak. The question is, if you expect any impact or headwind in the fourth quarter volumes stemming from this aside from the typical seasonality? And the second question, Alberto flagged on the $17 million impairment in non-operating assets in the quarter. So just wondering if this is still related to the recent investments on the EV side and if we should expect a similar impairment in terms of magnitude during the fourth quarter or not? Armando Tamez Martínez: I will answer the first question related to the Novelis fire. Certainly, we have been in conversations with most of our customers that were, let's say, supplying metal sheet, aluminum metal sheet from Novelis. So far, we have not seen any volume reduction that has affected us. Actually, we continue with very strong volumes in North America. Our customers, in conversations with them, are telling us that they have other sources. Novelis is a supplier of the Detroit 3 and other OEMs. They told us, in the conversations that we have had with them that they have other suppliers and that they are looking how to expedite also the rebuild of the facility that was affected by this fire in the New York state where the plant of Novelis was located. But so far, we have not seen any effect. We will monitor this very closely. And in the event that we see any type of volume reductions, certainly, we will take the necessary steps to align our cost structure. Alberto Sada Medina: And related to your second question, Jonathan, related to the impairments. Yes, as you correctly pointed out, these impairments are related to assets, most of them associated with projects on the EV side that have not been used to the extent possible. And going forward, I mean, we will continue reviewing our asset base to make sure that we have the right accounting for all the assets that are currently being used. And those that will have no use would certainly be written off as we negotiate with our customers for compensations in that case. We review that, I mean, all the time. So, we will report in due course if we have more impairments to do in the fourth quarter. Denise Reyes: We have another question from Stefan Styk from Barclays. Stefan Styk: This is Stefan from Barclays. I have a few, if you don't mind. First one is, can you quantify the specific EBITDA impact this quarter from last year's commercial negotiations that you didn't have this quarter? Alberto Sada Medina: Well, yes, as highlighted, last year, particularly the second half was heavily influenced with commercial negotiations. And as we discussed, I mean, those were very intense processes with our customers that we concluded along the year. So, part of that was reflected on the third quarter of last year. Unfortunately, we cannot provide specific numbers on the potential benefit from those claims as those were confidential negotiations with our customers. But I can tell you, as indicated that -- yes, a portion of the difference between last year and this year is associated to that comparable that is favorably reflected on the third quarter of last year. We also experienced a little bit of additional costs in certain operations, particularly in North America, which also explains part of that difference. Stefan Styk: Okay. On the acquisitions front, just curious how you're thinking about the EBITDA contribution on a run rate basis after you close? I think you disclosed historical EBITDA figure with the purchase memo. But should we expect it to be above or below this? And what sort of ramp-up period are you expecting for integration after closing? Armando Tamez Martínez: Yes. Thank you, Stefan. As we have indicated already, we're in the process of getting all the necessary approvals by the different antitrust places. And once we get the full approval, which is expected to be at the end of this year, and this is what we are getting from our legal staff, once we have this -- let's say, complete approval on this acquisition, we will provide a guidance of the combined 2 companies, the Nemak and the new Georg Fischer acquisition. We expect to have that one, let's say, available to share during the first conference call that we will have scheduled for January. Stefan Styk: Okay. And then if I could just sneak in one more. On the new business that you disclosed, the $250 million in annual revenue going forward, can you give a bit more color on the contract structure on the volumes there and the length of the contracts? And then that's all for me. Armando Tamez Martínez: Yes. Approximately out of this $250 million worth of new business, 80% is related to extensions and new contracts or volume increases on the ICE or internal combustion engine platform. Those are very interesting contracts. And the interesting part is that we will use existing assets to produce these parts. And this is related, Stefan, to the change, especially here in North America related to the slowdown of the electric vehicle adoption. And some of our customers are increasing, let's say, production of big ICE and hybrid vehicles, and this is why we're getting additional volumes. And as I indicated, the beauty of this is that most of that will be absorbed with existing assets without any additional CapEx. And in the contracts, certainly, we're signing an extension and also with the new pricing that will be beneficial for Nemak. Denise Reyes: The next question is from Alfonso Salazar from Scotiabank. We'll move on with the next question. The next question is from Alejandro Azar from GBM. Alejandro Azar Wabi: I think I have 3 or 2 if I may. On the transaction with GF Castings, if you can give us a little bit more color on the contingencies, after you mentioned you are going to pay $160 million when the transaction closes and the rest over a 5-year period related to some contingencies. If you can give us more color on those related to what is? And my second question is also on GF Castings. If you can -- if the contracts that you're acquiring from this company have similar terms to the ones that you have in Nemak, I mean, pass-through, et cetera? And the third one would be, with this transaction, how does your capital allocation priorities change, thinking specifically on the refinancing or the maturing of the bond, if I'm not mistaken, that you have in 2028? And those are my 3 questions. Armando Tamez Martínez: Let me respond to first question, Alex, related to the structure of the acquisition of Georg Fischer. As you correctly pointed out, and as I indicated before, we are due to pay $160 million upon closing, upon getting the approvals from the regulatory agencies. And after that, we have a combination of -- a structure, which is a combination of holdbacks, vendor financing and assumed liabilities from the operation. So, it's a combination from all of those elements. I cannot disclose you all the elements because of confidentiality restrictions with the seller. But what I can tell you is that related to those contingencies, those are the type of elements that you normally have on an agreement, which have to do with unknown items or things that have not been adequately reflected on the structure or on the due diligence that may pop up in the future. So, I would say it's nothing different than what you would expect. And the structure certainly allows us to do an efficient execution of any contingency if they materialize. Alejandro Azar Wabi: And those contingencies have a 5-year, let's say, period? Alberto Sada Medina: Yes, what we have is 5 years. If any of the identified, let's say, conceptual contingencies materialize in the 5 years, we will deduct part of that from the pending payment. If they do not materialize, we'll pay them back to the seller. Armando Tamez Martínez: Related to the contracts, as it's normal practice when we're making an acquisition is that we are not allowed by the antitrust authorities to take a deep look at the contracts. However, in conversations with the management team from Georg Fischer, certainly what they are indicating is that they have similar contracts to the ones that we have in which they are getting the contracts for the lifetime of the vehicle line on the products that they are getting and also normal payment terms, not only in Europe, but also in China. This is what they have shared with us without getting into any specifics. Once we get, let's say, the approvals, certainly, we will take a look at all the specific commercial contracts and compare those against us. And certainly, if we see any difference, we will address those directly with the customers. Alejandro Azar Wabi: Okay. My worry was actually on China. Armando Tamez Martínez: Normally, in China, for the benefit of all the entire supplier base is that the Chinese government implemented a new policy in which the maximum payment terms now stands at 45 days, which is normal for China. As you know, we have already operations in China, and these are the normal payment terms that we have. And even with the Chinese customers, they have, let's say, similar contracts to the ones that we have with Western customers. Alejandro Azar Wabi: Okay. And on the capital allocation priorities? Armando Tamez Martínez: On the capital allocation, one of the things that we are expecting, Alex, is that since the 2 combined companies, once we get the approvals from the regulatory authorities is that we will use existing assets to reduce significantly the CapEx going forward. And in some of the due diligence that we have made, we have seen already the opportunities that eventually once we get the approval, we will capitalize in reusing existing assets and try to go forward, at least in our projections to reduce significantly the CapEx going forward, so that the company will generate higher free cash flow and we will be able to reduce our leverage sooner than originally expected. Alejandro Azar Wabi: Okay. Can I make one more question? Armando Tamez Martínez: Yes. Alejandro Azar Wabi: From your press release, you mentioned, if I'm not mistaken, it was 2024 or 2023 that Georg Fischer generated $91 million in EBITDA terms. I'm just curious, I understand that that $91 million does not include some plants in the U.S. So, is there any way that you can share with us that plant, how much of the production of Georg Fischer represents? Or I'm trying to get the potential from that point, let's say, like that. Armando Tamez Martínez: Yes. Just clarifying, Alex. Today, Georg Fischer is building a new facility in the state of Georgia. This is a state-of-the-art facility. Actually, we have visited all the facilities, and we were very impressed. This is a brand-new greenfield facility built in the state of Georgia to support one very important German OEM. And certainly, that facility will be operational in the second half of 2026. In this transaction, we excluded, or they excluded out of the deal a few facilities, 1 iron casting that was located in Germany that is not part of the deal and 2 small plants located in Italy that were for a different industry that -- those were not part of the transaction. Once we get the approvals from the regulatory bodies, we will be able to share exactly what is the projection on the EBITDA of the combined companies, Alex. Denise Reyes: There are no more live questions. We will now move on to the written question. We have 2 questions from Alfonso Salazar from Scotiabank. First, how do you see the outlook for Europe in 2026? And second, given the risk of a strict control of rare earth exports from China, how is Nemak and its main customers preparing for potential bottlenecks? Armando Tamez Martínez: Yes. Thank you, Alfonso. Certainly, this is new information that our customers are trying to, again, understand if there is any potential implications. I think they are trying also, as we speak, to look for alternatives for these semiconductors. And so far, I think that we have not seen a major effect related to this at this point in time. But certainly, we will monitor this very closely. And as always, part of our operational model, in the event that we start seeing a decline in volumes, we will immediately align with the normal cost reduction activities that we have as part of our business model. Denise Reyes: Thank you, Armando. There are no further questions at this time. And with that, we conclude today's event. I would just like to take this opportunity to thank everyone for participating. Please feel free to contact us if you have any follow-up questions or comments. This does conclude today's earnings webcast. Have a good day.
Operator: Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2025 Third Quarter Results Conference Call and Webcast. I would now like to hand the conference over to Lavonne Zdunich, Vice President of Investor Relations. Please go ahead. Lavonne Zdunich: Good morning, and thank you for joining Precision Drilling's Third Quarter Conference Call and Webcast. Earlier this month, we announced the retirement of Kevin Neveu and the appointment of Carey Ford to President and Chief Executive Officer; Gene Stahl to Chief Operating Officer; and Dustin Honing to Chief Financial Officer. Kevin retires after serving as President and CEO for one of the longest tenures of any oilfield service CEO. We would like to thank Kevin for his many contributions during his time with PD. Before I pass the call over to Carey and Dustin today, I would like to recap some of our Q3 highlights. Precision Drilling activity outperformed industry and our U.S. drilling activity continues to grow. Our operating margins are resilient and within guidance. We increased our 2025 capital budget by $20 million to allow for 5 additional contracted rig upgrades as several of our Canadian and U.S. customers are taking a long-term view of demand for energy. And finally, we are on track to meet our 2025 capital allocation plans, having already achieved our debt reduction target. Please note that some comments today will refer to non-IFRS -- non-IFRS financial measures and include forward-looking statements, which are subject to a number of risks and uncertainties. For more information on financial measures, forward-looking statements and risk factors, please refer to our news release and other regulatory filings available on SEDAR and EDGAR. With that, I will turn it over to Dustin Honing, our new CFO. Dustin Honing: Thank you, Lavonne, and good morning or good afternoon, depending on where you're calling today. Our Q3 results demonstrate Precision's commitment to delivering on our strategic priorities and positioning the business for long-term success. We recorded adjusted EBITDA of $118 million, which equates to $129 million before share-based compensation expense compared with prior year EBITDA of $142 million. . In Canada, drilling activity averaged 63 active rigs, a decrease of 9 rigs from Q3 2024, resulting from customer projects being deferred to the upcoming winter season. Our reported Q3 daily operating margins were $13,007 a day compared to $12,877 a day in the third quarter of 2024, well within our prior guidance range. In the U.S., we averaged 36 rigs, an increase of 3 rigs from the previous quarter, primarily due to Precision's strength in gas-weighted basins. In Q3, daily operating margins for the quarter were steady at USD 8,700 a day compared to USD 9,026 a day in the second quarter, also within our prior guidance range. With favorable positioning in the U.S. natural gas market, we continue to add to our U.S. rig count, which has increased from a low of 27 rigs in Q1 to a high of 40 rigs today, a reflection of strong field performance recognized by our customers and the efforts of our sales team. While contract churn continues to challenge activity levels, we are encouraged by the quantity and quality of conversations tied to future opportunities in all basins. Internationally, Precision's drilling activity averaged 7 rigs, down from 8 rigs in prior year Q3. International day rates averaged USD 53,811 a day, an increase of 14% from prior year Q3 due to rigs recertification with nonbillable days recognized in 2024. In our C&P segment, adjusted EBITDA was $19.3 million, which compares to $19.7 million from prior year Q3. Our strong presence in Canada's heavy oil and unconventional natural gas markets combined with our favorable positioning in the U.S. has provided us the ability to capitalize on rig upgrade opportunities, underpinned by firm customer contract commitments. During the quarter, we increased our planned 2025 capital expenditures from $240 million to $260 million, comprised of $151 million for sustaining and infrastructure and $109 million for upgrade and expansion. The plan is inclusive of 5 additional contract-backed upgrades added this quarter. Our added contracted backlog in the third quarter far exceeds the increase in our 2025 capital plan, ensuring strong financial returns as we strengthen both the marketability of our rig fleet and customer alignment in key regions. Even with this increase in capital, we remain firmly committed to our strategic priorities. As of September 30, we've met our annual debt reduction target, reducing our debt by $101 million and are well on our way to allocating between 35% and 45% of our free cash flow to share buybacks. We have repurchased $54 million worth of shares during the first 9 months of the year. Moving on to forward guidance. I will begin with our expectations for the fourth quarter. While our outlook for the remainder of the year remains positive, it will continue to be commodity price dependent. In Canada, we are expecting activity for this year's winter drilling season to meet or slightly exceed last year's winter activity. Q4 rig counts should be similar to Q4 2024, which averaged 65 rigs. Keep in mind, this includes the seasonal slowdown for Christmas holidays. Our operating margins in Canada are expected to range between $14,000 and $15,000 per day. In the U.S., we expect to sustain the momentum we have experienced in the last 2 quarters with an average active rig count in Q4 within the upper 30s. For the fourth quarter, we expect our margins to remain stable, ranging between USD 8,000 and USD 9,000 per day. Moving to guidance for the full year. We expect depreciation of approximately $300 million and cash interest expense of approximately $65 million remaining unchanged from prior guidance. Our effective tax rate will be approximately 45% to 50% due to increased deferred income tax expense related to the momentum of our U.S. operations. Cash taxes are expected to remain low in 2025. And looking to 2026, we expect to return to our traditional effective tax range within 25% to 30% with cash taxes, again, remaining low. For 2025, we expect SG&A of approximately $90 million to $95 million before share-based compensation expense. We refined our share-based compensation guidance for the year and now expect to range in between $5 million and $30 million, assuming a share price of $60 to $100. Our long-term target to achieve net debt to adjusted EBITDA of less than 1x remains firmly in place as does our plan to increase our free cash flow allocated directly to shareholders towards 50%. Our net debt to trailing 12-month EBITDA ratio is approximately 1.3x with an average cost of debt of 6.6%, and we have over $400 million in total liquidity today. With that, I will pass it over to Carey. Carey Ford: Thank you, Dustin, and good morning and good afternoon. First, I would also like to acknowledge Kevin for his accomplishments and contributions to Precision over his 18 years as CEO. His commitment to high performance and ability to grow the business while navigating industry cycles have certainly left their mark on the company. We wish him well in retirement. Precision is today the leading land driller in Canada, a leader in drilling technology, a high-performance driller in the Middle East, a leading driller in the U.S. and the largest and highest performing well service provider in Canada. The company has a multiyear track record of generating sizable cash flows and now has a strong balance sheet approaching 1x leverage. In short, Precision is well positioned for its next phase of growth. Precision is undoubtedly one of the truly exceptional companies in the energy industry. What sets us apart is our culture, shared passion, commitment to supporting the field, enthusiasm for serving customers, and deep desire to be the best. Precision's culture, core values and people will continue to be the foundation for our success. For our investors, the Precision team will remain excellent stewards of capital and we'll follow through with our commitments, which include our plans for long-term debt reduction and increasing direct returns to shareholders. We will continue to be agile and run lean and we'll be prepared for whatever challenges the commodity market has in store for us. For our customers, we are committed to safety, consistency, reliability and technology that drives performance, reduces costs and delivers the highest quality wellbores. For our employees, Precision will continue to be a fantastic place to work, develop your career and call home. Case in point, Precision just completed a leadership transition in which the company filled 3 key positions, all with internal candidates, and our leadership team will not skip a beat. Gene, Shuja, Veronica, Tom, Darren and I have been working together on the leadership team for nearly a decade, and I look forward to the success this team will accomplish over the next stretch. I'm pleased to welcome Dustin to the executive leadership team as he steps into the Chief Financial Officer role. Some on the call will remember Dustin when he oversaw our investor relations and corporate development efforts over the 2018 to 2020 period. And over the past 5 years, Dustin has been a key driver of our financial performance working hand in hand with the sales and operations teams in both our Contract Drilling and Completion and Production services segments. I'm excited about Dustin's performance-driven mindset and his future contributions to Precision in his new role. I also want to extend my congratulations to Gene Stahl, on his new role as Chief Operating Officer. This is a well-deserved recognition of Gene's excellent leadership of Precision in the field with customers and within the industry. I'm truly honored to have the opportunity to lead such an outstanding team. As we dive into Precision's third quarter performance, I want to make sure for the listener that I link together how our competitive strategy, execution and capital deployment not only support the financial results, which we published, but also position Precision Drilling for future success. Three pillars of our strategy that underpin our performance are leveraging our scale, utilizing technology to drive rig performance and customer focus. I'll start with leveraging our scale. Precision is running 115 drilling rigs and 80 well service rigs today with rigs, support systems and over 5,000 employees serving customers across North America and the Middle East. Our scale enables us to seize opportunities and secure attractive returns for our investors. For instance, during the quarter, we mobilized 2 Super Triple rigs from the U.S. to Canada and perform major upgrades to prepare the rig for the winter drilling programs. One of the rigs is already drilling, and the second rig should leave our Nisku yard next week. These rig mobilizations were part of a larger multiyear customer contract where we repositioned and reactivated 5 rigs in total. The creative contract structure, mobilization of assets and quality and speed of the upgrades could not have been possible without Precision's scale and vertically integrated support functions. We also demonstrated the benefits of scale and geographic positioning in the U.S. market where our strength in gas basins positioned us to capitalize on attractive contracted upgrade opportunities for long-reach drilling applications for customers. These rig upgrades added to our contract book, our customer list and rig capabilities. During the quarter and because of recent rig upgrades and the quality of our crews, we drilled the longest well for a large customer in the Marcellus, and the second longest well for a large customer in the Haynesville, with both wells approaching 30,000 feet. We also set footage per day records for separate customers in both the Marcellus and Eagle Ford. Higher activity and scale in the U.S. are supporting operating margins as well. Those of you who have listened to previous calls have heard me discuss the strategic rationale for committing to our geographic breadth, in the U.S. market, understanding that we experienced some margin pressure in the short term to cover higher fixed costs. In the past 2 quarters, we have capitalized on several opportunities across the U.S. and are minimizing the fixed cost burden as our rig count has moved from the high 20s earlier this year to 40 rigs active today. As we communicated in our guide for the fourth quarter, our margins are now stabilized. My final point on leveraging our scale addresses the performance of our Completion and Production Services segment. The differentiated size and capabilities of our well service fleet, which we have scaled through consolidation over the past 3 years, combined with our Precision rental fleet, delivered a year-over-year revenue growth in a market that generally saw lower drilling and well service activity. Second pillar I'll discuss is that technology continues to be a key driver of success, not only with our Alpha and EverGreen platforms, but also with real-time monitoring technology further supporting rig performance. We now have 90% of our active Super Triple rigs running Alpha technology and 93% of all active rigs with at least one EverGreen solution, reducing fuel consumption and emissions for our customers. Our automated robotics rig working for a major in the Montney continues to deliver faster tripping and drilling times for our customer and interest in the robotics offering is broadening across our customer base. Our Clarity platform and Digital Twin initiatives delivered real-time monitoring of equipment and well performance, resulting in lower downtime, longer equipment lives, faster drilling speeds and more collaborative and enduring customer relationships. Technology applications are ubiquitous within Precision's operations and are clearly driving results for all our customers. Finally, I cannot overstate how important customer focus is to our business. The success we have had with the upgrade program in 2025 is a direct result of our customer focus. We work hand-in-hand with our customers to deliver rig equipment and technology packages that we mutually agree will deliver the optimal results. This year, we expect to complete 27 major upgrades and these upgrades are backed by customer contracts or upfront payments. Our strategic initiatives clearly supported our financial performance in the third quarter and will continue to drive results for Precision in the future. I'm personally excited about Precision's trajectory as we near the end of 2025 with our demonstrated ability to deliver on our shareholder capital return commitments while gaining market share, completing significant investments across our drilling fleet, building our contract book and sustaining strong field margin. The future for Precision Drilling is promising. That concludes my prepared remarks, and I will now turn the call back to the operator. Operator: [Operator Instructions] Our first question comes from Derek Podhaizer with Piper Sandler. Derek Podhaizer: Carey, congratulations to you. And Kevin, great to see you in the seat. Carey Ford: Thanks, Derek. Derek Podhaizer: So just maybe a question around some of the comments you made for 2026, the limited visibility in the first part of the year. Obviously, you have some contract term, short-term duration contracts. When can we start seeing those extend a little bit here and get some term back into your contracts? I'm just thinking about the interplay of a lot of the customer-funded upgrades that you've talked about and how that can then lead into extending the terms as we move through 2026? Carey Ford: Yes. I think I was going to go around North America on customer contracts. We are seeing a bit more commitment to longer-term contracts in the Montney. I'd say that would be where our longest duration contracts are. We're seeing some longer-term contracts in heavy oil, but not quite to the degree that we're seeing in the Montney. In the U.S., we're certainly seeing longer-term contracts in the Marcellus. We have a couple of 2-year contracts that we've signed this year, lot of 1-year contracts and then some shorter-term contracts. I think the contract duration is going to be the shortest in the oil basins as there's been a bit more volatility in that commodity. And in the Haynesville, we're seeing some short term and some slightly longer term, maybe 1 year to 18-month contracts. And I'll just add, I think Dustin made a comment here about some of the conversations we're having with customers. We don't have -- I think we have one contract in our book that starts -- that we booked that starts in 2026, but we are having a number of constructive conversations with customers for both oil and gas targets in the U.S. for work starting in 2026. But it's kind of yet to be seen how long those contract commitments are going to be. Derek Podhaizer: Okay. That's helpful color. And then just on the rig upgrades, obviously, you've done a lot here in 2025. I think the number is almost 30. We start thinking about 2026 and then as you start thinking about your budget around for CapEx and what that means for free cash flow, how much more rig upgrades do you expect to do? I guess what's the population that you have of your rigs going -- that are available to be upgraded. Just want to start contextually thinking about what rig upgrades can look like for next year, what it means for CapEx? Carey Ford: Yes. I think we -- I would just start with the capital commitments that we made to investors on debt paydown and share repurchases. We will start with commitments, maybe similar levels next year. Hopefully, we raise the commitment to deliver returns directly to shareholders. So we'll start with that. And then we'll have our regular maintenance, which has been trending kind of in the $150 million a year range at this activity level. And then beyond that, frankly, I hope we have a lot of upgrades. This is an excellent opportunity to generate a significant financial return for our customers. It's certainly the highest return opportunity we have out of all of our options. We have an embedded advantage on completing the upgrades with a 40-acre tech center in Nisku and a 20-acre tech center in Houston that are fully staffed with experts on completing these upgrades. So we have a cost advantage. And then also, it usually comes with -- or I would say almost always comes with a contract that locks in the return. So I hope we have more. I think as we continue to see longer reach horizontals in the U.S., that will drive demand from our customers for upgrades. We expect to see more pad configuration upgrades in the heavy oil in Canada. And I think it will be more -- it'll be much more than 0. I don't know if we'll hit the same level that we do this year, but I don't think that these upgrade requests are going to stop. Operator: Our next question comes from Keith MacKey with RBC Capital Markets. Keith MacKey: Certainly echo Derek's comments on congrats to you, Carey, Dustin and Gene. I think maybe, Carey, if we could just kind of start out with, and you did discuss it in your prepared remarks. But I'm not, at this point, expecting wholesale strategy change from Precision, but certainly some tweaks from how you might see the business to how Kevin might have seen it. Can you just talk about some of those factors and sort of how your priorities will stand going forward as you take on the CEO role? Carey Ford: Yes, sure. I think that's a fair question, Keith. And certainly early days, but I have been with the company for 15 years. I would say that the strategy that we've been working with over my tenure as CFO for the past 10 years. I was heavily involved in developing it, particularly around cost control, capital allocation, return to shareholders and kind of hand-in-hand on how we look at operating the business and dealing with customers. Where I think the initial focus will be on supporting field operations, the best we can, and proving to our field that we're delivering the best support we can. And then also with customers doing, I would say, a more thorough job of proving to customers that we are delivering the best performance in the industry. And we've got lots of new tools to do that and a commitment by our sales and operations and technology teams to follow through on that. And beyond that, I would just say that there's a lot of things that are working for Precision right now. So I'm not looking to change the things that are working. You look at kind of the laundry list that I closed my comments with about our contract book and market share and I think we had a revenue decline of 3% year-over-year this quarter, which I think you would be hard-pressed to find a service provider with a similar geographic footprint to us that had a similar resiliency in revenue. So there are a lot of things that are working. But I think there's a few areas where we can sharpen our focus. Keith MacKey: Okay. I appreciate the comments. And just one on the margin per day guidance, specifically speaking to any mobilization or activation costs. It looks like in the U.S., you had about $502 a day of impact in Q3. Can you just talk about what that might look like in Canada and the U.S. for Q4, please? Dustin Honing: So Keith, this is Dustin here. In Canada, we'll have a little bit tied to the rigs we've mobilized up, but I wouldn't view it as substantial as one of those rigs has already been delivered. And then when you look in the U.S., we've kind of seen a little bit of a constant run rate with some of the reactivation following the momentum of staging all of these incremental rigs from Q1 into Q3. So I think that's a reasonable run rate you can expect kind of with the contract term that we've been absorbing so far in the short term. Operator: Our next question comes from Aaron MacNeil with TD Cowen. Aaron MacNeil: Congrats to everyone. I would certainly echo that and looking forward to seeing where you guys take things. Maybe I'll build on Keith's question, Carey. I was just hoping you could comment on a few specific items like performance-based contracts, your comfort with the operating regions or business lines and your approach to M&A? And if those sort of factors differ from your predecessor? Carey Ford: Okay. So I would say with regards to M&A, no change. I mean I was involved in every kind of M&A discussion we've had probably over the last 15 years. And I think there's nothing strategic that we see on the M&A front. I think there's some transactions we could complete if the price was right, but there's not a transaction out there that we would view as strategic that we would need to pay up for. So no change on that. I think the other thing I would say on M&A would be we're proving, and this year, in particular, that there are ways to grow our business organically without M&A. And we're doing that through high utilization of assets, improved pricing, rig upgrades, technology add-ons, EverGreen add-ons. And so I think there's a bit more runway on that growth avenue. With regard to performance-based contracts, I think -- I might have a slightly different view on that, but it's not much different. I think there are good opportunities for performance-based contracts. The industry has certainly -- it's more prevalent in the industry than it would have been 2 or 3 years ago. And we're seeing more unique applications to insert performance clauses into our contracts in both the Canadian market and the U.S. market. And so we're not -- we're not opposed to them. We have several performance-based contracts, and they're working well on delivering financial returns as well as driving performance for our rigs. So I think that -- I don't think you're going to see a step change in how we look at performance-based contracts, but I would be surprised if we didn't see more of them in the future. Aaron MacNeil: Okay. And then just -- sorry, the last piece of the first question was just presumably you're comfortable with the operating regions and business lines you're currently in? Carey Ford: Correct. I think we're not looking to add any service lines onto our current business lines. And when we look at expanding internationally, we've said it before, and I agree with it today that the markets that we're in, Kuwait and Saudi Arabia are very good markets in the Middle East. It has been difficult to grow outside of those markets because the return profile of deploying new capital has been unattractive. And if we can make that change or find opportunities where that does change, we could grow in that region in the Middle East. And maybe there's another region or 2 that we grow in the future, but nothing to report or telegraph at this point. Aaron MacNeil: Okay. And then for the follow-up, I'm sure you guys gave this a lot of thought before moving additional rigs to Canada. But how do you sort of wrap your head around the downside mitigation in terms of adding supply to the market that's generally been pretty good for the last couple of years. And you also mentioned a unique customer contract structure in the prepared remarks. Can you elaborate on what you mean by that? Carey Ford: Yes. I mean that -- this was a 5-rig contract for a major customer in Canada, where we moved 2 rigs from the U.S. market to Canada, but also we're able to get long-term contracts on 3 other rigs in the Canadian market. So we were able to look at the contract package and the capital committed for that contract package and the contract term and the return that the contract delivered for all those rigs. And together as a package, it was a very attractive opportunity for us, and we were uniquely positioned to be able to capture it. So I think it was just a unique situation that allowed us to move 2 rigs to the Canadian market. Now your question about supplying more rigs to the market, and I just want to be clear on the comments that we delivered both in our press release and I believe Dustin delivered on his -- on his press release, we expect to be at 100% utilization on Super Triples this winter drilling season. So we are addressing higher demand for Precision Drilling Super Triples. And I don't know what that means for the rest of the market in triples in Canada. But certainly, for our rig class, we expect to be at 100% utilization. Operator: Our next question comes from John Daniel with Daniel Energy Partners. John Daniel: I guess, Carey, well, congrats -- everyone, congrats, by the way. This question is for Gene. I know it's too early to say how many rig upgrades you're going to do next year, but I'm curious if you could just speak to the demand for more upgrades next year? Gene Stahl: John, thanks. So working closely with all of our customers here in the U.S. and trying to understand what they need for rig requirements, what their drilling programs look like and then we've got 3 classes of Super Triples. So our regular 1,500 -- our 1,500 EER and our ST-2000. And so depending on what their drilling program looks like, they've got a steady program, and we've got a rig that we can upgrade for them at a reasonable price, and we can come to contract terms, then we'll go ahead and see if we can move forward with the upgrade. John Daniel: Okay. But when I look at the 5 rigs that you're doing for Canada, can you just speak to how that evolved the opportunity? How long were the discussions? And could you be surprised next year, all of a sudden that you're going to have 5 to 10 more upgrades. So just -- I'm just trying to get a feel for what the opportunity could be? Gene Stahl: Yes. So it's a blend of heavy oil rigs and a blend of Triples. Obviously, Carey just spoke to the Triples viewpoint. And heavy oil with Super Single rigs, we have 48 of them. As the Clearwater starts to evolve and they expand their well design, they're looking for year-round operations. Typically, that can mean 100 more days of utilization for us as a drilling contractor. And so converting those single-mode rigs to pad rigs is something that's of interest to our customers and to ourselves and that's where the growth would come from. John Daniel: Got it. Apologies for what's going to be a drilling 101 question here. But you did the 27 rig upgrades this year or you'll do them. Can you remind me what a potential rig upgrade cycle could be? When do you have to bring those 27 back in? Carey Ford: Oh, you mean the time it takes to complete an upgrade? John Daniel: Yes, just -- yes, I'm sorry for such a basic question, but I'm slow today. Carey Ford: You know, it's a -- for what for what we're doing, some of the rig upgrades might be an in-basin upgrade where in a rig move, we're installing a new piece of equipment from [indiscernible]. A longer-term upgrade might be doing a pad configuration for Super Single and that would be 3 to 4 months. The rigs that we moved up, the Super Triples, those were probably 2- to 3-month upgrades to get those rigs ready. So we're not looking at any kind of 6 to 9-month upgrades. Most of them are going to be pretty quick, inside a week to 3 or 4 months. Gene Stahl: And it speaks to our rig design and our capability to use our inventories and upgrade to our spec. So I think a differentiator for Precision, certainly. Operator: Our next question comes from Tim Monachello with ATB Capital Markets. Tim Monachello: Everybody, long-time listener and first-time caller in a while. Congrats, Carey, Dustin and Gene for much deserved promotions and Kevin for a great career. First question just around Canada. Interesting to see a couple of rigs being moved out of the U.S. into Canada Super Triple market. And with your comment that you're fully utilized for -- or expecting to be fully utilized for the winter drilling season, do you think there's more opportunity to move rigs out of the U.S. into Canada? Carey Ford: I think for this winter drilling season, no. And we don't currently have deep discussions with customers about moving more rigs. But over time, over the next couple of years, I mean, LNG Canada Phase 2, other LNG opportunities, there could be more demand for Super Triple rigs. And certainly, the rigs that we have in Canada are delivering good performance for our customers. So there may be opportunities in the future, but I would say it would be for next winter drilling season. Tim Monachello: Okay. That makes sense. And then the U.S., obviously, the oil basins, the outlook is a little bit circumspective, I would think. In the gas basins, you've seen almost 20% rig activity growth in gas in the U.S. year-to-date. And you have a unique footprint in the gas basins with a pre fragmented customer base. So I expect you have a decent view from a lot of customers on what their expectations are going forward for activity. Could you talk a little bit about your expectations for U.S. gas drilling activity over the next, I don't know, 6 to 12 months? Carey Ford: Yes. I think we have a decent viewpoint on where activity might be going on gas. I think the Marcellus is, I would say, steady to low growth. There might be some -- what we've seen is there's been a bit of high-grading within the basin. So as we've added more rigs to the basin, there's been a few instances where a rig has gone down. So they haven't -- our additions there haven't necessarily resulted in basin growth. In the Haynesville, I think most people look at the Haynesville as swing producer for LNG exports and natural gas production in general. So we could see higher activity in the Haynesville over the next year if gas prices are supportive. But I wouldn't say that we have a -- as we stated in our press release, we don't have much of a view on that demand beyond early 2026. Tim Monachello: What's the motivating factor behind, I guess, higher activity levels this year considering gas prices have been fairly uneconomic in the U.S. Is it just LNG export and building supply? Is that what you're seeing? Carey Ford: Yes, I think there's -- I think most people are seeing a wave of demand on both natural gas-fired generation for data servers and electrification of the economy and then LNG exports. And so I think some customers are looking through any short-term volatility in gas prices and looking at the longer-term demand outlook. Tim Monachello: Okay. That's helpful. And then could you just provide a quick overview of what the geographies, the 27 upgrades you're going to? Dustin Honing: So it's really a mix, Tim. But think of it, we obviously commented on the 2 Montney rigs that we're going to bring up from the U.S. into Canada. Heavy oil is really a key area we've invested a lot. So this would be our Clearwater Basin and then more into the unconventional plays in SAGD. One comment on that, we've seen a lot of enthusiasm with our customers on these upgrades where we have recognized a lot of upfront payments throughout the year to help support these upgrades as well. And then when you look down to the U.S., it's primarily weighted to the Haynesville and the Marcellus. But we have had some upgrade opportunities with high torque equipment in the Rockies and even in the Permian. Carey Ford: And I would just add to that, Tim, I believe we said this in the press release, but the vast majority of the upgrades are going to areas in North America where we expect to have year-over-year increases in activity. So it's a little bit out of stuff with kind of the broader market, but in the Haynesville, in the Marcellus heavy oil, and in the Montney, we expect that higher year-over-year activity, and that's what was driving these upgrades. