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David Mulholland: Good morning, ladies and gentlemen. Welcome to Nokia's Third Quarter 2025 Results Call. I'm David Mulholland, Head of Nokia Investor Relations. And today with me is Justin Hotard, our President and CEO; along with Marco Wiren, our CFO. Before we get started, a quick disclaimer. During this call, we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F which is available on our Investor Relations website. Within today's presentation, references to growth rates will mostly be on a constant currency and portfolio basis, and other financial items will be based on our comparable reporting. Please note that our Q3 report and the presentation that accompanies this call are published on our website. The report includes both reported and comparable financial results under reconciliation between the 2. In terms of the agenda for today, we will go -- Justin will go through our key messages from the quarter, and then Marco will go through our financial performance. We'll then move to Q&A. With that, let me hand over to Justin. Justin Hotard: Thank you, David. Overall, we delivered a solid performance in the third quarter, in line with our expectations. We grew net sales by 9% with all business groups growing. Order intake was again strong, particularly in optical networks and IP networks driven by AI and cloud customers. Our profitability in the quarter was as expected. Network Infrastructure gross margin improved sequentially, that was impacted slightly by product mix. Cloud and Network Services had a strong gross margin in the quarter. Product mix impacted the gross margin of mobile networks with a lower mix of software revenue. Our operating margin declined year-on-year due to a onetime benefit seen in the prior year from a loss provision reversal. Without which our operating margin would have been flat. The broader demand environment remains healthy as we move into the fourth quarter. We have seen some improvements in CSP expectations along with the strong order intake I mentioned in AI and cloud. In fact, entering the fourth quarter, our backlog coverage is stronger than in recent years. We're also pleased with our progress on the Infinera acquisition. We are ahead of schedule with the integration time line and with synergy expectations. The acquired business contributed strongly through both our net sales growth and order intake growth in Q3. So after a solid Q3 and continued strong order intake, we are well on track to achieve our full year outlook. We expect the fourth quarter with net sales growing sequentially and slightly above our historical seasonality of 22%. We are currently tracking towards the midpoint of our operating profit outlook range. Let me now share a few highlights across the business from the third quarter. For our network infrastructure business, and the key highlight has been our progress in the AI and cloud customer segment. In Q3, this segment accounted for 6% of our group net sales. Breaking it down, it was 14% of our network infrastructure business and more specifically, 29% of optical networks. In Optical, as mentioned, our 800-gig ZR, ZR+ coherent pluggables became available in the quarter and ships to our first hyperscale customer. Our pipeline in this space is growing as customer investments accelerate and data center architectures evolve. Q3 also saw us announce strategic partnerships with both end scale and Super Micro. With Endscale, we are now a preferred partner for advanced networking technologies across our NI portfolio. Super Micro is adopting our SR Linux network operating system for their 800 gig Ethernet switches, providing expanded footprint for our network operating system. Finally, we secured 2 new design wins for our switching platform in the quarter with hyperscalers. The market is growing rapidly. And while I'm pleased with these initial signs of progress in IP networks, clearly, we still have a lot of work ahead of us. In our fixed network business, we launched our new 50 gig PON offering. With our unique solution built on our Chilean chipset, operators can easily evolve from GPON to XGS, 25 gig and 50 gig PON on the same fiber. Ready with encryption for the post-quantum era, Nokia solution also provides enterprises with the bandwidth, security and reliability they require. Customers like Frontier Communications in the United States are already using our unique PON technology to seamlessly introduce 25 gig PON. Now I want to turn to our mobile businesses, starting with Cloud and Network Services. The team has delivered strong network -- net sales growth and operating profit growth as it continues to focus on autonomous cloud native architectures. In voice core, we became the market share leader in the first half of 2025 and as reported by Dell'Oro. Approximately 70% of 5G stand-alone core network deployments outside China use a portion of Nokia's 5G core stack. And network penetration is still less than 30% for 5G stand-alone core. In Mobile Networks, we continue to see the market stabilize. We recently announced a deal with Vodafone 3 that will see us enter their new combined network in the U.K. as a major RAN supplier with approximately 7,000 sites. We are focused on improving the returns in the business over time. delivering for our customers and differentiating through innovation. In Nokia Technologies, we secured several new agreements in the quarter. The team continues to be disciplined on productivity and operating leverage. While we are now entering the heightened investment phase for 6G standardization, we continue to see stability in our annual operating profit. In Q3, we completed a strategic review of our venture fund investments. We have decided to scale down our passive venture fund investments. Over time, we will substantially reduce the capital deployed in these areas. As a result, our venture fund investments are now reported within financial income and expenses. Going forward, we will consider targeted direct minority investments in companies that help us to accelerate our strategy. An example is the investment we made in Endscale alongside the strategic partnership that I referred to earlier. Because of this change, we are making a technical change to our operating profit guidance. increasing it by EUR 0.1 billion, which is related to the negative impact the venture funds had on our operating profit in the first half. However, operationally, our guidance is unchanged. After a solid Q3 and with recent order trends, we are well on track to achieve our full year outlook for operating profit. As I mentioned before, we expect fourth quarter net sales to grow sequentially at slightly above our historical seasonality of 22%. And we are tracking towards the midpoint of our operating profit range of EUR 1.7 billion to EUR 2.2 billion. At our Capital Markets Day in New York on November 19, we will share our strategy to unlock the full potential of our portfolio and the steps we are taking to focus the company to deliver ongoing growth and operating leverage. The AI super cycle is accelerating demand for providers of advanced and trusted connectivity. Nokia is uniquely positioned to be a leader in this market. With that, let me hand it over to Marco to discuss our financial performance. Marco Wiren: Thanks, Justin, and hello from my side as well. In quarter 3, we saw net sales increased by 9%, and we are pleased to see growth across all our business groups. Gross margin for the group declined 150 basis points year-on-year, and this was largely as we have expected. And this is because of the product mix within both network infrastructure and mobile networks. Operating margin was 9%, 220 basis points below the prior year, although this was mainly due to a onetime impact from the reversal of loss allowance for trade receivables in the prior year. Without this, the operating profit -- operating margin would have been flat year-on-year. And we generated EUR 429 million of free cash flow and ended the quarter with $3 billion of net cash. I would like to update you on our cost savings program, which we introduced in 2023. We expect to get about EUR 450 million savings in 2025. And going forward, we will focus on delivering operational leverage through continuous productivity improvement, IT simplification, digital instrumentation and organizational efficiency rather than using large restructuring programs. Ultimately, this means a cultural shift towards consistent cost discipline and efficiency to help us deliver our strategic calls. Turning to business group now, starting with net infrastructure, which had another strong quarter with 11% growth. Optical Networks was the standout performer with 19% sales growth and continue to see strong order trends with book-to-bill well above 1. IP Networks also saw a strong growth in orders in the quarter as we start to see and increased traction with AI and cloud, as Justin mentioned. IP Networks sales grew 4% and fixed networks grew 8% in the quarter. Gross margin was impacted by product mix and declined 190 basis points, although it did increase from the level we had in quarter 2. Operating margin declined because of lower gross margin along with the increased investments in R&D and the acquisition of Infinera. In the quarter, we see -- did see a small positive contribution to operating profit from Infinera as we start to see some initial benefit from synergies, along with the growth in the business. Cloud and Network Services sales grew by 13% in the quarter as we continue to see strong demand for our cloud-based core platforms. Gross margin increased 380 basis points as we improved cost of delivery, along with the operating leverage benefit of higher sales. Operating margin also increased by 250 basis points with some of the gross margin strength partially offset by higher R&D expenses. And mobile networks net sales increased by 4% year-on-year, driven by growth in Vietnam and Middle East and Africa. In quarter 2, we said we expect Quarter 3 gross margin to be lower than normal, reflecting a lower software contribution, and this was indeed the case. During year we saw a 370 basis point decline. With respect to operating margin, although operating expenses declined, the reversal of loss allowance in the prior year meant that operating margin declined. Without this, the operating margin would have only slightly declined despite this being a quarter with a low software contribution in the mix. Turning now to Nokia Technologies. Net sales grew by 14% in the quarter, and we signed several new deals in quarter 3. And our annual net sales run rate remains at approximately EUR 1.4 billion. Operating expenses in quarter 3 saw some timing benefits and therefore, will increase slightly in quarter 4. We continue to expect EUR 1.1 billion operating profit for the full year in Nokia Technologies. Now let's look at the net sales by region. In North America, we saw strong growth in network infrastructure and cloud and network services, while mobile networks declined slightly. In APAC, India sales grew in network infrastructure, driven by strong demand for fixed wireless, while mobile network sales returned to some modest growth. Outside of the benefit we saw from Nokia Technologies, Europe was stable in quarter 3. Now turning to our cash performance. We ended the quarter with a net cash position of EUR 3 billion. Free cash flow was positive EUR 49 million, consistent with our profit generation and well-managed working capital. We continue to target 50% to 80% free cash flow conversion from comparable operating profit for the full year. David Mulholland: Thank you, Justin and Marco. Before we turn to the Q&A session, you should really received an invitation to register for our Capital Markets Day, which as Justin mentioned, will be held in New York on the 19th of November. We hope as many of you as possible will be able to join us at the event. As usual, for the Q&A session, as a courtesy to whether is in the queue, can you please limit yourself to 1 question and a brief follow-up. Kelly, could you please give the instructions? Operator: [Operator Instructions] Yes. Let's go. I'll now hand back to David Mulholland. David Mulholland: We will take our first question today from Artem Beletski from SEB. Artem Beletski: So my question would be relating to IP Networks and switching business on that front. So how do you see the progress on that front in general. And you have also said to target 3 quarters ago, when it comes to year 2028. So are you well tracking on it? David Mulholland: One second, could you start your question again, please? We just got tech difficulty on our side. Artem Beletski: Yes, no worries. Can you hear me now? David Mulholland: Yes, we can hear you. Artem Beletski: Okay. Great. So I would like to ask a question relating to IP Networks and your initiatives what comes to data center and switching business. So you mentioned that you have some new design wins during the quarter. So how you're tracking against your target for 2028? And also, should we anticipate some contribution to revenues looking at upcoming quarters? Justin Hotard: Yes. So Artem, I think as I've said in a couple of forms, but maybe just to share here, I think when we talk about EUR 100 million incremental investment, the reality for me is that's a small portion of our overall capital. And so I don't think you'll see us focus on that metric going forward. What I will say about the business is, I was pleased with the wins I'm pleased on the book-to-bill in IP networks overall. The reality, as we all know, is that we're still a fairly small player in this space, well behind some of the market leaders. So we're at the start of a journey. But the announcements we've made, I think are positive. The metrics are positive. It's much more work to be done longer term. David Mulholland: Did you have a quick follow-up, Artem? Artem Beletski: Yes, absolutely. So maybe more general questions. So looking at your growth opportunities when it comes to AI and cloud. So it was sales in the quarter, so increased compared to Q2. But in general, looking at the next couple of years, where do you see the biggest growth opportunities looking at different customer segments. So as it's like hyperscalers, enterprise or super insight where you see the biggest opportunity for you? Justin Hotard: Yes. I think, first of all, the biggest opportunity is clearly it's clearly is in the hyperscalers and the neo cloud. So that's driving most of the demand. Obviously, the partnership with Endscale is a good example of our focus in this area. We've made other announcements in the past. And we also believe that sovereign clouds will present a significant opportunity for us over time. As we've talked about before, we're optimistic about the work that's being done in the EU as well as in other regions. So we think that these are all important growth segments for us. But clearly, the demand today is largely coming from the hyperscalers on some of the larger neo clouds. David Mulholland: We'll take our next question from Simon Leopold from Raymond James. Simon Leopold: Appreciate it. So nice to hear about the progress in the hyperscalers. I want to dig a little bit more deeply here in that more recently, we've heard about an application refer to a scale across for optics, which I think of as basically data center interconnect on steroids. Could you talk a little bit about what this means for Nokia in particular and how you see that as an opportunity. Justin Hotard: Yes, sure, Simon. And I think it's something that's been around obviously scale up or what's been talked about at scale across has been in networks for in data centers for a long time in certain parts of the market. So this isn't a new technology. But what is happening is as we push bandwidth demands, which obviously the AI data centers are driving it's creating new demand for innovation in that space. And I think this is where the assets we have, I think, are well positioned. It's not a place where I can tell you we can point to it and say, we've got material revenue today. It's still early days. But I do think if you look at our assets here, particularly what we're doing in Indian phosphide with the fab, the ability to build optical components down on the indium phosphide silicon and innovate and packaging in these areas. We think we've got technology that can be relevant here. But obviously, as bandwidth demands continue in networks, both scale across and scale out, which is what we typically call -- what we typically see in top-of-rack networking and IP switching, both of those create tremendous opportunity for us. And the way I would dimensionalize the opportunity in optical is we'll share more of this at CMD is that every time you get to the next unit, if you go from the long-haul networks to the metro networks to the data center or inside the data center, then inside the rack, each 1 of those has incremental opportunity at a volume level. Of course, there's a performance and cost delta you have to hit as well because what we build for long-haul networks is obviously going to be significantly more expensive than what you'd have to build to fit inside of a server inside of a rack. So there's a part of this that will require us to continue to innovate in this space. And you'll hear more about it in our discussions. David Mulholland: Did you have a follow-up, Simon? Simon Leopold: Sure. Yes, I presume we'll talk about the long-term strategy, of course, at the Capital Markets Day. But I'm wondering if you could provide us a few thoughts on how Nokia's plan is regarding 6G mobility investments. Have you started investing? Is that in the R&D today? Is it something that starts in 26 or is it something further out in time? I'm just really focused on modeling for the moment because I expect we'll hear some more at the Capital Markets Day next month. Justin Hotard: Yes. So on technology standardization, which is obviously very important relevant for tech, that work has already started and the investment is ongoing. And as I touched on in my comments, we're going to go through a bit of an investment. You go through a bit of an investment cycle in that space. So that ramp is happening, and we obviously reiterated confidence in the on the ongoing profit outlook for Nokia Technologies as a part of that. So I think that gives you some indication from a modeling standpoint. For MN, we are -- we've talked about this publicly. We're doing work on early on 6G -- I'd say pre-standard 6G radio technology. There's more work here. I think the thing for me in this space is. And Simon, I've talked about this a little bit in comments as well as I think there's a lot of focus on for obvious reasons on the G transition, the 3G, 4G, 5G, 6G. I actually think what's more important for us is what we've done in cloud and network services, which is the pivot to a cloud-native core. And then you look at the results and the performance on share capture and revenue growth. I think that's a good indicator for how we see the -- we're going to start to think about the opportunity in RAN, which is as we go into AI and in yes, there's going to be a new generation of radios in terms of hopefully, frequencies with spectrum approvals and, of course, 6 capabilities in terms of spectral efficiency. But there's a lot more to do in terms of radio capabilities and features. And we've got -- this is why we announced things like the AI ran Alliance. Previously, it's where we see opportunity with our work in Cloud RAN, for example. And I think that's where we'll continue to invest. What will impact for you is that these are things that we need to focus on and invest and innovate and of course, continue to work closely with customers. So we'll unpack that for you at CMD as well as how we're approaching that. But I wouldn't assume that we haven't -- it's a binary thing where we haven't started. It's a part of ongoing investment. David Mulholland: We'll take our next question from Alex Duval from Goldman Sachs. Alexander Duval: Yes. Thank you so much for the question. Firstly, just dovetailing off the last question, I'm very much looking forward to hearing more about the long-term tech strategy on wireless. Just in the short term, you talked about a measure of stabilization there. I wondered if you could give a bit more color as to the extent to which that's driven by the RAN market in your most important geographies versus progress you've made on your product? And then secondly, it was interesting to hear in your prepared remarks about how you will focus on cost control by ongoing steps like digitalization rather than large restructuring programs, wondered if at this point you could talk a bit more about what motivates that shift and the benefits this brings? Justin Hotard: Let me start with the second part, Marco, do you want to talk about that [indiscernible]? Marco Wiren: Yes, absolutely. And what comes to cost savings just like I mentioned in my introduction as well. So thinking is that operational leverage is extremely important for us and continues improvement is something that we want to get in our genes that every entity basically continuously in ways, how can we continuously improve and do things more efficiently and of course, here comes quite naturally in the new technologies, utilizing AI and other digitalization opportunities that you can find, and that's why IT simplification is extremely important in this and securing that we can actually get the benefit out of those different installations of AI that we have and continuously work on the process simplification and find ways how we can make the processes more efficient continuously. And it's not a one-off action. It's something that you have to do continuously. Justin Hotard: Yes. And then in terms of the market outlook, first of all, I think you're pretty clear from what we've been saying that if you think about the AI and cloud market growing rapidly, the CSP market broadly has been quite stable. So as we think about that, when I look at our results, I think stabilizing in MN in terms of our performance being predictable. There's always puts and takes. There's going to be ups and downs in the quarter and varies based on a given customer's volume in 1 quarter. So we'll see a little bit of that. But when you look at the longer-term trends, I think we're feeling better about a stabilizing environment. And then on Cloud and Network Services, as I touched on, we believe that we believe we're growing above market rates at this point. David Mulholland: Thanks, Alex. We'll take our next question from Sami Sarkamies from Danske Bank. Sami Sarkamies: Could you please elaborate on the factors that drove the positive surprise in the third quarter as you had anticipated similar sales and margins as in Q2. And when we think about Q4, you also mentioned a strong order book, but do you have still uncertainties related to timing of deliveries as you chose not to narrow the guidance range down? Marco Wiren: Yes. Thank you, Sami. And what comes to them, if you look at gross margin development and in different businesses, you can see that we had a very good development in Cloud and Network Services. And here, as you understand, this business has been frequently so that you get a big part of the profits in quarter 4. Now this year, we have been working actively to try to actually balance that distribution of profits more equal between the different quarters. But at the same time, you see also that we have increased our gross margins, and there's a few reasons for this. One is, of course, that we've seen a good traction on 5G stand-alone core implementations where we have been very successful in gaining market share. And then, of course, we've been working quite a long time in the CNS as well to clean up the portfolio. And this, of course, giving result as well. And the third point I would say as Wally is that also in our core business CNS has been working heavily to take cost out and make things more efficiently and by that, improving the margin levels. David Mulholland: Do you have a follow-up, Sami? Sami Sarkamies: Maybe a detail question on the 6% exposure to AAN Cloud in the third quarter. I think you mentioned 5% hyperscaler exposure after Q2. These are different metrics, right? Justin Hotard: These are comparable, Sami. So think of the 5% 6% as Q3. David Mulholland: We'll take our next question from Richard Kramer from Arete. Richard Kramer: Justin, when we look at your competitors into the various NI divisions, many of them are point solutions in 1 or another of the field of routing optics are fixed. In the current hyperscaler [indiscernible] are these areas being kept separate? Or do you think that the end-to-end promise we heard about so much from both of the prior CEOs at Nokia is finally being realized at least within NI? Justin Hotard: Well, I think a couple of things on this, Richard. So first of all, for me, clearly, fixed access is its own business and the technology and innovation there is coming out of a few markets. I mean, the largest 1 for us, obviously, is in the U.S., but there's other markets where we're seeing technology and innovation opportunities and so I think that's almost its own trend. And I shared -- obviously, I shared the discussion around the 50 gig PON but this capability that we have to allow you to add new technologies in line in your terminals, we think is a true differentiator. We hear that from customers. The customers using it, believe it gives them value because they can -- they don't have to invest in a complete infrastructure upgrade to overhaul. The key message there is we're competing on the technologies merits itself. And I think if you look at IP switching and certainly in optical networking, I would say the same. We've got a win on the technical merit themselves. I mean we've got very capable customers across our portfolio, AI and cloud as well as piece that want to buy best-of-breed technologies and enable their solutions and execute on their strategies and deliver value to their customers. And our focus has to be on doing the things that add value to them. and where I think there's leverage and synergy for us is being able to see what's happening across these markets and bring greater scale and innovation to them. But I think that for me, the term is an end to end. It's -- you've always got to have best-of-breed products, breast of breed technology, and then you've got to be able to leverage the ecosystem so that you're obviously, you're better together, but it's not something that we do that assume we could have a deficiency in 1 area. That's certainly not how we think about it. Marco Wiren: And just in just sense that, of course, the compatibility is very important. So that's a benefit that we can get compared to competition, which only go with 1 product. And when we come with several products and they are best of breed and customers want to buy those, that those actually work well together. David Mulholland: Did you have a follow-up, Richard? Richard Kramer: Yes. Quick 1, quickly for Marco. We saw a reduction in your forecast restructuring cash outflows from EUR 450 million to EUR 350 million. and an increase of EUR 50 million in gross cost savings. Is this Nokia finally transitioning from what's been a decade-long restructuring to maybe being able to focus more beyond '26 on just growth? Marco Wiren: Yes. I would say that the important thing is that we want to avoid this large-scale restructuring programs going forward and more get this into our DNA as continuous improvement and customer focus and secure that we continuously find ways how we can take out cost in our fixed cost basis and our operations and utilize all the digitalization opportunities that could bring instead of doing this large-scale cost-cutting programs. So that's our focus going forward. David Mulholland: We'll take our next question from Felix Henriksson from Nordea. Felix Henriksson: Good to see Infinera turning positive on operating profit contribution. And I wanted to ask about that, that in light of the progress that you made on integration, do you see the EUR 200 million in run rate operating profit synergies for 2027 as conservative? And are these savings something that you will have to reinvest in the growth in the optical business, kind of what you're doing in the IP side of things? Justin Hotard: Yes, multiple questions in there. So let me sort of answer. First of all, we'll provide a full update at CMD on our view. But I would say, certainly well on track on our commitments as we've talked about on the cost synergies, clearly, with the growth that we're seeing ahead of our expectations on top line synergies. And then I think in terms of investment, what I would say is we'll talk more about that talk more about that in CMD, but we're going to be very disciplined in capital allocation. Obviously, you saw 1 dimension of that with our decision on venture funds this quarter. But this is a place where if we see the opportunity to accelerate or enhance returns, we'll make continued investments. But right now, I think, again, pleased to be on track on the cost synergies and thrilled to be running ahead of expectations on revenue. David Mulholland: We'll take our next question from Rob Sanders from Deutsche Bank. Robert Sanders: I just had a question on mobile networks. This some speculation that the EU will apply pressure on some member countries to accelerate their swap out of Chinese vendors. So I'm just interested in that. And how you think about that given your recent public statements. And then, of course, I just want to talk a bit about OpEx, how you're thinking about OpEx into next year, given you clearly wanted to invest more in these growth areas. Justin Hotard: Yes. So Rob, thanks for that. First of all, I mean, obviously, we're -- we would love to see regulations in the that create the market opportunity you're talking about. And I think it's important from a high-risk vendor standpoint, it's also important from a -- just from a sovereignty perspective in terms of having the largest providers of networks in the West being European. I think that's important. We're optimistic that we would be able to obviously grow and that capture some portion of that market if it was available. Number two, in terms of the OpEx question was really just around operating leverage. I think our -- my push is really specific on this is I want to see us drive operating leverage, something Marco touched on in his comments, but the reason for that is because I want to be able to maximize returns in terms of capturing value from the business we have and then deploy capital in areas where we think we can win, things like incremental R&D if there's demand in the market, things like increasing factory capacity and optics to the extent that we see opportunities there. And it's important, we talk a lot about the fabrication facilities. These are far smaller than you think of a fabrication facility in silicon. And actually, the investment sizes are much smaller. And again, we'll impact more of that for you at CMD. But those are the kinds of things I want to be able to deploy capital into, obviously, incremental sales coverage where we're seeing growth in AI. But I would think of all of this as is driving enhanced returns, not something that's going to -- not going to dilute our performance, and that's key. David Mulholland: We'll take our next question from Andrew Gardiner from Citi. Andrew Gardiner: Thank you, David. I just had 1 on gross profitability, please, both I suppose on the positive side and what you've seen in CNS and then perhaps on the more negative side with mobile networks. We're seeing quite a lot of volatility quarter-to-quarter. CNS clearly driven nicely in 3Q by the mix towards 5G core. Is that mix sustainable? And so high 40s gross margin for CNS is what we should be anticipating? Yes, perhaps with some quarterly fluctuation, but perhaps not to the extent that we've been seeing, right? Can you sustain gross margins around that level? And then similarly, on the other side with mobile, 41% in the prior quarter, down to 35% in the current quarter. Yes, I understand again, software mix has changed, but quite dramatic moves. What do you think is sort of a more normalized level, given the revenue run rate that you're at in mobile? What's a more normalized level of gross margin for MN at this point? Marco Wiren: Yes. Thank you. If I start with the mobile network side, there is variability, and that's why we usually see that mobile networks would be better to look on an annual basis of 4 quarters because you have always some product mix fluctuations. The level of software has a big impact on gross margin and that you see also between quarter 2 and quarter 3, while we see this fluctuation between those quarters where you have more software in quarter 2 and less in quarter 3. And I would say that if you look on a longer-term or annual basis, then you can see the levels of mobile networks, gross margins and get an understanding of where it is and how we are tracking compared to previous year. And then when it comes to I mentioned already a few points there that are what about the reasons for the improved gross margins. And we definitely believe that it is sustainable. And this has been a multiyear journey to get the improvements here in up the portfolio, focus on cost out on the different products that we have. But also we see the market support here. It took for a while before the 5G stand-alone core started to get traction actually from our customer side on CSP side. Now we've seen in the past 18 months that it actually have been quite positive, and we have momentum there. And thanks to our cloud-based solution that we have, we have actually gained market share and been able to improve our market position. David Mulholland: We'll take our next question from Daniel Djurberg from Handelsbanken. Daniel Djurberg: Congrats to strong numbers. I actually would like to continue on that question, I heard the same, more or less. On the mobile networks, the software upgrades on stand-alone seems not to be in tandem, at least with the CNS on the 5D core. So should we expect to have a little bit of an upgrade in the baseband software radio unit software or ahead of us on back stand-alone core now being let down. Marco Wiren: Usually -- I can start and Justin, if you have anything you can add as well. What usually happens is in the new generation is that you first install the hardware basement and radios, and when you see that the demand increases on the customer side, then you actually implement the core as well when you see that actually you need those features that the new generation can offer. And this is exactly the same example here in 5G. In the beginning, the 4G core was still functional quite well and on the early 5G installations. And now when there's more opportunities to slice and done the network, you need actually a 5G stand-alone core to be able to capture those opportunities and offer those services to our customer base. Justin Hotard: I would just add a couple of things. I think we're -- we want to make sure we're clear on the Q2 to Q3 margin impact in is timing because of how we release software in this portfolio, which is we release an upgrade, we then recognize the revenue of those upgrades as they get deployed into customers and they largely customers take their release. And so that's the timing dimension between Q2 and Q3, but also realize that the MN baseband software, which is the majority of the software revenue we have in mobile networks today, is still largely in a legacy, what I would call more legacy appliance model. Cloud and Network Services or our core networks have moved to a cloud model. And that means you have much -- we have more subscription-based pricing. We have more ratable deployment. That means customers will be paying on a recurring revenue basis for an ongoing support and service. So whether it's a subscription-based models there. It's a very different. It's a different business model and that dynamic. Obviously, we think that's the long-term direction of travel in mobile, but that's not where the market is today. Today, our CloudRamp business is fairly small. David Mulholland: Did you have a quick follow-up, Daniel? Daniel Djurberg: Yes, please. Yes, just a question on -- a little bit on your work already in Q2, you commented to unify corporate functions, simplify work, et cetera, and more change culture, but to unlock the operating leverage. And then you've seen quite a large changes, especially when your CTO office. And my question is on the Nokia Bell Labs organization. Should we expect this to be more focusing on AI data center than on the mobile networks and radio access networks ahead given the departure of [indiscernible]? Justin Hotard: Yes. Look, I think for me, a couple of things. First of all, I talked about functional excellence, which was the purpose around the corporate functions. And I think having a leader that is the Chief Technology and AI officer that's focused on technology key areas of our platforms, AI, security, cloud, all of those elements that we're touching on or talking around on this call today is very important. And having someone who's excellent in that but also understands fixed -- our fixed network infrastructure business and mobile infrastructure. And if you look at Palabi's background, she has a career where she's done both across Juniper HPE and then also at Intel. And then the other thing was focused around corporate development, and that was not just out of the strategy organization, but also bringing together some of the corporate development folks we had within the business groups and also within the finance organization. So for me, this is all about around functional excellence and aligning accountability and having cleaner and simple functions. And then obviously, we also moved the digital office or the IT organization into finance, which really ties back to the focus that Mark touched on in his comments around driving ongoing improvement, ongoing productivity and enabling that through digitization, through AI, through simplification around processes. And obviously, IT is an important part of how you both simplify and standardize and realize those benefits. And so we felt like that was a natural alignment. So I think that's the way I would think about it. I think it's important. We have 2 compelling assets in both our network infrastructure business and our mobile portfolios. And we had a CTO that can look across all of that and also make sure that we're thinking about the right long-term investments in Nokia Bell Labs, whether it's from a research or from a near-term innovation standpoint. David Mulholland: We'll take our next question from Emil Immonen from DNB Carnegie. Emil Immonen: Hi, can you hear me? David Mulholland: Yes, we can hear you now. Emil Immonen: So I wanted to maybe ask a little bit on the demand in Europe in general. So on the revenue decline on some parts in NI and also mobile networks in Europe. Do you see that this is more, let's say, structural or would you say that this is temporary in the way that Europe is just not investing right now. How do you see this developing going forward? Justin Hotard: I think in terms of CSPs, I think that I would say telcos, it's stabilizing demand, and we think that's a good thing. Obviously, we talked about the potential of upside in Europe over time if there's regulation that addresses high-risk vendor status. But I think overall, that feels pretty good. And then Look, we're excited about the potential of AI and data center business in Europe. We're certainly excited about the opportunity we -- the partnership we have with Endscale and the opportunity for other companies to invest in Europe. And so we like the trends of what we're seeing. But the reality is the majority of the investment today is happening in the U.S. And so as you look at our revenues and you look at our profile, the demand is coming from the U.S., and I think that's important. So that's how I would net it out. David Mulholland: Did you have a quick follow-up, Emil? Emil Immonen: Yes. Maybe quickly touching on the private wireless side. The customer numbers grow nicely, but you haven't really discussed it at all in terms of revenue or anything. Could you say how is that part of the business going. Marco Wiren: Yes. Just like you said, we've seen a nice increase in number of customers. But remember, we are still in a very early phase of this journey. And even if growth rates are pretty good, but it will take some time before this will be a meaningful business. So it's worth focusing more about that. Justin Hotard: Yes. And I would just add, I think if you look at where we are today, I think Marco has summarized it well. I would tell you that where I see our biggest opportunity is in focused vertical markets vertical market use cases. And so there's some examples in railways, for example, and utilities is the other, right? So if you look at those, those are the places where we've got opportunity. But again, this goes back to that message of focus. David Mulholland: Our next question from Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: Coming back to mobile networks. Your business is going back to moderate organic growth in the third quarter, but to remain close to breakeven rather those days. How do you plan to return to more decent margins in the coming years, maybe not double digit, but maybe high single digit, is it more cost cutting? Is it more to support your revenue with more growth opportunity? And the second question is also linked to mobile. We have heard some comment that the Chinese government could be looking to push the network vendors in Europe outside the Chinese market? Is this something that you already see in your order intake in China? Or is this not something that you see already in your business? Justin Hotard: Yes. Absolutely. I mean, I addressed this a little bit in my comments. I mean, I think on mobile networks, we're absolutely -- 1 of my priorities right now is on improving the returns. And I think we do that in a couple of ways. Continued tight focus and tight engagement with customers. It ties a little bit to the second question you asked, which I'll address in a minute, but tight focused engagement with customers, particularly those customers that want to co-innovate and collaborate with us. because I think differentiation for us longer term comes through innovation and technology leadership. That was historically where the market was. I would say that obviously, if you go back 5 years, the business -- the company's business was in dire straits because we weren't in that case. We've now stabilized the portfolio. But as an industry, and I think certainly as a player in this industry, we need to continue to innovate. So that's as much of a preview as I'll give you to CBD, but I'd encourage you to attend. But I think absolutely, that's the line of where we're headed. And then in terms of China, this is 1 of the places where we were largely not exposed. The revenue in China has come down massively over the last few years. So I -- the reality is it's a fraction of our revenue today, and our market share is fractional in mobile networks in China. It's not a core market for us. So the communications from the government, obviously, we follow those closely. We respect and support their decisions. And the reality for us is we're going to focus on markets where we believe there's significant opportunity and customers where we believe we can collaborate and innovate. And I think there's more opportunity ahead for us. David Mulholland: We'll take our last question from Didier Scemama from Bank of America. Didier Scemama: Thanks, David, a question for Justin really. You've been in the job now for a few months. I just wondered if you could share your thoughts about the direction of the business strategically, especially when it comes to the mobile networks the core activities and also IPR, which are vastly different, I guess, from your day-to-day activities, which presumably are focused on getting those AI and cloud contracts. So that was my first question, and I've got a quick follow-up. Justin Hotard: Sure. So Didier, look, I think probably nothing I haven't shared in my comments. I think we have 2 businesses: network infrastructure, and mobile businesses in the portfolio. I mean, obviously, if you look at the comps, there's 4 major providers of mobile infrastructure. They all have 3 things. They have core networks, they have the radio networks, which was what we call MN and they have IP licensing, which is what we call tech. So I think we've got a pretty clear -- it's pretty clear you need the full portfolio. If you look at the players that have not had the full portfolio they've all struggled to innovate or sustain a foothold. And so I think that's for me, number one. In terms of the difference, look, as I've said before, I think connectivity is going to be an area where performance, reliable and trusted providers are going to be very valuable. And the reality is we have a portfolio that plays across all of those core elements of connectivity. What we're seeing today with AI, and I think the thing that, candidly, we weren't capturing a historical Nokia prior to the Infinera acquisition as much as we could have, was the fact that in our optical and IP businesses, the market -- the technology investment or the technology leadership has shifted to cloud and now AI and cloud. So now we're starting to capture some of that. Like I said, I'm pleased with the progress there. And I think that same -- I think you're going to see those same trends happen and roll into mobile over time. Because ultimately, if you think about some of the compelling uses of AI, autonomous vehicles, robotics, smart glasses, virtual reality, augmented reality. They all need mobile connectivity and I think that will be favorable. But I don't know if the answer I think -- I don't think the answer is going to be doing the same thing we've always done. I think we have to continue to innovate. And that's why I like what we've done in cloud and network services with setting up an autonomous cloud native core stack, and I think there's more opportunity for us ahead in mobile networks. Again, it's going to require the things I talked about: focus, collaboration and co-innovation with customers and an emphasis on best-of-breed technology and strong partnerships. David Mulholland: Did you have a quick follow-up, Didier? Didier Scemama: Yes, completely unrelated on the Nokia Technology side. So I mean, Nokia sold their phone business to Microsoft, what 10 years ago or so. So I just wondered how is the innovation pipeline in the IPR business for the nonstandard essential patents? Is there a risk of a cliff at some point as you're not in the phone business? Or are you confident that you can continue to monetize the SCP and non-SEPs at least at the current level? Justin Hotard: Yes, absolutely. I mean I think this is a good question. So just back to the comment I just made. Again, every player of scale in mobile infrastructure has to -- has a strong IP business, what we call tech with the changes, I didn't touch on this in my earlier comments, but with the changes we made in the CTO office, we've also now really tightly aligned the Standards team into tech. But we see -- one, we see very good , stable revenue in the business. We are -- we've said already, we're starting to invest in 16 gene monetization. That's important for us. And we see other -- we also see other emerging revenue streams in other segments. So I think the business is very healthy. The team is doing an excellent job. They're also doing, I think, probably the best job of any of the businesses right now. And in pushing on operating leverage so that they can continue to deliver the performance they need to. And you'll hear a little more about that in CMD. So that's the last plug I'll make for CMD. But we'll talk about some of that as well there. David Mulholland: Thanks, Justin, Marco, for the comments. Ladies and gentlemen, this concludes today's call. I would like to remind you that during the call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may, therefore, differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Thank you for joining us. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the STMicroelectronics Third Quarter 2025 Earnings Release Conference Call and Live Webcast. I am Myra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead. Jerome Ramel: Thank you, Myra. Thank you, everyone, for joining our third quarter 2025 financial result call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, Creditor and CFO; and Marco Cassis, President, Analog, Power & Discrete, MEMS and Sensor Group and Head of ST Microelectronics Strategy, System Research and Application and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST result to differ materially from management expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to 1 question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chery, ST's President and CEO. Jean-Marc Chery: Thank you, Jerome. Good morning, everyone. And thank you for joining ST for our Q3 2025 earnings conference call. I will start with an overview of the third quarter including business dynamics. I will then hand over to Lorenzo for the detailed financial overview, and we'll then comment on the outlook and conclude before answering your questions. So starting with Q3. We delivered revenues at $3.19 billion $17 million above the midpoint of our business outlook range with higher revenues in Personal Electronics while Automotive and Industrial performed as anticipated, and CCP was broadly in line with expectations. All end markets, but Automotive are now back to year-on-year growth. Gross margin of 33.2% was slightly below the midpoint of our business outlook range, reflecting product mix within Automotive and within Industrial. Excluding impairments, gross recurring charges and other related phase on costs, diluted earnings per share was $0.29. During the quarter, we managed to work down inventories, both in our balance sheet and in distribution and we generated a positive $130 million free cash flow. Let's now discuss our business dynamics during Q3. In Automotive, during the quarter, we grew revenues about 10% sequentially, in line with expectations, driven by all regions, except Americas. Our book-to-bill came above 1. We expect to grow mid-single digits in the fourth quarter compared to the third quarter, which would be the third consecutive quarter of second During the quarter, we continued to execute our strategy for car electrification. We had with both silicon and silicon carbide devices for electrical vehicle applications, such as traction inverter and onboard charger designs. On new application where we see silicon carbide being used is investors for full active suspension. Here, we have a design win with a module solution for our key Chinese electrical vehicle maker. Another key event is a switch to electronic fuses to support the land and domain architectures, both in 12 volts and 48 volts. Here, we added to our pipeline of designs for our IFUs controller with leading electrical vehicle makers and qualified our products for volume ramp up. Other wins in the quarter included microcontrollers for DC/DC management in electrical vehicle powertrain, body control modules and HVAC systems across multiple vehicle models. In car digitalization, we are executing our micro color product road map with a strong lineup of new solutions across both our Airbus Stellar and STM32 product families. Design-in activity continues globally with engagement from both large-scale automotive OEMs and Tier 1 suppliers. In legacy application, we have several significant wins based on our smart power technologies in application where we lead such as airbags, Steele and braking solutions. With our automotive brake sensors, we continue to see strong designing momentum and growing opportunities. Wins in the quarter included MEMS sensors for road noise constellation and door control and both MEMS and imaging sensors for in-cabin monitoring. Shortly after our results announcement in July, we announced that we entered in a definitive transaction agreement for the acquisition of NXP's MEMS sensor business, for a purchase price of up to $950 million in cash, complementing and expanding our current leading MEMS sensor technology and product portfolio. The transaction remains subject to customary closing conditions, including regulatory approvals and is on track to close in H1 2026. In Industrial, revenues were in line with expectations, showing increase of 8% sequentially and 13% year-over-year, back to year-on-year growth for the first time since the third quarter of 2023. Importantly, inventories in distribution further decreased. In Q4, we expect to grow value low single digits sequentially, as we continue to decrease inventories in distribution. During the quarter, we saw strong designing activity for our Power and Analog portfolio across a range of applications. These included factory automation over system medical equipment, motor control, white goods, solar inverters and metering. We also continue to expand the use of our industrial sensors in robotics, including robots and cobots and robots, an area where we see demand for significant number of sensors. We also had wins in medical devices like insulin pumps and full detectors. In Embedded Processing, we continue to win designs with our STM32 microcontrollers for a wide range of industrial applications with products from all parts of the portfolio from high end to wireless to specialized functions. This included power supply and optical modules for AI servers, industry automation and robotics, energy storage, metering and goods. We have a full pipeline of new products and software coming to market in the next quarters, and you will hear more about this during our STM32 summit in November. For general purpose microcontroller, we grew revenues both sequentially and year-on-year and we are on the right trajectory to return to our historical market share of about 20% -- 23%, sorry. For Personal Electronics, third quarter revenues were above our expectations, up 40% sequentially, reflecting the seasonality of our engaged customer programs, but also increased silicon campaigns, which also translated into year-over-year growth. Further strengthening of our unique position as a sensor supplier with both MEMS and optical sensing solutions, we signed a new license agreement with This new agreement broadens our capability to produce advanced meter leveraging ST's 300-millimeter semiconductor and optics manufacturing capabilities. This opened up new opportunities from smartphone application like biometrics, LiDAR and camera acids, robotic, jester recognition and object detection. Revenues for communication equipment and computer peripherals were broadly in line with expectations and up 4% sequentially. For AI data centers, we had multiple wins with silicon and silicon carbide devices for high-power solution. Although last quarter, we announced that we are working closely with NVIDIA, a new architecture for 800-volt DC AI data center, leveraging our power By combining silicon care, guided nitride and silicon-based technologies with advanced custom design at both chip and package level. I am pleased to underline that we recently completed the full power testing on a prototype social successfully demonstrating over 98% efficiency. Silicon photonics is another key technology for future data center and AI factories. ST now has the collaborative R&D programs across the full value chain with key suppliers and customers to develop high-speed optical solutions for data center, AI, telecommunication and automotive, from the substrate to the final product. During Q3, we have seen an increased demand for photonics IC prototypes to be launched in the next quarter and beyond in our 300-millimeter wafer fab. This confirms that photonic ICs will be a revenue growth driver for ST in the detail. In low earth orbit satellites. We have further strengthened our leadership position in the rapidly growing low broadband market by beginning shipment to a second global customer, leveraging our combination of biosimilars technology for front-end modules and paddle level packaging for user terminals. Our business in this segment is well positioned for steady growth delivered by several satellite constellations. Now over to Lorenzo, who will present our key financial figures. Lorenzo Grandi: Thank you, Jean-Marc, and good morning, everyone. Let's start with a detailed review of the third quarter, starting with the revenues on a year-over-year basis. By reportable segment, Analog Products, MEMS and Sensors was up 7.0%, mainly due to imaging. Power & Discrete products decreased 34.3%. Embedded Processing revenues grew 8.7%, mainly due to general Marconi. RF and optical communication declined 3.4%. By end market, Industrial increased by about 13%; Personal Electronic by about 11%; Communication Equipment and Computer Peripheral by about 7%. Automotive was still decreasing by about 70% and by showing some improvement in respect to the 24% decline recorded in the second quarter. Year-over-year sales to OEMs decreased 5.1% while revenues from distribution increased 7.6% back to year-over-year growth for the first time since the third quarter 2023. On a sequential basis, Power & Discrete was the only segment to decrease by 4.3%. All the other segment grew led by analog products, MEMS and sensor up 26.6% with Embedded Processing up 15.3% and RF and Optical Communication, up 2.4%. All our end markets grew, led by Personal Electronics, up by about 40%, followed by Automotive, up by about 10%. With Industrial and Communication Equipment and Computer and Peripheral up, respectively, by about 8% and 4%. Turning now on profitability. Gross profit in the third quarter was $1.06 billion, decreasing 13.7% on a year-over-year basis. Gross margin was 33.2%, decreasing 460 basis points on a year-over-year, mainly due to lower manufacturing efficiencies, negative currency effect lower level of capacity reservation fees and to a lesser extent, the combination of sales price and product mix. Total net operating expenses excluding restructuring, amounted to $842 million in the third quarter, broadly stable on a year-over-year. They were better than expected. Preferably, notably our continued cost discipline with the first benefits of the resizing of our global cost base. For the fourth quarter of 2025, we expect to stand at about $950 million, increasing quarter-on-quarter due notably to calendar base effect. This will lead the net OpEx for the full year 2025 to decline by 2.5% compared to 2024 despite unfavorable currency effect. As a reminder, these amounts are net of other income and expenses and exclude restructuring. In the third quarter, we reported $180 million operating income, which included $37 million for impairment restructuring charges and other related phase-out costs. This reflects impairment of assets and the restructuring charges predominantly associated with the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding this not recurring item, which is partially not cash, Q3, non-U.S. GAAP operating margin was 6.8%, with Analog Products, MEMS and Sensor at 15.4%. Power & Discrete at minus 15.6%. Embedded Processing at 16.5%, and the RF Optical Communication at 16.6%. This quarter, to 2025, the net income was $237 million compared to $351 million in the year ago quarter. Diluted earnings per share were $0.26 compared to $0.37. Excluding the previously mentioned nonrecurring items, non-U.S. GAAP net income and diluted earnings per share were respectively, $267 million and $0.29. Net cash from operating activity decreased 24.1% on a year-over-year basis in the third quarter to $549 million. Third quarter net CapEx was $401 million compared to the $565 million in Q3 2024. Free cash flow was a positive $130 million in the third quarter compared to the $136 million in the year ago quarter. Inventory, at the end of the third quarter, was $3.17 billion, a reduction of about $100 million compared to the end of the second quarter. These sales of inventory at the quarter end were 135 days, slightly better than our expectation and compared to 166 days for the previous quarter and 130 days in the year ago quarter. Cash dividends paid to stockholders in the third quarter totaled $81 million. In addition, ST executed share buybacks of $91 million. ST maintained its financial strength with a net financial position that remained solid at $2.61 billion as of the end of September 2025, reflecting total liquidity of $4.78 billion and total financial debt of $2.17 billion. It is worth to mention that in the course of the third quarter, we repaid fully in cash, $750 million for the first tranche of our 2020 convertible bond. Now back to Jean-Marc, who will comment on our outlook. Jean-Marc Chery: Thank you, Lorenzo. Let's move to our business outlook for Q4 2025. So we are expecting revenues at $3.28 billion, an increase of 2.9% sequentially, plus or minus 350 basis points. We expect our gross margin to be about 35%, plus or minus 200 basis points, including about 290 basis points of unused capacity charges. This business outlook does not include any impact for potential further changes to global trade tariffs compared to the current situation. The midpoint of this outlook translates in full year 2025 revenues of about $11.75 million. This represents a 22.4% growth in the second half compared to the first half, confirming signs of market recovery. Gross margin for the full year is expected to be about 33.8%. Finally, to optimize our investments in the current market conditions, we have reduced our net CapEx plan, now slightly below $2 billion for full year 2025 compared to a range of $2 billion to $2.3 billion previously. To conclude, in the fourth quarter, we expect to report further sequential revenue improvement. With revenues now broadly stabilized on a year-over-year basis as well as an increased gross margin while continuing to decrease inventories in distribution. We are on the right path to improve our gross margin in the medium term through the reduction of unused capacity charges, the reshaping of our manufacturing footprint and definitively our product mix improvement. In a context marked by signs of market recovery, our strategic priorities remain clear, accelerating innovation executing our copay program to reshape our manufacturing footprint and resize of our global cost base, which remain on schedule to deliver the targeted savings, and strengthening free cash flow generation. Thank you, and we are now ready to answer your questions. Operator: [Operator Instructions] The first question comes from the line of Francois Bouvignies from UBS. Francois-Xavier Bouvignies: My first question is on the top line. I mean, you guided plus 3% quarter-on-quarter, 2.9% to be precise. It seems to be below your seasonal at plus 7% quarter-on-quarter, if I'm not wrong. I mean you can remind us maybe the seasonality. Can you explain us as to why you are a bit below seasonal in Q4 for the top line and the drivers? And then secondly, on the gross margin, I mean, it's nice to see this improvement of 180 basis points quarter-on-quarter, how sustainable it is this gross margin? I mean, if you have any seasonality, product mix, should we extrapolate this dynamic of 35% into the first half of '26? Just trying to understand the work you have done on gross margin, how sustainable it is at least in the first half of '26 would be great. Jean-Marc Chery: So we'll take the revenue seasonality and Lorenzo, the gross margin. No, on the revenue seasonality of Q4, basically, there is 2 effects. The first effect is on automotive. Because in automotive, even if we will grow on a quarter-over-quarter, but year-on-year, it is still minus 12%. And why? Because, okay, 80% of this performance gap is explained by 2 reasons. It is a decrease of our capacity reservation fees compared to last year. And you know it is overall volume of one important customer of ST in the field of electrical vehicle. So this is what is explaining why in Q4, we are below the seasonality. The second explanation to be below the seasonality in Q4 is because in Industrial, we continue to decrease inventory in distribution. So our POP revenue recognition is significantly below the POS. However, on the other, let's say, verticals like Personal Electronics, Communication Equipment, Computer Peripheral and other legacy on Automotive or Industrial in the field of power, energy; basically, okay, we are at the seasonality we expect. Lorenzo Grandi: About gross margin. In Q4, the gross margin, the main positive driver, let's say, when we look at the sequential increase of our gross margin moving from the result of Q3 and the expectation of Q4 is clearly improved manufacturing efficiency. That is -- if you remember, let's say, in the first half and also in Q3, we were impacted by a significant negative impact on the efficiency -- manufacturing efficiencies that was due to the very low level of production that we have, especially in the first half of the year. There is also some improvement in terms of new charges. When we look, let's say, to how we will move moving in the first half of next year, but we have to remind that clearly, there are negative effect that we will impact moving forward. One effect is related to the fact that there will be some reduction entering 2026 of capacity reservation fees. And definitely, you know that in the first half of the year, there is some seasonality in terms of our revenues, let's say, in respect to the second part of the year. And then don't forget that there is also the negotiation of the pricing that will impact even if we see to a significant drop. We think that it will be something in the range of low single digit, mid-single-digit decline. On the positive side, we will have, let's say, still continued positive impact on manufacturing and reduce -- continue to reduce level of saturation. At this stage, it's a little bit to difficult to size, let's say, the level of gross margin because it will depend also on the level of the revenues. But this is directionally the trend that we will have moving -- entering in the next year. Operator: The next question comes from the line of Joshua Buchalter from TD Cowen. Joshua Buchalter: Maybe to follow up on that last one. Could you maybe spend a couple of minutes talking about how you're thinking about managing utilization rates right now? It seems like you're taking things back up. Are you at the point where you feel comfortable building a little bit of inventory downstream and/or on your balance sheet given the comments. You mentioned you're going into some negative seasonality into 1Q, but it sounds like utilization rates are going to be up in the fourth quarter and the first quarter. Could you maybe just spend a couple of minutes talking about what you're seeing there? Lorenzo Grandi: Now for the inventory, clearly, let's say, as you have seen, we try to keep control on the level of inventory in the current quarter, we think to stay substantially stable in number of days. This is our expectation in respect to Q3. But the positive point is that entering in the next year, clearly, let's say, as I said, there is our seasonality, the normal seasonality that means that, in general, the inventory in the first half of the year is a little bit higher also in number of days in respect to the second part of the year. Then you have to consider that entering next year, let's say, we start to have some decrease in terms of overall capacity, linked to the fact that we started to have some benefit coming from our reshaping of the manufacturing infrastructure. This will somehow mitigate the level of unused moving in 2026. This is, let's say, one of the drivers that we see in terms of progressively improve in terms of the utilization rate, together, of course, with some growth in Joshua Buchalter: I was hoping to ask about the Industrial segment. So it looks like book-to-bill went back to parity. Anything major going on there? Any geographies that are better or worse? And maybe how would you categorize the health of the general purpose microcontroller business underneath there? Basically, should we assume sort of shipping back to normal now? Jean-Marc Chery: No. In industrial, we see a different dynamic when we grow on some segments. We see a growth and dynamic more pronounced for power energy, basically all subsegments, okay, of this one are growing. And it is growing more definitively than the smart industrial, it means the factory automation. We can say that robotics is so far good, but overall, the factory automation is really, really soft. More than all the industrial, which are volume-driven, means consumer-driven, the hub cycle is pretty soft. So the takeaway we can have on the Industrial is what is related power energy infrastructure and robotics is now upcycle pretty solid. What is related volume and consumer is a very soft upcycle. It looks like inventory are digested, but the visibility is pretty short, it's pretty low. So that's the reason why the customers are still putting order on short term. But here, our decision is to continue to manage the distribution very closely and continue to adjust our POP below their POS forecast to continue to decrease inventory. Inventory and general purpose microcontroller came back what we classified normal, means a level of months of inventory that enable short-term business. Well, we have still some pockets of other inventory on some specific products like Power & Discrete or sometimes general purpose microcontroller, but we are going in the right direction. So this is a dynamic, okay, we are seeing on the industrial market. Operator: The next question comes from Tristan Gerra from Baird.. Tristan Gerra: I wanted to see how linear is the reduction in capacity reservation fees that you expect in '26 from the $150 million, $200 million reduction that you're looking at for this year. Is there a big drop in Q1? Or is it going to be pretty linear throughout all of next year? Lorenzo Grandi: In terms of capacity reservation fees, it works in this way, let's say, substantially, the capacity reservation fees that are ruled by contract with the carmakers quite constant over year the in term of million dollars. But yes, you can have a little bit higher, a little bit lower during the various quarter of the year, but they are not linearly going down. Let's say, they are substantially quite flattish, I would say, quarter after quarter. Clearly, when the contract expires, that is, at the end, for instance, of 2025, many of these contracts are expiring. But then, yes, you have a decline. And then the decline remains the level that you get in the first quarter will remain substantially similar all over the other quarters. So this is the way that it works. So what we will see in Q1 will be this reduction? And then that after that, we will stay stable, more or less stable during the course of 2026 at the level of capacity reservation. Tristan Gerra: Just a quick follow-up. Of course, it's going to depend on end demand, but any sense of -- or when you think POP can get back in line with point of sales in Industrial next year? Jean-Marc Chery: Globally, POP will be aligned with the POS each time our product line reach the target of inventory, we didn't want to exceed. This is okay, a lesson we learned from the past. And now, we are really disciplined on this point. So you cannot see the POP overall. We have to look the POP in detail by product line. And I repeat our microcontroller is pretty well aligned. So our POP is really driven by the end demand POS and by region, I have to say. While China, APAC, America are pretty okay, but Europe is still soft. And for the other product line, okay, we are still in a mode where the POP is below the POS; however, we expect to go back normal in H1 2026, most likely Q2. Operator: Next question comes from Stephane Houri from ODDO BHF. Stephane Houri: Yes. I have a first question about the CapEx budget because you're adjusting downward the CapEx for the end of this year. I guess this is in the course of managing your capacity by the end of the year and so an expectation of 2026. But what are you reducing at the moment? And how do you look at 2026 in terms of CapEx at the moment where you're transforming your tool from 200-millimeter to 300-millimeter? Jean-Marc Chery: We reduced the CapEx. In fact, there is 2 dynamics. There is a dynamic driven by where you know we want to close the 200-millimeter, so And of course, okay, we need to put the CapEx to increase the capacity at the right level in 300 and in coal 200. But here, we have not especially limited the dynamic because the demand is pretty solid. But then the other main important action is the CapEx for 200-millimeter conversion on silicon carbide because we will close the 150-millimeter. But here, we have limited the CapEx delivered by the demand, which is below what was -- we expected 1 year ago. So the main impact of the capacity limitation is on, let's say, silicon carbide. But then after it's more spread across test assembly, where we clearly adjust the capacity of what we need and no more. And generally speaking, is more adaptation to mix rather than volume increase. Stephane Houri: Just to ask you, with the Nexperia situation, you do receive phone calls or kind of rush orders from your customer? Or you see nothing for the moment? Jean-Marc Chery: No, I mean, we are sure that the