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back over to Lavonne for any further remarks. Lavonne Zdunich: Thank you for taking the time to learn more about Precision Drilling today. And with that, we will sign off. Everyone, enjoy your day. Thank you. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Operator: Greetings, and welcome to the Reliance Inc. Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] It's now my pleasure to turn the call over to Kim Orlando with ADDO Investor Relations. Kim, please go ahead. Kimberly Orlando: Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's third quarter 2025 financial results. I am joined by Karla Lewis, President and Chief Executive Officer; Steve Koch, Executive Vice President and Chief Operating Officer; and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.reliance.com. Please read the forward-looking statement disclosures included in our earnings release issued yesterday, and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance. Karla Lewis: Good morning, everyone, and thank you all for joining us today to discuss our third quarter 2025 results. We delivered another solid quarter amidst market uncertainty, reflecting the strength and adaptability of our business model and solid execution across the Reliance family of companies. Our third quarter results demonstrate how Reliance's scale, diversification and high-performing management teams combine to deliver strong financial performance and capture market share in a uniquely challenging environment. Our tons sold were a third quarter record and outperformed the industry by approximately 9 percentage points, increasing our U.S. market share to 17.1%, up from 14.5% in 2023 due to our smart, profitable growth strategy. Driven by our high levels of customer service and broad inventory and processing capabilities, we offset declining industry shipment trends by winning new business opportunities that also better leverage our operating expenses and meaningfully contributed to our overall profitability. Trade policy uncertainty and readily available inventory are causing buyers to be hesitant, creating an extremely competitive market. In this environment, it is more difficult to immediately increase selling prices to fully offset mill price increases. These factors have contributed to short-term gross profit margin headwinds in the past 2 quarters. In addition, the aerospace and semiconductor markets that we serve, which have high-value specialty products that typically contribute meaningfully to our profits, continue to underperform due to excess inventories within these supply chains. We are confident, however, that the underlying margin profile of our consolidated business remains solidly intact, and we maintain our long-term annual sustainable gross profit margin range of 29% to 31%. Our scale, product and end market diversity and exceptional customer service, including next-day delivery and extensive value-added processing capabilities, were instrumental in our outperforming our competition and capturing significant market share. Overall, non-GAAP earnings per diluted share of $3.64 were within our expectations and guidance for the quarter. Our capital allocation strategy is designed to drive growth and deliver strong returns to our stockholders. We generated approximately $262 million in operating cash flow in the third quarter, that we strategically redeployed into high-value initiatives, including investments in advanced processing equipment and other projects that strengthen our long-term growth platform. Our 2025 capital expenditure budget remains at $325 million, with more than half directed towards growth initiatives. Including carryover spending, we expect total cash outlays between $340 million and $360 million in 2025. Our strong financial position also affords us the flexibility to pursue M&A opportunities that enhance our geographic reach, expand our value-added capabilities and strengthen our margin profile. At the same time, we remain committed to returning capital to our stockholders. During the quarter, we returned $124 million through dividends and share repurchases. Our year-to-date repurchases total more than 1.4 million shares, reflecting our balanced approach to growth and shareholder value creation. In summary, our teams navigated the quarter exceptionally well, keeping our people safe while managing market dynamics with discipline and focus. Our primarily domestic supply chain and strong relationships with our U.S. mill partners provide Reliance a distinct competitive advantage, while our nimble operating model, solid balance sheet and diversified product mix continue to underpin strong and consistent performance. These same strengths also position us favorably to capitalize quickly as market activity rebounds. Looking ahead, we remain focused on investing for growth and delivering value to our customers and stockholders, supported by our consistently strong cash generation. I'll now turn the call over to our COO, Steve Koch, who will review our demand and pricing trends. Stephen Koch: Thanks, Karla, and good morning, everyone. I want to begin by recognizing our teams across the organization for their strong execution in the third quarter, delivering outstanding service to our customers and navigating ongoing macro challenges with discipline while maintaining the relentless focus on safety. Looking at our demand and pricing trends. Third quarter tons sold were consistent with the second quarter of 2025, surpassing our expectations of down 1% to 3%. Our tons sold increased 6.2% compared to the third quarter of 2024, significantly outperforming the service center industry which reported a decrease of 2.9% in the same comparative period. Our outperformance of the industry demonstrates our ability to gain share in a demand environment constrained by market uncertainty through our smart, profitable growth strategy and the contributions of our continued investments in growth. Consistent with our outlook, our third quarter average selling price remained steady compared to the second quarter of 2025, even as tariff-related momentum quickly leveled off. Pricing upside from certain aluminum and stainless steel products was offset by pricing pressure on most carbon steel products as well as stainless steel products sold into the aerospace and semiconductor industries. Through industry overbuying in the first quarter of this year in advance of the tariffs as well as readily available inventory at domestic mills and depots, pricing for most products has been declining since April, resulting in a very competitive market, which, when combined with stable to declining end demand, has pressured our gross profit margins. As Arthur will expand upon when reviewing our outlook, we believe pricing for most products has now stabilized entering the fourth quarter. Our teams navigated these market dynamics very well while maintaining discipline in pricing and strong customer service levels. Turning to our key end markets. Nonresidential construction represented roughly 1/3 of our third quarter sales, comprising carbon steel tubing, plate and structural products. Shipments for these products were seasonally strong in the third quarter and increased compared to the third quarter of last year, driven by strong demand in public infrastructure work, including civil projects, schools, hospitals and airports, as well as ongoing data center construction. Our scale and broad geographic footprint enable us to capture growth across these key areas. General manufacturing, also about 1/3 of our third quarter sales, is highly diversified across geographies, products and industries. Shipments in this market also increased year-over-year as military, industrial machinery, consumer products, shipbuilding and rail sector shipments were seasonally strong and showed solid year-over-year growth. Relative weakness in agricultural machinery continued. Our sustained outperformance across key product groups in general manufacturing highlights the versatility and competitive advantage for our diversified business model as well as our ability to grow with both new and existing customers in an uncertain macroeconomic environment. Aerospace products comprised approximately 9% of total sales in the quarter. Demand on the commercial side was down slightly due to pent-up inventory in the supply chain, while demand in defense and space-related aerospace programs remained consistent at strong levels. Automotive, which we primarily service through our toll processing operations and are not included in our tons sold, represented about 4% of our third quarter sales. Our processed tons improved over the third quarter of 2024 supported by our investments in capacity expansion. Semiconductor market remained under pressure from ongoing excess inventory in the supply chain during the third quarter. In summary, I thank our team for their strong, focused and safe execution in uncertain and volatile market conditions. The scale and diversity of our product offerings and value-added processing capabilities, combined with dependable customer service, continue to win Reliance new business and new customers and increase our market share. To reiterate what Karla said, we are well positioned to capitalize and improve on our already strong results as market activity rebounds. I will now turn the call over to our CFO, Arthur Ajemyan, to review our financial results and outlook. Arthur Ajemyan: Thanks, Steve, and thanks, everyone, for joining today's call. We were pleased to report third quarter non-GAAP earnings per diluted share of $3.64, consistent with both our expectations and the third quarter of 2024. Of particular note, the third quarter of 2024 benefited from $50 million of LIFO income, compared with $25 million of expense this quarter, which equates to a $1.03 per share unfavorable year-over-year LIFO impact. I'll circle back to LIFO, but first, I'd like to expand on a couple of points that Karla and Steve mentioned: gross profit margin headwinds and market share gains. Trade policy uncertainty has contributed to temporary headwinds to gross profit margins since May of this year for most carbon steel products. Tariffs initially drove rapid price increases for carbon steel products, which slightly elevated carbon steel margins. But without a corresponding increase in demand and plenty of inventory availability in the supply chain, we encountered a very competitive pricing environment, which led to a third quarter margin decline for carbon products from somewhat elevated levels in the first half. In addition, ongoing excess inventories within the aerospace and semiconductor supply chain continue to pressure prices and margins across a range of stainless steel and aluminum products. In sum, gross profit margin associated with less than 10% of our sales has contributed to consolidated margin compression. We expect this pressure to ease as we move through 2026. Finally, the impact of our LIFO accounting method also contributed to margin pressure this quarter. Since LIFO is applied on a pro rata basis, we continue to carry LIFO expense through 2025 that reflected cost increases that occurred earlier this year. This LIFO effect tends to smooth out on an annual basis, though. For the full year 2025, we are still expecting $100 million of LIFO expense. Turning to organic growth. Our teams have done an outstanding job winning new business and growing with existing customers. We tend to outperform industry shipment trends at wider margins during uncertain times. The incremental volume of over 100,000 tons for the third quarter and over 300,000 tons for the year so far in 2025 has allowed us to meaningfully contribute to our overall profitability. On a FIFO basis, our gross profit margin was 29% in the third quarter, up from the third quarter of 2024, and our FIFO pretax income increased 30%. Looking at expenses, our same-store non-GAAP SG&A expenses were up 4.8% for the quarter and 3.6% for the 9-month period compared to the same prior year period, due to inflationary wage adjustments and higher variable warehousing and delivery costs to support our increased tons sold. We also saw higher incentive compensation in the third quarter due to a 30% increase in FIFO profitability. On a per ton basis, our same-store non-GAAP SG&A expenses were slightly lower in both the third quarter and the first 9 months of 2025 compared to the same period in 2024, demonstrating the operating leverage achieved through our smart, profitable growth strategy. I'll now address our balance sheet and cash flow. We generated approximately $262 million in operating cash flow in the 2025 third quarter, which reflected a working capital investment due to seasonally strong net sales. We continue to generate strong cash flow from operations throughout market cycles, that we redeploy to execute our opportunistic capital allocation strategy. We used that cash to fund $81 million in capital expenditures, pay $63 million in dividends and repurchase $61 million of our common shares at an average price of approximately $288 per share. Year-to-date, our repurchases have reduced total shares outstanding by 2%. And we have approximately $964 million available for further repurchases under our $1.5 billion share repurchase plan that we refreshed in October 2024. As previously announced, on August 14, 2025, we borrowed $400 million under a term loan agreement maturing in August 2028, and used the proceeds to retire of senior notes due August 15, 2025. As of September 30, our total debt was $1.4 billion, including $238 million in borrowings on our $1.5 billion revolving credit facility. Our leverage position remains favorable with a net debt-to-EBITDA ratio of less than 1, providing significant liquidity to continue executing our capital allocation priorities. Looking ahead, we anticipate overall demand in the fourth quarter will remain stable across our diversified end markets subject to ongoing domestic and international trade policy uncertainty. Accordingly, we estimate our tons sold will be up 3.5% to 5.5% compared to the fourth quarter of 2024. And consistent with seasonal trends, down 5% to 7% compared to the third quarter of 2025. We anticipate our average selling price per ton sold for the fourth quarter of 2025 will stay relatively flat compared to the third quarter. As a result, we anticipate flat to slightly improved FIFO gross profit margin in the fourth quarter. Based on these expectations and consistent with typical sequential seasonality where we experience approximately 20% to 25% decline in earnings per share in the fourth quarter, we anticipate Q4 non-GAAP earnings per diluted share in the range of $2.65 to $2.85, inclusive of quarterly LIFO expense of $25 million or $0.35 per diluted share. This concludes our prepared remarks. Thank you again for your time and participation. We'll now open the call for your questions. Operator? Operator: [Operator Instructions] Our first question today is coming from Katja Jancic from BMO Capital Markets. Katja Jancic: Maybe starting on the gross margin. So I understand that right now, the environment is such that it's resulting in gross margin compression. But is any of this compression attributable also potentially to your focus on growing volumes? Karla Lewis: Katja, from a gross profit standpoint, I mean, we've tried to, in our remarks and release, give enough context to help everyone understand the uniquely challenging market that we've been in the last couple of quarters. And what really said a lot to me in recently speaking with a couple of our people who run some of our typically higher-performing Reliance companies, who've been in the business 30 to 40 years, they commented that they've never seen a market quite like the one we've been operating in the last 2 quarters with the pricing strength coming from tariffs without the underlying demand to follow it. And that's what we think is a little unique in the current environment. We think our teams have done exceptionally well in winning business. And they are getting price increases from some of the mill increases that are coming through on products, more so in some products than others, just not at the rate that Reliance has experienced in more normal periods where there was demand pull forward. But we do think that that is temporary. We also tried to highlight, in particular, there's been a drag on margins for some of our special -- high-value specialty products that we sell into aerospace and semiconductor. We're bullish on both of those markets long term. There's just been a little pain, and it has a bit of an outsized impact on our gross profit margin that we've been experiencing the last couple of quarters. But as far as our smart, profitable growth strategy that we've been pushing the last couple of years, that we think our teams have executed really well on, it means grow your tons with good, profitable business and keep our gross profit margin in that sustainable annual range of 29% to 31%. We said there may be quarters where we dip down, which we experienced in this quarter, which there's a little bit of the LIFO timing that Arthur explained that impacts that. But the tons we're going after, we certainly have picked up tons in the flat-rolled space, which those margins aren't always as high as some of the other products that we sell. So could there be a little bit of impact from that? But overall, the end game is the right end game in our view because this is profitable business that's adding to our earnings, it's helping leverage our SG&A expenses, and we're really happy with the additional profit that those tons are bringing to us. So it's not the reason that our margin dipped down. It could be a factor to a certain extent. But there are other -- it's more of the market and a couple of those specialty lines for us having the bigger impact. Katja Jancic: Okay. Maybe when I look at your inventory level on your balance sheet, it seems like they're moving higher a little bit. I wouldn't expect this to be the case in this environment. Can you maybe talk a little bit about what's going on there? Karla Lewis: So part of that is pricing. Because as we mentioned, there have been mill price increases, so that's part of the dollars increasing. But we also have our tons up, and we buy based on what we're shipping. And so I think we might have a slight uptick in tons as well, but it's right for the market. And I think we've seen many of our competitors pulling back a bit from having inventory on hand, and this is allowing us to win some business and better service our customers. Operator: Our next question is coming from Timna Tanners from Wells Fargo. Timna Tanners: I wanted to follow up, if I could, on the inventory side. I know you said ongoing -- I think the quote I have was ongoing excess inventory was pressuring margins or contributing to the margin pressure. And another mill CEO this week said destocking was over. So I'm just trying to get a sense of, how close are we to putting that in the rearview mirror? When do you think we could switch to seeing appropriate levels of inventory? And did you mean that from your competitors or from your customers, I guess? Karla Lewis: Yes. So Timna, more at both the mill and the service center level in Q2 and Q3. There was a lot of inventory at the beginning of the year. We think a lot of service center companies were buying heavy to get in front of the tariffs, whether that was coming through import or domestic buys. So we believe service centers have been trying to work down that inventory. We do believe those inventories have come down. We're not going to say if destocking is over. We don't talk about destocking and restocking in our company. We talk about buying what we need based on our shipment levels. But we are starting to see lead times for certain products go out a bit, which is a positive sign. Are we at an inflection point? Potentially. If we're not there, we're probably closer than we were. And when we were talking about the impact on gross profit margin from the competitive environment with a lot of inventory, that was really talking about Q2 and Q3 and the markets we were in every day. So we do see momentum coming out of that. We think like our gross profit margin troughed in Q3 based on the factors we see today. So I would say we probably generally agree with that comment, but probably just wouldn't say it is strongly as others. Timna Tanners: Fair enough. I want to ask on the comment about winning new business. How does Reliance win new business? Is it execution? Is it price? Is it a little of both? Karla Lewis: Well, hopefully, it's execution and not price. That's the strategy. And we have changed our message starting a couple of years ago and set specific targets with certain of our Reliance companies, where we felt that they could grow their tons in a profitable way, and ask them to execute on that. And it's really them calling on customers, maybe their customers they had not been calling on prior to that. Maybe they're going back after some business they used to have. We also have much more expanded processing capabilities. We can do a lot more for our customers now with the investments that we've made in that equipment. And so it's really going back out educating our customers, and then getting their orders and proving ourselves. We think that -- we think we provide among the highest levels of customer service in the industry. And that's why typically, once our companies can get their foot in the door with business and show our customers how well we can service them, we expect to retain most of that business that we've earned during these last couple of quarters. Our model, though, does fit with the market that we've been in, where it's been competitive, people have been hesitant to buy too much inventory because of the tariff uncertainty and falling prices in certain products. Our ability to service small orders on a just-in-time basis is a positive in that type of market environment. So we probably won some business because some customers' buying patterns changed a bit. But I think we should be able to hold on to a lot of that business that we were able to win during the last couple of quarters. Timna Tanners: Okay, appreciate it. And I want to squeeze in one more if I could. I'm going to dare to ask a question about LIFO. But it's kind of bizarre to see continued LIFO expense at the same time as you're talking about prices having drifted lower recently. So I guess just at a high level, when do we clear the decks and start to have like a neutral LIFO environment? It sounds like you're still expecting continuation into Q4. But is it getting to a point where we run through that and start to see LIFO income or at least no LIFO impact? Arthur Ajemyan: Yes, Timna, good question. So LIFO is an annual estimate. So I guess, the way you're thinking about it, a lot of the cost increases, if you step back or look at the year, happened in the first half of the year. But because it's an annual estimate, we applied it pro rata. So you're right. And intuitively, when you look at Q3 and you say there's LIFO expense, it's essentially associated with cost increases that are in the rearview mirror. But again, because the accounting method is pro rata, you're effectively spreading that equally throughout the year. So as we head into 2026 and costs are relatively flat, then essentially LIFO expense is in the rearview mirror. Karla Lewis: And just as a reminder, Timna, when we're in more normal times with pricing moves based more on the supply-demand dynamics and prices are going up because of demand and that creates LIFO expense, we're happy to incur LIFO expense in that type of environment. But again, it's been a bit of an atypical environment the last couple of quarters. Operator: Our next question is coming from Phil Gibbs from KeyBanc Capital Markets. Philip Gibbs: The semis, infrastructure and aerospace pieces specifically certainly been noting excess inventories for most of 2025. And I know Timna made a general question about excess inventory in the supply chain. But those markets specifically, are you anticipating that those begin to turn around or levelize sometime in 2026? Karla Lewis: Yes. And Phil, maybe we want to make sure too that we're clear, these are -- in those markets, we're talking in particular about the high-value products. These are the products you've heard us start talking about the end of last year -- well, actually for the last couple of years, coming out of COVID, we saw lead times move to 80 -- 50 to 80 weeks, which we had never seen before. And the whole industry saw that. We do think there was some general overbuying in both the aerospace and semiconductor market of some of these products because there was just concern about availability. And so we've just seen the supply chain working through those products. There are pockets where you start to see some improved demand. So we don't think it's getting worse today. We think it's getting better, but it's, for certain products, it's just going to take some time. So we commented as we go through 2026, we think we'll see continued improvement in the supply chain working itself down for those products. Stephen Koch: Phil, I would say that if you think about the aerospace inventory, from a Reliance point of view, we're probably in the seventh or eighth inning of kind of getting our inventory under control and in a good position to start restocking in the first quarter of 2026. But the overall industry and our competitors and some of our customers, they're probably more in the fifth and sixth inning. So I think we're in good shape, but we're still going to have to deal with the market dynamics of the reality of there's a lot of inventory. Philip Gibbs: And on the CapEx side, I think you said around $350 million in cash CapEx this year. What should we anticipate for 2026? Because I know you've been kind of on an above trend for the last several years as you've invested in your capabilities and made more acquisitions. Karla Lewis: Yes, Phil, that is our current estimate for this year. We're working on our 2026 CapEx budget as we speak. It, we believe, will be probably below what our 2025 number was. We've had some record years the last few years, and it's been good investments for us. But we are pushing our people to really utilize the equipment that we have better, how can we maybe share some of that equipment within the Reliance network, and just really pushing for better utilization of the investments we've already made. But we will continue. We do continue to see growth opportunities and we will have some growth initiatives in our CapEx in 2026. We'll give you that number in February, but probably directionally lower than our budget of $325 million in 2025. And remember, there will be carryover. Some of these projects are multiyear projects. So the cash outlay might be more consistent with this year just because of some of the carryover coming into 2026. Philip Gibbs: And the last question, just on taxes. So I know there's been the Big Beautiful Bill and half a dozen other things that seemingly are changing cash tax rates and effective tax rates for companies. But is your cash tax rate for this year and next year relatively aligned with the effective rate? Or is it somewhat below? Arthur Ajemyan: Yes, Phil. So I mean, you can look at our tax rate, for the most part, it's -- we're a full rate taxpayer. I think as far as the new tax bill, yes, it is definitely -- especially the bonus depreciation, that's going to help lower our cash taxes paid. We're currently estimating the impact, but that could be an incremental reduction of cash taxes, probably into $30 million to $40 million range. So that's kind of the extent of the impact at the moment that we've estimated. Operator: Our next question is coming from Bennett Moore from JPMorgan. Bennett Moore: If I could circle back real quick on the aero comment, I think from Steve. It sounds like you're expecting maybe restocking could emerge as soon as the first quarter. Is there any difference there between the aluminum and stainless side just given some commentary for some other players this morning and Boeing moving to 42 a month as of Friday? Karla Lewis: Yes, Bennett. So from I think Steve's comment, again, he was talking specifically about Reliance's inventory position. And remember, we're talking about these specialty alloy steels, titanium, specialty aluminum products. So it's not impacting all of our aerospace inventory and aerospace business. We've seen relatively steady activity with like the aluminum plate and some of the other products that we consistently sell into aerospace. This is a pocket of our inventory that we were talking about. But I commented earlier we're long-term bullish on aerospace increased build rates, absolutely could help that supply chain excess inventory get worked through faster. So that's all positive for Reliance and for the industry if we realize increased build rates. Stephen Koch: Yes. We're in really good shape regarding our heat-treated aluminum with the 2x and the 7x for aerospace. We're a little more challenged with some of the specialty long products that we're working through. Bennett Moore: All right. And then turning to the steady pricing guidance, if I could kind of dig into some of the puts and takes here. I mean it seems like flat steel is looking pretty steady. I think you made some similar comments. But we have seen the tinted plate price hikes over the past few weeks with some success. Structural sounds pretty strong, and Midwest premium reached a record high over this past week. So could you walk us through kind of the puts and takes there? Stephen Koch: So from the wide flange beam point of view, the lead times have been extended and demand has been strong for most of the year, actually probably the last 12 to 18 months. We do appreciate the plate increase that was announced recently, because there was a continuous sliding of some of those products. So we believe that that stopped some of the bleeding, and we are looking for more of an uptick in the fourth quarter going into 2026. There's a merchant bar increase that we think is going to take hold. And just in general, there's been some halt in some of the tubing mills. And overall, looking for brighter days in some of the carbon products. Karla Lewis: And I would comment too, you mentioned aluminum, Bennett, on the common alloy aluminum, and we did get our prices up in Q3 based on those price increases, some pretty high levels on the Midwest spot, which are good for us, and we're passing through. But I think with the trade uncertainty and not knowing when and what some of those final agreements might be, there's overall some hesitancy of stocking up too much on inventory in case there is a trade action related to the aluminum products. Bennett Moore: That's great color. And if I could squeeze one more in maybe just on M&A. We saw some activity from peers this past month. Just hoping to get your latest read on the M&A landscape, valuations, if you're seeing any new opportunities emerge. Karla Lewis: Yes. So we're continuing to see a pretty steady flow of opportunities. We have commented the first quarter -- the fourth quarter of last year, we think, because of the elections, and first quarter of this year, it has slowed a bit. But the market's been -- picked back up to what we would call fairly normal levels and has stayed there. So we continue to look at opportunities as they become available, think about where we might want to be growing. So we think it's a decent M&A environment. I think valuations are generally reasonable. Each opportunity is a little different depending on what the sellers are looking for. But we're pleased with the level of activity we've been seeing. Operator: Our next question is coming from Mike Harris from Goldman Sachs. Michael Harris: Quick question. As you work through the gross profit margin headwinds, are there any SG&A leverage you can pull to help protect the operating margin? Karla Lewis: Yes. So I think, Mike, that's something we're focused on every day and pushing our people to be focused on. We have been talking more internally and pushing our people to really look for efficiencies in their operations, in their warehouse activities. We have reduced our head count even with higher tons being shipped over the last couple of quarters. So that's a focus, again, like I said, that we're always looking at. We look -- we have several different locations. They don't all perform at the same levels. So we are continuously looking at any underperforming assets. How do we make changes there? Sometimes we combine locations. We'll close small locations. That's kind of constant activity that we're doing. And also with our smart, profitable growth strategy, we are getting better leverage off of the fixed cost component of our costs. Arthur, anything you would add? Arthur Ajemyan: Yes. No, great color, Karla. And Mike, yes, we actually peak head count in Q2, and we've trended down. And that's part of the efforts that Karla mentioned around rationalizing our operations. I think the service levels in this environment are important, and our market share gains have had a lot to do with our service levels. So it's important to be really thoughtful about maintaining those and not just go in and reduce head count for the short term, but in the long term really impact our service levels. So we're being very thoughtful, methodical as we're navigating this environment and really growing the business, getting new customers along with existing customers. We've had some really good success with that, and we're looking forward to continue that. Michael Harris: Okay. Great color, guys. And then I guess just on the market share gain that you pointed out, going from 14.5% up to like 17.1%. Just curious as to how much of that would you attribute to organic versus inorganic growth. Karla Lewis: Yes. So certainly, Mike, we have had a few acquisitions over the last couple of years, 4 in 2024, that is part of that. But -- and we call out our same-store and our consolidated shipment trends. But the majority has been organic growth, both again investments we're making in some greenfields, some expansions, our increased value-added processing we're able to do. But really just our salespeople looking for more opportunities and going after good business that's out there that maybe we haven't been servicing the last few years. So we're really proud of what our teams have done going out aggressively, but aggressively through service, not through price, getting that increased business. Arthur Ajemyan: Yes. That majority is organic, so. Michael Harris: Okay. Great. And then just last one, if I could. If we look at the third quarter shipments, were there any, I guess, major onetime items in there or perhaps any pull-forward sales that you would call out? Karla Lewis: No, there's nothing there we would call out, Mike. I mean when your average order size is $3,000 an order, it's hard to get that one big order that really moves the needle. So I think it was just pretty broad-based. Operator: Our next question is coming from Martin Englert from Seaport Research Partners. Martin Englert: For nonresidential construction, it seems reasonably good. I'm curious, how much of this activity do you think is related tied to AI, data centers, semiconductor build-outs, kind of that camp of activity? Karla Lewis: Yes, Martin. It's hard for us to quantify just based upon the diversification we have within our companies and then the customers that we're selling into. And I think we commented on this last quarter, almost every one of our Reliance businesses is touching the data center trend and build, including the build of the electrification to support that, with many, many different products, right? It's not just building the shell of the facility. It's a lot of the internal, racking and enclosures and equipment. It's cooling systems. It's, again, the grid. So we're touching it. And it's been very positive for the industry that the data center trend is strong right now. But for us to quantify that -- we think it will continue to grow. You can look at all the estimates out there of the builds that are being announced, and that will continue. So that's all very positive for us, but difficult for us to quantify specifically. Martin Englert: And if the government shutdown continues for an extended period, does this pose any risk to any programs you might have exposure to or anything within defense spending? Karla Lewis: There's nothing that we're aware that's impacted us directly today. We're on -- I think the programs we're on are pretty solid programs, that we expect to continue. But certainly, there, like with anyone else, there could be some fallout if this continues. But it's not something that we've heard any warnings from any of our companies about any of the programs they're on. Operator: Our next question is coming from Lawson Winder from Bank of America. Lawson Winder: May I ask about capital return, and I guess, really in the context of capital allocation? One might expect that as the shares were a little bit weaker during the quarter, it might present an attractive opportunity, perhaps allocate more of your capital to the share buyback as opposed to less and maybe direct that away from other opportunities. I mean so how do you think about that in terms of return on your dollars in buying back shares versus investing in the rest of the business? And how should we think about that going forward? Karla Lewis: Lawson, we think buying Reliance stock is always a good decision, no matter what the price level is. But we do look at that, we do look at what the market value is, and adjust our activity accordingly. We've been active the last few quarters. The exact volumes vary a bit. But we look to be in the market, we look to buy at attractive levels. We've got the balance sheet and the ability. We look at it as a pretty low-risk use of our capital when we're investing in Reliance by repurchasing our shares. And yes, it could be more attractive at different price levels, the same, I think, as for the general market. Lawson Winder: Okay. That's helpful context. Can I also ask you, are you being impacted by, any way, by the aluminum supply disruption in New York State? Karla Lewis: Yes. So we do, in our toll processing businesses, directly, we do work with the mill, that I think you're referring to there specifically. And it has created some disruptions in the market that was not expected. And we are working closely with our mill suppliers as well as the end users of the metal, the automakers and others, to try to do whatever we can. We try to be a problem solver for them, whether it's storing metal for them, processing metal for them, actually leveraging the whole Reliance company to see if we can source the metal and fill some holes through some of the other Reliance businesses. So definitely a collaborative effort within Reliance trying to help that particular mill and its customers, as well as the overall industry, because it's having a much broader impact on multiple end-use customers and different mills. So we're just trying to do what we can to help lessen the disruption for those impacted. Lawson Winder: Is it material enough for Reliance that that could show up on your cost item or impact profitability? Karla Lewis: No. And the good news with our tolling operations, if they do lose some processing business to this particular mill, they generally have more demand than they can accommodate, that they can process metal for some other customers and end-use applications. Lawson Winder: Okay. Great. And can we maybe talk a bit about seasonality or can you give us some perspective on that? I mean we've talked for a number of quarters about kind of negative impacts of seasonality on the business. In Q1, we saw seasonality benefit Reliance. When you think about the business today, and looking out to Q1, I mean, overall, across the business lines, should we be looking at a recovery in Q1? Or how are you thinking about seasonality going forward from here? Karla Lewis: Yes. Lawson, as much as anything is kind of normal in our business, the last few years hasn't been that much normal. But in the service center business, our activity is really based on shipping days and it's based on the number of shipping days that our customers are open. So the normal seasonality is Q1 and Q2 are our 2 strongest shipping quarters. They're usually fairly even, but there can be a little give or take. But the first 2 quarters of the year are our strongest. Q3 typically trends down a bit because a lot of big OEMs will do shutdowns for -- planned shutdowns during the summer in industries that we're selling into. Also a lot of the smaller customers, there are vacations and things going on where small businesses will shut down for a week or 2. So we generally see probably a 3% to 5% falloff in our shipping volumes in Q3 versus Q2. I think the fact that our Q3 '25 shipments were equal with Q2 '25 is a big positive and again shows how our businesses, the Reliance businesses, are going out and winning business from others. And the fact that there was no dip in our shipment levels -- because the industry, I think we'll see, did have the normal seasonality. And then Q4, with the holidays, that's usually another 5% to 7% reduction in shipment levels from Q3, just again because of customers being shut down more days, us being shut down a couple of days for the holidays. And then you see the bounce-back in Q1 when there are just more shipping days, people are back to kind of full staffing moving into the year. So we certainly expect that to happen. I would comment, when people look at seasonality, I just talked about shipment levels, but that obviously trickles down to earnings. And we -- our guide for Q4 earnings per share, typically, we've been down -- earnings per share from Q3 to Q4 dips about 20% to 25%, which is consistent with our guide. However, it was not reflected in the consensus numbers that were out there. So we ask that people putting those numbers out there do steady history and pick up on some of those trends and react accordingly. Operator: Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Karla Lewis: Well, again, we'd like to thank everyone for joining the call today and your continued support of Reliance. In particular, we'd like to thank all of the Reliance family members for continuing to operate safely and for all that you're doing in these challenging market times and the successes that we've had. We're very proud of what you're accomplishing out there. And also before we close out the call, I'd like to remind everyone that we'll be in Chicago next month presenting at Baird's Global Industrials Conference. And we hope to meet with many of you there. Thank you, and goodbye. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good afternoon. Thank you for joining us, and welcome to BeFra's Third Quarter 2025 Earnings Conference Call. Before we begin, the company would like to remind participants that this call may contain forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Please consider these statements alongside the cautionary language and safe harbor statement in today's earnings release as well as the risk factors outlined in BeFra's SEC filings. BeFra undertakes no obligation to update any forward-looking statements. A reconciliation of and other information regarding non-GAAP financial measures discussed on the call can also be found in the earnings release as well as the Investors section of the company's website. Present on today's call are BeFra's President and Chief Executive Officer, Andres Campos; and Chief Financial Officer, Rodrigo Muñoz. I would now like to turn the call over to BeFra's President and CEO, Andres Campos. Andres Chevallier: Thank you, operator, and good afternoon, everyone. I am pleased to share our results for the third quarter of 2025, a quarter that once again demonstrates the strength, resilience and agility of our business model. Before we begin our review, I would like to note that we are conducting today's webcast with a slide presentation to help better convey the relevant information that we want to share with you in our quarterly results conferences. Turning to Slide 4. Let me begin by sharing some overall highlights for the quarter. Despite a softer consumer environment in Mexico and the U.S., we delivered another quarter of growth, solid profitability and strong cash generation. Our operations continue to be executed with discipline, focus and passion while driving efficiency and reinforcing the foundations of our long-term strategy. During the quarter, revenue grew 1.4% year-over-year and EBITDA grew 22%, with the margin expanding 362 basis points to 21.4% EBITDA. Our free cash flow conversion remained strong at 77% of EBITDA, reflecting our continued financial discipline and healthy balance sheet. These results were driven by strong execution across the group. Betterware Mexico maintained solid profitability. Jafra Mexico continued to lead growth. Jafra U.S. delivered sequential improvement and our start-up operations in Ecuador and Guatemala exceeded expectations. It is important to highlight that we have continued to decrease inventories, freeing up space for future innovation, and our net leverage ratio decreased sequentially from 1.97x to 1.8x. All of this confirms that our strategy is on the right track. We have built a strong and diverse business group, one that is not only positioned to capture long-term opportunities, but also resilient in the face of short-term challenges. To talk about our results and progress on Slide 5, I am very excited to share with you what we have defined as BeFra's five strategic pillars, which will guide our growth and transformation over the next years. As you know, in the past four years, we have transformed the BeFra Group from being one single company in one country to becoming a diverse group of companies with multiple brands and categories and a diverse geographic footprint. Accordingly, these five pillars represent the next stage of BeFra's evolution through which we will capitalize on opportunities that lay ahead of us. For today's call and future ones, we will discuss our results in this context to explain the progress that we are making across these pillars. On Slide 6, the first pillar is strengthening our leadership in the Mexican market. It is important to remember that both Betterware and Jafra hold around 4% market share in each of the home solutions and beauty markets, which means there is still substantial room for growth. Turning to Slide 7. Third quarter 2025 sales at Betterware decreased 5.3% year-over-year as Mexico's softer demand has had a more significant impact on discretionary items in particular. That said, we remain focused on fine-tuning our internal strategies to mitigate these effects and to get Betterware back on track to consistent growth. Our focus this quarter was on optimizing pricing, reducing inventories, which fell 17% versus last year's quarter and refreshing our catalog merchandising techniques. These actions are strengthening the commercial fundamentals and set the stage for future volume recovery. On Slide 8, we showcased some of Betterware's most relevant innovations during the third quarter 2025. Innovation remains an important driver for our success, and this slide provides just a few examples. This quarter, we continued to advance product innovation across all of our major categories, ensuring our portfolio remains at the forefront of evolving customer needs, including stellar new innovations such as the limited edition Barbie Katrina we launched during the quarter with Mattel, which sold out in just two weeks. On Slide 9, Behind Betterware's revenue and profitability strength, we'd also like to point out three actions implemented during the quarter that showcase our continuous advancements. First, we reconfigured our catalog, decreasing our total SKU count to 370, including decreasing the products in our promotional portfolio. This move seeks to make our SKUs more productive and our products more visible with direct improvements in revenue, margins and inventory management. Second, Betterware has launched a new VIP program for its associates, which segments them according to their performance level. The new program better motivates associates by rewarding top sellers with more benefits. Finally, we launched an idea section in our proprietary Betterware Plus app, which all associates and distributors can now use to send us product ideas or reviews. We expect this new feature to have a significant impact on ongoing innovation at Betterware. Turning to Slide 10. The Jafra Mexico business continues to be one of our key growth engines. Revenue increased 8% year-over-year and EBITDA grew 31%, reaching a margin of 24%. Although we expect a run rate margin of 20% to 21%, this reflects our ability to strengthen profitability while driving growth. Our consultant base expanded 2% quarter-over-quarter, while the average order increased by roughly 10%. We continue to show how our business model proves highly effective when applied to new brands and product categories. Almost four years since its acquisition, Jafra is set to close the year with almost 50% higher revenues than the year before we had acquired it, which is particularly relevant when compared to its almost 15 previous years without growth. Turning to Slide 11. We highlight several of Jafra's most relevant product innovations for the third quarter. We launched our first collaboration with Disney, the Evil Queen's flash collection, which delivered outstanding consumer engagement and strong sales performance. We also continued to expand our successful new BioLab dermo-cosmetic brand with the introduction of our first dark spot removing product line, which performed exceptionally well from the outset. In additional, we completed the revamp of our Royal Body line, featuring updated packaging and a refreshed brand image, resulting in a more than 50% increase in volume compared to prior versions. Importantly, by year-end, we expect to have revamped approximately 80% of Jafra's portfolio under the new brand image with full completion anticipated by the first half of 2026. Finally, on Slide 12, we would like to highlight two relevant operational advancements for Jafra, mainly the success of the new printed Purple guide for Mexico, which explains Jafra's incentive program in a much simpler way than it used to. Jafra also adopted Betterware's outbound messaging system to associates, which we use to remind them of specific actions they can take to win more customers and orders according to their individual context. We continue to make other advancements to Jafra's model to make it more modern and effective. Please see Slide 13. Our second pillar is regional expansion, which we are executing by having BeFra's successful business model replicated across the U.S. and Latin American markets. On the following slide, starting with the U.S., Jafra achieved a quarter of stability versus last year. After a couple of quarters of decline, we see the trajectory of Jafra U.S. continues to improve each quarter. While the third quarter usually has a seasonal decline in revenue versus second quarter, this year, it remains stable, demonstrating the strength of the trajectory. It is important to highlight that in September, the business recorded its strongest month in the last three years, including 30% year-over-year growth in revenue. With regard to profitability, Jafra U.S.' losses reflect extraordinary legal expenses related to cases and issues that had begun before we acquired the company. Without those expenses, the company operates at a breakeven point and is getting close to generating profits. On Slide 15, as we've mentioned before, we have implemented three main measures to achieve Jafra's U.S.'s positive trajectory. First, the adoption of Shopify Plus platform, which is now complete and an important source of growth for all associates and distributors. In addition, we implemented a profound change in Jafra U.S.' incentive program, now called the Purple Guide, which we launched in May and which has started to kick in with good results. Finally, on Slide 16, we redesigned the product catalog to make it more attractive and yield higher sales conversion rates. On the next slide, you will note that since its launch in May, Betterware Ecuador has exceeded expectations, reaching almost 6,000 active associates, 380 distributors and revenue growing around 20% month-over-month. In Betterware Guatemala, sales grew 32% year-over-year, following the appointment of a new management team that has been in place since September of last year. Encouraged by the promising results in both countries, we are moving forward with plans to launch Betterware in Colombia in the beginning of 2026 with the aim of strengthening our presence across Latin America. We thought it'd be important to clarify the opportunity that Latin America represents for BeFra. On Slide 18, you'll note that the Andean and Central American direct selling markets are an estimated $4.5 billion in total size, which is almost as big as Mexico's market. We are confident that our scalable business model and proven playbook will enable us to replicate our success in these markets, representing another significant lever of growth for the group in the years to come. Now I'd like to jump into our third pillar, new brands and categories. While we will not showcase any specific progress in this quarter, I would like to mention that this pillar will be a major avenue for growth going forward. We are actively looking for potential acquisitions of new brands that can strengthen BeFra's position in our markets and enable us to expand into new product categories. With the huge success of Jafra's acquisition, which has demonstrated our ability to positively impact acquired brands, we are ready for possible new ones in the future. Within this same pillar, we are also assessing new categories that could fall under the Betterware and Jafra brand umbrellas. This includes analyzing opportunities that would strategically broaden our brand portfolio in the coming quarters. Moving to Slide 20, our fourth pillar, activating digital person-to-person selling, I am very pleased to announce that last month, we formed a new digital transformation team, which will help us adapt more quickly to emerging consumer trends and digital capabilities. Led by LatAm digital commerce expert, Maria Fernanda Hill, who reports directly to me, the digital transformation team will be crucial in adopting new technologies such as generative AI and agentic AI to further boost our successful person-to-person model. More to come on this front in the quarters ahead. Lastly, on the following slide, our fifth and final pillar, which is one that underpins everything we do, financial strength, discipline and control. This has been a hallmark of our company throughout the years. It enables us to grow without compromising company health and has also made us resilient in challenging times. We continue to operate with tight cost management, efficient working capital and healthy leverage ratios. Financial discipline isn't just part of our strategy. It's part of our DNA. With that strategic overview, I'll now turn the call over to Rodrigo, our CFO, who will walk you through the consolidated financial results for the quarter. Rodrigo Gomez: Thank you, Andres, and good afternoon, everyone. For starters, all figures I'll be referring to are in Mexican pesos, and all comparisons are year-over-year unless otherwise stated. Additional details are available in our earnings release published earlier in our Investor Relations website. Starting on Slide 22, in terms of net revenue, we saw growth of 1.4% year-over-year, which means that despite softer consumer trends, our business model and strategies remain strong and efficient. For EBITDA, we had a great Q3, which saw an increase of over 22% versus last year's Q3. While year-to-date EBITDA is still below last year's level due to a difficult first quarter in '25, we are recovering strongly and expect to achieve 1% to 5% growth over the year. On the next slide, it is also important to highlight that while maintaining a strong focus on profitability and continuous improvement across both Betterware and Jafra, we have continued to invest in our international expansion strategy. Thanks to the solid performance and financial strength of our home market in Mexico, we are in a good position to fund these investments. As Andres mentioned earlier, our international strategy represents a significant growth opportunity for the future and a key pillar in BeFra's long-term vision. Turning to Slide 24. Our adjusted net income increased 71% versus third quarter 2024. This was mainly due to higher operating profit, but there was also a positive impact from lower net interest expenses resulting from lower interest rates in Mexico as well as lower provisional income tax for the quarter. Our income was negatively impacted by FX effects due to the fact that FX this year is recognized in our gross margin under new hedge accounting guidelines. While last year, we had positive financial effects from our hedge positions, which used to be recognized under the EBITDA. On Slide 25, you'll note that our free cash flow increased 32.6% year-over-year and is expected to reach an annual rate of 60% free cash flow to EBITDA by the end of the year. We also remain consistent in our commitment to generating value for our shareholders through dividends. And the Board proposed a MXN 200 million dividend that was approved at our General Stockholders' Meeting held on October 21. This represents our 23rd consecutive quarter of paying dividends since we became public in 2020. I'd like to highlight that the 2021 and 2022 dividends were positively impacted by the pandemic demand surge in relation to Betterware, and 2023 was negatively impacted following the post-pandemic decline as well as the 2022 Jafra acquisition. As you can see in the last two years, the 2024 and 2025 dividends have resumed, representing between 30% to 40% of EBITDA. On the following slide, you will see our total debt and our net debt-to-EBITDA ratio demonstrates our ability to manage debt for growth initiatives. It is important to highlight that BeFra normally operates without debt as was the case before we invested in the new campus and in the Jafra acquisition. Since our debt peaked in beginning of 2022, we have reduced total debt from MXN 6,700 million to MXN 5,200 million at the end of third quarter 2025. During the same period, the net debt-to-EBITDA ratio fell from 3.1x to 1.8x. We expect to continue to drive down debt as quarters progress, including an estimate to close the year at around 1.6x. I will now pass the word back to Andres for final comments. I will now pass the word back to Andres for final comments. Andres Chevallier: Thank you, Rodrigo. Before we open the line for questions, let me conclude with a few remarks on Slide 27. While the external environment, particularly in Mexico and the U.S. remains challenging, our results this quarter confirm the resilience and viability of BeFra's business model. We are growing profitably, generating cash, expanding our footprint in the U.S. and Latin America and strengthening our brands. We are executing our strategy with discipline and focus and the momentum we're building gives us great confidence as we prepare to close 2025 and enter 2026. BeFra today stands as a stronger, more diverse and well-positioned group with great brands, committed teams and a clear road map for long-term growth. I will now pass the call to our operator regarding any questions you may have. Thank you. Operator: [Operator Instructions] Our first question is from Eric Beder with SCC Research. Eric Beder: I want to talk about inventory. You've reduced the inventory by almost, I believe, about 8% year-over-year and the revenue went up, which is a great combination even despite the fact that tariffs probably raised some of the cost of goods sold there. How should we be thinking about the potential inventory targets going forward? And will that provide extra free cash flow here to help drive expansion and paying down more debt? Andres Chevallier: Yes. Thank you, Eric. So, I will pass that question to Rodrigo so that he can give you our projection for year-end on inventory, how it looks like. Rodrigo Gomez: Eric, nice to hear from you. Remember that in Q3 last year, we were up in inventories in Betterware, and we are aiming through the year to get it down. We do believe that expectation to close 2025 will be around MXN 2,100 million to MXN 2,200 in inventory from the MXN 2,500 that we initiated the year. So that would be the aim and the future for inventories in the company. Andres Chevallier: And just to clarify the exact number, it's MXN 2,100 million where we aim to finish. Eric Beder: Okay. Well, that would be impressive. When you look at the better catalog, I guess there's two things here. One is, how are you taking advantage of the stronger peso in terms of ordering and being able to maximize margins? Obviously, you've already done part of that. And what should we be thinking about is a more -- what we see now kind of the focus on returns, lower inventories kind of what we're going to see going forward? How should we be thinking about the ability to drive potentially top line growth from the Betterware catalog? Andres Chevallier: Thank you, Eric. That is a very good question. As you say, we are benefiting now from a strong peso at around MXN 18.50 to MXN 19 per dollar. And then at the same time also, the freight costs have come down again near the lowest levels that we have seen. So this is coming together to benefit Betterware Mexico. And we are -- obviously, our first line of attack is to pass these benefits on to the consumer to drive more demand. Obviously, all while protecting the profitability that we aim for. But it obviously allows us to be a bit more aggressive with consumer prices. At these moments where consumption is sluggish in Mexico to have this benefit is very good, so we can be more aggressive in prices. Eric Beder: And you mentioned -- I guess one more question about Jafra. So you've talked about moving the business into new areas where the consumer is continually buying them, skin care, you mentioned dark spot remover, and that takes time. And it also has taken some of the changes you've done there. Where kind of are we in that kind of movement there in terms of that? And in terms of expansion, is there a preference to do it as direct ownership, joint venture? How should we be thinking about the new expansion like Colombia and the other potential countries in South America as how you want to structure that? Andres Chevallier: Yes. Thank you, Eric. So, on your first question from the Jafra side, still fragrances for Jafra Mexico, fragrances is still the main category. But in the last year and the years to come, the other categories will -- we expect the other categories to start growing at a faster pace than fragrances and start building on that mix of the revenue. Now on the second question about expansion, we are doing the expansion directly ourselves, 100% owned by us. And we are hiring management, professional management on site that has experience in the country or the region that lives in the region, and we're bringing them on board to manage the expansion to those regions. But it's by the moment, for the foreseeable future, 100% owned by us. Operator: [Operator Instructions] Our next question is from Cristina Fernández with Telsey Advisory Group. Cristina Fernandez: A couple of questions. I wanted to see if you can talk more about what you're seeing with the Mexican consumer in your categories. It's been a pretty volatile year with a soft first quarter, but then the second quarter, it seemed like the consumer was spending more and now back track. So I guess, what do you think is driving that? And how much outperformance you're seeing in your businesses versus the overall market? Andres Chevallier: Yes. Thank you, Cristina. Andres here. So, yes, I mean, the Mexican consumer has been pretty sluggish, I would say. We're seeing consumption growth lessen, and we're seeing consumption trends to come down. As you said exactly now, we saw a pretty rough first quarter, then it picked up again in the second. And then by the end of August, beginning of September, it came down again. So very volatile, what we're seeing with the Mexican consumer, and it's obviously not easy to operate in these conditions. We believe that this may be temporary as the Mexican economy as a whole, we think stands strong. But obviously, these are very uncertain moments, and we try to operate in these moments with, I would say, two things in mind. One is maintain strong profitability and cash flow. When we attack difficult times, we try to make sure that our cash flow and profitability is very well positioned and that we remain as a healthy company. And the second one, obviously, is keep attacking growth and keep trying to gain market share even in these tough times. So this will be how we will maintain our mindset in the coming months and quarters. Cristina Fernandez: And then another question I had was on the profitability, the pretty strong EBITDA margin we saw this quarter. You mentioned a couple of factors like FX and lower transportation costs that might be sustainable and continue to see those benefits going forward. But I guess, how should we think about this level? I mean, is this a level you want to stay or you want to reinvest back in the business to drive growth? And were there any onetime benefits that skewed this quarter higher? Andres Chevallier: Yes. So no, there's no relevant like onetime benefits. Nevertheless, we obviously saw a pretty strong gross margin, especially in Jafra. Mexico, we saw pretty like a 76% plus gross margin in Jafra Mexico, which is not the normal margin we have in Jafra Mexico. The normal gross margin we shoot for is like 74.5% to 75%. So we did have a little bit of a high margin in Jafra Mexico, which we do not expect to sustain, but reinvest that to continue driving Jafra's growth. So more or less, that's where I would say, our mindset would be at. Cristina Fernandez: And then the last question I had was on the -- on the technology transformation that you call out, as you look across the businesses, where do you see the most opportunity to embed greater technology or make it more efficient as you look out over the next couple of years? Andres Chevallier: Yes. It's a very good question. As you know, we have been investing in technology and in technology advancement for quite a while. It's one of our pillars of growth. And today, we are at a, I would say, a pretty good spot with our own proprietary app and the new Shopify Plus platform that we launched in all of our businesses and all of that. But technology continues going. So we see going forward with the whole surge of generative AI, agentic AI, there will be a lot of transformation that we can use. And we want to be at the forefront of these technological advancements. So this department, one of the things that's going to be working at is our evolution within AI. We're also looking at the fact that person-to-person selling is also evolving towards a more and more digital landscape where you see platforms such as social selling starting to explode, live shopping starting to explode in the U.S. with TikTok Shop or with other. So all these spaces, we need to move very fast and be at the forefront of all these technological advancements. So those are some of the ones I would mention. And it's become so relevant and so important that that's why we decided to make a specific department of this and bring a specialist to help us drive everything we do with the commercial technologies in order to evolve our channel. Operator: With no further questions, I would like to turn the conference back over to Andres for closing remarks. Andres Chevallier: Thank you, operator, and thank you, everyone, once again for your trust and continued support. We look forward to updating you on the next quarter. Thank you. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good afternoon, and welcome to Alfa's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would like to turn the call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin. Hernan Lozano: Good day, everyone, and thank you for joining us. Further details about our financial results can be found in our press release, which was distributed yesterday afternoon, together with a summarized presentation. Both are available on our website in the Investor Relations section. Let me remind you that during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. It is my pleasure to participate in today's call together with Roberto Olivares, Sigma's CFO. I will provide a brief update related to Alfa, Sigma, then Roberto will discuss Sigma's third quarter results and outlook. It is exciting to report Alfa, Sigma's first complete quarter as a streamlined global branded food player. We have experienced a smooth transition into a steady-state business after years of transformational developments. To better reflect Alfa's new identity and to concentrate on growing Sigma's corporate brand equity, we are implementing a re-branding initiative. As a first step to sunset the Alfa brand, an extraordinary shareholder meeting will be convened soon to propose adopting a Sigma-related entity name at the Alfa level. We will share updates on these changes in due course. Returning value to shareholders through cash dividends will remain core to capital allocation. On October 1, the Board approved the first dividend under the company's new food-focused structure, a $35 million payment, bringing total cash dividends for the year to $119 million. This amount is aligned with distribution levels historically supported by Sigma's strong cash generating ability. With that, I will now turn the call over to Roberto to discuss Sigma's results. Roberto Olivares: Thank you, Hernan, and thank you all for joining us today. We are pleased to report another quarter of positive sequential improvement in volume, revenues and comparable EBITDA, underscoring consistent progress adapting to raw material cost pressures in a global environment of soft consumer confidence. Consumers are moving across channels, categories and brands, including varying shift between retail and food service, dairy and packaged meats as well as value and premium brands. The good news is that Sigma's diversified business platform gives us a relative advantage to maintain strong connections with consumers throughout the broad marketplace. One of the biggest industry-wide challenges we continue to face is rising raw material costs. In particular, turkey breast has experienced the sharpest price increase, reflecting supply constraints amplified by seasonal avian flu. Prices reached an all-time high of $7.10 per pound at the close of 3Q '25, which was an outstanding 244% increase from a year ago. Although we have certainly felt the effects of high turkey prices and other protein costs, Sigma's large scale and global supply chain have helped reduce their impact on our results. Looking ahead, we anticipate that current high prices, vaccination and low feed cost will be supportive of a gradual improvement in turkey supply and cost. In addition to Sigma's structural advantages, our experienced teams have done an incredible job staying on top of consumer needs and expectations. All the initiatives we have undertaken drove third quarter revenues to a record $2.4 billion, up 8% year-on-year and 5% sequentially. We have been implementing targeted price actions through a balanced approach to mitigate rising input costs while also supporting volume. EBITDA was down 9% year-on-year due to sustained raw material cost pressures and a record high comparison in 3Q '24. Adjusting for the Torrente property damage reimbursements in the second quarter, comparable EBITDA increased 3% sequentially, marking the third consecutive quarter of improvement. As a result, 9-month comparable EBITDA of $722 million is tracking in range with our full year guidance. We are confident that this upward trend will continue gaining momentum into the fourth quarter, which implies significant year-over-year growth for the first time in 2025. Moving next to key highlights by region. Mexico was once again the standout with revenues in local currency increasing both year-over-year and sequentially. Volume increased 1% quarter-on-quarter as growth from retail channels offset weaker performance in food service, which was impacted by soft hospitality demand. By product, yogurt and value branded packaged meats were key drivers in the retail channels. FX-neutral EBITDA improved 6% sequentially as ongoing revenue management and efficiency initiatives offset higher raw material costs. In the United States, revenues were flat year-on-year and quarter-on-quarter as favorable pricing was offset by lower volume in both periods. Softer demand for packaged meats in national brands was partially offset as Hispanic brands continue to gain traction in mainstream channels and new customer acquisitions. EBITDA was 17% lower quarter-on-quarter, reflecting lower volume in national brands and changes in mix involving lower dairy sales. Staying in the Americas, Latin America delivered 2% currency-neutral revenue growth in the third quarter, driven by higher volume year-on-year and sequentially. EBITDA decreased 11% versus 3Q '24 due to higher protein costs and mix effects, but increased 10% quarter-on-quarter due to operating efficiencies achieved in the Central American operations. The underlying business in Europe has maintained an upward trajectory. Adjusting for all insurance reimbursements received last quarter, EBITDA increased more than 100% sequentially as effective price actions and Torrente-related production adjustments drove a recovery trend that is expected to be amplified with seasonality effects in the fourth quarter. Lastly, Sigma's Europe capacity recovery plan continues advancing on schedule towards full restoration in 2027. Looking at our financial position and select cash flow items, we maintained a strong consolidated net debt-to-EBITDA ratio of 2.7x at the close of the third quarter with a stable net debt. CapEx represents our largest use of cash, driven by planned investments. Projects underway include capacity and distribution expansions, primarily in Mexico and the United States, plus the previously discussed capacity recovery in Spain. Next, let me briefly touch on some of the exciting steps we are actively taking to strengthen the business model for long-term success. Our growth business unit remains focused on piloting and scaling new products and ventures with disruptive growth potential. Grill House, our direct-to-consumer venture that caters to the grilling enthusiasts is ready to make its entrance into the U.S. after uninterrupted growth in Mexico for the last 5 years. At the same time, the Studio, Sigma's Global Center of Excellence for design and innovation is moving forward in its first year with developing 46 prototypes and advancing on 11 innovation commitments to boost core brands. Advancements in these areas like these will continue to set us apart from competitors in all regions. With this, let's open the call for questions. Please, operator. Operator: Our first question comes from Ricardo Alves from Morgan Stanley. Ricardo Alves: I had a question on Mexico. I think that certainly, as you mentioned in the preliminary remarks, another quite positive and resilient performance in top line in the low double digits. With that in mind, can you break that down into more details as it pertains to eventual share gains? I'm really looking forward to what has been driving the strength of you relative to other food players in Mexico. If you can talk about share gains or your revenue management initiatives or even on a channel by channel? Is it exposure to smaller purchases that is benefiting you more than others with a less diversified SKU? So just trying to get some more granularity to try and explain the strength in top line in Mexico and if that's something that should continue going forward, that would be helpful. My second question, I think that, Roberto, you did refer to the guidance. We appreciate the fact that the company is reiterating the guidance. I think that the message is pretty clear here, and it does imply to the comment that you made that the fourth quarter should be significantly stronger. I think that we're talking about almost 10% EBITDA growth on a sequential basis. So, with that in mind, can you also lay out in more details in your view, what are the key value drivers from the third quarter into the fourth quarter for this big sequential improvement? Is it -- when we look historically, the seasonality doesn't really help us to come to a conclusion that the fourth quarter is going to be significantly better. So is it something that we cannot model as well as you can, meaning your hedges may be looking better or to one of the points that you made, maybe Europe is going to be improving much faster than expected. Is there any top 2 or top 3 value drivers for us to be more confident about this sequential recovery into the fourth quarter? Roberto Olivares: Thank you, Ricardo, for the question. Let me first address the first one related to Mexico. In general, let me first explain that in Mexico, we do have the retail business and the foodservice business. We have seen different dynamics in each one of them. Foodservice first being more soft on volume, particularly due to raw material cost increase, particularly beef, but also softer hospitality trends, as I explained in my initial remarks. If you divide the business, retail is actually growing a little bit more on volume and foodservice is decreasing in volume. And in retail, we have a good presence in both the modern and traditional channel and a good presence across the different value segments across the socioeconomic spectrum. So we do have brands that whenever a consumer is trading down or trading up, we manage to catch the consumer as they move. So we have been seeing a little bit of trading down. So volume from our value brands is growing a little bit higher than the premium and the mainstream brands. And also volume in some of our dairy brands, particularly yogurt, continues to increase. I would say those are the 2 main drivers of the resilient volume that we have seen in Mexico. Then let me address your second question regarding reiterating the guidance and what we see in the fourth quarter of 2025. First, let me just make the comment that last quarter was -- fourth quarter '24, we have some extraordinary impacts, particularly in Mexico. If you see the margin that we have seen through this year in Mexico up to today, up to the third quarter, we were almost at 15% EBITDA margin. If you normalize that effect, we have close to $30 million more in Mexico in the fourth quarter versus the fourth quarter of 2024 just because of that. Additionally, we do expect to receive -- to continue receiving the reimbursement from the business interruption insurance from the Torrente incident we expect between $15 million and $20 million of business interruption coming in the fourth quarter. We actually already received a small portion of that during the month of October. We do also expect the European operation to have better results than the fourth quarter of 2024 because of higher prices and the momentum that we have seen in the operation between $5 million to $10 million in that sense. And in the case of the U.S., we see that we will move from a decrease versus last year in this third quarter to actually being able to have a similar result in the U.S. versus the fourth quarter of 2024. So those are the main key drivers for us being in range with the guidance. Ricardo Alves: Exactly what we are looking for, Roberto. Operator: Our next question comes from Renata Cabral of Citi. Renata Fonseca Cabral Sturani: So I have 2 regarding the U.S. business. One -- the first one about category trends. How would you describe the overall competitive environment right now in the U.S. in packaged meats and refrigerated food? Are private label or value play is gaining share right now? And how is Sigma positioning to defend pricing? And still on the U.S. business, in the release, it's mentioned that we have volumes in the national brands. My question is to what extent was this driven by category contraction or share loss and how the company has just seen the product mix to reaccelerate volumes in 2026? Roberto Olivares: Thank you, Renata, for your question. Regarding category trends in the U.S., we have been seeing just more competition of private label in the category, particularly, I would say, because of all of our regions, probably the U.S. is the one that has a softer consumer confidence recently. Consumers in the U.S. are managing a tighter budget. They are more cost conscious. Having said that, we -- particularly in the national brands business, we play as a smart choice, I would say, very close to the segment where private label is playing. And although we have seen that private label is penetrating more in the category, has not necessarily impacted our brands, has impacted more of the mainstream brands in the category. We try to position ourselves as a smart value brand, playing a lot with innovation on convenience on -- not only on affordability that has helped maintain our position with the consumers. And actually, we, in that sense, have been doing well. In regards to what we see going forward, definitely, the category this year, mainly in the Americas has suffered a lot because of raw material cost. We have mentioned a lot that turkey, but also pork and also other -- beef, other materials has been increasing. We do expect for 2026 for raw materials to ease, to start to recover production, particularly in turkey, that will increase the supply in the production and also impacting raw material to the downside. And hopefully, with that, we do expect a pickup in the category for next year. Operator: Our next question comes from Federico Galassi of Rohatyn Group. Unknown Analyst: I don't know if I was allowed to speak. It's [ Matteo ] here. I wanted to know if you could give us some color on how is operating leverage looking in this scenario with lower volumes. I think the picture in terms of raw material costs is very clear. Everyone understands the pressure particularly turkey has had on your results. But I wanted to see if you could provide us some guidance on what we should expect in terms of OpEx as a percentage of sales with more granularity by country, if possible? Hernan Lozano: Matteo, this is Hernan. Let me see if we understand your question correctly. So the first part refers to operating leverage and whether the decrease in volume is creating some slack in terms of the level of operation that we maintain across the different regions. Is that right? Unknown Analyst: Yes, exactly. Hernan Lozano: Okay. So the answer is no. This is not creating any slack in terms of operating leverage. What we're seeing is we are operating at pretty much capacity, especially in the Americas, in Mexico and the U.S., if you look at many of our CapEx projects, these have to do with catching up with volume that has grown at a pretty strong rate before 2025. So from an operating standpoint, the operations are normal, I would say. Roberto Olivares: I will add that -- thank you. I will add that it's not that volume is necessarily decreasing a lot. I mean, again, in the case of the U.S., was 1% this quarter is -- we do expect to continue growing in volume in the next years. Unknown Analyst: And one quick follow-up related to cost of raw materials. It should be fair to expect that particularly turkey prices stabilize towards the end of the year and that we see lower raw material prices for next year. What's your strategy, your view on pricing, if you could give us any idea on that for next year? Roberto Olivares: Sure. Thank you, Matteo. I mean, in general, we do expect, I would say, more friendly raw material environment next year. We -- let me talk about turkey. We are starting to see some indications that some recovery in the turkey production is starting to happen. There was an inflection point in July where production is starting to increase versus last year. And actually, the rate of increment or the rate of how the production has increased has been at a good rate. Having said that, there is still some uncertainty on how it's going to continue that rate in the next months, particularly because, again, we're entering the winter in this hemisphere and potentially, there could be more diseases coming along. There was a particular disease that affected a lot the Turkey this year was a pneumovirus. And they developed a vaccine for that virus that started to help. They started to vaccinate the turkeys around April and May. So we do expect that, that continues helping with the production over the next months. We are cautiously optimistic. I will say that we do expect production of Turkey to continue increasing. But again, cautious about the rate of that increase. Operator: Our next question comes from Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Roberto, Hernan can you hear me? Roberto Olivares: Yes. Fernando Olvera Espinosa de los Monteros: Perfect. My question, just a couple of follow-ups. Regarding or linked to the cost outlook, I mean, thinking that turkey prices should start easing going forward, how are you thinking about pricing mainly in Mexico towards year-end and next year, trying to see if any additional adjustments might be needed. And also thinking about volume softness overall, how are you thinking about CapEx for next year? Roberto Olivares: Thank you, Fernando. Let me just make the comment that although we have been seeing that some indication that production of turkey started to increase, prices of turkey has not reflect that. So prices of turkey continues to be at a record level, both in turkey breast and turkey thigh. And we do expect them to decrease in the following -- particularly in the following year. I will say more as the -- probably between the first and second quarter of the next year, that is our expectations. Regarding pricing, when that happened, we have been working very closely with the revenue management teams to be able to protect both margin and volume. We try to do any price increase that we do, we try to do it very -- with a lot of analysis in regards to elasticity, how the competition is moving and also how the consumer perceives that price increase. We want to maintain the preference of our consumers. So whenever there is something that we can see that we can act both on higher raw material costs and lower raw material costs, we will act upon that to be able to protect and to continue growing volume. In regards to that, your question about CapEx in general, again, particularly Mexico and the U.S. operation, for the last couple of years, we have been working at capacity or almost at full capacity. So we have been planning and investing in some projects to increase the capacity. We also have the recovery plan in Europe to recover the capacity that we lost in the Torrente flood. So we will be working also on that on next year. So at least, we still don't have our guidance number for CapEx for next year. But what I will say directionally, we'll continue to be around the same level that this year. Fernando Olvera Espinosa de los Monteros: Okay. Roberto, regarding pricing, I mean, at this point, do you feel comfortable with the price hikes implemented so far or additional hikes might be seen going forward in that sense? I mean, thinking about the turkey price that you were saying that they might start to decline until the first and second quarter of next year. Roberto Olivares: Yes. Thank you, Fernando. I will say that unless, again, the raw materials continues to increase, which we are not expecting that. We not necessarily will do something structural on prices as of right now. There might be the need to do some particular adjustments in some particular product, but not something that will be structural for the whole company. Operator: Our next question comes from Felipe Ucros of Scotiabank. Felipe Ucros Nunez: A couple of questions on my end. So one has to do with your pricing power. Can you talk a little bit about your capacity to maintain your pricing levels when costs start coming down and margins start expanding. Historically, what has been the behavior of your competitors? Are they typically disciplined? And I guess, how does that change by region? I have an impression that perhaps Mexico and the U.S. are stronger than Europe. But any color you can give us on that would be great. And then on the second question, is there any direction you can give us about which proteins are most important to you out of the ones you use? And I know this varies because there's reformulations depending on where the costs are at given times. But even if you can't give us precise numbers, perhaps you can give us a ranking or some directional idea of which ones are the most important proteins. Roberto Olivares: Thank you, Felipe. Let me first tackle the second one. So we -- regarding protein, -- and when we have this information in our website in our corporate presentation, around 40% of our protein -- of our raw material cost of -- the raw materials is pork. Then we have close to 20% is turkey, then around 10% is chicken and then around 30% will be dairy, mainly milk, but also cheese and some other dairy proteins. We -- particularly pork ham, I would say, is our largest material that we buy, both in -- particularly in Europe, but also in Mexico. And in the case of Mexico, more turkey, turkey thigh, turkey breast and in the case of the U.S., particularly chicken. Regarding your first question, I will say we -- again, as I explained to the question that Fernando did, we try to take a very disciplined approach in terms of price management. Whenever the -- we take a look of elasticity, how the competition is moving. And whenever we see an opportunity area where we can either protect margin or protect volume, we will be taking that opportunity. In general, I will say it varies by region. But in Europe, given the competition, the penetration of private label and some excess capacity that there's in the industry, we have -- it takes us more time to increase prices between the rest of the regions. Operator: There being no further questions, I would like to return the call to management. Roberto Olivares: Thank you, everyone. On a final note, we entered the fourth quarter focused on a strong close for 2025, building upon our positive sequential momentum. Looking ahead, we're preparing to capitalize on opportunities in 2026 and advance our long-term consumer-centered growth initiatives. Thank you very much for your interest in Alfa, Sigma. Please feel free to reach out to us if you have additional questions. Have a great day. We will now disconnect. Operator: This concludes today's conference call. You may disconnect.
Operator: Greetings, and welcome to Valero Energy Corp. 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, Homer Bhullar, Vice President, Investor Relations and Finance. Thank you. You may begin. Homer Bhullar: Good morning, everyone, and welcome to Valero Energy Corporation's Third Quarter 2025 Earnings Conference Call. I'm joined today by Lane Riggs, Chairman, CEO and President; Jason Fraser, Executive Vice President and CFO; Gary Simmons, Executive Vice President and COO; Rich Walsh, Executive Vice President and General Counsel; as well as several other members of Valero's senior management team. If you have not received a copy of our earnings release, it's available on our website at investorvalero.com. Included with the release are supplemental tables providing detailed financial information for each of our business segments, along with reconciliations and disclosures for any adjusted financial metrics referenced during today's call. If you have any questions after reviewing these materials, please feel free to reach out to our Investor Relations team. Before we begin, I would like to draw your attention to the forward-looking statement disclaimer included in the press release. In summary, it says that statements made in the press release and during this conference call that express the company's or management's expectations or forecasts of future events are forward-looking statements and are intended to be covered by the safe harbor provisions under federal securities laws. Actual results may differ from those expressed or implied due to various factors, which are outlined in our earnings release and filings with the SEC. I'll now turn the call over to Lane for opening remarks. Lane Riggs: Thank you, Homer, and good morning, everyone. We're pleased to report strong financial results for the third quarter, highlighting our long-standing track record of operational and commercial excellence. Our refinery throughput utilization was 97% with the Gulf Coast and North Atlantic region setting new all-time highs for throughput following last quarter's record performance in the Gulf Coast. Refining margins remained well supported by strong global demand and persistently low inventory levels despite high utilization rates. Supply constraints were driven by refinery rationalizations, delayed ramp-ups of new facilities and ongoing geopolitical disruptions. These market dynamics contributed to the margin strength despite relatively narrow sour crude differentials. The Ethanol segment also delivered a strong quarter, achieving record production and solid earnings. Strategically, we continue to make progress on the FCC unit optimization project at our St. Charles refinery. This initiative will enhance our ability to produce high value product yields, including high-octane alkylate. The $230 million project is expected to begin operations in the second half of 2026. Looking ahead, refining fundamentals should remain supported by low inventories and continued supply tightness with planned refinery closures and limited capacity additions beyond 2025. Sour crude differentials are also expected to widen with the increased OPEC+ and Canadian production. In closing, our strong financial results and record operating achievements this quarter are a testament to our commitment to commercial and operational excellence. This, coupled with the strength of our balance sheet should continue to support strong shareholder returns. So with that, Homer, I'll turn the call back over to you. Homer Bhullar: Thanks, Lane. For the third quarter of 2025, net income attributable to Valero stockholders was $1.1 billion or $3.53 per share compared to $364 million or $1.14 per share for the third quarter of 2024. Excluding the adjustments shown in the earnings release tables, adjusted net income attributable to Valero stockholders was $1.1 billion or $3.66 per share for the third quarter of 2025 compared to $371 million or $1.16 per share for the third quarter of 2024. The Refining segment reported $1.6 billion of operating income for the third quarter of 2025 compared to $565 million for the third quarter of 2024. Adjusted operating income was $1.7 billion for the third quarter of 2025 compared to $568 million for the third quarter of 2024. Refining throughput volumes in the third quarter of 2025 averaged 3.1 million barrels per day or 97% throughput capacity utilization. Adjusted Refining cash operating expenses were $4.71 per barrel. The Renewable Diesel segment reported an operating loss of $28 million for the third quarter of 2025 compared to operating income of $35 million for the third quarter of 2024. Renewable Diesel segment sales volumes averaged 2.7 million gallons per day in the third quarter of 2025. The Ethanol segment reported $183 million of operating income for the third quarter of 2025 compared to $153 million for the third quarter of 2024. Ethanol production volumes averaged 4.6 million gallons per day in the third quarter of 2025, achieving record production. For the third quarter of 2025, G&A expenses were $246 million, net interest expense was $139 million and income tax expense was $390 million. Depreciation and amortization expense was $836 million, which includes approximately $100 million of incremental depreciation expense related to our plan to cease refining operations at our Benicia Refinery next year. Net cash provided by operating activities was $1.9 billion in the third quarter of 2025. Included in this amount was a $325 million favorable impact from working capital and $86 million of adjusted net cash used in operating activities associated with the other joint venture member's share of DGD. Excluding these items, adjusted net cash provided by operating activities was $1.6 billion in the third quarter of 2025. Regarding investing activities, we made $409 million of capital investments in the third quarter of 2025, of which $364 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance, and the balance was for growing the business. Excluding capital investments attributable to the other joint venture member's share of DGD and other variable interest entities, capital investments attributable to Valero were $382 million in the third quarter of 2025. Moving to financing activities. We returned $1.3 billion to our stockholders in the third quarter of 2025, of which $351 million was paid as dividends and $931 million was for the purchase of approximately 5.7 million shares of common stock, resulting in a payout ratio of 78% for the quarter. Year-to-date, we have returned over $2.6 billion through dividends and stock buybacks for a payout ratio of 68%. With respect to our balance sheet, we ended the quarter with $8.4 billion of total debt, $2.2 billion of total finance lease obligations and $4.8 billion of cash and cash equivalents. The debt-to-capitalization ratio, net of cash and cash equivalents was 18% as of September 30, 2025. And we ended the quarter well capitalized with $5.3 billion of available liquidity, excluding cash. Turning to guidance. We expect capital investments attributable to Valero for 2025 to be approximately $1.9 billion, which includes expenditures for turnarounds, catalyst, regulatory compliance and joint venture investments. About $1.6 billion of that is allocated to sustaining the business and the balance to growth. For modeling our fourth quarter operations, we expect Refining throughput volumes to fall within the following ranges: Gulf Coast at 1.78 million to 1.83 million barrels per day; Mid-Continent at 420,000 to 440,000 barrels per day; West Coast at 240,000 to 260,000 barrels per day and North Atlantic at 485,000 to 505,000 barrels per day. We expect refining cash operating expenses in the fourth quarter to be approximately $4.80 per barrel. For the Renewable Diesel segment, we expect sales volumes of approximately 258 million gallons in the fourth quarter, reflecting lower production due to economics. Operating expenses should be $0.52 per gallon, including $0.24 per gallon for noncash costs such as depreciation and amortization. Our Ethanol segment is expected to produce 4.6 million gallons per day in the fourth quarter. Operating expenses should average $0.40 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the fourth quarter, net interest expense should be about $135 million. Total depreciation and amortization expense in the fourth quarter should be approximately $815 million, which includes approximately $100 million of incremental depreciation expense related to our plan to cease refining operations at our Benicia Refinery next year. We expect this incremental depreciation related to the Benicia Refinery to be included in D&A for the next 2 quarters, resulting in a quarterly earnings impact of approximately $0.25 per share based on current shares outstanding. For 2025, we still expect G&A expenses to be approximately $985 million. That concludes our opening remarks. [Operator Instructions] Operator: [Operator Instructions] Our first question today is coming from Sam Margolin of Wells Fargo. Sam Margolin: On -- this is a comment from your opening remarks. As you mentioned, not much of a contribution from heavy crude this quarter on differentials. I guess we're like a year into TMX barrels sort of fully flowing. And I wonder if you could share any insights you have into the differential side as kind of 12 months into TMX and then just on the overall kind of availability picture that's emerging into 2026. Gary Simmons: Yes. So I would tell you, we've been somewhat -- I'll start with TMX, somewhat disappointed that TMX hasn't had as much of an impact on West Coast crude values and it has -- really, ANS didn't come off like we anticipated it would. And most of those barrels are flowing to the Far East. In the broader sense, in terms of quality differentials, we have seen the quality differentials move quite a bit. WCS now trading at a 12% discount to Brent, Maya 14% discount to Brent. Those had been as narrow as 7% previously in the year. On medium sours, we had seen discounts as narrow as 2.5%. That's widened up closer to an 8% discount. So discounts have certainly moved to the point where we are seeing an economic benefit in our system to running medium and heavy sour crudes. Our expectation is you'll continue to see those widen. Although OPEC began unwinding their production cuts in April, much of that volume was offset by an increase in summer power burn. So it wasn't really until September that we saw any meaningful increase in the export volume from OPEC. The pricing signals that are there still suggest that most of that incremental OPEC volume will be directed towards Asia. However, we've been seeing increased offers to the U.S. market, especially for Rocky crude. We'll be processing both Basra and Kirkuk during the fourth quarter in our system. The arbitrage to move Mars into Asia has closed. Additionally, we're starting to see Asia push back on some of the Latin American grades, which ultimately is beginning to pressure medium sours in the Gulf Coast. So all of those effects are things that we're starting to see in October. And as medium sour discounts widen, you'll see heavy sours react to remain competitive with medium sour. So we anticipate that to continue to happen as we move through the fourth quarter. In addition to just OPEC, heavy Canadian production has continued to ramp up as well as some of the deepwater medium sour production in the Gulf, and then you've seen Chinese demand has been very high for medium and heavy sour barrels as they fill their SPR. At some point in time, you'd expect that to be full and they would back off. I think the real wildcard here is with the headlines on ramp-up in Russian sanctions yesterday. In the past, we felt like sanctions were largely ineffective. They just result in a change in trade flows. At least if you see the market reaction today, the market believes this round of sanctions could be successful and result in some Russian oil being taken off the market. On paper, OPEC has the capacity to make up that lost supply, but that certainly could be a headwind to quality differentials. However, it would be very bullish for product cracks. Sam Margolin: Okay. I guess we'll keep it on industry macro for a second, if that's okay. And just on the capacity queue globally next year, we've encountered some feedback about what looks like a fairly heavy schedule of capacity additions next year after a number of years of kind of trailing demand or lagging demand. If you have any insights on to the timing of the capacity additions or what do you think we can expect reliability-wise or just a change in balances, that would be much appreciated. Gary Simmons: Yes. So our numbers would show about 460,000 barrels a day of total light product demand growth next year. Net capacity additions are about 415,000 barrels a day. So those numbers, if you assume somewhere around an 80% total light product yield on crude, you would still have tighter supply-demand balances next year than what you have this year. In addition to that, I think a lot of the forecast you see assume that new capacity that started up is going to run at nameplate. We haven't seen them be able to get up to nameplate yet. And our expectation is a lot of that capacity won't hit nameplate next year. And then Russian capacity is a real wildcard here, also 1.5 million barrels a day of Russian capacity off-line. A lot of the forecasts assume that Russian capacity is up and running beginning of the year. Our expectation is it will take longer to get that up and running as well. So we expect things to be tighter next year as well. Operator: The next question is coming from Manav Gupta of UBS. Manav Gupta: I just quickly wanted to follow-up on that. We are seeing a massive spike in global outages, Russia, Dangote, Dos Bocas. I think over the weekend, there were issues where you had Romania having issues. So what are you seeing in terms of global product markets out there, all these outages and what they are causing for the margins out there? If you could talk a little bit about that. Gary Simmons: Manav, this is Gary. I think we've seen good export demand all year. The fact that we've been unable to restock inventories in the United States is keeping somewhat of a pull into the domestic market, but the export markets are very good, continue to see really good export demand for gasoline into Latin America and South America. On the diesel side, a bigger pull into South America than what we've been seeing. Freight has really been volatile. And so on the export arbs going to Europe, it's kind of been up and down, and it's really just freight that's kind of been what opens and closes that arb. If you look today, that arb is marginally open. And I think you'll start to see a heavier flow going to Europe from the U.S. Gulf Coast on diesel. Manav Gupta: Perfect. My quick follow-up is on the capital returns. A big jump in the buybacks. And should we assume if margins remain well above mid-cycle like they are, then your payout ratio remaining the same, you would continue to buy back your stock as you did in the third quarter. If you could talk a little bit about the capital discipline as well as the return to shareholders. Homer Bhullar: Yes. Manav, it's Homer. Absolutely. I mean we've talked about this for the last several quarters. We've been in this mode where effectively all excess free cash flow goes towards share buybacks, and you saw that this quarter as well. You had a small build in cash, but that was largely because of working capital. But I think you should continue to assume that we stay in that mode where any excess free cash flow goes towards share repurchases. Manav Gupta: Perfect. You have done exactly what you had said that excess cash will go to shareholders though, thank you for that. Thank you, sir. Operator: The next question is coming from Neil Mehta of Goldman Sachs. Neil Mehta: Yes. Lane, there's been a lot of talk about crude that's on the water and in transit and some estimates have it north of 3 million barrels a day, if you look at some of the shipping tracking data. You guys have unique visibility into whether that crude is actually on the water. And so I'd be curious how your commercial team is seeing it. And do you think it's going to land here in OECD or if that moves into China specifically? And I say that in the spirit of -- to your point of crude differentials potentially starting to widen out, do you start to see that as the factor that could be the catalyst? And maybe you could talk about Iraq in particular because that could be a leading indicator. Lane Riggs: Neil, I'm going to sort of pass the ball over to Gary to answer that question. Gary Simmons: Yes, Neil, I kind of alluded to that a little bit previously, but where we see the big change is a lot more Rocky barrels flowing this way. As I mentioned, we have bought Basra. We've also bought Kirkuk, and we see that to be a portion of our diet in the fourth quarter and moving forward is really the big change that we've seen. Most of the other barrels seem to be making their way to Asia. Neil Mehta: All right. We'll keep on watching it. And the other question is just on some of the non-refining businesses did better than expected -- than we expected this quarter. Ethanol continues to perform well. And I guess DGD is getting closer to profitability. So can you talk about both of those businesses and whether we're -- there's sustainability at the ethanol margins and weather post the RVO, we are on a path back to the black in DGD. Eric Fisher: Neil, this is Eric. Ethanol continues to look positive. I think a lot of that is we've had a record corn crop. Ethanol demand has been strong, both domestically and in the export markets. We're seeing the continued interest in countries going from E0 to E10. Canada has gone to E15 in some of the provinces. And you see Brazil and India looking at moving from the E20s to the E30s. And so all of this is creating more ethanol demand in the world. And being the largest exporter of ethanol, that favors our segment pretty well. So cheap feedstock and lots of demand. So ethanol, I think outlook is good and continues to look good in the future. On DGD, you're exactly right. We've seen throughout the year, there's just been a lot of impact from tariffs and policy downturns in the U.S. We've seen fat prices rising for the better part of the year. And I think just most recently, we are seeing enough rationalization in both biodiesel and renewable diesel where fat prices are finally starting to soften. And with that lower fat price, we've seen DGD margins return back to positive EBITDA. So that's a good sign for the fourth quarter. Obviously, with the PTC changing Jan 1 on all foreign feedstocks as well as SAF, that will be a challenge as we start 2026. But I think everyone seems to expect that the RVO will be net positive for renewables. That's a lot of speculation because there is a lot of back and forth on these policies right now. But I think the general view is the number is probably going up and will probably be supportive of renewable diesel. Operator: The next question is coming from Theresa Chen of Barclays. Theresa Chen: I wanted to talk about your PADD III and PADD II assets in light of 2 major product pipeline binding open seasons that have been announced over the recent weeks to move more volumes from these regions into PADD V given ongoing West Coast refinery closures, including your own Benicia facility. So if one of these 200,000 barrels per day plus systems were to be built, how do you anticipate this could reshape flows and margin capture across your Gulf Coast and Mid-Continent assets? And is there any volition, would it make sense for you to be a shipper on one of these pipes? Gary Simmons: Yes, Theresa, this is Gary. We engaged in conversations with both the projects that we think could go forward. In both cases, we'll have to wait and see what the final tariff numbers are. It looks like the tariff would be set such it's competitive versus the Jones Act movement to the West Coast. But we believe we can be more competitive with foreign flag waterborne movements into the West Coast. In addition to that, we like the waterborne movements because, one, the volatility on the West Coast, if you take a position on that pipe, you could be shipping into a closed arb a good portion of the time. And then we like the waterborne option as well because it allows you to source barrels from anywhere in the world and take advantage of international arbs that can be open. So we have connectivity through McKee already to El Paso and into Phoenix. So we have a lot of connectivity as well as space on the pipe from Houston to El Paso. So I don't think you'll see us participate in those projects. Lane Riggs: This is Lane. The second part of that would be, you would expect it to firm up the group in the Gulf Coast as barrels do get committed and move West, assuming those projects go through. Theresa Chen: That's very helpful. And separately, Gary, there's been some noise in the DOEs as of recently. I'd love to get your take on what you're seeing across your domestic distribution channels and your commentary on domestic demand in addition to the color you gave already on exports. Gary Simmons: Sure. If you look at our gasoline demand, I think in our system, we would say year-over-year gasoline demand is flat to slightly down, pretty similar to what's in the DOEs. Third quarter, our volumes were flat year-over-year. It looks to us like vehicle miles traveled are up year-over-year, but probably not enough to offset the more efficient automobile fleet. So again, probably flat to slightly down gasoline demand. As I mentioned, export demand looks good. When you look at gasoline fundamentals in addition to good export demand, the transatlantic arb to ship from Europe into New York Harbor is closed, and it's actually closed on paper all the way through the first quarter. So really for this time of year, gasoline fundamentals look about as constructive as you could hope for. Obviously, we've transitioned out of driving season, producing high RVP winter-grade gasoline, so you wouldn't expect a lot of strength in gasoline cracks in the fourth quarter. Jet demand, we're continuing to see good nominations from the airline. So again, comparing to the DOEs which show about a 4% bump in jet demand. That looks consistent with what we're seeing in the market. And then finally, on diesel. In our system, in the third quarter, year-over-year sales were up 8%. I don't think that's representative of the broader market. DOE data showing about a 2% year-over-year increase in diesel demand is probably close. We've seen good agricultural demand in our system. That continues. Harvest season starting to wind down, but then you'll start heating oil season, which again be a good pop in demand. And as I mentioned, good export demand as well. Freight volatility is hindering that, but the demand is there. Operator: The next question is coming from Doug Leggate of Wolfe Research. Douglas George Blyth Leggate: Lane, your throughput performance has been extraordinary again. My question is kind of a bigger picture. I guess it's kind of an AI machine learning kind of question. And I'm wondering if there's a change going on in how you're running your business, things like planned turnarounds, just in time as opposed to the behavioral once every 4-year kind of deal. If there's anything happening that would lead us to think some of this throughput performance could be sustainable, not just for you but perhaps for the broader industry? Lane Riggs: Yes. Doug, I'm going to have Greg Bram to sort of start off on this question. Greg Bram: Doug, so the journey you're talking about related to how we plan turnarounds. We've embarked on that for, gosh, probably at least a decade. So I wouldn't say there's a shift there, but we definitely have reaped some benefits from the kind of the approach we take now, which aligns with kind of the way you described it. But if you want to talk about AI in general, I'd say that we're probably cautiously optimistic about how that can help us further improve our availability. We're evaluating a number of places where we can use that technology. As you'd expect, focusing on areas where we think we can create some tangible value, and we've deployed that in some of those new techniques and a few applications. But I think one of the key learnings that we picked up as we've embarked on looking at AI machine learning applications is that you really have to have good quality data of your operation to have a successful use of that kind of a tool. And I think it's an advantage for us because we've embarked on an effort to improve that data and gather that data in kind of a consistent way, kind of consistent practices across our system, again, probably 10 or 15 years ago. And so having that data makes it -- makes the opportunity to try to use that to make further improvements more real. And so we start from a good place. You've mentioned the quality of our operation today, good performance to start with. But again, some optimism that AI type techniques can help us make some further improvements. Douglas George Blyth Leggate: I appreciate the answer. I guess we're trying to figure out if we should lift our expectations of mid-cycle throughput for Valero. I guess that was at the root of my question, but I appreciate the insights. My follow-up, and I apologize to Homer specifically because I've had a couple of chances to talk to him this morning about this already. But I'm trying to understand what's going on with cash flow because your tax rate is obviously up a little bit on mix. But if we look at the translation of your earnings to your cash flow, a big beat on earnings didn't show up in cash flow. And we're trying to figure out if there's some transitory issues in there. Don't necessarily go into all the specifics, but is cash tax part of that? Or was there another reason that this might be seen as a transitory quarter from that standpoint? Maybe for Jason. Homer Bhullar: Doug, it's Homer. I mean, you'll see this when you see the Q filed, but part of that is some -- like PTC, for example, you book it within earnings and then obviously, the payment comes in later. So you'll see that as a deduct from net cash flow from operations. So that's one of the big variances. Again, you'll see that when you see the statement of cash flows in the Q. Douglas George Blyth Leggate: So no tax issue, Homer? No temporary tax issues? Homer Bhullar: There might be some small deferred tax items, but nothing that's substantial. Operator: The next question is coming from Ryan Todd of Piper Sandler. Ryan Todd: Maybe one on refining utilization. U.S. refining utilization has been quite strong versus historical norms over the last 6 months. Any thoughts on drivers of this, whether it's an impact of exiting a period of heavy maintenance over the last couple of years? And any thoughts on whether -- like suggestions that this -- that would prevent this from normalizing as we head into next year? Or are there reasons to believe that we can -- the U.S. system can continue to run in -- running this hard? Lane Riggs: Ryan, it's Lane. So you're talking about just the U.S. industry refining utilization has improved over the last few years? Ryan Todd: Yes. I mean it's been very strong this year, like over the last 4 or 5 months. Lane Riggs: Well, I'll start and let Gary or Greg tune me afterwards. I think we started on the journey, I'm going to say, 15 years ago to work extensively on our reliability, and we actually showed that this could be done. I think a lot of the rest of the industry is sort of working on the same things, and they're getting better at it, being more careful in their execution. The systems are getting better, whether -- like the previous question from Doug, how many people are using something that they might call AI. I don't know, but there are systems out there to let you execute turnarounds better, do your maintenance better, have some predictive capabilities with respect to failure mechanism, which all that improves what we actually term is availability, even through even better scheduling, things like this. And I think generally, the industry has done a little better job on this. So that's how I would answer it. Greg Bram: The only thing I might add, Lane -- Ryan, just maybe the only thing I would add, the only thing I think about when I think about this past summer versus some of the previous periods is we didn't really have a lot of extreme weather throughout the summer and refineries run well when you kind of got nice ambient conditions. And so I think we all have been incented to run hard for -- throughout these different periods. It could be maintenance part of it. It could just be that when you're not dealing with a lot of really hot temperatures, you can definitely tune up the operation and eke out that last little bit. So I don't have proof of that. But when I think about how our operation runs, I can see that being a positive impact this past summer. Lane Riggs: Well, that's a great point. Hurricane, we have not had any hurricane activities to speak of in the Gulf. Ryan Todd: Right. Maybe one other, as we think about the fourth quarter here. During the third quarter, there were a number of things that were -- I mean, you had a great quarter, but there are a number of things that were, I would say, like modest headwinds on margin capture, whether it was narrow crude differentials, crude backwardation, some West Coast jet fuel dynamics and secondary products, et cetera. Many of these appear to have reversed or improved here early on in the fourth quarter. Any thoughts on direction of some of these trends that may impact the type of capture of profitability that we see during the fourth quarter and what looks like a pretty strong environment? Greg Bram: Yes, Ryan, it's Greg. It's early for the fourth quarter, right? And you did mention a few of the things that have turned more favorable as we've gotten started out here in October. A couple of things I always think about as we approach the winter season, we'll blend more butane into gasoline as RVP shifts to winter specifications. That tends to be -- create some uplift on margin capture. But I think it's also worth noting while there have been a number of things that have moved favorably, you still have some pretty weak secondary products. Naphtha has turned a bit weaker. Propylene continues to be fairly weak. So there are a few things out there that have not really turned positively yet as we started out in the quarter. Operator: The next question is coming from Paul Cheng of Scotiabank. Paul Cheng: Just before my question, just curious that and have a comment. I was surprised that you guys didn't increase your G&A full year. I thought with the strong earnings that you guys are going to increase your bonus accrual. So I was surprised, maybe that is a part of the cost savings from Lane. Lane Riggs: Yes, that's not one we'd eagerly jump on. Paul Cheng: I told Homer that this is not going to be counted as my question. But anyway... Homer Bhullar: We will count that as a good comment, Paul. Paul Cheng: Okay. My question is actually that in the third quarter, I think part of the issue related to the margin capture is on the octane. Octane value comparing to the second quarter, I think, has come down. Just curious that if you guys will be able to share some insights what happened and then whether you think that will continue that trend? Secondly, I want to go back into not so much about just AI, but also robotic technology and all that. So Lane and the team or Greg, do you guys think that we are seeing all this new technology now available to you is more the evolution or that is going to transform the way how you guys may conduct business, not just in the refining side, but also in your back office in your trading commercial as such that -- I mean we have seen your upstream counterparts, some of them that announced some pretty sizable cost reduction effort because of the new technology. Just wanted to see where we stand for you guys or for the industry. Gary Simmons: So maybe I'll take the naphtha question and let Greg take the second one. So -- or that octane question, sorry. When we look at octane, we tend to view that it trades at an inverse to naphtha. And so what you really had in the last quarter was naphtha got a little bit stronger. And I think there are several reasons for that. You had less naphtha coming out of Russia. You had some of the naphtha from the U.S. Gulf Coast going back to Venezuela as diluent. And then you're seeing a little bit more naphtha pulled to Asia into the pet chem market. So when naphtha's weak, there's a big incentive to try to blend it into gasoline and that takes octane to do it, but when naphtha gets stronger, there's less of an incentive. So although the regrade -- the octane [ regrade ] was a little bit weaker, it probably helped set up stronger gasoline fundamentals. Greg Bram: All right, Paul. And so this is Greg. On the question around robotic automation and AI. I think maybe we don't talk about this a lot, but we've been using those techniques and further expanding the use of those techniques over time as -- again, as they make sense in terms of improving efficiency. And it improves our ability to inspect equipment, certainly to execute some of the work that we do. So that will continue to grow, I suspect, and some of these new techniques will create more opportunity to use those tools going forward, which is kind of back to the answer before. I think there will be some improvement that comes from this -- some of this new technology and these new techniques that are out there. And it will be -- if you start from a really good place like we do, it's going to be harder to find a lot of big opportunities there, but we're certainly focused on trying to find ones that make good sense from a value standpoint. Lane Riggs: And Paul, I'll add to it. The only -- some examples of those things is we, like lot -- many other people in the industry have been using robotics with respect to tank cleaning. I could see where the upstream guys would really -- that would really help them. The other thing that we've used is drones for inspection, like if you go into a -- today, we get into a big structure on an FCC and we can actually just rather than have to get in scaffold up to a particular location that might be problematic, we can put a drone in, flow it up, look at it, understand that situation without having to -- we may have to go back in and put scaffold, but now we understand the scope of work. So there are certainly things like that. And then with -- in our systems, we're always trying to think about ways to consolidate our control rooms and work on being more efficient with the operators that we have and some of which has to do with technology improvement. Operator: The next question is coming from Joe Laetsch of Morgan Stanley. Joseph Laetsch: So I want to start on the refining side. And with the strength in the diesel crack, can you talk about the ability to maintain the strong, I think it was 38% or 39% diesel yield level going forward? And then as part of that, the crude slate got a bit lighter quarter-over-quarter, but the diesel yield also stepped up, which I was hoping you could talk to as well. Greg Bram: So I'll take -- I'll start with the second one, I think. So -- well, actually, I can probably cover both of them. Joe, we've had strong diesel yield. That 38%, 39% is not too far from where we've run in the past. It reflects a mode of operation where we're maximizing diesel production or distillate production over gasoline. Again, as we kind of tuned up the operation and ran very well in the quarter, I think you saw us reach some of the highest levels that I think we can achieve with the current hardware we have. So sustainable, we can probably stick in this range with continued strong operations like we had. Remind me, Joe, what was the second part of that question? Joseph Laetsch: Yes. I was just asking about the crude slate got a bit lighter quarter-over-quarter, but you were able to step up the distillate yield. So just hoping you get a little bit of thoughts on that. Greg Bram: Yes. No, we did get a little bit lighter, but I think in some of the places where we lightened up, we were still able to -- the growth was more on the jet side than on the diesel side, and we were able to kind of drop that back into the naphtha, into the jet, still make a distillate product and had good incentive to do so. So I'm not sure that the slate itself, if I were to try to back in -- and I haven't tried to back into what was the total available distillate yield. But I don't know that it was a big enough shift in some of the places where we got lighter that would have had a material impact on our distillate -- or our yield there. Joseph Laetsch: Great. That's helpful. And then, Eric, I wanted to shift to RD. And then as we wait for clarity on the RVO and the SRE reallocation, can you talk to how you're thinking about the path for D4 RINs here? And then as part of that, is there a level that you think it needs to rise to, to incentivize the marginal producer? Eric Fisher: Yes. I think it's one of those things where there's more variables than knowns. I mean -- so -- but there's any number of combinations of a number, an SRE reallocation and a final number. But any combination of those numbers, the current number is 3.3 billion D4s. I think if you go back and look at the original premise of keeping the BD producer breakeven with a $1 BTC, they've done a lot of work this year with removing ILUC out of the model for soybean oil. They gave a small producer benefit, which I think counts almost every single BD producer. And I think they're around $0.70 to $0.80 versus that $1 last year. So this last $0.20 is probably -- if you took that to a D4 RIN, you probably need RINs to go up something like $0.25 to $0.30 to get BD back to breakeven. So that's kind of how I see -- so any combination of the math that gets to that kind of number essentially satisfies the original design of trying to keep BD operational. What that number translates out to RINs is a number higher than today. Although one of the challenges, I think, is they're trying to figure out this math is '25 D4 RIN production is down versus last year. So we're -- we have a current target of 3.3. If we underperform that number, we will consume the bank early into next year. So depending on how high you set that number, it's very difficult to pick exactly where you'll meet that BD requirement, but not overshoot and then create an impact to overall diesel prices. So I think that's kind of the challenge of how this works. But if I try to anchor on something, I go back to the dollar BTC and where was the BD producer and where are they today. And so I think there's still a gap there. And clearly, with the trade issue with China and soybean oil and soybeans in general, how that plays into this is really difficult to predict. But I think the math is something like that. Joseph Laetsch: Great. I realize there's a lot of moving pieces, but I appreciate your thoughts. Operator: The next question is coming from Phillip Jungwirth of BMO Capital Markets. Phillip Jungwirth: Specific to the heavy sour mix in the Gulf Coast, can you just talk through the moving pieces here with Mexico production declining, the Venezuela uncertainty. I assume that wasn't any help in the quarter and also just Canada TMX capacity. And then also just how fuel imports might be helping replace some of these barrels in your Gulf Coast system? And maybe also just touch on coker margins with high diesel cracks, but also still tight differentials. Gary Simmons: Yes. So overall, yes, we do see declining production from Mexico. Our volumes from Mexico aren't really down much yet, but they continue to forecast that we'll see declining production from Mexico. A lot of that is being made up with additional volumes from Canada as they continue to ramp up production and fill the pipeline capacity coming to the Gulf. So I would say those somewhat offset each other. We do have Venezuelan barrels back in the mix, which is helping. And then the additional OPEC production, as I alluded to, getting the Basra barrels and Kirkuk barrels, all that really, I think you'll see in the fourth quarter a heavier crude diet than what we had in the third quarter, filling out a lot of our conversion capacity. On the high sulfur fuel oil question, actually, high sulfur fuel oil has been pretty strong. And we haven't seen a real strong incentive to buy high sulfur fuel oil to put into coker. So there's been some opportunistic purchases, but for the most part, on paper, those economics haven't been strong. Phillip Jungwirth: Okay. Great. And then on the planned Benicia closure, you did have the charge in the quarter. Recognizing the state would like to keep this open and the official close date is in April, but when do you kind of reach the point of no return here just given preparations needed and the scheduled turnaround? Richard Walsh: This is Rich Walsh. I'll take an effort to answer at least the interaction with the government part of it. I mean we have been in discussions with California, but nothing has materialized out of that. And so as a result, nothing has changed. Our plans are still moving forward as we've shared and as we've informed the state. So I don't see anything changing on that. Operator: Our next question is coming from Matthew Blair of Tudor, Pickering, Holt. Matthew Blair: Could you talk about DGD performance so far in the fourth quarter? I think your indicator is up quite a bit, maybe $0.36 a gallon quarter-over-quarter. Are you realizing that improvement so far? Or are there other factors we need to take into account, like hedging or feedstock lag? Or I think some of the SAF credits changed on October 1. But yes, just any sort of broader commentary on DGDs so far in Q4 would be great. Eric Fisher: Yes. I think most of that, I would say, is tied to lower feedstock prices. I think you're seeing rationalization and feedstock prices starting to come off. And so a lot of that is improving the profitability of DGD. We still have strong SAF benefits both in the U.S. and in the European and U.K. markets. So that's an advantage that DGD has over a lot of other RD producers and SAF has a premium in the base. And so fourth quarter looks good from an overall production rate standpoint as well as just PTC capture and on lower fat prices is really the fourth quarter. I think the question is still going to be as we enter into '26, will you see adequate premiums on SAF to cover the loss of the PTC benefit? And are you going to see, as we were -- we've discussed a couple of times, what is going to be the RVO impact because that will have to be the vehicle to make up any gap in profitability for biodiesel and renewable diesel to comply with wherever the RVO gets set. And so we still have a lot of policy that appears to be in conflict of increased RVO but decreased generation because of foreign feedstocks. Those are all going to be things where you're trying to raise the number, but make it more difficult to generate that usually is going to mean higher RIN prices. And so I think that is the question that everyone's got to get settled on. And I think there's good awareness of how these knobs will affect the overall market. But I think those are the 2 things that will determine whether or not this fourth quarter improved profitability can continue into '26. Matthew Blair: Indeed, a lot of moving parts there. And then if I could follow up on Theresa's question on the new product pipes that are headed west. Could you talk about what this means for the prospects for your Wilmington refinery, I think Los Angeles currently ships about 125 a day of product east out of the market to Phoenix. If one of the proposal goes through, then Los Angeles could actually receive about 200 a day. So that's a pretty big shift on California supply/demand and do you think Wilmington would be able to compete with an extra 200 a day coming into that Los Angeles market? Gary Simmons: Yes, this is Gary. I think when we look at the numbers, if you look at the California market today, it looks like it's being set by import parity. And if you look at the tariffs on those pipes, import parity through the pipeline doesn't look to be significantly different than import parity on the waterborne barrels. So I don't know that you'll see much of a change in the California market as a result of the pipelines. Operator: Our next question is coming from Jason Gabelman of TD Cowen. Jason Gabelman: Hopefully, 2 quick ones. First, just on the Russian refining disruptions. There's a lot of headlines on the Ukraine drone strikes, but it does seem like in many cases, the refineries come back online quickly. So I was wondering if you could provide some numbers around the amount of disruption that you're seeing on Russian product exports and kind of before today, trying to parse out how much of the product strength was driven by actual disruptions versus geopolitical risk premium in the prices? And then my second one is on the Benicia shutdown. Can you talk about your plans to resupply the market? Or are you going to have to kind of import products from Asia in order to meet your contractual obligations? Or do you not have really many outstanding in that market once the plant shuts down? Gary Simmons: Yes, I'll take the first part of that. I think we do think the drone strikes have been pretty effective. It looks like a lot of what's happening in Russia is that they're largely attacking some of the higher complexity refining capacity. And so as that happens, then Russia will go ahead and ramp up some of the lower complexity refining capacity. So you can kind of see that with the fuel exports and some of those things. The second part of your question, I think the spike we're seeing today is not so much due to any kind of disruption from Russia yet. It is just hype in the market on what could happen in the future. But we definitely see exports from -- product exports from Russia falling. Lane Riggs: Jason, this is Lane on the second part. Our intent is to continue to supply our contractual obligations for our wholesale business after we shut down the refinery. Jason Gabelman: Okay. And those would be essentially imports from Asia, presumably? Lane Riggs: It could be from anywhere in the world. This is kind of what Gary alluded to earlier, waterborne allows you to have optionality to try to work arbs into that short versus maybe having a huge commitment on the pipeline. It's -- that's sort of our intent. We're not going to go out and term up barrels from some particular market, we'll figure out how to supply it. Operator: The next question is coming from Nitin Kumar of Mizuho Securities. Nitin Kumar: I really just have one, I'll do a part A and B. You've talked a little bit about the crude spreads widening from here on out. Just maybe some thoughts on what do you see the mid-cycle or sort of at least 12-month view on some of these spreads because you should have at least based on what's going on between Canada, Iraqi barrels you were mentioning, there seems to be a lot of supply of heavier crudes coming at the same time to the market. And then maybe part B is, given your complexity, especially in the Gulf Coast, you have like a buffet of crudes that you could choose from. Is there a specific crude that you think falls to the bottom if it's not discounted appropriately? Gary Simmons: Yes. So I'll take a stab at that. I guess our view is, without getting into a lot of specifics on what we call mid-cycle, I guess we would say where the quality differentials are today, it would be a little inside of what we would view as mid-cycle, and we do see those continuing to widen going forward. In terms of crude we see falling out, I don't really know that I have a view on that, Greg. I don't know if you have one, but... Greg Bram: What I'd probably add, if you look back, and I think the market works its way today as well, the Latin American grades are the ones that tend to be the swing. And so they're probably the one that's kind of moved into fill holes when there was a short in the Gulf Coast. So they're probably the first ones that would back out as some of that supply comes in. Operator: Thank you. At this time, I would like to turn the floor over to Mr. Bhullar for closing comments. Homer Bhullar: Great. Thank you, Donna. We appreciate everyone joining us today. And as always, please feel free to contact the IR team if you have any additional questions. Have a great day, everyone. Thank you. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.