carmaker and the Tier 1 of the automotive industry have clearly taken the lesson of the previous shorter period, and they have enabled many source to prevent such issues. And of course, okay, as the other semiconductor player, STMicro is part of this process. More than that, I have no comment. Operator: Next question comes from Didier Scemama from Bank of America. Didier Scemama: I have first question maybe on your inventory and related to that. on what you're thinking about in terms of factory loadings for the first half, I think, one of your U.S. peer already announced last week or earlier this week that they would reduce factory loadings to reduce inventory, especially in the context of a shallow recovery? So I think it looks like your inventory are tracking about 30, 40, 50 days above where they used to be. So are you thinking about taking down further factory utilization in the first half, I guess. Lorenzo Grandi: In terms of inventory, I would say that, yes, you're right, it's a little bit higher in respect to what was our historical ending of the year, that is a little bit higher. But at the end, I think that when we look next year, I think the dynamic of our -- we will continue to keep under controlling that. The dynamic of the inventory will, let's say, be, as usual, a little bit increasing during the first half of the year to go back and to decrease in the second part of the year. In terms of that, let's say, unloading factory utilization I think that moving in 2026, there will be an improvement. Notwithstanding, we will continue to keep the control our inventory. This improvement that I was saying before is due to the fact that we do expect some, let's say, increase in terms of our revenues, so looking at the evolution of the market. And the other element is that we start to, let's say, reduce capacity in some of our fabs. The one that we aim, let's say, to progressively close in the course of the -- by the end of 2027. So we will start, of course, to move out some equipment, and this will reduce the capacity, and this will reduce the level of unused then. Didier Scemama: Got it. And then I think last quarter, you said that the gross margins were impacted by, if I remember correctly, roughly 70 basis points of the 140, at 70 basis points of FX headwinds on and 70 basis points of related basically the manufacturing transition from 6 to 8 and 8 to 12. Is there any of that in Q4? Lorenzo Grandi: No, no. Let's say, moving from Q2 to Q3, let's say, the FX was overall an impact of 140 basis points. Q2, Q3, let's say, related to the combination of these 2 effects, but very different. Let's say, something in the range of 120 basis points was the FX and around 20 basis points was the impact of these extra costs, let's say, related to our programs. Now, let's say, in this quarter, clearly, the FX is a minor impact. This is quite stable. It's a little bit negative because we moved from 114 to 115 is ranging in the range of 20 basis points negative impact. It's not so material, while these extra costs related to the activity to reduce the capacity and to start to move products from one side to the other is impacting our gross margin expected for Q4 between 30 to 40 basis points. This is -- so the turnkey impacted by something ranging between 30 to 40 basis points of extra cost. Didier Scemama: Understood. And just a clarification, because it wasn't clear, your OpEx guide for Q4 is 915, right? It's not 950? Lorenzo Grandi: No, no. It's 915. And this is driven by the fact that we have a negative calendar days impact for 2 reasons. The calendar is longer. And the vacation in Europe is, let's say, less than what we benefit in the course of the previous quarter. On the other side, we will continue with our, let's say program to reduce account in expenses, and this will bring us some benefit. Operator: The next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: My question is regarding the trends into the first quarter. I mean, you normally have a weaker first quarter. And thus would you expect the utilization rate to go down? And given all the other factors you've talked about in the earlier factors, which are there, there is a downtick associated with the capacity reservation fees. Should we expect that your gross margin in the first half of the year to be weaker than where it is at the moment? And I have a quick follow-up after that. Lorenzo Grandi: Yes. In terms of gross margin, it's true that in the first half, the seasonality is not favorable. And yes, there are the lower capacity reservation fees. On the other side, in respect to where we stand today, our expectation is that the level of a new budget will decrease. The decrease is not due to the fact that we aim to increase our inventory. There is some seasonality in our inventory, but the decrease, as I was trying to explain before, it's mainly driven by the fact that we start to reduce the capacity. So it means that we will start to some transfer of equipment. And this or, let's say, not utilization of equipment due to the fact that we progressively in some fab, we started to reduce the capacity aimed, at the end, let's say, to move to close the spec. So we will start, and this will progressively impact our capacity and, for some extent, our unused capacity. Sandeep Deshpande: I mean, a follow-up to that essentially -- quickly on that would be, is the number of days in Q1 [Technical Difficulty] you have any new engaged programs with your customers, which will improve revenue significantly either in first half or into the second half, particularly? Lorenzo Grandi: No, I confirm, Sandeep, that in Q1, Q1 will be shorter in terms of number of days, than Q4, Q4 is longer in terms of days than normal 91. And the calendar next year, Q1 will be shorter than the normal 91. It's a little bit the same trend that we have seen this year, let's say, in terms of calendar. So yes, I confirm that there is a shorter calendar in Q1. Jean-Marc Chery: Well, first of all, okay, about next year 2026, Q1. With the current visibility, we have for the loading of the backlog we have seen in Q3 and we are seeing today. But we don't see a specific reason why we will not be at the usual seasonality of Q1 revenue versus Q4. This is generally speaking, really slightly above minus 10%. Well, then moving forward, of course, we will -- but it's depends on the market dynamic. But I would like to say that for 2026 Well, first of all, okay, in the second half, we will clearly see the normalization of inventory everywhere. We really expect that in H2 2026, we will have no other inventory, point number one. Point number two, next year compared to 2025, the silicon carbide will be a year of growth because 2025 is a year of transition where basically, okay, we have cumulative headwinds related to one specific customer, some program not going at the expected speed in Europe. And you know we are not specially still present in China. But next year will be a -- but then after we have our exposure to fast-growing segment. Clearly, that already give us a sign of growth like ADAS with our main customers that already provided some let's classify upside and MEMS as well. And definitively, one point is our increasing content in terms of value and silicon in our main customer. So all in all, we do believe that Q1, we have no sign that the seasonality will be impacted by other factors that we do not control. And in H2, we will be as well as the usual seasonality of growth H2 versus H1. Do we grow more like here because this year, we grow at 23% and the usual seasonality, 15% H2 versus H1. Well, here, we need to have a little bit more booking in Q1 and in Q2 to confirm. So my takeaway is, yes, we will have, let's say, idiosyncratic growth driver on top of the, let's say, up cycle of the market that we are seeing today even if this up-cycle market of automotive and industrial should be classified at this stage, soft, okay? And with subsegment pretty dynamic like the one related to infrastructure. Operator: The next question comes from the line of Janardan Menon from Jefferies. Janardan Menon: I just wanted to go back -- go to the Power & Discrete business where your margins are still very weak at minus 15% in the third quarter. So what can be the drivers to improve that? You talked about silicon carbide improving in Q3 -- I'm sorry, in 2026. But would that revenue come mainly from your Sanan JV to Chinese customers? And will that help your overall profitability given low utilizations in Europe? And do you need to take any further action to try and improve the profitability there Power & Discrete, given the kind of competitive environment in that industry? And then my follow-up is just a small clarification on a previous answer. Your 30 to 40 basis points of manufacturing inefficiency from the conversion and shutting down, et cetera, does that continue until you reach the end of that journey, which is when you fully close down your 200-millimeter transition to 300 millimeter? Or does that drop off before that? Jean-Marc Chery: So Lorenzo will comment about the improvement driver on Power & Discrete profitability. While Marco will comment on the dynamic of Power & Discrete revenue because as I have already anticipated, in my last answer, clearly, silicon carbide for us in '25 is a transition period. And Lorenzo, on Lorenzo Grandi: Yes, I can take it. Clearly, well, I will let Marco to explain what are the drivers. But at the end, let's say, clearly next year, we do expect a recovery in terms of the top line that is this year, we were impacted by a significant inefficiency in our manufacturing environment for the Power & Discrete in general and for the silicon carbide, in particular, due to the fact that we were working a very old level of saturation for these steps. Clearly, there are the following drivers that we expect to recover in term of profitability. Having a higher level of revenues clearly will help to better load our infrastructure. Then don't forget that silicon carbide, it will be the first to move, let's say, in the course of next year from the 6-inch to the 200-millimeter to the 8-inch, and this will bring clearly, let's say, some positive in the medium term in terms of profitability. Moving up in terms of revenues will improve significantly our expense to sales ratio that today clearly has been impacted by the fact that revenue are quite depressed. So at the end, these are the main drivers that we see together with the fact that we are improving, and we are moving to the next generation of silicon carbide that give also some benefit in terms of performance for what concerns, let's say, the profitability. Before to give the -- to pass to Marco, I just clarify the point of this extra 30 basis points on gross margin. Yes, this is mainly related to the duplication of mask related to the, let's say, qualification of processes. But this will continue, the amount will be more or less this range over, for sure, the next part of 2026 and probably also in the second part because we will continue with this program. This will be probably peaking in the first half 2026 then it will go down. But yes, this is something that we need to expect to have -- as we have this activity, let's say, to migrate our products from one fab that is going to be close to another fab. Marco Cassis: Okay. So we take on the dynamics. So we'll have basically 2 dynamics in 2026 that will help to start to grow. First of all, well, as Jean-Marc said, during the first half of 2026, we will keep reducing and will be clean in terms of inventory in Power & Discrete; here, speaking mainly about the noncedarbide portion. And this will allow the market dynamics next year to restart having year-over-year growth. Specifically, on season carbide as Jean-Marc has already anticipated, 2025 is a transition year, meaning is that we are experiencing lower volumes and inventory collection from our main customers. I would like to underline, this is happening while we still are maintaining stable our commercial contractual level of market share. This is happening since the beginning of 2025. And during 2025, we are -- this dynamic is not yet offset by Europe and China. So there is yet no strong contribution from the rectification programs in Europe and China. During the next year, we will start seeing growth in these 2 regions that will help the 2026 overall growth of the silicon carbide versus 2025. I hope that this answers your question. Jerome Ramel: Thank you, everyone. This is ending our call for this quarter. So thank you for being us today, and we remain here at your disposal should you need any follow-up questions. Sorry for the one that you don't have time to ask a question there. Thank you very much. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Thank you for standing by, and welcome the Lloyds Banking Group 2023 (sic) [ 2025 ] Q3 Interim Management Statement Call. [Operator Instructions] Please note, this call is scheduled for 1 hour and is being recorded. I will now hand over to William Chalmers. Please go ahead. William Leon Chalmers: Thank you, operator, and good morning, everyone. Thank you for joining our Q3 results call. As usual, I'll run through the group's financial performance before we then open the line for Q&A. Let me start with an overview of our key messages on Slide 2. We continue to make great progress on our strategy. In doing so, we are creating value for our customers and wider stakeholders through improved propositions, targeted growth and enhanced operating leverage. In Q3, we delivered a robust financial performance, supported by healthy growth across the business, driving continued income momentum. We maintained our cost discipline and strong asset quality, reflecting stable credit performance in the period. Taken together, this is driving strong capital generation. As you know, in the third quarter, we've taken an GBP 800 million additional charge relating to the FCA consultation process on motor commissions. Clearly, we are disappointed by this outcome, and I'll talk more about it later in the presentation. Accordingly, we've revised our 2025 guidance to reflect the motor provision. Excluding the charge, we are beating our prior targets. We remain highly confident in our 2026 guidance. Before turning to our financials, a brief update on 2 important strategic developments. Firstly, I'm delighted to say that we have completed the full acquisition of Schroders Personal Wealth to be renamed Lloyd 12. This is an exciting step forward for both our customers and shareholders. who will deliver full control of a market-leading wealth management business that has GBP 17 billion of assets under administration, more than 300 advisers and 60,000 clients. Embedding Lloyd's Wealth into the broader group will advance our end-to-end wealth ambitions, delivering clear benefits and proposition and journey for our customers. Secondly, we've taken significant steps forward in our digital asset strategy. Earlier in the year, we partnered with Aberdeen Investment to deliver a U.K.-first FX derivatives trade collateralized with tokenized digital assets. Alongside, we're co-chair and the U.K. finance project to deliver GB tokenized deposits. Retail and commercial pilot use cases in programmable digital money are due to deliver in H1 of next year. These developments will ultimately drive material customer opportunity and maintain our commercial leadership. We look forward to elaborating on this alongside other areas of our technology, digital and AI strategy in an investor seminar on the 6th of November. Let me now turn to the financials on Slide 4. The group demonstrated a robust financial performance during the first 9 months of the year. Year-to-date, statutory profit after tax was GBP 3.3 billion with a return on tangible equity of 11.9%. Excluding the motor provision, return on tangible equity was 14.6%. Looking at the full year, we now expect RoTE to be around 12% or around 14%, excluding motor. We are pleased with the group's continued income momentum. In the first 9 months, net income of GBP 13.6 billion was 6% higher than the prior year. This was driven by further growth in net interest income, alongside a 9% year-on-year rise in other operating income, led by customer activity and strategic investment. Within the quarter, net income was up 3% versus Q2. This was supported by a net interest margin of 3.06% and in line with our expectations for a gradual increase, again, alongside ongoing OOI growth. Looking forward, we now expect net interest income for the full year to be circa GBP 13.6 billion slightly ahead of our previous guidance. We remain committed to efficiency. Year-to-date operating costs of GBP 7.2 billion were up 3% year-on-year, in line with our expectations for this stage. Credit performance meanwhile remains strong. year-to-date impairment charge of GBP 68 million equates to an asset quality ratio of 18 basis points. Given our performance to date, we are upgrading full year guidance on the asset quality ratio to circa 20 basis points. Meanwhile, tangible net assets per share increased to 55, up 2.6p in the year-to-date and 0.5p in the quarter. Our performance delivered strong capital generation of 110 basis points year-to-date or 141 basis points, excluding motor. Our losing CET1 ratio is 13.8%. I'll now turn to Slide 5 to look at developments in our customer franchise. We have seen good growth across both the lending and the deposit franchises so far this year. Group lending balances of GBP 477 billion are up GBP 18 billion or 4% year-to-date. Focusing on Q3, lending is up GBP 6 billion or 1% versus Q2. Within this, retail lending grew GBP 5.1 billion. This was driven by an increase in the mortgage book of just over GBP 3 billion, reflecting both market growth and a completion share that remains at around 19%. So far, we are seeing no sign of a slowdown in mortgage applications ahead of the budget in November. Elsewhere in the retail business, we saw continued growth across each of our cards, loans and motor businesses as well as growth in European retail. Commercial lending balances meanwhile, are up by GBP 1.3 billion in Q3. As has been the case throughout the year, we saw growth in CIB across our targeted sectors, including in institutional balances. In BCB, balances were broadly stable with new lending in mid-corporates, offsetting the net repayments of government-backed facilities. Turning to liability franchise. Year-to-date deposits have grown GBP 14 billion or 3%. In Q3, we also saw a good performance, up GBP 2.8 billion quarter-on-quarter. Within retail, PCAs grew by GBP 1.2 billion, driven by income growth, subdued spend and lower churn during the quarter. Alongside the reduction in savings balances of GBP 0.9 billion, was largely due to some fixed rate savings outflows following our post ISA season pricing decisions. Commercial deposits are up by GBP 2.4 billion in Q3, driven by growth in targeted sectors across both CIB and BCB. Pleasingly, NIBCA balances were up in the quarter. Alongside deposit developments, we continue to see steady AUA growth in insurance, pensions and investments, with circa GBP 3.3 billion of open book net new money year-to-date. Let me turn to net interest income on Slide 6. Year-to-date and in Q3, we are seeing sustained growth in net interest income. And for the first 9 months was up 6% year-on-year to GBP 10.1 billion. This included GBP 3.5 billion in Q3, up 3% quarter-on-quarter. Income growth continues to be supported by positive momentum in the net interest margin. The Q3 margin of 306 basis points was up 2 basis points on Q2, driven by a growing structural hedge tailwind. Net interest income was further supported by average interest earning assets of GBP 466 billion in Q3, up GBP 5.5 billion versus Q2. The increase was driven by sustained lending growth, particularly in the mortgage book. Looking ahead, we now expect net interest income for 2025 to be around GBP 13.6 billion. This incorporates the healthy volume developments we have seen alongside a slightly more supportive rate environment. We remain very confident in the trajectory for net interest income growth. Let's turn to other income on Slide 7. We continue to demonstrate strong and broad-based momentum in other income. Indeed, our diversified franchise has supported consistent high single-digit growth over the last 3 years. Year-to-date OOI is GBP 4.5 billion, up 9% year-on-year. In the third quarter, OOI was GBP 1.6 billion, up 3% versus Q2. This was particularly driven by growth in motor and LPG investments. It also represents a good performance in protection, boosted by improving mortgage take-up rates. Other income growth continues to be supported by investment and strategic progress across the business. I spoke earlier about 2 specific areas of delivery, the slide shows a number of other proof points to testify to our progress, including, for example, the launch of the Lloyd's Ultra card in retail as well as further scaling of capabilities in our commercial franchise. Looking forward, the full acquisition of Schroders Personal Wealth will further support OI growth. We see an opportunity to meaningfully grow the business in the coming years as part of our integrated wealth proposition. Briefly turning to operating lease depreciation. The Q3 charge of GBP 365 million was up slightly, in line with growth in the fleet, driving other income. Moving to costs on Slide 8. The group continues to maintain strong cost discipline. Year-to-date operating costs of GBP 7.2 billion are up 3% on the prior year, in line with our full year expectations. Excluding growth in severance, operating costs are up 2%. Business growth and inflationary pressures continue to be mitigated by savings driven by strategic investment. Within the third quarter, costs of GBP 2.3 billion are down 1% compared to Q2. This is partly helped by investment timing. And looking forward, Q4 will see higher operating costs due to the usual seasonal factors and added costs from the full acquisition of SPW. We will meet our GBP 9.7 billion full year guidance, excluding these additional SPW costs or modestly above this, including them. Remediation was GBP 875 million in the quarter. This reflects low levels of non-motorbased charges alongside the GBP 800 million incremental motor finance provision. I'll now spend a moment on that on Slide 9. The additional GBP 800 million provision for the potential motor commission remediation costs takes our total provision to GBP 1.95 billion. The recent FCA proposals are subject to consultation and so the final outcome differs. However, as it stands today, they represent an outcome that is at the adverse end of our previously modeled expectations. Based on the proposals, there are a high number of cases determined to be unfair. Resumptions a unfairness do not apply the legal clarity provided by the recent Supreme Court judgment. And the address calculation is less linked to harm than it should be. We will, of course, be making representations to the FDA on our points of concern, and we look forward to engaging in a constructive dialogue. Our total provision of GBP 1.95 billion still using scenario-based methodology includes both redress and operational costs. It represents our best estimate of the potential impact of this issue. Moving on to asset quality on Slide 10. Asset quality remains strong. Neutral arrears are low and stable across our portfolios. Early warning indicators also remain benign and again, very stable. The year-to-date impairment charge is GBP 618 million equivalent to an asset quality ratio of 18 basis points. The charge of GBP 176 million in the third quarter represents an asset quality ratio of 15 basis points. This is the result of a low underlying charge, reflecting our prime customers, a prudent approach to risk and stable macro conditions as well as some one-off model benefits. It also incorporates a small MES charge of GBP 36 million in the quarter. Our stock of ECL on the balance sheet meanwhile, is GBP 3.5 billion, which remains around GBP 400 million above our base case expectations. Given the strong performance year-to-date, we now expect the asset quality ratio for the full year to be circa 20 basis points. Let me turn to our returns and tangible equity on Slide 11. Lloyd Group delivered a return on tangible equity of 11.9% year-to-date or 14.6%, excluding the motor provision. This benefits from strong business performance, cost control and low impairments. Below the line volatility and other items were GBP 157 million in the 9 months or GBP 109 million in Q3. The third quarter charge driven by negative insurance volatility and market developments and the usual fair value unwind. Tangible net assets per share at 55p are up 2.6p since year-end. This continues to be driven by profit build and the unwind of the cash flow hedge reserve partly offset by shareholder distributions. Looking ahead, we expect material TNAV per share growth in both the short term and in the medium term. Including the motor charge, return on tangible equity for the year is now affected at around 12%. Excluding Motor, the RoTE is expected to around 14% and upgrade versus prior guidance. Turning now to capital generation on Slide 12. Our business performance has driven strong capital generation in the year-to-date. Within this, total RWAs ended the quarter at GBP 232 million, up GBP 7.7 billion year-to-date and GBP 0.9 billion in the third quarter. This increase reflects strength in lending, partly offset by optimization activity. Q3 also saw the full reversal of the remaining GBP 1.2 billion of temporary RWAs that we have previously highlighted. Note that while we've taken no new additions for CRD 4 secured risk weightings in the year so far, we do expect to do so in the full quarter. Year-to-date, our strong banking profitability has driven capital generation of 110 basis points in the first 9 months or 141 basis points, excluding motor. Expected full year capital generation is now circa 145 basis points or circa 175, excluding Motor. Our closing CET1 ratio is 13.5%. This is after a 74 basis point accrual for the ordinary dividend. We still expect to pay down to around 13% by the end of 2026, with this year a staging post towards that target. I'll now wrap up on Slide 13. To summarize, group demonstrated a robust performance in the first 9 months of 2025. We are building momentum in income growth whilst retaining cost discipline and strong asset quality. Together, this is delivering meaningful operating leverage. The business is performing as we expected, if not a little better in some areas. While the motive provision is obviously unwelcome, the underlying business continues to drive strong, growing and sustainable capital generation. This financial performance results in improvements to our underlying 2025 guidance, including net interest income, asset quality and return on tangible equity ex motor. Alongside, we remain confident in our 2026 targets. Guidance for both years is laid out in full on the slide. Overall, the business is in good shape to deliver for all stakeholders. Third quarter represents another step in this journey. That concludes my comments this morning. Thank you for listening. Now I open the lines for your questions. Operator: [Operator Instructions] Our first caller is Benjamin Toms from RBC. Benjamin Toms: The first is Motor Finance. The provision post top-up leaves you with the [indiscernible] just below GBP 2 billion. That's based on a weighted average scenario calculation. If the consultation paper does not get softened and the FCA is correct with their 85% claim rate, how material would the provision top-up be from here? Just some sensitivity around that would be useful. And then secondly, on NIM, I think before you said you expected NIM to build faster in Q4 than Q3. Is that still the case? And can you give us some indication about whether you'd expect NIM to continue to build through 2026. I think the hedge will continue to be additive and mortgage margin compression deposit mix shift should fade. So it's hard to see how NIM doesn't increase materially next year? Is there a missing moving part like asset mix shift that we need to consider? William Leon Chalmers: Thanks, indeed, Ben. Just to take each of those in order, the start point and perhaps the end point is to say GBP 1.95 billion in respect of motor represents our best estimate of the cost of this issue. It is, as you say, a scenario-based estimate and those scenarios or sensitivities, as you called them, represent what we think are reasonable FCA responses to the issues that we raise, and I assume the issues that others raised. And those will be principally around things like the calculation of dress, which is set, we think is best tenuously linked to [indiscernible].The termination of fairness, which we think is too broad. And these types of things will be part of our response to consultations. And when we look at scenarios, that's what's figuring into those scenarios, some slide amendment around those. But to be clear then, the FCA proposals, as currently proposed, represent the heaviest weighting in our overall scenario analysis. My script at the adverse end of our expected outcomes, i.e., they are all DCAs, most of the commission that we get -- that we received gets handed back, and it is a very high response rate. That all means that with the FCA being the heaviest weighted component in our overall provisioning analysis suggests that even if the FCA proposals come out exactly as they are today, then our overall position is not going to move by that much. So we are not far off then in short. On your second question, Ben, in respect NIM has said, has had a tick up in the course of Q3 by a couple of basis points. We're now at 3.06. And it is our expectation that we see continued, if you like, growth in that earn interest margin over the course of Q4. As I alluded to, I think at Q2 and possibly before that in Q1, we do expect to see a bit of a back-end loaded step-up in Q4, and that is predominantly because of the structural hedge contribution, which is slightly more heavily weighted in Q4. It is somewhat offset by the usual headwinds that is to say bank base rate and deposit effects, predominantly deposit effects as our -- rather our next bank beta is now not expected until next year. but then also at the mortgage point. So the mortgage headwinds, as you know, has a little further to play out, that includes quarter 4, and it includes '26. But summing all of that up, then you should expect to see that interest margin expansion in the course of Q4. There will be a step up there. And it will be a little greater than what we have seen Q2 to Q3. In respect to '26, Ben, your analysis is right. We should expect -- you should expect -- we do expect to see continued margin expansion during the course of '26. It is predominantly because of the factors that you've identified, that is to say the structural hedge makes a meaningful contribution, GBP 1.5 billion increase in structural hedge expected earnings for is what we've guided to earlier on this year, and that still remains more or less the case as we go into '26. And then there is some offset from that in the context of, again, base rate decisions and indeed some continued level of deposit churn off the back of a slightly higher rate environment. And then alongside of that, the playing out of the mortgage refinancing headwind. So those factors are still at play. But nonetheless, the net of it for 2026 is continued and reasonably meaningful margin expansion. That is our expectation. Ben, maybe I'll just finish off with the point. As you know, we have moved from kind of large AIA and nonbanking net interest income guidance to net interest income guidance in its totality. And we've upped that guidance for the remainder of this year, i.e., circa GBP 13.6 billion. We will be guiding to what that means for 2026 in due course, but it is the combination of net interest margin expansion as well as AIA growth that we expect will deliver meaningful NII growth in 2026. And that, in turn, is what will help us deliver our greater than 15% ROE. Thank you, Ben. Operator: Our next caller is Jason Napier from UBS. Jason Napier: Two, please. The first, I wonder if you could just talk about how Lloyd's sees wealth as a sort of a banking business in the U.K. the Schroders Personal Wealth business today, you might, as you read your slides, about the 300 advisers and the funds that they advise and look after but then the bullet point on scaling to mass affluent and workplace might suggest that this is really just an integrated mainstream client type offering. The backdrop for this is, as you recognizes that the market is quite interested in whether you might be interested in inorganic expansion in IFA led businesses. And so if you could just talk about what we can learn from the buy end of the half of the SPW business? And then the second, I don't want to steal the thunder from your upcoming tech event, but the slide on tokenized assets does, I think, invite further inquiry. At a very high level, I just wondered whether you could talk about the work that you've done so far and where you think things like tokenized assets and deposits. What that does to banking industry revenues in total. At a high level, people are somewhat concerned that we might see compression in things like payments and remittances and a bunch of the CIB revenue lines that we actually can't see from the outside as the sort of technology takes through. So any early thoughts you might have on the outlook for [indiscernible] William Leon Chalmers: Thank you, Jason. On both questions. First of all, in respect to the wealth question, a couple of comments there on SPW and then a couple of comments on how we see the wealth opportunity. it's worth me just repeating that we are really pleased to see the conclusion of the SPW -- now Lloyd 12 transaction. It brings us full control of what we think is a great business. So you've heard the statistics, but at the risk of repeating them, 17 million assets under management, 60,000 clients, 300 advisers. It is a really promising start, if you like, for a business that we hope to grow into, frankly, an awful lot more. So there is a great business there that we think we can really grow and help profit going forward. It is part of an integrated proposition as we see it. That is to say it will sit alongside our direct-to-consumer self-serve proposition. It will also sit alongside the building digital proposition that we are currently creating. But it is important to have alongside those more or less self-service facilities, an advisory capability. And that's really what Schroders Personal Wealth now Lloyd's Wealth will deliver for us. It is important in the sense that we can make our customer journey seamless with those other capabilities, EG, the digital direct-to-consumer offering. Likewise, we can, if you like, bring the benefit of the group to bear here, not just in terms of group infrastructure, cost synergies and the like, but also in terms of plugging it into our 3 million affluent customers, and then there's a third really important part of that integration, if you like, which is around the workplace proposition. At the moment, at least, we have a very strong workplace proposition in the context of our insurance, our [indiscernible] business. But at the same time, we really want to build the advisory component of that as people's pensions plans mature so that we can advise them properly on what to do with those proceeds, which at the moment, is a source of leakage from our perspective to other third-party providers, we'd much rather keep it within group. And that's what SPW now Lloyd's Wealth will allow us to do. So there is something with the Lloyd's Wealth acquisition, the SPW acquisition, which itself is in good shape as we speak today. And my statistics earlier on, then testimony to that. But hopefully, you can tell from my comments that we think it can be, frankly, a lot more going forward. You asked in that context about inorganic, Jason. I obviously shan't comment on that explicitly. Safe to say that we've got a lot to do with what we've just done. The acquisition of Lloyds Wealth is a tremendous step forward for us and the franchise. It enables us to develop and enhance our existing customer propositions in what we hope will be a very compelling way which in turn, most importantly, will create customer value, but in doing so, we think, create quite a lot of shareholder value, including benefits to our other operating income over the course of Q4 and looking forward into 2026 and growing thereafter. So I think for now, at least, we're very happy with what we've done. We're going to focus on the organic integration of it, and we're going to build our customer propositions and shareholder value as part of that. The totalized deposits topic is a very interesting one. It's a topic which I could probably talk for ever on, but I won't. I'll try to [indiscernible] my remarks somewhat. In essence, there's a couple of things going on right now. First of all, as you mentioned, in respect of our strategic update, I just mentioned that we've done what was a really exciting partnership with Aberdeen, where we effectively delivered an industry first tokenized assets use case, i.e., using tokenized assets as collateral for a market-based trade. That was the industry first. It was more or less a proof of concept, but it offers illustration of the potential. When we look at the landscape right now as it's developing, there are a couple of things going on. One is, obviously, the rise of stable kind, which is much commented on. And indeed, it seems to us that in the international sphere it may be that by virtue of speed of payments, for example, and by virtue of low costs, it may have something to offer in respect of international transactions. But actually, if you bring that back to the U.K., much of what is offered by stable coin is already effectively offered in the context of things like faster payments. That is to say they're instantaneous and they're very low cost. So really what excites us actually in the context of tokenized assets is an opportunity that goes well beyond stable coins, which is around programmable currency. And we're currently sitting at joint chairs with U.K. Finance, in a project, which is called GB tokenized deposits, GTD is the acronym. It used to be called regulatory liability network. But GBTD is essentially building of a programmable and exchangeable currency in the U.K. that is part and parcel of the existing commercial money framework. That is to say it is interchangeable between digital money and if you like, analog money. We think that has the potential to offer customers tremendous amounts of value in terms of programmable capabilities. And at the moment, we're running use cases in respect of wholesale use cases, particularly digital gilts, in respect of mortgage use cases, i.e., programmability around that capability and an exchange of effectively payment on receipt capabilities from a consumer point of view. So there's 3 use cases that will land in early part of next year. The reason for just briefly commenting on that detail, Jason, is because we see that as an example of tokenized deposits, digital assets, offering a tremendous customer opportunity. And if it can be brought in the sterling monetary framework, if you like, and be interchangeable with analog money and the way that we're proposing, I think there's a lot more that we can do with our customers to offer them value. And if you like, far from this being a threat, it's an opportunity. Operator: Our next caller is Perlie Mong from Bank of America. Perlie Mong: William, so just a couple of questions. One is on distribution. So it sounds like you're pretty comfortable with the motor finance charge or any top-up if necessary. So clearly, you've talked about paying down to 13% next year. But as you think about full year distribution at '25, would you think of it as there is no more uncertainty in your mind regarding to [indiscernible]? And then while we are on that topic, clearly, one of your peers have moved on to quarterly buybacks. You're still on annual buyback. So is there any thinking about maybe moving to a more frequent distribution cadence? And then secondly, on mortgage margins, again, your peer reported yesterday talked about 5-year mortgages rolling off next year. And that cohort had a relatively high margin. So I presume that is already in your guidance and in the way you think about '26 mortgage margins. But as we come into this period, do you expect competition or behavior of competitors to change in any way, given this is something that is happening across the board. William Leon Chalmers: Yes. Thank you, Perlie. There's -- perhaps 3 questions there, at least that's how I'll interpret it. And you'll have to let me know whether I'm responding appropriately. First of all, in respect of motor, as said, our current revision, GBP 1.95 billion, best estimate, to the extent there's a worst case, we can't be far off simply because, as I said, the FCA case is most heavily weighted in scenario-based planning. Alongside of that, the FCA case captures a pretty adverse outcome, all DCAs, for example, most of the commission will be received being handed back a very high response rate. Those 3 things tell us that the FCA case, the proposals, if currently enacted are, as I say, at the adverse end of the spectrum and most heavily weighted in our overall provisioning. So not terribly far off. When we look at distributions for 2025. A couple of points to make there, really. One is we remain very committed to distributing excess capital. Two is, as per the comments earlier on, we are generating strong capital generation over the course of this year. We put forward guidance now of 145 basis points, which that is post motor to be clear. When we look at our expectations for the full year in terms of distributions, we also have the reduction in CET1 ratio that we have previously advised you of and we expect it to reduce our CET1 ratio from about 13.5% end of last year to about 13.25% or thereabouts, give or take towards the end of this year before landing at circa 13% at the end of '26. So that is an additional 25 basis points of capital there, which if you add it to the GBP 145 million that we're guiding to is 170 basis points in total. Perlie, you'll be able to tell from our numbers today that the dividend will be about 100 basis points of that. We've accrued 74 basis points year-to-date. So therefore, a full year is about 100 basis points of that 170 that I just mentioned, which in turn, leaves about 70 basis points of excess. Against what will probably end up being about GBP 234 million, GBP 235 billion of risk-weighted assets, something like that. And all I'm doing is simply taking Q3 outcomes in RWAs and adding on a bit for our continued lending performance. and indeed a CRD4 add-on in the quarter of quarter 4. So that gives you an idea of 70 basis points against that GBP 234 million, GBP 235 billion of RWAs. It gives you an idea of the excess capital that will be available and up for consideration by the Board as to what it chooses to do with it towards year-end. Clearly, you asked about buyback and whether we should move to a more frequent buyback. The I guess what I'd say to that is, first of all, capital distribution, not just the quantum, but also the form, if you like, is always going to be an outlet for the Board. And we'll, of course, respect that. What we've done to date, of course, is once per annum. And our view is that, that has allowed clarity in terms of our guidance, number one, and it has been appropriate as we reduce our capital ratio, number two. As we look forward, there are some advantages from considering a switch. Lower CET1 over the course of the year is one of those. The timing benefits, obviously, from a shareholder point of view is another. There are also some considerations taken into account, which is to say a lower capital base implies a slightly lower level of flexibility either for dealing with contingencies or alternatively, take advantage of opportunities. So these are the types of things, probably that we'll have to consider when we look at the buyback. But every year, we consider not just the quantum, but also the form in which we make distributions. And this year, in that respect will be no different, and we'll have a conversation with the Board at the end of the year to that effect. The 1/3 of your topics earlier around 5-year merges, in a sense, it's welcome to the club. We've been talking about a mortgage refinancing headwind for about 2 years now. Our expectation was that, that will continue during the quarter of '25, and that it will continue into '26. And we said that before, and that remains the case. What I am pleased to say though is that our guidance in that respect has not changed. And when we've talked about in the past, our expected increase in net interest income, including in response to Ben's question later on, that incorporates our expected headwind from a mortgage point of view over the quarter '26. So we do expect continued growth in net interest income and indeed margin. And that does incorporate the headwind that we see from the type of 5-year mortgages with the spreads written at that time as they mature in '26. So yes, it is all integrated into guidance for sure. In terms of what effect that might have, it's obviously a little hard to say, but at the risk of speculation, maybe there is a chance that as these higher spreads roll off, people reconsider the spreads that they're currently writing business at today. And maybe, therefore, there is a marginal benefit to spreads being written during the course of '26. Partly, that is, of course, speculative. But as these higher spread mortgages come off, will that cause people just to reconsider the rate at which they or rather spread at which they write new mortgage business and cause them to revise up what I think an appropriate spread is for mortgage business? Possibly, yes. And if it does, we'll obviously welcome it. Operator: Our next is Jonathan Pierce from Jefferies. Jonathan Richard Pierce: Got 2 questions. The first is on structural hedge, again, some about that. I wondered if you could help us a little bit scale the contribution from Q4, you talked previously in that significant increase this year and the contribution to the movement has been was 4 basis points in the latest quarter and 10 basis points in the first quarter. Maybe you could put Q4 in the context of that for that would be helpful. And just a supplementary on the hedge. I wondered if you could -- just talk a little bit about what happens to '26 in terms of timing because I'm still entirely -- sure, I understand how are you thinking about that? I mean it's rose that the '27 tailwind is probably more about the full year impact of the '26 in the trend then we get as a lot of the [indiscernible] starts to roll through be helpful just to get a little bit more on that. [indiscernible] an idea what will be next year and how fast forward you will be looking in the sort of metrics you will be updating or distribution so on and so forth. But will this be sort of 2028, '29, look forward. William Leon Chalmers: A couple of questions there. First, on the structural hedge. Second on strategy and what we'll be talking about and where the next year. In respect to the structural hedge, maybe just a kind of a mark-to-market. The Q3 yield on the structural hedge is about 2.3%. As you rightly said, the contribution to the margin of the structural hedge in respect of Q3 was about 4 basis points. And we've previously highlighted and maintained still today that the contribution of the structural hedge going into Q4 will be meaningfully greater. We've put a precise number on that, but just maybe help the discussion. The expectation for the yield as a whole during the course of '25 will also be around 2.3%. I'll come back to '26 in just a second. . But the expectation is, as I said, is that the structural hedge contribution to the margin will meaningfully increase in the course of quarter 3 and I would expect in that context, Jonathan, again, without putting too precise number on it, the structural hedge contribution to the margin will more than double in quarter 4 versus what it was in quarter 3. And as I said, that all leads in combination with the deposits headwind and mortgages headwind to an expectation that the margin in totality will step up in Q4. Will step up in a way that is more significant than what we saw Q2 to Q3. So I know I'm not putting precise numbers on it, but hopefully, that gives you some steam. When we look at 26% on the structural hedge, the expectation for the yield in '26 is consistent with our previous discussions, actually, on average, about 2.9%. You cut that out, obviously, from the circa GBP 6.9 billion guidance that we've given you for structural hedge earnings off the back of about a GBP 244 billion structural hedge, you'll get to 2.9% through that path, too. But that gives you a sense for the year as a whole. There is obviously a bit of a journey in respect to the structural hedge. At this point in the year, I'm not going to kind of go through it on a quarterly basis. But it isn't all delivered on quarter 1. It isn't all delivered at quarter 4, and it won't be perfectly linear in between. But overall, that is the contribution of the structural hedge, i.e., GBP 6.9 billion in total, an incremental circa GBP 1.5 billion versus what we got over the course of '25 as we look forward. It is important to say in this content section that structural hedge then continues to build over the course of future years. And I would -- again, I won't give precise numbers on it. but you should expect continued build, most notably in '27 and then continue building the years thereafter '28, '29 and so forth, but at a slightly lower level. We'll talk more about that in the course of the year end, give you more specificity. In respect to strategy, Jonathan, our focus right now is very clearly on delivering '26. We set out some very explicit, some very clear and I think some very important commitments in respect to what we're going to do in '26. Cost-to-income ratio less than 50%, ROTE in excess of 15% and capital generation in excess of 200 basis points we are going to deliver on those '26 commitments. And so that is very much our focus. Now it's a very fair question for you to ask having said that, about where do we go from there? Our expectation is that we will also update in the course of next year as to '27 and beyond. It will probably be around the middle of next year when we come to market with that update. So that gives you a sense of timing. Then in terms of the look forward period, that's something which we'll probably discuss actually over the course of next year. But these things often end in round numbers, and maybe I'll leave it there. Operator: Our next caller is Aman Rakkar from Barclays. Aman Rakkar: I actually had 2, please. I wanted to query on nonbanking funding costs. I think that's actually [indiscernible] a touch lower than your commentary previously around up GBP 100 million year-on-year. So I was wondering if you can give us an update for that. And I don't know if that's contributed in any way to slightly firmer outturn for this year. But if you could just kind of update us on that particular line item within NII, that would be great. . Just another one on other operating income, actually. So obviously, the headline rate is good again. It's quite divergent trends within the division. So I think it looks like retail has kind of reaccelerated again in Q3. The insurance business is, it looks like it's actually tapering off, if I look at the year-on-year trends through the course of this year, and then commercial continues to be quite soft. So could you give us a bit of a kind of steer on how to think about these divisional trends going forward? I'm just trying to work out how we arrive at a similar kind of run rate next year. And if there's anything kind of episodic or lumpy that we should think about or one-off elements that might kind of unwind into next year, that would be very helpful. William Leon Chalmers: Thank you, Aman, both of those questions. The -- taking them in turn. In terms of NB NII, nonbanking net interest income. Q3 as we disclosed today, GBP 136 million, that is running at about 10% ahead of where it was last year. So year-to-date, I think it's about GBP 372 million thereabouts. That's about 10% up versus where it was -- and what's going on there, as you know, it is very much about the funding of the other operating income -- income streams insofar as they're not related to banking. So LDC is an example of that. Lloyd's living in is an example of that. Of course, Motor is an example of that, but so is the insurance pensions and Investments division. And so is commercial banking activity. It is probably running a little bit more slowly, i.e., slightly slower growth rates versus what we previously thought. That is, if anything, partly attributable to commercial banking activity, which has been a little bit less in that space, at least than we previously expected. I'll come back to that in a second. But overall, what's going on within the nonbanking net interest income that is most important is that we are seeing the takeover of volumes rather than rate rises driving it. So if you look at the trend last year in nonbanking net interest income, it was probably about half and half to do with volumes, number one, but also increased rates in refinancing number two. But if you look at it this year, it's more like 15% or thereabouts in terms of rates and 85% in terms of volumes. So volumes is really making the running in terms of the increases in nonbank net interest income that we see over the course of this year. And of course, looking forward, what that means, Aman, is that if you believe in other operating income growth, which we do, and I'll come back to in just a second, you should expect that nonbanking net interest income to continue to grow over the course of 2026 but continue to grow from very much a volume-driven perspective as opposed to a rate perspective. Rates won't be 0 because there is some term financing going on, in particular in relation to Motor, which has got about a 3.5-year average life. So it won't be 0, but it will be predominantly a volume-led story within long bank net interest income. Before moving on, it's worth just wrapping that up in the context of the net interest income guidance that we have given you and will give you for 2026 and beyond. That is including, obviously, nonbanking net interest income in all of that. So that is wrapped up in the guidance that we give you for net interest income, GBP 425 million this year, circa GBP 13.6 billion now. And indeed, for the guidance, we will give you next year of '26. In respect to other operating income, maybe just to start off with the core point that as you know, when Charlie and I launched the strategy in February 2022. It was very much focused upon trying to ensure that we diversified the business from an undue dependency on rates. Looking to avoid being, if you like, pressured by a downward trend in rates during the next cycle and also achieve the benefits of what is a strong and very highly present franchise right the way across the U.K., across the retail the commercial sector and indeed within insurance, pensions and investments. So the other income -- the other operating income strategy was a strategic diversification, which is intended to benefit from the strength of the Lloyds Banking Group franchise. It's that combination that led us to deploy significant strategic investments in this area. And then we've seen the benefits of customer activity, if you like, picking up on those strategic investments and helping us drive the operating income now for about 3 years of high single-digit growth. And that's again what we've seen during the quarter 3, whether you look at it year-to-date or whether you look at it year-on-year [indiscernible] introduction, Aman, but before getting into your question, I thought it's important to highlight those points. The individual business components within other operating income, as said, up 9% in total. What are we seeing year-to-date? We're seeing strength within retail. I've talked about transportation there, but it is also about PCA offering. It is also about protection offering increasingly to mortgage customers and it is also about cards year-to-date. So a retail offer that is growing significantly. It's transportation, but it's also those other factors. Within commercial, commercial has been a slightly slower pattern over the course of the year-to-date performance, and that is partly because low markets performance has been probably slower than we would have perhaps expected but it's been somewhat offset by things like cash management and payments, number one, it has been also the case that the comparative period benefited from valuation adjustments on a year-to-date basis, which, of course, inherently don't repeat during the course of '25 so there's a slight comparative issue there, which has meant that commercial has been slower year-to-date versus where you would normally expect it to be. And indeed, our expectation looking forward is that, that is going to change as those comparatives come out of the analysis. I'll come back to that in just a second. Insurance pension investments up about 5% year-to-date. That is off the back of long-standing strength. It is also off the back of GI strength and things like share dealing. But to be clear, if you look at it on a quarterly comparison basis, weather in respect of substance, the back of dry weather hits a little bit in the course of Q3. So insurance is still growing for sure. But the reason why you're seeing it at 5% in part at least, is because of that weather during the course of quarter three, which, of course, we wouldn't expect to be repeated on a BAU basis. And then finally, Aman, the strength in investments is clear to see. That is the living LDC has been a significant contributor to the business on a year-to-date basis and again, on a look-forward basis. When we put that together, Aman, first of all, we would expect those growth streams to continue to build over the course of the remainder of this year and certainly into next. And that is a combination of strategic investments landing, if you like, and increased customer takeup. Allied to that, we now are adding in previously -- that is going to contribute in Q4, and it's going to contribute during the course of 2026 more meaningfully. We haven't given precise numbers around that. Our expectation is that, that is going to boost other operating income for the course of 2026 at least, by around GBP 175 million or so beyond what you would have previously seen in the other operating income line. Now of course, our ambitions in respect of Lloyds Wealth go meaningfully beyond that. And so we would expect it to build in the years thereafter, but that gives you a sense to what we expect it to contribute in '26, which, of course, will be added to the contributions from the other income streams that I've just been highlighting. Hopefully, that's useful, Aman. Operator: Our next caller will be Sheel Shah from JPMorgan. Sheel Shah: The CIB business has been particularly strong this year. I want to stand out performance, I think, at least when I look at your balance sheet momentum, could you talk a little bit about this business? What's actually happening? How much of this is market driven? How much of this is an active strategy to maybe target share gains and what are the margins looking like in this business? And then secondly, to come back to your less than 50% cost-to-income ratio for 2026. Just looking at consensus, it sits at 51% at the moment. You've just mentioned GBP 175 million coming from the Schroders Wealth business into OOI. What do you think the market is missing either on the revenue line or the cost line to get to this cost-to-income ratio target? William Leon Chalmers: Thanks, Sheel. Two questions there. One relation to commercial bank in CIB in particular and one in relation to costs. Just before getting into CIB, just to step back, as you know, our commercial banking business consists of both business and commercial banking BCB and the CIB business. And we are engaged in quite a bit of transformation in respect of each of those 2. When I look at the BCB business, as I mentioned in my comments earlier on, we've seen some really constructive signs in terms of BAU lending growth, which is great to see. When you look at it externally, that is offset by the government repayments that have been going on in respect to bounce back loans. And so the net, if you like, is affected by that. But we are encouraged by some decent positive signs, if you like, our ongoing BAU growth. And that is alongside of creating a much broader digitalized proposition to our customers, which in turn is going to help us drive other operating income growth going forward. When we look at CIB, again, that is going through a significant period of transformation, but it is about product broadening and product deepening. There have been some areas that have probably been slower than we might like to have been, for example, the loan markets area. There have been some areas that have been successful, particularly successful over the course of this year. I mentioned cash management and payments, for example, capital markets have shown some strength alongside working capital. And actually, the indicators that we've got on an early Q4 basis have been really promising in respect of CIB. Now CIB comparatives, as I mentioned a second ago, have been a little bit weighed down by strong valuation adjustments in the course of '24. So kind of bear that in mind. But the underlying momentum in CIB we're really encouraged by. We think it's really positive, and it's really -- it's a big part of our transformation story going forward. In respect to your second question, Sheel, on costs, the cost shape for 2026, as said, remains very much a commitment to sub 50% cost income ratio. Within the cost/income ratio, it is clearly composed of 2 elements. One is to say income strength. We've talked a bit about that during the course of this call, so I shan't repeat those points. But your specific question is around the cost part of that equation. And how do we see that developing? I guess a couple of points, really. One is we spent quite a lot of money on various strategic initiatives, which in their orientation are cost focus. As we go into 2026, we see the full year run rate benefit of those investments take place. Whether those are around the business units are alternatively around the functions, including things like our systems and, of course, our various other risk, finance and other support functions, those strategic investments engineer rather help us engineer a lower cost base going forward and '26 represents a full year run rate for a number of those. At the same time, our cost growth in respect of OpEx is slowing somewhat. And that in part is because of some of the investments in things like the FTE reductions that we have made over the course of this year. You'll remember earlier on this year, we talked about our severance budget being higher for '25 than it had been previously. And that has been the case, said in turn, that helps us address OpEx growth over the course of '26. The result of that is that we expect 26 costs to be flatter than you have seen recently. I won't commit to absolutely 0, but nonetheless, you should expect to see them be flatter than they have been previously. And that, in turn, or rather in conjunction with the income developments that we talked about is what helped us deliver a cost/income ratio of sub-50%. Now to be clear, Sheel, it is not going to be sub-50% by much. And we've said that before, it's worth repeating. But nonetheless, it will be delivered and it will be sub-50%. Operator: Our next call is Chris Cant from Autonomous. Christopher Cant: I had one on stable coin and tokenized deposits and one on motor, please. So on the former topic, I mean, obviously, lots going on and you're involved in this U.K. finance initiative in terms of tokenized deposits. In terms of time scales and relative regulatory burdens, I guess the question is, can the industry move fast enough to deliver tokenized deposits ahead of stable coin providers potentially trying to get a foothold? And what sort of time lines do you think we're talking about to move beyond the use cases? I know there's a few things that are moving outside the sandbox in terms of remortgage, for instance, what sort of time line are we talking about to move beyond the use cases currently envisaged by the U.K. finance initiative. And on programmable money, could you give us an idea of the use cases that you see? I guess, it's corporate clients that are more interested in these options. Could you give us some examples of use cases that corporate clients are looking for? That would be interesting. And then on motor, the FCA consultation, obviously, you're going to feed into. One of the points from the FCA's perspective, I suppose, is that if we don't capture the majority of cases through a redress program, and it goes through the courts, then administrative costs would be potentially materially higher. Is that something that you agree with? i.e., you would be pushing for a narrower scheme potentially or for less redress and taking then some risk that the administrative burden of more cases remaining in the court system would push costs in that area. William Leon Chalmers: Yes. Thanks for those questions, Chris. First of all, on stable car and tokenized deposits. A couple of points to make there. What is about the path forward on that? And then the second is around use cases. Said earlier on, the rise of stable kind has obviously been notable in recent periods. And it's been particularly notable in the context of international payments where, as I said, there may be some advantages in terms of speed and cost. What we think in the U.K. is that the GB tokenized deposits, GTD that we are constructing together with the industry is effectively commercial bank money in its current form, which allows interchangeability between a digital point, if you like, an analog coin the current coin that is there in the market. And that has tremendous advantages. It has tremendous advantage from a customer point of view because it is basically one and the same, and they should be able to move freely between digital money and, if you like, analog money. And that makes it a much more kind of customer-friendly approach. It also means that we, as banks can offer that to customers as our money effectively together with all of the security and indeed, insurance benefits that are currently in place and of course, from a regulatory point of view, together with all of the KYC and so forth that we currently have in place. So it is -- it goes hand in hand with today's money in a way that is, as I say, very user-friendly from a customer point of view. And in that sense, has material benefits over what stable coin has to offer, which is clearly not interchangeable with commercial bank money. It is not one and the same thing. In terms of timetable, Chris, I think your point -- your question rather, is a good one. We need to move quickly on this. And indeed, use cases, as I said, landing in the first half of next year, we would expect off the back of that to be able to get something out in a workable customer proposition format, I hope by the first half of 2027, if not before. Now what we really need to fall into place in order to secure that progress, if you like, is a regulatory framework that is consistent with the ambitions of the industry and indeed is consistent with how the Bank of England would like to see this play out. As a form of digital money in the U.K., it is important that in place in a supportive manner. So that's really what we need. But if that is in place, then the speed of this is very much within the sex hands, and we would expect to play a leadership role in securing that, making progress and indeed getting to the customer benefits that we think are promising as a result of this. In terms of use cases, you mentioned hotel and for sure, there are wholesale use cases here, Chris, but I don't think it's just that. That is to say, digital money offers use cases, both in the wholesale and in the retail space. Wholesale, we've just started an example with Aberdeen using basically tokenized assets as collateral that offers meaningful efficiencies in the context of collateral management and need speed and pace and indeed cost of collateral alongside transactions. Likewise, the digital kill is an innovation that is being sponsored in terms of one of my use cases and again, offers meaningful speed, cost and efficiency benefits from a customer point of view. And then, of course, transacting with each other. I say corporates can transact with each other in digital asset format. Again, that is going to offer speed and transaction cost benefits. But as I said, these are also [indiscernible] benefits. So 2 out of 3 of our use cases are in the retail space, one being effectively cash on delivery to meaningfully cut fraud in the retail space and the other being effectively reengineering the home buying journey off the back of programmable money for just that journey. So I think there are meaningful retail benefits there, too, Chris. We've got a lot to do in this area in digital assets. But as I said, if we get it right, there's an awful lot of customer value to be created. On the second topic, Chris, on Motor. It is our view, as I mentioned earlier on, that the motor proposals as put forward by the FCA are currently disproportionate. And they're disproportionate as for 3 main reasons. One is because we believe the determination of unfairness is too broad who is because we build the judgments that are inherent in these proposals do not align to the Supreme Court clarity that was provided earlier on this year. And 3 is because we think the redress calculation as said, is at best tenuously linked to harm. Now what that all means, Chris, is that, indeed, if the proposals remain as broad as they are. In many respects, at least, we would expect to see better outcomes in the context of litigation because presumably, the courts will take into account the Supreme Court rulings in the way in which they were made. And presumably, the courts will take into account the linkage between address and harm. So in that sense lease, I would expect litigation outcomes to be better than much of what is in the FDA proposals right now. Now having said all of that, Chris, we clearly want to move on from this. We clearly want the business to move Ireland to focus on customer value creating propositions we have today just as we expect to be in the future. So as a result, that is why we've taken a GBP 1.95 billion best estimate for the provision which in turn is not far away from what it would be if the FDA were to enact their proposals in full. It's very much in the spirit of saying, okay, look, we don't agree with them. We're going to do what we can to change them and get them into a better place. But we are provisioning on the basis that a large part of them is going to stay in place, and we want to move on, and that's what this provision is designed to do. Operator: Our next caller is Guy Stebbings from BNP Paribas. Guy Stebbings: Had a couple of questions back on net interest income. The first one is around volumes. The interesting asset growth was quite strong in the quarter, a couple of billion ahead of consensus on average nearing assets and the end of period position at [indiscernible] Q4 in a good place. If you could talk about sort of broad expectations for the outlook from here, I made your contractor comments on mortgage volumes probably being out of our better-than-expected performance in Q2. So it sounds like we're talking to a positive trajectory, which given your Q4 NIM which takes quite a promising picture. And then related to this, on mortgage spreads. So interested in your comments in response to Perlie's questions and perhaps the market reacts to the headwind from mortgage spread shown on upcoming maturing cohorts by lifting new spreads. I wondered within that, your comment signal that maybe current spreads have drifted a little bit lower in recent months on new lending and perhaps you're getting to levels you're a little bit less comfortable [indiscernible] just reading too much into the remarks there. I guess I'm really trying to work out on the upside versus downside on your initial expectations. You had the visibility clearly on the maturing yields for quite a while, but where the new lending spreads are coming in better or worse than what you'd initially envisaged. William Leon Chalmers: In respect of AIA, first of all, the Q3 performance, as you know, saw a meaningful jump in terms of AIs off the back of what has been increased lending over the course of the year as a whole and continued into the third quarter. So maybe taking a step back before getting to AAAs. As you know, we've had GBP 18 billion growth within the lending book year-on-year, which, of course, contributes to meaningful IA growth on a kind of realized basis, if you like. And within that, we've had cards year-to-date up 7%. We've had personal loans up 13%. We've had Motor up 5% over the course of the year. We've had mortgages up GBP 8.7 billion or 3%. It's a really decent loan performance for the business. in total, GBP 18 