Odd-Geir Lyngstad: Hello, and good morning, and a very warm welcome to Elkem's Third Quarter Results Presentation. My name is Odd-Geir Lyngstad, and I'm responsible for Investor Relations here in Elkem. In today's presentation, we will go through the highlights for the quarter and give an update on the markets before we go through the outlook for the fourth quarter. CEO, Helge Aasen, will take us through this first part of the presentation before CFO, Morten Viga, will present the third quarter results in more detail. We will open for Q&A after Helge and Morten's presentations. So with that, I give the word to CEO, Helge Aasen. Helge Aasen: Thank you, Odd-Geir, and good morning, everyone. Very nice to see the turn up today. Yes, we seem to be repeating ourselves when it comes to describing the markets we operate in. The story about weak and challenging conditions doesn't seem to go away. And the market does actually remain much the same as it has been for a while now. However, despite challenging macroeconomic environment, Elkem's results are relatively good, but of course, below our financial targets. The EBITDA for the third, I'm sorry, the EBITDA for the third quarter ended at NOK 829 million, which gave an EBITDA margin of 11% for the group. If you exclude silicones, the operating income ended at NOK 4.1 billion with an EBITDA of NOK 586 million, which then represents a margin of 14%. This result is to a great extent, explained by good operational performance and ongoing cost improvements. Silicon Products was impacted by low silicon and ferrosilicon prices in the third quarter. But Specialty segment as Foundry alloys and Microsilica, which is a silica powder, delivered improved results. Carbon Solutions continued to deliver good margins, but the operating income and the following EBITDA is impacted by the lower sales. Silicones has improved on cost and market positions and delivered a higher EBITDA compared to the same period last year. The strategic review is ongoing. We gave an announcement some weeks ago, and I can just confirm that this is moving ahead as planned with an exclusive sales process, and we are still aiming for closing this transaction within the first half of next year. So before we go on to the market update and the results, I'd like to say a few words about our ESG work. It's built on two main pillars: reduce CO2 emissions and to supply the green transition with critical materials. Our aim is to reduce and ultimately remove fossil CO2 emissions from the smelting processes. Elkem supports the green transition through the supply of critical raw materials, and we work systematically to cut emissions and reduce waste throughout the entire value chain. Circularity is also playing an increasingly important role in this world. And we have introduced a new, actually a breakthrough method for recycling silicones through a mechanical recycling. And this then goes back into what used to be waste now is going back into new formulations. Our efforts within ESG are also recognized with strong ratings from EcoVadis and CDP. And in the third quarter, we received a gold rating from EcoVadis, and this puts us among the top 5% of all the companies they are assessing globally. And over the past years, Elkem has consistently received either gold or platinum ratings from EcoVadis, which places us among the top of the companies they are rating. Here, we show a couple of examples from Silicon Products and Carbon Solutions, illustrating some of our strong cost and market positions. I mentioned Microsilica initially. It's SiO2 silica powder, a byproduct from the ferrosilicon and silicon metal smelting processes. And over decades, we have developed this into a portfolio of specialty products, which go into quite a wide range of end applications. To mention some of them, construction, well drilling, cementing, refractories and also polymers. Over the past years, this product area has consistently grown and shown stable high margins. And I think it's a very good excellent example of how we are able to specialize on the basis of commodity production capacity. We're also a leading producer of electrode paste, electrodes and refractory materials coming from Elkem Carbon. This goes into the metallurgical industry. And these products are probably not very familiar to you, but they are critical consumables and lining materials, which are very important for stable operations and lifetime in furnaces and electrolyser cells in the aluminum industry. Also here, we are focusing on product development, and we have developed a more environmentally friendly product. With bio-based binders, which greatly improves working conditions. This solution has a proven performance record, and we have installed the product in more than 15,000 aluminum electrolytic cells. And we are gaining market share. Competitive cost position can, of course, be explained by many factors, operational knowledge, operational excellence, economies of scale, upstream integration, et cetera. However, electric power is another, of course, very important cost factor in the production of most metals. We have long-term supply agreements for renewable hydropower in Norway, Iceland, Canada, Paraguay. And access to long-term competitive energy contracts is a prerequisite for achieving competitiveness and also, of course, predictability in order to plan investments, et cetera. And renewable sourcing of energy also gives us a low carbon footprint, which clearly is, if not gaining or achieving premiums on end products, it gives us a preferential supplier status. CRU, a global business intelligence company, have published their analysis of the 2025 cost curve, which is illustrated on the graph here. This is for silicon 99, silicon metal. And as you can see from the chart, this puts our Salten and Thamshavn plants in Norway among the lowest cost producers in the western part of the world. Then coming to another important frame condition, which is trade barriers. That's affecting several markets and industries these days. And as you know, a highly dynamic and quite unpredictable environment. We are affected by this directly and indirectly. Two relevant examples are EU's ongoing safeguard assessment on silicon and on ferrosilicon and potentially silicon metal and also a U.S. countervailing duties assessment on silicon metal imports. EU safeguard measures could come into effect from November 19th. It's so far unclear how this is going to affect Elkem and how it will be structured. The potential measures will be aimed at raising prices, obviously, and protecting internal production within the EU, but we don't know how Norway and Iceland will be positioned in it. The regulations appear to focus on ferrosilicon and foundry alloys in this round, and there's no clear indication if silicon will be included. But most likely, silicon will be subject to another process at a later stage. The U.S. has imposed countervailing duties on silicon imported from several countries, including Norway with a preliminary rate of 16.87%. The basis for these duties are the CO2 compensation and CO2 quotas that the Norwegian companies receive under EU's carbon schemes. And our position on this is that these policies are a compensation for CO2 tax and do not constitute countervailable subsidies harming the U.S. domestic industry. We have had similar cases in the past. And each time we have been able to document that there was no injury to U.S. industry. So, we don't know the outcome of this round. It's now introduced as a preliminary measure, and then it will be followed by a permanent decision later on. Unclear when, partly because of the shutdown of the U.S. government at the moment. A few more words on the strategic review process. It's underway, as I mentioned, and it is going according to plan. We cannot say much more about the process beyond the status update that we gave during the third quarter. We are in an exclusive sales process with a major industrial player with a significant presence in the global chemical industry. The process is well aligned with the strategic review and represents an important milestone. And in a challenging market environment. But we are confident that the potential transaction will represent the best possible outcome for the silicones division in Elkem. And we're also confident that this process will be the best outcome for the rest of Elkem and as such, benefit to all stakeholders.Subject to further negotiations, final agreement and necessary approvals, the closing of the transaction is, as mentioned, expected to happen during the first half of next year. Now let's have a look at the markets. Automotive continues to be an important sector for Elkem, driving demand for many of our products. The growth in this sector remains weak with the exception of China, where the production is up in 2025. This is mainly the case for electrical vehicles. During the first half of 2025, the overall production in the EU is characterized by weak order intake and consequently low number of new registrations. Forward-looking forecasts have been revised upwards as markets adapt to ongoing trade and structural changes. Europe's outlook is up, supported by improved expected demand in Germany, France, Austria and Turkey. China's forecast has increased due to incentives and export growth. But overcapacity and price competition clearly persist, especially for electrical vehicles. North America is also seeing upgrades driven by tariff relief and higher production. In South America, the gains are so far limited by very high import pressure. So, any improvement in the automotive sector will definitely have a positive impact for Elkem. Several markets have been impacted by weak demand and various trade regulations and governmental initiatives. In the EU, the silicon reference price dropped by approximately 20% in late June. This was mainly due to low import prices from China, which suffer from, I would say, a severe oversupply. Prices in the EU then recovered modestly again in September due to improved market balance. This was a result of capacity being taken out in Europe as well as higher prices in China. U.S. silicon prices have increased in the third quarter. This is expected to continue to rise due to trade regulations. And in China, we have seen some price recovery from very low levels, mainly due to signals that the government will launch initiatives to curb overcapacity. Discussions are ongoing there regarding new energy consumption standards for the industry, which seems to be aimed at reducing overproduction. The ferrosilicon markets have many of the same drivers as silicon. Also here, we have a market impacted by trade regulations and possible safeguard measures in the EU, which have resulted in price fluctuations. The market sentiment is still characterized by weak demand and downward price pressure. However, based on the expected safeguard measures in the EU in August, we saw ferrosilicon prices jump up. This didn't last very long. It dropped back down again when it became clear that no preliminary measures would be announced. Prices in the U.S. increased towards the end of the third quarter. This was mainly driven by trade regulations. And in China, we've also seen some recovery from very low levels, partly due to this government focus on reducing excess production capacity. It's also somewhat linked to higher raw material costs in China. The market for carbon products is much smaller than silicon and ferrosilicon. We don't have reference prices to compare with here. Quite a big difference between regions when it comes to demand. But obviously, the underlying driver is the production of steel, which again triggers ferroalloy demand and then, of course, the aluminum industry. Global steel production in the third quarter remained quite stable compared to the same quarter last year. Europe experienced a 3% decline, whereas North America saw a 3% increase, largely due to tariffs again.The steel and ferroalloys markets continue to face challenges. Carbon Solutions specialized product offering and wide geographic presence is, however, proving to be resilient and creating a stability in earnings. Then moving on to silicones. Also like in silicon metal, overcapacity is significantly hampering any meaningful price recovery in the commodity part of the business. Producers are actively trying to increase the prices, and we've seen quite a lot of fluctuations in China, in particular, during the quarter. DMC prices first rose from a level of around RMB 10,400 per tonne to up to RMB 12,250. This was a result of a fire at one of the bigger players. But due to the overcapacity, that was a very short-lived price uptick and prices subsequently lowered again because other producers are ready to fill the gap quite quickly. So, the current price level is around RMB 11,050 per tonne and quite sensitive to changes in raw material costs, where silicon metal obviously is one of the big input factors. Demand in China continues to be weak, especially in construction. Demand for commodity silicones in the EU and the U.S. is also negatively impacted by changing tariff policies. But I would say, in general, there's quite good and stable demand for specialties. So, coming to the outlook. Silicon Products are still going to face quite challenging conditions and low demand on a historical basis. But as mentioned in the presentation, our leading cost position and good performance in more specialized part of the business are mitigating the negative impact. Carbon Solutions benefits from good cost positions and geographical diversity, and continued weak demand will have some impact on the results. Silicone producers are actively trying to increase prices. But as mentioned, the markets are still hampered by overcapacity. Potential trade regulations and protective measures are expected to impact our markets going forward. And of course, we are very eager to see the safeguard measures in the EU and how that's going to play out. It's not yet concluded, and very hard to say the overall impact on Elkem from this. So I think with that, I'll give the word to you, Morten, and take us through the financials. Morten Viga: Thank you very much, Helge, and good morning, everybody. So it's a pleasure to go through the financial numbers for Q3. Our operating income for the quarter amounted to NOK 7.5 billion, and that's down 7% compared to the third quarter last year. All divisions had a decline in operating income this quarter, mainly explained by lower sales prices. Elkem's EBITDA for the quarter was NOK 829 million. This was also well below the third quarter last year, but it's slightly higher than Q2 this year. The reported group EBITDA margin for the quarter amounted to 11%, which is somewhat below our long-term target of 15% to 20% EBITDA margin. Having said that, we should also emphasize that the EBITDA margin for the continuous operations, i.e., excluding silicone's was 14%. And it is important to bear in mind that these margins are generated in a situation where sales prices in key markets are at or close to historical low levels. And as such, the EBITDA is not supported by market conditions, but it's held up by good operational performance and a very strong underlying cost position. There were no particular one-offs affecting the EBITDA in the third quarter. As usual, we provide an overview of some of the main financial numbers and ratios. I will not go into detail on all of them, but it's important to note that the Silicones division has been reclassified as discontinued operations and assets held for sale. In this presentation, we mainly focus on the financial numbers, which include silicones. However, the regular financial statements, including the profit and loss statements, reflects Elkem's results excluding silicones. And in the table to the right, you can see the comparable figures for Elkem with and without silicones. Including silicones, the group EBITDA amounted to NOK 829 million. The realized effects from the currency hedging program was minus NOK 16 million reported in the segment Other. Other items amounted to NOK 78 million and the main [Technical Difficulty] of minus NOK 17 million. Net finance expenses were minus NOK 34 million. And here, the main items related to net interest expenses of minus NOK 114 million, which was largely offset by currency gains on NOK 96 million, mainly related to translation effects on our external loans. The income tax was minus NOK 96 million, and this gives a very high effective tax rate of 65%. And the reason for that is that the Silicones division had a loss before income tax, which is rather high, and there is no tax in a major part of that division. Let's then take a look at the divisions and start with the Silicon Products division. So, the silicon and ferrosilicon markets remained difficult, but the division's EBITDA for the third quarter was supported by good operating performance. Total operating income amounted to NOK 3.4 billion, representing an 8% decrease compared to the same quarter in 2024. And the decline in operating income is mainly driven by lower sales prices for the commodity segments in silicon and ferrosilicon. EBITDA amounted to NOK 389 million, representing an EBITDA margin of 12%. The EBITDA is higher than the previous quarter, but significantly lower than Q3 '24, and this is explained by significantly lower sales prices, particularly for silicon. This is partly countered by good and stable results from the specialty segments, particularly foundry alloys. And as I said, in addition, the EBITDA is supported by strong operations and good cost improvements. Sales volume increased by 13% compared to the third quarter last year, mainly due to improved sales of specialty products. So, if we look at the Carbon Solutions, this division is once again presenting a good margin, and it reached an EBITDA margin of 28% in the third quarter despite very challenging market conditions. Total operating income amounted to NOK 822 million, which was down 7% from the third quarter last year. And this decline here is mainly explained by lower sales prices. The EBITDA was NOK 231 million, which represents an EBITDA margin of 28%. The EBITDA margin is in line with the previous quarter, but it's somewhat lower than Q3 '24, mainly explained by lower sales prices and somewhat higher raw material costs. The sales volume for the third quarter was in line with the previous quarter, but is negatively affected by low steel production, particularly in the EU. As mentioned, and very well known, the Silicones division is under strategic review. The division has a good portfolio of specialty products, which provides to a large extent, stable sales and margins. But also, the division's exposure to the commodity market is still very significant. And particularly in China, we have seen strong price pressure hampering our margins. The division has, however, been able to compensate for lower commodity sales prices in the quarter through higher sales volumes and good cost improvements. Total operating income amounted to NOK 3.6 billion, which was down 6% from the third quarter last year. Higher sales volume in the third quarter was more than offset by lower commodity sales prices. The EBITDA amounted to NOK 248 million, representing an EBITDA margin of 7%, and this is in line with the previous quarter, but it is significantly 23% higher than the third quarter last year, mainly driven by cost improvements and better sales volume. Sales volume was up 10% compared to the third quarter last year, mainly due to higher sales volumes in the Asia Pacific region, where we also have introduced a new production line, higher capacity, and significantly stronger underlying cost position. Let's now take a closer look at some of Elkem's key financial ratios. The earnings per share, EPS were quite low also in the third quarter with NOK 0.05 per share, and that brings the EPS year-to-date to minus NOK 0.77 per share. And we are, of course, not satisfied with this, and we are working on further cost reductions and other improvements to mitigate the market situation. The EPS was also this quarter negatively impacted by net losses from the Silicones division, which is under strategic review. And if you exclude the Silicones division, the EPS for the third quarter would have been NOK 0.34 per share plus, and it would have been a positive NOK 0.40 per share year-to-date.The balance sheet remains very solid. Total equity amounts to NOK 24 billion by the end of third quarter, which equals an equity ratio of 50%, very stable level. Elkem's financing position is well managed, and we have a very good and robust maturity profile. However, as you can see, the interest-bearing debt has continued to increase, and the current leverage is above our target level of 1 to 2x EBITDA last 12 months. By the end of the third quarter, our net interest-bearing debt amounted to NOK 11.7 billion, and that's up by NOK 0.3 billion from the previous quarter. And based on the last 12 months EBITDA, the debt leverage ratio is now 3.1. Our target is clearly to bring down the leverage, and Elkem has a plan to deleverage the company after the strategic review process has been concluded, which we plan to achieve during the first half of next year. By the end of the third quarter, Elkem's interest coverage ratio was 6x, which is well within the covenant of 4x, which is the covenant in our loan agreements. The cash flow from operation was NOK 526 million in the third quarter. We have a high emphasis on preserving and generating a good cash flow despite underlying market weaknesses. And this was a clear improvement from the previous quarters. It's explained by lower reinvestments and also positive working capital changes. As already mentioned, the markets are weak, and we will definitely continue to focus on a very disciplined capital spending as long as the weak market conditions prevail. In the third quarter, total investments were down to NOK 312 million and reinvestments were NOK 244 million, which amounted to 39% of depreciation. Strategic investments are very much down and amounted only to NOK 68 million as we have completed all major strategic CapEx projects previously. So let me take the opportunity to wrap up this presentation by summarizing the main headlines and takeaways from the quarter. We will continue to focus on cash generation and a very disciplined capital spending in response to the challenging market conditions. We're very happy to see that Silicon Products has leading cost positions and strong performance within the specialty segments. And I think this is very important to bear in mind when the markets are really, really, really tough out there. Also, Carbon Solutions is in a very good position, and we benefit from good cost positions and a very geographically diverse customer base. Silicones, also a very tough market, but we have improved our cost and market positions based on specialization and also based on new and more modern production lines, both in China and in France. The safeguard measures for ferrosilicon and ferroalloys in the EU and a new trade defense regime for steel in the EU could lead to improved market conditions if these measures are successfully supporting increased industry production in the EU, which is the intention. The strategic review process is progressing as planned with an exclusive sales process ongoing. And as we said, we expect to have the transaction closed within the first half of 2026. So I think that summarizes the presentation, and then I hand back the word toOdd-Geir for the Q&A session. Odd-Geir Lyngstad: Thank you, Helge, and Thank you, Morten. We have a good audience here today. So I think we will start and see if there are any questions from the audience. There is Marcus? Marcus Gavelli: Marcus Gavelli, Pareto Securities. So you talked about the safeguard measures, and clearly, we have no visibility right now. But could you try to provide some color on how you think about potentially worst-case scenario with higher tariffs and with Elkem potentially not being as competitive in the EU market. What sort of flexibility do you see having to redirect volumes and do other sort of measures to fight that? Helge Aasen: I think if we are left on the outside of this and have to compete on the same basis as everybody else, EU is a big net importer of ferrosilicon. And I would claim that Norway and Iceland are among the best position to continue to supply that market. So I don't think we will have to redirect volumes. Obviously, we are very uncertain about how the price protection mechanism will be constructed or put together. But that could, of course, I would say, I don't see a big downside, but there is quite a significant upside if this is done in a way that favors us. Marcus Gavelli: And also just to follow up on the, you mentioned the cost reductions that you're currently looking at. Could you also provide some color on what sort of measures that is? Is it, we've seen some ferrosilicon production now being curtailed? Is it more trying to optimize the production? Or is it actual larger reductions you're looking at? Helge Aasen: This is a wide range of different measures. Obviously focusing on fixed cost reductions continuously, but it's also linked to a lot of optimization in production, producing campaigns where we have the best cost position in different plants and furnaces, and yield improvements. And yes, there's no one particular program that's yielding this, but a very big effort ongoing, and it's giving results over time. Magnus Rasmussen: Magnus Rasmussen, SEB. You have an improvement in the Silicon Products EBITDA Q-on-Q despite lower silicon metal prices, as you said in Q2. Our understanding is that after the decision that you were to be allocated more CO2 quotas, which you reported in early July, you have to purchase less CO2 quotas on a running basis to cover what was previously a deficit. Has that been a positive driver this quarter, and by how much? Helge Aasen: Sounds like a CFO question. Morten Viga: Yes. You're absolutely right. We have got the ruling from the Norwegian Ministry, securing equal treatment with our European competitors. And that's very important. We have not yet received any additional quotas. Such things takes a bit of time, but we are very sure that we will receive a good amount of new quotas. And of course, that will put us in a much better position. There are no particular significant, let's say, CO2 quota P&L elements in our Q3 results. Magnus Rasmussen: When you, on a running basis, start to receive quotas on equal terms as your peers in Europe, then I assume you will not have to purchase quotas to cover that deficit as you've done in the past. Doesn't that imply that you will get a cost saving? Morten Viga: That is correct that in the future, there are 2 important things about this. First of all, equal treatment that's very important as a principle. And certainly, we will have significantly lower CO2 quota costs in the future when we receive those quotas, either late this year or early next year, we assume. So for our long-term competitiveness, it's good news, very good news. Magnus Rasmussen: And also, I see that your net interest-bearing debt in silicones is increasing by about NOK 375 million quarter-on-quarter. And it seems to me like more or less half of that is driven by you repaying what you label as bills payable in your balance sheet, and bills payable has come down by more than half over the past year. So, I'm just wondering why you are repaying that working capital financing ahead of the sale of the division? Morten Viga: No, that is kind of a working capital management done by the Chinese operation. So, I'm not able to give a precise answer to that. But they're managing this position. And as you rightly say, they have decided to repay some of that and reduce some of the bills outstanding. Magnus Rasmussen: Should we expect bills payable to be repaid ahead of the sale? And/or should we look at bills payable as interest-bearing debt when the sales price? Morten Viga: You should not look at bills payable as interest-bearing debt. So, it's part of the working capital management done locally in China. Odd-Geir Lyngstad: Are there any further questions among the audience? If not, I think the questions are quite well covered from what I see here, but one additional question maybe that could, and that is how long you expect curtailments at Rana in Iceland to last, and also if any of our competitors are reducing capacity to the same extent? Helge Aasen: Yes. We had an idle furnace in Rana, and we decided to postpone starting it up again. We are closely monitoring what's happening now. It's obviously inventory management, but it's also in anticipation of what will be the outcome of the safeguard decision in November. And then we have, we're going to stop one furnace in Iceland in mid-November, and that will be idle for 2 months, approximately, and what was the other part of the question? Odd-Geir Lyngstad: Competition. Helge Aasen: Yes, competition. Interestingly enough, Ferroglobe, which is our biggest competitor in silicon products in the conference, I think a couple of weeks ago, announced that they are now stopping all production in Europe. So, it says something about Elkem's competitive position. Odd-Geir Lyngstad: Very good. Thank you very much. And that also concludes our presentation here today. So, thank you very much for attending. Helge Aasen: Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] A telephonic replay of this call and the presentation slides to complement today's discussion is available on the Investors section of our website. Please also refer to the disclaimers on Slide 2 of our presentation concerning forward statements and non-GAAP financial measures. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Jason Darby, Chief Financial Officer. Please go ahead, sir. Jason Darby: Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me today is Priscilla Sims Brown, our President and Chief Executive Officer. Additionally, Sam Brown, our Chief Banking Officer, is here for the Q&A portion of today's call. First, I want to note that we are introducing shorter prepared comments this quarter. By condensing this section of the call, we hope to transition to your questions faster and avoid repeating details you've already reviewed in the earnings materials. Let me now turn the call over to Priscilla. Priscilla Sims Brown: Good morning, everyone, and thank you for joining us. Well, it was another good quarter. Amalgamated delivered core earnings per share of $0.91 in the third quarter, and we experienced strength on both sides of our balance sheet, highlighted by across-the-board share gain in our deposit franchise, coupled with accelerating loan growth as our new lenders are already having an impact. Amalgamated has now delivered $2.66 year-to-date core earnings per share, which is about 3% growth, making our case for an implied value of our stock well above where we have been trading recently. One thing I'd like to remind us is that we are coming off of a 2024 year where we grew core EPS by over 18%, far exceeding most banks. So what we're doing in 2025 is just that much more remarkable comparatively speaking. So for Q3, what stands out to me, mainly that we keep delivering great results. And the quality and sustainability of our earnings allows us to handle problem situations with ease. Last quarter, Jason discussed a $10.8 million syndicated commercial and industrial business loan to an originator of consumer loans for renewable energy efficiency improvements that was under stress. I'm happy to report the quick, successful and final resolution of this loan during this quarter with the final impact all absorbed within our core earnings. I use the word successful to reflect on the decisive action we took to exit a problem credit, negotiate what we felt to be the best near-term recovery value and put the problem behind us so that our investors can see our overall credit portfolio quality with clarity. While, of course, we're not happy to absorb a loan loss every quarter charge-off, the flip side to that is a nice improvement to our nonperforming assets and overall credit quality metrics. Nonperforming assets decreased $12.2 million or 34.6% to $23 million or 0.26% of total assets and credit quality improved nearly $19 million to $79.2 million or 1.67% of total loans, which is our best ratio since I've been here. All that said, we recognize that the credit cycle is still in process, and we are acutely aware of some of the big reserves and charge-offs taken by some super regional banks recently. The best thing I can say is that you can be sure Amalgamated will be early in disclosure and decisive in our resolution. Now let's move on to some more fun stuff. Back in the first quarter with the change in administration, we said we were built for this moment, built to thrive. Nothing has changed there. We still are. Our mission, brand and values resonate with our customers, which can be seen in how our production team performed this quarter. Loans grew by $99 million across our growth mode portfolios of multifamily, CRE and C&I, about 3.3% growth, a nice acceleration from the second quarter's growth rate of 2.1%. This was in line with our quarterly targets and benefited from the addition of some C&I experts that added to our origination team in the second quarter. Our PACE portfolio also saw an acceleration as total assessments grew $27.4 million. The strength came from over 8% growth in C-PACE, where there is a rapidly growing range of opportunity and to capitalize on our new originator partnership. And then there's our deposit franchise. Wow, these folks are amazing. We just keep taking market share in our deposit gathering as all of our segments saw growth during the quarter, driving over $415 million of new deposit generation. Very few banks our size can do what we do. Looking at our segments, political was a standout with deposits increasing $235 million or 19% to $1.4 billion as fundraising begins to accelerate looking to the midterm elections, which are now only a year away. Our Climate and Sustainability segment was also a standout as deposits increased $86 million or 21%. Not-for-profit also grew $42 million. Labor grew $26 million. And overall, it was just another great quarter for our deposit gathering team. For the most part, I like what we see. We still have some work to do, no doubt, but the bank is firing on most cylinders, which provides real optimism as we look to the future. To support our growth and to ensure we efficiently scale our operations, we have been investing in a fully integrated digital modernization program, which will drive improved productivity, provide a holistic view of our customers to better understand their needs, provide more customized solutions and ultimately deliver more revenue growth. This platform went live in the third quarter, and we're already seeing the benefits across our organization as we continue to manage the business to key metrics. To close, I could not be more excited with what the future holds for Amalgamated. Our ability to deliver balanced and predictable contribution from our lending channels is starting to show, and I'm happy that we have geographic diversity, which will help us manage future loan growth targets. We are keeping a close eye on the policy debate playing out in New York City. But regardless, we feel very good about our current rent stabilization exposure. We've added some more disclosure for you this quarter in the presentation on Slide 14, and we're happy to take your questions on that. There's also more I could talk about, but we want to get to your questions sooner this time. So let me turn the call over to Jason. Jason Darby: Thanks, Priscilla. Starting off with some key highlights on Slide 3. Net income was $26.8 million or $0.88 per diluted share, while core net income, a non-GAAP measure, was $27.6 million or $0.91 per diluted share. Our net interest income grew by 4.9% to $76.4 million, which exceeded the high end of our guidance range, bolstered a bit by the recapture of some loan interest income from the payoff of one of our legacy problem assets. Additionally, our net interest margin increased 5 basis points to 3.6%. Margin expansion was partially offset by a 5 basis point rise in our cost of funds as we carried a higher average balance of interest-bearing deposits in the quarter. It's worth noting that our average spot rate paid on deposits declined 8 basis points after we repriced our deposits following the Fed's 25 basis point rate cut in September. Deposits were strong. Excluding $112.3 million of temporary pension funding deposits, total on-balance sheet deposits increased $149 million or 1.9% to $7.6 billion. We also held $265 million of deposits off balance sheet at the end of the quarter. Continuing to Slide 4, we look at some of our key performance metrics during the third quarter. Starting on the left, our tangible book value per share increased $0.98 or 4% to $25.31 and has grown over 46% since September '21, which was Priscilla's first full quarter as CEO. Tangible book value is a key component of management's long-term equity incentives, which tightly aligns management with our shareholders. Our leverage ratio was managed well at 9.18%. During the quarter, we used capital to improve our TCE ratio to 8.79%, absorbed $4.5 million of losses to improve our credit quality metrics, returned capital to shareholders through approximately $10.4 million in share repurchases and to pay our $0.14 quarterly dividend. Looking forward, we expect to continue our buybacks over the coming quarters until our share price rises to a level that we feel realistically reflects our forward earnings projection. Our core revenue per diluted share was $2.84, a $0.17 increase from the prior quarter. This increase was due to a combination of higher net interest income and the effect of our share repurchases. Importantly, this metric shows our balance sheet optimization and commitment to positive operating leverage. We're laser-focused on driving this message to the top of the broader industry peer group. Jumping ahead to Slide 9. Core noninterest expense was $43.4 million, an increase of $2.9 million from the linked quarter. This was mainly driven by a $2.2 million increase in employee compensation expense as well as an expected $0.5 million increase in technology spend due to continued investment in digital transformation development. Overall, we were pretty much right where we want to be with expense management, and we're able to add some additional compensation accruals for full year performance that is starting to look pretty promising. I'm also really happy with our core efficiency ratio of 50.17%, which places Amalgamated on average at the top of the pack from banks in the $5 billion to $10 billion range as well as banks in the $10 billion to $100 billion range. We'll continue to keep our target of approximately $170 million for annual OpEx, though there may be some upside to that number. Hopping to Slide 10. Net charge-offs were 0.81% of total loans. Obviously, this is an elevated number, but there is some good news within this metric. First, as Priscilla mentioned, was the final resolution of the problem C&I credit we talked about in the second quarter. That resulted in a $5.4 million charge-off, but the P&L impact this quarter was only $3.1 million due to prior period reserves. This credit situation is done. And thankfully, we don't have to speculate about it any further. Another bit of good news was the note sale of a legacy nonperforming leveraged loan. This resulted in a $1.5 million charge-off, but also a small recovery of $0.6 million that flowed through our net provision expense during the quarter. The remainder of the charge-offs related to normal activity from our consumer solar and business banking portfolios, although each showed some modest improvement from the prior quarter. One thing we thought would be interesting to note is the bank received a revised outlook to positive from KBRA during our annual credit rating surveillance report completed during the quarter as well. Turning to Slide 11. The allowance for credit losses on loans decreased $2.5 million to $56.5 million. The ratio of allowance to total loans was 1.18%, a decrease of 7 basis points from 1.25% in the prior quarter. The decrease was primarily the result of a $2.3 million net reserve release related to the resolution of the loan I just discussed and also by a $2.1 million reserve release related to the resolution of a legacy leverage loan credit. This was partially offset by a $1.6 million increase in reserves related to one $2.8 million multifamily loan that went nonaccrual in the quarter and a $0.2 million reserve increase for a nonperforming construction loan. Finishing on Slide 16, turning to our outlook. Today, we are raising our full year 2025 core pretax pre-provision earnings guidance to $164 million to $165 million and tightening our 2025 net interest income guidance to $295 million to $296 million, which considers the effect of the forward rate curve of 2025. Additionally, we estimate an approximate $2.2 million decrease in annual net interest income for a parallel 25 basis point decrease in interest rates beyond what the forward curve currently suggests. Briefly looking at the fourth quarter of 2025, we target average balance sheet size at approximately $8.65 billion and our net interest income to range between $75 million and $76 million. We expect our net interest margin to stay near flat relative to our Q3 mark as we believe our loan yields will drop due to repricing as we model the Fed to cut rates again by a total of 50 basis points in Q4. Based on these targets, we've gone ahead and done the implied full year math on the guidance page, so you can easily compare it to our 2024 results as well as our baseline 2025 performance targets. We're now happy to take your questions. Operator, please open up the line for Q&A. Operator: [Operator Instructions] Our first question comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: First question I had, I was curious in the slide deck on Page 11, you mentioned that there was a $1.9 million specific reserve. What is that against? Jason Darby: Mark, this is Jason. The specific reserve that was built is related to one of our multifamily properties that we had an appraisal put against. It's one of the properties that we had already been through a refinance or a renewal about a year ago. It had a little bit of an equity infusion. We did a modification of terms. It had been paying and then we received an updated appraisal as part of our normal process for evaluating substandard credits that are real estate oriented and the valuation didn't look appropriate for the value of the property that we had originally been carrying on the books. So the reserve was put in place to effectively account for a change in the LTV. As of right now, the credit is moving to a nonaccrual status, and we're trying to figure out a path forward with that particular deal. But the [indiscernible] is pretty good at the moment. We just felt the reserve was appropriate. And as we've said before, when we see problems in the portfolio, you'll see our coverage ratios move, and that has been reflected also in the overall coverage for the portfolio moving up to 30 basis points from the 20 we had it at previously. Mark Fitzgibbon: Okay. And then, Priscilla, you had mentioned before your comments about changes to the rent-regulated multifamily market in New York and you guys feeling comfortable with that. I guess I'm curious, in the event that we do have a [ Mamdani ] and he freezes rents through the rent guidelines Board, would that change your outlook for that rent-regulated multifamily business? Is it likely that you'd sort of slow down growth in it or maybe exit and sell some of the portfolio? Priscilla Sims Brown: No. Thank you, Mark, for the question. I'm sure it's on the minds of a number of people, certainly those watching New York politics. By the way, this is why we're giving more disclosure. You see it on Page 13 and 14, and we'll continue to monitor the situation closely and update you as we learn more. But we don't expect that we're going to see impact in the next 18 to 24 months, certainly based on those changes. I do think it's important to think about the fact that, that's one tool, and it's one that's talked about quite a lot, this notion of rent freezes or stabilization. But there are other tools as well, zoning reform, public-private partnerships, community land trust, which Mamdani has spoken about, and certainly, office to residential conversion, social housing, all those things. And so keep in mind that there's real potential upside if a balanced approach leads to creation of more housing in New York, and that's one of the things we're looking at as well. Mark Fitzgibbon: Okay. And then sort of unrelated, it seems like we read every day that the Department of Energy is canceling or pulling funding from green energy projects. I think the Department of Energy has canceled something like $8 billion worth of projects and pulled funds back. And I know in the past, you guys have sort of said the funds were allocated, so you weren't concerned. But now that the administration is pulling those dollars back, I guess I'm wondering if you're concerned about any of your various projects related to that and how those are likely to sort of play out if federal funding evaporates. Sam Brown: Mark, it's Sam. I'll jump in on that one. So look, in the existing portfolio, we feel totally great about where we are. Those projects are already in the ground. And as we've talked about in the past, their funding streams, including their tax credit provisions, including any federal contribution is locked in. The other thing I'll mention is we talked about back in the second quarter call, the acceleration of projects and transactions in order to hit that deadline that will happen in 18 and 24 months. You certainly saw some of that pull-through happen in our C&I growth for the quarter, which we are very pleased about. And we're also seeing that in pipeline as well. The other thing I'll add just on the broader market spectrum, as you mentioned, about what does that mean kind of in general, as things change, you've heard us talk a lot about growing energy demand, citing a bunch of stats and figures from various well-respected authorities. Kind of the best thing I would throw out is this -- there is a new kind of base case assumption about what renewable energy deployment looks like being only 4% less than what it was before the budget was passed last year. So again, we feel good about that. And when you couple that with how energy demand is expected to continue to rise between 2.5% and 3.5% per year, getting up to 25% by 2030, 78% by 2050, the demand here dictates that there is going to be a need to finance these projects. And so while, yes, federal capital contribution might change, the reality is this industry is alive and well and is going to have a lot of participants in the financing these projects for years to come. Mark Fitzgibbon: It's hard to believe, Sam, that none of the projects you're involved in the fund -- federal funds have been pulled back from. And it's also -- it's hard to believe that if you don't have federal funding, the projects still pencil out financially. I guess I'm curious, just from the outside looking in, reading the media every day with money evaporating, it just seems a stretch to understand that. Sam Brown: Yes. And I think a lot of what is out there, Mark, is funds being pulled back for projects that haven't started yet. For example, I know that there was the largest project in Nevada was certainly a big headline recently. In our portfolio, everything we financed is already underway, has -- in an operating state, those projects are not in jeopardy because they are underway. Where there are projects that are still in pre-dev, I think that is a completely valid concern. That is not something we have present on our balance sheet and not an area we focused on as we've built out our portfolio. Mark Fitzgibbon: Okay. Last question I had. I guess I'm curious, we're in kind of unusual times with what's going on in Washington and all this sort of conversation around debanking. I know you guys have been written about in some articles in the journal and elsewhere. I guess I'm curious, how can you best position Amalgamated so that you don't become a target for the regulators given their aggressive debanking efforts? Priscilla Sims Brown: Thank you, Mark. Yes, there's a lot of noise in the news, and we certainly see it all as well, and we know you do. I guess the best way I can address that is to say we continue to be a bank that just follows all laws and regulations, and we always will. We focus on risk management, and we focus on solid, consistent performance. Organizations that manage with appropriate KYC and BSA requirements, they know we're open for business. And you've seen that on both sides of the balance sheet consistently since these concerns started to be manifested in the last -- this year, certainly. If you look at the core deposit growth, it's phenomenal. We continue to see growth across all of our segments, not just some. And so that -- those solid returns and strong profitability is really our best answer to what you're hearing. And we don't expect to see any material risk to our business model or our customer base based on the fact that we are a bank first and foremost. Operator: Our next question comes from [ Mark Shutley ] with KBW. Unknown Analyst: So on expenses, you mentioned you still target the $170 million a year, I think, but expenses came in a little higher than we were expecting in the third quarter. I know you've got the digital transformation underway. And so it sounds like a better run rate for quarterly expenses is probably somewhere in between this quarter and last quarter. Just trying to think about the moving pieces of the PPNR guide. Jason Darby: Yes. Sure, Mark. I'll take it. This is Jason. So on expenses, I think this quarter came in very much what we were expecting in terms of our overall progression towards our $170 million annual OpEx guidance. And we have been talking about for a couple of quarters, the ramping in expenses that was going to happen as we got to the back half of the year. And we were in a better spot than I was really expecting at the end of the second quarter. Here in the third quarter, we also did very, very well on the expense side. Now we were able to book a little bit of accrual in this quarter for some compensation-related expense that would be tied to year-end performance as it's becoming clearer and clearer that we're going to have a pretty strong year. So that really was the top off on maybe the expense expectation you had versus where we came in at about $43.3 million for the quarter. But if you look at it year-to-date, we're $125 million versus an average target of $127.5 million. So we're doing better there. The core efficiency is still really, really strong. And to your comment about what the fourth quarter ought to look like, I would expect it to look very similar to Q3. Now we've said that $170 million is still the target, but there's some potential upside there. If we hit expenses that looked a lot like Q3, we'd probably have some upside beat on our $170 million target. But we sort of leave that out there as a conservative marker because in the fourth quarter, occasionally, things pop up that require some additional expense to cure year-end processes relative to audits or other types of things that pop up towards the end of the year. So all things equal, I like a run rate of very similar to what we had for the third quarter as the projection for the fourth quarter. And in theory, if we hit that, there's some upside potential to the $170 million overall target. Unknown Analyst: Okay. That's helpful. And then maybe switching gears. You mentioned the loan yields. I think you expect that to come down next quarter. Obviously, those saw a nice increase this quarter and kind of drove the NIM. But with a couple of rate cuts expected, I totally get that. But I was just wanting to dig in a little bit more and see maybe what new originations were coming on at in the quarter and sort of any additional color you have there? Jason Darby: Yes. Perfect. Great question. Let me start off with the loan yield and the decline. I think, obviously, picked up on our projection of the 50 basis points of the total rate cuts, and that's obviously going to have an impact on some of the variable pricing we have in the C&I portfolio. And also, I did make a comment there was a bit of a one-timer that flowed through with the recapture of some interest income for a very long-dated problem credit that we have had on our books that we were able to get a full payoff from recovery on. So that accounted for about 9 basis points of loan yield in this quarter. So most of the drop will probably be just tied to the resetting of net interest income -- I'm sorry, noninterest income -- net interest income for the quarter, absent that onetime effect for the current period. Now in terms of the bring on, we had a pretty decent quarter in terms of overall bring on. I think where we were on the C&I side was in the high 6s, maybe even crossing to low 7s in certain places for the quarter. The real estate portfolio came in just above 6%, which are pretty strong yields given the credit quality that we're seeking. And then going forward for the fourth quarter, we're pretty much saying it's going to be about 30 to 50 basis points lower just as a result of the repricing. So figure somewhere in the 6.50% to maybe 6.75% range on your C&I deals and maybe close to 6%, maybe 5.75%. I'm kind of getting a little bit wrong there, probably about 25 basis point decline in the bring on yields from the current quarter. And then the only other thing to point out is that we still have a very strong origination on the PACE side, which drives a yield of about 7%. Now we'll see probably a little bit of erosion there, but those coupons are pretty strong, and they really help the margin from a rollover perspective on the yield side. Operator: We have reached the end of the question-and-answer session. I would like to turn the call back over to Priscilla Sims Brown for closing comments. Priscilla Sims Brown: Thank you, and thank you for those very good questions. I'm sure they will continue as we follow up today and in the future around the quarter. But I want to just take a second again, as we do every quarter, to thank our employees for their hard work and the dedication to the bank and our customers. We know our success would not be possible without the commitment and the determination of our talented team of bankers. To conclude, I'm very pleased with our third quarter results, which demonstrates our lending -- sorry, our leading deposit franchise, which is unique in the industry and when you combine that with our lending platform, which I also believe is unique, we are at an important inflection point. Taken together, we're poised to deliver continued organic growth as we further build the earnings power of the bank and as we focus on delivering long-term value for shareholders. I look forward to updating you on our progress on the fourth quarter call and taking your calls in the meantime. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation. Enjoy the rest of your day.
Essi Lipponen: Hello, and welcome to Fiskars Group's Q3 Results Webcast. My name is Essi Lipponen, and I'm the Director of Investor Relations. I'm here with our President and CEO, Jyri Luomakoski; and our CFO, Jussi Siitonen. Jussi Siitonen: Hello. Essi Lipponen: Here is our agenda for this webcast. Jyri will start with key takeaways of the quarter. After that, Jussi will walk us through the financials and then back to Jyri for business area specific performance and guidance. After the presentation, we will have plenty of time for your questions. We will take questions both through the phone line and through the chat. You can type in your questions in the chat already during the presentation. Before diving deeper into Q3, I still wanted to highlight the news that we shared last week. Jyri Luomakoski has been appointed as the President and CEO of Fiskars Corporation following his interim role in the same position. But with this piece of information, I will hand over to you, Jyri. Jyri Luomakoski: Thank you, Essi. It's a pleasure being here. If the numbers would be better, the pleasure would be even bigger. But let's go into the quarter. Key takeaways, some things went well and some clearly less good. And if we start with the positive ones, our net sales turned to growth, and this was very much driven by several of our Vita brands, actually, most of our Vita brands. And Vita grew in Q3 in the magnitude of 8%. The other positive thing is that we had actually a solid growth in the U.S. The market, which has been in some kind of a turmoil as a consequence of the tariffs, consumers becoming uncertain what's happening there, it seems that our value proposition to the consumers has been such that it's continued to appeal and we've had good development there. What didn't go well is certainly the decline of our comparable EBIT in the quarter. And this is much driven by our additional costs in the supply chain and many of them are self-inflicted. Why? Last year, the inventories started to grow, and that was still happening in the beginning of this year in our BA Vita. And we started very determined actions to take down the inventory levels by curtailing production. As a consequence, when you curtail production, your supply chain costs are partly fixed and there is less volume to absorb those costs. So it was a kind of a premeditated action from our side to prefer cash flow and go into '26 without too much of excess baggage from the inventories. What I will soon come back when we get to the BA updates, but in our Fiskars business area, the innovation pipeline actually over the last 1.5 years or so has been more than doubled. And that's very important to stay relevant to the consumers, but soon getting back to that. And then as a consequence of this, we specified actually our guidance. Comparable EBIT range was narrowed to EUR 90 million to EUR 100 million from the EUR 90 million to EUR 110 million. And currently, as we see the market picture, that is pointing us to the lower end of that range for the comparable EBIT for 2025. Turning over to Jussi, please. Jussi Siitonen: Thank you, Jyri, and hello, everyone. So I continue with this positive news what we had in Q3, i.e., top line growth, solid 4.1% growth, so that Vita was up 8.2%, then Fiskars BA came down slightly, 0.9% negative there. Actually, this is the first quarter since Q2 2022 that we were able to deliver this kind of mid-single digit solid growth. There are a couple of good news also where this growth is coming. So the fundamentals are in place. It was very broad-based. If we take our top 15 countries, which represent more than 90% of our sales, 12 out of 15 countries were growing in Q3. Also same for brands. If we take our top 12 brands, 97% of sales, 10 out of 12 brands were also growing in Q3. So it was very broad-based. EBIT, EUR 13.9 million came down EUR 10.4 million from last year for 2 main reasons. Jyri already mentioned the supply chain issue, what we have there of under-absorption of fixed cost when it comes to our production volumes. Another one is our SG&A cost. When it comes to SG&A part, it's mainly phasing between Q3 and Q4. On gross margin, EUR 46.7 million. It was down 140 basis points from last year, so that Vita was down 380 basis points, 3.8 percentage points there. And Fiskars BA was actually up 110 basis points. On cash flow and I will go a bit deeper to that after a couple of slides, it was up from last year, around EUR 7 million, but still negative of EUR 10 million. If we dive a bit deeper about this EBIT bridge here and where the difference versus last year were coming from. So as said, group was down this EUR 10.4 million, so that Vita was down EUR 7.5 million and Fiskars was down EUR 1 million. The rest is from other operations there. Focusing first, what we have here on the right, i.e., Fiskars BA. So you can see that underlying gross margin was quite significantly up there and only partially offset by tariffs. For the actions we have put in place there, as we said after Q2, are now impacting positive results there and are mitigating the tariff impacts in Fiskars BA. Same what I mentioned already about SG&A, you can see here. So Fiskars BA, SG&A slightly up versus last year, but that's also mainly phasing. On the middle, you can see Vita bridge, which is down to EUR 7.5 million, as I said. Here, you can see the impact of the supply chain challenge, what Jyri explained. So that was one biggest -- big driver there. And also in Vita, it's mainly SG&A phasing what we have there, showing quite strong negative numbers in Q3, but we assume based on what we have seen that that will be somewhat offset in Q4. Overall, when we are talking about SG&A here, I would say that year-to-date SG&A, which is flat versus last year, it's a better proxy for full year than just looking our Q3 numbers. And then, of course, the group as a summary of those 2 BAs down this EUR 10.4 million so that even at the group level, our underlying gross margin was improving. But then as a total, it was more than offset by those tariffs. Moving then to cash flow. As I said, cash flow was negative EUR 10.2 million here. Even though it improved from last year, it was still negative. And of course, this is the topic we are not very happy with. The actions we have been put in place or already put in place or Jyri also explained here are the ones we are focusing now also for the rest of the year 2026 to get cash flow back on track. Here, you can see the impact. I would focus more on year-to-date cash flow here to avoid this kind of seasonal volatility. The challenge what we have is well illustrated here. Inventory is up some EUR 46 million, whilst last year for the same first 9 months period, it was down similar type of number. So we had significant delta, negative delta there when it comes to our inventory situation. And then quite naturally being a component of net debt and EBITDA, the net debt continued increasing due to this negative cash flow as a main single reason there and then that we are behind last year with EBITDA. The fact is that net debt EBITDA went up from last year being now 3.7x. Our target maximum 2.5x is still valid and we remain committed to this target. And therefore, this is one example why we have initiated those actions to mitigate inventory inflow and make sure that actually we get back on track with this net debt EBITDA. But with that, giving back to you, Jyri, on BAs. Jyri Luomakoski: Thank you, Jussi. And briefly on our 2 business areas, starting with Vita, which is approaching its annual high season, which is the fourth quarter. And here, we've seen, as earlier mentioned, a broad-based net sales growth. So if 10 out of the 12 top brands are growing, that I think we can call a broad-based and geographically also broad-based. It's not just one market which is booming and the others not performing. And the inventory-related actions, we've touched quite much upon. And when we look at the growth, and Jussi mentioned, it's several years back when the group was reporting this magnitude of growth numbers and I think it's over 2 years you need to look back till you saw a growth quarter in Vita. And this is extremely important for us driving our performance that we have the underlying growth, have used the kind of a comparison or parallel to steer a ship that does not have any propulsion is very difficult. And the same applies to company growth being kind of the propulsion for the business too. Actions that we started to look upon in the summer already recognizing the inventory levels that the only way to solve the 2 big inventory issue is really to curtail the inflow and, of course, start to boost the outflow. When you look at the comparable EBIT margin, really the big delta is coming from the supply chain aspect and the phasing-related SG&A. The underlying -- preempting maybe a very logical question that would be arising out of the numbers, the underlying gross margin or in terms of pricing, we do not see anything that would be alarming us, and that's extremely important. So when we have the propulsion, i.e., growth and the brands are loved by the consumers, then I think we have the ingredients to improve our position. And that's what the guidance also implies. A few highlights, leveraging our assets -- production assets in the more complicated glass production, which economically industrial logic is more of a process industry logic. Royal Copenhagen, one of our biggest brands, very successful brand has now actually next to the hand-painted porcelain launched also high-end glassware with crystal and mouthblown glass. And those are manufactured in our crystal factory in Rogaska in Slovenia and in our Iittala factory in Finland. So good both for the supply and complementing the offering towards our consumers to have a complete Royal Copenhagen tableware and glassware set. Iittala has expanded now to the scented candles. And when you look at those before you even light them up, you see a form or shape that we all can recognize. So it's the Aalto silhouette. And this is something that appeals as a decoration item and now getting into the darker, less light time of the year, what is then nicer to than have a beautiful scented candle lighted up and you can enjoy all the effects. And actually, the fire is bringing one of those, it's the elements of glass that are the 3 scents, water and sand and air that are in this offering. When we talk about desirable brands, you might recall that historically and I still read in many reports about luxury. We have actively dropped the word luxury. We recognize that to be luxury, there are certain characteristics that many of our brands actually would fulfill, but not all of them. But our brands are very desirable. And one of the kind of manifests to that desirability, Moomin Day in the early August time frame. It was a few days -- a few hours online. We actually sold out the Moomin Day celebration mug. When the sales started, there were about 50,000 people queuing online. And interesting, when I bypassed our store at the Helsinki Airport at the Schengen side, the store opens at 5:00 a.m. Normally, our stores open at 9:00. And at 5:00 a.m., according to our colleagues there, actually there was a queue outside of that. So there were some happy ones who got 4 hours before others their Moomin Day mug. So I think that's a clear manifest to the desirability of a brand, but describes what we have in many of our brands. Moving over to Fiskars business area, relatively stable top line. And as you saw in the bridges, EBIT bridges Jussi just showed, the gross margin improvement and the tariff cost, the incremental tariff costs have been pretty well matching each other, which is a remarkable achievement by the team in terms of managing the situation, which is complicated. It's still fluid situation, as we know. Tariff announcements are still in the air and how those -- some of them will settle, we don't know yet. But a decrease of 0.9%. And when I look at many peer companies who have recently published their numbers, I think we've been weathering this storm extremely well and implicitly indicates -- and I don't have the proof in any formal statistics, but indicates that we've been actually able to capture some market share and have remained definitely relevant to our consumers. In terms of how to capture the market share, there are a few keys, but one of them is also continued distribution gains, which we also see that we still have a clear pipeline of distribution gains coming for this business. Looking at the highlights, many know Fiskars as either the scissor or the axe, or the garden business. Now here highlighting the latest generation, the Fiskars Ultra axe range, which is, again, how the world's best axes have been made even better. And there is a established heritage and know-how and this is a product family now we all are proud of having been able to launch it. Innovation focus. As I mentioned earlier, our Fiskars business area has more than doubled its innovation pipeline in the last 20 months. And this is not only nice picture and promises on November 11, actually, we are arranging for institutional investors and analysts an investor event that will be then broadcast or webcasted, get to know business area, Fiskars. Last spring, we had a similar event in Copenhagen for our BA Vita and the feedback from analysts covering us, some fund managers attending that was very positive that we really show what we are doing, who is doing it, and we are proud to show what will be there available soon also in the stores coming out of the innovation pipeline. So it's not only talk, but there will be a chance to get a look and feel and the touch of these new products that are coming partly later this year, partly in the coming year. Our sustainability targets, we take them extremely serious and continue our commitment there. And when we look at certain environmental criteria, circular products and services, we've been able to grow the share by 300 basis points from last year's September level of last year's first 9 months, but there is still a way to go towards our 2030 target that half of our sales comes from circular products and services. What might not look too ambitious currently is when we have reached minus 61% on our Scope 1 and 2 emissions from our own operations, 7 percentage points improvement year-on-year. The target was 60. So it looks quite favorable that we are reaching -- actually have now reached that target. Then how to tackle our -- the fact that our Scope 3 emissions is defined by us as a percentage of suppliers spend, how many percent have spent to vendors who have committed to science-based targets. And there we've been moving sideways and still have some way to go towards our target. So we are currently at 65%. And in our H1 reporting, in that context, we also flagged out that the rebasing of some of the sourcing for our U.S. business might actually take us a small step back short term before the new vendors can be qualified and submit their science-based targets. But it's not a target that we want to give away. On the social side, the zero harm target remains in force. We have 3.5 as our lost time accident frequency per million hours worked. It is a notch up from a number of a year ago, which is very unfortunate, but the work continues. Health and safety of our people is extremely important to us. And then finally, inclusion experience. We have a target in a comparison with global high-performing companies of 80 and we are currently kind of moving sideways, just shy of that 80 at 77. So not yet there. The split of our businesses, our BA, so separation into subsidiaries is advancing. The legal entity structure will be in our current assessment, finalized by the end of first quarter '26. The operational structure has been in force since last spring, but that's kind of the relatively easy part of it. We are operating in about 30 countries, have had more than 30 legal entities and then having those split and put under basically subgroups for the Fiskars BA and for the Vita BA under the holding company, which is Fiskars Corporation, i.e., the parent company. So that work is ongoing. We had the first wave of a number of countries that went well because that has to do also with IP things, et cetera. The next one is beginning of November. And this step by step, we will get there by the end of the first quarter. What do we want to achieve with this separation? Of course, full business accountability. So we have 2 colleagues who are running these 2 business areas and they have operational end-to-end accountability for their business. So there is no scapegoat of a group supply chain. They could say that, yes, we would have sold, but the factories didn't deliver, et cetera. So it's all under one hat, which improves flexibility. It improves the speed of decision-making. The closer to the consumer we are making decisions, I think the more relevant they are and more timely they are. The independent legal entities as subgroups under the holding company, that's very self-evident. Then when we talk about the transparency and measurability, once this is completed, we have already committed to the financial markets that we can provide and we will provide more transparency into the numbers. Currently, we have the income statement pretty well already covered by BA, but not the entire balance sheet. So there is potential. And by transparency, we hope that these individual businesses are also getting with their different type of characteristics in terms of financial dynamics and asset utilization, et cetera, the fair valuation, which then is reflected into the aggregate, basically some of the parts as Fiskars Group's valuation. And when we have this structure, there is definitely a different level of dedication and this is to accelerate, of course, to tap to the growth opportunities into which these 2 businesses have available to them. In terms of the guidance, already addressed it in the very beginning, we narrowed down the range. And also openly pointed out that we have the most important quarter of the year ahead of us and the current visibility indicates more towards the lower end of the range. I know that many analysts have calculated what does it imply in terms of growth in the fourth quarter that is needed to achieve these numbers. And I'm happy to share that while we do not share regularly kind of mid-quarter or monthly business updates or anything like that, but as of today, having the visibility, how sales has progressed also in October, i.e., the fourth quarter has started, that has been well consistent with the expectations and projections that are needed to get there. Consumers make the decision. And actually, it will be after New Year's Eve when we close the stores, when we actually will, in the end, know how the fourth quarter been. Our D2C share increased a notch in the third quarter. And traditionally, the fourth quarter is more direct-to-consumer heavy. So both our own e-com and our stores play a relatively seen bigger role, which means that the visibility is really at the point of sale that takes place. We have in the background, certain assumptions and definitely actions also and those relate to the supply chain variances, which we have addressed. Those 2 published factory curtailments or mothballing as somebody would call them, are both related to 90 days furloughs and that means that they will span