billion, up 4% up on assets for the year. And as you say, that is now translating into AIA growth, 65.5% in the -- we're seeing continued growth in the course of quarter 4 across the asset. So of course, it is a slightly shorter period because of seasonal factors but [indiscernible] you should expect to see growth within assets within quarter 4 that will be perfectly respectable. And off the back of that, deliver continued strength in AIA for the remainder of this quarter and looking into '26 and it will be that combination, i.e., AIA growth, together with the step-up in the margin that I mentioned a second ago, which in turn sets the stage for 2026 and gives us a lot of confidence in our 2026 guidance. So that's a picture of AIA's guy, which I hope is helpful. On mortgage spreads, it's interesting. I mean, we've seen now 70 basis points Q1, Q2, Q3. It is fair to say that we've seen perhaps a basis point or 2 of erosion within that over the course of these successive quarters but we are still rounding to circa 70 basis points in the course of quarter 3 and comfortably rounding to circa 70 basis points in quarter 3 to be clear. A couple of points to make within that. One is -- when we look forward, my comment earlier on about whether there will be a bit of repricing of the back of 5-year charities and therefore, people feeling a bit more pressure in their mortgage books. We're not banking on that to be clear. When we put forward our guidance for in excess of 15% ROTE and the guidance we'll be giving you next year for the component of net interest income that will make up or contribute to that outcome. We have never been and are not banking on any uptick, if you like, in mortgage spreads that is driven by that 5-year maturity pattern that I talked about earlier on. So we're not banking on it. If it comes, so much the better, and you'll see that in the context of our interest income at the time. The second point I wanted to make is the business or rather the spreads at which we are writing business right now, contribute to ROE attractive mortgages for us. And that's certainly true on a stock -- on a marginal basis. It is also true, albeit at a lower level on a fully loaded basis. So you're seeing very attractive marginal returns even at the current spreads. You are seeing, if you like, fully loaded returns that are still above the cost of equity. So we're happy to write them. We're particularly happy to right and bearing in mind a couple of other factors. One is that we are increasingly able to contribute protection alongside the mortgage product as our insurance and our retail businesses work increasingly closely alongside of each other. We're now up to about 20% protection penetration for mortgage products and so this is a strengthening relationship that we're seeing, not just a one-off mortgage relationship. And then the second is that we see an increasing share of our mortgage coming through the direct channel. And that is a more profitable product for us to write. It is also one that more closely aligns us to the customers, to be clear. But at the moment, at least, we're seeing about 24% of our mortgages coming through the direct channel. That is, frankly, more than we've had for a long time, and it is a result of a very deliberate strategy that we are embarking on. So in that context as well, Guy, we were able to write mortgages which are attractive to us on a stand-alone basis. But off the back of the, if you like, relationship that we're developing and the channels through which we're distributing is a more attractive position. Operator: Our next caller is Ed Firth from KBW. Edward Hugo Firth: I had 2 questions actually. The first one was just the sort of -- I guess, I don't know what the right way is cadence, I guess, if you like, or the growth rate of NII. I mean if I look at your -- you're talking about around GBP 13.6 billion for the year. And year-to-date, it's 10.1%, which would suggest somewhere around 3.5 in Q4, even my analysis, I can do that. We suggest that to a slightly slower growth rate than you saw in Q3 rather than a higher growth rate. So I'm just trying to think -- is there something I'm missing there? Is it something about nonbanking income? Or is the GBP 13.6 billion really a number that we should take us up as a sort of very safe space that actually all other things being equal, we could see something better than that. So I guess that's my first question. And then the second one was, I think you were saying that we should put another GBP 175 million in for next year for the buyout in revenue, other income for the buyout of the SPW joint venture. Is there a cost offset on that? Or is that just like straight through the bottom line? I mean, obviously, you talk about modestly higher for the little bit for this year. I'm just wondering what sort of cost numbers might equate to that GBP 175 million or is that just a straight number we should just put in straight [indiscernible] William Leon Chalmers: Yes. Thanks, Ed. In respect to net interest income growth, first of all, the easiest way to explain it is I think the following. As you know, we've upgraded to circa GBP 13.6 billion from GBP 13.5 billion. That is intended to be, and I hope very clearly is a sign of confidence in terms of our net interest income trajectory. It is -- as you pointed out, hopefully, as is evident in the guidance, the circa word, the C is very deliberate. That is to say 13 points is not intended to be a cap. It is saying circa GBP 13.6 billion. So I'll kind of leave you to move around from that. But it is -- now that in how things develop will be around GBP 13.6 billion, including numbers that go above GBP 13.6 billion provided that they are within the circa range. . The -- stepping back, net interest income in quarter 3 was, what, GBP 3.45 billion. It's up about GBP 90 million growth versus Q2, which we, as you know, is about 3%. Some of that Q2 growth that we saw in Q3 is day count increase. And so a slightly lower amount of that is underlying increase. If you look forward into Q4, we expect to show continued progress in NII with to be clear, probably a similar absolute income growth in Q4 as we saw in Q3, a similar absolute income growth in Q4 as we saw in Q3. But to be clear, none of that will be daycount benefit. And that is to say the daycount in Q4 same as the daycount in Q3, which if you translate that, that means that growth is actually strengthening, not weakening. So growth is strengthening in Q4 rather than weakening, and that is off the back of the factors that we discussed before, which is the step-up in the margin, which is, as I said, more pronounced in Q4 and then the AIA progress that I was discussing with guidance just a second ago. And now it's coming off the back of the fire. So all of that, hopefully, helps can illustrate the point. And in turn, we have a lot of confidence in that number. So hopefully, that's helpful. On the SPW point, when we -- unfortunately, all good things come into price, I guess. So when we look at the GBP 175 million incremental That, in turn, comes with costs, which are probably going to be about GBP 120 million in excess of what you saw previously there. Now you didn't actually see them previously because they were all consolidated in the OI line. So it's probably about GBP 120 million adding costs to procure that circa GBP 200 million which, in turn, the OOI is about GBP 175 million ahead of what we'd have previously seen. So I hope that's clear. There's a couple of other points that maybe I should make in the context of the SPW transaction, [indiscernible] transaction, which are important to us, one is we did it at 0 capital cost. As you know, we had to give up our 20% share in [indiscernible] in order to get that. But the benefit that we're getting from that casino share was a modest annual dividend that you saw in Q4 and frankly, this feels to us like -- from our perspective at least, a really positive trade, but it was done at 0 capital cost. And then the second point is we'll have to work at it to make sure that it comes within our cost income ratio. But as I said, that's consistent with our sub-50% cost income ratio guidance. But at the same time, you can probably imagine, as with many of these wealth businesses, this is a materially RoTE positive transaction, and we'll deliver an RoTE that is well above not just our cost of capital, but probably well above the types of IoTs that we'll be delivering on a kind of group aggregated basis. This is a net positive contributor to the ROTE of the business. Most importantly, Ed, it's a very important strategic development and indeed, a very important part of our customer proposition. Operator: As you know, this call is scheduled for 1 hour, and we have now exceeded the end of the allotted time. So this is the last question we have time for this morning. If you have any further questions, please contact the Lloyd's Investor Relations team. With that, our final caller is Amit Goel from Mediobanca. Amit Goel: So 2 relatively quick questions from me. One, just on the deposits -- the real deposits. So some positive trends there on the back of the pricing decisions. Just curious whether that's largely done now or whether we could continue to see a little bit of that shift and whether or not that can benefit the hedge capacity. And then the second question, just curious how engagement with the government is going ahead of the budget and also whether or not they kind of recognize the motor costs when also thinking about banking sector taxation? William Leon Chalmers: Yes. Thanks, Amit. The -- in respect of each of those, as you say, deposit performance has been pretty good over the course of this year, GBP 14 billion up in total, 3% year-to-date increase. So a good performance in deposits. And within that, retail is up GBP 4 billion year-to-date. And what we saw within retail in the third quarter was a little bit of outflow within the U.K. retail savings area, and that was very much within the fixed-term product, off the back of effective pricing decisions that we had taken, given the fact that we performed so strongly in Q2, in particular, in the ISA season, which we highlighted at the time. So this was a kind of, I suppose, inevitable reaction to very deliberate pricing decisions that were taken in the course of quarter 3. It was good to see that it was offset by PCA performance in the course of we were up GBP 1.2 billion, which is a good performance. And as you know, leads us to a year-to-date performance within PCA is up around GBP 0.5 billion or so. I think a couple of things are happening there, Amit, which are pretty constructive on the whole. We're seeing continued wage inflation with respect to our customers. Importantly, we are also seeing reduced levels of churn out of the PCA product into savings products and into fixed term in particular. And so that falling churn is down about 33%, i.e., down about 1/3 in Q3 versus Q2. That's a material reduction in churn, and we expect to see that pattern more or less continue going forward. But it's good to see. As said, PCA is an incredibly important customer product from our point of view. It's an incredibly important product from a structural hedge point of view. And so the solidity of the PCA performance has been good to see. As we look forward, I think we do expect churn to continue to add Q3 was particularly marked, but nonetheless, we continue to see -- we continue to expect it to add going forward. PCAs, we are seeing other trends slowing government payments, for example, probably over time saying wage growth as well. And so PCA performance, I don't think we expect to see it be particularly exciting, maybe more or less static might be a reasonable way of looking at it. We'll see how it goes. Going into next year, I think that starts to change as things pick up perhaps a little bit more. Our expectation for the structural hedge to be clear and it insofar as it relates to this issue is we're not banking on significant increases in structural hedge balances. So all of our forecasts for you, the GBP 1.5 billion growth in structural hedge income, for example, going to next year, GBP 6.9 billion revenue in total from the structural hedge. That is built on a steady hedge. And so if we see performance within PCAs, instant access and other hedge eligible deposits, including NPCA within BCB, which has shown an uptick actually in Q3, if that performs more positively than we expect, that would represent structural hedge upside and opportunity. At the moment, we're expecting flat structural hedge performance. On your second question, Amit, in respect to budget, a couple of points to make, really. One is the business has been really only very modestly affected, if at all, by budget concerns. So I mentioned earlier on that we've seen mortgage performance being very strong. As you know, GBP 8.7 billion year-to-date, GBP 3.1 billion of that in the third quarter. We've seen applications up 19% over the course of the third quarter. We've seen completions up 23% over the course of the third quarter. And so no meaningful sign, if you like, of insertion because of budget in the third quarter mortgage performance. And then within the pensions business, another area that conceivably might be affected. We've seen a little bit of an increase in individual pension encashments, but no material change to be clear within Workplace. And in any case, any change in volumes that we have seen in the pensions area have been well below what we saw last year. So really nothing to report effectively in terms of the, I suppose, hesitation that might be induced by the budget overhang in respect to the business as usual. In respect to tax, I mean, I think those are really decisions for the government, obviously, and we'll leave them to make those decisions as and when they see fit. From our perspective, at least, the most critical thing is that we have a stable and a predictable tax regime and one that is competitive. That is to say, at the moment, we're a material taxpayer as you know, GBP 1.5 billion of corporate tax all in, including things like NII and BA and so forth about GBP 2.5 billion of total tax paid. We see ourselves a meaningful tax contributor. We see a stable and competitive tax regime and indeed a predictable tax regime as essential, frankly, to the continued prosperity in the financial services sector and by extension, all of the things that we can do for the U.K. economy as a whole. So I think that's really all we'd say on the tax front, Amit, which I hope is useful. Operator, we're going to call it a day for now on the questions. I just want to say thank you to everybody for joining the call today and your interest in the stock and the company is, as always, greatly appreciate it. Thanks very much, indeed. . Operator: Thank you. This concludes today's call. There will be a replay of the call and webcast available on the Lloyds Banking Group website shortly. Thank you for participating. You may now disconnect your lines.
Operator: Good morning, and welcome to Nexans' 9 Months 2025 Financial Information Conference Call. My name is Laura, and I will be your coordinator on today's event. [Operator Instructions] And now I'd like to hand the call over to Mr. Julien Hueber, Nexans' CEO. Please go ahead, sir. Julien Hueber: So good morning, everyone, and thank you for joining us today on the Nexans conference call. It's a special moment for me to be speaking with you for the first time as the CEO of Nexans. With me today, I have [ Christine Preolevi ], our Interim CFO; and Audrey Bourgeois, our VP, Investor Relations. I would like to begin by thanking the Board of Directors for their confidence. It's an honor to take this role and to lead a strong, high-performing company with a clear vision for the future. I also want to express my appreciation to Christopher Guerin for his leadership and the remarkable transformation he has led, a transformation I was proud to help drive as part of the Executive Committee. Chris leaves behind a strong company built on solid foundation that we will keep strengthening. I spent more than 2 decades at Nexans always close to operations and transformation. From my early years in manufacturing to leading our activities in China, South Korea or globally for the Industry & Solutions project, I've seen how performance is built on operational excellence, flawless execution and a deep understanding of our customers. As a member of the Executive Committee since 2018, I helped shape the group strategy on the capital markets road map. Leading our EUR 2.6 billion of PWR-Grid and Connect in Europe business reinforce my conviction that agility, execution and industrial excellence are the levers that will be key to Nexans's next chapter. Our strategy remains unchanged, and the megatrends behind it never been so strong. Electrification is accelerating and the need for secure, modern infrastructure keeps growing. These dynamics reinforce Nexans' positioning and long-term strategy. As a new CEO, I want to be very clear, we will continue to execute the road map presented at the last Capital Market Day, and we confirm our 2025 guidance and 2028 objective as well. The direction is right and the foundation are solid and all megatrends are continuing. The environment, however, has grown more complex since our last Capital Market Day, from geopolitics, supply chains disruption or shifting policy environment around energy and renewable. This makes one thing clear. It is the right time to make Nexans even stronger, stronger in execution, stronger in competitiveness and stronger in agility. I will continue to fuel our model of value creation that delivers results, combining our SHIFT program, complexity reduction, innovation deployment and vertical development. But building on that, I will also move forward and I will emphasize even more on the further complexity reduction of the organization, efficiency optimization of our industrial operations, both in terms of productivity and cost competitiveness, further mutualization of our industrial footprint and of course, keeping absolute discipline on cost and cash. All these priorities will further enhance the resilience of Nexans model. Our ambition is clear, to consolidate Nexans' competitiveness while amplifying selective profitable growth in Electrification, powered by digital acceleration and the smart use of new technologies and artificial intelligence. Nexans is entering this new phase from a position of real strength. We have a clear road map, robust financial foundations and teams that are talented, dedicated and united and proud of what we do. Together, we will deliver with strong discipline and focus, the long-term value creation for all our stakeholders. So after this introduction, let me now turn to the group's performance in Q3 on the first 9 months of 2025 on Page 4. In the third quarter, the group delivered a plus 7.7% organic growth, including a strong 12.6% in Electrification. Over the first 9 months of 2025, the group standard sales reached EUR 5.3 billion, representing a plus 5.8% organic growth compared to last year. Over the same period, Electrification, which remains the core of Nexans growth, recorded a plus 9.4% organic growth, confirming our disciplined execution across our 3 segments, which are Transmission, Grid and Connect. Our Transmission adjusted backlog reached EUR 7.9 billion at the end of September, providing for Nexans a strong visibility for the coming years. And no later than today, I am pleased to announce the acquisition of Electro Cables in Canada that will be reinforcing Nexans' position in PWR-Connect in a highly dynamic market and with approximately EUR 125 million current sales on a yearly basis. And I will come back on that on the next slide. In short, the first 9 months confirm the solid and disciplined growth of our Electrification businesses. This performance reflects our sharp focus on high added value solution and our selective approach to capture the strong underlying trends in Electrification. So before we move to our segment in details, I wanted to highlight something that is important to me. So I will move to Slide 5. Our Innovation Summit in Toronto that took place 2 weeks ago was a great platform for exchange with our platinum customers, our technology experts and our partners. Nexans becoming a pure player of Electrification. So I believe that our role is to bring together the key stakeholders of the electrification ecosystem to imagine and to build collectively the next level of electrification that is critical to our societies from powering homes and hospitals to supporting education and many other essential services. The choice of holding this event in Canada reflects our strong interest in North America. Canada is a powerful growth platform for Nexans, both for the Grid and the robustness of this construction industry in our Connect segment. So talking about Canada, I will now move to Page 6, where I will present the acquisition of Electro Cables that was signed today, this morning, in fact. Electro Cables is a Canadian player in low-voltage cable system, delivering a high performance and service-focused solution. This company represents a strong strategic complement to Nexans Canadian portfolio, offering an attractive growth perspective and a robust profitability profile. This acquisition also allows Nexans to further strengthen and complement its portfolio in Canada, enhancing its position in a very dynamic market while optimizing local supply chain efficiency. It also paves the way for valuable synergies driven by Nexans' expanded local presence and the rollout of its proven proprietary SHIFT program while enhancing innovation. This acquisition will be fully financed in cash, leveraging Nexans' strong balance sheet and is expected to be EPS accretive from day 1 and from year 1. Now moving to Page 7. Let me now comment the overall group performance over the first 9 months of 2025. Standard sales reached EUR 5.3 billion, representing a plus 5.8% of organic growth, confirming a solid trajectory for the group. The growth continues to be driven by Electrification business, which make up the core of Nexans strategy. It delivered a plus 9.4% organic growth over the period. Let me remind you that this is well above our Capital Market Day organic growth that we have announced last November of a CAGR between plus 3% and plus 5%. This performance reflects the disciplined execution in Transmission and in Grid as well as the recovery in Connect during this third quarter. Other Activities, mainly Metallurgy, a strategic segment for Nexans, posted a plus 4.1% organic growth over the first 9 months of this year. And as you know, we observed unusually high level of external sales in H1 that was driven by customer bringing forward orders ahead of the U.S. tariff. As expected, this overstocking subsequently led to correction in Q3 2025. The Non-electrification activity declined by minus 6% as expected, given the challenging automotive market. We remain very active to make this disposal of autoelectric, the last remaining activity to finalize our portfolio rotation. So overall, the group growth is at a high level and fueled by healthy growth drivers in Electrification, which remains our main engine of value creation. So let's now take a closer look at our different segments, starting with Transmission on Page 8. Performance was particularly strong over the first 9 months of 2025 with standard sales above EUR 1 billion, which is up by 25% organically versus last year and with a very strong Q3, up by 33%. This strong performance reflects solid execution, a favorable production mix and a more installation campaign carried out in Q3 compared with last year. Now regarding GSI projects, let me confirm once again that we keep working hand-in-hand with our customers. We have a very collaborative approach with them on this ongoing project that is on track as per schedule and milestones. Last but not least, Transmission pipeline of activity remained robust, supported by sustained demand for interconnection and offshore projects across our key markets. Our adjusted backlog stands at EUR 7.9 billion, which is up by 27% compared to last year, providing a strong visibility until 2028. So in short, the PWR-Transmission segment continues to deliver, thanks to the quality of the execution. I will now move to Page 9 on the following slide regarding PWR-Grid. So PWR-Grid sales reached EUR 989 million, which represents a plus 6.7% organic growth for the first 9 months, which also represents a plus 9% in Q3. This reflects solid structural trends coming from replacement of offset grids and the connection of renewables to the Grid, coming from Electrification needs in verticals such as electrical mobility and data center. And it also comes from the high development of our low carbon offers, and I will be able to comment or answer any of the questions regarding this element. Also, our Accessories business continued to be very well oriented over the period. Overall, projects in Europe and North America ramp up under the new frame agreements with major utilities. So now turning to our PWR-Connect business on Page 10. The net sales of the Connect amounted to EUR 1.7 billion for the first 9 months of 2025 compared to EUR 1.5 billion in the same period last year, representing a plus 1.4% organic growth. You know how contrasted is this segment. We have indeed some strong performing regions with a double-digit organic growth. It's the case for Canada, South America, Middle East and Africa. And so here again, our acquisition of today in Canada will further leverage on wind trend. We continue also to actively grow our tech product as fire safety product with sales growth progressions, which are higher than the market average. That was a key element that we communicated during our last Capital Market Day last year in November. In contrast, and as you know, some region remains more challenging. That's the case of Nordics in Europe or Asia Pacific, specifically Oceania in Australia, specifically on the residential market. Countries like France, Italy and Spain were quite resilient. And let me deep dive on Italy, where, as you know, we have started our SHIFT complexity reduction program on the new LTC business that we acquired last year. This SHIFT complexity program is completely part of the integration process. So we are currently exiting from low-margin products and low-margin market as per schedule. And I can tell you that the integration process of LTC is going very well. Moving on now to Page 11. And before we move to the Q&A, let me confirm our full year 2025 guidance, which was upgraded in July. We continue to execute with discipline and focus and remain on track to deliver an adjusted EBITDA between EUR 810 million and EUR 860 million, and a free cash flow between EUR 275 million and EUR 375 million. Let me remind you that this annual guidance upgraded in July is confirmed and does include only 6 months of Lynxeo. Now entering the final quarter of 2025, we look ahead with confidence. Electrification keeps powering the group performance and Nexans is well positioned to capture this growth with resilience, efficiency and focus. Also, I would like to thank all our teams in Nexans for their commitment and hard work. They are the driving force behind our success on the journey that lies ahead. I am now happy to take on the questions. Operator: [Operator Instructions] We will now take our first question from Daniela Costa of Goldman Sachs. Daniela Costa: I want to ask one sort of like more medium term and one a bit more shorter term. So I'll do them one at a time. But given the deal you've just done now in Canada, and I think in your commentary remarks on the press release, you're mentioning that you're moving from -- or Nexans moving from execution to expansion. Can you talk a little bit about how you view the balance sheet? What's an ideal positioning? Should we see this deal has sort of more of a start of a wave of deals in Electrification perhaps? And then I'll ask the second one. Julien Hueber: Okay. Thank you, Daniela. So clearly, the capital allocation is not changing. My priority will remain the same. I will focus and accelerate the M&A as per -- based on the same logic as in terms of thesis, basically, which is prioritizing M&As in countries where we are already located in order to reinforce our positions and in order to scale our innovations. And also second thesis is to focus on M&As in countries where we are not. So basically, we'll be looking for bigger acquisitions in these countries. And then the third thesis is also to grow in adjacent to cable, could be around Accessories or any other elements. Daniela Costa: And then just -- it sounded like in Q2 that the commentary was very strong regarding the outlook for 3Q on Connect. And I think sort of the market in general had interpreted that maybe more like high single digits or maybe above that, and you ended up with some growth, but relatively modest. Was it something in those countries that were weaker that deteriorated further? Or maybe people just got overexcited with the growth rates after the Q2 call? Sort of what's your interpretation of the deviation there? Julien Hueber: Yes, of course. So first of all, Connect is a very contrasted market. We have indeed meet the double-digit growth in South America, Canada, Middle East. That was completely in line with our expectation. For Europe, we were expecting a recovery in the Nordic part that did not happen. So what we have been doing is to accelerate the launch of innovation products. We are launching our more than 10 innovations both in Norway, in Finland and Sweden in order to compensate this. So we will not have any impact in terms of profitability in this area of Europe. On the rest of Europe, we start to see some -- in Q3, we started to see some signals of recovery, specifically in France, Belgium, Italy and Spain. Daniela Costa: But -- so it was as strong as you expected at the same dynamics you expected at Q2 or... Julien Hueber: So basically, you see the recovery in Q3 in Connect, it's a plus 3.6% compared to -- it's better, it's an improvement compared to Q2. And I expect that Q4 will be on the similar trend in Connect. Operator: And we'll now take our next question from Lucas Ferhani of Jefferies. Lucas Ferhani: I just wanted to have a bit more information on the North America business. So you said it's about 20% of group revenues. Can you say how much it is in Connect and Grid specifically? And also, do we still have that same split between kind of Canada versus the U.S.? And how would you characterize the EBITDA margins there? Would you say that they're higher kind of than group average? And the last point on that North America business, do you see any risk related to copper tariff in the U.S. that might redirect some volumes towards Canada? Julien Hueber: Thank you, Lucas, for this question. So I just want to remind that when we talk about North America, we are not in the U.S., we are in Canada. We are well positioned in Canada, and this acquisition will strengthen our position there. The split between Connect and Grid, it's mostly a Connect business, and we are in both, of course, markets, but it's mostly Connect business. And this Connect business in Canada is very accretive to the group. We have an extremely high level of first growth, but as well as profitability, hence, our choice to accelerate this M&A in Canada. Regarding -- sorry, your last part of the question, the copper tariff. We -- basically, we see that there is no impact for us in terms of copper tariff because we are our own brand in Canada, delivering the market in Canada. So we have no impact for that. on the H1 and the H2 will be as expected. So there will be no specific impact there in this part of the world for the tariff. Operator: And we'll now move on to our next question from Chris Leonard of UBS. Christopher Leonard: So maybe 2, if I can. And focusing on the Transmission business, obviously, a very good quarter in Q3. Can you update us on the contracts that you're still looking at in terms of the pipeline and saying that there's good growth potential here? Is there anything we should expect for 2025 so that you can reach that book-to-bill level of 1x? And within that, could you also help to give us some color on the U.K. National Grid contract again and just give us a flavor for why I believe you decided not to bid and move into the tender on those contracts. Because so far, the pricing looks very strong on those contracts for Prysmian and as a preferred supplier and NKT, it would be helpful to get any color there. And then a second follow-up question would be on your comments for GSI saying that the contract with IPTO is going well, very collaborative and on track with schedules and milestones. Is there anything more you can give on visibility of a plan B that you spoke to or your previous management team, I suppose, spoke to at first half results? That would be super helpful. Julien Hueber: Okay. Thank you for your questions. I will start and then I will hand over to Vincent Dessale, who is with me in the room today. So basically, indeed, you've seen this strong performance Transmission in Q3 and year-to-date as well. In terms of backlog, you have noticed that we are a book-to-bill of 1 in Q3, and we expect to have a similar approach during the year-end. We are active in terms of -- in the quotation at this moment. We are -- of course, I cannot disclose the number of projects, but we are quite active, and we are positive to do some quotation in Q3, hopefully, with some award in H1 next year. So that's basically the situation. And regarding the GSI project. As I said, the project is ongoing, extremely good relationship and collative work with IPTO, our customer. And for us, there is no plan B. There is only one plan A, which is keep going and working with our customers to deliver this project. And I will not -- leave Vincent to continue. Vincent Dessale: Yes. Maybe to give some color and to complement Julien answer regarding the backlog, indeed, we have a great improvement compared to last year, plus 27%. You know it. It has been mentioned with some press release, typically the award of the RTE frame agreement in March and more recently, the Malta-Sicily Project. The pipeline remains active. We have indeed -- and just to give an example because it's public recently this week, Terna has announced a new tender for a major interconnection in Italy. So it just gives an example of the robustness of the pipeline. And indeed, we are quite active on what I would call medium-sized projects and large projects, which are going to be awarded in the next 12 months. So quite active backlog and quite active pipeline in the coming months. Christopher Leonard: And is there any comment on the National Grid contracts that you guys weren't a part of? Vincent Dessale: Yes. Sorry, I forgot this point. I will answer to it, of course. But the story for Nexans has not changed. We are -- we have the SHIFT approach in the project, which means that we are very selective in the way we choose the project that we want to target. We have commented this in the past. It's a mix of technical fit, terms and condition fit, how it fits with the other projects that we have already in the backlog. And indeed, when we look at this frame agreement, it was not answering from our perspective to the different criteria. And as I said, we have other opportunity in the pipeline that we consider from our perspective, more interesting for Nexans. Operator: And we'll now take our next question from Jean-Francois Granjon of ODDO BHF. Jean-Francois Granjon: Yes. Two questions from my side. The first one concerns the acquisition of Electro Cables. Could you give us some more details regarding the current profitability of this company compared to the profit of the Connect division? And what do you expect? You mentioned an accretive impact, but could you give us some more details? And can you give us the EV and the multiple for the transaction? And the second question, I will come back on the GSI project. So you confirm the continue of the operations. Could you give us the contribution expected from GSI this year in 2025? And when do you expect next year? And I understood that probably there will ramp-up, and we expect a higher contribution in '26 compared to 2025. Could you give us some more color about that? Julien Hueber: Okay. So first question regarding the new acquisition, Electro Cables. So this is -- this business is relative to Nexans. It's on Canada for us as well. So both our business in Canada and as well as this Electro Cables is in the upper range of the -- above 20% of EBITDA. So it's extremely relative to Nexans. This business is extremely well positioned in market segments which are for us priorities and fully in line with our Capital Market Day. So the -- for example, the data center elements, the infrastructures, gigafactories and so on. So it's completely aligned with what we want to do. We also see some very interesting synergies from a supply chain standpoint between Nexans Canada and Electro Cables. So basically, that's why we decided to move on and to finalize this deal. So that's element -- first positive element. Regarding GSI, your second question. Well, you know that we have received EUR 250 million of payments the past months in different parts. So this year, we will do approximately EUR 150 million as part of the -- that was what we have communicated. So we will stay on this type of ratio. And maybe, Vincent, you want to comment for... Vincent Dessale: Yes. I think Jean-Francois, I think we will not comment in details, of course, the coming revenue for GSI. But as a matter of fact, this is -- you know the amount of this project is EUR 1.4 billion, basically. We have started in '23, so a smooth ramp-up. And after you can consider that you have a kind of linear activity in the first year and with a kind of acceleration in the last 2 years of the project, '28 and '29 due to the installation, which is usually compact in terms of activity versus the production, which is split basically during 5 years. So that's basically the profile of what you can expect in terms of activity. Jean-Francois Granjon: Okay. And just the additional question regarding that, you expect you confirm an improvement for the EBIT margin for the Transmission division next year compared to 2025? Julien Hueber: I think, yes, we will come back on you on this when we'll publish our results in February with a new guidance. But what I can tell you is that we are extremely satisfied with the execution of this -- of the different project ongoing and very proud of what the team is doing at this moment in this Transmission stream. Operator: And we'll now move on to our next question from Scott Humphreys of Berenberg. Scott Humphreys: I just have 2. The first is a very quick follow-up on the tariff topic. So one of your peers has been speaking recently about kind of increasing their purchases of scrap in the U.S. or in North America. From a kind of European perspective, has the reduction in the amount of scrap that China is importing from kind of North America. Is that having any impact on the cost of your scrap in Europe? Or was the Chinese buyer not as significant in Europe in the first place? So that's the first question. But I can -- carry on, please. Julien Hueber: No. So very clear here. So no impact at all in our scrap recycling activities in Europe, no incidents, nothing. Scott Humphreys: Okay. And the second one, just kind of a broader one on medium voltage. If you could maybe kind of remind us where you are in terms of the process of adding capacity in the medium voltage business in terms of, I guess, Morocco and then you mentioned briefly the low carbon production in France as well. So kind of how are you seeing that the level of capacity in medium voltage given how strong the Grid segment continues to be? And how does that kind of tie in with this additional layer of kind of a focus on production efficiency that you've talked about in addition to the CMD strategy? Julien Hueber: So thank you. This is a very interesting and important question. So you can imagine when we grow your business by 9% year-on-year, of course, it has an impact on manufacturing. So here, first of all, I want to remind you that what the job we have done in the past year was to increase the capacity because we anticipate this large increase in the Grid to come. I just want to remind you the acquisition we did in Reka, Finland 2 years ago with 2 civil lines, the announcement of the additional CapEx in Bourg-en-Bresse, an additional civil lines as well as the [ Safi ], which is Morocco new plant that is going to come. So in terms of capacity increase, I mean, we are completely in line with our plans to sustain this growth. Now regarding the existing footprint as well, we are -- and that's -- and you've seen in terms of communication that we have done in the past last week, basically, that in order to basically deliver our commitments and objective for 2028, industrial excellence will be key. And that's why we are really accelerating today, the efficiency, the productivity and as well as the competitiveness of our plant in Grid. So we have a full program on that, and that's extremely important to continue on this. And maybe one word because Grid is, of course, cable, but as well Accessories, and I will let Elyette to comment on the Accessories as well. Elyette Roux: Thank you, Julien. So what we can say is that we are accelerating even further away in Accessories. And indeed, as presented in our CMD, we mentioned that we had anticipated the investment in the plants with automation and robotization. So we are basically delivering at the scale that we announced in the CMD. Operator: And we'll now move on to our next question from Nabil Najeeb of Deutsche Bank. Nabil Najeeb: The first one is on GSI. I think you guys said -- you just said you had received EUR 250 million of cash for GSI so far, and that's the same amount as what you indicated at the H1 stage, which you said should keep you going until early September on GSI execution. So I'm just wondering if you have received any more cash recently? Or are you executing on GSI while waiting for a payment? And then the second question, given, Julien, you've been in charge of the Grid and Connect business for Europe, I was hoping to get your thoughts on how you see the margin potential for these 2 divisions. I think previously, your predecessor alluded to a longer-term range of around 15% to 16.5% for Grid. Is that a view you share? And what about for Connect? Julien Hueber: Okay. So I will start, of course, by the GSI. So indeed, you know the amount of cash we received, EUR 250 million. We have been completely transparent on this. Once again, what I can tell you is that we are working very closely with IPTO in a very, let's say, collaborative way. And we are in discussion at this moment in terms of the next steps of this project on the milestone and payment is part of it. So I cannot disclose anything, but that's, of course, as you can imagine, a part of our discussion. There's also ongoing discussion on political as well regarding the GSI. But on the cash payments, we are close discussion with IPTO on the -- and that's where we stand today. Now regarding your second question, indeed, the European business, there are 2 streams, Grid and Connect. So Grid, you are right with more than 15% EBITDA in terms of profitability. Here, you need to understand that in Grid, there is basically 3 parts, 3 elements. First one being the long-term agreement with utilities. And here, we are extremely satisfied with relationship with platinum customers that we're having. We have signed long-term agreement with them. In the past, it used to be 2 years contract agreement. Today, we are talking about 4, 5, 6 years contract. So we give us a very good visibility about the long term. The second part is project base of Grid, which are renewable solar or wind. Here, it's more, let's say, a project for a few months. And this business is extremely dynamic as well in Europe. I mean, Italy is one of them, Greece, or the other parts of the countries. Here, the profitability of this project are also at the right level of what we are looking for and what is in line with our Capital Market Day. And then you have the third activity, which is Accessories managed by Elyette, which is -- and we have communicated that a few times that is extremely lucrative as a business growing very fast because you know that the accessories part is, let's say, the critical element of the Grid. And our customers, platinum customers are replacing that regularly due to the climate change. And that's also giving us the reason why this business of accessories is growing even faster than the cable. So that's basically for the Grid part. Now talking about Connect. So Connect contrasted, as I said, businesses. The -- let's say, the profitability in Europe is around 13% EBITDA. And we will be growing this step by step with -- because we have growth patterns in our strategy where we will be growing in the sectors in the verticals for us, which matter the most, data center, critical building, injecting new technology of products, injecting new innovation of products. On that point, I think just for you to understand, we are -- in the past 2 months, we have launched Klaro, new innovation in Italy market with LTC. We are launching in September, ULTIMO innovations in Benelux, MOBIWAY in Norway. All these innovations are comforting the profitability of this business and are providing us also some resiliency because we try to avoid being too much exposed to residential and much more, let's say, focused to the market segments, which are going better. Vincent Dessale: And maybe to add on Julien's comment, just to remind that we have improved significantly over the last year, the performance of the Connect business, thanks exactly to what Julien comment, the SHIFT program deployment plus innovation, which are really the 2 pillars. And if you remember in the last call, we have not given any guidance on the percentage of EBITDA for Connect for very simple reason is that we have an ambition in terms of acquisition and the acquisitions that we do usually are slightly below the average of Nexans. And we have after the deployment of our integration program in order to bring them at least to the average and sometimes above the average. And indeed, we have -- we know that in the coming years, we'll continue to do this acquisition. So this is basically why we -- how we drive the evolution of the performance of Connect. But as mentioned by Julien, we are confident. Julien Hueber: And one more comment, I think what is very important to understand, in the Connect, you can grow very fast and you can take any type of business. But remember, the strategy of Nexans is to be selective. And for instance, in the Nordic in Q3, I asked the team to be extremely selective in the type of project because we don't want to consume cash for projects which are not accretive to our EBITDA. So we took always the decision to select the type of project and choose the one that really bring both cash and profitability to Nexans. Operator: And we'll now take our next question from Akash Gupta of JPMorgan. Akash Gupta: My first one is on outlook. So when you raised full year guidance in July, you were guiding double-digit growth in Grid and Connect in Q3, but we saw Grid growth in Q3 was slightly below double digit and Connect was not below double-digit level. And then we also saw some losing momentum in Metallurgy business, which was pretty strong in first half. So my question is that today, you are reiterating the guidance. But when we look at this guidance corridor and giving consensus is towards the bottom end of the range, where do you expect to end up in the year? Like how much confidence do you have in the midpoint? And how much confidence do you have on the upper end of the range? So that's the first one. Julien Hueber: Okay. Thank you, Akash, for your question. So basically, the Metallurgy tariff impact was none at the moment where we upgraded the guidance. So I think this one is -- there's no, let's say, negative impact whatsoever in terms of the guidance for the year-end 2025. Regarding the Grid and Connect, so our strategy is not always to go for volume. It's also to go for profitable growth. And typically, as I mentioned, for Connect parts, even though, as you say, the volume has been slightly below the expectation of the market. I can tell you that the quality of the growth of the 3.6% based on innovation we are doing, secure our guidance for the year-end. So I can tell you, that's why we will be securing our guidance by year-end. And I will not now comment where we'll be landing because we are still working on it. Of course, you can imagine. But the quality of the growth we have both in Grid and Connect secure our guidance. Akash Gupta: And my follow-up question is on Transmission growth. So when we look at the comps in absolute term, I think you will have a toughest comp in Q4. So maybe if you can comment about what sort of growth rates do we expect in Q4? And then when we move from '26 to '25, again, is there any unutilized capacity where utilization can be driver for growth? Or will the growth in 2026 will be mostly coming from project mix? Julien Hueber: Okay. So in Transmission growth, you have seen that -- so basically, we will be -- so you may have some spike from one quarter to another. You see a very strong Q3 numbers, 33%. I would say that our growth for the year-end will be first very well oriented and in line with the average of what we have announced in H1, this type of growth level. Now regarding the vision for 2026, maybe Vincent, you want to comment on this one? Vincent Dessale: Yes. Akash, Vincent speaking. I think you know the story very well. I mean the significant increase of this year is the result of our decision some years ago to make several investments in terms of manufacturing, testing and installation. So it's a kind of expected, I wouldn't say mechanic, but at least expected growth. Now we have a backlog, as mentioned by Julien before, for the next 4 years. So we will be in line in terms of volume with this year because now all the capacity that we have added over the last 3 years are now running and they are fully loaded for the next 4 years. So that's basically the profile of activity for the next 4 years. And as mentioned by Julien, depending on the different, I would say, planning of the execution, you can have from one quarter to another one, some differences in terms of volumes because you will have more installation, less installation. You know that we do more installation during summertime than during winter time, the usual approach of this business. Operator: And we'll now take our next question from Uma Samlin of Bank of America. Uma Samlin: So my first question is on -- a follow-up on GSI. I was wondering if you could help us -- how should we think about the progress of GSI so far in relation to your full year guidance? I think in the previous calls, you had mentioned that even if the project does not go ahead, the EUR 250 million that you have received so far would still contribute enough for the guidance to be hit in the mid-range of the guidance. Just wondering if you can confirm if that still is the case. My second question is on the PWR-Grid market. I guess we've seen a fair share of capacity expansion there. How should we think about pricing versus capacity expansion in PWR-Grid going forward? Julien Hueber: Okay. So GSI, I think I will repeat what I just explained. So basically, yes, indeed, when we -- when the guidance has been raised last July and confirmed today, we completely integrate the GSI elements of the milestone we have with customers. So having no change for that, I can [ contain ] this point. Now regarding the PWR-Grid, your second question. So it is also a very interesting question. So the growth is there. We demonstrated 9%. The capacity in Nexans -- manufacturing capacity in Nexans is also ready to sustain the growth. And we do not see any change, any pressure on price. Why? Because, first of all, we are -- we have launching low carbon innovations, which are extremely let's say, in line with the expectation of our customers, platinum customers that -- because you may know that the type of medium voltage low carbon offer that we are providing and selling to the market today, they are reducing by 50% the CO2 emission. So you can imagine the importance it has for our customer utilities. That's why we are able to differentiate from our competitors that are not offering the same thing. And as well as the strong, let's say, no pressure on price in Grid is also linked to the growth we are making in Accessories. Here again, I think you have seen last communication where we are launching innovations on new type of accessories, new joints that are also accelerating the installation phase from our electricians on the field. Operator: And we'll now take our next question from Miguel Borrega of BNP Paribas Exane. Miguel Nabeiro Ensinas Serra Borrega: Sorry to come back to GSI, which you say is on track, and there is no plan B. But it seems you're now more at risk than where you were in the first half. If the project is really canceled, what are the remedies? How can you replace the production reserves for next year? And do you think there are other projects out there with such a margin? I'm just trying to understand if the previous 17% margin for Transmission as a whole is still possible without GSI. Julien Hueber: Okay. So first of all, the project is not canceled. We are still working on it. They are extremely close discussion on relationship with our customers. There are ongoing discussion on the political side and supported by the European Commission. So I mean this is -- we do not see that as a risk. And we'll come back on that, of course, when we'll have some more, let's say, information to share. But this project is not canceled so far. Regarding now the -- we have enough pipeline of projects ongoing. Some of them already secured. Some of them are also under quotation. So here, we have so far -- we have no -- let's say, we don't forecast any problem for next year on this part. So basically, on -- maybe Vincent, if you want to add. Vincent Dessale: Yes, maybe to give you some color, I mean, just keep in mind that this project is what we call a mass impregnated project with deepwater installation. And let's be clear, on the previous projects with this type of technological content, we have been only 2 players to be qualified. So you don't have so many players able to deliver so far this technology. And basically, when you look to all the coming projects in Med Sea, for example, they will all request this type of activity. And today, both players are fully loaded for the next 4 years. So you can imagine that the other projects coming in the pipe are just waiting the available capacity. So as mentioned by Julien, there is no plan B. Today, we are working with our customers in very good collaboration. And we are already working with some potential projects after GSI, which will be '28, '29, basically. Miguel Nabeiro Ensinas Serra Borrega: Okay. And then just a high-level question as you were previously Head of PWR-Connect and Grid, what can you tell us about recent performance in terms of growth and profitability? And maybe some insights on what will be the #1 priority from here on? Is it accelerating top line growth? Is it continuing to expand margins or accelerate M&A? And then if I just can squeeze one more on Industry & Solutions. I think there's only Auto-harnesses left to be disposed. Is that still the plan? And do you see other areas potentially up for sale? Julien Hueber: Okay. So I will start by your last comment with autoelectric. So the answer is yes, it is -- there are still ongoing discussions with potential buyers. And this discussion are progressing. So that we will be able to come back to you as soon as something is a bit more concrete on that. But that's something that is part of our strategy to dispose and to become 100% electrical pure play electrification. Now regarding the -- you like, let's say, what would be the priorities. But basically, capital allocation is clear because we want to accelerate the M&A. That's really my objectives. I think the announcement of today for Canada can demonstrate it. And we have -- the team, M&A teams of Nexans is also very active with different pipeline. So we will review that very quickly to move on these elements. Growth, yes, but profitable growth, selective growth like we have demonstrated since several years. I think we will continue to do this. And also, we will be extremely -- and we explained that in the Capital Market Day in terms of innovations. We have a pipeline of innovations. There was recently a big event with one of our customers, platinum customers in France. We have seen a lot of electricians understand talking about innovation. There's a big appetite for innovations. And last but not least is the SHIFT and SHIFT AI that maybe we can also explain to you. That's one of our priority. We really want to grow in this segment. And I will give the floor here of Guillaume in charge of strategy and AI for Nexans that maybe can give some color on that. Guillaume Eymery: Thank you, Julien. Indeed, SHIFT AI is a hot topic for us. Basically, it's the platform from which we develop the Nexans AI solutions. And the choice we made is to amplify and accelerate the SHIFT program that has been very successful for Nexans. We focus on 4 axis: costing, complexity reduction, dynamic pricing, client advanced segmentation. And basically, the idea of SHIFT AI is that when a normal manager uses 5% of the data available, we moved to 20% with SHIFT. And with SHIFT AI, we will move to 90%. So at the moment, we are really in the topic of building up this platform, and we will tell you more in '26. Julien Hueber: And maybe just to finish on your question, maybe one of my other priorities, which is for me extremely important, is to work on the industrial excellence, generate mutualization of industrial footprints, both in Grid and Connect because we have here a room of improvement, productivity and competitiveness. So that will be also a key element of my priorities in the coming weeks with the team. Operator: And we'll now take our next question from Eric Lemarie of CIC. Eric Lemarié: I've got 2, the first one on GSI. I appreciate your various comments on this project, but could you confirm maybe that you're on time with the initial schedule on GSI and that the project has not been somewhat delayed as it is sometimes mentioned by the press? And could you maybe say when you expect to receive the final notice to proceed for GSI? And I got a second question on the backlog. The backlog on Transmission is flattish, is up year-on-year. I can see that, but it's flattish sequentially this year, around EUR 8 billion. Could you perhaps remind us your strategy here? Is it to properly execute and renew the backlog in good condition? Or is it more to expand the backlog to make it grow further? Julien Hueber: Thank you for your question. Maybe, Vincent, you want to comment? Vincent Dessale: Yes. I can take the backlog, if you wish, Julien. I think what we must have in mind, you have to take a kind of step back, I think. Why the backlog has increased significantly is that, if you remember, in '23, there has been this big move on the market with the Tenet frame agreement, which was basically the largest award of the history of the subsea business, which has basically catch a big part of the capacity on the market. And as a consequence of this major move from Tenet, you have seen plenty of other players placing their tender in order also to avoid a lack of capacity on the market. So '23 was indeed a peak of order intake. So I think now we are more in a normal process because basically, all the key players, we have 4 to 6 years of backlog. So it's quite logical, I will say, that you have a lower activity of tender right now, even if, as we say, it's still very active and very robust. You have the different players have announced award around this year. But if you follow my logic, you should expect potentially a new peak of order when there will be much more free capacity, which means basically probably more in '27 or '28. And that's why we have said previously that we think that the book-to-bill will be around 1 this year and probably next year due to this -- not due to us, but due to the cycle of the business. So we are focusing to answer to your question to 2 points. First, to execute properly the backlog because we have a good backlog to execute. And indeed, we are looking to the pipeline in order to on time, prepare the next generation of order, which will start basically from '29 onwards. And this means probably, as usual in this business, tendering 2 years in advance before the available capacity. Julien Hueber: And just -- thank you, Vincent. Just to answer your first question regarding GSI, yes, I do confirm we are in time with initial schedule, and we are in close discussion with our customers about the next steps. And so that's where we are standing today. Operator: And we'll now take our next question from Xin Wang of Barclays. Xin Wang: A quick follow-up on GSI, given we can't see your financial statements. Can you confirm for the volumes produced since September, are these sitting as contract assets or trade receivables on your balance sheet, please? Vincent Dessale: Just maybe a clarification because you speak a lot about the production. And I think just as a reminder, a project is not only production. I will not give you in details the detail of the scheduling of the project. But when we -- all what we have done since the beginning of this project is, of course, engineering, testing, production and so on. So when we say that we are on track, as mentioned by Julien, it means that we are on track not only with manufacturing, but also with jointing activities, with testing activities, with engineering activities, and this is basically what we are doing. So we have produced, I think, probably around 240 kilometers more or less. And indeed, we are continuing with both production and jointing and testing. That's the normal life of a project from a pure -- to give some color on the -- what does it mean from an operational perspective. It's not only production. If not, the project will not progress as planned. Xin Wang: Okay. I think my question was more on for the work you did since September, are you able to invoice them? Julien Hueber: So yes, we have been -- of course, we have been invoicing the customer as per normal, as per the ongoing project as per the milestone. So -- but that's nothing exceptional to report as usual, yes. Unknown Executive: [indiscernible] is limited so far. Xin Wang: Sorry, I didn't quite get the last bit. Julien Hueber: So it's Christine, our interim CFO, which was saying that our exposure is completely aligned with -- there's nothing special to report yet. Xin Wang: Okay. Great. And then my second one is, do you think there is a temporary regional oversupply in Canada since the introduction of U.S. tariffs? Because in H1, it was very obvious that you were exporting a lot more copper to the U.S., which was reflected in very high other activity numbers as you also commented in Q3, this was negative 6.3% year-on-year. Julien Hueber: So I don't think so for Canada. We have a very strong growth in Canada, close to 20% growth year-on-year, extremely dynamic. You know that we have 2 type of business, Grid and Connect. The Grid, it's fueled by long-term projects, long-term agreement with customers, utilities. So here, we are very well secured on the visibility. And in terms of Connect, we are -- what the team is doing is to really focus the activity on the specific verticals, data center, critical buildings. And here, again, there is no -- we don't see any specific additional competition from outside the Canada or from any other country. So basically, we are very well secured in this market, very dynamic with very long capability to grow in terms of construction infrastructure. Xin Wang: Okay. Good to know. And then final one, is the 9% Grid growth margin diluting? Because I think previously, management commented on sensitivity table between organic growth and margin. Is there a shift on how you think about the market? Julien Hueber: I can tell you that it's not diluted. This Grid business is extremely profitable. And so no dilution at all. It's -- we are completely aligned. Once again, we are aligned with the target we have communicated in Capital Market Day, both in terms of profitability and in terms of growth. Operator: Thank you. There are no further questions in queue. I will now hand it back to Julien for final remarks. Julien Hueber: So thank you, operator. So let me just finish by saying that I believe the solid performance delivered in our trading update today confirm the robustness of Nexans model and discipline with which we execute it. Now we enter into a final quarter with confidence, and we reiterate you have seen and you understood today our 2025 guidance. I'm very pleased to go now on the roadshows and to meet investors in the coming weeks. Thank you again for joining today. Operator: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning. Thank you for standing by, and welcome to the Sodexo Fiscal Year 2025 Results Call. If you -- I advise you that this conference is being recorded today, Thursday, October 23, 2025. I would like to hand the conference over to the Sodexo team. Please go ahead. Juliette Klein: Good morning, everyone. Welcome to our fiscal 2025 results call. I'm here with Sophie Bellon and Sebastien De Tramasure. They'll go through the presentation and then take your questions. [Operator Instructions] The slides and the press release are available on sodexo.com, and you'll be able to access this webcast on our website for the next 12 months. Please get back to the IR team if you have any further questions after the call. I remind you that our Q1 fiscal 2026 revenues announcement will be on Thursday, January 8. With that, I now hand over to Sophie. Sophie Bellon: Good morning, everyone, and thank you for joining us today. We spoke to you a couple of weeks ago regarding our governance changes. And today, we are going to cover our fiscal year '25 results and our priorities and outlook for 2026. Just on the slide here, a brief summary of what we're going to cover today. When I became CEO in 2022, our priorities were clear: reposition Sodexo as a pure-play food and services company and simplify the organization. Over the past 3 years, we've made solid progress, streamlining the portfolio, refocusing on food, accelerating key investments and strengthening client relationships. These were essential steps to build a strong foundation for sustainable growth. In financial year '25, results came in line with revised guidance, reflecting both operational and commercial challenges. We are actively addressing these with targeted action plan in commercial and in U.S. universities. We're also continuing to strengthen our foundation. With this in mind, fiscal year '26 will be a year of transition and the start of a new phase for the group. Thierry Delaporte will soon take over as CEO, bringing the right experience and profile to drive operational execution, accelerate commercial momentum and lead the group forward. But let's now first take a backward perspective on our key achievements from the last 3 years and 2026 priorities before Sebastien walk you through the fiscal year '25 results and the resulting fiscal year '26 guidance. Turning to the next slide. While I won't go into every detail here, this timeline of recent years shows the major steps of our shift to a pure-play food and services company. We have simplified our structure through geography reorganization and the sale of Sofinsod. We have actively managed the portfolio by spinning off Pluxee and making other non-core disposals, while pursuing targeted acquisitions to accelerate in food. So if we look now at the impact of this refocus on core activities, you can see that there has been real progress in the numbers. Let me pick out some highlights. Food now covers more than 2/3 of our portfolio, up from 62% in fiscal year '22. We have modernized the offer based on data-driven insights across culinary, digital and sustainability. Digital engagement has surged almost 6 million active consumers, up from just over 1 million, showing how we're expanding our reach and creating new growth avenues. Our branded food offer now represents over 50% of revenues versus less than 20% 3 years ago, improving client experience, standardization and operational efficiency. Entegra has more than doubled in size, boosting procurement benefits, and we have also advanced catalog compliance, both strengthening our competitive edge. On sustainability, we are hitting the targets we set on workplace safety, carbon and food waste, thanks to close collaboration with our clients and partners, and we are leading by far the industry on those aspects. And all of this is creating tangible value. Our underlying earnings per share has grown at 14% compound annual growth rate, and we have seen a marked improvement in our return on capital employed. Moving on to commercial performance. We have made a solid improvement in retention and development compared to the pre-COVID period. Over the last 3 years, our average retention is 94.5% versus 93.5% between 2017 and 2019. Likewise, on development, we signed around EUR 1.7 billion of new contracts per year, including cross-selling compared with EUR 1.4 billion before the pandemic. This is a result of our ongoing focus on processes, team culture and competence, but also client relationship. However, this does not reflect our full potential with fiscal year '25 presenting some commercial challenges. In fiscal year '25, retention came in at 94% due to the negative impact from the loss of a global account and softer performance in North America, in particular, in Education. Performance is uneven across the business. For example, U.S. Healthcare. In U.S. Healthcare, we delivered retention above 97%. And in France and Australia, we were above 96%. On development, H1 was strong, especially in Europe and Rest of the World, but H2 softened and total new business landed at EUR 1.7 billion. North America, which remains our largest market, is where we need to improve. We have clear actions underway. We are addressing near-term priorities in U.S. Higher Education, and we are strengthening our U.S. sales team through expansion and training. We are also investing and reorganizing to make sure we capture the market's potential. I will now walk you through in more detail how we are addressing the challenges in U.S. Higher Education. We clearly had some performance gap over the past couple of years in this segment, and it's translated into market share losses. Since February, together with Michael Svagdis and his team, we have carried out a comprehensive diagnostic process to fully understand the root causes behind this lack. A few key issues stood out. First, our footprint is still too concentrated in small and midsized institutions. Second, we have not focused enough on mid-plan renegotiation. And third, we've had some resource misalignment. The remedial action plan is already well underway. Michael has put in place a new organization with culinary and digital now reporting directly to him, and he has reenergized the team to drive best practice and greater standardization. Our sales function was clearly subscale, so we have expanded the team by 50% with the newly hired sales executives already in place and operational. We are also targeting more large universities and athletics, working more closely with Sodexo Live!. To strengthen existing relationship, we are growing our account management team and refreshing our broader teams, bringing in new talent where needed to ensure the right capabilities are in place. Execution is a big focus. We are currently renegotiating 75 meal plans for implementation in fall 2026, and we have rebuilt the meal plan team, which had been disbanded during the COVID period. Now we are harnessing data and tech to methodically track what's selling, where and to whom. We are deploying digital platforms like Everyday and Grubhub, and strengthening our own retail brands to streamline the offer. This plan is clear, but it won't be executed overnight. Some levers will take time. And given the timing of the selling season, fiscal year '26 is largely set already. The goal is, therefore, to restore growth momentum and capture new market opportunities progressively from fiscal year '27 onward. Michael and his teams are laser-focused. Michael has visited more than 20 campuses in the last 3 weeks. The feedback is very consistent. Universities are under financial pressure. They are becoming more business-driven, and they are open to change. That creates challenges, but also a lot of opportunities, and we are now in a much better position to seize it. So as you can see, we have set focused priorities in the U.S. for this year, short term very execution-driven, to put us back on a stronger trajectory. With that in mind, fiscal year will very much mark itself as a year of transition. It will still reflect some of the commercial challenges we have just discussed, but also the investments we are making to strengthen our foundation to drive efficiency, accelerate digital and prepare for long-term