also into the fourth quarter. The tariff impacts, direct tariff impacts are way easier to calculate. Of course, the indirect impacts on demand is very much then visible again on the point of sale. And we expect this Vita's positive net sales trend to continue in the fourth quarter. And as I mentioned, we are on track on that. And the tariff mitigation efforts continue as some parts of the tariff landscape are still effectively open. So in brief summary, what is really delightful here is that we've returned back to growth. Especially the Vita part and this is the year -- time of the year where that growth is relevant and super-needed. And the U.S., where we've had certainly many aches and pains with the very volatile tariff situation, we've remained relevant and been able to remain relevant also to our customers, i.e., the distribution and gain some more traction on that side. The actions to reduce inventories, they continue. It is not acceptable from my perspective to see inventory numbers as we currently have and that's something we need to fix. Innovation pipeline, more on that in a few weeks and guidance I already touched. And relating to a guidance longer-term topic, last spring when I took over as interim CEO, there was a date penciled into the calendar in this autumn for a Capital Markets Day. We all know that our long-term financial targets are basically expiring end of this year. That's clearly recognized. But at that time, I personally felt that it would not be right to go out and make promises about the future and then somebody else might be then bailing out those promises. That's not the style we want to kind of enforce in our company. In H1 '26, we will arrange a Capital Markets Day. The timing is still open. And in that connection, we also plan to issue then our new long-term financial targets. So this as a promise and now being able to bail out those promises, it feels way better to be standing here and announcing this and we will be back on the timing of this. That concludes my part of the presentation. So thank you for your attention so far and we are shifting to the Q&A session, I guess. Essi Lipponen: Yes. And let's first take questions through the phone line. But if you want to ask questions through the chat, just please write your questions in and we will take them afterwards. But let's see if we have any questions through the phone line. Operator: [Operator Instructions] The next question comes from Calle Loikkanen from Danske Bank. Calle Loikkanen: And first off, congrats, Jyri, on the new appointment. Then starting on few questions, if I take them one by one. First, in Vita, the inventory-related actions and the scaling down of production, for how long will this continue to impact profitability? Jyri Luomakoski: As I said, the current announced furloughs are 90 days furloughs. And with regards to Barlaston, that's a 90-day block kind of a mono block, I would say. And with respect to Iittala, it's phased and part of that is in '25 and part of that will be in the winter season of '26. And we are, of course, continuously looking at do we see the development. We had a notch of inventory reduction now in Vita already in Q3 with the bigger demand anticipated in Q4. Of course, we expect more. And it is very much a steering where we want to clear the baggage from the past, have a clear slate forward for the business and manage the cash flow and implicitly through that also the indebtedness or the net debt position. So timing, difficult to say, but it's not ending in Q4 already based on what we have announced with respect to Iittala. Calle Loikkanen: Okay. But you're not expecting a similar kind of impact on EBIT anymore from these actions as we saw in Q3? Jyri Luomakoski: Into our guidance, we have certainly factored in what we know for the actions for this current year. And at this stage, we are not yet going to guide any income statement or any other element of '26. So we are managing that situation diligently and carefully balancing between the cash flow optimization. And of course, we are in the business of making profits and delivering profits and that's even our legal obligation to do that and manage the situation between these 2 aspects. Calle Loikkanen: Yes. Okay. Got it. And then secondly, I mean, now looking at year-to-date adjusted EBIT, EUR 46 million roughly. So you need about EUR 44 million in Q4 to reach the lower end of the guidance. And last year, you did EUR 43 million of EBIT in Q4. So in practice, you need EUR 3 million more now in Q4. And so I was just wondering, I mean, you mentioned that you expect Vita to continue to grow top line in Q4, which should, of course, help. And -- but I was wondering, I mean, if you have these -- still these kind of inventory-related actions ongoing, probably a bit of negative EBIT coming in from those then or at least negative impact on EBIT. So can you elaborate a bit perhaps more in details on what levers there are for you to grow EBIT in Q4 to really reach the guidance? Jyri Luomakoski: Two critical aspects. Of course, the top line growth, as indicated, is vital for that. That's the prerequisite. With respect to the cost side, SG&A, where we had a uplift in Q3, which relates to phasing relates to some accruals. So they were accrued last year comparing year-on-year and some accruals when like with respect to variable compensation, short-term incentives, et cetera, apparently, and I was not there in this role, but as a former audit committee chair, you remember some of the facts from the history when the visibility went a bit sour last year, some of those were reversed, creating a benefit into last year's Q3, which makes the current comparison also somewhat unfair in terms of the Vita Q3 EBIT performance and that type of a ugly comparison doesn't reoccur in Q4. So that's -- so it's revenues and costs, which I know sounds like a very simplistic answer, but there are very targeted items. And of course, we are careful and very cautious in terms of other costs and expenditures in the fourth quarter. Calle Loikkanen: Okay. That's very helpful. And then lastly, before handing over to others. And I know there's still plenty to do this year, but what sort of initial thoughts do you have for 2026? Anything that you kind of are looking forward to or expecting from next year? Jyri Luomakoski: Next year, we hope that there will be a kind of stabilization of the tariff situation because now it's been waking up in the morning and checking the social media, what is the new situation, and that's been keeping our organization extremely busy. That's also time off the consumers and customers. It's time that has been spent in rebasing our sourcing and relates now to the U.S. Fiskars business predominantly. The team has done a tremendous job in terms of finding new sources, qualifying them, testing them and negotiating that we can move and base our sourcing into already settled down tariff environments and so forth. So that's the only part actually, given that we will issue our '26 guidance in early February in connection with our Q4 full year reporting that I can share at this stage. But that remains like a wish that we could concentrate on some more productive or progressive topics instead of fighting the situation here. Operator: The next question comes from Maria Wikstrom from SEB. Maria Wikstrom: Yes. Maybe continue a bit with the soft topic that Calle raised as well. So I mean, just getting a little bit of more color, I mean, as Q4, I mean your guidance, I mean, reaching the low end of the range indicates that you need to record some 8% growth in the EBIT, which in light of, I mean, today's results, I mean, something needs to change. But I mean, is the thinking right that, I mean, given that it seems that in the Fiskars BA, I mean, you have been able to get these price increases through and the EBIT is stabilizing -- more stabilizing year-over-year so the lift that we are going to see -- we would need to see is coming from the Vita segment? And then here, I mean, you think that the Q3 was somewhat extraordinary, so it should be better in the high season. Is that, I mean, rightly summed up? Jussi Siitonen: So Calle's math worked well. So if you take our year-to-date numbers here, you can see that we are EUR 25 million behind last year when it comes to EBIT on the first 9 months, making our guidance, we need to be roughly EUR 5 million better than last year in Q4. What I said in my part here is that we have some technical tailwind there coming from SG&A phasing. So therefore, I would say year-to-date change in EBITDA would be better proxy to give direction there for full year SG&A. So you can figure out how much upside we -- technical upside we are expecting there. And then exactly like Jyri said here, we do need demand, which as of today looks pretty good there for Vita that we are following the plans what we had in place. And then when we are prioritizing the cash flow here, so the decisions are very much ours here, what to do with production to ensure that we can continue improving cash flow. So these are the items what we have in place. This time, Q4 is a bit different from last year. So you might remember last year, we were struggling with demand when it comes to Q4. I would say, at the very moment, we have one problem less versus last year. And then we have this kind of technical tailwinds. But as said, all this needs to work very much with in plans what we currently have to make a guidance. Jyri Luomakoski: And your analysis on BA Fiskars' role in the fourth quarter is also correct. It's not really the gardening season. Yes, some craft things happen for the holiday season. And of course, from our perspective, we wish a lot of snow to the Nordic countries. The snow season is always something we are cheering while the traffic in the cities is kind of not happy about snow. Maria Wikstrom: Perfect. This is very helpful. And then wanted to touch upon -- on the geographical sales development as it seems that, I mean, the demand is better in Americas as well as in the Asia segment versus, I mean, Europe is still lagging behind. Is there any like lead indicators or some bright spots, which would indicate that Europe would join the crowd what comes to the demand? Or do you see that Europe is likely to remain muted also for the last quarter? Jyri Luomakoski: Of world economy, Europe does not currently have a big contributing factor to world economic growth and consumers in Europe are typically more cautious than in many other geographies. In the Nordics, we've had good tailwinds with our Vita business. So when we commented broad-based, both brands and market-wise. So Nordics, we have been able to remain very relevant and very much a desired way to bring some joy and making the everyday extraordinary with our products. But your analysis is correct that it's both North America, U.S., especially and Asia where the consumers are more happy to consume. Maria Wikstrom: And then finally, touching upon the tariff situation and your mitigating actions. I mean, personally, I was very surprised, I mean, how well, I mean, you were able to, I mean, to get the price increases through for the Fiskars segment, I mean, during the Q3. So would you say that, I mean, the tariff risk has now winded down? Or is there still, I mean, many unknowns that we should consider as a risk going forward? Jussi Siitonen: Yes, we are very pleased with the Fiskars BA team here, how they have succeeded to mitigate those tariffs. As you might remember, we got some extra burden there late August when those steel tariffs came in and we are still -- we are still mitigating also those there. We are now leaving the last 2 weeks, if I'm right, this last 90-day extensions, which is given to Chinese tariff. So let's see where it goes after 8th of November there. So no one knows at the moment. So we are, as Jyri mentioned, following on a daily basis what's the current mood when it comes to tariffs and trying to tackle it. More fundamental-based, the actions we have put in place, price increases are only part of the story, mainly focusing on our own footprint, what we have in sourcing there to find alternatives for those high tariff countries, how we are able to make some re-footprinting in that sense. So can't promise that we have tackled all the problems because we don't know them. But as the ones we know at the very moment, we are very pleased with our BA Fiskars execution capability. Jyri Luomakoski: And with respect to the re-footprinting that implies basically products that we have historically sourced out of China, we have qualified suppliers, brought tooling into some of the neighboring countries, which already have settled down tariff deals with the United States. And those tariffs are clearly at a lower level than the current China tariffs are and gives a kind of a planning horizon for us going forward. Maria Wikstrom: And then I had one more question in mind, which reflects to the Gerber division as I recall that Gerber was the one that had faced some difficulties or faced lower demand during the summer period. So what are currently the trends you are specifically seeing for the Gerber brand in the U.S.? Jyri Luomakoski: Gerber has been hit in some geographies by restrictions, whether you can advertise knives or multitools, which are then qualified also as knives because they are in some jurisdictions like weapons. And from that perspective, the push towards the consumers has been a more difficult struggle. Our efforts, and I visited in the summer Portland and the Gerber team, similarly as in the rest of Fiskars BA, innovation and remaining relevant to the consumer is extremely important. And I think it's fair to say that we have neglected that. It's been a few years where we haven't had too much of innovation flow, new products and happy to see that that pipeline is also well equipped with new ways to charm the consumer, to have the outdoor people, the fishermen and the women and the hunters and campers and all those with new need stuff equipped and that is the key to tackle this issue. So what we can't advertise in public or what needs to go beyond a locked cabinet in a outdoor store in some states in the U.S., we have now other ways in the pipeline to make us relevant and again, wanted. Jussi Siitonen: Yes. Maria, when I said that 10 out of 12 brands were growing in Q3, Gerber was one of the growing ones there in Q3. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Essi Lipponen: Yes, we do have questions in the chat. Thank you, Calle and Maria, for the questions through the phone. But maybe if we start with the question related to top line. And Jyri, if you take this one. Was there any impact of timing between quarters supporting the top line development in Q3? Jyri Luomakoski: Not that I'm aware. We have potentially between Q2 and Q3, we have the load-ins for the back-to-school season in North America. That's traditionally been something that either happens last week of June or first weeks of July and then you get big swings. But we are not here in that type of phasing the holiday season load-ins, which holiday season as reminding for Vita, less than half of our sales is through distribution, more than half, clearly more than half is through our D2C channels. Those load-ins are happening now in October anyhow. So those have not been moved forward to September. No signs of that. Essi Lipponen: Great. Let's see what we have next. Related to production, maybe Jyri, if you can continue. Given the current demand situation and production curtailments, how do you view the current production footprint, especially in Vita? Are you considering any adjustments? Jyri Luomakoski: A prudent and careful manager of a business always considers adjustments. I know this is kind of a rounded answer, but that's our obligation to see how we can best perform and serve our customers and in the end, make money for the company. Those always being in the background, but now here in terms of some concrete that there is a site that we would need to kind of permanently mothball or so, such plans are currently not on the table. And of course, demand situation is dictating. We are here for the customers, for the consumers. That's dictating in the end the footprint, how we are set up and how we operate that. Essi Lipponen: Thank you. Maybe, Jussi, related to working capital and inventories. How large working capital release are you expecting in Q4? Have you considered other actions than reducing inventories? Jussi Siitonen: Yes. Well, following our historical pattern, what we typically have had in Q4 is that working capital is coming down. And typically, cash flow has been improving versus Q3 and Q4 is happening now, we can't confirm it yet. The actions we have put in place at the moment are exactly ones Jyri already explained there with a high priority target of continue reducing inventories. This inventory challenge is very much on Vita side, less on Fiskars side. Essi Lipponen: Yes. And maybe to both of you, but maybe if Jyri starts. When comparing Q4 and Q3, are you expecting higher under-absorption of fixed costs in Vita related to the inventory? Jyri Luomakoski: We have implicitly guided for Q4, the EBIT or comparable EBIT number, not individual line items and not individual line items within our cost of goods sold where the supply chain variances would be ending. Certainly, we have our plans how and we will operate our different production sites during the fourth quarter. And based on that calculated and factored in into the mathematics, how we have arrived at our forecast, which are supportive of our guidance. Essi Lipponen: Great. Then about tariffs. And Jussi, if you start. Given the U.S. tariffs and additional steel tariffs, how much headwind are you expecting for 2026? And how much of these have you been able to mitigate as of now? Jussi Siitonen: Yes. Steel tariffs, as said, is something new there started or announced in late August. So there the steel tariff impact is mainly in 2026, whilst the other tariffs what we have for country-specific, they have been already since April this year. So there, this kind of year-on-year change is not expected to be significant. So it's mainly the new one, i.e., steel tariffs impacting more in 2026 than in 2025. We haven't announced any specific numbers how much they are impacting, what's the direct impact of tariffs on our gross margin, only say that when it comes to direct impacts there, we do have toolbox to mitigate them, including this re-footprinting what we are referring prices and the likes. And of course, we are now looking for category expansions there when it comes to offering what we have, which will also help to create new demand and therefore, tackling it not only by cutting costs, but also expanding our portfolio and top line there. So toolbox is quite broad. How much still left for 2026, that we haven't yet commented. Essi Lipponen: Yes. We still have a couple of questions and let's see if there are any new ones coming. It might be that we have already covered this, but maybe just to remind, how quickly can inventory levels in Vita be normalized? If you want to comment on that? Jyri Luomakoski: It is not a sprint. It consists of 2 factors. One is the one which is more really in our control, and that's curtailing the supply or the input into the inventories, both relating to sourced items and own manufacturing. And those we can tackle and those we have started to tackle very clearly. At the same time, the output from inventories, so clearance sales type of topics, that's also needed. Now we are heading to the seasons where you have, as we know, the Black Fridays of this world, they are, to some extent, also created for clearing some inventories and -- but it's definitely not done in the fourth quarter of this year. It's -- if not a marathon, but it's still long distance activity that we have there. So working on both ends, input and the output. And as we progress, the output, of course, requires always the willing purchaser, consumer or distributor. And once we have more to share on that front too, not only those actions that are under our control, we will, of course, be back and updating on those. Essi Lipponen: Thank you. And then maybe the final question for Jussi. With net debt at over EUR 600 million and leverage at 3.7x, what is the deleveraging plan for 2026? Jussi Siitonen: Very good point. First of all, it's just an outcome, what Jyri just explained. So that's the main driver there what we have on short term and then I'm moving to 2026. Typically, historically, we have come down when it comes to net EBITDA towards the end of the year after Q3. So that's our historical pattern there. More important than how much we are now coming down is to turn the trend. So we need to get a declining trend there when it comes to our net debt EBITDA and then impacting on both components there, net debt and then improving our EBITDA. I'm not expecting any rapid overnight improvement there. As I said, more important is now to have fundamentals in place to turn the trend, getting it on the lowering trend there. And then what we said that this max 2.5x net debt to EBITDA remains our target. It might take a bit more time than probably someone might expect to get it there, but it clearly remains our target. Jyri Luomakoski: And we work in a very determined way on both elements of this EBITDA -- Jussi Siitonen: Yes. Yes. Jyri Luomakoski: -- and the net debt where really the main lever is inventories. Jussi Siitonen: Yes. Essi Lipponen: Thank you. It seems that we are out of questions. So thank you for the active participation, and I wish you all a nice end of the week. Jyri Luomakoski: Thank you very much for joining, and happy shopping in the year-end holiday and gifting season. Jussi Siitonen: Thank you.
Operator: Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Bankwell Financial Group Third Quarter 2025 Earnings Call. [Operator Instructions] I'd now like to turn the call over to Courtney Sacchetti, Executive Vice President and Chief Financial Officer. Please go ahead. Courtney Sacchetti: Thank you. Good morning, everyone. Welcome to Bankwell's Third Quarter 2025 Earnings Conference Call. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.mybankwell.com and go to the Events and Presentations tab for supporting materials. Our third quarter earnings release is also available on our website. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K; for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. And now I'll turn the call over to Chris Gruseke, Bankwell's Chief Executive Officer. Christopher Gruseke: Thank you, Courtney. Welcome, and thank you to everyone for joining Bankwell's quarterly earnings call. This morning, I'm joined by Courtney Sacchetti, our Chief Financial Officer; and Matt McNeill, our President and Chief Banking Officer. We appreciate your interest in our performance and this opportunity to discuss our results with you. Bankwell delivered another strong quarter with GAAP net income of $10.1 million or $1.27 per share, up from $9.1 million or $1.15 per share last quarter. Pre-provision net revenue return on assets was 1.7% for the quarter, up 27 basis points from the prior quarter. Our results reflect the continued expansion of the company's net interest margin as well as growth in noninterest income generated by our SBA division. We've also made further progress in reducing our nonperforming asset balances during the quarter and continue to have a positive outlook on credit for the quarters ahead. Our NIM continued to expand this quarter as we forecast for the last several quarters. This is the result of the combined impact of repricing approximately $1 billion of time deposits, increased asset yields and the growth of our low-cost deposit balances. Low-cost deposits include noninterest-bearing deposits as well as NOW accounts at rates of 50 basis points or lower. These accounts average balances collectively grew by $20 million over the prior quarter and $64 million or 16% since the fourth quarter of 2024. Loan originations remained strong. During the third quarter, we funded $220 million of loans, bringing our year-to-date fundings to just over $500 million. Our SBA division increased its momentum as gains on sale rose to $1.4 million for the quarter. SBA originations totaled $22 million for the quarter, bringing our year-to-date total originations to $44 million. The government shutdown has potential to temporarily impact our SBA results for the remainder of this year. While there may be potential for short-term impact, the SBA division has been a strong performer, reaching nearly 90% of our full-year origination goal of $50 million within the first 3 quarters of this year. Year-to-date noninterest income, including SBA gains on sale, totaled $6 million. Credit trends in the portfolio continue to improve. Nonperforming assets as a percentage of total assets fell to 56 basis points compared to 78 basis points last quarter. This improvement was driven by the collection of $5 million on 3 SBA guaranteed loans and the sale of a $1.6 million commercial real estate loan. Additionally, Special Mention loan balances decreased by $30 million. Finally, our efficiency ratio improved to 51.4% in the quarter, down from 56.1% last quarter as we continue to balance growth with fiscal discipline. Now I'll ask Courtney to provide a more detailed review of our financial results. Courtney Sacchetti: Thank you, Chris. For the third quarter, pre-provision net revenue totaled $13.9 million or $1.77 per share, representing a 21% increase from the second quarter. Net interest income reached $26 million, while noninterest income increased to $2.5 million, driven by $1.4 million in SBA sales gains. Net interest margin expanded to 3.34%, up 24 basis points over the prior quarter. This growth was driven by a 13 basis point rise in loan yields, with approximately 3 basis points of both margin and yield attributable to onetime interest income from resolved SBA loans. Deposit costs also improved 10 basis points now at 3.30%. Improvement in both deposit costs and loan yields have contributed materially to our NIM expansion this year, up 74 basis points from the fourth quarter of 2024. Interest-bearing deposit costs are down 37 basis points from the fourth quarter of 2024. Loan yields widened, with our year-to-date average originations yield approximately 136 basis points higher than the runoff yield, generating a 41 basis point increase on yield for the total portfolio from the fourth quarter of 2024. These results do not reflect our response to the September rate cut made by the Fed. In response to the rate cut, we reduced our CD rates by 25 basis points and repriced approximately $0.5 billion of non-maturity deposits. We expect $1.25 billion in time deposits to reprice favorably over the next 12 months by approximately 27 basis points. The annualized incremental benefit of this repricing is approximately $3.4 million. Please refer to Page 10 of our investor presentation for more detail on our time deposit maturity schedule. Although we expect to realize the benefit of lower cost time deposits over the next 12 months, we also have approximately $800 million in loans tied to prime that repriced at the end of September. We anticipate the short-term impact of these recent rate changes to hold our net interest margin relatively flat in the fourth quarter. However, as term deposits mature, we expect our margin to improve as liability repricing aligns with assets. For a future 25 basis point rate cut, we would anticipate a modest annualized increase in our net interest margin of approximately 5 basis points. Since the start of the year, we have strategically increased our proportion of variable rate loans from just over 20% to 35%. As we have constructed a more neutral balance sheet, the impact of future interest rate changes on our results is expected to diminish. Noninterest income of $2.5 million increased 24% versus the linked quarter, largely driven by $1.4 million of SBA gain on sale income, an increase of $0.3 million over the last quarter. As you can see on Page 14 of our investor presentation, noninterest income now represents 8.8% of total revenue compared to 4.6% in the fourth quarter of 2024. Total revenue grew 10% compared to the prior quarter, while noninterest expense increased just 1%, resulting in positive operating leverage. While our noninterest expense to average assets was 180 basis points, our efficiency ratio improved to 51.4% for the quarter. We're pleased with this progress and expect further improvement in our efficiency ratio as profitability expands. Turning to credit, third quarter results reflect continued positive trends. We reduced our nonperforming assets by $7 million, bringing our NPA to assets ratio to 56 basis points. We recorded modest recoveries and a small provision of $372,000 in the quarter. Our allowance for credit losses remains at 110 basis points of total loans, while our coverage of nonperforming loans increased to 177%. A few final thoughts on our financial condition. Our balance sheet remains well capitalized and liquid with total assets of $3.2 billion, up slightly versus the linked quarter. The holding company and bank both saw expanding capital ratios during the third quarter, with our consolidated common equity Tier 1 ratio now at 10.39% versus 10.18% in the prior quarter. Our tangible book value also increased, reaching $36.84. I'll now turn it over to Matt to provide an update on loan originations. Matthew McNeill: Good morning. As Chris mentioned, loan fundings in the first 3 quarters remained strong. The bank has funded $500 million in new loans as of 9/30. 2025 year-to-date loan fundings have already outpaced full year 2023 and 2024, respectively. Payoffs have been at record levels and are projected to remain high through the end of the year. Despite our strong origination numbers, net loan growth only increased $49 million in the quarter and $12 million year-to-date. I would like to point out that some of our payoff activity is being encouraged by the bank, where we would like to exit some less attractive credits. Overall, we believe the recycling of the loan book is a sign of good health, and it provides the bank the opportunity to make new loans at more favorable yields. Now I will hand it back to Courtney to summarize our guidance for the remainder of the year. Courtney Sacchetti: Thanks, Matt. Due to our elevated payoffs, we are revising our low single-digit loan growth guidance to flat for the year. We affirm our noninterest income guidance of $7 million to $8 million for the full year, and the resumption of the SBA program would be additive to that total. We also affirm our net interest income guidance of $97 million to $98 million, along with our guidance on noninterest expense of $58 million to $59 million. With our fourth quarter earnings in January, we will provide additional guidance on our 2026 outlook. I'll now turn the call back to Chris for [Technical Difficulty]. Christopher Gruseke: Thank you, Courtney. We've continued to make excellent progress and to deliver on our strategic objectives of diversifying our income streams, improving our deposit base and continuously attracting talented banking professionals who value the opportunities afforded by working with the team committed to constant improvement. Importantly, we've made significant strides on closing out some pandemic-era credits with no further losses. Nonperforming assets now stand at 56 basis points of total assets versus 207 basis points a year ago, and we look forward to further improvement in the quarters ahead. Thanks to everyone on the Bankwell team, whose commitment to excellence has enabled these results. This concludes our prepared remarks. Operator, will you please begin the question-and-answer session? Operator: [Operator Instructions] Our first question comes from the line of Steve Moss from Raymond James. Stephen Moss: Chris, maybe just starting with the good originations this quarter, I think Courtney gave a loan yield number, but I'm sorry, I missed those, I was kind of hopping on the call a little late here. Just kind of curious, where is loan pricing these days? And do we continue to see elevated payoffs maybe carrying over into 2026? Courtney Sacchetti: Yes. So Steve, it's Courtney. On Page 10 of our investor presentation, we do give a little bit more detail. We -- year-to-date, our originations are a weighted average rate of [ 7.86 ]. That's on about $0.5 billion of originations, and that's the rate as of 9/30, so impact from any repricing or anything there. Matt? Matthew McNeill: Yes. Loan demand is very strong. That's reflected in that pricing. So [Audio Gap] pick and choose kind of where we want to move forward. The lack of material loan growth year-over-year is really related to the timing and the velocity of the payoffs. This is the strongest year of payoffs that we've experienced. And that's -- it takes a couple of months to get the loan pipeline to respond to be able to backfill those numbers, which we successfully did this quarter. And we anticipate the fourth quarter to have some similarly strong payoffs. So we think we'll be able to meet -- and Courtney had said earlier that we're going to stay flat, and that's how we're looking at it. But the loan demand is still there. It's just the timing of payoffs and trying to get the pipeline robust enough to respond to that. Christopher Gruseke: Stephen, with regard to next year, it is -- we have demands due to originate higher volume than we have. So it's a matter of lead time. So we'll just plan to be out in front of it. We can control it with pricing. Stephen Moss: Yes, I hear you there. And then in terms of an update on your core deposit initiative with the teams you brought over, just kind of curious, how is that developing? And if you have any update on that front? Matthew McNeill: So the teams, the first teams were hired in April, and we've hired some subsequent teams since then, including in the third quarter. We're bullish on the teams. They're already starting to produce and add deposits to the balance sheet. We don't think that we will have a -- their full production in place until sometime in '26. We did very carefully target teams that had large portfolios of noninterest-bearing deposits. So those are primarily [Audio Gap] accounts, which take longer to [ move ] than a high interest-bearing account where it's just money sitting around that's not being utilized in a business. So they're well within our time threshold for how they're performing, and we're [Audio Gap] full impact technical [Audio Gap]. Stephen Moss: Okay. And just kind of -- maybe just last one for me here in terms of just thinking about just the cadence of lower [ cuts ]. I hear you guys on CDs getting repriced 100% beta. Kind of curious on the nonmaturity deposits, how you're thinking about deposit beta with the Fed? Courtney Sacchetti: Right. So the most recent rate cut at the end of September, we have just rough numbers, approximately $1 billion of non-maturity interest-bearing deposits. About $250 million, $260 million of that we have indexed to Fed funds. So that will move that part of the relationship that we have. And then with this recent round, we did another $250 million or so of our exception rate pricing, 100% beta down. So we were able to achieve effectively 50% beta on $1 billion of deposits. Operator: The final question comes from the line of Feddie Strickland from Hovde Group. Unknown Analyst: This is Feddie's associate [ Anira ] on for him. The first question, we saw some strong SBA contributions in the quarter, and we wanted to know, how much more do you feel you can ramp up that side of the business? And in your opening remarks, you did mention that there may be short-term government shutdown effects. Will that affect the ramp-up or anything to do with that side of the business? Matthew McNeill: I believe the answer to the second question is it really depends on the duration of the shutdown right now. So Bankwell is a preferred lender. We're able to continue to underwrite SBA credits. We are not able to get in-place guarantees, and we are not [Audio Gap] our guaranteed [Audio Gap] previously originated. There is a temporary freeze to the SBA income. If the government opens up in a relatively short amount of time, it may not have a large -- or it may not have an impact on the business. We may be able to fluidly flow through it, but it's really going to depend on the duration of the shutdown. As far as the ramp, we hired Michael Johnston from ReadyCap, which was the fourth largest producer of SBA loans in the country in previous years. And we believe that the SBA division does have operating leverage able to further scale the business beyond $50 million in production, and we'll talk about that in the fourth quarter. Christopher Gruseke: And we'll just need the government to be open to do that. Matthew McNeill: Correct. Christopher Gruseke: This is Chris. I'll continue a little bit on that answer and say that we did note that in the 3 quarters' worth of activity, we pretty much hit our original goal of almost [ $50 million ]. So we've got almost a full year's worth of original expectations in the results. So the government opens, as Courtney had mentioned, there's [Audio Gap] it will be [Audio Gap] up to when the government [Audio Gap]. Operator: There are no further questions. This concludes today's meeting. You may now disconnect.