growth. Sebastien will get back to that. We have a strong foundation to build on, with a solid balance sheet and the flexibility to invest where it matters most. We are the #2 player globally with a balanced portfolio across regions and segments. We have the scale to leverage procurement, technology and operational excellence across the group. Our culture remains a key driver of sustainable performance, purpose-driven, people-focused and deeply engaged with our clients. Retention in our industry drive resilience, and our teams are proud to deliver on our mission every day. And of course, we operate in a large and attractive market, still 50% in-sourced with significant outsourcing opportunities ahead of us. Looking ahead, I'm also very confident in the next phase for Sodexo. On November 10, Thierry Delaporte will join us as Group CEO. He brings over a decade of leadership experience in the U.S., strong digital and AI expertise and proven track record in leading large people-intensive organization. He's operational and execution focused and deeply aligned with our values. He is the right fit to take Sodexo into its next stage of development. And with that, I'll now hand over to Sebastien to take you through the fiscal year '25 financial and fiscal year '26 guidance in more detail. Sebastien De Tramasure: Thank you, Sophie. Turning now to our fiscal '25 performance. Overall, our performance was in line with our revised guidance. Organic growth came in at 3.3%, slightly higher at 3.7%, excluding the base effect from the major sports events and the leap year in fiscal 2024. Underlying operating margin was 4.7%, up 10 basis points at constant currencies, while on a reported basis, it was broadly flat due to the FX headwinds. Free cash flow was EUR 459 million, including the exceptional cash out of circa EUR 160 million related to the finalization of the tax reassessment in France. And excluding that, our cash generation remained robust with an underlying cash conversion of 91%. Underlying EPS reached EUR 5.37, representing a rise of plus 3.7% at constant currencies. And the Board will propose a dividend of EUR 2.7 per share, up 1.9% versus last year and in line with our 50% payout policy. So now let's have a look at our performance by geography. Breaking down our results further, all regions contributed positively to our performance. Our largest region, North America, delivered 2.8% organic growth, reflecting strong results in Sodexo Live! and Business & Administrations, along with solid underlying momentum in Healthcare despite timing impact and partly offset by contract losses in Education. In Europe, organic growth was plus 1.7%, or 2.7%, excluding the base effects from the Olympics and the Rugby World Cup with steady progress across segments, notably in Healthcare & Seniors and Sodexo Live!. Rest of the World delivered strong organic growth of 7.5%, which was mainly driven by strong performance in India, in Australia and Brazil, which remain key countries where we are strengthening our positioning and consolidating our market share. And overall, close to 86% of our revenue in this segment are generated by Business & Administrations services. On margins, North America was stable at constant currencies, while Europe and Rest of the World improved 20 basis points, lifting the overall margin for the group of 10 basis points, to 4.7%. And the margin also reflects procurement efficiencies and benefit from our Global Business Services Program. So now let me guide you through the full P&L picture. Fiscal '25 consolidated revenue reached EUR 24.1 billion, up 1.2% year-over-year. As already mentioned, we faced currency headwinds this year, mainly from the U.S. dollar and several Latin America currencies, which had a minus 1.8% negative impact on revenue. And we also saw a small net impact from acquisition and disposal of minus 0.3%. Underlying operating margin, as we discussed, was stable on the reported basis and improved 10 basis points at constant currencies. Other operating income and expenses reached minus EUR 154 million with minus EUR 97 million of this related to restructuring and efficiency initiatives covering our global business service program, ERP implementation and other organizational optimization. Operating profit came in at close to EUR 1 billion compared with EUR 1.1 billion last year. Net financial expenses were EUR 88 million, lower than expectation due to some one-off gains. The new USD bond issuance had little impact this year as higher coupons were largely offset by cash interest income and gains from tendering existing bonds. However, net financial expense will increase next year as a result. The tax charge was EUR 198 million with an effective rate of 22.2%, reflecting updates on the tax credit and use of previously unrecognized tax losses in France. And looking ahead, our normative tax rate is expected to be around 27%. As a result, group net profit reached EUR 695 million, translating into EUR 785 million of underlying net profit, which was up 3.7% at constant currencies. So let's now turn to cash generation, which remains a key strength for the group. Free cash flow in fiscal '25 was EUR 459 million, compared with EUR 661 million last year. The change in operating cash flow mainly reflects the exceptional tax outflow for around EUR 160 million related to the finalization of the tax audit in France. Working capital remained well contained and net capital expenditure increased by 3%, translating into a CapEx to sales ratio of 2%, broadly in line with last year. Acquisition net of disposal amount to an outflow of EUR 93 million following the acquisition of CRH Catering in the United States and Agap'pro, a GPO in France. Both acquisitions fully aligned with our strategy to strengthen our convenience business in the U.S. and our procurement capabilities. Overall, our free cash flow remains solid, supporting both reinvestment in the business and shareholder returns. Then at the end of the financial year, net debt stood at EUR 2.7 billion, which was slightly higher than last year, while EBITDA increased by 2% over the same period. So this translated into a net debt-to-EBITDA ratio at 1.8x, within our target range of 1 to 2x. During the year, we repaid the EUR 700 million bond maturing in April 2025 and successfully issued a USD 1.1 billion bond. And part of the proceeds was used to repurchase some of our 2026 bonds. Overall, the balance sheet remains solid and give us the flexibility to invest in growth. So now that we have looked at the performance and the financials for the year just ended, I'd like to take a step back and talk about how we are accelerating our investment in foundations that will drive our long-term efficiency and profitable growth. This is really a strategic phase for the group as we are making significant investment into our HR, finance and supply system and our food and FM platform. In short term, this will put some pressure on margin, but it is essential that we position ourselves for improved efficiency and stronger profitable organic growth. We will continue to invest in sales and marketing, especially in North America to ensure more consistent net new business, as Sophie stated earlier. An important part of our investment program is supply chain management with a strong focus on the U.S., where we are optimizing processes, systems and ways of working to improve both cost and agility. The idea is really to bring more sites into a single unified purchasing system, giving us much better visibility on spend and allowing us to track compliance in real time. We are also standardizing our menus and recipes, so that they automatically link to order guides and purchasing system. And that means simpler execution for our site manager, stronger compliance and more leverage from our volume, including greater pooling between our on-site operations and Entegra. All of this is about making compliance and efficiency happen at the site level, and we are now incentivizing our unit manager directly on compliance. Another key area is our digital and IT foundations. Our global ERP rollout is a perfect example. It allows us to standardize end-to-end processes, secure our infrastructure, which is instrumental in all aspects of our operation, obviously, for data and performance management, but also to strengthen client account management by giving teams better visibility and faster insights. We are also investing to enhance our analytics and AI capabilities to support better decision-making, sharper performance tracking and faster execution across the organization. Finally, Global Business Services is another major focus. We are transforming support function into a shared service model with center in Porto, Mumbai and Bogota, now employing over 900 people. And these teams are centralizing finance, HR, other functions like supply and legal. And by doing this, we are driving efficiency, standardization and innovation while also creating talent hubs for the future. And we are already seeing some early benefits. For example, in the U.S., more than 90 positions were moved over to the Bogota center during the summer, improving competitiveness, process harmonization and supporting employee administration, recruitment and tender preparation. So this is really the second leg of our near-term priorities. The first being the U.S. turnaround that Sophie discussed before. And this investment position us to capture growth more effectively in the future and over time, and the margin improvements will follow. It's also about building the right platform today to deliver stronger performance tomorrow. Now moving to the outlook for fiscal year 2026. As we mentioned previously, fiscal 2026 will mark a year of transition as we proactively address the commercial challenges faced in 2025, especially in North America. And at the same time, we are accelerating the investment in our foundation, as just mentioned, to build a stronger platform for future efficiency and profitable growth. With that in mind, our guidance for fiscal year '26 is as follows: We expect organic growth between 1.5% and 2.5%. This includes a minimum plus 2% contribution from pricing, neutral to moderate contribution from both like-for-like volume and net new business and a one-off reclassification triggered by the renewal of a large contract. And this last point relates to a large NorAm contract currently being renegotiated. And under the new terms, we will act as an agent rather than the principal, meaning that revenue will be recognized on a net basis. And this will mechanically reduce reported organic growth by around 70 basis in fiscal year '26 with the new terms of the contract taking effect during the second quarter of the year. And our underlying operating margin should be slightly lower than fiscal year 2025, reflecting mix and timing of growth driver and the targeted investments we are making. In terms of quarterly phasing, we expect a relatively soft start with growth gradually improving over the year. This will be mainly driven by North America, where the impact of last year's Education losses will be most visible early on. And in addition, several contracts existed last year will annualize in the second half. Now I would like to conclude with you on our capital allocation priorities. We remain focused on disciplined execution, and that also applies to how we allocate capital. On capital allocation, framework remains balanced and consistent, designed to support both near-term execution and long-term value creation. First, we continue to focus on organic growth, with acceleration of our investment and CapEx objectives remaining unchanged at 2.5% of revenue. We remain selective on M&A, targeting midsized bolt-on acquisitions that are accretive and aligned with our strategy. On average, we expect to allocate about EUR 300 million per year to M&A, mainly focused on convenience, GPO and food services in our key existing markets. And recent acquisitions fit perfectly within the framework and the closing of the acquisition of Grupo Mediterránea expected to happen by the end of the calendar year. It's also part of the objective to strengthen our food services position in our key markets. And this acquisition will allow us to double our footprint in Spain. Furthermore, we are committed to optimizing returns to shareholders. Our dividend payout ratio is unchanged at 50% of underlying net income, ensuring an attractive and balanced remuneration for shareholders. And finally, we keep a close eye on liquidity and balance sheet strength, with a leverage ratio maintained between 1x and 2x and a commitment to preserving our strong investment-grade ratings. Overall, this framework supports our near-term priorities while providing the flexibility to adapt. With that, we are very happy to take your questions. Operator: [Operator Instructions] First question is from Jamie Rollo, Morgan Stanley. Jamie Rollo: Two questions then. First, could you please quantify the margin guidance? What is slightly lower, please? And also, is that pressure in all the regions? Or is that going to be concentrated in North America? And the second question is, you're describing '26 as a transition year, but you said the other day that the new CEO probably wouldn't announce their review until maybe early summer, which could that not mean that 2027 then is another transition year if there were further changes to be made? Or are you going to be doing all of the implementation in 2026? Sebastien De Tramasure: Thank you, Jamie. So I will take this first question about the guidance. So as I said, the objective is to have an operating margin to be slightly lower than fiscal year '25, reflecting really the mix phasing of our growth driver and also the phasing of the targeted investment we have to do. Then, the reason we did not give a range is that because there are a lot of moving parts. Again, at this stage, we do expect margin to be slightly below fiscal year '25. There are different drivers. Again, the low organic growth with small optimization in terms of volume increase. And then there is a timing of the investment. And also, we do expect also some headwinds from the -- from the exchange rate that will also impact our margin. So a lot of moving parts, the reason why we decided not to quantify this guidance. Sophie Bellon: So thank you, Jamie, for your question. I will take the second question on the transition. So 2026 will be a year of transition in several ways. First and foremost, it's a year marked by a change in leadership with the upcoming arrival of Thierry as the CEO next month, on November 10. It's also a year of investment to continue to lay the foundation for sustainable future growth. We are investing heavily in our HR, in our finance, in our procurement system, in tech and data as well as in our food and FM platform. And in the short term, this weigh on our margin, but I think it is essential to prepare for the future to be more efficient, more agile and to support sustainable growth. So for example, in the supply chain, particularly in the U.S., where we are improving our processes and system to better manage our expenses. And also, we want to increase our compliance in real time. We're also investing in data and analytics and artificial intelligence to better track the performance and execute faster. And -- does it mean another year of transition in '27? No, we are not standing still. We have our near-term priorities, U.S. Education, as an example, the investment in the commercial, and our underlying organic growth is between 2.2% and 3.2%. So we are moving forward, and we are in the actions. Jamie Rollo: If I can -- can I just come back on the margin answer? I appreciate you can't give guidance. There are lots of moving parts. But obviously, with a margin of under 5%, every 10 basis points is quite a big impact. I mean, is slightly lower nearer to 10 basis points or nearer to 30? Sebastien De Tramasure: Again, as I said, Jamie, we are not quantifying the guidance at this stage. We are talking about a slight decrease in terms of margin. And to also answer your question, the pressure on margin will be mostly in the U.S. because, again, as I said, our focus on accelerating investment in sales and marketing and all the supply initiatives will be also focused on strengthening our position in North America. Operator: Next question is from Estelle Weingrod, JPMorgan. Estelle Weingrod: I've got three, please. I mean the first one on U.S. Education and Higher Education more specifically. Could you give us some initial colors on the full-term enrollments? Then on North America, again, you elaborated on the action plan underway in the U.S. When you talked about targeted investment to enhance foundations for profitable growth, is it mostly investment in U.S. Higher Education? And within this, is it mostly about expanding sales higher? You mentioned 50% expansion of sales teams. And last question is just on your -- on modeling details. You've got that slide in the PowerPoint. On other income and expense, you guide for EUR 160 million, which is broadly flat year-on-year despite the step-up in investment this year, being an investment and transition year. So I was a bit surprised there's not more of an increase there. Sophie Bellon: So thank you, Estelle. I will take the first question on U.S. Education and Sebastien can answer on the other two questions. So first, you asked on the enrollment. The early indication from our boarding data show that we are about 0.7% below last year in our comparable base, and it really varies from countries to another. Some are growing, others are slightly down. Geographically, we're seeing softer trends in the Midwest and Northeast, while the Southwest and Southeast are showing increases. And these figures are still preliminary, and we'll have a more definitive year-on-year view once final enrollment numbers are confirmed over the next few weeks. But obviously, we are not standing still looking at that. Let me remind you the measures we are taking, and I told you, to boost volumes, retail and of course, to win new clients in the next selling season. And I explained that earlier in the presentation. Also, if we go specifically on international students, enrollment for the fall 2025 is expected to drop due to visa delay, denial, revocation, post-graduation restriction. So it will mostly be graduate program and will be most affected. We could reduce demand for housing, dining and other campus services. And undergrad services like mandatory meal plans are less affected. And also, what we see is that universities are adapting with, for example, mid-semester starts, which may mitigate some of that decline. And of course, we will monitor those trends closely and be ready to adjust our offering, our financial planning and the support to respond to the potential changes in the campus demand. And also, as I said on the slide, we are really investing in our sales force. We expanded our sales team by 50%. So I think it's -- and also investing in our account management team. So we are in the action. Sebastien De Tramasure: So on the second question regarding the investment and the acceleration of the investment in North America. So we have specific investment as described by Sophie for the Education segment. But we are really targeting investment across the organization. We want to strengthen the sales and marketing organization, not only for Education, but for all the segments. And all the investment regarding supply is not only for Education, it's, again, for all our businesses. And on your third question. So we are guiding other income and expenses at EUR 160 million, flat versus fiscal year '25. But the combination of the different restructuring program is slightly different. We had many regional restructuring program to optimize the structure at the regional level in fiscal year '25. We will have less than in fiscal year '26, and we will increase our investment again in our GBS program. The restructuring costs related to the GBS will increase in fiscal year '26. But if we combine both, yes, it's flat between fiscal year '25 and '26. Operator: Next question is from Jaafar Mestari, BNP Paribas. Jaafar Mestari: I have three questions, if that's okay. First one is in terms of your operating models and services. You mentioned some of the qualitative targets that you've achieved this year: branded offers, more than 50% of revenue; Entegra, more than doubled; carbon emissions, minus 34%; food waste, you didn't quite get to minus 50%, but not far. There was another one on digital and new services, 10% of revenue, you haven't said, but I assume you're not that far. My question is, you've achieved most of your soft qualitative targets and yet the overall financial performance was disappointing. What is your assessment here? Did you take targets that were not the right ones, and they need a complete rework under new management? Or was the delivery not deep enough? I guess you can get to 50% branded by changing a logo on the site. So have the teams delivered on these targets the right way, a way that benefits the business? Or have they delivered sometimes in a cosmetic way that has not really helped cross-sell or cross-fertilize the business? Second question, shorter, just on business development. You said yourself, your average signings pre-pandemic were EUR 1.4 billion each year. In H2 '25, this is where you are, EUR 700 million. What have you seen? Is it the industry? Is outsourcing less dynamic? Or would you say it's entirely market share issues on your side? And lastly, on full year '26, net new business, if I look at the forward-looking retention and signings, it looks like you could be a plus 1%, but you never quite get there. And I think that was one of the issues last year where you had 1.6% forward-looking, but you don't quite get there because you lose more staff, because the contracts take time to ramp up. So in terms of net new, could you help us a little bit more in terms of your assumptions in the guidance? Sophie Bellon: Okay. Thank you, Jaafar, for your question. So first -- on the first question, yes, we have delivered. I think when you talk about the offer and the branded offers and the fact that we have reached our target, I think it's a first step. No, it's not just a logo on -- it's not just a logo in a restaurant saying that we are implementing a new offer. It is much more than a logo. It's a menu. It's a number of SKUs that are linked to that menu, and it's more compliance. So I think it's a first phase. And I agree with you that it's not driving gross profit enough yet. And we are fully aware of that and especially in the U.S. where our compliance, at the site level, is not sufficient. And that's why starting in September, all our managers are incentives, from the site manager and upwards are incentives on the compliance. It's a new -- it is for every member in the organization. I think also when you have -- so it takes more time than just sending the offer. You need to also go -- we need to go deeper now. Second, when we talk about the, for example, the digitalization and the fact that now we have 6 million of people that can have access through -- digital access, it will also drive the revenue because we have seen that. And it will also drive the margin because we will be able to answer better what people want on a daily basis. So on your third question, I will let Sebastien answer, and then I will get back to you on the net development. Sebastien De Tramasure: Yes. So on the net new, you're right. I mean, the net impact, if we take the looking forward KPI, 1.4%, and then the in-year impact expected for '26 will depend obviously of the net new from '26 as well and the in-year impact. It depends on the phasing of the development, phasing of the retention. And it's the reason why we took this year a more cautious approach, I would say, baked into the guidance, as we said that the net new impact in-year expected for fiscal year '26 should be between neutral to moderate contribution. And again, the phasing development retention is explaining this cautious guidance in terms of net new impact for fiscal year '26. Sophie Bellon: And in terms of the -- the last question was about the development, right, and the EUR 1.7 billion. Clearly, this year, as I said it in my introduction, financial year '25 has been a challenging year and on new development, especially in the second half, we had a first -- a good start in H1. And what we see -- and the second half was very disappointed. What we see is that, for example, in the U.S. our hit rate with big contract is not sufficient. I think we are doing well in Healthcare, and we had a good net development. We had, as I said, a good retention in Healthcare in the U.S. this year, but we also had a good development. So a net development above 2% in Healthcare in the U.S. We have invested for a while in those teams. We have teams that are capable of addressing and winning a large contract. And we are in the process also of building and strengthening those teams in the U.S. in the other segment. But that being said, there are countries or geography where -- like France or like Australia, where we are winning market share and where we have a good net development rate. So we need to make it happen everywhere. Jaafar Mestari: And that last qualitative target that you didn't explicitly say, the 10% of revenue from digital and new services. Did you achieve that in '25? Sophie Bellon: I'm not sure I understand your question. Jaafar Mestari: I think in your qualitative target, you had doubling Entegra, and you had reaching 50% branded offers, but you also had a target to reach 10% of group revenue from vending and digital and new services. So I just wanted to check if that one was on track as well. Sebastien De Tramasure: On that one, we are slightly below this 10% objective we defined at the beginning of the... Sophie Bellon: 8%. Sebastien De Tramasure: Yes, we are around 8% in terms of covering of -- from advanced food model. Operator: Next question is from Simon LeChipre, Jefferies. Simon LeChipre: I've got three, please. First of all, on organic growth for next year. Could you clarify the timing of the demobilization of the global accounts and also the timing of the -- impact of the reclassification of the contract? I don't quite get why organic growth should drop from 4% underlying in Q4 to kind of 1.5% in Q1, and then how you would then accelerate in subsequent quarters. Secondly, on this contract reclassification, could you clarify if there is any impact on profit and on margin in percentage terms? And lastly, in terms of the organization, I mean, I noticed that Michael is managing Government Services on top of universities. What is the rationale for this? And does that mean you do not necessarily believe in a strategy focused on sectorization similar to what your closest competitor is doing? Sebastien De Tramasure: I will take the first one. So regarding the timing of demobilization of the global account, if you look at the one we lost in fiscal year '24 and the one we lost in fiscal year '25, basically, the overall impact for fiscal year '26 is minus 50 basis points. And it's -- combining both, it's similar impact between H1 and H2. Regarding the reclassification of a large contract in North America. So here, we are talking about a preemptive renegotiation and to extend, the duration of this contract. As I said, we -- given the new term of the contract, we moved from gross revenue to net revenue. And overall, we are renegotiating the economics of the contract, and we are not expecting any significant impact in terms of margin, in terms of [ UOP ] margin. Sophie Bellon: And on the third question on organization, it -- why is it together? Because it has been historical. The person that used to be in charge of Government then extended his role to University. Yes, of course, we are doing market sectorization. It's the only exception. I want to remind you that for us, Government is not a priority. It only represents 4% of our revenue and with a huge contract that you know, U.S. Marine Corps. And so it has been part of that portfolio. And I don't think it's -- it doesn't affect the bandwidth of -- that Michael has to put on universities. And just for the U.S. Marine Corps, because it's the biggest part of that Government business, it still runs for another 18 months. And we are working proactively to -- we expect the client to launch an RFP , but we are fully engaged in the process and also -- yes, fully engaged in the process. Sebastien De Tramasure: And I will go back to your question -- sorry, I'll go back to your question about Q4 underlying versus the guidance in terms of organic growth. We have to keep in mind that Q4, the mix and the weight of Education is lower. So it means that this had a positive impact in our Q4 organic growth. It will not be the same for the full year '26. And also, we had a very strong Q4 fiscal year '25 in Sodexo Live!, with a more than double-digit organic growth in the U.S. with some specific events. And this will not obviously reproduce the full year '26. We will not have 10%, double-digit organic growth in Sodexo Live! during the full year '26. Simon LeChipre: Okay. Just on this impact of contract reclassification, I mean, can you quantify it? And is it going to impact you as soon as Q1? Or does the impact start later on in the year? Sebastien De Tramasure: Okay. So we are currently, again, under renegotiation of this contract. Again, it's a preemptive extension of the contract. Today, we are expecting to sign the renewal of the contract in Q2. So the impact will start in Q2 fiscal year '26, and it will impact negatively the organic growth by 70 basis points for fiscal year '26. Simon LeChipre: So it means that you need to accelerate organic growth after Q1 to offset this impact on top of the rest, right? Sebastien De Tramasure: Yes. And that is the plan, again, with some ramp-up of development. And again, this phasing of Sodexo Live! will be quite different between fiscal year '25 and fiscal year '26. Operator: Next question is from Leo Carrington, Citi. Leo Carrington: If I could ask just two questions. Firstly, I appreciate he doesn't officially start for 3 weeks, but did Thierry Delaporte have any input into setting this guidance? And then secondly, just on the margin outlook again. In terms of the factors pushing margins down mix phasing investments, is it correct to say these are all headwinds? And in terms of the relative importance of all three of them, is one more important than the other? The investment sounded significant, but I wonder if you can quantify that. Sophie Bellon: So thank you, Leo, for your questions. I will take the first one. So regarding the involvement of Thierry, of course, we had a few preliminary discussions with him. But I remind you that he's only starting on November 10. And however, the financial year '26 guidance reflects the work of the current team. It's also the result of a bottom-up approach based on the visibility we have for the year. Sebastien De Tramasure: Okay. And on the investments, so we are not providing any specific quantification at this stage of each investment. We'll do it in another time, I would say. And again, there are moving parts on this timing of the investment. It's the reason why we said that, again, it will have [ this ] negative impact in terms of margin for next year. Operator: Next question is from Kate Xiao, Bank of America. Kate Xiao: I have a couple. The first one is a follow-up on the previous question on branded offer. You mentioned, Sophie, that now the first step is done, and you need to go deeper now. I wonder if you could elaborate what that means? Do you mean a further, I guess, change of the organization, change of the team so that it's more brand focused, more sectorized? And would this be a big task for the new CEO? That's my first question. And the second question also on just investment. I think, Sophie, you mentioned before for fiscal year 2024, you spent more than EUR 600 million on IT, data, digital. I wonder what that number is for '25? And do you see a step-up in '26? If you could just -- obviously, I appreciate you cannot give us exact numbers, but the level of step-up would be really helpful. And then just number three, specifically on retention. I think you mentioned that you're doing preemptive renegotiations with big contracts. I guess, any progress there? Are you doing more in terms of preemptive retention -- preemptive efforts to help really with retention? If you could elaborate on the efforts there? Sophie Bellon: Okay. So I will take the first question on the branded offers. I think it's a work, as I said, that started a couple of years ago. And when I mean go deeper, it's that -- for example, we are implementing in Education a brand that -- are -- one and all brand, it's close to EUR 1 billion of revenue, thanks to the active conversion of the sites during summer break. Now it's our largest brand globally and regionally. So it means that now the team have adopted the brand, but then we need to make sure that the implementation is happening right, that the right recipes are implemented, that the right menu, the right products. And it's by -- when I mean go deeper, it's making sure that operationally, it happened on each and every site the way it should happen. That's why I explained that, for example, in the U.S., where -- when you implement a brand, like I just said for University, it implies a lot of people. We have also added for every single manager the compliance because that's what will improve the margin and the profitability on those sites. And then about Thierry, of course, he will make his assessment of the situation. But definitely implementing the brands and not just putting names but an offer with -- that matches the client and also especially the consumer needs with price points, more standardization, less SKUs, better leverage on our purchasing powers simplifying the bid process. All that takes time, but it will definitely help us make progress. Maybe, Sebastien, you want to answer the second question? Sebastien De Tramasure: On the investment in IT and digital, based on all the ongoing program, we have been increasing our investment if you take OpEx and CapEx in fiscal year '25 compared to fiscal year '24. And again, with this acceleration of our transformation with the ERP, with the finance supply platform, the food platform as well, AI and data, again, this amount will continue to increase for fiscal year '26. Sophie Bellon: And in terms of retention, as we said, we have made progress, and there are areas or countries where we are fully aligned with our targets, to be above 95% and at some point, in midterm, at 96%. And on the preemptive bid, yes, we are pushing. I don't have the exact number with me today, but we can get back to you. And we are definitely pushing, and it's something that we want to make happen, as I said, not just in some geography, but all geography and all segments, especially in the U.S. Operator: Next question is from Sabrina Blanc, Bernstein. Sabrina Blanc: I have three questions from my part. The first one is regarding the branded offer. I would like to have more idea of how it has been organized. I mean, who has designed the brand, who is in charge of the leadership of the brand? My second question is regarding -- you have mentioned the hiring of commercials. I would like to understand in which areas specifically, if it's regarding the GPO for new commercial? Or is it commercial dedicated to the retention? And are they incentivized in these three key segments? And lastly is regarding the M&A. You have mentioned bolt-on acquisition, but we would like to understand in which areas you are focusing and what are your KPIs? Sophie Bellon: Okay. Thank you, Sabrina. So for the branded offers, for example, I just discussed, all in one, in the Education market in the U.S. This brand has been designed one and all -- sorry, in the U.S. in the University business. It has been designed by the team in Universities and getting some support from the North American marketing team. There are some brands like Modern Recipe where we have -- that we have implemented in different countries, in the U.S., but also in Europe. And there, we have a center of expertise at the group level, so we can accelerate the share of best practice between countries. And -- but it's the countries that are responsible for growing the brand at the local level by segment because, of course, those offers are different what we propose, an indication is different from what we propose with a Modern Recipe or Good Eating Company in corporate services, even though sometimes Good Eating Company, if there is a need, could also be proposed on a campus. But the brands belong where most of the revenue happen with that brand. On the second -- your second question about commercial: in which area specifically? Well, in all areas. Now we hired a number of salespeople with -- in the GPO and in our Entegra business and especially in the U.S. But we also hired -- as I said, we want to increase our sales team. And we have increased our sales team, I think, in the U.S. by 30% this year. And how are they incentivized? We have changed the incentive for our sales team. And we have revamped our sales incentive structure. Previously, it varied by region and wasn't always linked to the individual performance or profitability. Now we have a global commission that based system with a consistent rule across the region. It includes clear threshold and accelerators for over-performance and staggered payouts to ensure quality and overs. And we also -- we have also added specific incentives for renewals, cross-selling and strategic priorities. So in terms of sales incentive, we have worked a lot. And now it's really rolling out, and it's really implemented for fiscal year '26, but we have really worked a lot on making sure that we have the right incentive and also the right teams. We have changed a number of people in our sales team. Sebastien De Tramasure: And to the third question regarding M&A. So we have a very clear strategy regarding M&A. We want to invest in food. We want to invest in our existing markets. And then we have done investment in GPO, especially in Europe over the past year and especially in France in fiscal year '25. We are also investing, and we have been investing since 2022 in convenience in the U.S. So here again, we are talking about small, midsized bolt-on acquisition, very important to get the scale and the efficiency with the supply. And then we want to invest in also a key market on food, again, market share in the U.S., in Europe, also in the Rest of the World, but again, focusing on our key existing markets. A good example is the acquisition, the signing of Grupo Mediterránea in Spain. It will allow us to double our footprint in the Spanish market. And also, we can also do some small acquisitions to gain capabilities in advanced food models. It can be also linked to commissary and central kitchen capabilities. And in terms of indicators, [ LGO ] payback, we look at the [ LGO ] payback below 10 years. And we looked at the ROCE and the objective is to have a ROCE above 15%. Operator: Next question is from Andre Juillard, Deutsche Bank. Andre Juillard: Just a follow-up on investments in general. Could you give us some more color about what you plan to do in terms of IT and reporting software? Do you still have some significant investment to do on that side? And could you give us some quantification on that? And regarding CapEx, you remain relatively low with 2% compared to your main competitor. Do we need to anticipate a significant improvement on that side or not? Sebastien De Tramasure: So I will start with the CapEx. So you are right. Today, our CapEx level is around 2%, fiscal year '24 and fiscal year '25. The objective is really to reach 2.5% with, I would say, two main components. The first one is supporting retention and development. So we need CapEx to sign large deals. And as we said before, this is one of our priority. And then we need also CapEx for the -- our investment in IS&T and digital, especially for our ERP program. So this is really the reason for the targeted increase in terms of CapEx. Sophie Bellon: And just to add to what Sebastien just said, in terms of CapEx, as I said -- and as I said also earlier, we want to sign more large deals, and we want to improve our hit rates on large deals. So the way that happens, the large deals are the one where we spend more money. And the fact that our hit rate has not been as good as expected explain also the fact that our CapEx today is closer to 2% than 2.5%. So hopefully, when our hit rate with those big targets improve, it will have an impact also, and it will automatically increase the percentage of our CapEx, and we will get closer to 2.5%. Andre Juillard: But you still consider that 2.5% is the right number? Sophie Bellon: Yes. Well, we have been talking about 2.5% and still staying at -- so far now, we really want to reach 2.5%. And if you know, some specific deals that sometimes it happens in Sodexo Live! or in Universities in the U.S., if we need to go beyond, we will go beyond but not systematically. Operator: Next question is from Johanna Jourdain, ODDO BHF. Johanna Jourdain: Two questions from me. First one, could you please remind us the level of renewals in large contracts to come in '26? And can you update us on where you stand there on those renewals? And second question, can you update us on the ramp-up of the Healthcare contracts that were delayed in '25 or late to start and in particular, the captive contract in North America? Sophie Bellon: So thank you, Johanna, for your question. So the level of renewal for the large contract, I think you're talking about the GSA contract because last year, we had -- in fiscal year '24 and '25, we had a big number of those GSA contracts in renewal. And today, this fiscal year, we don't have any. So there will not be any renewal of those large contracts and a very small number also for fiscal year '27. The contract that we discussed earlier is not -- it's not a global account. And so that's for a clarification on those large contracts. And then for captive, first, last year, we talked about the ramping up of Healthcare and especially that contract. We have had two big contracts in Healthcare, ProMedica and University of Cincinnati that started in June and July. So there, we are on track. And as I said, we had a very good net development for Healthcare during the fiscal year '25. For captive, during the first year, as I remind you, it was a very innovative contract. And the first year, we spent more time and focus than anticipated in evaluating the existing client for the transition into the captive program. And this led, as you know, to a slower-than-anticipated ramp-up of new business. We signed the very first contract with captive members at the end of financial '25. Currently, we are negotiating with a significant number of clients. The pipeline is well advanced and robust. And our objective remains unchanged to sign over EUR 100 million in contracts within the first 2 years of the program. But since the launch was shifted to the end of fiscal year '25 instead of the beginning of '25, our target is now to reach EUR 100 million in signed contracts across '26 and '27. Operator: We have no further questions registered at this time. Back to Sodexo for any closing remarks. Sophie Bellon: Well, thank you very much for your question. And as this is my last call as CEO, I would like to sincerely thank you for all your -- for your engagement and your constructive dialogue over the years. I remain deeply confident in Sodexo's strength, and I look forward to continuing to support the company as Chairwoman. Thank you very much, and take care. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Kati Kaksone: Good morning, everybody, and welcome to Terveystalo's Q3 Results Call and Webcast. My name is Kati Kaksonen. I'm responsible for Investor Relations and Sustainability here at Terveystalo. As usual, we'll go through the result highlights with our CEO, Ville Iho; and our CFO, Juuso Pajunen. And after the presentation, you will have a chance to ask questions. I will take the questions from the phone lines, as well as through the webcast, after the presentation. Without further ado, over to you, Ville. Ville Iho: Thank you, Kati, and good morning from my behalf. Let's dive directly into Q3 highlights. As you can see from the numbers, this quarter 3 was a quarter of margin improvement amid a revenue headwind. So the EBIT -- adjusted EBIT margin developed positively; very strong operating cash flow; EPS developing positively as expected; very high NPS, taking all-time highs all the time; but then with a decline of some 5% top line, adjusted EBIT in absolute terms slightly down. Double-clicking into different P&Ls and their role in the business, how they are contributing and continue contributing in the future, starting from Sweden. Just as a reminder, Sweden is in a phase still of turnaround. We have been adamant in the fact that we continue focusing only on turnaround and profitability improvement. Sweden is getting -- our Sweden team is getting the results. The underlying efficiency is continuously improving. The results continue to improve. The market being fairly muted at this stage still, we are not making proper profits yet. But looking at next year, volume development looks positive, and we start making results, and then it's time to focus on growth. Portfolio Businesses, quite the same story. The profitability turnaround has for large parts happened. Some minor fixes in smaller businesses, but the bigger businesses are doing fine and developing positively. Now, it's time to grow, and we are eyeing specifically in 2 different segments, as we have said before, dental and then opening public market. Healthcare Services, our biggest business, margin on a very, very high level, really strong, starting from a very strong position. Now, our eyes and focus turn into volume growth, and we continue to boost that one with selective specialties-driven M&A, and then investments in digital delivery and capabilities. Further double-clicking into the strategic agenda, as I said, Sweden profitability improvement program, [ Gamma ], almost done and dusted. Efficiency in all-time high level. Now, looking at organic and potentially inorganic growth there on a solid base. Portfolio Businesses, as I said, profitability improvement done and dusted. Now, organic growth in dental and also inorganic growth in dental and public partnership being relevant in the opening market when health care counties are actually starting buying, where we have seen positive signs already. Inside Healthcare Services, we are seeing very strong development in our consumer-driven businesses. We continue boosting that one, Kela 65 being a prime example of sort of a positive drive. Also in insurance business, our position continues to be strong and developing nicely; out-of-pocket in good place and developing positively against the low morbidity. We have reorganized our operations and our delivery model so that there's clearly separate brick-and-mortar delivery through our health care services or hospital network, and then, now, forcefully and decisively scaling up the digital health 10x, where we are eyeing at major leaps in efficiency, in transactions, more intellect in our patient and customer steering, and then finally, truly scaling up truly digital health care services, tech-based services, nurse services and in very near future also, AI-supported health services. Among all the positive developments, the challenge currently, which we'll further discuss is in occupational health care. We know exactly where we are. We know how to turn around the negative development. There we have a program called [indiscernible], led by new SVP, Occupational Health care or Corporate Health, Laura Karotie, and that one will be discussed in more detail. So, all in all, agenda, very clear, sort of 9 out of 10 moving very fast to the positive territory, more focus needed for occupational health care, which will be fixed. Looking at the volume development and our sort of view on markets in near term, next 12 months, starting from the smallest, Sweden, as we have communicated many times, the market has been very soft. Swedish economy has driven the demand for occupational health care services very low. Now, looking forward, both the market seems to be picking up. Sweden economy is doing better next year. But more importantly, looking at our internal view on the sales funnel, commercial activities, sales funnel looks positive. And when we are able to do, in next year, more volume on higher operating leverage, of course, then we'll start making money. Portfolio Businesses, public business, as all know, has been very, very slow in buying. Health care counties are only sort of picking up the buying activities. What we see in large tenders and also in smaller tenders is increased activity. And looking at the next 12 months, we see the market developing positively. Same goes with the consumer business. It has been fairly muted due to low confidence of consumers. We have seen already some positive signs, specifically in the dental services, which typically is the most sensitive for consumer behavior, and we expect the positive drive and vibe to continue for next 12 months. In public business, when we jump over to Healthcare Services, in public services produced by health care services units, it has come down and it has brought -- or contributed to lower volumes in Healthcare Services. We see that one bottoming out, and next 12 months should be more positive. Consumer business, even though our own position has been strengthening, has been fairly flat due to low morbidity. But with the sort of normalized view on that one, our strong drive in Kela 65 and insurance business, we see that one developing positively also going forward. Insurance business, equally, it has actually been the growth driver inside Healthcare Services, continues to be so. Number of insured persons in Finland continues to slowly pick up, and use of services is on a high level. Occupational health care, finally, so we'll double-click on the development, what has contributed to lower volumes in Q3, but very shortly, it's number of connected employees, sort of thinner scopes in the agreements by the corporate clients, and then inside those agreement scopes, lower use of services. All of these are slightly negative from our business point of view. It's been negative. It's going to stabilize. But specifically, number of connected employees will not be sort of turned around in 1 quarter. We'll turn that one around, but it will take a couple of quarters to get to -- again to all-time highs. If we dive deeper into this phenomena, as you can see, and it's good to remember the phases that we have seen in the development over the last couple of years and quarters. In '22 and '23, in the number of connected employees, we were pushing all-time highs. At the same time, as you remember, the profitability of this business was really, really low. And we struggled with the low contribution to rest of the business and hence, the Alpha program. With the Alpha program, we totally turned around the profitability of not only occupational health care, but the company. With that one, of course, the -- some of the less profitable agreements went out. And now, we see also some unintended tail effects of the Alpha period. Now what we are doing is, of course, we are rebalancing products, pricing, offering, and it's not going to be either or. It's going to be both, so both profitability and volumes. Occupational health care, as I said, is the biggest focus area in our agenda currently. It will be turned around with our program. It's a comprehensive exercise of renewing, partly even transforming sales and account management, our product offering to become more relevant and according to expectations by ever-demanding customers. And then, finally, digital front renewal, which we now can accelerate and fast track with our MedHelp joint venture. And our customers will see tangible results already from Q1 onwards on this area. Positive thing -- a very, very positive thing in our portfolio is consumer side, so combined insurance, Kela 65, out-of-pocket area. Our brand is doing fine. And that's, of course, one of the basic building blocks for boosting this business. We are the most preferred brand when we look at the brand preference development. We have been so. But now, we are all-time high. Also in top of mind, the company, health care services company that Finnish consumers think about them when they wake up in the morning, that's now Terveystalo for the first time. And that itself gives a very solid base for further improvement in this business. We have invested heavily in services. We invested heavily in digital engagement with our consumer customers. We have invested in Kela 65. And in that particular new segment, we are a clear leader in that developing market. Finally, Juuso will explain in detail the strength of our finances, the profitability, cash flow and balance sheet. We continue increasing our investments in our digital capabilities. It's an ever-increasing value driver in our business model. And we have some key focus points and developments in that digital ecosystem. For the professionals, we have launched the Ella user interface and digital front door and continue scaling that one up. And that's going to bring tangible efficiency improvements during next year in our sort of traditional brick-and-mortar appointment activities. For individual care, looking at -- looking from a customer's point of view, as I said, it's very much in the core of our 10x agenda. We are making leaps in efficiency, in transactions related to our incoming traffic and customer contacts. We are going to further improve the leading capabilities that we today already have in patient steering and customer steering. And then, finally, we'll make efficiency leaps in text-based appointments, text-based digital appointments, nurse services and introduce first AI-supported health services in very near future. In occupational health, as I said already, we are now in a very good position to migrate our occupational health capabilities, digital capabilities into new MedHelp environment. It's best-in-class in Europe. And our customers, as I said, they will see tangible results and fully a new view and sort of better control on their own people, own organization, sick leaves, workability, starting from Q1 next year when we start deploying new system to first customers. All in all, we are, in this digital journey, in very strong, very good place. Our architecture is where it should be. Our initiatives, projects create value, not in years, but rather in months, and we are confident in investing more and getting more yield out of the digital engine. With that one, over to you, Juuso. Juuso Pajunen: Thank you, Ville. So good morning all. I'm Juuso Pajunen, CFO of Terveystalo, and let's talk about the financial performance in the third quarter. So first of all, if we look at the whole group, we have the positive margin development continued despite the revenue headwinds. This was, in relative terms, the second best Q3 during the group's history, and the best one was during the COVID times. So what I want to highlight is that our efficiency is in place, our machine is [ ticking ]. But also having said that one, we do know that we can't be happy on the growth and especially the revenue development when it comes to occupational health care. So if we look at the big picture, portfolios in Sweden improved both in relative and absolute profitability, while they are still facing anticipated negative growth. So portfolios in the outsourcing businesses in Sweden, we are still coming from the efficiency hunt and now going for the growth mode. And then, with Healthcare Services, we have the strong margin, but the headwinds in the occupational health and the morbidity have been pushing the growth negative, like Ville also explained a bit on the occupational health part. So then, if we look first on the Healthcare Services, I will double-click in the next slide on the growth, especially what comes to visit growth. So let's park that question. But all in all, the performance, what comes to the relative profitability, it was really solid. We had the decline in revenues, headwind in the markets. And despite those ones, we were able, through solid cost control and our flexible operating model, to keep our profitability in a good place, especially remembering that this is the low season Q3. And for the growth, we have a strong plan. And in the longer perspective, I still remind you that the megatrends will continue to support our long-term outlook [ what ] comes to the growth. So then, let's see the visits. Let's address the elephant in the room. So basically, we can split our visits growth. So now, we are talking about the volume. We can split it into different type of buckets. First of all, we have the morbidity. So, that one is basically seasonal. We have no control over that one. And we had plenty fewer visits compared to previous year. And this is part of normal seasonal variation, and it changes annually. We have -- then if we go into the occupational health care, we have different factors behind the decline. We have basically macro-driven components. So the general employment in Finland is lower than earlier, and we have a sluggish economy, and that one also then impacts on the employers' behavior. So basically, they are implementing cost reduction initiatives due to own economic pressures and push, and that one impacts on our demand also. So, a concrete example on that one would be narrowing down the contract scopes on what they offer to their employees. Then we have the third component, which goes into more on what we have done ourselves. As Ville explained, how our profit improvement program has been progressing and how the -- despite having very high amount of connected employees, our occupational health business was not super profitable. Now, we have very efficient machine, profitable business, and we need to load further volume on that one and get then the benefit of the operating leverage. And for that part, we have a solid strong program ongoing, like Ville mentioned. The name is [indiscernible]. And we are confident that by implementing that program, we will address the weaknesses we have had, and we would expect to see growth in the number of connected employees in the coming year. In public sector, especially the capacity sales, which is a minor part in the Healthcare Services segment, but it is in a very low level due to the wellbeing county setups and all of that one. But now we have seen that the sales pipeline is opening up and the market is little by little finding its form. And then, we have the positive momentum, Kela 65 consumer insurance market where we have been growing and we have been able to capture positive momentum. And that one, we will obviously continue pushing. The experiences from Kela 65 are very positive from the patient perspective and also from our perspective. So with all of this one, there are various factors impacting our growth, and we will address especially the occupational health part decisively when going forward. Then if we go into the Portfolio Businesses, we have clear improvement in profitability. We have been able to improve the EBIT margins continuously, 2.2 percentage points up compared to previous year. And then, we have the momentum in especially public sector business. Outsourcing, we have been guiding you that it will most likely decline EUR 30 million this year, and we are on that trend, on that pattern and continuing on that one. On staffing, we started to have revenue headwinds during roughly a year ago, and now those ones are stabilizing out. And part of that one was also our own selection on how we address the market. But now little by little, the positives are coming, markets are opening up. Wellbeing counties are more and more capable of also buying and willing to buy. So this market momentum is little by little turning. And then, we have the consumer part that is growing. It is performing positively, and we will obviously continue to push on that part. So solid performance improvement in the portfolios when it comes to profitability. Then in Sweden, we are also improving both absolute EBIT and relative EBIT. We are still showing heftily negative numbers in a very seasonally low quarter. So Q3 is always difficult and weak in Sweden due to how the offering behaves during vacation period. In here, what I'm really proud is that our efficiency continues to ramp up. We have -- we continuously see, on our KPIs, positive development what comes to occupancy rates, but also we start to see that one on a monthly gross margin levels going up. So we are now getting into an efficiency place, and we will load further volumes on top of that one. We have a solid sales pipeline that supports us getting back on track and on heftily numbers. So program is in plan. Improvements are now continuously more visible also in the backward-looking income statement, and we will push forward. However, there is a weak market environment still in Sweden as a totality. So the macro has not recovered yet to the full extent. But despite macro, we are able to push Sweden back to good numbers in the coming year. Then, if we look at our investments, we've been continuously investing in technology. We have been stating since the Capital Markets Day last year that we will land somewhere between 4% to 5% of revenues in the longer perspective on the investments. Now, we are at 3.4%. We are heavy in digital. We have been talking about Ella, our professional user interface and related flows. You have seen, during the quarter, investments in MedHelp, the joint venture, which will be the digital front door in our occupational health. And then, some may have seen that we have deepening our collaboration with Gosta in the artificial intelligence and ambient scribing, further improving our tools. We have a good momentum. We have solid technology road map, and we have capability to invest. So we will continue on doing on that one. And then, in inorganic growth, the market is there, and we are evaluating different type of opportunities. And for those opportunities, we had a solid quarter for cash flow. We are now in the green bucket again. As was the [ negative part ] normal seasonality, so is this one. Our cash profile has not materially changed, and there is no reason to believe it materially changes either, so normal volatility. We are the Swiss clock we have been. We tick, tick, tick cash. And then, our leverage ratios, 2.1 at the moment, so we have powder to continue investing. So positive financial position, and we can definitely do organic and inorganic investments. Then, if we look for our guidance, basically this is unchanged. So despite some market headwinds, we reiterate our guidance after the second best third quarter ever. So we are expecting our adjusted EBIT to be between EUR 155 million and EUR 165 million. These are based on the current demand environment, employment levels and morbidity rates. So normal disclaimers, nothing new on that one. What is good to note maybe that the implied range for Q4 seems highish compared to previous year Q4. But then, you need to look back on your notes and remember that in previous year Q4, we had especially personnel-related items that we don't have this quarter -- this year in Q4. So the baseline adjusting needs to be a bit taken to understand our Q4 performance. So all in all, I'm happy to reiterate our guidance, EUR 155 million to EUR 165 million in total. With these words, let's invite Kati on stage and let's have a Q&A. Kati Kaksone: Thanks, Juuso. I think we are ready to take questions from the phone lines. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: Maybe I'll start with your guidance as you mentioned that as the last item here. So you already said that there were some special items in your comparison period. But how should we think about underlying assumptions here? Like, does it require any improvement in the market sentiment or something you are not seeing yet to reach your lower end of the guidance range? Juuso Pajunen: I think that's a very relevant question. So, at the moment, the guidance is based on the current market environment and the current morbidity rates. So it already factors in, like always when issuing the guidance, everything we know up to yesterday evening. So the current guidance assumes lowish morbidity rates and the occupational health market in the conditions we know at the moment. Anssi Raussi: Got it. That's clear then. And maybe the second question about your occupational health care. So I think you said that maybe you lost some connected employees due to your profit improvement program. So do you think that it's possible to increase the number of employees or connected employees without sacrificing some of your profitability gains in this program? Ville Iho: Yes. Again, a good question. So, as I said during the presentation, it is not going to be either or, so either volume or profitability. It's going to be both going forward. It requires some balancing in our sort of offering and pricing, but we are not going to sacrifice the profitability just for the sake of absolute volume. Anssi Raussi: Okay. So maybe continuing on that one. So when we look at your -- of course, you showed your appointment volumes and the impact of prices. So how should we think about the pricing going forward in the coming quarters or years? Ville Iho: So, of course, the cycle is very much different than it was, let's say, 2, 3 years ago. The pressure on the -- contracts pressure on prices is, of course, higher post inflation cycle. And we should not -- or you should not expect as sort of a rapid price development going forward. Now, it's more on the how we package our products, what is the mix in our sort of agreement portfolio, and how efficient are we under the hood in delivering those services. And then, final component is the volume. So the growth cannot be, for example, next year, driven so much by the price increases as we have seen during last -- or past 2 years. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Kati Kaksone: All right. It's a busy results day today. I think there are some 30 companies today. There's one question in the webcast currently from DNB Carnegie from Iiris; two parts. Regarding the plan to address the revenue headwind, can we talk about when do we actually expect to see these measures to become visible in the top line and whether we plan to provide any financial estimates of the sales or earnings impact of those actions? Juuso Pajunen: If I start, like I actually hinted a bit, or not even hinted, written out loud in the bridge that we would expect the connected employees' impact to be visible in '26. And that's obviously coming from the nature that if you today win something before it's visible and the connected employees are part of our portfolio, that, especially in the big cases, is a matter of months rather than anything else. So we would expect on '26 the impact. And at the moment, obviously, our financial guidance relates to Q4 and full year '25, and we will come back for the total guidance for '26 along with Q4 publication. Ville Iho: Yes. Again, the only caveat is sort of with what Juuso said, this is that -- as I said before, we are not hunting the volume with the price of profitability. So it is going to be both profitability and revenue and also volumes. So we are not repeating the mistakes that the company did some 6, 7 -- or 5, 6, 7 years ago. Kati Kaksone: Maybe then, continuing on that one, a follow-up question from Iiris. We talked about an update to our product offering in the occupational health to make it more relevant for our customers. Can we give some examples on what that means in practical terms and where we expect to see the largest positive impact? Ville Iho: It's down to the segmentation of different needs amongst our customers. Of course, we are serving 30,000 -- roughly 30,000 different companies in Finland. And there's a wide spectrum of different type of needs and appetites also to pay for the services. Now, when we are talking about sort of transforming or renewing the products, typically, it concerns the sort of customers who are more sort of keen on looking at the price and value for money type of sort of comparisons. And there, we do have strong means inside the company to steer the services across our vast network. We have not used them to the full extent. So what I mean is that if there's a company whose main focus is to get things to a certain level and then look at the spend after that one, we have means to serve that type of customer. If there's a customer that wants to maximize the services to the employees, then we can serve that type of customer. If there's a product, which is priced with a fixed contract, we have means to control both the profitability, delivery and cost for that type of customers. And that type of steering capabilities will be sort of utilized to full extent now going forward. So we have the flexibility. We have different type of delivery models, and we are also renewing sort of commercial packaging of these type of different models. Kati Kaksone: Yes. And of course, MedHelp is a concrete example of the value increase that we can show to our customers in a relatively short term as well. Ville Iho: Absolutely. It's going to be the next level. Kati Kaksone: Good. Then, a question on the public outsourcing tenders and the outlook there. Besides the tender of Pirkanmaa wellbeing services county, which was won by our peer yesterday, are there any larger tenders opening up at the moment? Ville Iho: Well, there's one other which we know of. And then, I think what's going to happen is that health care counties are watching very closely each other. And when somebody is opening a path, then the rest will follow, specifically if there's a successful implementation of a certain model. So we believe that this is only a first step, this [ Pirka ], and congrats to Pihlajalinna for good competition and a nice win in there. Kati Kaksone: Yes, indeed. Then maybe a question to both of you. Can we talk about the M&A pipeline? How does it look at the moment? Juuso Pajunen: Yes, if I start, so basically, it is fair to say that M&A opportunities are now little by little emerging in different type of segments. And we are, as we have said, happy to do disciplined M&A when we see an opportunity to fill a blank, whether it's a technology bank, offering blank or other blank. So, that market is little by little activating, and we are and we will be active in that one. Ville Iho: Yes. There's -- just looking from sort of a short history perspective, where we have been and where we are now and potentially will be, the activity on our desk is way higher than it has been for 5 years or so -- 5, 6 years, sort of post-COVID or during COVID times. This is sort of an all-time high activity. And there are sort of real potentials out there. Of course, you always need to get to the -- get over the sort of finish line to get something materialized. But the funnel is there, and it's strongest that it has ever been during my term in Terveystalo. Kati Kaksone: Yes, definitely signs of picking up there. Then a couple of questions from Matti Kaurola, OP. We mentioned that the insurance business is growing fast. Are there any possibilities to take more market share from other players in that segment? Ville Iho: Well, I would say, it's not growing fast. It's growing steadily. So it's -- coverage of insurances in Finland has been developing positively, and then use of services have been developing positively. We have gained market share over the 2 last years. And then, further gaining market share, of course, requires also new means and new type of value creation for insurance companies. I think we have a strong plan there, which we continue implementing. The bigger moves, in my view, will happen only in 2027. Next year will be more like a steady progress in this segment. Kati Kaksone: Of course, we have a clear attack plan for 2027 to deepen the cooperation with the insurance companies. Then, maybe continuing on the outsourcing market and the well-being services counties, how do we look at the public outsourcing market in general in the future? Is it attractive? And is it a part of our core offering and our business going forward? Ville Iho: Well, we explicitly said earlier that we are interested in this new type of outsourcing deals. We were part of [ Pirka tender ]. And one can say looking now in hindsight, the competition and the outcome that each and every out of 3 main players were on the ball in sort of pricing and offering the package. So very close margins who won and who did not win. When it comes to profitability, of course, this would have not been sort of the richest agreement, but still value-creating, EPS enhancing, which is the key for our business model. So when this type of tenders come to the market, we are interested. Kati Kaksone: Indeed. At the moment, we don't -- we have one more question from the phone lines. Let's take it now. Operator: The next question comes from Anssi Raussi from SEB. Anssi Raussi: One follow-up from me. So you also mentioned these somewhat extraordinary costs last year in Q4 and that there were some one-offs related to employee expenses. But can you remind us like what kind of amount we are talking about that you consider one-offs in Q4 last year? Juuso Pajunen: Yes. So basically, compared to baseline in last year, if you go into the details, you remember that we paid EUR 500 per employee to all employees an extra bonus. And based on the CLA, there was EUR 500 per employee fall all under CLA. So that's the personnel expenses I referred to. And then, if you go into a bit deeper, you see that there was a bit of accelerated amortizations and depreciations in the income statement in Q4 last year. So, that one you need to put your finger into yourself, but normally, forecasting depreciation and amortization is not super difficult. Kati Kaksone: Thanks. With that, I believe we don't have any further questions on the phone lines or from the webcast. So any closing words? Over to you, Ville. Ville Iho: Well, as discussed earlier, a quarter of improving margins with revenue headwind; strong agenda to further accelerate the areas where we are progressing well and to tackle the headwind in occupational health care; investments with the dry powder provided by [indiscernible], used more and more to digital offering, where the agenda is -- strong architecture is there and delivering tangible results. Kati Kaksone: Great. With that, we thank you for your time, and have a great rest of the week. Juuso Pajunen: Thank you. Ville Iho: Thank you.
Natalia Valtasaari: Good morning, everyone, and welcome to KONE's Third Quarter Results Webcast. My name is Natalia Valtasaari. I head up the IR function here at KONE, and I'm very pleased to be joined by our President and CEO, Philippe Delorme... Philippe Delorme: Good morning, everyone. Natalia Valtasaari: And our CFO, Ilkka Hara. As usual, we'll start by walking you through the financial highlights of the quarter, what we're seeing in the business and what we're seeing in the markets, then we'll move on to your questions. [Operator Instructions] but with that, over to you, Philippe. Philippe Delorme: Thank you. Thank you, Natalia, and good morning, everyone. I'm very pleased to be presenting our third quarter results today. And let me start by saying that Q3 was, in many ways, a strong quarter. Order development was, of course, a key highlight. Nearly 8% growth is an excellent achievement, and I'm happy that growth was broad-based. We delivered again on our target to consistently improve profitability towards our midterm margin corridor. Not only did we grow earnings, but we also had healthy cash conversion in the quarter. For me, a key point worth emphasizing is that over 60% of our sales is today coming from service and modernization. This shows that our pivot towards a more resilient business model is proving successful. And last but not least, we continue to drive our strategy forward with precision and speed. I will share a few concrete examples of strategy progress, but let's first take a look at our financial performance in more detail. So as just mentioned, order growth was strong this quarter. We saw over 10% growth in all areas except China. The biggest driver was modernization, where orders were up double digits. And I'm also pleased that our efforts to strengthen competitiveness in the residential segment paid off. This supported good momentum in New Building Solutions, especially in Europe and in the Americas. Sales grew by 3.9% at comparable currencies. Modernization delivered another excellent quarter with sales up 15.5%. Our Service business also performed well outside China, while in China, development was more stable. Adjusted EBIT margin expanded by 75 basis points from a low base. And the main driver was the growth in our largest profit pools, service and modernization. And finally, cash generation was strong with operating cash flow increasing by roughly EUR 100 million year-over-year. Let me now share some highlights from the quarter. The first one, and you see the smile on my face, is a very exciting milestone where we secured the contract to equip the Jeddah Tower in Saudi Arabia, rising to over 1,000 meters. This will be the world's tallest building once completed. It will be equipped with solutions from KONE next-generation high-rise offering, including our superlight UltraRope hoisting technology. I'm very proud of this win. It showcases not only our unique innovations, but also our capacity to deliver highly complex projects in a reliable way. With this win, 5 of the world's 10 tallest building will feature KONE technology. I see this as an excellent recognition of the work we've done to reinforce our leadership in the high-rise segment. As you know, our strategy focuses on making KONE an even more resilient business with service and modernization as the key drivers of growth. And I'm pleased with the progress we've made in accelerating this shift during the year. Let's start with services. We began the year with roughly 35% of our maintenance base connected, and we are now approaching 40%. At the same time, our field service technicians are leveraging productivity tools in 41 countries, and we're enabling remote service in 35. These advancements are critical to deliver greater transparency, improved predictability and more efficient service for our customers. Let's now turn to modernization, where customer response to our partial modernization offering has been very positive. This is the fastest-growing segment within modernization and accounts for the largest share of modernized units. For KONE, partial modernization provides scalable growth and enable us to address market opportunities more broadly. For customers, it offers easier installation and improved energy efficiency at a more attractive cost. I see this as a true win-win. Let's now move on to sustainability, where we have lots of good news to share. Let me highlight a few components of our sustainability index, where we've made particularly strong progress. First, we have continued to scale our solution to drive energy efficiency. A good example is the growth of our partial modernization business and the fact that regenerative drives are now included in more than 60% of our deliveries. We have also improved our [indiscernible] rating, which is how we measure progress in cybersecurity, a key priority for us. We're actually now in the top 10 percentile of the engineering peer group. On the people side, I'm proud to share that KONE was recognized for the 6 years in a row on Forbes and Statista's list in the World's Best Employer. This is a fantastic acknowledgment of our commitment to being the #1 choice for employees, fully aligned with our strategic ambition. Finally, we announced a partnership with UNIDO. Together, we will conduct training programs for our suppliers to promote sustainable practices and human rights across the supply chain. Now let me hand over to Ilkka, who will go through the market development and financial in more details. The floor is yours. Ilkka Hara: Thank you, Philippe. And also a warm welcome on my behalf to this third quarter result webcast. As usual, let me start talking about how we are seeing the markets developing in the different regions over the past 3 months. Overall, the trends were broadly similar to what we've seen earlier this year. In terms of New Building Solutions, as I'm sure you are well aware, market conditions continue to be difficult in China. In all other areas, we actually saw increasing market activity. If we move East to West, demand continued to be strong in Asia Pacific, Middle East and Africa. In Europe, activity picked up from Q2, growing slightly compared to last year, and we also saw some growth year-on-year in North America, despite trade policy-related uncertainty. Then looking at Service and Modernization, we continue to see healthy growth in all regions. Next, let's go through our financial development in the quarter in more detail. As usual, I'm starting with orders received, which, as Philippe mentioned, was a highlight of this quarter. 7.8% growth at the comparable currencies is a great achievement. Interestingly, China New Building Solutions was the only soft spot. Modernization continued to grow strongly in all areas, and we had a good quarter also in New Building Solutions outside of China, both in volume business as in the major projects as well. Order margins were stable overall with China still under pressure and more stable development in other areas. Turning into the sales, which grew 3.9% at the comparable currencies in the quarter. Looking at the development by business, it was great to once again see the strong order book rotation in modernization. Sales increased by 15.5% overall. And more importantly, all areas contributed with double-digit growth. In New Building Solutions, continued low delivery volumes in China was the main driver behind the 5% decline. In Service, we grew by 7.3%. Outside of China, growth was very much in line with our targets. In China, we have taken deliberate actions to prioritize margin and cash flow over volume in all of our businesses, including service. This means being selective and sometimes walking away from contracts that are not meeting our performance criteria. Pricing and revenue uplift from digital services solutions continued to contribute positively to service growth. The repair business also performed well in the quarter. This is actually a great example of the benefits of accelerating digital. As Philippe said, connectivity enables productivity. And when we perform service more efficiently, we release time that we can use, for instance, more proactively drive repair sales. Then moving to adjusted EBIT and profitability. Margin expansion in the quarter was 75 basis points year-on-year, which is a good outcome despite the lower -- low comparison point. This took adjusted EBIT to EUR 341 million. Looking into the details, we saw again some negative impact from higher investments into R&D and our strategic growth areas. That said, the main headwind continued to be the new equipment market in China, more than offsetting was the positive mix impact of services and modernization growth. So overall, good delivery of our 11th consecutive quarter of profitability improvement and especially good to see also sequential improvement, which is not always the case for Q3. Then turning to cash flow, one of my favorite metrics. Cash generation was strong in the quarter, supported by growth in operating income and by changes in working capital. Cash flow from operations increased to EUR 364 million, bringing year-to-date cash flow to EUR 1.3 billion. The contribution from working capital came mainly from advances received, which, of course, related to a strong growth in orders. And although not a big contributor this quarter, our focus on collections continues and it's progressing well. Then looking at the whole year '25. First, we have made a small update on our market outlook. We now expect the New Building Solutions market in North America to grow slightly, as activity continued to trend upward in Q3. Of course, the business environment in the U.S., in particular, remains fluid. Our view on other areas is unchanged. China continues to be the main challenge. In Europe, we expect some growth. And in Asia Pacific, Middle East and Africa, we expect clear growth. For Services and Modernization, our outlook continues to be positive with growth opportunities in all areas. Then to our business outlook. With 3 months left in the year, we have specified our guidance slightly. We now expect sales to grow 3% to 5% at the comparable exchange rates and the adjusted EBIT margin to be in the range of 11.9% to 12.3% this year. FX is expected to be a headwind. If it remains at the October levels, we estimate a roughly EUR 30 million negative impact to EBIT. China continues to be burden to both volumes and margin. We also expect some small impact from tariffs. But as we discussed already previously, most of the impact is recoverable in our view. We have already made good progress in mitigation actions. In terms then on tailwinds, service and modernization growth is the main positive. We also expect some support from the ramp-up of performance initiatives. Then Finally, let's look at how we're currently thinking about year '26, starting with challenges. China construction market is not yet showing any signs of leveling out. So this will continue to be a burden, less than in '25 as our exposure continues to come down. We also expect similar inflationary pressure on wages, as we have seen this year. On the positive side, we continue to see opportunities to grow our service and modernization business, which will contribute positively to the earnings mix. We also expect meaningful contribution from our performance improvement measures. And we have made it very -- and we have made very good progress in our product cost reductions this year, which will also be supportive. So those are our initial thoughts. And of course, we will provide more color when we report the Q4. Let me now hand back to Philippe to close the presentation before going to the Q&A. Philippe Delorme: Thank you, Ilkka. So to wrap it up, let's make -- sorry, changing slides. So let me first take the opportunity to thank all the KONE teams for their great achievements and for delivering a strong Q3. We had yet another quarter of good momentum in service and modernization, which shows that the transformation we are driving is well underway. I'm also very happy with the progress we are making in executing our Rise strategy, and we continue to move full steam ahead. And finally, our performance this quarter shows that we are on track to delivering on expectations for 2025 and building solid momentum towards reaching our midterm financial targets. Thank you all for your attention, and I suggest now we move on to your questions. Operator: [Operator Instructions] The first question comes from the line of Andre Kukhnin from UBS. Andre Kukhnin: Maybe actually, I'll start with a quick follow-up on what you mentioned on China exposure coming down during this year. Maybe could you help us to calibrate that a little bit? I think we talked about China New Equipment margin being clearly below group average in 2024. Is it fair to assume that it has come down substantially further in 2025 in sort of more mid- to low single-digit range? Ilkka Hara: It's always difficult with these objectives substantially, like you said, but what I would say that our margins in China in New Building Solutions have come down in '25 further. Andre Kukhnin: Got it. And the main question really for me is on the performance improvement initiatives that you talked about and we've been kind of tracking and talking about since the Capital Markets Day last year. Can you just walk us through what has been done during 2025 and what will be delivering those kind of meaningful contribution, as you mentioned, in 2026? And is there any way we can start sort of quantifying that already for 2026? Ilkka Hara: Well, if I start, I think you're quite passionate about this, Philippe, yourself. So what we outlined in Capital Markets Day is that we see an opportunity for us to improve our profitability by 150 basis points by year '27. And then, of course, we need to make a decision that we invest some of that back to growing the business further. In that progress, we have started to now execute those programs. The largest ones which are contributing to the profitability are focus on our procurement, how we source both at the factories as well as in the local operations and as well as how we perform at the regional level or the lowest level where the KONE teams come together, and we call it sales and operational excellence. On sourcing, I'm very happy how we've been able to drive our product cost down this year. We have yet another record in terms of product cost reductions as a result. We have more work to be done on the local sourcing part, and that's because it's touching more teams, and we need to then just lower to get that executed. So good progress in where it's more centralized, more work to be done and good opportunities in there. And then sales and operational excellence, we are seeing that the teams are really now able to drive better and better outcomes, and we have more and more consistent execution. But also there, we have plenty of work to be done on that one. Maybe you want to comment? Philippe Delorme: Yes. I mean those things take time. I'm rather impatient as a person, but you -- I mean, you don't -- the company is not a light switch. So when you drive things at a branch level with much stronger sense of execution, timely, weekly, tactical and things like this, it takes some time to spread within the company. I think we've said during the Capital Market Day that we would start to see the impact of most of these actions by the end of 2025. Nothing has changed on that front. The only thing I can say that we've been extremely diligent in '25 to ramp up our actions, be extremely systematic. And I feel much better about, let's say, the level of detail and scrutiny and capacity to execute we have on this work. And I would say on procurement, the arrival of Michelle Wen, who came with a very strong automotive background, and she just came in actually in August. So it's not yesterday, but it's a few weeks away, is giving me confidence that we can actually intensify the work we want to do on the procurement side. Operator: The next question comes from the line of James Moore calling from Rothschild. James Moore: I wondered if I could talk about your service growth. Would it be possible just to give us a flavor for the speed of the unit growth in maintenance base versus the price behind that and other topics is the first question. Just to understand whether the speed of maintenance base growth is broadly stable or accelerating or slowing for any reason and whether price is broadly the same behind that? Ilkka Hara: Yes. So overall, on the LIS growth, and I guess I commented that already during the presentation. So the LIS component of that is growing in Q3 a bit less than we've seen as a trend line. And the main reason for that is 2 things. One, which is that in China, we clearly focused more on lining up the business to focus on cash flow and profitability. And in some cases, also in the service business, we've actually decided to let go some of the customer contracts, as they're not meeting our performance criteria. And then it's more of a quarter-by-quarter, there's fluctuations. So it happened to be that in Q3, we had a bit less acquisitions than we've seen in the recent quarters as a result. The good thing is that both pricing including digital as well as repair sales are actually progressing quite well. So in that sense, we are making very good progress on that front. And then lastly, I think it's also that given what I said, so we had very close to the targeted level of 10% growth or close to 10% growth in services in 3 of the areas, whereas really the slowdown in sales was more related to China actions we've taken. Philippe Delorme: Which is a clear choice. And actually, I'm very happy to see the result, which is our cash generation in China and our profit improvement in China on that front is according to plan. So I would say we are executing what we want to execute. And it's a bit of 2 way of doing things, which is China on one side, where we've always said cash margin and moving to more service and modernization versus elsewhere where clearly our -- the way we are executing is different because the markets are different. James Moore: Could I just follow up on that? I mean, over time, I felt that the maintenance base grows with a lag after the first service period from the unit deliveries, but also your win-loss ratio and your conversion ratios. And you always had a very high U.S., European conversion ratio, 80%, 90% and a more muted 50%, 60% conversion ratio in China. I'm just trying to understand, is it that the conversion ratios are broadly staying the same across the 3 regions and that it's the active choice on the win-loss ratio to effectively proactively lose? And is the intensity of this change, which slows your maintenance base growth at the moment? Is that something that's going to intensify yet further going into '26, if you like, with more proactive contract management? Ilkka Hara: No, I don't think that's something which will continue going forward. It's been more of a targeted efforts right now. And it's good to note, so first, your comments on conversions as well as retention. So they are quite stable. And for example, in Europe, where the NBS market has been now for a few years, been down, we've been able to actually quite nicely grow the services business, as I've noted in previous quarters. So we've been able to mitigate with good retention, win-loss ratios improving and some acquisitions as well to drive growth in a market where there's less conversions. Philippe Delorme: And talking about our service business, we -- you've probably noticed that we talk quite a bit about our repair business. Actually, we've done quite some work to make sure that we would optimize that part of the business. It's actually significant in our service figures, both top line and profit. And when trying to understand how the service business work, I would encourage you to really look at, yes, the pricing and the service base but also the repair business, which for us, at least is very important. Ilkka Hara: And actually, the repair business grew really nicely, almost double the speed of our service business in the quarter. Philippe Delorme: Yes, absolutely. Operator: The next question comes from the line of Daniela Costa calling from Goldman Sachs. Daniela Costa: I'll ask just one and it's regarding modernization, obviously, very strong 10% organic order growth there. Can you give us some light on how sort of your installed base age has evolved? I know you talked about the mono elevators being very important for that modernization. So can we see this 10% plus as sustainable going forward when you look at sort of how the curve of age of installed base is? Any light there would be helpful. Ilkka Hara: Well, I guess, first, good to note that the modernization growth was actually on a quite close to the 15% target that we talked about in the quarter. So very good numbers. Then on this aging of the portfolio, so I think there's 2 topics I would highlight. So first, there are so many elevators in the world that need to be modernized that we're not yet making a dent onto the aging as a whole. And most of the elevators that are old are actually outside of our own LIS base. So for us, the growth opportunity, we've been working and targeting previously our own service base. But really, the big blue ocean is the elevators that are not in KONE maintenance. And there, I think we're increasingly making good progress in identifying those and having the right go-to-market to really get to those customers. So at this rate, we're still -- the elevator base is aging more than we're able to modernize as an industry and also, I guess, for KONE as well. Philippe Delorme: Maybe to illustrate a bit more, Daniela, the topic, and I'm going to quote some figures that I think I have listed in the Capital Market Day, but there is 25 million elevators in front of us, of which 10 million are more than 15-year-old total in the world. This 10 million will become 13 million by 2030. So whatever happens every year, whatever happens to real estate market in China, outside of China, there is growth because elevators are aging, whether our elevators or the elevators of competition. With that in mind, today, when I look at our figures -- and we are happy with our figures, and we'll try to do our best to sustain that growth. We are actually modernizing tens of thousands of units versus 10 million units in front of us. So we've said it many times, but we'll repeat and we'll repeat and will repeat, this market is growing structurally because elevators are aging. And today, we have good figures, but we are not -- I mean, there is still a lot more that could be done with innovation, with better execution and so on. So we are confident in our capacity to drive scalable growth in that field. Operator: The next question comes from the line of John Kim calling from Deutsche Bank. John-B Kim: Could we just go back to wage inflation for a second. Can you give us a sense of quantum of growth there as a growth rate and how that compares to what you maybe were seeing earlier in the year? And how should we think about the cadence of the price ups that are in the contracts versus this inflation? Ilkka Hara: So twofold. We are seeing -- I guess, I've said also earlier that our wage inflation this year is around about 5% on average for KONE as a whole. And yes, our escalation in contract prices for services have actually been quite close to the inflation level. So we've been able to continuously now drive not only the CPI level inflation, which is continuously coming down, but actually representing the inflation we are seeing and then we have the productivity as a separate item. So pricing, yes, we can escalate service contracts. But of course, then also we see broadly outside of the service operatives, also the wage inflation impacting our cost base as such. John-B Kim: Super helpful. One follow-on, if I may. Can you give us any color on how you're driving better penetration of connectivity? Ilkka Hara: I think that's for you. Philippe Delorme: Discipline. Discipline and it looks like -- it's not easy. I mean, in every, let's say, original industrial company, I think it takes some time to make sure that our people understand the value of connectivity. And on the few things that I'm really happy with, when I look at the step-up that has happened in the company for every one of us to understand, especially in our service business that service will have to be digital. I think we've been good at discipline. And we'll be even better at discipline. And we've been -- I've been very clear to the people in KONE. We want by 2030, 100% of our installed base to be connected. And we're going to be very disciplined and focused on driving that goal and it makes sense for customers. And actually, I've been on the road for 3 weeks in North America, meeting many, many customers. The great news is -- the feedback from our customers is we execute well. They see the value of our connectivity around transparency, around predictive capabilities, around from time to time remote services, and they really like it. And the feedback we get is we seem to be executing pretty well on that front. So we'll keep doing that. Operator: We are now going to take a question coming from Martin Flueckiger calling from Kepler Cheuvreux. Martin Flueckiger: Two questions. The first one is on China and particularly the property market there, where July, August data seemed to suggest that there was a steepening of the decline. And yet when I look at your data on the Chinese property market, it looks like NBS orders were relatively -- in real terms were relatively stable in terms of dynamics. So just wondering, is that because of rounding? Or -- what do you see on the ground in the field? Was there a worsening in the NBS market actually maybe towards the end of Q3? That would be my first question. The second question, if I just may add on, is on the financial income that you've reported for Q3. If I saw this correctly, you've posted a negative financial income for Q3. If you could just elaborate on the reasons for that, that would be helpful. Ilkka Hara: Okay. I'll take them in reverse order. So the financial income is related to hedging. And if you look at the 9 months year-to-date, that gives you a better picture. So Q2, Q3, you see the opposite direction there. So in 9 months, you see the real underlying performance there. Then on China, so I think as I've said during the last few years that a lot of the KPIs fluctuate somewhat. And whether it's better or worse around that volatility, our view of the market has not changed. So we are seeing the market to decline this year in units and value double digit and more in value than in units. And I would say that during Q2 Q1, Q2, there was a bit some signals that were better, but I would not say that the Q3 has been something where we've seen a big change overall. And it's important for us to also note that, yes, we want to be a meaningful player in China and want to go after the service and modernization opportunity. But as Philippe already said, and I said, I guess, as well that we are optimizing the business to cash flow, profitability and the pivot to services and modernization. So we'll take the business that we see supporting those priorities in NBS then in the market. But I don't see that the market has dramatically -- or there's been a bigger shift during the Q3. Philippe Delorme: And the repeat on the China market, maybe it's clear for everyone, but I will repeat. The market today is 50 NBS, 50 modernization and service. So if there is any change, that is that over multiple years, what was NBS-dominated market, now it's coming 50-50. I'm not having any crystal ball, but it's pretty obvious that, that trend will continue, meaning the share of modernization and service will likely keep increasing if we see what's happening because the country is aging. We see growth and actually pretty healthy growth in modernization. We are driving our service mix first with cash and margin, but there are still opportunity in service. And we are clearly adapting our forces in NBS to take into account that market reality. And I would say on that front, I want to compliment the team for reducing their cost very aggressively, both product cost and the fixed cost we have to adapt ourselves to a market reality, which indeed is going down, on NBS. Operator: The next question comes from the line of Vlad Sergievskii calling from Barclays. Vladimir Sergievskiy: Two questions from me. Can I please start with the follow-up on modernization growth opportunity ahead? To what extent it is driven by the market growing? Or it is actually KONE creating the market for itself by addressing installed base, perhaps in a more proactive way or opening new market niches for themselves? Because I hear your comment that fleet -- the installed base is aging, but it probably has been aging for forever. And KONE modernization growth was almost never as impressive as it is today. Philippe Delorme: I think it's a mix of both. The market is growing, and you have the data on our assumption of the market, but the market growth is good. And we believe that we are gaining market share in that space because we are focused and because we try to drive the right innovation and be customer-centric, which is when you have an elevator in your premise, the last thing you want is having any OEMs coming and say, okay, for months, your elevator is not going to work. So what we are doing is we are listening to our customers and say, you know what, we are going to make it shorter, simpler so that actually we do what's strictly necessary to start with, which very often is electrification upgrade. And then we'll go in a life cycle discussion with you to make that improvement over multiple years with smaller chunk that will be less risky. That's not -- I'm not reinventing the wheel here, but we are executing in a very focused manner, trying to have modular offers in front of this, and it's working very well. So we are gaining share in that regard, and we're really trying to push our team to be very customer-centric on a growing market. And the result is a double-digit growth, which is very consistent, which is driving value for the company, and we are very happy with that. Vladimir Sergievskiy: That's great. And a quick housekeeping question, if I may, to Ilkka. Interest income line was negative about EUR 15 million this quarter, which I think is almost the first time ever when this line was actually negative. Is there something to do with hedging practices? Has any hedging practices changed to drive this change? And where in the P&L, there could be an offset to this line if there is one? Ilkka Hara: So actually, the previous question was on the same one. I said, yes, it's on hedging. And the year-to-date picture gives a better picture of the real underlying income and expenses. So between Q2 and Q3, we had an opposite development on there. Operator: The next question comes from the line of Panu Laitinmäki calling from Danske Bank. Panu Laitinmaki: I have 2 questions. Firstly, on China NBS, just on the margin. So was it still positive in Q3? And going forward, do you expect to kind of protect the margin with the actions you mentioned reducing fixed costs and so on. So that is why you gave the comment that it's a smaller headwind going into '26. Ilkka Hara: Well, yes, on both of the questions. And I guess I was also in the smaller headwind, meaning that the size of the business relative to the size of the rest of the business is smaller. Panu Laitinmaki: Okay. That's clear. Then the second question is on modernization. So how much is parcel modernization out of orders and sales roughly? And then how has the margin of modernization developed? I mean, a year ago, you said at the CMD that it's close to the group average. So is it still there? Or has there been changed so far? Ilkka Hara: We see on the parcel modernization, it continues to be a bigger and bigger part of the modernization. I don't think we've been very clear on exactly how big part of that is. And on modernization, we continue to see, as it has been during the last years that the profitability continues to be improving as we are scaling up the business on modernization. Panu Laitinmaki: Okay. And is it fair to assume that the parcel modernization is more profitable for you than the kind of traditional modernization? Ilkka Hara: Yes, it is. It is focused on the most important components of the elevator and there's less construction work related to that as well. Philippe Delorme: That's what we call the benefit of being modular and standardizing work, which actually for the customer is better value for money. And for us, it's better execution, less time lost in the field. So it's a win-win for everybody. Operator: The next question is from Ben Heelan calling from Bank of America. Benjamin Heelan: I just had one, which was on M&A. Now you've obviously said in the past that you want to be a consolidator of the industry. I just wondered if you -- is that still where your minds in terms of the future of the business? You see consolidation as a focus? And when we think about leverage ratios, is there any sort of framework that you can give us in terms of the leverage that KONE would be willing to go up to? And any framework there? Is it based on credit rating, et cetera? Ilkka Hara: I don't think the comment on the consolidation making sense in the industry has changed. We've said it for a very, very long time. Lately, actually, we've been doing consolidation more on the smaller maintenance companies on an increasing speed. So that's also then that we want to be a driver of the consolidation. Then on leverage, so I guess we don't -- we're net debt negative right now. So it's not been an issue. But I've said previously that we want to continue to be an investment-grade -- strong investment-grade company going forward. Operator: The next question is from Rizk Maidi calling from Jefferies. Rizk Maidi: Just to follow up on M&A and more specifically transformational M&A. Can we maybe just chat around whether you would be considering issuing equity, if you were to pursue a larger acquisition? And then maybe geographically, what are the regions where you feel you have a little or perhaps where we would like to add sort of more exposure? I'll start there. Ilkka Hara: Well, I guess on the first one, so I wake up every morning, and I guess, Philippe as well as somebody who sees that there are bigger companies in the industry. So we're a challenger. We want to grow faster to be the leader in the industry. So that's clear. I don't think it's one geography per se. I think it's a general statement where we want to grow faster than our competitors to make that happen. And as such, then on other things on capital structure, capital raising, I don't think it makes much sense to speculate on that. Rizk Maidi: Okay. And then the second one that I had is just covering the industry for quite some time, and this question is specifically on China maintenance. I think we've seen historically that whenever new equipment business being weak for an extended period of time, we saw that basically spread to the maintenance side of things. I'm just wondering why this should not be applicable. I mean I remember this happening to Europe back in 2013, '14 after the European debt crisis. Just wondering why you think this should not happen in China, whether it's -- you compete with different players, structure of the market different and whether the slowdown in maintenance has anything to do with this? Ilkka Hara: Well, first on China maintenance, I don't think I've ever said it's easy or something where there's not a competition. It is like we see it it's -- half of the market is service and modernization. So of course, everybody knows the same thing. And among the world's fragmented, so i.e. most competitive market in service is China by far. So I think that's a starting point. And then when you have less new elevators enter into the market, then, of course, it makes it tougher. What I'm very happy about is that how our team has been able to address it. And now I call it out because we made conscious decisions now in Q3 that impact the outcomes. And it's not a market-wide comment. It's rather our focus on profitability and cash flow. Philippe Delorme: And maybe to build on your point on China market. When we benchmark across the world, clearly, the China market is more fragmented. And we see at the lower part of the market, companies that are doing the very minimum of what they should do in terms of safety. We see on the other side, the China government being conscious that safety standards should move up, also seeing an opportunity with digital. So my point is not about next quarter, but when I look at a longer time period, I would expect some further concentration because on one side, the lower part of the market would have a hard time to survive with a standard that I would expect would increase with more digital technology that would make it less accessible for, let's say, lower cost, low-value player to deliver a value, which is more and more essential in a country that's being more and more modern and more and more asking for top safety standards. And we have work to do as an industry to help the industry move to a higher level of digital safety and so on. So this is upside. How fast it will materialize, we'll see. We have our role to play here. We are very active on digital to be a digital driver in China. It's taking some time. Rizk Maidi: Perfect. And I promise the very last one, so apologies if this was tackled before because I joined late. Section 232 and its extension to more than 400 products in August, maybe how you're thinking about the direct, but also more importantly, the indirect impact on the business. Ilkka Hara: It is first question on tariffs, and I think there is a reason for it because we don't see that meaningfully impacting our results. We are, number one, of course, working with our own supply chain on what we produce in U.S. and what do we ship to U.S. And actually, the export -- sorry, import to U.S. is less -- about 10% of our business. So it's actually quite small. And then secondly, we're protected by our contracts. So we are actually moving the cost of tariffs largely to our customers. And then, of course, we need to continue to drive product cost actions and efficiency in our supply chain going forward. Operator: Moving on to our next question from John Kim calling from Deutsche Bank. John-B Kim: He just took my question. Someone was strong. Ilkka Hara: Okay. That's good efficiency in action. Operator: And the next question is from Vivek Midha calling from Citi. Vivek Midha: Hope you can hear me. I just have one follow-up really on the questions around service growth with one eye on the quite ambitious aims for midterm growth here and the building blocks there. Is there also any material contribution at all from the strong modernization growth that you've been seeing in adding to the service installed base? Is there expected to be some over the midterm, helping you achieve your targets there? Ilkka Hara: You're seeing me smiling because that's actually a really important topic. And I was talking about the modernization. So the focus and the volume of the opportunities outside of our own maintenance space. And indeed, once we partially modernize an elevator, it becomes a digital modern elevator for us to maintain. So increasingly, that will be a driver for unit growth. And of course, already now with this modernization growth, we're starting to see increasing impact coming from that. And the more mature the markets are the bigger driver for unit growth is modernization in the long run. Philippe Delorme: And those, as you call, modernized connected elevators, actually, we are more efficient in delivering the right output with our customers because we use all our capabilities. So it's playing very positively in the mix. But that's a great point. Vivek Midha: Understood. Just a quick follow-up -- as a quick follow-up on that -- I don't know if you have data, but in terms of the conversion rate of, say, one of these partial mods, for example, compared to NBS, I mean, how does it compare in terms of driving the service there? Ilkka Hara: Well, twofold. So the relative conversion rate is quite high. So it's a very good level. Then still on the absolute volumes, it's still a smaller contributor. So we need to scale up the business, but it's a very good way to increase our LIS base. Operator: There is a follow-up question from Andre Kukhnin from UBS. Andre Kukhnin: So firstly, on the service adjustment in China that where you decided to let go some customer contracts, can you just confirm that, that's a one-off? Or should we think about that for Q4 and then maybe into 2026 as well? Ilkka Hara: I guess I already said it's not a long-term action. But of course, we continue to monitor the business. So let's see now how Q4 develops, but it's not something we expect to continue for years. The priorities don't change, but I think it's more of a discrete focus on this. Andre Kukhnin: Got it. And if I were to think about it, I'd probably think about it being more margin focused than cash as such, as probably some of these units are in fairly sort of spot locations, not really helping density. Is that the right sort of avenue? Or is it cash driven as well? Philippe Delorme: I think it's both, but it's driven by margin, but we've been really very clear with our China team, cash, margin rebalance the business. And there -- I mean, China is seeing some cash tension across the board. So how much is margin and cash? Usually, the 2 are related actually, but it's a bit of both. Andre Kukhnin: And if I may, just one more on China... Ilkka Hara: A follow-up on follow-up. Andre Kukhnin: Yes. Triple follow-up. Is modernization still the highest margin business for you in China? And is there -- well, I think there is scope, but are you also implementing a kind of modular approach there given that you've got a substantial and sort of broader universal installed base there? Ilkka Hara: Yes. So we plan to drive this more modular approach in China as well. And if you think about the size of the buildings, the time to execute the modernization is even more critical for the customers. And we have actually progressed really well be, I guess, fastest in the world in China in terms of driving modernization, is a fair statement. So kudos to the team on that one. And yes, modernization continues to be a good margin business for us in China. Operator: There is another follow-up question coming from James Moore from Rothschild. James Moore: I just wanted to follow up on service and NBS margins at a global level. You mentioned that China's margin is now in a loss in NBS in new equipment. Is that such a loss that the whole global NBS profitability is now a negative one? And the second question is on service margins. Are we at an all-time high in terms of service profitability? And if not, could you say when that was and how many bps or percentage we are below the all-time high? Ilkka Hara: On the first comment, I absolutely did not say that we are making a loss in China in NBS, neither did I say that we're making a loss in NBS globally. So it is clearly a lower-margin business compared to the other 2, but I have not said that we're making a loss. Then second, on services, I'm sure that in the history of 115 years, we've had margins that are peaking due to many reasons in services as well. But I would say that directionally, we continue to see margins improving in services, as we're digitalizing the business and driving productivity and the actions we talked about in pricing and more repair work. So it's directionally continuing to develop quite positively. Operator: Well, ladies and gentlemen, there are no further questions so I will hand you back to your host to conclude today's conference. Thank you. Natalia Valtasaari: Thank you, and thank you, Philippe and Ilkka, for the answers. Thanks, everyone, online for the plentiful questions, lots of varied ones. Really good to have active dialogue. Thanks for everyone who just listened in as well. I know it's a busy results today, so we appreciate the time. And as usual, if you do have any follow-ups, please reach out to me or the team. We're here for you. With that, have a great day. Philippe Delorme: Have a great day. Thank you so much. Ilkka Hara: Thank you.
Operator: Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated 2025 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Sam Ullrich, Vice President, Investor Relations. Sam Ullrich: Thank you, Andrew. Good morning, and welcome to our third quarter 2025 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2025 3rd quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company's website titled News, located at churchilldownsincorporated.com as well as in the website's Investors section. Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent reports on Form 10-Q and Form 10-K. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in yesterday's earnings press release. The press release and Form 10-Q are available on our website at churchilldownsincorporated.com. And now I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen. William C. Carstanjen: Thanks, Sam. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel. I will share an update on growth plans for our company, including with respect to the Kentucky Derby and our HRM businesses. And then Marcia will provide insight into our financial results as well as an update on our capital management strategy. After she finishes, we will take your questions. First, regarding our third quarter results. We delivered overall record net revenue and record adjusted EBITDA in the third quarter. We also delivered record adjusted EBITDA for our Live and Historical Racing segment as well as our Wagering Services & Solutions segment. We are also very pleased with the performance of our regional gaming properties in the third quarter. Their results reflect consistent strength from our high end and rated guests, along with nice growth from our unrated players across the majority of our markets. Now let's talk about our plans for the company, both near-term and long-term. First, regarding our plans for Derby Week and Churchill Downs Racetrack. During our last earnings call, I discussed the 5 key growth catalysts for the Derby that will power the growth of Churchill Downs Racetrack in 2026 and beyond. The first is ticketing revenue driven by premium experiences during Derby Week. The demand for the Kentucky Derby and for Derby Week tickets is continuing to grow as we deliver new and unique customer experiences. We will also realize further incremental ticketing revenue from the investments we have made over the last number of years. One example of this is the Starting Gate Pavilion and Courtyard. We significantly improved this area this past year and the guest feedback has been overwhelmingly positive. As a reminder, this project transformed 10,000 bleacher seats into a combination of approximately 8,500 premium stadium and trackside box seats. We also significantly improved the amenities for these guests as well as for an additional 2,800 people seated in existing surrounding sections who are now able to access the hospitality options of the newly renovated area. We believe that ticketing revenue from the Starting Gate Pavilion and Courtyard and from other recent investments as well as general price increases will provide meaningful adjusted EBITDA growth for Derby Week going forward. The second driver of long-term growth for Derby Week is our broadcast rates. As I discussed on our last earnings call, our NBC deal will deliver a $10 million increase in adjusted EBITDA for 2026. We also announced that NBC will, for the first time, broadcast the Kentucky Oaks race in 2026 during prime time on Friday night, May 1. We believe this will amplify awareness, engagement and wagering for both the Kentucky Oaks race and for the Kentucky Derby, the next day on Saturday, May 2. The third driver of long-term growth is wagering. We continue to attract the best horses from around the world and are benefiting from the Derby's expanding cultural relevance, both domestically and internationally. We believe the increasing availability of online sports wagering across the United States is very much a positive development for wagering on the Kentucky Derby and races across Derby Week. The huge customer base delivered by the online platforms gives us the opportunity to reach more potential bettors and fans than ever before. Also of note, our TwinSpires.com platform has continued to post strong growth in unique users during this period of rapid sports wagering expansion. And these players are remaining active and engaged long after the Derby. Internationally, we recently announced the expansion of the European and Middle Eastern road to the Kentucky Derby by adding 3 new points races in Dubai and Saudi Arabia. There are now 10 races across 5 countries that comprise this series, allowing for up to 2 horses to qualify for the Kentucky Derby. This strengthens the quality and intrigue of the international pathway to the Derby and extends our brand further into 2 of the sport's most dynamic and high-profile markets with Dubai and Saudi Arabia. We are very excited to deepen our engagement with owners, trainers, sponsors and fans across these regions which we believe will generate long-term benefits for Churchill Downs Racetrack and enhance the global reach of the Kentucky Derby. The fourth driver is sponsorships and licensing. Sponsors are increasingly recognizing the value of our expanding national and global footprint, driven by growth in on-site attendance, television and digital audiences, social media engagement and other strategic initiatives. The heightened visibility is attracting interest from some of the most well-respected brands, and we remain focused on broadening and strengthening our sponsorship portfolio in the years ahead. And finally, the fifth driver is selective renovations and expansions through capital investment. As discussed on our last earnings call, we are on track to complete the renovations of 2 of our most prestigious and exclusive areas, the Finish Line Suites and The Mansion for the 2026 Kentucky Derby. We announced last evening that we are planning to invest $280 million to $300 million to build a new structure called Victory Run, just past the finish line between the Sky Terrace and the First Turn section, an area we refer to internally as the gap in the smile. Victory Run will be a fantastic location and will offer tremendous views of the horses and the pageantry of the event. This new venue will replace existing uncovered ground-level box seats in dated dining areas with new premium hospitality offerings, including private suites and a combination of indoor and outdoor dining and covered box seats. Construction will begin following the 2026 Kentucky Derby with Victory Run completed in time for the 2028 Derby. During the 2027 Derby, Derby 153, we plan to offer an interim upgraded seating experience in this area, featuring temporary covered stadium seating and enhanced amenities to ensure guests enjoy a premium experience even during the year of partially completed construction. We remain committed to strategically investing in our flagship asset over the long-term to enhance the guest experience during Derby Week and to broaden our appeal to new audiences. These investments have delivered and will continue to deliver adjusted EBITDA growth with outstanding returns for our investors for years to come. Churchill Downs Racetrack in the Kentucky Derby remains the crown jewel of our company. These 5 growth catalysts provide a strong foundation for a vibrant and successful future for the Kentucky Derby and our company. Next, turning to our HRM progress. First in Kentucky. We are on track to open our eighth HRM entertainment venue in Calvert City during the first quarter of 2026, on time and on budget. This will be an important addition to our portfolio of entertainment properties in the Commonwealth. With a population of 300,000 people within a 60-mile drive, our Calvert City site is conveniently located near the intersection of 2 interstates, providing easy access for customers from several surrounding cities in Southwestern Kentucky. This venue will be branded Marshall Yards Racing and Gaming inspired by the railroad industry that shape the surrounding communities. Marshall Yards will feature 250 HRMs and a music stage that will host a wide variety of live entertainment attracting customers to the special property. Turning to Virginia. As expected, the rows continued to show great progress during the third quarter. Gross gaming revenues grew meaningfully, and we are rapidly building our customer database. We were also pleased to see continued growth in weekday gaming revenue, driven by increased visitation frequency through our data-driven marketing. As we approach the 1-year anniversary of the opening we are making excellent progress in laying the foundation for long-term growth at The Rose. In Central Virginia, we completed the expansion project at our Richmond HRM venue. We renovated an unused space to expand our gaming floor in May of this year and completed the remaining phase of this project in August, which added 450 incremental HRMs to the property. We also opened the Roseshire Gaming Parlor in Henrico County on September 29, ahead of schedule and below budget. The subscale entertainment venue features 175 games and other gaming-related amenities. It's off to a fantastic start. We currently have 4,875 HRMs deployed in Virginia. Virginia has proven to be a great investment and business environment for us. As the exclusive operator of Thoroughbred racing and HRMs, we are building strong relationships with key constituents in both the horse racing and agricultural industries. We will continue to pursue opportunities to expand our footprint and grow the number of HRMs in this dynamic market. Turning to New Hampshire. We completed the acquisition of a 90% interest in the Casino Salem project located at the Mall at Rockingham Park and Salem, New Hampshire, near the Massachusetts border at Exit 2 on Interstate 93. This is a highly attractive market with approximately 800,000 adults within a 20-mile radius and over 4.9 million people in the broader Boston MSA. More than 100,000 vehicles pass the property daily on I-93. Currently, we are operating a temporary facility with 100 HRMs and 13 table games. Design work for the permanent venue is nearly complete, and we expect the facility to have approximately 900 HRMs, 30 table games, 3 food and beverage venues, a signature center bar and a large live entertainment venue. We will seek local permits and approvals for the final design, after which construction of the permanent venue will begin. We will provide more details on timing on our next earnings call, but expect to open the facility in 2027. We plan to invest approximately $180 million to $200 million to develop the state-of-the-art gaming and entertainment destination. In the near term, we anticipate continuing to operate our Chaser’'s Poker Room in Salem and we have retained the rights to the associated HRM license. We will evaluate and pursue viable alternative uses for the second HRM license in New Hampshire in the future. Turning to Exacta. Our Exacta business has grown through the expansion of our HRM operations in Kentucky and Virginia as well as through our third-party relationships in Kentucky, New Hampshire and Wyoming. Exacta technology is supporting our temporary facility in Salem, New Hampshire and will be utilized in the permanent Salem casino facility when it opens. We anticipate that a new third-party HRM property in Wichita, Kansas will open in December this year with a significant portion of the gaming floor utilizing our technology. We are excited to support the expansion of HRMs into this new market. We have also made excellent progress towards gaining approval to deploy HRM-based electronic cable games. We are working to gain the necessary approvals from appropriate state authorities and expect to have more to share in the near-term. HRMs and the related Exacta technology represent a high-growth, high-margin investment that delivers strong returns for our shareholders. We will continue to focus on developing these businesses. In summary, third quarter was very strong for us with record financial results. We have a portfolio of unique and high-performing assets that collectively provide multiple catalysts for growth and free cash flow generation for years to come. We believe that Kentucky Derby will deliver outstanding growth in 2026 and beyond, as well our recent investments in HRM properties and the related Exacta technology. We will also continue to identify and execute high-quality growth initiatives. Our strategic decisions, disciplined capital allocation, strong balance sheet and diversified portfolio positions us to drive sustainable long-term growth in adjusted EBITDA and free cash flow. We remain focused on delivering superior returns for our shareholders. With that, I'll turn the call over to Marcia, and then we will take your questions. Marcia? Marcia Dall: Thanks, Bill, and good morning, everyone. I'll start with a few insights into our financial results and then provide an update on capital management. First, regarding third quarter results. As Bill shared, we delivered record net revenue and record adjusted EBITDA for the third quarter. Our Live and Historical Racing segment had record net revenue and record adjusted EBITDA for the third quarter. This segment grew revenue by 21% and grew adjusted EBITDA by 25% compared to the prior year quarter. This is the 21st consecutive quarter of record growth in revenue and adjusted EBITDA compared to the prior year quarter for this segment. All of our Kentucky HRM properties contributed to this strong performance. our Louisville and Northern Kentucky teams contributed double-digit growth in adjusted EBITDA compared to the prior year quarter. This double-digit growth was a result of strong execution on the top line as well as from a cost perspective. We are building a strong customer base for Owensboro, Kentucky, HRM venue in Western Kentucky, and our team in Southwestern Kentucky is continuing to successfully penetrate the Nashville market. This will be the fifth consecutive year of strong growth for our Oak Grove HRM venue. Our margins for our Kentucky HRM properties were very strong for the third quarter, collectively increasing over 3 points compared to the prior year quarter from the continued growth and optimization of these properties. In Virginia, The Rose had a strong quarter with GGR per unit per day increasing every month of the third quarter when adjusted for calendar differences between the months. Our HRM venue -- our Richmond HRM venue in Central Virginia has completed the expansion of the property, adding 450 incremental HRMs. The new HRMs and gaming floor expansion has been well received by our guests. We are also very pleased with the initial results from our new Henrico County venue. Our Southern and Western Virginia results reflect the comparison to a strong third quarter in 2024 as well as the impact of increased competition for our Vinton and Hampton properties. Overall, we generated a combined 51% margin during the quarter for our same-store Virginia HRM properties. This margin is best in class, and we believe these margins are sustainable given the continued scaling of our Northern and Central Virginia properties. Turning to our Wagering Services & Solutions segment. This segment delivered record third quarter adjusted EBITDA, driven by the continued growth of our Exacta business. Exacta benefits from the growth of our Kentucky and Virginia HRM properties as well as our third-party customers. And last, regarding our gaming segment, our wholly-owned regional gaming properties performed relatively well in the third quarter. Excluding the impact of removing HRMs from our Louisiana operations, our adjusted EBITDA for our wholly owned gaming properties increased over $3 million and margins were up 1.1 points compared to the prior year quarter. These increases result of both top line growth and effective cost management. Regional gaming consumer behavior was relatively consistent on a sequential basis. We saw continued strength from our rated players with increased visitation and spend per trip from the highest end rated players in our database. We also saw unrated player trends improved compared to the prior year quarter and on a sequential basis. Turning to capital management. We generated $166 million or $2.34 per share of free cash flow in the third quarter, primarily from the strong cash flow generated from our businesses. Free cash flow per share is up 13% from the prior year quarter as we continue to realize the benefit of recent capital investments and the impact of share repurchases. Our free cash flow yield based on our trailing 12 months results is approximately 10%. We spent $53 million of maintenance capital through the first 9 months of the year. We now expect to spend $75 million to $85 million on maintenance capital in 2025. We spent $172 million in project capital through the first 9 months of the year. We now expect to spend $200 million to $240 million on project capital in 2025. For 2026, we are now projecting our project capital to be between $160 million and $200 million. This reflects the 2026 expected project capital for The Mansion, Finish Line Suites and Victory Run projects for Churchill Downs Racetrack and the Casino Salem project in New Hampshire that Bill discussed. Turning to share repurchases. We repurchased over $50 million of our stock in the third quarter under our share repurchase program. Regarding our dividend, our Board of Directors approved a 7% increase in our dividend, which will be paid out on January 6, 2026 to shareholders of record on December 5, 2025. This is the 15th consecutive year of increased dividends per share for our company. As a reminder, because of the federal tax bill that was signed on July 4, we will see an improvement in our free cash flow from favorable cash taxes. The new tax provisions include making the 21% business tax rate and 100% bonus depreciation rule permanent. The federal tax bill also reinstated a 30% of EBITDA-based interest deduction limitation. The additional interest deductions, combined with 100% bonus depreciation will reduce our cash taxes and increase our free cash flow this year and in future years. We estimate that the impact of lower cash tax payments will be $50 million to $60 million in both 2025 and 2026. At the end of third quarter, our bank covenant net leverage was 4.1x. We expect our bank covenant leverage to remain at this level at the end of the year, and then we'll be below 4x in 2026. We are proud of the record performance our team achieved in the third quarter. We are well positioned for sustainable long-term growth, supported by our unique portfolio of high-performing assets, disciplined capital management and our strong balance sheet. We remain committed to creating long-term shareholder value. With that, I'll turn the call back over to Bill so that he can open the call for questions. Bill? William C. Carstanjen: Thank you, Marcia. Andrew, I think we're ready to take questions. Operator: [Operator Instructions] And our first question comes from the line of Barry Jonas with Truist Securities. Barry Jonas: Congrats on the quarter and the announcement of Victory Run. Can you talk more about your ROI targets for Victory Run, how and when you think you'll hit them? And maybe if there are any lessons learned you can apply from the Starting Gate Pavilion introduction at Derby 151? William C. Carstanjen: Sure, happy to do that. Barry, so we target a 20% unlevered IRR. That's what we shoot for. We shoot for that, really focused on year 3. It takes time in this business to introduce the new asset, get trial and then get word of mouth. So it's a 3-year window that we focus on. Operator: Our next question comes from the line of David Katz with Jefferies. David Katz: I appreciate it. I wanted to ask about ETGs -- from not putting words in anybody's mouth, from my own work, my sense is that Kentucky might be closer in than some of the other markets that you have. But generally speaking, have you done any sort of penciling, Marcia and team, around what the prospective opportunity could be, whether it's in Kentucky or in any of the other markets in terms of lift, maybe based on learnings from other markets that have gone into ETGs before and after? William C. Carstanjen: Thanks, David. Good morning. So ETGs, electronic table games, that's an important frontier for us with HRMs, our facilities across Virginia, Kentucky, New Hampshire, they don't have the benefit of offering table games, which is something, of course, a class of customers really want. So electronic table games in states like Virginia and Kentucky represents an important opportunity for us, and it's a technology journey and it's also a regulatory journey. And it's one we have been focused on for a while. So I don't have any news to announce today, and I hinted at that in our comments, but it's a material focus. It's something we think can be really important and it levels us up in terms of having a comparable suite of offerings for customers compared to traditional Class III facilities. So I can't give you and wouldn't -- can't responsibly give you predictions on what it will do, and it also depends on the regulatory framework that's finally approved. But I can assure you that we take it extremely seriously and think it's an important opportunity for us and we're going to focus on it until we can get it done. Operator: Our next question comes from the line of Chad Beynon with Macquarie. Chad Beynon: Congrats on the announcement on Victory Run. I wanted to ask about just capital allocation. So year-to-date, and including the dividend, it looks like about $400 million will be spent on share repo and the dividend. So with the updated CapEx for the next couple of years, Marcia and team, how are you thinking about leverage and the balance between share repurchase and the money that will be spent on the projects? Marcia Dall: Thanks, Chad. As you know, we're very disciplined in our capital management. We have made a commitment to have our leverage come below 4x next year, and we will execute that through that. That being said, we are very thoughtful about -- and strategic about buying shares back when it's appropriate. And we will continue to balance. We have a very good forecasting model that allows us to balance our capital investments with the dividend that we grow at 7% per year, along with other share repurchases throughout the year. Operator: Our next question comes from the line of Daniel Guglielmo with Capital One Securities. Daniel Guglielmo: The brick-and-mortar property portfolio is wholly owned across both the live and historical and gaming segments. Outside of not having to pay rent, what are some of the incremental mid- to long-term benefits of owning the properties outright? And then do you think the market is giving you enough credit for the full ownership piece right now? William C. Carstanjen: Thanks for the question, Dan. So our philosophy for our gaming assets has been to own the real estate. Other companies have chosen other philosophies and they can explain their philosophies. For us, we've been focused on growing these businesses, stabilizing these businesses and running them as best as we can. So owning your own real estate gives you a sense of stability and a sense of predictability that's made sense for our company. But the philosophy is around why different companies do it the way they do it is up for the other companies to explain. For us, I don't think we get credit for it fully in our stock. It's been occasionally a source of discussion on these calls and a source of discussion with other investors. But fundamentally, we structured a very stable, consistently performing well-executed strategy around regional gaming, in particular, and hopefully, the market recognizes that because our track record is clear and our future is also fairly predictable and clear as well. Operator: Our next question comes from the line of Dan Politzer with JPMorgan. Daniel Politzer: Bill, Marcia, I was wondering kind of broad strokes, if you kind of could just touch on the M&A environment here. I mean, obviously, we've seen some transactions lately. You guys obviously participated with Casino Salem. I mean, as you kind of look broadly and think about kind of inbounds and outbounds, how would you describe the kind of level of activity or interest? It just seems like there's been a little bit of a pick up externally. William C. Carstanjen: Yes. Certainly, we've seen that pick up. There have been a couple of announcements in the brick-and-mortar space recently over the last month or so and even over the last week. And that's always encouraging. Now those were -- those are opco/propcos as I think about the ones that come to mind and we're, of course, holdcos. So I think it's nice to see some clarity in the market. So the investor community and the markets in general get a sense of the value of properties, and we watch those markets closely. And as a company in the space, you've seen over the long-term, we're both an opportunistic acquirer, and we're also a seller when opportunities afford themselves. So we're always a flexible participant in the market, and we like to pay attention to the trends and the activities we see. So everything is relevant and interesting to us. But I would say, in general, you are seeing a pickup in activity over the very recent term. Operator: And our next question comes from the line of Ben Chaiken with Mizuho. Benjamin Chaiken: Maybe just a follow-up there. Obviously, in New Hampshire, you acquired 90% interest in Salem. Talk to us about the M&A environment, specifically in this region. Is this an area we could see more activity? Or was this more of a one-off for some reason? William C. Carstanjen: Well, talking specifically about New Hampshire, we entered New Hampshire originally through our Chasers' license in Salem. So we believe very strongly in that market. And the second license was created, so the parties came together and that was an opportunity that just made a lot of sense for us based on the work and our understanding of that market. Generally, in the state of New Hampshire, I like the model in New Hampshire with HRMs, and I certainly like -- I like the demographics there. But there's not a philosophy per se for that particular region. We look at every region. We look at demographics. We look at pricing, we look at the technology that at play and we make a determination based on that. But New Hampshire is a story of us investing in the Salem market and then seeing an opportunity to double down on a market that we really believe is going to be a long-term positive development for us. Operator: Our next question comes from the line of Jeff Stantial with Stifel. Jeffrey Stantial: I wanted to ask a bit more of a high-level strategic question on the Derby. Bill, just as you look at the track assets built up currently. I'm curious just to get your updated thoughts on what inning you think you're in with respect to some of these, call it, more substantial projects such as the First Turn or the Victory Run, and that's a corollary to that. Do you think the current product is diversified enough where it covers the full consumer life cycle? Or is there still some opportunity left to bridge jumps and ticket price, such as going from infield to premium seat and things like that? William C. Carstanjen: Well, thanks for that question, Jeff. I like the baseball analogy. It's World Series time, so that's a very timely analogy. So in that theme, what inning are we in? When it comes -- the Derby is a very old event. It's been around for 151 years, but I think we're in the third inning. I think there's so much opportunity with that, it's a very dynamic evolving event as we develop it. And as the country changes and as we see things moving towards experiential customer spend, so I think the future is very bright for the Derby and there's a lot more to come. I think it's important to have a breadth of offering for the Derby. And a lot of that is still yet to come. When we look at Victory Run, that's a very, very, very attractive part of the track. It's just past the finish line. It has a great view of the stretch as the horse is sort of thunder towards the finish line. And it was a very -- it has seats there, but they're tired -- it's a tired old section that hasn't seen capital investment in a long time. So it was a perfect opportunity to really upgrade that and meet the modern expectations of our consumers, and we get that feedback from them every single year on what they're looking for. So they want more suites. They want more covered boxes. They want higher amenities. That's what they're looking for, and this is an area where we can do that. And there are other areas around the track where that also is in the cards for the future. So I think you'll see us be active on a small-to-medium scale constantly, but the next big project is the one we talked about today, which is Victory Run, and we need to get that done and get that digested before we talk about some of the other big projects that come next. I would say about Victory Run, it increases the capacity of the track, seating capacity by about 2%. It's a 20% increase in that section, and that's a really important section. But we're always very careful about layering in capacity because it's not really about the number of seats. It's about the quality of experience and the segmentation of the experiences that we offer. And so this fits in with a plan and a philosophy that you've seen us execute over time and it's the right next step. Operator: And our next question comes from the line of Brandt Montour with Barclays. Brandt Montour: So I wanted to ask about The Rose. Obviously, a nice ramp you're seeing there. I think you're now within your long-term win per unit per day target. And so I guess the question would be how to think about the margin ramp from here and into next year. And I apologize for the near-term question, but any sort of concerns around the sort of government shutdown that's going on in the DC and the like, that would be helpful, too, as well. William C. Carstanjen: Brandt, thanks for the question. Yes. We're thrilled with the progression of The Rose. We still think we have a long way to go. And we think as we progress and as our win per unit goes up, you should see improving margins. Right now, we're still heavily investing in marketing as we try to drive awareness in a very big, large complex MSA. And you mentioned also what's going on in that market. We don't really see or feel in a way that we can tell that the impact of some of the government shutdown discussions or whatnot. It's such a huge area. It's 6.5 million people, and we've not even been open in a year. So we're just growing through it. So I think it's such a huge market with great demographics, both from the population level and from the income level that we're just in the process of growing into our size. So some of the noise going on is just not something that we can discern as we currently grow. So yes, we're really happy with how that's progressing. We're really happy with the quarter-to-quarter growth. And as our team settles into the pace, we think there's more things -- good things to come there. And it would be our expectation that you'll continue to see improving performance on margins and things like that as we drive better awareness and better performance per machine. Operator: Our next question comes from the line of Shaun Kelley with Bank of America. Shaun Kelley: Just wondering if you guys have thought at all about or could give us some of your kind of emerging thoughts on the whole emerging landscape of prediction markets. This is a fairly disruptive force that's happening out there in the online sphere. And I'm thinking about the potential implications specifically for the Derby, you've obviously, through the pari-mutuel approach and then through the content control have generally had very strong sort of ability to control what's going out there in the betting sphere for the Derby. But this kind of new world seems to do particularly well when we're talking about like really large tentpole events and the Derby, in our eyes from a sporting perspective is definitely one of those. So just kind of wanted to get your thoughts. I know it's an early subject, but if you had any -- and have any of those operators potentially approached you about sponsorship or anything else? William C. Carstanjen: Sure. Thanks, Shaun. So let me start by saying that wagering on horse racing in the United States is actually governed under an umbrella federal law called the Interstate Horseracing Act. That's very different than sports wagering that you see across all of the states, which is a state-by-state sort of balkanized state law construct. So our construct is fundamentally different than all the other sports wagering activity you see in the United States. We are governed by a specific dedicated federal law about how wagering works on horse racing. So that makes us quite different. And the requirements under that law are very clear about what it takes in order to take a wager on a horse race, you have to have a contract with the content provider. That's us. You have to have a contract with our horsemen, et cetera. So our philosophy on the prediction markets are, we will approach them, we will explain to them the legal construct under which activity on our sport happens -- wagering activity on our sport happens. We'll explain that both the civil and criminal elements of the Interstate Horse Racing Act and why compliance with it is so clear. And we'll take it from there. We do not have a deal with any prediction markets -- predictive market companies to take wagers on our product. We are not in discussions to do that at this time, but we do plan on approaching them and explaining to them the legal construct under which wagering happens on our product. This is not a question like some of these other sports between state law and federal regulations. We have federal law that governs how we operate. And certainly, to the extent people act counter to having a deal with us and act counter to the Interstate Horseracing Act will pursue all our rights and remedies under the Interstate Horseracing Act. So for us, I think we're different than the other sports. I think we're different than the other players in the online wagering game. And that's a serious subject. It's one we take very seriously and it's one that we've talked a lot. And for us, it's always a matter of communication and making sure that the players out there on the field understand how this sport works so they can contrast it and understand it compared to the others. Operator: And our next question comes from the line of Joe Stauff with Susquehanna. Joseph Stauff: Bill, Marcia. A question on Virginia, if I could. Sorry to repeat the question as maybe I have in the past, but I wanted to ask again really on the process of shutting down illegal machines kind of where that is, Bill, you've described it as a bit of a whack-a-mole process. Has that changed? And do you think it's affecting some of your assets within Virginia, at least in a modestly negative manner today. Just trying to understand essentially the opportunity and the tailwind of closing down those machines over time and how strong it is, et cetera? William C. Carstanjen: Sure, Joe. Happy to take that question. And we haven't talked about that yet today. So I almost used the term gray games, but these aren't gray games. These games are illegal. The legislature has spoken, and the court has spoken, but there are constant issues of enforcement and also constant variations of games that manufacturers try to introduce to try to distinguish themselves from the very clear law of how this works. So it is a bit of a whack-a-mole. There's been a lot of progress in the state. This isn't binary. It isn't black or white in the sense that there is always going to be an element of enforcement necessary because of the shenanigans some of these manufacturers try to engage in to introduce machines. So generally, there has been pretty strong enforcement. It's very clear from the Attorney General. It's very clear from the legislature. But there's always enforcement issues that will happen, especially when manufacturers may try to muddy the water with games that are different in some way. So I think it's -- I think that's a process that goes on. It's sort of a slow burn indefinitely. And yes, there's still great games out there. We don't think they're really material at this point. The enforcement has been pretty good. But they are out there, and it's -- it requires constant vigilance and constant communication with law enforcement and constant and willingness to engage with the courts. It's just part of the environment in that state and in others. So we're going to grow through that. We are growing through that. We are building our business through that and that's just part of that process that we keep our eye on that and keep pushing on that. But I would say over the most current quarter, it hasn't been a big driver or a big concern. We feel like we have it mostly in a good place. Operator: I'll now turn the call back over to CEO, Bill Carstanjen for any closing remarks. William C. Carstanjen: Thanks for your time this morning, everybody, for our investors. Thank you for your trust in us. We won't let you down. We're proud of the team. We think we had a strong quarter, and we think we have more good things to come. So we'll keep doing what we're doing. And again, thanks for your confidence and trust in us. We look forward to talking to you next year, next -- actually will be next year, but next quarter as well. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: Greetings, and welcome to the Veris Residential, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Taryn Fielder. Please go ahead. Taryn Fielder: Good morning, everyone, and welcome to Veris Residential's Third Quarter 2025 Earnings Conference Call. I would like to remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to the company's press release and annual and quarterly reports filed with the SEC for risk factors that impacts the company. With that, I would like to hand the call over to Mahbod Nia, Veris Residential's Chief Executive Officer, who is joined by Anna Malhari, Chief Operating Officer; and Amanda Lombard, Chief Financial Officer. Mahbod? Mahbod Nia: Thank you, Taryn, and good morning, everyone. We're delighted to report another quarter of exceptionally strong operational performance, including blended net rental growth of 3.9%, significantly outperforming the national market and core FFO per share of $0.20. Despite challenging transaction markets, we made considerable progress on our corporate plan to monetize select non-strategic assets, using sales proceeds to further delever as we seek to continue unlocking the value embedded within the company. To date, we've sold or entered contracts of $542 million of non-strategic assets, including Harborside 8/9, exceeding the upper end of our initial $300 million to $500 million target, which we are now raising to $650 million. These sales and subsequent debt repayments continue to drive outsized earnings growth relative to our peers, while strengthening our balance sheet as we have proactively reduced net debt-to-EBITDA by 15% since the beginning of the year to 10x. Harborside 8/9 is expected to close early next year, albeit closing is subject to factors outside of our control. and the resulting proceeds are anticipated to generate $0.04 of run rate earnings while further decreasing net debt-to-EBITDA to approximately 9x with the potential to delever to below 8x by the end of 2026, as we continue divesting non-strategic assets, in accordance with the revised $650 million target. We anticipate that this will significantly enhance optionality for the company and allows to explore a wider range of financing strategies, including alternatives that were previously unavailable to us, with the potential to further reduce our cost of capital over time, positioning Veris for continued outperformance next year relative to peers. We also realized several one-time tax appeal refunds during the quarter, which Amanda will discuss in more detail. As a result of these adjustments, core FFO per share for the quarter increased to $0.20, which is reflected in our decision to raise guidance for the second consecutive quarter to $0.67 to $0.68, 12.5% above 2024. Before discussing our recent sales in further detail, I'd like to say a few words regarding the broader multifamily market as well as current dynamics in our key markets. While the national multifamily market remains structurally undersupplied, demand has recently weakened in select markets, driven by an influx of new supply, which is expected to be absorbed over time. Rents slowed significantly in September, growing by only 30 basis points year-over-year, with asking rents decreasing in the largest 1-month drop since November '22. Looking ahead, softening labor markets, declining consumer sentiment and more stringent immigration policies could present headwinds to the sector overall. In contrast with the national market, the Northeast continues to perform encouragingly well, supported by favorable supply/demand dynamics and resilient urban migration trends. In September, New York City led the nation in rental growth of 4.8%, reflecting continued strength in demand and extremely limited supply. Between 2020 and 2024, New York City's multifamily supply grew by only 6%, approximately half the national average, driving robust demand to neighboring submarkets with strong transit links, including Jersey City and Port Imperial, where the majority of our properties are located. Over the past 2 quarters, the neighborhood surrounding Manhattan have largely absorbed more than 8,700 units of new supply, including nearly 5,000 units in the third quarter alone, the highest quarterly total in 5 years, with deliveries expected to taper beginning in 2026. Despite this regional supply influx, Manhattan alternatives continue to outperform with the broader New York metro area averaging rental growth of 2.3%. Among these submarkets, the Jersey City Waterfront has been particularly resilient, maintaining low vacancy levels and rental growth of almost 3%, reflecting robust, sustained demand and an ongoing lack of new supply. The Waterfront has not seen any meaningful deliveries since mid-2022 with new supply well below its historical annual average of 600 units, which have been consistently absorbed over the past 15 years. Currently, approximately 4,500 Class A units are under construction on the waterfront with 2,500 units expected to be delivered over the next 24 months across 4 projects. While not directly competing with the Waterfront, nearby submarket Journal Square saw 2,800 units of new supply delivered and absorbed in the last year, further testament to the ability of the broader Jersey City market to absorb new supply across various price points. We expect the New York City demand/supply imbalance to continue fueling sustained demand for housing in alternative submarkets such as Jersey City that are expected to see population growth well in excess of projected unit deliveries for the foreseeable future. Turning to the investment market. While transactions remain challenging, particularly for larger sales, with core capital largely remaining on the sidelines, there are early signs of renewed engagement from Core-Plus capital with interest concentrated in gateway cities. As I mentioned in my opening remarks, we've exceeded our target for non-strategic asset sales with $542 million of sales closed or under contract this year. During the quarter, we closed on the sale of 4 smaller non-strategic multifamily assets for a combined $387 million, reflecting an average cap rate of 5.1%. In addition to Signature Place and 145 Front Street, which closed in early July, as previously announced, we sold The James, a 240-unit property in New Jersey for $117 million; and Quarry Place, a 108-unit property in New York for $63 million. We also continued rightsizing our land bank during the quarter, disposing of Port Imperial South for $19 million and entering a $75 million contract for the sale of Harborside 8/9. The Harborside transaction is anticipated to reduce net debt to EBITDA to around 9x and contribute $0.04 to core FFO on an annualized basis. Following these sales, our remaining land bank is valued at approximately $35 million with parcels primarily located in Massachusetts. Before Anna walks through our operational performance, I wanted to share our recent results from the Global Real Estate Sustainability Benchmark, or GRESB. Year-over-year, our GRESB score improved by 1 point to 90, maintaining our 5-star rating and Green Star and earning us the #1 rank in our peer group as well as designations as a regional listed sector leader and top performer for residential companies in the Americas. Last but not least, I'd like to thank our team whose dedication and execution have been instrumental in establishing Veris as a high-growth, rapidly deleveraging company. With that, I'll hand it over to Anna to discuss our operational performance for the quarter. Anna Malhari: Thank you, Mahbod. Despite a broader market slowdown, our portfolio continues to outperform with the same store blended net rental growth rate of 3.9% for the quarter, comprising 3.6% growth in new leases and 4.3% in renewals; in line with our expectations as we entered the slower leasing season. For the first 9 months of the year, our portfolio's same store blended net rental growth rate was 3.5%, comprising 2.3% in new leases and 4.2% in renewals. Our portfolio's continued rental growth, coupled with our strategic exit from select suburban markets has increased our average revenue per home to $4,255 and over 40% premium compared to peers. Turning to occupancy. Excluding Liberty Towers, where we continue to undergo unit renovations, occupancy was 95.8% as of September 30. Including Liberty Towers, which is now over 85% occupied, overall occupancy was 94.7%, with retention improving by over 570 basis points since last year to 61% across the entire portfolio. Our New Jersey properties continue to benefit from strong fundamentals, including our assets' strategic locations, adjacent to New York City and sustained interest from prospects moving to the broader metro area who are compelled by the relative value proposition of our generally newer, larger units and the wider range of amenities they offer compared to those in Manhattan. During the third quarter, approximately 55% of new move-ins came from out of state and 25% from the metro area. While some portfolios have been impacted by declining international student enrollment, our exposure has been extremely limited as only 2% of our units are occupied by students. Our properties continue to primarily attract affluent, young, urban professionals with an average household income of over $480,000, providing a strong foundation for sustained future rent growth. Notably, our Jersey City Waterfront portfolio has significantly outperformed with new lease net blended rental growth of 6% during the quarter. In September, new lease rental growth across our Waterfront assets was 4.6%, well above the submarket's average of 2.9%, a testament to the quality of our assets, the strength of our markets and platform, and the unwavering commitment and hard work of our teams. We continue to elevate our customer experience and operational efficiency by investing in innovative technologies through PRISM, our strategic approach to technology implementation, which recently earned us recognition as a finalist for the ThinkAdvisor Luminaries Award. These efforts are reflected in year-to-date controllable expenses growth of just 1.9%, well below inflation. With that, I'm going to hand it over to Amanda, who will discuss our financial performance and provide an update on guidance. Amanda Lombard: Thank you, Anna. For the third quarter of 2025, net income available to common shareholders was $0.80 per fully diluted share, reflecting substantial gains from sales during the quarter versus a loss of $0.10 for the prior year. Core FFO per share was $0.20 for the third quarter, up $0.03 from the second quarter due to the recognition of $0.04 of successful tax appeals on sold assets, which was offset by $0.01 from the finalization of Jersey City property taxes in the third quarter. Year-to-date, core FFO is $0.52 per share versus $0.49 at this time last year. Before we dive into same-store, please note that the same-store pool has been adjusted to remove the 4 multifamily properties sold during the quarter, with this recalibration impacting some of the growth rates. Same-store NOI growth was 1.6% on a year-to-date basis and off 2.7% for the quarter compared to last year. This was largely due to the company lapping the extremely favorable resolution of non-controllable expenses in 2024, combined with an approximately 4.5% increase in Jersey City tax rates this year. On the revenue front, same-store revenue increased by 2.2%, both for the quarter and year-to-date. Overall, our revenue growth remains robust, aligning with typical seasonal patterns. In fact, when revenue growth is adjusted to remove the impact of Liberty Tower's occupancy and non-recurring income from last year, growth would have been 3.1% for the quarter and 4.6% year-to-date. As Anna mentioned, technology investments and portfolio optimization have continued to generate cost efficiencies on the expense front. However, a slight rise in R&M and utility expenditures this quarter led to a 5.7% increase in controllable expenses for the period. Combining the impact of technology investments in R&M this quarter with the considerable savings recorded earlier this year, year-to-date controllable expenses have grown by a modest 1.9%. Diving deeper into non-controllable expenses. While our property insurance renewal delivered savings of nearly 20%, this was largely offset by increases in other insurance premiums and the rebalancing of the same-store pool. Jersey City also announced its final tax rates for 2025 during the quarter, as I previously mentioned, which together with other finalized taxes, resulted in a $1.1 million increase. Despite these various factors, year-to-date overall expenses increased by only 3.4%. On the overhead front, core G&A after adjustments for severance payments was $8 million, broadly in line with last quarter as expected and reflecting savings in compensation due to further organizational simplification. For the full year, we anticipate realizing G&A savings in excess of $1 million relative to last year, although fourth quarter G&A is expected to increase sequentially. Last quarter, we took a significant step in strengthening our financial position by modifying our revolving credit facility. This amendment introduced a leverage grid and resulted in a substantially-lower borrowing spread, enhancing our ability to continue reducing financing costs as we delever further. In addition, sales completed during the quarter reduced debt by $394 million, including the early repayment of our most expensive coupon debt, a $56 million 2026 maturity. Furthermore, the buyer of Quarry Place assumed the $41 million in-place mortgage resolving the 2027 maturity. As a result of these transactions, as of September 30, our net debt-to-EBITDA on an adjusted basis has further decreased to 10x, as mentioned by Mahbod, representing a reduction of 14.5% since the beginning of the year. We ended the third quarter in a stronger position than the second, with our weighted average coupon decreasing 32 basis points to 4.8% and weighted-average years to maturity of 2.6 years and liquidity of $274 million. Turning to our outlook. We are raising core FFO guidance for the second consecutive quarter to $0.67 to $0.68 per share annually compared to our previous guidance of $0.63 to $0.64 per share. This enhancement reflects $0.04 from one-time tax appeal benefits associated with previously sold office properties. While we are realizing approximately $0.01 in overhead savings this year, this is largely offset by the increase in real estate taxes in the third quarter. Our raised guidance range represents robust year-over-year core FFO growth of 12% to 13%, underscoring the strength of our markets and portfolio and the effectiveness of our deleveraging strategy. Not only does this approach reinforce the strength of our balance sheet, but it also drives meaningful earnings expansion and increases free cash flow. We are affirming our same-store NOI guidance of 2% to 2.8%, reflecting our solid performance year-to-date and strong visibility into rental revenue through the end of the year as well as realized savings from our technology and operational initiatives and a resolution of non-controllable expenses within expectations. These results are a testament to our commitment to maximizing value for our shareholders while maintaining disciplined financial management and operational excellence, resulting in sustained earnings growth and accelerated deleveraging. With that, operator, please open the line for questions. Operator: [Operator Instructions] And our first question comes from Jana Galan with Bank of America. Jana Galan: Maybe just following up on the same-store guidance ranges that were maintained. The 9 months to-date, they're trending a little bit at the low end. And so, can you let us know any timing-relating items that may impact 4Q that can get you back to kind of the middle of the range? Amanda Lombard: So, look, I think, first off, Q3 same-store NOI growth is an anomaly due to the resetting of non-controllable expenses for this year as well as last year. Last year, we had a very good result, so the expense base is very low. And then this year, we had a slight increase in real estate taxes, which pushes it up. I think looking to the fourth quarter; right now, we don't see any major one-time items, which would impact the numbers. And so, I think you need to really look back at Q1 and Q2, where we have very low expense growth. In fact, I think in Q2, we actually had a reduction in our expenses and expect that, that trend will continue into the fourth quarter. So, I think, those factors combined with the fact that in the fourth quarter, a very small percentage of our revenue is still open is what gives us confidence that we will be within the range of our same-store NOI guidance. Jana Galan: Great. And then on the visibility into the rental revenue into year-end, can you let us know kind of where you're setting out the rental rate increases now? And I guess, kind of the percent of expirations in 4Q, typically, I'm assuming is lower than earlier in other quarters in the year. Anna Malhari: Yes, as you mentioned, we do have our expiration metrics following the seasonal trend in a way that we have limited exposure in Q4. We also have strong visibility into renewals already and only about 0.5% of our NOI is outstanding to renew at this point. In terms of the renewal rates, we continue to send out renewals just touch below kind of mid-single digits around the 4% to 5% range, something maybe slightly below that. But we are in a very good shape from an occupancy perspective since the end of the quarter with 95.8%, excluding Liberty Towers and feel confident about the revenue range that Amanda mentioned earlier. Operator: And we'll go next to Steve Sakwa with Evercore ISI. Sanketkumar Agrawal: This is Sanket on for Steve. We had a question around, like your leverage target of 8x through year-end '26. What does the path forward look like from there on in terms of, will you still focus on selling more non-core assets after that or move to more operational initiatives? Mahbod Nia: Thank you for the question. I think at this point, I would say the focus is on executing on the extended plan that we've announced, and in parallel, continuing to push the operational side of things, which as you've seen, is continuing to perform very well, and we expect that to continue into next year. And that should set us on this path delever in this accelerated fashion down to that 8x or even potentially below 8x, as we've said, next year. As for what comes next, there may be from time-to-time, and in the past, you've seen at the beginning of the year, we set out the plan for the year and communicate that to you. So, there may be further amendments or changes to this plan, which we'll announce in due course. But at this time, I think the focus really is to execute on this plan, see where that gets us while in parallel working with the Board and the SRC to evaluate a wide range of options available to the company as we always do in pursuit of the creation of value on behalf of our shareholders. Sanketkumar Agrawal: Makes sense. And the other question was like you guys were very active on the transactional front, like disposing a couple of assets, land. So, I just wanted to know like, how was the buyer pool like? Was there a wide area of people who are out there buying assets? Or it was just some specific types of people who are out there looking at this asset? Mahbod Nia: Sorry, you're a little faint, but I think I got the question, about the buyer pool out there for assets. Yes, look, I would say consistent with our expectations when we set out on this plan at the beginning of the year, there is a somewhat broader or deeper buyer pool for smaller assets today. I think once you get into sort of what would be regarded as large today, which is not that large, a couple of hundred million dollars, $200 million, $250 million and above, the buyer pool does spin out and the nature of the buyer does tend to become more of a value-add opportunistic type of a buyer. But look, there's also some encouraging signs in transaction activity that particularly with the low end of the curve coming in, obviously, the 10-year has come in and now it's around 4% or touch below 4%, and that's helpful. But with the front end of the curve, rates having come in and expected to continue coming in; in the near-term, we think that that actually is creating more interest in the transaction market from prospective buyers. Operator: And our next question comes from Eric Wolfe with Citibank. Eric Wolfe: Can you talk about how you came up with the high end of the disposition guidance at $650 million and what assets you're considering selling for the remaining $100 million? Mahbod Nia: Thanks for the question, Eric. So, I think the way we came up with that number is, it's really reflective of, again, what we're seeing in the market. You have a Board, a Strategic Review Committee and management team that's highly focused on the creation and crystallization of value for shareholders. And so, when we set out on this plan at the beginning of the year, our best estimate of how much value we could crystallize through asset sales, values that were at or close to intrinsic value, our best estimate was that range. It's been a very challenging transaction market and still is today, which is why it was the range. Thankfully, we've been able to make progress ahead of expectation. That wasn't guaranteed, far from guaranteed. And as we've done that, and I mentioned earlier, we're constantly reviewing, working with the Board and the SRC, a wide range of ways to be able to continue creating and unlocking value for shareholders. And so, I think this extension is really reflective of that dialogue, staying close to the market and what we believe really represents the best interest of our shareholders today, given the restrictive parameters that are placed on us through the current state of the transaction markets. Eric Wolfe: Got it. That's helpful. And I guess on a similar line, the $100 million of stock repurchases, is there sort of a certain price you have in mind? Or is it really about getting the balance sheet to a certain leverage level before you even consider using the repurchases? Just trying to understand the framework from which you'll decide to use repurchases or not? Mahbod Nia: No, it's a great question. Look, it's a very useful tool to have. To be clear, we believe there is significant value in the company over and above the current share price. And so, as an investment, as a capital allocation decision, we have strong conviction that share buybacks would make a lot of sense. Having said that, we have to balance the limited capital that we have as we're recycling capital through asset sales. And the determination we've made at this time is to prioritize deleveraging. And to some extent, notwithstanding the whole sector is trading at a discount to NAV at the moment; to some extent, that leverage is, for us, probably causing some of that discount that we're seeing. And so, it's a little bit circular. But when you take into consideration the potential accretive impact of even that full buyback program, $100 million buyback program relative to the impact on leverage from using those proceeds to delever, to us, it makes more sense at this time to prioritize deleveraging. Operator: And moving on to Tom Catherwood with BTIG. William Catherwood: Just wanted to circle back on Eric's disposition question there. For the $542 million of transactions closed or under contract, did prices come in stronger on the original pool of non-core assets that you had identified back in February? Or did you end up selling more assets than were initially planned in that original pool? Mahbod Nia: Tom, I think it's a great question. I think when we set out in February, the markets were still quite challenging, but we felt like for smaller assets, we'd be able to make some progress. The truth is, it wasn't clear to us how quickly we'd be able to make progress. We felt like conditions could improve during the year, and they did improve during the year, and they're continuing to improve now. But as I said earlier, we could have been in a very different situation here with far fewer asset sales. As for price and the two obviously are related, we ended up pretty much exactly where we expected. As I said, we were looking to crystallize pockets of NAV or sell assets where we could release pockets of value at levels that are in line or very close to NAV, and that really pointed mostly to smaller assets. And the overall cap rate and actually even the individual cap rates, which are pretty much all in line with the blended cap rate at which we sold those assets was right on top of what we expected and hoped for when we announced that plan. So, we sold at a low 5s, around a 5.1% cap rate across that pool and that's stripping out the land. And that's exactly where we thought we'd be or hope it would be. William Catherwood: Got it. Got it. Okay. So, the follow-up on that then is, if you ended up where you thought you'd be on pricing or hoped you'd be on pricing, that would suggest the $150 million increase to sales guidance would be the addition of other assets than were initially planned. If that's the case, are those assets that the market has recovered to the point where now you think you can sell them? Or is that just as you went through the sales faster than you expected, you reevaluated and transferred more into that non-core strategic sales bucket? Mahbod Nia: It's a little bit of both. As I said, we still -- for larger assets, I think there is still illiquidity discount at this moment in time, given capital flows. It feels like things are improving and that discount may over time, reduce or potentially even fully be eliminated. But I think it's a little bit of both. I think it's a little bit of market conditions improving over the past several months and continuing to improve today and us constantly evaluating alternatives that could make sense for shareholders and determining that it could make sense to slightly increase that target to $650 million. William Catherwood: Got it. Got it. And then last one for me, and this kind of follows up on your comment about transaction markets improving. But Mahbod, in your prepared remarks, you noted early signs of renewed interest from Core-Plus capital. I assume that's both commercial real estate and specifically multifamily. Can you provide some more thoughts around that and kind of what was driving those comments? Mahbod Nia: Yes, it's no secret that for the past few years, particularly with rates having climbed at the pace that they have, the more core, Core-Plus capital that was active previously in the market has reverted more to credit strategies, given the relative risk return profile that credit strategies have offered over the last few years. But with rates coming in a little bit recently plus the realization that with credit investments, you don't necessarily get the multiple that you get with equity investments, we understand that potentially the gates are opening somewhat, particularly on the Core-Plus side at this point. In terms of the core, if you look at what's happening there, the Odyssey funds are still seeing net redemptions, that redemption queues come down a little bit, which could be an encouraging early sign, too soon to say. But on the Core-Plus side, there are certainly a few groups out there that are becoming more active, both in terms of capital raising and fund structures and single-managed accounts and starting to look at more Core-Plus type opportunities. Why is that relevant? Because while those 2 groups of capital really have been otherwise focused on credit opportunities, the active capital, the dominant active capital in the market for the last few years has really been value-add and opportunistic capital, which obviously has a much higher cost, a much higher return expectation associated with it. And so that commands a certain risk profile to the assets that those investors are acquiring or it just requires a certain return regardless of the risk profile, which has implications for core asset valuations to the extent that those buyers are involved. And so, it's an encouraging early sign that things may be finally turning. We know that by their very existence, opportunity funds came to be to provide liquidity at times when more traditional sources of capital were unavailable. And so that's been the case for the last few years, but these are temporary capital flow dynamics that ultimately revert back to some normality over time. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Mahbod Nia for closing comments. Mahbod Nia: Well, thank you, everyone, for joining us today. I'd like to thank the team for the hard efforts that have allowed us to post another quarter of extremely strong operational results and meaningful strategic process. We look forward to updating you again next quarter. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the ARMOUR Residential REIT Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Ulm, Chief Executive Officer. Please go ahead. Scott Ulm: Good morning, and welcome to ARMOUR Residential REIT's Third Quarter 2025 Conference Call. This morning, I'm joined by our Chief Financial Officer, Gordon Harper, as well as our Co-Chief Investment Officer, Sergey Losyev and Desmond Macauley. I'll now turn the call over to Gordon to run through the financial results. Gordon? Gordon Harper: Thank you, Scott. By now, everyone has access to ARMOUR's earnings release, which can be found on ARMOUR's website, www.armourreit.com. This conference call includes forward-looking statements, which are intended to be subject to the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995. The Risk Factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission describe certain factors beyond ARMOUR's control could that cause actual results to differ materially from those expressed in or implied by these forward-looking statements. Those periodic filings can be found on the SEC's website at www.sec.gov. All of today's forward-looking statements are subject to change without notice. We disclaim any obligation to update them unless required by law. Also, today's discussion refers to certain non-GAAP measures. These measures are reconciled with comparable GAAP measures in our earnings release. An online replay of this conference call will be available on ARMOUR's website shortly and will continue for 1 year. ARMOUR's Q3 GAAP net income available to common stockholders was $156.3 million or $1.49 per common share. Net interest income was $38.5 million. Distributable earnings available to common stockholders was $75.3 million or $0.72 per common share. This non-GAAP measure is defined as net interest income plus TBA drop income adjusted for interest income or expense on our interest rate swaps and futures contracts minus net operating expenses. Total economic return for the quarter was 7.75%. Quarter end book value was $17.49 per common share, up 3.5% from June 30 and up 2.8% from August 8, the last date which we have reported book value. Our most recent current available estimate of book value is as of Tuesday, October 21, and was $17.50 per common share, which reflects the accrual of the October common dividend of $0.24 per share payable on October 30. During Q3, ARMOUR raised approximately $99.5 million of capital by issuing approximately 6 million shares of common stock through an after the market offering program. In August, we completed the sale of 18.5 million shares of common stock for proceeds of approximately $298.6 million, net of underwriting discounts and commissions. And in September, we repurchased 700,000 shares of common stock through our common stock repurchase program. ARMOUR paid monthly common stock dividends per share of $0.24 per common share per month for a total of $0.72 for the quarter. We aim to pay an attractive dividend that is appropriate in context and stable over the medium term. On October 30, a cash dividend of $0.24 per outstanding common share will be paid to the holders of record on October 15. We have also declared a cash dividend of $0.24 per outstanding common share payable November 28, to holders of record on November 17, 2025. I'll now turn the call over to Scott Ulm to discuss ARMOUR's portfolio and current strategy. Scott Ulm: Thank you, Gordon. The third quarter unfolded against the backdrop of shifting macroeconomic currents. Downward revisions to employment data confirmed that the U.S. labor market had been softer than earlier reports suggested. In response, the Federal Reserve resumed its easing cycle, implementing a 25 basis point cut in September. Chair Powell described the move as a risk management cut, reflecting growing caution around labor conditions. Updated projections now signal 2 additional cuts by year-end, setting the stage for a constructive environment for Agency MBS as financing conditions continue to improve. Markets responded positively to the Fed's pivot. Treasury yields declined, Agency MBS spreads tightened by roughly 20 basis points and volatility fell to its lowest level since 2022. These dynamics produced a total economic return of 7.75% for the quarter, as previously mentioned by Gordon. Following this strong performance, MBS spreads are now near the tightest levels of the year. Near-term consolidation is possible valuations remain compelling on a medium-term horizon. As we entered the fourth quarter, macro and political visibility became more clouded. The federal government shutdown that began on October 1, delayed key data releases and introduced incremental uncertainty to growth forecast. Even so, the market continues to expect an easing bias through year-end that's likely to redirect liquidity from the short end of the rates curve into Agency MBS. Chair Powell's recent comments also indicated that quantitative tightening may conclude in the coming months. Although details are still evolving, the Fed's MBS runoff is likely to continue with paydowns from MBS and treasuries expected to be reinvested in the treasury market. Together with a broader push toward banking deregulation, these shifts are aimed to ease balance sheet constraints and reinforce demand for treasuries and Agency MBS. Notably, SOFR treasury spreads have turned more positive in recent weeks, strengthening the effectiveness of pay fixed SOFR swaps as portfolio hedges. On the policy front, reports suggest that major banks are positioning to lead potential IPOs for Fannie Mae and Freddie Mac, collectively estimated around $30 billion. Although the process has been delayed by the U.S. government shutdown and the absence of a formal road map for privatization, administration officials have reiterated support for retaining an implicit government guarantee, an outcome that could transform GSE reform from a potential headwind into a tailwind for MBS investors. An additional and somewhat unexpected source of demand could come from GSEs themselves. After years of balance sheet contraction under conservatorship, Fannie Mae and Freddie Mac now have roughly $250 billion of combined capacity to invest in mortgage loans and MBS should it align with GSE's earnings and valuation objectives. While no formal plan has been announced, recent disclosures point to greater flexibility within their investment mandates, hinting at a more dynamic approach to managing their portfolios than in the prior cycles. I'll now turn it over to Sergey for more detail on our portfolio. Sergey? Sergey Losyev: Thank you, Scott, and good morning. ARMOUR's most recent net duration and implied leverage were 0.2 years and 8.1x, respectively, a balance stance with a bias towards further Fed easing. Roughly 87% of our hedges are in OIS and SOFR pay fixed swaps with the balance in treasury futures. Our liquidity remains robust at approximately 55% of total capital. The portfolio is invested entirely in Agency MBS, Agency CMBS and U.S. treasuries. Our recent activity has centered on par to slight premium coupon mortgages where levered and hedge ROEs range from 16% to 18%. Higher premium pools continue to offer up to 19% returns, though with greater sensitivity to prepayment risk. Diversification across 30-year coupon stack, Ginnie Mae and DUS securities whose positive convexity and shorter duration provide relative value remain a key advantage. During the second half of the year, 30-year mortgage rate briefly reached 6.15%, lowest level of this year. While rates remain just above 2024 lows, refinancing activity has already exceeded last year's pace, elevating prepayment concerns for TBA and generic premium MBS. This reinforces our long-standing focus on specified pools, which represent over 92% of the portfolio. Aggregate portfolio prepayment rates rose to 9.6 CPR in October compared with the third quarter average of 8.1 CPR, a 19% increase and consistent with our expectations. We anticipate a similar uptick in November before prepayments stabilize towards the year-end as refinance volumes moderate. Should mortgage rates move down below 6%, levels we've not seen since early 2022. The MBS coupon stack offers a deep market of lower-priced coupons as a hedge against higher prepayments. Roughly 40% of our assets are already positioned in prepayment of protected Agency CMBS pools and discount MBS. As usual, we financed 40% to 60% of the MBS portfolio through BUCKLER Securities, distributing the balance across 15 to 20 additional repo counterparties. Average gross haircuts stand near 2.75%. Repo market liquidity remains healthy with only a modest 2 to 3 basis points increase in repo SOFR spreads versus Q3 average. More meaningfully, the spread between SOFR and Fed funds widened from 3 basis points in Q3 to roughly 10 basis points through October, muting the transmission of the Fed's recent cut to funding markets and by extension to broader economy. An increase in treasury bill issuance and a gradual decline in banking reserves means banks can lend cash at higher prices. This makes repo funding a key area of focus heading into year-end, yet despite a recent bump in SOFR rates, we view funding conditions as stable with standing repo facility to supply liquidity if needed. Looking ahead, we expect structural demand for Agency MBS to continue to strengthen. Regulatory clarity around banking reform and resumed easing cycle have historically been a powerful catalyst for high-quality liquid assets like MBS. While spreads have compressed, underlying fundamentals and market dynamics remain favorable. Back to you, Scott. Scott Ulm: Thanks, Sergey. We executed a $300 million overnight underwritten bought deal in August, first one we've done this decade. While it was somewhat more expensive than our ATM execution, it allowed us to put a significant amount of capital to work at attractive spread levels. In fact, we estimate that the spread tightening from the newly purchased assets alone contributed about 0.6% to our increase in book value this quarter, along with a meaningful reduction in operating expenses per share. We saw some weakness in our stock in mid-August. And as in the past, we repurchased some shares in the open market. We will continue to look at both sides, selling and buying in our equity account. As you know, we determined our dividend based on a medium-term outlook. We view our current dividend as appropriate for this environment and the returns available. ARMOUR's approach remains unchanged, grow and deploy capital thoughtfully during spread dislocations, maintain robust liquidity and dynamically adjust hedges for disciplined risk management. We are confident in our positioning strategy and ability to deliver value for shareholders. Thank you for joining today's call and your interest in ARMOUR. We're happy to now answer your questions. Please open the line for some questions, please. Operator: [Operator Instructions] Our first question comes from Doug Harter with UBS. Douglas Harter: Hoping you could talk a little bit about where you see current returns on incremental investments and kind of the importance of the hedge choice you make in that and how that factors into your view of the attractiveness of the market today? Desmond Macauley: Yes. Doug. So expected ROEs, hedged ROEs are in the 16% to 18% range. Obviously, a touch lower than where they were at the end of June, given the tightness in mortgage spreads. So over a short-term basis here, you can assume 8 tons of leverage and hedge to swaps. So that's also picking up the swap income. Now we are still constructive medium term, given the resumption of the normalization cycle and also because of spreads, while local types are still attractive over a longer time horizon. So if we see another 10 basis points of tightening, that could add about 4% in return on equity to that base case of 16% to 18% range for production coupon. Douglas Harter: I guess how do you think about what the outlook is for swap spreads? And then how do you think about the attractiveness if you looked at mortgage spreads on like an OIS basis? Sergey Losyev: Doug, this is Sergey. Yes. So swap spreads have also had a big move since September meeting. We think swap spreads will continue to normalize. If you look at some of the average prior to Liberation Day, we see 10-year swaps somewhere in the mid-30s, currently trading around 44%. So we've gone a long way from minus 60 earlier in Q2, and we feel like this is going to continue to be a tailwind for the portfolio as effect of more effective hedges to hedge MBS. Currently, we have about 87% notional allocated to SOFR and OIS swaps. So that's a good positioning. We will probably tailor it if we do get back to those averages, but a lot of things have been lining up to see balance sheet expansion as well as potentially the Fed looking at changing the target policy rate from the Fed funds to SOFR or another repo measure, and that will provide lower volatility to funding rates and potentially wider SOFR spreads as well. So a lot of tailwinds are lining up there. Operator: And the next question comes from Jason Weaver with Jones Trading. Jason Weaver: Scott, along with your prepared remarks, if the administration is actively looking for ways to reduce borrower rates via GSE deregulation, do you have any thoughts on what the actual implementation looks like, whether that's GP manipulation, changes in LLPAs, underwriting guidelines? Scott Ulm: There are a lot of levers they could pull. And what knows we get a lot of levers pulled these days that we may or may not expect. So I think -- and I think that probably fits somewhere on their agenda. So the broad answer is yes. I think we could see a lot of things move around here. And particularly, if -- but particularly, I think you have to put it through the lens if they are thinking about a capital raise here for the GSEs. They're going to want to configure the GSEs to be as attractive a proposition as they can. So that may put the brakes on a couple of things as well. So there's a balance there I have no further insight into it other than just note that there are 2 competing things going there. One is undoubtedly, they'd like to see lower mortgage rates, but they also want to see the GSEs as an attractive investment proposition. Jason Weaver: Agree. That's helpful. And then noticing the hedge ratio ticked down quite a bit from Q2. Is that more of a timing issue? Or just along with the greater confidence in the pace of easing activity, you can be a bit more directional here? Scott Ulm: There are a lot of things going on in that. Sergey, Desmond, maybe you want to give a little more color on that, but there's a lot that goes into the way that, that ratio in itself works. Sergey, Desmond, do you want to give a little more color on that? Desmond Macauley: Yes, Jason. So I mean, the way we kind of look at hedges, it's really to hedge our duration across the entire curve, right? So as we said earlier, our duration of 0.2, we are taking a balanced view with a bias towards more Fed easing. So our goal is to -- most of that 0.2 duration is actually in the front end of the curve, whereas in the back end, we aim to stay flat. And ultimately, we move our hedges around to accomplish our duration targets across the curve. Operator: And the next question comes from Trevor Cranston with Citizens JMP. Trevor Cranston: All right. There was a pretty significant drop in interest rate volatility in the third quarter, which had a carryover impact to MBS, obviously. Can you guys share your thoughts on kind of how you think volatility evolves going forward? And since it's being priced significantly lower today, how that factors into your -- the potential to maybe add some swaptions or options into the hedge portfolio? Desmond Macauley: Yes. Trevor. So in terms of volatility hedging, you can think of 2 approaches to it. One, obviously, is you can use swaptions. We have used swaptions in the past. We continue to look at hedges even those that are not in our balance sheet. But the other approach is actually through asset selection, right? So you can pick assets that have low optionality. About 40% of our book, as we said in our prepared remarks, is in shorter -- lower coupons and also DUS securities. And these actually have very low optionality and another benefit of these securities is that their convexity in some cases, is even positive. So they act as a good offset to the negative convexity that you see in our production coupons. Now one more point on volatility is that, yes, volatility has come down a lot so far this year. But if you expand the time scale if you go back and look at other periods that are similar to this one, you can pick 2019. That was a period when the Fed had resumed normalization. They had started [indiscernible] back -- not buying mortgage-backed securities. That period of time, volatility was actually lower than where they are right now. If you take, for example, obviously, it's an entire volatility surface, but if you look at the swaptions for 1 year by 10-year, today is about 82 basis points. The average over that period was about 64 basis points. So still we are still about 18 basis points higher. If the Fed continues normalization, we can expect that the tail risks around rates will become compressed. And for that reason, we can see volatility in the medium term continue to decline, right? Now that's not going to prevent short-term bouts of volatility. But over the medium term, we can see volatility decline. And if you are long options, then the valuation of options would decline if volatility declines. So yes, I mean, we always -- it's a very dynamic position. We're always looking at our hedges. But for now, we think just keeping low optionality assets is the better approach. Operator: And the next question comes from Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: Just one for me. Regarding economic net interest margin, it seems like it widened about 1 basis point quarter-over-quarter. Looking forward to year-end and maybe to halfway through 2026, what would we need to see for this trend to kind of continue and if not pick up pace? Gordon Harper: Well, I guess you're going to -- it really depends on our portfolio and where continued cuts in the Fed rate, and that will imply how it impacts on our financing costs. And we think we've constructed a very good portfolio. And I think the returns that we're generating, I think, are reasonable under the circumstances. I don't know, Sergey and Desmond have other things to add to that what they think on the horizon, but we don't normally give too much forward-looking statements on where we think earnings are going to be in the future, but it's really going to be dependent on how fast the rates cut and also how the market reacts to that. But we think we've constructed a very good portfolio for the future. Desmond Macauley: Yes. Yes. So just on that to continue God's comment there. Yes, so we kind of typically just look at forward ROEs as well, another way to look at the same way of looking at things. So 16% to 18% in production coupons. Our dividend yield, weighted average dividend yield, both preferred and common plus operational expenses all in is about 18%. So that could be sort of as a hurdle rate. We already have assets we are buying that are at 18%. There are others that are slightly lower than that. But as we said, we're still constructive medium term here. So just a few more basis points of tightening and those assets would meet or exceed our hurdle rate. Operator: [Operator Instructions] Our next question comes from Eric Hagen with BTIG. Eric Hagen: Maybe following up on some of this conversation here. I mean what do you think is priced into MBS spreads with respect to the Fed cutting rates? Like right now, it looks like there's 125 basis points of cuts priced into the forward curve through the end of next year. Do you feel like spreads would widen if those expectations got walked back for any reason? And do you feel like spreads would actually have room to tighten once they actually deliver those cuts? Sergey Losyev: Eric, this is Sergey. Yes, to both. Definitely, a pause in the easing cycle or something that would cause them to walk back their projections would be a potential source of volatility in the market. But in terms of delivering cuts to the market, I think a lot of the bank demand will get unlocked there. If you look at the current coupon mortgages versus yields on money markets or T-bills, it's compressed again over the course of the year, closer to 100 basis points. So I think as we get closer to 152% on the spread of mortgage yields versus cash you start to see more and more engagement from other players in the market that we've seen -- we haven't seen as much demand as expected earlier this year. So I think that kind of answers yes to both scenarios. And we note in our prepared remarks that spreads have tightened significantly over the course of the quarter. We do see upside, but I think it's overall macro picture, the lack of government economic data coming through that's given us a little bit of pause here. But over a medium-term horizon, that's a clear positive for -- to have lower Fed funds rates. Eric Hagen: Yes. Got you. That's good color. The move to raise capital and buy back stock in the quarter, can you kind of share the rough level of your stock valuation when you did those transactions? And like what's the best way to compare the value from having done each of those deals, transactions? Scott Ulm: Yes. So Gordon will maybe give me the -- if you can pull up the level where we bought back. But look, we're committed to being on both sides. And when we get a dislocation, we'll buy back some stock. And when we see good valuations, we'll sell stock. Stock buybacks are always fraught because they happen when a bunch of other things are going on, and it's always expensive to get the stock back out there as well. But we had a pretty good spread between where we executed both of those. Gordon, do you have those numbers to hand? Gordon Harper: Yes, I know offhand, we -- when we did the buybacks, it was about a couple of cents accretive on the days, and it was in the 14 -- just get you the right number. Got it. We were buying it back at -- yes, it was in the [ $14.40 ] handle around that on the days that averaged out. So you can see we've bounced back since those days and we bought back the stock. Scott Ulm: Is that useful? Eric Hagen: Yes, that was helpful. I appreciate you guys. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Ulm for any closing remarks. Scott Ulm: Thanks for joining the call today. We appreciate it. Any further questions occur to you, give a ring at the office, and we'll be back to you as soon as we can. Very good. Thank you, and have a nice day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Regis Resources quarterly briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Jim Beyer, Managing Director and CEO. Please go ahead. Jim Beyer: Thanks, Darcy. Good morning, everyone, and thanks for joining us this morning for the Regis Resources September quarter results. Joining me today is our Chief Financial Officer, Anthony Rechichi, and our Chief Operating Officer, Michael Holmes; and our Head of Investor Relations, Jeff Sansom. As usual, we will refer to some figures in the quarterly report released earlier this morning. So please, it might be helpful just to keep it handy as we step through the results. So firstly, starting with safety, as we always do. Through the quarter on a 12-month moving average basis, our lost time injury frequency rate actually got down to 0. However, unfortunately, towards the end of the quarter, we saw a single LTI occur, which pushed out LTIFR, lost time injury frequency rate, to 0.36, which was in line basically with our performance last quarter. Now while still below the industry average, as always, we should never be satisfied with any injury. And the team, I know, is driving hard as we are diligent and continue to build a strong disciplined safety culture for our teams across all our operations. Now on to production performance. The September quarter marked another period of consistent operational delivery and a resultant strong cash generation. Group production totaled 90,400 ounces at an all-in sustaining cost of AUD 2,861 an ounce. And I note that this also includes a noncash charge of just under $200 an ounce, and that relates to drawdown on historic stockpile inventories. Now we are comfortable with the performance in our first quarter, and we're well positioned to deliver within our FY '26 guidance ranges. From a financial perspective, this quarter has seen another period of unprecedented gold price movements. Spot gold during the quarter increased over 15% from just over $5,000 an ounce to just under $5,800 an ounce during the quarter. And during that time, we sold at an average price of $5,405 an ounce. Of course, since the end of the quarter, gold has risen another $500 an ounce, will actually rose more than that, and we have seen this slight correction in the last couple of days, but the fundamentals are still there, and it is a great time to be producing gold. This meant that we grew our cash and bullion position by $158 million for a balance at the end of the quarter of $675 million. That's another record for Regis and highlights the ongoing strength of the business and really continues to demonstrate the significant cash-generating capacity. We remain debt-free with significant balance sheet flexibility. From a growth perspective, we saw first ore from our underground development projects at Duketon, and these both remain on target. Now with that, I'll hand over to Michael for more detail on the operational rundown, followed by Anthony, who will cover more on the financials. Over to you, Michael. Michael Harvy Holmes: Thanks, Jim, and good morning, everyone. As Jim mentioned, it was disappointing that we had 1 lost time injury in the quarter, which continued our 12-month moving average frequency rate of 0.36. We are working on numerous initiatives within our operations to reduce the occurrences of safety incidents and injuries. Operationally, the quarter was steady across both sites with results consistent and in line with plan. At Duketon, we produced 58,400 ounces at an all-in sustaining cost of $2,832 per ounce, which includes a noncash charge of $238 per ounce. This is a few hundred dollars lower than the previous quarter on stronger production and reduced total material movement with lower open pit waste movement. During the quarter, open pit mining commenced at King of Creation, recommenced at Gloster and continued at Ben Hur open pits. Our open pits contributed 14,400 ounces at a grade of 0.92 grams per tonne. Underground mining at Garden Well and Rosemont delivered 31,800 ounces at 1.9 grams per tonne with development totaling 3,990 meters for the quarter. Milling throughput was 2.08 million tonnes at 0.99 grams per tonne with an 88.3% recovery. Importantly, as Jim mentioned, during the quarter, first ore was mined from stopes at both the Garden Well Main and the Rosemont Stage 3. The first ore contributed to the increased underground ore tonnages compared to the previous quarter. These 2 underground developments are key contributors to our long-term growth strategy, and Garden Well Main is progressing well towards commercial production in H2 of this financial year, so we should see growth capital from the development roll off towards the end of the year. In light of the ongoing strong gold price environment, the team continues to identify and evaluate options for organic growth across Duketon. At Tropicana, production was 31,900 ounces at an all-in sustaining cost of $2,821 per ounce, which includes a noncash charge of $198 per ounce, reflecting solid delivery and grade improvement. Open pit mining delivered 16,100 ounces at 1.6 grams per tonne, with material movement and grade in line with expectations. Total material movement was elevated related to the previous quarter related to the planned waste mining in the Havana open pit. Over the coming quarters, waste stripping in the Havana pit will ease, and we expect the strip ratio will moderate, and this will be particularly apparent in the second half of FY '26. Our share of what Tropicana underground delivered was 15,200 ounces at 3.12 grams per tonne and 983 meters of development with a recovery steady at 89.7%. Growth capital was moderate at $3 million with development of Havana underground progressing to plan. With that, I'll now pass to Anthony for the financials Thanks, Michael. Anthony Rechichi: We're continuing on from a really impressive financial performance that we reported for the full year ended 30 June 2025, with a great start in the first quarter of FY '26. We sold just under 83,000 ounces in the quarter at an average realized gold price of $5,405 an ounce, generating $447 million in revenue. Operating cash flow was $290 million, including $186 million from Duketon and $104 million from Tropicana. As an aside, when we were selling the gold in and around that $5,500 an ounce mark, the team was ecstatic. But as Jim mentioned, what a difference of a few weeks makes, noting that while those gold prices were impressive, the recent few weeks of gold sales have been in the $6,000, which is just incredible. It's an amazing time to be in gold really. Moving on to capital expenditure. We spent $114 million, including $70 million at Duketon, $19 million at Tropicana, and we spent $20 million on exploration. Within the capital spend amount, $66 million of that was growth capital, with $63 million at Duketon and $3 million at Tropicana. The majority of this spend was related to the underground growth projects. At Duketon, Garden Well Main is expected to commence commercial production later in the financial year. And therefore, the capital spend in that area from then on will report to sustaining capital, not growth capital anymore. With this in mind, in the absence of any new organic growth we create along the way, we expect to see the growth capital spend rate reduce as the year goes on. But again, that's on the basis that we don't find anything extra across Duketon that's worth pursuing. So for cash and bullion, in the end, we closed the quarter with $675 million, which is another record for Regis and the $300 million revolving credit facility remains undrawn. I'll just circle back now to all-in sustaining costs, and Michael mentioned the noncash charges across Duketon and Tropicana, and I want to talk some more about that. At Duketon, there was a noncash charge of $238 an ounce related to stockpile inventory movements. And at Tropicana, we had a charge of $125 an ounce for the same reasons. At a group level, that's a charge of $198 an ounce for the quarter. Focusing in on Tropicana, this quarter's all-in sustaining cost per ounce was higher than last quarter. If you cast your mind back, in the June quarter, Tropicana reported a significant noncash credit related to stockpile survey adjustments. If we net off the noncash stockpile movement impacts for Tropicana, then the all-in sustaining cost per ounce becomes similar across the 2 periods. On another topic, and as you now know, with the business high profitability and impressive cash generation, the directors declared a final fully franked dividend of $0.05 per share, totaling $38 million off the back of the FY '25 results, and we paid that earlier in this month of October. And as I've mentioned before, due to that strong profitability, Regis will return to a cash tax payment position and is expected to pay approximately $100 million in the third quarter of this FY '26. So that's all for me. Thank you all, and back to you, Jim. Jim Beyer: Thanks, Anthony, and thanks, Michael. At McPhillamys, we're progressing the dual-track strategy to return the project to an approvable status. And I want to very quickly go over some of the details of the project and remind or highlight why we continue to pursue this line. Look, we released the DFS at McPhillamys back in the middle of last year, and that highlighted a resource of 2.7 million and reserves of 1.9 million At the time we released the DFS, as I said, the reserves were about 1.9 million, which, of course, isn't a reserve anymore, thanks to the Section 10, but the key fact is it's still in the ground and quite valuable at the moment. As expected, it was to have a mine life of around 10 years, so an average production of 185,000 ounces per annum, at a capital cost of $1 billion and a life of mine average all-in sustaining of something like $1,600 an ounce. Now I do have to say that as a result of the Section 10 declaration, of course, the project is no longer viable in its current form, and we were through the DFS. However, if you benchmark the project on those metrics I just mentioned and look at the spot gold price today where it's sitting around $6,300, that gives nearly 3/4 or gives well over $2 million a day, $3.5 billion in pretax cash flow each year on average. Now that's the value to our shareholders. But there is also other stakeholder value in addition to this such as the value that it represents in New South Wales. And this would be significant. It takes the form of 300 steady-state jobs over -- well over now with this price $366 million in royalties along with millions in local rates and taxes. The list of benefits goes on as it always does when we have a grown-up conversation about the real contribution mine makes to our Australian economy and the quality of life, but that's a topic for another time. So with these multiple value benefits for many stakeholders, we are committed in our drive towards a positive outcome for the McPhillamys Gold project. And to that end, we continue to prepare the legal challenge of the Section 10 declaration, and we expect that to be in mid-December. And in parallel, we're also investigating alternative waste disposal options and concepts. This dual-track approach aims to put Regis in a position where we could conceivably return the project to an approvable status and positioned to proceed under either outcome, albeit with probably different time lines. Now back to our current operations. As Michael and Anthony have discussed, the quarter was in line with expectations. And as we sit here today, we are very comfortable with our FY '26 guidance range and see no changes required there. We'll maintain capital discipline focused on generating strong margins for our core assets while positioning the business for future growth. As also noted by Michael and Anthony, we continue to seek out organic opportunities that make good economic sense in this new gold price environment. Our exploration team continues with their focus on conversion and extensional drilling to build long-term optionality. And I haven't said