Operator: Good afternoon, and welcome to Alfa's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would like to turn the call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin. Hernan Lozano: Good day, everyone, and thank you for joining us. Further details about our financial results can be found in our press release, which was distributed yesterday afternoon, together with a summarized presentation. Both are available on our website in the Investor Relations section. Let me remind you that during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. It is my pleasure to participate in today's call together with Roberto Olivares, Sigma's CFO. I will provide a brief update related to Alfa, Sigma, then Roberto will discuss Sigma's third quarter results and outlook. It is exciting to report Alfa, Sigma's first complete quarter as a streamlined global branded food player. We have experienced a smooth transition into a steady-state business after years of transformational developments. To better reflect Alfa's new identity and to concentrate on growing Sigma's corporate brand equity, we are implementing a re-branding initiative. As a first step to sunset the Alfa brand, an extraordinary shareholder meeting will be convened soon to propose adopting a Sigma-related entity name at the Alfa level. We will share updates on these changes in due course. Returning value to shareholders through cash dividends will remain core to capital allocation. On October 1, the Board approved the first dividend under the company's new food-focused structure, a $35 million payment, bringing total cash dividends for the year to $119 million. This amount is aligned with distribution levels historically supported by Sigma's strong cash generating ability. With that, I will now turn the call over to Roberto to discuss Sigma's results. Roberto Olivares: Thank you, Hernan, and thank you all for joining us today. We are pleased to report another quarter of positive sequential improvement in volume, revenues and comparable EBITDA, underscoring consistent progress adapting to raw material cost pressures in a global environment of soft consumer confidence. Consumers are moving across channels, categories and brands, including varying shift between retail and food service, dairy and packaged meats as well as value and premium brands. The good news is that Sigma's diversified business platform gives us a relative advantage to maintain strong connections with consumers throughout the broad marketplace. One of the biggest industry-wide challenges we continue to face is rising raw material costs. In particular, turkey breast has experienced the sharpest price increase, reflecting supply constraints amplified by seasonal avian flu. Prices reached an all-time high of $7.10 per pound at the close of 3Q '25, which was an outstanding 244% increase from a year ago. Although we have certainly felt the effects of high turkey prices and other protein costs, Sigma's large scale and global supply chain have helped reduce their impact on our results. Looking ahead, we anticipate that current high prices, vaccination and low feed cost will be supportive of a gradual improvement in turkey supply and cost. In addition to Sigma's structural advantages, our experienced teams have done an incredible job staying on top of consumer needs and expectations. All the initiatives we have undertaken drove third quarter revenues to a record $2.4 billion, up 8% year-on-year and 5% sequentially. We have been implementing targeted price actions through a balanced approach to mitigate rising input costs while also supporting volume. EBITDA was down 9% year-on-year due to sustained raw material cost pressures and a record high comparison in 3Q '24. Adjusting for the Torrente property damage reimbursements in the second quarter, comparable EBITDA increased 3% sequentially, marking the third consecutive quarter of improvement. As a result, 9-month comparable EBITDA of $722 million is tracking in range with our full year guidance. We are confident that this upward trend will continue gaining momentum into the fourth quarter, which implies significant year-over-year growth for the first time in 2025. Moving next to key highlights by region. Mexico was once again the standout with revenues in local currency increasing both year-over-year and sequentially. Volume increased 1% quarter-on-quarter as growth from retail channels offset weaker performance in food service, which was impacted by soft hospitality demand. By product, yogurt and value branded packaged meats were key drivers in the retail channels. FX-neutral EBITDA improved 6% sequentially as ongoing revenue management and efficiency initiatives offset higher raw material costs. In the United States, revenues were flat year-on-year and quarter-on-quarter as favorable pricing was offset by lower volume in both periods. Softer demand for packaged meats in national brands was partially offset as Hispanic brands continue to gain traction in mainstream channels and new customer acquisitions. EBITDA was 17% lower quarter-on-quarter, reflecting lower volume in national brands and changes in mix involving lower dairy sales. Staying in the Americas, Latin America delivered 2% currency-neutral revenue growth in the third quarter, driven by higher volume year-on-year and sequentially. EBITDA decreased 11% versus 3Q '24 due to higher protein costs and mix effects, but increased 10% quarter-on-quarter due to operating efficiencies achieved in the Central American operations. The underlying business in Europe has maintained an upward trajectory. Adjusting for all insurance reimbursements received last quarter, EBITDA increased more than 100% sequentially as effective price actions and Torrente-related production adjustments drove a recovery trend that is expected to be amplified with seasonality effects in the fourth quarter. Lastly, Sigma's Europe capacity recovery plan continues advancing on schedule towards full restoration in 2027. Looking at our financial position and select cash flow items, we maintained a strong consolidated net debt-to-EBITDA ratio of 2.7x at the close of the third quarter with a stable net debt. CapEx represents our largest use of cash, driven by planned investments. Projects underway include capacity and distribution expansions, primarily in Mexico and the United States, plus the previously discussed capacity recovery in Spain. Next, let me briefly touch on some of the exciting steps we are actively taking to strengthen the business model for long-term success. Our growth business unit remains focused on piloting and scaling new products and ventures with disruptive growth potential. Grill House, our direct-to-consumer venture that caters to the grilling enthusiasts is ready to make its entrance into the U.S. after uninterrupted growth in Mexico for the last 5 years. At the same time, the Studio, Sigma's Global Center of Excellence for design and innovation is moving forward in its first year with developing 46 prototypes and advancing on 11 innovation commitments to boost core brands. Advancements in these areas like these will continue to set us apart from competitors in all regions. With this, let's open the call for questions. Please, operator. Operator: Our first question comes from Ricardo Alves from Morgan Stanley. Ricardo Alves: I had a question on Mexico. I think that certainly, as you mentioned in the preliminary remarks, another quite positive and resilient performance in top line in the low double digits. With that in mind, can you break that down into more details as it pertains to eventual share gains? I'm really looking forward to what has been driving the strength of you relative to other food players in Mexico. If you can talk about share gains or your revenue management initiatives or even on a channel by channel? Is it exposure to smaller purchases that is benefiting you more than others with a less diversified SKU? So just trying to get some more granularity to try and explain the strength in top line in Mexico and if that's something that should continue going forward, that would be helpful. My second question, I think that, Roberto, you did refer to the guidance. We appreciate the fact that the company is reiterating the guidance. I think that the message is pretty clear here, and it does imply to the comment that you made that the fourth quarter should be significantly stronger. I think that we're talking about almost 10% EBITDA growth on a sequential basis. So, with that in mind, can you also lay out in more details in your view, what are the key value drivers from the third quarter into the fourth quarter for this big sequential improvement? Is it -- when we look historically, the seasonality doesn't really help us to come to a conclusion that the fourth quarter is going to be significantly better. So is it something that we cannot model as well as you can, meaning your hedges may be looking better or to one of the points that you made, maybe Europe is going to be improving much faster than expected. Is there any top 2 or top 3 value drivers for us to be more confident about this sequential recovery into the fourth quarter? Roberto Olivares: Thank you, Ricardo, for the question. Let me first address the first one related to Mexico. In general, let me first explain that in Mexico, we do have the retail business and the foodservice business. We have seen different dynamics in each one of them. Foodservice first being more soft on volume, particularly due to raw material cost increase, particularly beef, but also softer hospitality trends, as I explained in my initial remarks. If you divide the business, retail is actually growing a little bit more on volume and foodservice is decreasing in volume. And in retail, we have a good presence in both the modern and traditional channel and a good presence across the different value segments across the socioeconomic spectrum. So we do have brands that whenever a consumer is trading down or trading up, we manage to catch the consumer as they move. So we have been seeing a little bit of trading down. So volume from our value brands is growing a little bit higher than the premium and the mainstream brands. And also volume in some of our dairy brands, particularly yogurt, continues to increase. I would say those are the 2 main drivers of the resilient volume that we have seen in Mexico. Then let me address your second question regarding reiterating the guidance and what we see in the fourth quarter of 2025. First, let me just make the comment that last quarter was -- fourth quarter '24, we have some extraordinary impacts, particularly in Mexico. If you see the margin that we have seen through this year in Mexico up to today, up to the third quarter, we were almost at 15% EBITDA margin. If you normalize that effect, we have close to $30 million more in Mexico in the fourth quarter versus the fourth quarter of 2024 just because of that. Additionally, we do expect to receive -- to continue receiving the reimbursement from the business interruption insurance from the Torrente incident we expect between $15 million and $20 million of business interruption coming in the fourth quarter. We actually already received a small portion of that during the month of October. We do also expect the European operation to have better results than the fourth quarter of 2024 because of higher prices and the momentum that we have seen in the operation between $5 million to $10 million in that sense. And in the case of the U.S., we see that we will move from a decrease versus last year in this third quarter to actually being able to have a similar result in the U.S. versus the fourth quarter of 2024. So those are the main key drivers for us being in range with the guidance. Ricardo Alves: Exactly what we are looking for, Roberto. Operator: Our next question comes from Renata Cabral of Citi. Renata Fonseca Cabral Sturani: So I have 2 regarding the U.S. business. One -- the first one about category trends. How would you describe the overall competitive environment right now in the U.S. in packaged meats and refrigerated food? Are private label or value play is gaining share right now? And how is Sigma positioning to defend pricing? And still on the U.S. business, in the release, it's mentioned that we have volumes in the national brands. My question is to what extent was this driven by category contraction or share loss and how the company has just seen the product mix to reaccelerate volumes in 2026? Roberto Olivares: Thank you, Renata, for your question. Regarding category trends in the U.S., we have been seeing just more competition of private label in the category, particularly, I would say, because of all of our regions, probably the U.S. is the one that has a softer consumer confidence recently. Consumers in the U.S. are managing a tighter budget. They are more cost conscious. Having said that, we -- particularly in the national brands business, we play as a smart choice, I would say, very close to the segment where private label is playing. And although we have seen that private label is penetrating more in the category, has not necessarily impacted our brands, has impacted more of the mainstream brands in the category. We try to position ourselves as a smart value brand, playing a lot with innovation on convenience on -- not only on affordability that has helped maintain our position with the consumers. And actually, we, in that sense, have been doing well. In regards to what we see going forward, definitely, the category this year, mainly in the Americas has suffered a lot because of raw material cost. We have mentioned a lot that turkey, but also pork and also other -- beef, other materials has been increasing. We do expect for 2026 for raw materials to ease, to start to recover production, particularly in turkey, that will increase the supply in the production and also impacting raw material to the downside. And hopefully, with that, we do expect a pickup in the category for next year. Operator: Our next question comes from Federico Galassi of Rohatyn Group. Unknown Analyst: I don't know if I was allowed to speak. It's [ Matteo ] here. I wanted to know if you could give us some color on how is operating leverage looking in this scenario with lower volumes. I think the picture in terms of raw material costs is very clear. Everyone understands the pressure particularly turkey has had on your results. But I wanted to see if you could provide us some guidance on what we should expect in terms of OpEx as a percentage of sales with more granularity by country, if possible? Hernan Lozano: Matteo, this is Hernan. Let me see if we understand your question correctly. So the first part refers to operating leverage and whether the decrease in volume is creating some slack in terms of the level of operation that we maintain across the different regions. Is that right? Unknown Analyst: Yes, exactly. Hernan Lozano: Okay. So the answer is no. This is not creating any slack in terms of operating leverage. What we're seeing is we are operating at pretty much capacity, especially in the Americas, in Mexico and the U.S., if you look at many of our CapEx projects, these have to do with catching up with volume that has grown at a pretty strong rate before 2025. So from an operating standpoint, the operations are normal, I would say. Roberto Olivares: I will add that -- thank you. I will add that it's not that volume is necessarily decreasing a lot. I mean, again, in the case of the U.S., was 1% this quarter is -- we do expect to continue growing in volume in the next years. Unknown Analyst: And one quick follow-up related to cost of raw materials. It should be fair to expect that particularly turkey prices stabilize towards the end of the year and that we see lower raw material prices for next year. What's your strategy, your view on pricing, if you could give us any idea on that for next year? Roberto Olivares: Sure. Thank you, Matteo. I mean, in general, we do expect, I would say, more friendly raw material environment next year. We -- let me talk about turkey. We are starting to see some indications that some recovery in the turkey production is starting to happen. There was an inflection point in July where production is starting to increase versus last year. And actually, the rate of increment or the rate of how the production has increased has been at a good rate. Having said that, there is still some uncertainty on how it's going to continue that rate in the next months, particularly because, again, we're entering the winter in this hemisphere and potentially, there could be more diseases coming along. There was a particular disease that affected a lot the Turkey this year was a pneumovirus. And they developed a vaccine for that virus that started to help. They started to vaccinate the turkeys around April and May. So we do expect that, that continues helping with the production over the next months. We are cautiously optimistic. I will say that we do expect production of Turkey to continue increasing. But again, cautious about the rate of that increase. Operator: Our next question comes from Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Roberto, Hernan can you hear me? Roberto Olivares: Yes. Fernando Olvera Espinosa de los Monteros: Perfect. My question, just a couple of follow-ups. Regarding or linked to the cost outlook, I mean, thinking that turkey prices should start easing going forward, how are you thinking about pricing mainly in Mexico towards year-end and next year, trying to see if any additional adjustments might be needed. And also thinking about volume softness overall, how are you thinking about CapEx for next year? Roberto Olivares: Thank you, Fernando. Let me just make the comment that although we have been seeing that some indication that production of turkey started to increase, prices of turkey has not reflect that. So prices of turkey continues to be at a record level, both in turkey breast and turkey thigh. And we do expect them to decrease in the following -- particularly in the following year. I will say more as the -- probably between the first and second quarter of the next year, that is our expectations. Regarding pricing, when that happened, we have been working very closely with the revenue management teams to be able to protect both margin and volume. We try to do any price increase that we do, we try to do it very -- with a lot of analysis in regards to elasticity, how the competition is moving and also how the consumer perceives that price increase. We want to maintain the preference of our consumers. So whenever there is something that we can see that we can act both on higher raw material costs and lower raw material costs, we will act upon that to be able to protect and to continue growing volume. In regards to that, your question about CapEx in general, again, particularly Mexico and the U.S. operation, for the last couple of years, we have been working at capacity or almost at full capacity. So we have been planning and investing in some projects to increase the capacity. We also have the recovery plan in Europe to recover the capacity that we lost in the Torrente flood. So we will be working also on that on next year. So at least, we still don't have our guidance number for CapEx for next year. But what I will say directionally, we'll continue to be around the same level that this year. Fernando Olvera Espinosa de los Monteros: Okay. Roberto, regarding pricing, I mean, at this point, do you feel comfortable with the price hikes implemented so far or additional hikes might be seen going forward in that sense? I mean, thinking about the turkey price that you were saying that they might start to decline until the first and second quarter of next year. Roberto Olivares: Yes. Thank you, Fernando. I will say that unless, again, the raw materials continues to increase, which we are not expecting that. We not necessarily will do something structural on prices as of right now. There might be the need to do some particular adjustments in some particular product, but not something that will be structural for the whole company. Operator: Our next question comes from Felipe Ucros of Scotiabank. Felipe Ucros Nunez: A couple of questions on my end. So one has to do with your pricing power. Can you talk a little bit about your capacity to maintain your pricing levels when costs start coming down and margins start expanding. Historically, what has been the behavior of your competitors? Are they typically disciplined? And I guess, how does that change by region? I have an impression that perhaps Mexico and the U.S. are stronger than Europe. But any color you can give us on that would be great. And then on the second question, is there any direction you can give us about which proteins are most important to you out of the ones you use? And I know this varies because there's reformulations depending on where the costs are at given times. But even if you can't give us precise numbers, perhaps you can give us a ranking or some directional idea of which ones are the most important proteins. Roberto Olivares: Thank you, Felipe. Let me first tackle the second one. So we -- regarding protein, -- and when we have this information in our website in our corporate presentation, around 40% of our protein -- of our raw material cost of -- the raw materials is pork. Then we have close to 20% is turkey, then around 10% is chicken and then around 30% will be dairy, mainly milk, but also cheese and some other dairy proteins. We -- particularly pork ham, I would say, is our largest material that we buy, both in -- particularly in Europe, but also in Mexico. And in the case of Mexico, more turkey, turkey thigh, turkey breast and in the case of the U.S., particularly chicken. Regarding your first question, I will say we -- again, as I explained to the question that Fernando did, we try to take a very disciplined approach in terms of price management. Whenever the -- we take a look of elasticity, how the competition is moving. And whenever we see an opportunity area where we can either protect margin or protect volume, we will be taking that opportunity. In general, I will say it varies by region. But in Europe, given the competition, the penetration of private label and some excess capacity that there's in the industry, we have -- it takes us more time to increase prices between the rest of the regions. Operator: There being no further questions, I would like to return the call to management. Roberto Olivares: Thank you, everyone. On a final note, we entered the fourth quarter focused on a strong close for 2025, building upon our positive sequential momentum. Looking ahead, we're preparing to capitalize on opportunities in 2026 and advance our long-term consumer-centered growth initiatives. Thank you very much for your interest in Alfa, Sigma. Please feel free to reach out to us if you have additional questions. Have a great day. We will now disconnect. Operator: This concludes today's conference call. You may disconnect.
Operator: Good morning, and thank you for joining Becle's Third Quarter Unaudited Financial Results Call. During this call, you may hear certain forward-looking statements. These statements may relate to our future prospects, developments and business strategies and may be identified by our use of terms and phrases such as anticipate, believe, could, estimate, expect, intend and similar terms and phrases and may include references to assumptions. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those in forward-looking statements. Before we begin, we would like to remind you that the figures discussed on this call were prepared in accordance with International Financial Reporting Standards, or IFRS, and published in the Mexican Stock Exchange. The information for the third quarter of 2025 is preliminary and is provided with the understanding that once financial statements are available, updated information will be shared in appropriate electronic formats. [Operator Instructions] Now I will pass the call on to Becle's CEO, Mr. Juan Domingo Beckmann. Juan Legorreta: Good morning, everyone, and thank you for joining us today as we discuss Becle's third quarter 2025 results. In a challenging environment, we continue to strengthen our position in key markets, supported by the consistent execution of our strategic initiatives and the strength of our brand portfolio. Consolidated volumes increased by 3.7%, mainly driven by a 5.2% growth in our spirits portfolio. In the U.S. and Canada, Tequila remained the main growth driver, and we continue to protect long-term brand equity while prioritizing premiumization. In Mexico, our core categories continue to gain momentum, and we consistently outperformed the market, gaining share across most segments. Finally, EMEA and APAC delivered double-digit growth, supported by strong execution and healthy inventory levels. On profitability, our gross margin expanded by 300 basis points, reaching 56.1%, mainly reflecting our lower input costs and operating efficiencies. Additionally, EBITDA for the quarter reached MXN 3.5 billion, marking a 63.3% increase year-over-year. As we approach year-end, our priority remains balancing shipments and depletions while continuing to execute our premiumization strategy across all regions. I'm confident in our ability to close the year strongly and position ourselves for sustained growth in 2026. Thank you. With that, I'll turn it over to Mauricio Vergara to discuss our U.S. and Canada results. Mauricio Herrera: Thank you, Juan, and good morning, everyone. Please note that [indiscernible]. During the third quarter, the U.S. and Canada region continued to face a complex and highly competitive market environment, characterized by persistent pricing pressures, cautious consumer spending and evolving category dynamics. Despite these challenges, our team remained focused on disciplined execution. Net sales value declined 10.3% compared to the same period of last year, reflecting a 6.4% decrease in shipments and a 4.4% decline in depletions. This result was mainly driven by continued softness in our Ready-to-Serve portfolio and retail boycotts in Canada, which resulted in approximately 120,000 cases in lower shipments. Encouragingly, our full-strength spirits portfolio outperformed the region's overall trend, led by stronger performance in high-end tequilas, which continue to drive premiumization across our mix. In terms of consumer takeaway, our performance was in line with the overall market. According to Nielsen 13-week data through September 27, our spirits portfolio, excluding prepared cocktails, declined 3.5% compared to a 3.4% decrease of the total industry. Meanwhile, C-stores, which provides one of the most comprehensive views of the industry performance, shows that Proximo outperformed the broader industry within full-strength spirits, including the Tequila category, over the 3-month period ending in August. Our prepared cocktails portfolio continued to weigh on consolidated shipments, largely due to softness in our large-format Ready-to-Serve offerings. But in contrast, our ready-to-drink cans gained momentum versus the first half of the year, signaling a positive turnaround as we align our portfolio with evolving consumer dynamics. Within Tequila, we continue to observe intensified industry-wide pricing competition. Average tequila pricing in the market declined 7.9% versus last year as leading competitors implemented material negative price adjustments. In this environment, we have remained disciplined, focused on selective strategic promotions while maintaining an overall responsible pricing approach. Notably, small format offerings of our super-premium and ultra-premium brands continue to outperform, underscoring that consumers are seeking high-quality products while managing their spending. Our strategy to strengthen the on-premise continues to deliver results. On-premise shipments outpaced the off-premise, driven by initiatives that enhance brand visibility and consumer reach. Looking ahead, we anticipate improving long-term fundamentals in the U.S. spirits market, particularly within our focus categories. Premiumization continues to drive growth in Tequila, where demand for authentic high-quality brands remain robust. I will now turn the call over to Olga Limon to discuss the results for Mexico and Latin America. Olga Montano: Thank you, Mauricio, and good morning, everyone. In a challenging industry landscape, Mexico posted solid third quarter results. Even with constrained consumer demand, we outperformed in our key categories and continue to improve our leadership position. Net sales value increased 24.3% in the quarter, primarily driven by an increase in volume. This was further supported by a favorable product and channel mix as high-end Tequila outperformed the rest of the portfolio. Shipments in the quarter increased 18.3% year-over-year, driven by market share gains and an easy comparison against last year. As you recall, 2024 was a typical year marked by strong industry destocking. Compared to the third quarter of 2023, shipments grew 1%, demonstrating that we have returned to premarket contraction shipment levels, and we have done so with a normalized inventory position. Overall, inventory levels remain healthy and well balanced across channels as we head into the year-end. Our brands continue to gain market share in Mexico, reinforcing our leadership in both Tequila category and the broader spirits industry. According to [ Nielsen ], we grew in value 3.4% year-to-date compared to flat performance for the overall industry, while our volume rose 3.4% versus a 1.1% industry decline. These results underscore the strength and consumer appeal of our brands in the Mexican market. During the quarter, we took a strategic step to further optimize our portfolio with the sale of Boost, reinforcing our commitment to focus on our core spirits business. The fourth quarter of 2025 will serve as a transition period, during which we will continue to operate the brand in close collaboration with the buyer to ensure business continuity. As of January 1, 2026, Boost will no longer be consolidated in our financial statements. For reference, in 2024, Boost sold 938,000 9-liter cases, representing 3.7% of our consolidated volume and therefore, will impact our volume comparables in 2026. In Latin America, performance was strong, with shipments and net sales both increasing. We also achieved a double-digit increase in net sales value per case, reflecting the successful execution of our premiumization strategy. Despite persistent macroeconomic uncertainty, underlying trends continue to improve across the region, and we remain focused on disciplined pricing, protecting profitability and reinforcing our leadership position. I will now turn the call over to Shane Hoyne, Managing Director of the EMEA and APAC region. Thank you. Shane Hoyne: Thank you, Olga, and good morning, everyone. During the third quarter, we operated in a volatile trading environment influenced by macroeconomic uncertainty, aggressive competitive pricing and continued cost-of-living pressures. These factors led distributors to manage inventories cautiously. Even in this context, our premium spirits portfolio delivered solid results, driven by robust growth in super premium tequilas across key Asian markets and emerging EMEA countries. Shipments in EMEA and APAC increased 11% in the quarter. Asia remained a key growth engine, achieving double-digit growth in both shipments and depletions. Tequila remained our primary growth driver across the region with shipments up 20% year-over-year and super-premium tequila shipments accelerating 38%. These results demonstrate the strength of our premiumization strategy and the growing global appeal of our brands. Looking ahead, the fourth quarter will be a pivotal trading period. Through effective commercial execution and agile decision-making, we expect to maintain momentum in the EMEA and APAC region, backed by the strength of our portfolio and our disciplined focus on premiumization. We believe we are well positioned to deliver sustainable growth across the region. I will now hand over to Rodrigo, who will take you through the financial results. Rodrigo de la Maza Serrato: Thank you, Shane, and good morning, everyone. I will now walk you through the financial results for the third quarter of 2025. The company reported a 3.7% increase in volume, driven primarily by a 5.2% growth in our spirits portfolio, marking our first quarter of volume recovery since Q1 '23. Consolidated net sales were flat at MXN 10.9 billion, reflecting the continued impact of price normalization, geographic mix dynamics and unfavorable FX. This quarter marks our seventh consecutive period of year-over-year gross margin expansion, a significant achievement despite unfavorable regional mix and despite the appreciation of the Mexican peso, which represented a modest drag on margins. Despite these headwinds, we continue to benefit from lower agave-related input costs and ongoing cost efficiencies from strategic sourcing and manufacturing operations, resulting on a gross margin of 56.1%, an expansion of 300 basis points. A&P expenses declined year-over-year, reflecting our focus on strategic brand prioritization and disciplined resource allocation amid moderate demand. SG&A expenses also decreased as a percentage of sales as productivity gains and tighter cost controls more than offset inflationary pressures. EBITDA increased 63.3% year-over-year to MXN 3.5 billion, while the EBITDA margin expanded to 31.7%. This increase reflects both strong organic performance across the business and inorganic contributions. Turning to the financial results. We recorded a favorable swing of MXN 3 billion in the quarter, primarily driven by a MXN 2.5 billion gain from asset divestitures as well as MXN 188 million year-over-year foreign exchange gain, as the appreciation of the Mexican peso positively impacted our net U.S. dollar debt exposure. As a result, net income grew at triple-digit rate year-over-year, reaching MXN 4.1 billion. From a cash flow perspective, the company generated MXN 3.3 billion in net cash from operating activities, primarily reflecting strong profitability. Our cash balance increased MXN 5.1 billion relative to the end of the second quarter, mainly due to proceeds from the portfolio optimization activities. Our capital allocation approach remains consistent and disciplined. Every decision aims to support long-term value creation and sustainable growth. Our top priority continues to be investing in organic growth through brand prioritization, targeted A&P spending, innovation and R&D to ensure the continued strength and resilience of our portfolio. At the same time, we remain disciplined in managing our portfolio, acting decisively when brands no longer fit our strategic direction. The recent divestment of the Boost brand is a clear example of this, an action aligned with our ongoing efforts to sharpen our portfolio and exit noncore assets. Looking ahead, we will continue to explore value-creating investment opportunities, being mindful that our portfolio is unique and any acquisitions must be both strategic and accretive to the business. The following chart shows how our company is delivering on CapEx efficiency. The business is generating more EBITDA while requiring less CapEx to do so, demonstrating the success of our efficiency initiatives and our progress towards a more asset-light value-accretive operating model. Finally, our lease adjusted net debt-to-EBITDA ratio improved to 1.0x from 1.7x in the previous quarter, underscoring the strength of our balance sheet and our capacity to create long-term value. Overall, the step-up in underlying operating profit was the main driver behind a 160 basis points increase in ROIC compared to the same period last year. With that, I will now turn the call back to the operator for the questions-and-answer session. Thank you. Operator: [Operator Instructions] Our first question comes from the line of Ricardo Alves. Ricardo Alves: Ricardo Alves from Morgan Stanley. Impressive numbers. I had a couple of questions on the main positive surprise to us came on the gross margin, the 56% number in the third quarter, certainly very impressive. Is it possible to go a little deeper or to quantify any agave impact or raw materials in general that boosted your margin for the third quarter? Any color that you could share? Even if qualitative, in terms of how you're cycling the inventory of raw materials in the portfolio that you're selling today, that would be helpful. We've been talking about going back to that 60% gross margin or so for many years now, and it seems that we are approaching that. So any qualitative or if you're able to quantify in a way how you're cycling through the inventory of agave finished products? I think it would be helpful for us to have a better idea of how your profitability could shape up in 2026. That would be my first question. The second question, really impressive numbers in Mexico and Rest of the World. So I think that we have less concerns there. But I think that the U.S., I believe that one of the comments that you made is that the competition remains tougher in that market. So I wanted to focus on that market. We noticed that your unit revenue on a U.S. dollar terms was down, I believe, 5% in U.S. dollar. And we also assume that your product mix continues to improve in the U.S. So that would imply that there seems to be some discount activity on the spirits category. I just want to pick your brains on that to see if indeed, you're still seeing your competitors more aggressive in pricing. And if there is a light at the end of the tunnel here, maybe things are looking better as we go into the fourth quarter and shipments and depletions could be more aligned. So just trying to see if we are closer to a stabilization of the U.S. market. Rodrigo de la Maza Serrato: Thank you, Ricardo. This is Rodrigo. I will take the first question. In fact, yes, we're satisfied with the progress on gross margin. So far, we continue to cycle all the inventory, as you correctly mentioned. And I want to highlight that most of the benefit on gross margin is coming actually from agave-related input, everything that happens there in terms of the agave, the yields and also the manufacturing efficiencies that have been implemented through manufacturing investments. And so the main driver is that. On the contrary, we have, at least in this quarter, an unfavorable Mexico peso impact, driven by the appreciation of the peso, also mix -- unfavorable mix dynamics overall, given the U.S. results as a percentage of the total portfolio, plus, as you mentioned, the heightened promotional activity resulting in a lower price per case. Overall, that's what's driving the gross margin, which stands at 56%, which is quite positive. Mauricio Herrera: On your second question, Ricardo, this is Mauricio. You're right. The market continues to be extremely competitive. If you look at total Tequila, the overall pricing is down by almost 8%. So what we -- the approach we have had has been to actually indeed have some targeted promotional activity to remain competitive and protect our share in the marketplace, but without chasing competition. So our focus continues to be protecting our competitive position in the marketplace whilst protecting the brand equity for the long term. So we will refrain from chasing competition on the downside. We need to remain competitive, but our focus is really long-term equity growth in what I think will continue to be for the next year or so, a very competitive market environment. Ricardo Alves: That's helpful, Mauricio. Do you see any early indications that maybe the market is going to become more rational anytime soon? Or maybe the trends that we saw in the third quarter did remain the same into the fourth quarter? Mauricio Herrera: Look, based on what we're looking at all the data sources and for me, the most comprehensive one is [ DeepSource ], what we're seeing is a projection of next year of the market of our potentially continue to decline at a rate of 4.5%. So with that projection of the market, I would expect the market to remain extremely competitive as everyone will be focused on share. So I don't see the current dynamics changing at least for the next 18 months. Operator: Our next question comes from the line of Nadine Sarwat. Nadine Sarwat: This is Nadine Sarwat from Bernstein. Two for me, please. First, sticking to the U.S. on RTDs, I know that continues to be the main drag. It's been the case for quite some time. Although I believe in your prepared remarks, you did call out better momentum as you've adjusted your strategy. Could you please flash that out, what is this current strategy when it comes to the subsegment over the coming quarters? And what are you expecting the performance to be there? And then a second question, I appreciate the clarification of calling out Mexico shipments versus 2023. Could you just confirm or clarify that depletion number for Mexico so that we ensure we get the full picture? Mauricio Herrera: Thank you, Nadine. So in terms of your first question, this is Mauricio, on the U.S. RTDs, as I mentioned during the call, what continues to be a drag on our performance in [ RTS ], so which is the large formats, and that -- if you look at the marketplace, that continues to trend down as consumers are shifting to cans or RTDs. So when we talk about RTDs, we're talking mainly about cans. So what we are doing is changing and adjusting our portfolio with a lot of focus in RTDs, both in terms of execution format configuration, driving increased penetration across different channels. And we saw actually a big shift in the last quarter. We're showing growth of around 30% versus last year in our cans. So as we go forward, we will continue to drive not only execution, but also you would see innovation coming from us in that space, which is just pretty much adapting our portfolio to the evolving consumer needs. Olga Montano: As for the Mexico question, as we have already talked about, we had an easier comparable base in terms of shipments in the third quarter. So it's more meaningful to look at the year-to-date performance. In the year-to-date performance, where shipments are and depletions are broadly in line, we are up 4.7% year-to-date in shipments versus 2.5%, respectively, in depletions. So I hope that answer your question. Nadine Sarwat: Perfect. And then could you just remind us your split for -- of your RTD segment? I guess, how much is that large format versus RTS versus the cans, now that you've been implementing these changes? Mauricio Herrera: So still from a mix perspective, we still hold a large part of our mix in RTS, but our focus will then to continue to increase the mix now on RTD. So for now, our mix continues to be larger on RTS. We feel that the market will continue to evolve within the cans. And therefore, you would see in the future, our mix of RTDs/cans continue to increase relative to the large format. Operator: Our next question comes from the line of Froylan Mendez. Fernando Froylan Mendez Solther: Froylan Mendez from JPMorgan. A couple of questions. First, on a follow-up on the gross margin. Just trying to understand how sustainable is this margin gain from agave? Because if we look back in the previous quarters, it has been very volatile, let's say, the margin dynamic into the third quarter, I would have expected more of a headwind from FX, which was clearly offset by the agave. But is there any reason why the fourth quarter shouldn't be at least this 300 basis points gross margin expansion if similar volume conditions remain into the quarter? Or what are we missing to understand the gross margin dynamics into the fourth quarter into 2026? And secondly, into Mexico, I mean, it's very impressive to see the performance, given the weak economic backdrop in general in Mexico. Do you see any difference in the consumer behavior in Mexico versus what we see in the U.S. in terms of consumption per capita? Or what is driving this recovery in volumes in Mexico? Those two questions. Rodrigo de la Maza Serrato: Thank you, Froylan. I'll take the first question regarding the gross margin expectation. We will be facing a much more unfavorable situation from an FX perspective in the short term. Q4 comparable relative to last Q4 is going to be unfavorable as exchange rate was 20.1% on average. Other than FX, which could impact negatively the gross margin in Q4, we don't see any meaningful trend, changes regarding cost components. So besides that, that's the only impact that we, at this point, would be concerned about. Olga Montano: As for Mexico, we continue to see a volatile and challenging market environment and a very cautious consumer. We continue to see a contraction, but the good news is contraction at a slower rate. And also the good news is Tequila remains one of the few categories that is growing, and we are actually outperforming the industry within it. So that's what I can tell you. Fernando Froylan Mendez Solther: If I may just follow up, Rodrigo. So can I understand that the inventory that you are passing through the P&L is now at, let's say, a much lower cost versus what we have been seeing in most of the first half of 2025 and second half of 2024, so we are facing a real advantage on the cost side on agave from this point onwards? Rodrigo de la Maza Serrato: Yes. I think that sounds right, Froylan. Operator: Our next question comes from the line of Antonio Hernandez. Antonio Hernandez: This is Antonio from Actinver. Just wanted to see if you can provide more color on the lower A&P expenses as a percentage of sales, if this at all, maybe this is impacting maybe sales performance? And in which regions are you mostly lowering this expense? And what are your expectations going forward? Rodrigo de la Maza Serrato: Of course, Antonio. I'll take the question first. So A&P investment as a percentage of NSV is simply reflecting the more, let's say, some efforts in terms of efficiency on how we spend the A&P. But definitely, that's not a driver that we perceive is impacting top line performance in any of the regions. Antonio Hernandez: Okay. And these efficiencies are all over the place, I mean, in all the regions? Rodrigo de la Maza Serrato: Yes. Operator: Our next question comes from the line of Ben Theurer. Benjamin Theurer: This is Ben Theurer from Barclays. So I wanted to just understand a little bit and ask if there's more something in the pipeline. I mean, you've been divesting some of these like smaller noncore things. We've seen the Boost divestment. We have the Lalo brand this quarter. And we've seen this in the past by kind of like this review of the portfolio. So I just wanted to understand, as you look at the current portfolio in different regions, et cetera, specifically considering some of the softness also in RTD in the U.S., are there other things that you would consider as an asset for sale or like kind of like a noncore to kind of like really be able to focus and concentrate on the key things within Tequila, other tequilas and those other spirits that have been driving growth and have been doing better? Juan Legorreta: Yes. We -- this is Juan Domingo. Yes, we are continuing analyzing our portfolio and -- to see which brands should we invest more and which less and which brands so we can dispose. So yes, probably there will be more. Benjamin Theurer: Okay. And then I have one follow-up. Just as we look into the dynamics of spending on A&P over the last couple of quarters, it's clearly been, I would say, on the softer side. So as you look ahead, do you think this is a new level and new balance? Or as volume picks up and some of the momentum comes back up as we think into 2026 that you're probably going to be as well a little more on the upper end of what your usual guidance is for A&P? Mauricio Herrera: So this is Mauricio. So for the U.S., what we've been working on is a very disciplined approach to return on investment, making sure that we're understanding more and more what are the activities that are actually having the best impact in the marketplace. We continue to spend ahead of industry standards. So I think that we're actually in a very healthy level of spend, and our focus is more on understanding where can we put the dollars that will have the maximum return so we can drive efficiencies without compromising our -- how we compete in the marketplace. Operator: We have not received any further questions at this point. That concludes today's call. You may now disconnect.