anything -- I won't say anything more on that, but I do note that we will be providing a midyear exploration update later on this quarter. So to summarize, our team has delivered another quarter of consistent performance that has enabled us to capitalize on the exceptional gold price. Cash and bullion is up $158 million to a record $675 million. First ore mine from Garden Well Main and also Rosemont Stage 3, and we continue to ramp up both of these underground projects. Ongoing development at Havana Underground. We continue to seek out and evaluate organic growth opportunities within Duketon. McPhillamys is progressing through both legal and technical pathways. And finally, but very importantly, our FY '26 guidance is reaffirmed. So thanks for this morning. I'll now open the floor up to questions and back to you, Darcy. Operator: [Operator Instructions] Your first question comes from Hugo Nicolaci from Goldman Sachs. Hugo Nicolaci: Obviously, as you said, a great time to be in gold. Just first one for me, just a clarification on the McPhillamys project. Just with the hearing in mid-December, do you have a rough time line for when you'd expect an outcome after that hearing? Jim Beyer: Yes, sometime after that hearing. I mean, unfortunately, these -- as we know, the courts run to their own beat. We would like to think that we would get a result back sometime in the first quarter of next year, but that's not certain. Remembering and understanding the legal process here, it's not actually an overturning of the decision. It's a process of going through and convincing the judge that there were elements of the process that we felt we were significantly disadvantaged over. And as a result, of that, the judge sort of says, well, the decision is set aside. The minister, who is a new minister now, of course, presumably asked the department to correct the injustices, for want of a better description, or the correct the flaws in the process. And then the minister will make a new determination. How long that takes, there is no time line to that? It could easily be out to the end of next year. Hugo Nicolaci: Got it. That's helpful color. And then just the second one for me just at Tropicana, just observing that your partner there had put in and then recently got an environmental approvals for a power plant expansion and a new pace plant there to support the Boston Shaker. Could you just provide a little bit of color around the need for the paste plant? Has there been a change in geological conditions what you expected? Or was it more around cost and greater ore recovery that you're putting that in? And then just any comments around sort of timing and cost benefits there? Jim Beyer: No. I mean the power thing is pretty obvious. We'll need more power. And the paste fill is really, it's a trial at the moment, and it's driven by the potential to improve overall economics by increasing ore extraction ratios. Hugo Nicolaci: And in terms of timing of having that trial up and running? Jim Beyer: I mean there's a trial in the first instance and then there will be -- have to be a decision, and that's on the -- on when it would -- a full approach will be implemented, and there's no timing on that, but I would consider that to be a least a year. Operator: Your next question comes from Levi Spry from UBS. Levi Spry: Just exploring a little bit more of the returns piece of the big cash pile you built and building in the context of these growth options. So how are you thinking about it? Is there a scope to formalize some sort of returns policy? Or do we really need to wait for McPhillamys or potentially something from inorganic [indiscernible]? Jim Beyer: Yes. Look, I mean, it's -- you're the first person who asked that question lately. Look, the first thing -- and I guess, historically, what we've done is we've pointed to the fact that the company and the Board has always had a strong view on returning returns to shareholders via dividends. And it's great and very pleasing to see that as we've moved our way through all the recapitalization and the hedge books over the years that we've been able to return and the debt, of course, for Tropicana, we've been able to return to a position to be able to pay dividends. And our view has always been where we've got the capacity to do it and it makes sense, we will look at that ongoing process very favorably. But as you pointed out, we don't have a policy. That is something that we are under consideration at the moment. And I would imagine as we work our way through that, we'll make some decision on that over the coming months. The next key time for us to make any another decision on whether a dividend is payable or not. And obviously, it's a pretty favorable environment at the moment, but I wouldn't want to preempt anything, but the next time to be making any decision would be the half year results because we look at it on a half year and full year basis. So yes, no, we don't have a policy. We've always said that where we've got the money and the -- it's an important part of our reason for being is to return -- make a return to our investors via dividends as well as regular growth. So -- and that's what we plan to continue to do. We just don't have a locked-in policy at this stage. Operator: Your next question comes from Andrew Bowler from Macquarie. Andrew Bowler: Just a question on the McPhillamys study just looking at the dry stack tailing options. Just wondering on the timing of those studies? And will that be affected by the judicial review? So for example, if it falls in your favor, are we likely to see that study a bit sooner maybe as you sort of -- or should I say, if it falls in your favor, we likely never to see that study? Or if it falls against you, are you like to see it a little bit sooner as you try and get it out to market as quickly as possible? Jim Beyer: Look, our intention is, as I said, we're running a dual track. I think our preferred scenario because it's probably a little bit more timely and requires less additional approvals is -- and test work is to return to the original DFS concept, i.e., what I'm saying there is we much prefer to win the -- we much prefer to be successful in the challenge of the Section 10 and then follow that through with an appropriate decision by the minister after his review. That's the way we prefer it to go. But we don't want to sit around in hope, so we've also planned to find and prove up this alternative method. Probably the reality of that is that it's going to take, at this stage, it could take considerably longer for us to work that through. But the initial test work that we've done is encouraging. It's really a timing issue and making sure that we understand all the risks that this now introduces that we didn't have before and have we got everything in place. So the short answer to your question is we prefer the Section 10 to be successful, but we'll continue to pursue the other one. And if the Section 10 is successful and that's great because it means we've probably got a better time line as well. Andrew Bowler: Yes. Sorry I was on mute. Yes. No, sorry, I was on mute. And just a follow-up. I mean I know you're working through the study, and it's very early stage, but is it the intention for these dry stack tailings studies to retain the relative scope and scale of the old plan at McPhillamys? Or are you -- or is there some tinkering to be done with the dry stack tailings studies that might see a [ biggering ] of the project or a bit of a trimming as well? Or is it roughly the same with the dry stack scenario [ bolted ] on the back end? Jim Beyer: In terms of footprint, it's probably a little smaller. So it's not actually -- the concept that we're working on is not so much a dry stack. It's an integrated waste landform. So we -- there's -- obviously, in terms of what can move as much as I'd like to, we can't move the ore body. The process plant probably stay roughly where it is. There's a big waste rock dump that's already there. It's already part of the approval. But obviously, if we co-mingle the tails in that, then whatever we don't put in the tailings because we won't be able to which has to go under the waste rock dump. And that's why it's sort of, that's why it's called an integrated waste landform. And that would need to be bigger. And so there's a few things that we have to go through and get, work on to see whether that requires extensive changes or reasonably modest modifications. And so that's all part of the work that's kicking off at the moment. Andrew Bowler: Apologies. I wasn't very clear. I mean as in sort of, I guess, the processing capacity scale. So the project itself would be on a similar scale. Jim Beyer: Yes. No, it'd be a similar scale. I mean basically, the concept is you put -- it's not unusual. It's reasonably common certainly in South America, where water is exceptionally at altitude where it's scarce. And there's a couple of operations here in Australia, one over here in WA that uses a form of it. So it's not uncommon, but it is something that involves more equipment. But our plan would be to maintain the scale of the operation as it currently isn't just changed the back end of it. Andrew Bowler: No worries. That's very clear. Operator: Your next question comes from David Coates from Bell Potter Securities. David Coates: Just more on observation. I suppose it sounds like McPhillamys, understandably, is getting quite a bit of attention from you guys. Is that because sort of [indiscernible] the inorganic opportunities that are a bit sort of thinner on the ground and I guess, sort of harder to find value in the current market and McPhillamys obviously has those really compelling metrics that you mentioned -- referenced before? Jim Beyer: Yes. Good question, David. Look, I don't think what -- I guess the question don't misinterpret the fact that we only talk about McPhillamys as we're only inwardly focused. We do talk about it because I do genuinely think that the market doesn't recognize the value that's there. I mean, basically, what we're saying is one way or another, this thing is going to be developed. It's really just a question of when. And if you're sitting down and trying to work out what the value is -- in this new price environment that we see gold in, and frankly, this is not a flash in the pan. This is, you can see that there are global fundamentals that have driven us to this new level from where we were 18 months or 2 years ago. So it reminds us that we need to -- our team needs to keep pushing on and make sure that, that becomes approved in one form or another, and then we can develop it. The thing is the time line. So that could be a couple of years out. And so that we put our effort into it and you can see we're spending not an insignificant amount at the moment on an annual basis on that works under the McPhillamys guidance that we've given, but that doesn't mean that we're not looking for near-term opportunities to sit between now and then either, which is definitely on our agenda and probably everybody's at the moment, but then we're no different. David Coates: Cool. And then just sort of sticking with the organic opportunities. You mentioned with this price that everyone's out sort of looking hard and reviewing the at Duketon in particular. Can you give us a bit more detail on some of the opportunities that might be emerging up there? Jim Beyer: Look, we've -- at the moment, the exploration side of things is pretty interesting and getting exciting again for us, but we haven't really got anything material to sort of hang our head on there yet, although, I guess, we'll keep an eye for whatever it is those time. And -- but if you look at what else and what Michael and Anthony were talking about is where there's no doubt about it that this at this new price environment, we can go back to some of our old pits, be they big or small. And sometimes it's a small ones that are actually the opportunity or back to -- even back to some of our old oxide stomping grounds. We look and go, well, hang on at $5,000 or $6,000 an ounce. This stuff is actually quite viable. And so they are the things that we're looking at. I don't really not in a position, really, I don't really want to go through the nuts and bolts of the individual items. But when we get something that is material, we will certainly update the market on that so that what you can add to our model and add to your valuation work. So we are doing plenty of it at the moment. We're just not in a position yet to strike it into a gold bar. Operator: There are no further questions at this time. I'll now hand back to Mr. Beyer for any closing remarks. Jim Beyer: Thanks, Darcy. And thanks, everyone. Thanks, especially for the folks that asked questions. Thanks for joining us and enjoy the rest of your day. Take care. Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
Leszek Iwaszko: Good morning. Thank you for standing by and let me welcome you to Orange Polska Q3 2025 Results Conference Call. My name is Leszek Iwaszko, and I'm in charge of Investor Relations. The format of the call will be a presentation by the management team followed by a Q&A session. Unfortunately, our CEO, Liudmila Climoc, couldn't join us today due to urgent private matters. So, the sole speaker will be Jacek Kunicki, CFO. So, I'm passing now the floor to Jacek. Jacek Kunicki: Good morning. I'm pleased to say that the third quarter was very successful for Orange Polska. The success is rooted in our strong operating performance. We've achieved very good commercial growth, especially on the consumer market, where both the customer bases and the ARPOs have increased at a healthy pace. Our wholesale line of business has delivered more revenues and more margins. This comes as a result of new business, that is, monetizing our fiber infrastructure. It will generate more value over the course of the next few years, allowing us to compensate some large wholesale contracts that are due to end in 2026. This should remind us that wholesale is our strategic asset, complementing our retail operations and reducing our risk profile. Successful commercial activity is the anchor of the Lead the Future strategy and our value creation. After 9 months of 2025, we are pleased with the developments in this area as they lay a solid foundation for the strategy going forward. This performance has translated into strong financial results, and let's take a look at that -- these on the next slide. I'm pleased with the financial results of Q3. We have increased revenues, profit and cash generation. Revenues were up by a steep 9.3% year-over-year, including a spike in IT&IS sales and also a strong consistent contribution from the core telecom services business. This solid expansion of the core business, combined with cost discipline, drove the Q3 EBITDA almost 3% up year-over-year despite a demanding comparable base. We're really happy with this result. Our eCapEx has amounted to just over PLN 1.1 billion year-to-date. It is at a comparable level to the same period of last year, and it is in line with our full year plans. This quarterly evolution reflects different timing of CapEx between the 2 years. Following a stronger Q3, the year-to-date level of organic cash flows is also stable year-over-year. This reflects higher cash from operating activities, driven by the EBITDA expansion, which compensated for less proceeds from real estate disposal. My takeaway from this is that robust Q3 results give solid support to our full year prospects. After 9 months of the year, we're confident to deliver on our 2025 objectives and to create further value for shareholders. Let's now look -- take a look at the commercial activity in more detail on the next slide. It came very solid across all core telecom services. What particularly stands out this quarter is Mobile. The net customer additions have exceeded 100,000 and were at the highest in more than 4 years. As you may recall, our B2C strategy is focused on reaching new households not yet using Orange Polska services, in order to unlock the growth potential for the future. We're pleased that it is bearing fruit, and we are enlarging our customer footprint. The robust growth of the customer base was coupled with an increase of the Mobile ARPO, a slight improvement versus the trend observed a quarter ago. This comes due to a strong ARPO development in the main consumer brand, partly diluted by an increasing share of the B-brand customers in the overall customer base. Growth in convergence and fiber was solid, consistent with previous quarters and in line with our strategy. It was a combination of 5% and 13% growth of the respective customer bases and a solid 3% to 4% uplift of the average revenue per offer. In spite of fierce competition in fiber, we are successfully competing in the local battles and growing well by addressing our customers' need for higher speeds and for more content. Commercial growth is essential for future value creation, and these results demonstrate that we have the right commercial strategy to prevail in the core telecom offering. Let's now take a look at how these translated into revenues. Our Q3 top line dynamic was exceptional, above 9% growth year-over-year. It reflects 3 main developments: first, an exceptional hike of the IT&IS sales; second, a consistent growth of the core telecom services revenues. And 3 -- third, the accelerated dynamics of wholesale. Let's now review them one by one in a little bit more detail. The IT&IS revenues went up by an extraordinary 47% in quarter 3. The key driver of this performance was resale of software licenses. It is a tool to create future upsell potential. Hence, despite the large top line, its immediate contribution to profits was negligible. Nonetheless, looking at this development and also at other wins in our pipeline, we are now more optimistic about the future prospects for the growth in IT&IS revenues and profits. What is most important in our top line performance this quarter is that revenues from core telecom services grew by 6.5% year-over-year, repeating their strong and consistent dynamics. You've seen the drivers of this growth: robust increase of our customer bases and solid ARPO development. Finally, the third factor, wholesale. Its growth has accelerated on the back of fast revenues coming from the new fiber optics backhaul business that I mentioned earlier on. It is a multiyear business development, and it gives us a solid baseline also for 2026 and beyond. We anticipate to further grow the value of our wholesale line of business activity in the future. To sum up on revenues, after 9 months of the year, the top line growth exceeds 4%. Revenues from core telecom services are delivering a rock-solid performance this year, supported by robust net customer additions and ARPOs. And three, the new business in wholesale significantly boosts its future prospects, once again demonstrating the value-add of this activity to Orange Polska. Obviously, the profitable revenue growth is the main driver of the higher EBITDA. Let's look at the latter on Slide 7. EBITDA for Q3 has increased by almost 3% year-over-year. It benefited both from growth of the direct margin and from less indirect costs. Direct margin grew by PLN 21 million year-over-year and its underlying increase was even greater. Please note that last year's results included a positive one-off related to capitalization of PLN 53 million customer connectivity costs. Obviously, excluding this one-off, our direct margin for Q3 would have grown by 4% year-over-year. This outstanding growth was driven by high margin from core telecom services and by an increased contribution from wholesale. Indirect costs were PLN 4 million lower versus the third quarter of last year. We benefited from increased efficiency of network operations, including savings in field maintenance. The transformation of the network activity is an important part of our strategy, and we're pleased that we can already report its first tangible results. Q3 indirect costs have also reflected lower growth of labor costs and less advertising expenses versus the previous quarters. To sum up on EBITDA, we are very happy with its growth in quarter 3. It stems from a healthy combination of high margin from core business and cost discipline. And obviously, this is our main recipe to deliver consistent and sustainable EBITDA growth throughout the Lead the Future strategy period. With 3.4% growth for the 9 months of this year, for the year-to-date, we are obviously well on track to deliver on the full year objective in this area. Let's now turn to cash flow on Slide 8. Year-to-date, we generated nearly PLN 670 million of organic cash flow. This is almost exactly the same level as last year, helped by a very solid quarter 3. The OCF benefited primarily from a very healthy growth of cash from operating activity. It increased by almost PLN 200 million year-over-year due to a higher EBITDA and also due to less -- lower working capital requirement. It was offset by higher cash CapEx and also by PLN 80 million less proceeds from real estate disposal than in the comparable period of last year. We're satisfied with cash generation so far and with robust sources of growth coming from the operating activity. We plan for a peak of property sales in Q4, and we anticipate a solid organic cash flow in the last quarter of the year. Our leverage has increased very slightly following the acquisition of the 5G spectrum license and a payment of the dividend in July. However, our balance sheet structure remains very sound. Let's now summarize Q3 on the next slide. So, for us, the underlying message is our commercial and financial results in Q3 were very solid. We're pleased with the performance to date and in particular, with the commercial developments. We have a well-performing core telecom services business. The prospects for wholesale operations have improved substantially, and we see initial signs of recovery on the business market. These demonstrate our strong fundamentals. We're confident to achieve our 2025 objectives and also to create further shareholder value by implementing the Lead the Future strategy in subsequent years. That's all for me and we are now ready for your questions. Leszek Iwaszko: [Operator Instructions] First question is coming from the line of Marcin Nowak. Marcin Nowak: Three questions on -- rather, issues for me. The first one, regarding this new wholesale deal, could you provide more details regarding how much it contributed in the first quarter to both the top line and EBITDA, for how many years this contract is signed, and if you believe that there are similar deals possible in the future with other parties? The second issue, could you provide maybe an update on those provisions for significant risk that Orange has created last quarter? And the third issue, could you provide more detailed plans about the marketing spending and how -- by how it has been lower than in previous quarters? And what are the plans for the following quarters, especially with this lower spending, the commercial performance has been quite good. Jacek Kunicki: Thank you very much, Marcin. I guess I will start with your last question. For the marketing or for the advertising and promotion spend that we were mentioning. When I look at quarter 3, the spending was roughly PLN 8 million lower than in the quarter 3 of the – of last year. And that is -- well, it is much different if we compare to the second quarter where advertising and promotional expenses have actually grown by PLN 12 million year-over-year. So, the difference to the Q1 was not that great. But obviously, quarter 3 was with a different timing of advertising campaigns and spendings versus last year. So that is regarding the costs. On the efficiency of those marketing spendings, I think it's fair to say we're very happy with those. Looking at the level of our net additions, both in postpaid and prepaid as well as in the convergence and fiber, we are very happy with the direction of the -- both advertising and overall the efficiency of the commercial period that we had for the back-to-school activity. And that is -- that has really delivered on our plans. So, we're now focusing definitely on the peak commercial season of Q4 and especially the second part of November and December to make sure that we are able to replicate a successful commercial activity. Then regarding your second question, well, I will not be able to help you much. We have created a provision for risks, claims and litigations of PLN 45 million in the second quarter of this year. And obviously, we've described as much as we can in the notes to the financial statements, but we are unable to provide you with the exact detail as this is commercially sensitive. We do not want to prejudice the outcome of any activities that are covered by the provision. And then regarding wholesale, well, it is a multiyear deal. Again, I will not be mentioning the specific commercial conditions because that is commercially sensitive. But definitely, we did see a much greater contribution of wholesale to the margin creation this quarter versus what we've seen in the previous quarters. I would say it's fair to say some of it was already -- so that was more than PLN 20 million better than in the previous quarters. Some of it was helped by the particular development that I have mentioned, and part was simply due to other business reasons because we do need to remind ourselves that wholesale is an important part of our activity, and it's not driven just by this one deal. And this is something that -- well, we've tried flagging for quite a long time. It enables us to monetize our infrastructure by selling data transmission, by selling FTTH access, by being an active player on all the interconnect market in Poland. It also enables us to decrease the risk profile of our retail activities because we are able to grasp some of the profits on the wholesale market. Getting back to this particular business development, it's obviously a long-term business development that we have, such as they usually are in wholesale. I would guess that the peak of the value will be the next 4 years. And I think we will see a more visible contribution of wholesale or of this business development already in quarter 4. And what I mentioned is when we take a look at 2026, we were aware, and we are aware that some important wholesale contracts are coming to an end and this particular business development should help us to offset the impact of those contracts ending. So, we're back to the state where we expect the contribution of wholesale towards our [ EBIT ] to actually be able to grow year after year. I think that is what I would mention regarding this particular activity. Thanks. Leszek Iwaszko: Our next question is coming from the line of Nora Nagy from Erste Bank. Nora Nagy: Two questions from my side, please. Firstly, could you give us, please, more update on the B2B segment? And what is your outlook for the coming period? And secondly, approximately when shall we expect the next Social Plan to be released? Jacek Kunicki: Thank you very much, Nora. Very relevant questions. So, on the B2B line of business, I think it's fair to say that while this line of business has been extremely successful for us in the past, and the success of the previous strategy was -- B2B was a significant contributor towards that success, we did see the B2B under a greater pressure this year, both from the connectivity business and also from the slowdown on the IT&IS market. Some of it results from a very high comparable base of last year, where we benefited from some specific activity on the wholesale SMSs. Some of it results basically from a slower -- a softer IT market. I think it's fair to say that while we are not back to robust growth yet, so, the B2B trends, I would say, remain relatively fragile. If I'm comparing what we're seeing right now in terms of the amount of deals that we are able to win and the profit margins on the deals that we're able to win, we're getting, I would say, the first signals that could lead us to believe that we could be going back to growth in the next 2 or 3 quarters. That would be my outlook for the B2B. And that is something that we really need. You know that the Lead the Future strategy and generally, the value creation in Orange Polska, it starts with the top line and with a profitable top line, so with a direct margin. And we need the 3 engines of commercial activity to be delivering results. We see the B2C engine really going ahead full steam. We do see an acceleration in wholesale and improved prospects versus the ending contracts of 2026. So, between the last quarter and this quarter, we are more confident about the level of wholesale activity next year. And then I think the next step is we need B2B to get back to solid, consistent growth as it used to deliver in the past. And this is when we will be really happy with our ability to grow the EBITDA, to grow the cash flows on the back of a profitable expansion in the commercial activity. And then getting to your second question, before the year-end I would expect we will close the discussions with the social partners for the next round of Social Plan, which I anticipate it will cover 2026, 2027, and we should come back to you before the year-end with a current report whenever we do finalize it. And then probably this current report will also include some early estimate of the provisions that you would see in the income statement for the fourth quarter. Obviously, the final ones might be -- will be reported when we will report the quarter 4, but stay tuned for the next few months, and I'm sure that we will get back to you with the news on the Social Plan before the year-end. Leszek Iwaszko: Thank you. We have no more voice questions. Two questions that came online. First question, they cover topics we've already discussed, but maybe in a slightly different angle. So, a question from Pawel Puchalski from Santander. Wholesale segment, are you pleased with Q3 2025 Wholesale segment growth pace? And should we expect its further acceleration in coming quarters, years? What are wholesale margins? What is wholesale’s cash conversion? May we consider Q3 '25 wholesale pickup to represent likely driver of 2026 DPS increase? Jacek Kunicki: So, thank you, Pawel, for your questions. And you've rightly spotted wholesale as a point of focus. I think it's very relevant. Yes, we are pleased with the wholesale acceleration in Q3, definitely pleased. I do expect that we will have good value contribution from wholesale also in quarter 4. So that is something that will help us before the year-end, and it makes us even more confident in our ability to post a nice EBITDA growth this year. I think that is definitely a big help. When it comes to the next years, well, you are aware that we were previously anticipating that due to some contracts ending in 2026, wholesale might be under pressure in that year. I think that situation is much easier now, and we would be looking at ourselves actually getting a positive contribution from wholesale year-over-year because of this new business development. So that is definitely improving the prospects for wholesale going forward. And then in terms of margin and cash conversion, what I would say, it really depends on the level -- the margins really depend on the level of -- on the revenue line of wholesale because if you take some interconnect, the margin might be thin when we are looking at the interconnect coming in and going out, like some transit activities. But overall, the relation of revenues to margin is extremely high on those services where we are monetizing the existing infrastructure. And likewise, when we look at the cash conversion ratio, because we are treating wholesale as a way to monetize mostly existing infrastructure, then yes, the conversion of revenues to cash is extremely high, much, much higher than on the retail activity. It is because we are using and monetizing whatever infrastructure already exists. So obviously, wholesale has its limit when it comes to the size because by nature, it is filling up the needs of our competitors in this area. But the -- our ability to extract margin and cash from whatever revenues we get is extremely high. And that's why wholesale is a very important contributor to our results. On the DPS, I think it's -- stay tuned and we will talk about that in February because that is the moment that we make the decisions, and we are in a position to make some recommendations. What I keep on repeating throughout this year is that our primary focus with all the months except February, is to create conditions to allow us to be generating more profits and to be in a position to share more value creation with our stockholders, shareholders. And so, I do believe that the growth of profit and cash generation in quarter 3 is an important step in the direction of further value creation for the shareholders of Orange Polska. Leszek Iwaszko: We have another voice question coming from the line of Dawid Górzynski from PKO BP. Dawid Gorzynski: I have 2 questions actually. First on net customer additions in Mobile segment. It was particularly strong in the third quarter. And I wonder if there were some particular large clients that entered the base this quarter or it was like just a successful marketing activity from your side? So, this is the first question. And the second question is about organic cash flow outlook. Right now, we are flat after 9 months of the year, we are flattish, like organic cash flow is flat year-on-year. Last year was particularly strong. And I think that the expectation was that this year, CapEx -- sorry, organic cash flow should be lower. I wonder if you still think this is the true or maybe you see some upside potential? And you think that like exceeding PLN 1.1 billion of organic cash flow this year is at hand? Jacek Kunicki: Thank you very much for your questions. I think starting from the net additions, yes, we did have a support of 2 large accounts in the Q3 numbers. And so, this was -- this is something that we are quite happy about. You could have read in the press that we took over 15,000 sim cards from the Polish Post. But this -- even if you were to take out those larger deals, it's still the best quarterly result in the last 3 years. So, I think -- I'm looking at the data right now for B2B, for B2C, for all the brands of both B2B and B2C, and it's -- across the board, we are very, very happy with all the results. If I take a look at the main Orange brands, the best results in a few years, new brands, new mobile, very good results, flex brands, very good results. It's across the board, good performance. And I would say both in postpaid and prepaid. So, this is particularly strengthening. And it reflects a good offering that we've had. It was supported by the family offer that we launched. It was supported by, I think, quite good advertising and a straightforward messaging for this commercial period. So, I know that my colleagues in marketing were happy with the results. And also, throughout this year, we do see simultaneously a good increase of the prepaid base. And when we take a look at, again, at the actions of this, it's about the quality of the promotions and the advertising. It is about us strengthening the position in some of the key distribution channels that we have had. And it enabled us to have a volume growth despite the fact that we've significantly increased the ARPO in prepaid and that we've gained a substantial amount of revenues and margin from prepaid as a result of that. So generally, mobile activity, very good in quarter 3, and I would not say it's a one-off driven activity. Obviously, everyone is now focused on the key period of November, December, where we need to be smart about the level of retentions that we make. But equally, we want to get as much as we can from the market when the availability comes in. So that is on the net additions. For the organic cash flow, I believe the PLN 1.1 billion that you mentioned was 2023. And last year was PLN 980-something million. I do agree this was quite a strong comparable base, which is something that we had mentioned. We are stable after 3 quarters. We are heading into quarter 3 with quite good operating performance dynamics, quite good from the perspective of the EBITDA and the ability to convert the EBITDA on to operating cash flow. So that is definitely supporting quarter 4. I think the main unknown today is how much real estate will we sell in Q4. Obviously, we're planning for a peak of real estate sales. That is directly helping our cash position. And so that remains, I think, the main uncertainty. But we are relatively confident about posting a good result, both in Q4 and for the full year. Leszek Iwaszko: And we have one more text question from Piotr Raciborski from Wood & Co. Congratulations on strong Q3 2024 results. Could you please again comment on strong ICT sales growth? Do you expect similar growth trends in the upcoming quarters? Do you see an increased demand on IT services from public institutions? Jacek Kunicki: Okay. Thanks a lot. Well, we don't expect that 47% year-over-year in quarter 4. It was quite an exceptional event. And I did mention it's -- it was driven by resale of licenses with a small margin. But it is important that we conduct these deals for the sake of the future upsell that we are able to do on the back of these deals. So, I would really not disregard the resale of licenses and our ability to then monetize on them over the next 4, 5 or 6 quarters. That is definitely worth doing, and we will continue doing that. Then regarding the future prospects, I think for us, it's not only a matter of Q4, but it's a matter of getting the right momentum to grow the revenues and margins from IT&IS or from ICT over the next years. I think when we take a look at the long-term potential, we are very optimistic. There is growth that is there to be had over the next years, both for revenues and for margin creation. And that is definitely the case. When it comes to IT, yes, it includes IT. I think that the IT market, while it was relatively soft this year, I do believe that it has still a lot of growth potential. And so, we definitely count on ICT revenues and margin growth in the next periods to come to help us to increase the EBITDA, increase cash generation and deliver value for shareholders. Leszek Iwaszko: Thank you. It appears we have no further questions. Thank you very much for participation. Please let us know if you'd like to meet us and then talk to you in February. Thank you. Jacek Kunicki: Thank you very much. Bye-bye.
Operator: Welcome to the Atlas Copco Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead. Peter Kinnart: Thank you, operator, and a very warm welcome, good morning, good afternoon or good evening to all of? You attending this third quarter 2025 earnings call. Together with me is Vagner Rego, who will guide you through the presentation together. But before we start, I will repeat the same topic I always say when we start the call, and that is when we start after the presentation with the question round, please only ask one question at the time. So we make sure that all participants have the opportunity to raise their most important question. Is there more time available afterwards, you are, of course, more than welcome to line up again to ask your next question. With that, I hand over to Vagner Rego, who will start the presentation. Vagner Rego: Thank you very much, Peter, and welcome to this conference call. We're quite happy to be here once again. So if we go straight to the summary of this quarter, we have seen a mixed demand with stable orders pretty much aligned with what we have said on the guidance for Q3 during the Q2 conference call. So -- and then you can see industrial compressors flat. Gas and process, we see a decline in the orders received when you look to year-to-year comparison was good on the industrial vacuum side, but negative on the semiconductor vacuum side. When it comes to industrial assembly and vision solutions, there, we saw a negative development, mainly driven by automotive due to the conditions in the market. We had a solid growth for power equipment that we were quite happy to see that. And again, good growth on our service business. We see that our efforts to further develop our service business and the implementation of the installed base, I think we managed to capture that installed base that has been deployed over the years. When it comes to revenues, it was somewhat up, and we had 2 business areas with a good organic -- reasonable, let's say, organic development and 2 business areas with a negative development that led us to a growth of 1%. The profit margin has been affected by restructuring costs. We will come back with more details and acquisitions. We have done 6 acquisitions. 2 acquisitions I would like to highlight because they are very important for our strategy. The first one is ABC compressors that is increasing our ability to serve customers in hydrogen and CO2 applications. And the other one is Shareway, which is a joint venture. We acquired 70% of the company, and it's going to be a very important one for our development in China, adding as well technologies that we didn't have in our portfolio. So cash flow was quite solid. We were very happy to see we continue to generate very good cash flow. So going to the next, if we look into the financials, how was that translated? We reached SEK 40.5 billion in terms of orders received, as you can see, SEK 41.6 billion in revenues, orders received more or less aligned with previous quarter, but unchanged organically. And like I have mentioned, 1% organically in the revenues. Operating margin was 20.5%. But then if we readjust for the restructuring cost, we end up at 21.3%. And the operating cash flow, we have mentioned already SEK 7.3 billion, which is quite solid, and we were quite happy to see that development. If we then move to how we have performed all over the world. If I then start with North America, we saw still the environment there is, let's say, has challenges, uncertainty, but we are happy with the quarter with plus 10%, if you correct for currency. So -- and there, we see very strong development in Compressor Technique and Power Technique that it was really good to see. And Vacuum and Industrial Technique were slightly negative, impacted by semiconductor and the automotive market. When it comes to Europe, it was also good to see 10% development. And here, again, Compressor Technique had a good development, positive development, Power Technique, the same, and we had a negative development in Vacuum Technique and Industrial Technique. When it comes to Asia, basically, all business areas had a good development, positive development. The only headwind we had was in Compressor Technique, mainly due to large gas and process compressors and some large industrial compressors where we saw negative development. But combined, we still had a positive development of 1%. Latin America continues -- not Latin America, but South America being more specific, had a positive development, almost basically most of business area with positive development [indiscernible] Industrial Technique negative. And then Africa, Middle East, they had quite a big comparison to be. And there, we saw a negative development that is mainly influenced by Compressor Technique and Power Technique. Overall, if we adjust for currency, plus 2% in orders, which is more or less aligned with what we have seen year-to-date. If we then move -- if we combine again all the figures, we can see that we had plus 2% in structural change. That is basically our acquisitions. In revenues, the acquisitions performed better, plus 3%, quite a lot of currency headwind, minus 6% in orders, minus 7% in revenues, organic growth unchanging orders like we have mentioned, we end up at SEK 40.5 billion in orders received and SEK 41.6 billion in revenues. So if we then see the split among the the business areas. We can see now that Compressor Technique in the last 12 months as an order -- has contributed to 46% of our orders received and this quarter with 0% growth or no growth basically. Vacuum Technique, 21% of our orders with 1% growth, very good contribution from Industrial Vacuum and Service. Power Technique continues a good development in orders, 17% now of our business, plus 5% in the quarter and Industrial Technique with minus 3% in orders received. If we then move to Compressor Technique, it's what we have seen, industrial compressors were basically unchanged. Let's say, a little bit more negative towards the larger compressors, a little bit more positive towards the smaller compressors. That is not a big indicator, but just what happened in the quarter. We saw decreased order intake year-on-year on gas and process compressor, but sequentially, we saw a good development and improvement compared to Q2. Service business continued to develop very well. Once again, quite happy to see that. Revenues as well that shows that the quality of our order book is good, and we continue to develop 4% organic growth profitability, we are quite happy with this level of 25.3%. We should have in mind, we have done slightly larger acquisitions that has a bigger impact, and we are focused to do more integration items at the beginning, meaning deploying our IT, our -- especially when it comes to cybersecurity. So a little bit more cost at the beginning to safeguard our acquisition. So a bit more cost, but we are happy with that level of 23.5%. So ROCE remains at a good level. And we continue our innovation pipeline with Compressor Technique. And here, today, we brought an example of our development in China that sometimes you have to develop to come with more features that you can come with a different value proposition to the customer. Sometimes you have to innovate to cost reduce. And this is a good example of how we innovate also to cost reduce to be competitive in China, but also to create options as well in other regions. A very good achievement now with this new innovation. Then if we go to Vacuum Technique, we saw 1%. It's good to see positive development, although it's not in the semi market, but it's very good to see that industrial and scientific vacuum in terms of equipment continues to develop very well. We still don't see -- we are yet to see a positive development in the semi market, but we still have headwinds, especially for North America when it comes to the semi. In the other hand, it's very good to see the service business developing very well, especially in the semi part of the business, new fabs being built coming into operation, and we managed now to get the aftermarket from these fabs. But also not only on the semi service, but also the industrial service is developing quite well. And then we have headwinds in the revenue. Revenues were down 6% organically. That put pressures in the bottom line, but we see good traction on the restructuring activities that we have announced and performed during the year. But this quarter, we felt that we could -- because of the headwinds we have in the North American organization when it comes to some market and semi as well, we decided to further optimize our footprint there without damaging our ability to grow, to sell, to further develop the business. I think that we didn't touch, but we have reorganized our North America that include to reorganize one factory to adapt one of our service centers to integrate and also to work in our customer center, try to optimize, decrease management structure and safeguard that our ability to support our industrial and semi customers are not touching. I think that was the main target. And that's why we decided to do a new round of restructuring in Vacuum Technique to make sure we safeguard our bottom line. So then the adjusted operating margin was 20.1%. So return on capital employed 18%. And we continue to innovate in the semi market. You know that real estate is very important in the semi market. I mean, the footprint that your product utilized is very important, and we managed to come now with this integrated abatement system that we occupy 30% less space in the fab. That's also important to support our customers in that market segment. If we then go to Industrial Technique, we saw order decline of 3% and is mainly driven by the headwinds in the automotive. And I would say not everything is negative in the automotive. We still get quite a good level of orders when it comes to flexible production lines, meaning if the production line needs to be more flexible, we can support our customers on that. We have more products, more software-driven products as well that can support our customers. And we also see more demand for automation. That is good. But in the other hand, we see less production lines being built, and that means less project. And the project business is having more headwinds. So -- and that's what we have seen. And service was basically unchanged. That has also -- that is also influenced by the number of cars produced. And that's why we see a stable level in Service and Industrial Technique. Revenues were down 1% organically. Operating margin were at 18.8%, excluding the restructuring costs, a minor restructuring cost of SEK 53 million compared to Vacuum Technique. So we keep on fine-tuning our organization in Industrial Technique because we have the headwinds. And it's the same concept. We have optimized management structure, and we try to adapt to the circumstances that we see today in the market. And again, the innovation efforts continue. Here, we develop a product that is reducing the dispensing time in about 50% that definitely can support some of our customers, and we are also quite happy with that development. So if we then move to Power Technique, and that is more a positive picture when it comes to the orders development, solid growth in equipment. Basically, most of the Equipment division had a positive development. Good growth in rental. I think that we continue to develop. Revenues were up 3% organic and operating margin at 17%. And here, we have higher functional cost and then a little bit of dilution from the acquisition. But I think the main topic here is higher functional costs. We have created a new division to sell industrial flow products. We are building up competence in our customer centers. I think that will bring -- is bringing a good organic growth, but I think we haven't seen -- we are yet to see translation in improved margin that will come over time. We believe we can operate in a higher margin with a higher margin in Power Technique. And now it's important as well, the acquired companies, we also invest in innovation. On the functional cost, there is also a component of higher R&D because also the acquired companies, we buy technology, but we believe we should continue to innovate. And this is one example of an innovation of one of our acquired companies, Wangen that they managed to come with a new twin screw pump for applications, pumping high viscous media in demand high flow rates. So also there, very good to see our innovation. So with that, I will transfer to you, Peter, to talk about our profit margin. Peter Kinnart: Okay. Thank you, Vagner. So from the operating profit of SEK 8.5 billion, we go through the net financial items, which are slightly lower due to somewhat lower exchange rate -- financial exchange rate differences to a profit before tax of SEK 8.5 billion compared to SEK 9.2 billion last year. and an income tax expense of SEK 1.8 billion. That means that we have an effective tax rate of 21.1% for the quarter, which is on the low side. Main reason for that is that besides the normal things that we see recurring that we also had a lowering of deferred tax liabilities linked to the lower announced tax rate for the German market. Therefore, this is a fairly low tax rate. It also still includes some of the release of provisions from the past from China high-tech we used to have. And so for the next quarter, we think the effective tax rate will be somewhat higher, probably around 21.5% to 22% in the near term. And that gives us a total profit of the period of SEK 6.7 billion and basic earnings per share of SEK 1.37 for the quarter. Then I will move on to Slide #12, talking a bit more about the profitability in detail. I would say, first of all, overall, I think we were quite pleased with the overall profit level that we managed to achieve in these quite turbulent and difficult circumstances. As already explained by Vagner, we had some restructuring costs. Actually, also last year, we had some restructuring costs. So therefore, you see here in the bridge, the net. For this year, the total cost was about SEK 205 million. For last year, we had a cost of SEK 123 million, leading then to the net SEK 82 million in the bridge, slightly diluting the margin as well as the impact of the LTI programs also having a small negative impact. But the main headlines of the profitability development, I would say, were, on the one hand, a slightly positive currency development. As you remember, last quarter, we had quite significant impacts of currency, but this month -- this quarter, it's much more mild and actually slightly positive. So I will not go into more detail like I did last time. The acquisitions, however, are then a detractor of about 0.6%. And also the tariffs had a bit of a negative impact on the profitability for the quarter. Nothing dramatic, but I have to admit that we did not manage to completely compensate for the tariff impact and the turmoil in that particular area throughout the quarter. And so I think that are the main contributors to the profit development for the quarter. Talking about currency, also for next quarter, we do expect actually, in absolute terms, a continued negative development of the currency contribution due to the fact that the average rate continues to lower, all things being equal. And therefore, we would expect anywhere around SEK 800 million potentially of cost impact, also depending, of course, and that remains to be seen on the revaluation of assets on the balance sheet. If we then take the profitability and dive a little bit deeper into each of the business areas, highlighting the main contributors to the respective profit developments on Slide #13. Then starting with Compressor Technique. First of all, 25.3%, continuing at a very good and solid margin. There was a slight detraction from the acquisitions, which is, in our belief, a very important investment in future growth. We also front-load a bit more with costs in order to safeguard a good, speedy integration process from the beginning onwards. And that is the reason why we see a bit more of detraction from the acquisitions. Otherwise, I don't think anything else was very strong. Secondary, maybe also, of course, the tariffs had to have a minor impact as well. On Vacuum Technique, here, a bit of a mixed picture, a bigger impact from currency, as you can see. The main reason is that last year, we had quite a big negative impact, and that in the bridge then turns into quite a significant positive. Otherwise, it would be relatively comparable to the other business areas, but that's the reason for the high positive. On the other hand, volumes were the main detractor. We see, of course, the top line going down with SEK 591 million, and that has an impact on the profitability on the bottom line. That's the main contributor. But also here, tariffs are part of the equation. Again, a minor impact, but still an impact in our profitability development. And of course, we already mentioned the restructuring net impact in the profit bridge as well. Industrial Technique, also here, the impact of the restructuring cost, as I already mentioned. Further then also revenue volumes being negatively affecting the profitability. The currency also slightly negative impact from a margin point of view. Also, the acquisitions were a bit dilutive. So overall, going to 18%. But I think with the restructuring activities, we are also there working hard to try to turn the corner and improve the profitability. As already indicated, we evaluated quarter-by-quarter how things develop. And whenever needed, we take the necessary measures. And we need to do it cautiously because, for example, in Vacuum Technique, you've seen the very solid development of service. So obviously, we cannot just cut away everywhere in the organization. We need to do it in a careful way, so we don't jeopardize the growth of the respective businesses. And then last, in the table here, Power Technique with delivering a solid margin of 17% again. Here, as we already mentioned, the main topic of the lower profitability from an organic point of view was more the functional costs. We are investing in a new division as one aspect of it. We are also working on a number of transformation projects, rejuvenating some of the old ERP systems we have for specialty rental for some of our production entities, for example. And that also triggers a number of additional costs for the time being. But over time, of course, we expect them to become more efficient and as a result, also improve the margin coming from those different investments. Also investments in dedicated salespeople in Power and Flow also within IFD in the Industrial Flow division, we are working hard to build that organization so we can leverage the sales of all the different technologies we have acquired in the last few years. So I think that explains the overall profitability business area by business area. If I then move to the balance sheet, I would say, relatively uneventful. Of course, on the one hand, intangible assets go up due to the acquisitions. On the other hand, we amortize, so basically quite stable. We see some impact on the inventories, for example, which is beneficial. We are actually indeed improving the inventory levels across the organization with all the different actions that we have ongoing. The receivables overall fairly quite stable, especially from a relative point of view. So we are quite happy with maintaining that good performance on the receivables side. On the equity side, also there, not so much to mention, mainly the equity is changing because of the fact that we are generating more profit, while on the other hand, of course, we are also paying dividends. And on that point, I would like to just highlight the fact that tomorrow, we will actually pay the second installment of the dividend related to 2024, SEK 1.50 per share roughly in total volume, an amount of SEK 7.3 billion. And with that, I turn to the cash flow. In the cash flow also there, I think a solid performance. You could say, well, yes, it's a little bit lower than last year. But on the other hand, quarter-over-quarter or over the different quarters, I think this is quite a significant value of operating cash flow we are generating. On the one hand, we have a little bit lower operating cash surplus, but we have a little bit less taxes paid. On the other hand, we have a slightly less positive impact from the change in working capital compared to the same quarter last year. But we also see a gradually slight slowdown in the increasing rental equipment, but also in the investments of property and plant. We continue to do a number of investments that are necessary for the future to replace some of the old assets, but also to build some new capacity, but at a slower pace than we used to a while ago. Also, of course, given the current climate, I think that makes a lot of sense. And with that, we end up with the SEK 7.3 billion operating cash flow. And with that, I think we have come to the end of the comments to the financial statements. And I would like to hand over back again to Vagner, who will comment a bit more on our near-term outlook. Vagner Rego: Good. Thanks, Peter. And once again, I would like to repeat that our forward-looking statement when it comes to the outlook is not -- is a sequential guidance. It's not a straight projection of our orders received. And again, to do that, to come to that statement, we look to the external world. And once again, we don't see a change in the environment. The world continues with a lot of uncertainty that are not supporting our customers to take decision, especially on large orders. So -- and then when we also look to our business internally, we don't see a dramatic change. We talk with our 24 divisions, look to the pipeline, different market segments, and we see no reason to believe that there will be a dramatic change compared to Q3. So that's why we continue with our statement that we expect that our customer activity to remain at the same level -- to remain at the current level. And then I would like to invite you for our Capital Markets Day that will happen in Germany. We will first go to Stuttgart, and there, we will have some presentation. And after lunch, we will go to our innovation center in Breton, where we will share some of our innovations related to Industrial Technique and Vacuum Technique. And I'm looking forward to see you there. Peter Kinnart: Yes. Thank you, Vagner. And we actually have still a few places left. So if you're really eager to see those products, then please come forward so we can reserve your seats. With that, we come to the end of the presentation, and we would like to start the question round. Again, I would like to repeat, please refrain yourself to only asking 1 question at a time. And then we are looking forward to receiving your questions. Back to the operator. Operator: [Operator Instructions] The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I want to ask a question about sort of what you mentioned regarding the margin still and the fact that you didn't fully compensate the tariffs entirely. Is this -- do you see that as sort of a delayed impact? We should see sort of eventually the full compensation within the coming quarters? Or is it more sort of an intention to not fully compensate it, I don't know, because of competitive reasons or anything else? Can you elaborate a bit there, please? Peter Kinnart: Sure, Daniela. Thank you for your question. No, first of all, it's definitely not intentional not to fully compensate for the tariffs. I think it's just been a very turbulent quarter with a lot of changes, especially towards the end of August with Section 232 being added to the equation and asking quite a lot of effort from big parts of the organization to investigate more deeply and to qualify a number of products, et cetera. So that has caused, of course, a bit of delay in being able to answer fully to some of these issues. And therefore, we have somewhat higher tariffs. I wouldn't say that it is necessarily so that in the very short term, we would be able to fully compensate, but we are quite confident that over time, over the quarter that we will be able to compensate for the tariffs as they exist today. With that, I also need to immediately apply some caution because as the changes are happening overnight very often, we don't know, of course, what's coming, but we continue to monitor it very closely. Maybe one thing to underline as well is that I did indicate that the tariffs did have an impact on the profitability for the quarter, but I also want to underline that the impact was not humongous that it was not totally destroying the profitability level. But we do admit that we did not manage to fully compensate for the tariff impact for the time being. Operator: The next question comes from Michael Harleaux from Morgan Stanley. Michael Harleaux: I'll limit myself to one as requested. On the large gas and process category, would it be possible for you to help us understand where we are in the LNG ordering cycle? Vagner Rego: Well, I think to say exactly where we are in the cycle, I think it's a bit more difficult. What I can say is this -- our presence in the market, we cover several market segments including LNG. Particularly this quarter, we did have orders on LNG as well. We had orders for fewer gas boosters. There are quite a lot of investments ongoing to increase the energy production capacity with gas-fired turbines. So -- and we do have products for that. And -- but we also saw good order development in industrial gases, for instance. So it's a quite a diverse market, let's say, segments that we cover, and we saw a good development this quarter, including in LNG. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: So I just want to come back on the impact from tariffs. You mentioned Section 232 added through the quarter, but that was 18th of August. And then you probably had some inventory to cover you through September, right? So shouldn't Section 232 hit you harder, Peter, in the fourth quarter when the full effect kicks in from steel and aluminum. So shouldn't we see a weaker drop-through here in the fourth quarter? Or can you take out enough cost to raise prices to mitigate that incremental impact? Peter Kinnart: Thank you, Klas. I think a very fair question and logical reasoning, of course. But I think it's also fair to say that the introduction of 232 didn't allow us immediately to get to lower tariffs with the Section 232. There's a lot of documentation required to pass the customs in order to prove that you don't need to pay 200% tariff or that you pay 50% tariff. So as a result, I think we had a bit of a spike, you could say, maybe in September towards the end of the quarter when it comes to the impact of 232. While now, of course, we have worked with a lot of people in the organization on trying to sort out both through our suppliers, both through our engineering departments throughout different locations, et cetera, how we can document all the products in the best possible way in order to be able to get the best possible tariff, so to say, under the present rules. So as a result, I think in quarter 4, we are better placed to pass the products to custom duties. That being said, I think on the other hand, of course, there will be more products going through the full quarter, as you indicate. And therefore, you could say that in absolute terms, the cost will be higher. But I think overall, and it's hard to really estimate, of course. But overall, I don't think it would result in a dramatic increase of the tariffs in the fourth quarter for us. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: I'm wondering if you could give us some color on what you're seeing in semiconductor demand. I'd say fairly recent news flow has been positive both on the memory side, plus you have better clarity on what Intel is going to do or not do. Can you just tell us what you're seeing in VT right now and how we should think about development into next year? Vagner Rego: Yes. What I can say, I think when it comes to leading edge nodes, I think the market environment is very positive, very good. A lot of investments ongoing, players that are -- some that are more mature on scaling up really the leading-edge nodes. Some are trying. And there, I really cannot say where they are. So we also not -- we don't comment on specific customers. We are not allowed to talk about specific customers. But one thing that is important to remind, leading edge node is going well, and we get orders. We are happy with that business. But of course, the entire market still has quite a lot of capacity. So -- and if you take a little bit advanced nodes and legacy nodes, there -- there is overcapacity. And of course, we need the entire market developing very well in order we can see a bend in the trend when it comes to orders received in that market. John-B Kim: Okay. And can you comment on memory, please? Vagner Rego: Sorry, I didn't get the last comment. John-B Kim: Could you offer a similar comment on memory, memory customers? Vagner Rego: No, we are a bit more agnostic when it comes to memory and logic. We are present in both markets. And I think if there is a good development in that market, we will be able to capture that development. I think we are well positioned to capture any movement in that market. Operator: The next question comes from Sebastian Kuenne from RBC. Sebastian Kuenne: I spoke recently to some of your competitors in Europe, and they speak of a more aggressive pricing behavior of some of your American competitors inside of Europe. Could you maybe give us an idea of what the pricing situation is and whether that's related to the currency differential? Vagner Rego: Yes. I cannot really comment what is happening with our competitor. I must say we do have positive price development in our -- if you are referring to our compressor business, for instance, we do have positive price development, including in Europe. We also have positive development in the U.S. that we try to compensate as well for the tariffs. That's what I can say. difficult for me to judge what's happening. I think our position in Europe remains quite solid. I think we had a good development in Q3. As you could see, I mentioned that we had positive development in Europe. So we are quite happy with the development in the orders that we have had in Q3. So good. That's what I, let's say, I would like to comment when it comes to price. Operator: The next question comes from Magnus Kruber from Nordea. Magnus Kruber: Magnus from Nordea. Sorry to labor the point about the tariffs. I think you had a 40 bps headwinds on the organic part in the bridge -- margin bridge this quarter. Could you help us frame the tariff impact within that? I'm not sure if you want to comment exactly what it was, but some help on the magnitude would be helpful. Peter Kinnart: Yes, I think it's hard to pinpoint exactly, of course, because, okay, on the one hand, we do follow up quite closely what is the exact impact of the tariffs. As such, the custom duties that we need to pay when we clear the goods. On the other hand, there's, of course, a lot of indirect costs as there's a lot of people in the organization working hard on the whole topic. Secondly, there's also additional storage costs when you are holding goods for a longer time before clearing them into -- waiting for maybe additional information or other type of things. And then last but not least, of course, we also work a lot with extra support external to help us make sure that we don't make big mistakes in the way we assess the value on which the custom duties will be paid. But like I said, overall, I think the tariff impact was not dramatic. It didn't turn around the profitability completely. It was one of the contributing factors. So okay, as you say, minus 0.4% overall on the group from an organic perspective. Tariffs were a contributor to that, but not the only one in there. There was also volume mix and price combined, you could say. So I think, like I said, no very substantial impact, but altogether, still an impact in that I think we didn't -- we don't want to shy away from, so to say, to say that there is a minor negative impact from the tariffs in the profit margin. Operator: The next question comes from Alexander Jones from BofA. Alexander Jones: You mentioned that industrial compressor orders in Europe were up in the quarter, whereas last quarter, you talked about stable. Could you highlight for us whether that's driven by any particular areas? And how are you thinking about that European outlook in the coming quarters? Vagner Rego: I think it came especially from our effort -- we have created as well a new division that we call Air & Gas Solutions. And they managed to have quite a good development for some gas generation project. I think we did quite well. Also, medical air did quite well. There are some pockets where we can find good opportunities for growth. But the industrial market in general, there was not a huge uptick. But in some pockets, we managed to have good business. I think it's also fair to say smaller compressors developed quite okay as well. That was important. So -- but not something that I wouldn't like to say the overall market is bouncing back. It's more driven by the activities that we have done to try to gain market share and in some areas to have -- to capture the opportunities in a market segment that is developing a little bit better. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: So the question is, can we double-click, please, on Compressor Technique in 2 regions, North America and China. If you could just walk us through how you've done in small- to medium-sized compressors, gas and process and large industrials and how you feel your competition has done as well, how you feel you've done versus the market? Vagner Rego: I think in North America, to say against the market, I think it's a bit difficult. But in North America, we are quite happy with the development in Q3 because we have all these uncertainties around tariffs and Session 232 and the teams, they did a very good job, very solid job. We had a double-digit growth in North America when it comes to compressors. We also had good development in -- in gas and process compressors. And there is more around industrial gases and fewer gas boosters that they go to gas-fired power plants. So that was the pockets that we're doing quite well. And then if I comment a little bit more about China, there is a little bit more challenging. I think the scenario has not changed. We see less projects in industrial compressors, but also in gas and process gas and process is a little bit more difficult than industrial compressors. Operator: The next question comes from Rory Smith from Oxcap. Rory Smith: It's Rory from Oxcap. I just wanted to sort of double-click on that industrial compressor piece. And if you could add any more color to the difference you're seeing in the quarter between the sort of small and medium-sized industrial compressors and the large industrial compressors. Is that by market, by region? Any color there? And I might try my luck with a follow-up, if that's okay. Vagner Rego: I think overall, like I said, it's a bit more difficult in Asia, particularly in China that we have mentioned already. There is a very small difference between small and large, a little bit more in favor of the smaller compressor, but it's not a huge difference. It's not something that is becoming an indicator, I would not use as an indicator because the difference is very small. But it was more in favor of the smaller compressors. Rory Smith: Understood. And if I could just follow up on that. You obviously called out the investment you're making to innovate to cost compete in China. I was just wondering if you'd be able or willing to put some numbers around that R&D piece, yes, for the investment in sort of, I guess, not lower spec, but yes, innovating to cost compete. Any numbers around that, that would be the question. Vagner Rego: No, I don't have a number to share. But what I can say, we are focused as well to be competitive in China. We have done an investment in our facility in Wuxi that we call now the Wuxi campus, where we have concentrated most of the Compressor Technique facilities in one place. And that gave a lot of R&D capabilities to the team we have in China, capabilities that we didn't have before with more test cells with more R&D facilities to do test, to do design. We are increasing the autonomy that our Chinese teams, they have in terms of design, still with good collaboration with our Belgium team, but a little bit more independence. And I think that is going well. And that's why we would like to share that product because I think that comes out of that reorganization and that investment. Operator: The next question comes from Johan Sjöberg from Kepler Cheuvreux. Johan Sjöberg: My question is also regarding semi CapEx. I understand your near-term comments on leading edge and also the overcapacity. I think that is sort of comments you made before, Vagner, if I'm not mistaken. But given all this, a lot of news flows in during Q3 here, when you're talking to your customers about sort of 2026 and beyond, how have they responded to these news and also especially the future CapEx plan from their side because -- I stop there. Vagner Rego: Yes. It's difficult to talk about 2026. We only talk about Q4 first. In Q4, we believe that it's going to be stable. I think it's difficult. You know this market, how it works. It's key account business. When they decide to place order or to populate a fab when they -- first, they do the R&D stage and then they do the pilot, then they need to try to nail that production facility with the right yield and then they scale up and sometimes can come very fast. I think it's difficult for me to comment looking at 2026 or even 2027. What I can say from Q3 to Q4, we see the market -- we don't see any reason to change the trajectory that we have seen lately. Operator: The next question comes from Anders Idborg from ABG. Anders Idborg: Just wanted to ask about acquisitions. So we've seen a very nice flow of bolt-ons. I'm just a little bit surprised when we look at the -- over the last, well, 6 quarters, basically, there's been very little of EBIT contribution on the bridge, and I don't have really the impression that you bought unprofitable companies here. So what is the reason? Is there some just initial cost restructuring going on? Or could you -- would you care to explain that? Vagner Rego: Yes. Thank you for the question. I think we -- definitely, we try to add good businesses to our portfolio of technologies and companies that we have definitely. But we also have an effort to integrate these companies faster and I mentioned during the presentation that we -- for instance, cybersecurity is very important. And we try to -- that is a kind of nonnegotiable. We try to bring that to our spec as soon as possible. We have deadlines to meet because I think it's very important to protect the assets that we have bought. And of course, that incur in some cost at the beginning. We have seen now with the acquisition of Shareway. For instance, there was quite a lot of costs that we had at the beginning. So -- but of course, those companies are profitable. And that happened -- that has happened as well in the years before. So the first year is a bit more challenging. And then we recuperate over time deploying synergies. And acquisition is very important for us. We have reorganize our post-acquisition process to be able to capture the synergies in a good and structured way. We are reinforcing the teams there because we have acquired more companies that required even more structured process that what we used to have. So we are investing on that as well to be able to capture this value that we believe when we -- before the acquisition. So I think we are happy with the companies, a lot of activities. And year 1, we see that is normally challenging because we want to do some of the integration items quite fast. Operator: The next question comes from Sebastian Kuenne from RBC. Sebastian Kuenne: I have a question on VT. You mentioned lower volume as one of the key reasons for the lower margin. But at the same time, you have competition that sits in Japan like Ebara, you have Busch in the U.S., [ Pfeiffer ] in Germany. Is the price situation in the global vacuum pump market stable? Or do you see the pressure from manufacturers in lower-cost countries effectively? Vagner Rego: What is key for the price development is technology, and we need to continue to develop our products to come with better products to be able to exercise some pricing power. And I think that's our focus, and we will continue to develop the products that will allow -- that can deliver superior value to our customers, and that could help us with our price efforts. So -- and I think that's where we are focused on now. Sebastian Kuenne: Okay. So no change in pricing. Operator: Next question comes from Magnus Kruber from Nordea. Magnus Kruber: Just reverting to some of these announcements that has been in the media over the past couple of months with respect to some big framework agreements, particularly on the memory side. Is there any way you can sort of help us scope what these opportunities could mean to you if they come to fruition over the coming years? How -- can you frame them, for example, with respect to sort of how big that potential is compared to your legacy semi business? Vagner Rego: What I can say about the market, we -- let's say, we know all the players in the U.S., in Asia, including China. So we are present in all these players. We have a good position in most of the players. If this comes to fruition, we will be there to capture. I think that is our main focus. We don't know which one we will scale up first or later. That we don't know. I think the most important for us is what give us confidence as well is the fact that we are very well positioned. Any movement we will be able to capture. Magnus Kruber: Got it. And can I just have an additional question. You talked a little bit about ramping up on R&D in Compressor Tech going forward to drive additional growth. Is that sort of a China-focused initiative? Or could you highlight a little bit of potentially how much you would be willing to interest and invest and in which pockets? Vagner Rego: I would say the investment were more in capabilities in facilities, better places where they can test the machine testing environment. So those capabilities we have -- we have created -- we have increased actually. We always had, but we have increased in China. And I think we continue -- this is not a dramatic increase in R&D in Compressor Technique. They have been focused. They will continue being focused. But I think we can get more out of our Chinese organization. That's what we are doing, getting ready for that. Peter Kinnart: Okay. Thank you very much, Magnus, for that question. And actually, with that, we have also answered the last question on the call. I would like to thank you all for your presence and for listening to our presentation. As always, of course, should you have any further detailed questions on any of the business areas or the group overall, you're more than welcome to contact our IR department as always. So with that, thank you very much for attending, and have a great rest of the day. Thank you. Bye-bye.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Carpenter Technology Q1 Fiscal Year '26 Earnings Presentation. [Operator Instructions] I would now like to turn the call over to John Huyette, Vice President, Investor Relations. John? John Huyette: Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the fiscal 2026 First Quarter ended September 30, 2025. This call is also being broadcast over the Internet, along with presentation slides. For those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Tony Thene, Chairman and Chief Executive Officer; and Tim Lain, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter Technology's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2025, and the exhibits attached to that filing. Please also note that in the following discussion, unless otherwise noted, when management discusses the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income, excluding special items and sales, excluding surcharge. I will now turn the call over to Tony. Tony Thene: Thank you, John, and good morning to everyone. I will begin on Slide 4 with a review of our safety performance. We ended the quarter with a total case incident rate of 1.6. As we continue to drive improvement in multiple leading indicators, I expect to see continued progress. As always, we remain committed to our ultimate goal, a 0 injury workplace. Let's turn to Slide 5 for an overview of our first quarter performance. First quarter was a great start to fiscal year 2026. Let me highlight the 4 major takeaways. One, record earnings. In the quarter, we generated $153 million in adjusted operating income, exceeding the fourth quarter of fiscal year 2025, which was then a record quarter. And it is a 31% increase over first quarter of fiscal year 2025, a meaningful step-up year-over-year. The earnings exceeded our strong first quarter guidance, driven by increased productivity, product mix optimization and pricing actions, a positive step towards our full fiscal year 2026 earnings outlook. Two, expanding operating margins. The SAO segment continued to expand margins, reaching an adjusted margin of 32% in the quarter. The 32% margin compares to 26.3% a year ago and 30.5% in the prior quarter. And we don't believe this is the peak margin level over the long term. Our ability to continue to expand margins can be attributed to our solid execution, strong market position and unique capacity and capabilities. As a result of the expanding margins, the SAO segment recorded $170.7 million in operating income, an increase of 27% year-over-year and an all-time record for the segment. Three, strengthening market demand. We continue to see demand environment strengthen, especially in the Aerospace supply chain as it gains confidence in the Boeing and Airbus build rate ramp. As a result, September was the highest order intake month in over a year. Specifically, in the quarter, we saw bookings for Aerospace and Defense accelerate, up 23% over the previous quarter. Four, pricing continues to be a tailwind. In this strengthening demand environment, our pricing remains elevated and consistently increasing as evidenced by our financial results. Our customers continue to be focused on securing their supply of our critical materials. As evidenced in the last quarter, we negotiated 5 large LTAs with Aerospace customers with significant price increases, reflecting their strong outlook on the market. If I were to write the headline for this quarter's performance, it would be Carpenter Technology delivers all-time record quarterly earnings, driving SAO margins to an impressive 32%, even in a quarter where they smartly completed planned maintenance activities. In addition, they shattered the narrative held by some of a seasonally weak quarter, a weakening demand environment and decreasing pricing power by achieving record earnings, strong sequential growth in Aerospace and Defense orders and negotiating 5 aerospace LTAs with substantial price increases. Let's turn to Slide 6 and a closer look at first quarter sales and market dynamics. In the first quarter of fiscal year 2026, our total sales, excluding raw material surcharge were up 4% over the first quarter of fiscal year 2025 and down 3% sequentially. As expected, the sequential sales decline was driven by the planned maintenance outages we discussed on the last earnings call, offset by increased productivity, improved product mix and pricing actions. Sales in the aerospace and defense end-use market were up 1% sequentially and up 11% year-over-year. Notably, sales in the engine submarket were up 14% sequentially. Our engine customers continue to be concerned about surety of supply as they navigate high MRO demand while managing the ongoing and accelerating build rate ramp. Across all submarkets, the aerospace supply chain continues to increase activity as build rates ramp and confidence grows in the OEM's ability to perform. As evidence of this, we saw Aerospace and Defense bookings accelerate in the quarter, increasing 23% sequentially. And as I mentioned earlier, we also completed 5 LTA negotiations with aerospace customers in the quarter, all with significant price increases. Moving on to the medical end-use market. Our sales were down 20% sequentially and 16% compared to the prior year first quarter. The large majority of the sequential decrease is from medical distribution customers as they continue to see quarter-over-quarter volatility. Recall that coming out of COVID, there was a rapid recovery in patient procedures, generating significant activity in the supply chain. As the medical field caught up on the backlog of procedures and growth rates normalized, the supply chain, especially our distribution customers, has been working to manage working capital levels. As we've highlighted in previous quarters, this has impacted a portion of our medical business and it is continuing longer than anticipated. Even so, we have still been able to produce record quarterly earnings and see the medical market as an increasing tailwind going forward. Our medical customers report a positive long-term outlook on the market as the fundamental demand drivers remain strong. Further, our broad portfolio of medical alloys is unique and critical to our customers' focus on improving patient outcomes. Shifting to the energy end-use market. Sales were down 5% sequentially and up 8% year-over-year. As discussed during our last several earnings calls, the energy market is currently driven by the accelerating demand for power generation, and we see this only getting stronger with order intake up 41% in the quarter. As we have stated before, sales in the power generation submarket will fluctuate quarter-to-quarter due to the frequency of orders and our practice of strategically slotting them into our production process. Of course, the key end-use market for our increasing profitability is Aerospace and Defense, where we see demand strengthening as evidenced by accelerating order intake and increasing pricing actions. Altogether, we are operating in a strengthening demand environment across the high-value end-use markets that we believe will drive meaningful growth in both the near term and long term. Now I will turn it over to Tim for the financial summary. Timothy Lain: Thanks, Tony. Good morning, everyone. I'll start on the income statement summary. Starting at the top, sales excluding surcharge increased 4% year-over-year on 10% lower volume. Sequentially, sales were down 3% on 5% lower volume. The improving productivity, product mix and pricing are evident in our gross profit, which increased to $216.4 million in the current quarter, up 1% sequentially and 23% from the same quarter last year. SG&A expenses were $63.1 million in the first quarter, essentially flat sequentially and up slightly from the same quarter last year. The SG&A line includes corporate costs, which were $26.6 million. This is flat sequentially and up slightly when excluding the special item from the first quarter of fiscal year 2025. For the second quarter of fiscal year 2026, we expect corporate costs to be about $25 million, which is in line with our quarterly average of fiscal year 2025. Adjusted operating income was $153.3 million in the current quarter, which is 31% higher than the $117.2 million in our first quarter of fiscal year 2025 and up 1% from our recent fourth quarter. As Tony mentioned earlier, this represents another record quarterly operating income result, breaking the previous record set last quarter. This is even more impressive considering we were able to deliver the results in a quarter with planned maintenance activities. Moving on to our effective tax rate, which was 15.4% in the current quarter. This quarter's effective tax rate was lower than anticipated and comparable to the same quarter last year due to discrete tax benefits associated with the vesting of certain equity awards in both quarters. For the balance of the fiscal year, we expect the effective tax rate to be between 22% to 23%, and the effective tax rate for the full fiscal year 2026 is expected to be on the low end of the full year guidance we provided of 21% to 23%. Finally, the earnings per diluted share was $2.43 for the quarter. Again, our recent first quarter was a record quarter for profitability. Our teams continue to drive higher profitability with the manufacturing organization's focus on increasing productivity while managing the product mix to optimize profit and realizing the benefits of pricing actions that we continue to pursue and capture. Now turning to more detail on each of the segments, starting with our SAO segment. Net sales, excluding surcharge for the first quarter were $533.9 million. Compared to the same quarter last year, sales were up 5% on 11% lower volume, reflecting the impact of product mix optimization and pricing actions. Sequentially, sales were down 3% on 5% lower volume. The sequential decline in volume was in line with expectations given the planned maintenance activities in the quarter. SAO reported operating income of $170.7 million in the first quarter. But I think the most impressive measure for the SAO segment is the adjusted operating margin of 32%. This marks the 15th consecutive quarter of margin expansion. The record margin is being driven by the growth levers that we consistently highlight, specifically the SAO team's ability to increase productivity at key work centers to drive an improving mix while realizing higher selling prices. These areas are as relevant as ever as we actively manage our production schedules to optimize the highest value margins while carefully managing costs and executing thoughtful planned maintenance activities. Tony will talk in detail about the pricing environment. Altogether, we continue to see opportunities to expand profitability and margin further as we execute against our growth levers. Looking ahead to our upcoming second quarter of fiscal year 2026, we anticipate SAO will generate operating income in the range of $168 million to $172 million, in line with the record first quarter. The SAO guidance for the second quarter considers our available effective capacity. This accounts for the impact of time off for the holidays, which is important to our employees and downtime associated with upgrades to key testing work centers. This is an area where it makes sense to spend modest capital to upgrade certain equipment to ensure capacity is available to support our highest value materials, which means we see significant payback on small investments. Now turning to Slide 10 and our PEP segment results. Net sales, excluding surcharge in the first quarter of fiscal year 2026 were $87.2 million, down 10% sequentially and down 6% from the same quarter a year ago. In the current quarter, PEP reported operating income of $9.4 million compared with $11.7 million in the fourth quarter of fiscal year 2025 and $7.3 million in the same quarter a year ago. The year-over-year increase in profitability despite lower sales reflects the impact of a favorable shift in product mix. We currently anticipate the PEP segment's operating income to be relatively flat in the second quarter of fiscal year 2026. A few additional comments to keep in mind. PEP represents roughly 6% of the company's overall segment profitability on a trailing 12-month basis. In other words, SAO dwarfs PEP and SAO will continue to be the growth driver for Carpenter Technology. From an outlook perspective, we anticipate PEP results will improve, but would point out that our total company outlook is based largely on our growth expectations for the SAO segment, which will continue to outpace PEP performance. With that said, the PEP business is a small but strategic part of Carpenter Technologies portfolio. We believe that PEP can be a growth accelerator in the future. Before we move to cash, I just wanted to pull together the pieces that make up our outlook for operating income in the second quarter of fiscal year 2026. We anticipate total operating income of $152 million to $156 million. This includes SAO at $168 million to $172 million, PET roughly at $9 million and corporate costs of $25 million. Now turning to the next slide to talk about our cash generation and capital allocation priorities. In the current quarter, we generated $39.2 million of cash from operating activities and spent $42.6 million on capital expenditures, which resulted in negative adjusted free cash flow of $3.4 million. For fiscal year 2026, we continue to anticipate generating between $240 million to $280 million of adjusted free cash flow, which includes $175 million to $185 million of spending for our brownfield capacity expansion project. To be clear, the brownfield capital expenditures are on top of the $125 million of annual capital expenditures to fund our normal maintenance and sustaining capital as well as smaller growth projects. As an update on the brownfield expansion project, construction activities are in full swing. Site work is underway, currently focused on building foundation work at our Athens, Alabama site. The project is currently on budget and on schedule. As the project progresses, we expect that capital spending will begin to accelerate in the second half of fiscal year 2026 as construction activities broaden and equipment delivery and installation begins in earnest. Moving on to our capital allocation philosophy. As we've discussed before, our primary focus areas for capital deployment are investing cash in attractive and accretive growth and returning cash to shareholders. Our commitment to investing for growth is evident in our brownfield expansion project I just mentioned. In terms of returning cash to shareholders, we continue to execute against our $400 million stock buyback authorization. In the current quarter, we repurchased $49.1 million of our shares, bringing the cumulative total to $151 million. In addition to the buyback program, we also continue to fund a recurring and long-standing quarterly dividend. Our capital allocation philosophy is enabled by our healthy liquidity and strong balance sheet. Liquidity as of the most recent quarter is $556.9 million, including $208 million of cash and $348.9 million of available borrowings under our credit facility. Our credit metrics remain very strong with net debt-to-EBITDA ratio remaining well below 1x. Altogether, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns. With that, I will turn the call back to Tony. Tony Thene: Thanks, Tim. Over this past quarter, a couple of important topics have garnered the attention of the investment community. I would like to address them to make sure Carpenter Technologies position is 100% clear. There has been much written on the current pricing environment in the nickel-based super alloy market. We have 2 basic categories that we break our customers into, those that work with us under long-term agreements and those that don't have long-term agreements with us, which we call transactional. Customers in both categories are extremely important and strategic. The customers who do not work with us through a long-term agreement, our transactional customers in almost every case, are long-standing customers with highly specialized and exact specifications. Quoting for these transactional customers require significant time and effort with multiple levels of internal technical reviews and discussions with the customer. As a result, we do not entertain spot pricing as it is typically defined. There is not a moving daily price, and we do not typically quote for immediate or short-term delivery. In fact, our transactional business pricing is generally higher than LTA pricing. Certainly, we do not provide transactional customers with better pricing than our LTA customers as that would be illogical. For customers who work with us through long-term agreements, their primary focus during renewal discussions remains the surety of supply of our products. With each contract renewal, we have been able to realize price increases that demonstrate the value of our products in the supply chain and reflect the underlying supply-demand imbalance that is only expected to tighten in the future. I will note again to support our view of the pricing dynamic for our materials that in the quarter, we completed negotiations on 5 LTAs with aerospace customers with significant price increases. It is also important to note that, in turn, our customers also benefit greatly as they are getting surety of supply of our products, which is highly valuable to them in an extraordinarily high demand environment. You can see the results of our pricing actions in our SAO segment financials as our total sales dollars per shipment pound remained elevated and increased significantly year-over-year. For more insight, I will note that the year-over-year increase is 10 percentage points higher for the aerospace and defense end-use market. The results demonstrate we are consistently increasing the pricing level of our Aerospace products. If we were discounting Aerospace products are seeing immense pricing pressure, you would have seen a significant sequential decrease in the price per pound. Clearly, that is not the case. With that said, it is important to repeat something that I've said before. Price per pound may not move in a linear fashion quarter-to-quarter as the product mix in any given quarter influences results. However, we expect that the pricing trend will continue to be favorable. Final point on this topic. We have communicated publicly many times and state again today that we believe pricing actions will continue to be a positive tailwind into the future due to the supply-demand imbalance that exists today and that is expected to intensify in the future for nickel-based super alloys. In addition, another topic that has been written about is the Aerospace demand environment and more specifically, the potential weakness in the titanium market. Let me address the titanium portion first. Carpenter Technology does not melt titanium or produce large titanium forgings for aerospace structural applications. To be very clear, any current or future weakness in the titanium raw material or structural markets has no material impact on Carpenter Technology. In stark contrast to titanium raw materials, nickel-based superalloys, which is our primary focus, are in sharp supply, have only a few qualified producers globally with high barriers to entry and rapidly accelerating demand. As I mentioned earlier, our Aerospace and Defense end-use market orders have been steadily increasing over the last couple of quarters. In this quarter, they were up 23% sequentially. That is after a similar sequential increase in the prior quarter. This strong sequential growth in bookings was driven by increased volume, which is a very encouraging sign and continued pricing actions. Obviously, the accelerating bookings is a very positive trend developing and signals continuing expansion as the airframers drive for higher build rates. To support this position, let me provide more color on what we are seeing in each of the aerospace submarkets. I will start by saying that in general, the tone with all of our Aerospace customers is one of increasing positivity as they see large demand upticks on the horizon. Our Aerospace structural customers experienced the most disruption from the OEM build rate issues we have seen over the last 1.5 years. This is due to the relatively low MRO needs on structural versus engine parts. Over this period of time, they have been carefully managing their near-term working capital needs. Encouragingly, some have begun reordering on increasingly positive momentum from Boeing, while others state they are expecting more earnest ordering to begin soon. Collectively, our aerospace structural customers universally agree that strong demand is on the near-term horizon and are considering when and how to ramp activity back up. Our aerospace fastener customers report steady improvement in their demand. Some customers are already placing orders with us to cover all of calendar 2026. They are continuing to expect improvements in demand, and our quoting activity has increased notably over the last few months. Fastener customers are generally expecting very solid double-digit growth next year based on ongoing improvements in the aerospace OEM build rates. Our aerospace engine customers continue to remain busy as they generally have been over the last several quarters. Engine OEMs are very active across the supply chain, working to ensure material availability. Customers continue to report high MRO activity and a need for more material from us. In summary, our engine customers continue to be very positive as evidenced by the 14% sequential increase in aerospace engine sales in the quarter. I don't usually mention the space submarket as it is a much smaller portion of our business, but I will note that we have seen large increases in activity over the last few quarters, and our space customers report expectations for significant ongoing demand. Finally, I will mention our Defense customers because we have seen significant increase in activity here as well. Our Defense customers are expecting very strong increases in demand based on new programs being worked on as well as the expected fiscal year 2026 defense budget. With those insights, let me state where we believe the aerospace market stands today. The aerospace market has seen large cyclicality over many years, and we have seen the same pattern play out cycle after cycle. That is the supply chain gets a little ahead of OEMs and then decides to pull back or pause. That is followed quickly by a time when the supply chain realizes they do not have enough material on order, and there is an urgent scramble to place orders. This results in what the industry describes as the bullwhip effect, where there is effectively a run of material. In this case, I'm speaking specifically of nickel-based aerospace materials. This cycle we are emerging from right now is similar as before, except for one major factor. That is the total demand targets from OEMs are significantly higher than before. Our conversations over the last quarter with our closest customers have focused on advising them to ensure they have their orders placed now, so they are not last in line. The pattern I have described is not a surprise to our nickel-based customers who all understand the question is when, not if this run occurs. And then last week, we have the reporting of the FAA approving a 737 MAX rate increase from 38 to 42 per month, which we believe will support the bullwhip effect I just mentioned. Lastly, we have received questions about our confidence in our earnings guidance as the marketplace continues to move. To start with, just a couple of points on our earnings guidance philosophy. One, we believe it is important to provide. Two, we established challenging targets that we have line of sight to achieving with disciplined action plans in place. Three, we don't believe multiyear earnings targets should be back-end loaded. Therefore, we commit to meaningful earnings growth in the first year of multiyear guidance. And four, not only do we have a track record of achieving our targets, we exceed them. That philosophy should give you confidence in our future performance. Now specifically to address our guidance. As a reminder, at our February 2025 investor update, we announced our fiscal year 2027 operating income target of $765 million to $800 million. More recently, on our last earnings call, we provided additional insight as we guided to a strong fiscal year 2026, projecting $660 million to $700 million in operating income. As I stated then, this range for fiscal year 2026 represents a 26% to 33% increase over our record fiscal year 2025 earnings and as we believe the highest earnings growth trajectory among our industry peers, quite impressive. Now we have just completed the first quarter of our fiscal year 2026 and remain confident in our full year earnings guidance. Most importantly, we have line of sight to the high end of the range with increased volume, pricing actions and productivity, all contributing to higher profitability. As I just mentioned, the reporting that the FAA approved a 737 MAX rate increase from 38 to 42 per month is important. That was a material unknown that has now been revealed and should support a continued increase in Aerospace bookings. As we look at fiscal year 2027, we also remain committed to that level of profitability, which, by the way, would be an approximately 50% increase over our recently completed record fiscal year 2025. But let me be clear, as this aerospace market continues to accelerate, our focus is not on achieving the fiscal year 2027 guidance. The focus is on exceeding that lofty target. Now let's turn to the final slide to summarize this great story. Let me close with why I think Carpenter Technology is a compelling story for existing and potential shareholders. Specifically, let's take a look at the 3 major areas most important to shareholders. One, we have an enviable market position in the industry. We are in the midst of a significant acceleration in demand, especially in the aerospace and defense end-use market. Demand for air travel has never been higher, and OEMs are pushing to ramp production build rates significantly over the next several years, which is just the beginning. With accelerating build rates driving higher demand for our materials, a fundamental supply-demand imbalance in nickel-based super alloys will tighten even further. Our world-class collection of unique manufacturing assets and related capabilities are difficult, if not impossible, to replicate. Our leading capacity and capabilities are further differentiated by stringent qualifications necessary to supply advanced materials for aerospace and defense and other key end-use market applications. Two, we are committed to a balanced capital allocation approach. We have a healthy liquidity position and a strong balance sheet, combined with an impressive free cash flow generation outlook. We are focused on returning cash to shareholders via a long-standing dividend and a robust share repurchase plan. In addition, our strong performance allows us to invest in highly accretive growth projects like our recently announced brownfield expansion that accelerates earnings growth but will not materially impact the nickel-based supply-demand imbalance. And three, we have delivered impressive financial results with a strong earnings outlook. We have just completed another record quarter of profitability, driven by significant margin expansion in our SAO segment. Our outlook for fiscal year 2026 implies a 26% to 33% increase over our record fiscal year 2025, and we are well on our way to achieving and even surpassing the ambitious earnings target for fiscal year 2027. I don't know of anyone in our industry who can say they have a stronger earnings outlook than Carpenter Technology. Of course, fiscal year 2027 is not expected to be our peak. We have plans and line of sight to further earnings growth beyond 2027. In summary, I believe Carpenter Technology checks every important shareholder criteria box. We have created significant shareholder value to date, but we are only at the beginning of this growth journey. The best is still to come. As always, we remain focused on supporting our customer needs, operational execution and living our values as we drive to exceptional near-term and long-term performance. Thank you for your attention. I will now turn the call back to the operator. Operator: [Operator Instructions] And it looks like our first question today comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna: Great results, guys. Tony, I did want to get your perspective on a couple of things, a, like what has happened, if anything, in your own jet engine alloy lead times? Are they still kind of fairly extended? And also just what is your best guess as to why some of those channel checks are so not representative of the business? If it is -- I mean, it's -- there's such a dichotomy with what you guys have continued to put up and some of the chatter out there. And then lastly, just on your comments on Boeing. You guys have already endured a number of quarters of, if you will, destocking. I just wanted to get a sense for like your perspective on had that not happened over the last year, whether you would have had even more profits? And if that's what we're pivoting to, we're starting to see that recovery in the Boeing orders. A lot there, take it anywhere you want. Tony Thene: Okay. Thanks, Gautam, for the questions. One, yes, on engine lead times, they're still extended. And in fact, I think we're at the point now where they're going to start pushing out again pretty quickly because the Boeing news, whereas, of course, many people say, well, that's what they expected. But it's a big deal for the FAA to come out and actually say that. So the discussions we've had with customers just in the last couple of days, remember that was just reported, I think, last Friday, has turned, and you've seen more push to start increasing orders. So I think that's a very significant positive for us. As far as the news around the industry, it's hard for me to speak to that. That's why we took even extra time on today's call to explain very clearly, and I appreciate that you recognize that. We take it really seriously. These earnings calls, we try to communicate very clearly. We believe we are different than other products, the capabilities, the capacity that we have, the broad customer base we have. So the best thing to do for us is listen to what we have to say, follow what we have to say, and I think we'll do a good job of guiding you there. The third thing you mentioned was really -- is really important because a lot of people missed the fact that starting back in early of calendar 2024 is really when you started seeing some issues in the Boeing supply chain. And we were able to maintain and, in fact, produce record quarters during that time because of the flexibility that we have. Airbus was still making planes. We had a very robust backlog that we were able to pull in and use. Power generation then stepped up with more demand. And even in that very difficult time where you had 1 of the 2 airframers, Gautam, effectively making 0 airplanes because remember then later in 2024, they had their work stoppage that we were able to produce record results during that time, I think, went a bit unnoticed and maybe underappreciated. And now here we are where you've got Boeing performing very well, but only at the beginning, Airbus, who has quite a bit further, they want to go, let's say, for example, on their A320 targets. And I think now as we go into the second half of FY '26, that's why you heard the confidence from me and then in terms of our guidance and then also for FY '27. I mean I think there's more opportunities for increase over that guidance than there are risks. Hopefully, I answered all 3 of them for you. Gautam Khanna: Yes. No, that was a very great answer. And just maybe a quick ask on fastener demand trends, how those tracked in the quarter? Tony Thene: Yes. Sorry about that. I know you usually asked about it. Fasteners for this quarter were down 7% sequentially, 40% up year-over-year. But as we look at the order intake coming in right now, as you well know, fastener orders can be a little lumpy. Those are strong coming into our second quarter. And like I said in the prepared remarks, which I think is a very important point, you're seeing a lot of these fastener companies already trying to place orders for the entirety of their calendar year 2026. So that's a big deal, and that's a really strong evidence of how they see the market playing out. Operator: And our next question comes from the line of Andre Madrid with BTIG. thanks... Andre Madrid: You mentioned the 5 new LTAs. And I was just wondering if you could speak more to the duration of these and how we can maybe expect duration mix to shift moving forward. Tony Thene: On these 5 specific ones that I was referencing, they range between 2 years and 5 years. Andre Madrid: Got it. And I mean, obviously, these have come in from what you saw pre-COVID, pre-MAX, post-COVID booming. I mean, I guess just how do you expect the duration to -- yes, like what should it look like through the end of the decade, would you say? Would you say it's be consistent at these levels, pulling even further or push out a little bit longer? Tony Thene: Well, I think that contract lengths will stay at this range versus a historical 10-year contract. And that's all -- I mean, that should be obvious that, I mean, that's based on where you think the supply-demand imbalance is going to go. So I think it's interesting as well. I can provide a little bit more color of those 5 contracts, only one of them were a renewal from prior to COVID. So the other 4, this is the second time we've renewed them, if you will, since the post-COVID more robust ordering, especially now. So that's an important point to make as well. Andre Madrid: Got it. Got it. No, that's very helpful. And then I think if I could squeeze in one more. When you look at -- it's very clear on the aero side, what the moving pieces are, but can we maybe peel back what some of those pieces are for defense? I know you highlighted still strong demand there, especially inside of a strong budget request. So... Tony Thene: Well, we play across a lot of different areas in defense. I mean we offer products not just that are maybe traditional or historically been offered, but the next level where we're looking at alloys and tweaking those alloys to get better performance based on the outcomes that they're looking for. So you see us across multiple segments inside the defense market. And quite frankly, our relationship there has grown significantly over time, mainly because they're looking for increased performance. They're looking to operate at a higher level and our alloys and our innovations allow them to do that. Operator: And our next question comes from the line of Josh Sullivan with JonesTrading. Joshua Sullivan: Tim, John, congratulations on the quarter. I think I had the title of my note wrapped up, but just had some other questions, Tony. On the aerospace backlog is up nicely, that bullwhip dynamic that just always seems to happen in this industry. Are customers receptive to that messaging to get in now? Or is it your sense that most of the industry is just going to get hit with the rush as it comes? Tony Thene: Well, that's a really good question. And you know this, you've been around long enough. Aerospace customers, there are differences based on whether they're an engine customer or structural, they're in the distribution side. I think that I can tell you they're very receptive to that message. The discussions we've had over the last couple of weeks, they're very receptive. Now all of them are in a little bit different point on where their working capital levels are. But clearly, you've seen an inflection point that says we see this demand coming. We see Boeing continuing to perform well. We see Airbus pushing higher and higher. And I think that has become a pretty uniform feel that now is the time to start increasing the order intake. You've seen that. I mean, 23% sequential this year on Aerospace. If I remember right, last quarter, it was -- Aerospace was up over 20% as well. So you might not get 20% sequentially, Josh, every quarter for the next 3 or 4 quarters. The point is that linear trend upward, I think, is going to be pretty strong as we go through the rest of this fiscal year. Joshua Sullivan: Got it. And then kind of relatedly, into your comments just on LTAs versus transactional customers, you got the 5 new ones signed up here. How should we think about that optimal mix for -- between the 2 customer sets and then how that layers into Athens? And I think you had mentioned at Paris, there's a lot of interest in Athens. Tony Thene: Yes, there's really nothing overly magic about that. I mean whether somebody is on an LTA or not has a lot to do with their point of view, certainly, our point is a view well. Is that what's best for them to have an LTA. Some customers prefer not to do that. On the distribution side, Josh, that's not their mode of operation. So I think the point that I was trying to make there is that there's really not a big distinction for us between an LTA customer and a transactional customer. This idea that a non-LTA customer walks in randomly from the street and orders a random aerospace alloy just doesn't exist. These are customers that we've had for decades that order very specific material. So -- and it commands the same type of price, as I said in my prepared remarks. So there's really not a percentage that I'm trying to get to. We manage each of our customers as individuals, and we'll keep doing it that way. Operator: And our next question comes from the line of Scott Deuschle with Deutsche Bank. Scott Deuschle: Tony, do you already have line of sight to another quarter of sequential A&D growth in the quarter you're in right now? Tony Thene: Right. And that's what I just was telling, Josh. I don't -- I can't tell you it's going to be exactly 23%. But I think over these next several quarters, you're going to see continued growth in order intake for sure. Scott Deuschle: Okay. And then the EBIT per pound at SAO was up 42% year-over-year on down volumes. So if the volumes actually start to return to growth on the back of this order improvement, is there an upside opportunity in which you could have a repeat of the EBIT growth profile you experienced over the last couple of years? Tony Thene: Well, certainly, the math works out in our favor, right? If we're producing these types of numbers and you still have volume that's not at the point where we think it's going to go to, that's a pretty good equation. Scott Deuschle: Okay. And then last question for the LTAs that you said repriced this quarter, do we see that benefit hit in the fiscal second quarter? Or do those become effective in January for the third quarter? Tony Thene: I don't want to give specifics on each of the contracts, Scott. But as you know, it varies, right? Some of them will be more, what should I say, earlier, maybe in the second half of this fiscal year. Some of our customers will renegotiate a little bit further out. Operator: [Operator Instructions] And our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Philip Gibbs: I think you mentioned it earlier in the call. Were the engine sales up 14% year-on-year? Or was that sequentially, Tony? Tony Thene: Yes. Thanks for mentioning that, Phil. It was 14% sequentially. It was about 20% year-over-year. Philip Gibbs: Okay. Excellent. And you mentioned in your prepared remarks on Space and Defense verticals, and you've had some Space business be a little bit more recurring over the last few quarters. Any sense or color you can provide in terms of how much maybe the combination of Space and Defense is of the A&D business? Tony Thene: Yes. Well, I mean, Space is small, right? But the reason I mentioned it is because it's a growing area. And I think it's just another example of our exposure to this very quickly growing market. And I think probably going forward, you'll see me or see us speak about space more. So it's very small, Phil, but I think it's going to be very strategic for us going forward. Philip Gibbs: And then lastly, on the brownfield, can you just give us give us an update in terms of what you expect in terms of the construction period in the second half and deliveries and then give us a view of the time line just as we try to envision the project. Tony Thene: Yes. I'll give that one to Tim since he's overseeing that project for us. Timothy Lain: Yes. Phil, in terms of time line, just high level, construction now expected to be complete beginning late fiscal '27, early fiscal '28. In my remarks, I said we're -- construction is underway. Most of the focus in these last several months has been about getting the site ready, so doing the land preparation -- site preparation, getting building foundations poured, things like that, getting the structure in place. Over the next several months, several quarters, we'll shift pretty quickly to more building infrastructure, getting the equipment delivered, set up, installed. So high level, we're on track in terms of budget and schedule. And just to reiterate the guidance for the capital, specifically for the brownfield expansion, we said $175 million to $185 million of CapEx this year, fiscal '26 on top of the normal CapEx of $125 million. Operator: And our next question comes from the line of Bennett Moore with JPMorgan. Bennett Moore: Congrats on another impressive quarter. I was hoping you can maybe delineate on the A&D bookings growth sequentially, what this look like between engines and structural. I think you had a comment in there that part of this was volume driven. So just trying to gauge if there's Boeing levered customers to what extent they're coming off the sidelines. Tony Thene: Well, I made the comment around that it was volume-driven as well because that's important, right? And it's -- certainly, price is a big driver. But the point there was it's not just a price increase. The volume is coming from the marketplace. So that was an important point. I don't think I'm not going to get into bookings for each one of the submarkets that would get us into a level of detail that probably is not helpful overall. I'll just keep it at the total Aerospace and Defense level for you and keep it there. Bennett Moore: All right. I guess as we think about the fiscal '26 guidance then and the revision towards the high end, what were the prior assumptions around when the structural activity would resume? And how has that changed now? Or is that really just what's reflected in this new guidance? Tony Thene: Well, I mean, the guidance is the same. We've just said we're very open about what we're feeling right now and saying that we see it at the high end, right? So we're always adjusting our forecast based on what we're hearing from our customers. And the takeaway there is that you're seeing, as I think I said in my prepared remarks, a higher degree of positivity coming from them. So based on that, we have line of sight that we'll be on the higher side of that guidance. But it's all based on what we're hearing from the market and from -- directly from our customers. Bennett Moore: All right. And then if I could real quick, are you seeing any acceleration in the incremental value being realized in these LTA renewals? Or is kind of the repricing similar to what we saw initially post-COVID? Tony Thene: Tough question only because it really depends on the submarket that you're in, Bennett. I would tell you at a high level that you are seeing continued increased percentages, not always the same for each submarket, if that makes sense. Operator: And it looks like there are no further questions. So I will now hand it back over to John Huyette for closing remarks. John? John Huyette: Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2026 first quarter conference call. Have a great rest of your day. Operator: And ladies and gentlemen, that -- again, that concludes today's call. Thank you for joining, and you may now disconnect.
Operator: Welcome, everyone, to Telia Company's Q3 2025 Results Presentation. And with that, I will now hand it over to Telia Company's Head of Investor Relations, Erik Strandin Pers. Please go ahead. The floor is yours. Erik Pers Berglund: Thank you, Jen. Welcome, everyone, to the call. We have our CEO, Patrik Hofbauer; and our CFO, Eric Hageman, in the room, and I hand over the word to Patrik. Please go ahead. Patrik Hofbauer: Thank you, Erik, and good morning. Q3 was, in many ways, an important quarter as it confirms that we are doing the right things for our customers. Our group-wide NPS, so Net Promoter Score, continued to improve and has trended positively all quarters this year. Telia Sweden again won a clear majority of awards in the customer satisfaction survey by SKI. And in both Finland and Norway, we had strong outcomes in the EPSI surveys on our customer satisfaction. We also continue to deliver on the value creation plan that we laid out in Q3 last year with EBITDA growth supported by profitable growth in service revenues as well as cost efficiencies. This helped drive an increase in free cash flow, which again more than covered our SEK 2 billion dividend for the quarter. And as we talked about already 3 months ago, it was an eventful M&A quarter. The closing of TV and Media transaction strengthened our balance sheet further. In July, we also signed a memorandum of understanding with our partner in Latvia, and we are now working hard to ensure that both parties fulfill the commitment to sign a share purchase agreement before year-end. We have also launched a formal offer to buy Bredband2, which will strengthen our consumer business in Sweden. And finally, we are upgrading our full year outlook for the free cash flow to around SEK 8 billion from SEK 7.5 billion before, reflecting, among other things, strong CapEx discipline. And we are also now changing our full year outlook for booked CapEx from SEK 14 billion to around SEK 13 billion. Now let's go into the financial highlights. Service revenue growth continued to be good in Sweden and the Baltics, but partly offset by decline in Norway, meaning overall growth of 1%. EBITDA growth of 4.4% was as expected, a bit below the ambition for the full year, but not too much, and with both Sweden and Finland continued to perform well. CapEx continued to be well below our SEK 14 billion limit. And even though we expect a seasonal pickup in Q4, we are already comfortable -- we are very comfortable, sorry, to lower the full year outlook to around SEK 13 billion. Free cash flow will continue to be strong, driven by higher EBITDA, lower interest payments and positive working capital movements. This, together with growth in EBITDA and proceeds from the TV and Media divestment resulted in a lower leverage, and we ended the quarter at 1.93x. Moving now to Sweden that is performing well on customer metrics. We had a strong outcome in the 2025 SKI survey. For example, Telia won the award for most satisfied enterprise mobile customers. And in consumer, Telia again had the happiest customers among the mobile main brands and fellow came out well among sub-brands. Telia's TV service also had the most satisfied TV customers. More importantly, new customers signing up across mobile, broadband and TV, as you can see here, the broadband intake stands out as it actually is a result of 2 good quarters rather than one since around 10,000 new customers in Q2 were registered in Q3. The late registration was related to our transition into a new system. In Enterprise, we signed a long-term partnership with Sweden's largest train operator, SJ, to deliver high-quality communication for the entire train fleet. Financially, Sweden is well on track to reach the full year plan with service revenue growth at 2%, driven mainly by broadband and TV. As a reminder, revenue growth on a quarterly basis is affected by project-based revenues, which is lumpier than subscription-based revenues. In Q4, we expect more project-based revenues than we had in Q3. And EBITDA growth was again strong on the back of profitable growth and cost savings driven by the Change Program. Let's now move east to Finland. That came out as the #1 in the EPSI's survey on customer satisfaction in both Consumer and Enterprise. This is promising and shows that we have good foundation in Finland to build on. Mobile net adds improved, and we did not lose any mobile handset customer this quarter. The net loss was due to mobile broadband, where the market is declining. Our SME base grew as did the number of consumer handset customers for the first time in a very, very long time. ARPU grew at the same time by 4%. On fiber, we are also adding customers not least from being a service provider in our Valokuitunen JV network. Financially, we saw a slight improvement in service revenue trends with growth in Consumer and a decline in Enterprise, driven in part by our choices to discontinue noncore activities and in part by a weak market. And finally, the strong execution of the Change Program continued to give tangible savings and resulted in EBITDA growth at high single digits with a margin climbing to 34.6% versus 32.5% one year ago. So in summary, we are making progress on all 3 of our midterm ambitions for Finland that we presented 1 year ago, stabilization of the mobile market share, improvement in SME and improved profitability. Now moving west to Norway, which is, as expected, saw another challenging quarter with both service revenue and EBITDA growth clearly in negative territory due to lower mobile wholesale revenue and headwinds in the broadband and TV. Like for Sweden and Finland, Norway came out well in customer satisfaction surveys with Phonero winning the EPSI survey for the fourth consecutive year in the B2B category. We expect to have reached the low point when it comes to service revenue, although not yet when it comes to EBITDA because of the timing of OpEx. So EBITDA decline in Q4 is currently expected to remain similar to the levels we have seen in Q2 and Q3. The reason for headwinds in Norway are well known, and the mobile wholesale decline is expected to be around SEK 95 million in the fourth quarter. The other part, a weak performance in our fixed business is something we are addressing very actively. And on the next slide, I want to share some more information about this development. So we have now launched a new value proposition in all segments, modernized our TV platform, modernized our installed base of CPEs, signed future-proof new content agreements and created a dedicated organization for fixed consumer services. Network quality has improved. And as you saw, we added TV and broadband customers in this quarter. At our investor update 1 year ago, we talked about our backbone of our network being already fully fiberized and around 50% of our broadband customers were on fiber or fixed wireless access connections. Today, the share is around 55%. And as we have said before, this is too slow. And from next year, we will see a clear acceleration in the coax to fiber upgrades, in line with the commitment we made last year to invest more. This will be done within our existing CapEx frame. Now moving on to Lithuania, which had a solid quarter with healthy service revenue growth supported by both mobile and fixed, something that together with continued efficiencies resulted in an EBITDA growth of 9% and EBITDA minus CapEx that remained at a record high level of SEK 1.6 billion on a rolling 12-month basis. At the end of the quarter, Lithuania successfully launched Telia Safe, a security add-on, and it's also completed an IT transformation within B2C, 2 achievements which will help our growth journey going forward. Now let's move to Estonia. That saw both service revenue and EBITDA growth accelerating following great momentum in especially the public sector and good work on generating efficiencies. And like for Lithuania, cash conversion remained at record levels. And with that, I hand over to Eric before I come back to summarize the quarter. Eric Hageman: Thank you, Patrik. Let me now go through the financial development of the quarter, starting as usual with service revenue and EBITDA. In the quarter, service revenue growth remained at 1% as stable or improved performance in Sweden, Finland and the Baltics was offset by pressure in Norway, predominantly driven by lower wholesale revenue. In Finland, we also continue to simplify our product portfolio, and we are now getting close to the end of the ramp down of the e-invoicing business. Year-to-date, we are at 1.3% service revenue growth. And looking into the last quarter of 2025, we expect an improvement related to pricing, growth in Enterprise and public sector contracts and less revenue decline in Norway. Moving to EBITDA. Growth in Q3 was somewhat below the 5% ambition for the year as we flagged 3 months ago, with all markets except Norway growing on the back of higher service revenue growth and efficiencies created by the Change Program. We're also encouraged to see that our EBITDA margin was 140 basis points higher than in the same quarter last year, in line with our margin expansion promise at the investor update September last year. As mentioned, we expect improvement in service revenue growth in Q4. For EBITDA, we currently expect growth in Q4 to be approximately similar to the growth rate we saw in Q3, penciling in a modest increase in sales and marketing costs, both in Norway and Finland. Moving now to OpEx and CapEx. As we can see on the left-hand side of this page, continued cost discipline and the positive impact of our Change Program continues to drive down resource costs. Our operating expenses declined by 2.9%. This more than compensated for an increased level of marketing spend across the Nordic markets as well as higher pricing from IT vendors. OpEx as a percentage of service revenue continued to trend down this quarter, this time by 120 basis points to 28.4%. We increasingly managed to do more with less and have only just started on this journey to become more efficient. We also remain very committed to being disciplined on our capital expenditures. As you can see from the middle graph, we ended the quarter with CapEx of SEK 12.5 billion on a 12-month rolling basis, more than SEK 2 billion less than 24 months ago. This shows how being focused and having clear priorities can be translated into better capital efficiencies. CapEx spend is expected to increase somewhat in the last quarter of the year, in line with normal telco seasonality. But overall, we don't expect the current run rate to change much, which is why we today lowered our expectations for the full year to around SEK 13 billion. Finally, as you can see on the right-hand side, growing EBITDA and lowering CapEx resulted in EBITDA minus CapEx comfortably above the SEK 19 billion on a 12-month basis. This equals a step-up of 9% versus a year ago and also resulted in a much improved cash conversion, which is now 61% on a rolling 12-month basis, up from 58% a year ago. Let's now have a look at the free cash flow for the quarter. Free cash flow improved by SEK 1.5 billion compared to the corresponding quarter last year. And as for several quarters now, the key building block is our profitable growth. Cash CapEx increased by SEK 300 million, which was driven by phasing in payments and a rebalancing of the vendor financing program, the latter, however, having an equal positive contribution to working capital. Interest payments declined by SEK 300 million due to lower debt and partly also because last year's number was rather unusual high due to phasing of interest between Q2 and Q3. Working capital was, as you can see, marginally positive, which was a significant improvement versus last year as the number then was impacted by the rightsizing we did of our vendor financing program. Finally, we saw a SEK 200 million higher outflow of minority dividends in Q3 related to a catch-up dividend paid to our co-owner of our mobile business in Latvia. Overall, with SEK 6.9 billion free cash flow delivered in the first 9 months of the year and the clear belief that the cash flow generation will remain strong also in Q4, we raised the outlook today for the full year from around SEK 7.5 billion to now around SEK 8 billion. Let's now briefly look at our net debt and leverage development. As you can see on the right-hand side, our net debt decreased by SEK 7.1 billion in the quarter as free cash flow more than covered our quarterly dividend payment, and we also received the proceeds from the divestment of TV and Media. The combination of lower debt and growing EBITDA reduced leverage to 1.93x compared to 2.09x at the end of last quarter. Looking at the longer-term trend on the bottom of the left of this page, we can clearly see that leverage has come down over the last 2 years as we have grown EBITDA and used the cash proceeds from our divestments to improve our balance sheet. This now puts us in a very good position to further strengthen our business, like, for example, the last quarter, we announced SEK 3 billion acquisition of Bredband2 in Sweden. The phase 2 investigation of Bredband2 has now started. And as said before, we expect to close the transaction in Q1 next year. Finally, before I hand over to Patrik, I would like to say a few words on some of the milestones we have achieved in the third quarter and how that resonates with our value creation agenda laid out at the investor update about a year ago. As you may remember, we laid out a clear agenda at the investor update on how we aim to create shareholder value. And I believe we continue to make good progress on it. Firstly, free cash flow has covered our dividends for the first 9 months of the year. And as you have seen in our updated outlook, we expect that also to be the case for the full year. 2025 is the first time in quite a number of years where our free cash flow generation covers our dividend commitment without the recourse to growing vendor financing. Largely, this free cash flow uplift is driven by our profitable growth trajectory and CapEx discipline, the latter which we also upgraded today. Secondly, on active portfolio management, we closed the TV and Media transaction this quarter and are making a bolt-on acquisition to further strengthen our core business in Sweden, while we are working hard on securing the full exit for Latvia. Thirdly, our balance sheet continues to strengthen. Liquidity is strong. And after closing the TV and Media divestment, we are below the 2 to 2.5x net debt-to-EBITDA range. Fourthly, we paid another quarterly dividend to our shareholders, and we remain committed to deliver on a progressive dividend policy. And finally, at the CMD last year, we set out a plan to return to an all-in free cash flow covering our dividend commitment. Our free cash flow guidance upgrade today means we will be covering the dividend despite the absence of the free cash flow from our TV and Media business. See this as another proof point that we are very serious about delivering on our commitment to shareholders. With that, I hand back to you, Patrik. Patrik Hofbauer: Thank you, Eric. Before I summarize the quarter, I want to reflect on what has taken place since we launched our change program last year and how we are taking steps toward a simpler, faster and more efficient Telia. The number of employees and resource consultants in Telia is now almost 25% fewer than it was in the start -- or at the start of 2024 after our Change Program and the exit from TV and Media. Central resources are down by half. We also have half as many products and half as many IT systems managed centrally compared to the start of last year. Many have been moved and are now managed by the country organizations who are closer to the customers and some have been closed down. We are encouraged by the results so far. Network incidents have continued to become fewer and so has incoming calls from customers who are contacting us with issues and questions. This means both better customer satisfaction and material monetary savings. Meanwhile, employee engagement is up and our people see that barriers to execution are being removed, collaboration and decision-making is improving and of course, EBITDA growth has improved. This is a promising start of first few steps, but we intend to do more on all parts of our agenda. We can still become much simpler, faster and more efficient than we are today. And then on the summary of the quarter, which was overall in line with our own internal expectations, we continued a healthy group EBITDA development, supported by profitable growth and efficiencies from the Change Program. And we continue to see clear signs that customers appreciate our high-quality services and see the benefit from how those improve their everyday lives. We continue to execute on our agenda, and we can now upgrade our free cash flow from outlook to fully cover our dividend, as Eric said, which is a key milestone for us. And with that, I will open up for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Owen McGiveron with Bank of America. Owen McGiveron: It's Owen McGiveron from Bank of America. So on your upgraded guidance, how should we think about 2026 and 2027 CapEx within the frame of your medium-term ambitions? Should we expect similar levels versus 2025 or more moderation? And how does the additional investment in Norway play into this? Just wanted a few more details on the moving parts. Patrik Hofbauer: I can start. It's Patrik here. First of all, we are not guiding yet on '26 and '27. We will come back to that in January. But I can say we have worked hard and actively to improve, I would say, the discipline when it comes to cost and also how we use the capital. That discipline will not be less next year or the coming year. So we continue to see how we can use the capital much more efficient than we are today, and that will continue. But we will come back in January with the guidance or update or whatever in January -- in that call. So Eric, do you want to add something? Eric Hageman: Yes. I mean that would -- just my simple observation that it doesn't change so much from one moment to the next. And with regards to Norway, it's part of that. So the slide that Patrik talked about where we say we want to accelerate the rollout of fiber. That part is at the SEK 1 billion that we already talked about in the investor update last year. Part of that money is being invested this year. Part of it will be invested in the coming couple of years, but it's firmly part of that CapEx guidance that we have just talked about. Operator: Our next question comes from Andreas Joelsson with DNB Carnegie. Andreas Joelsson: Just to follow up on your comment on further efficiency gains. Could you perhaps describe how you view the cost base currently and what else you can do? From the last slide, it seems like you have been able to do this Change Program without any basic negative effects. So are you encouraged to do more? Do you think you can do more on the cost side in order to get these efficiency gains? Blurry question, but I hope you understand. Patrik Hofbauer: Andreas, I understand your question very well. It was not blurry at all. So first of all, the Change Program went obviously very well. We have delivered on basically all parameters, and we see that the operations is really much more stable, which we had, of course, the concerns about when we do this big change that we did last year. But so far, everything is running very well. Then remember, last year, we had this investor update, we gave out a 3-year plan with a CAGR on service revenues around 2%, EBITDA at 4% and then a free cash flow above SEK 10 billion in -- or at least SEK 10 billion in 2027. And that requires to continuously work with efficiency to deliver on that plan. And we are fully committed to deliver on the plan that we have put in place, which means that we will actively, of course, to improve the operations from year-to-year. So I think that is a clear answer on your question where we are heading. Well, I hope at least. Andreas Joelsson: Yes, absolutely. Less blurrier than the question. Patrik Hofbauer: Thank you. Operator: Our next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: So I have a question each on Finland and Norway, which are 2 of the areas where investors had a bit less certainty recently. Just on Finland, there's some improving -- slightly improving service revenue growth trend today and also sub-trends. Could you just talk about how you're achieving that? And also how you're thinking about the balance of not disrupting the market too much, given we've had one of your competitors basically disappointed fairly materially on their mobile service revenue growth outlook in the near term. Just comments around kind of how you're improving and how you don't disrupt the market too much would be helpful. And then secondly, on Norway, there are quite a few tailwinds or easier comps as we go into Q4. One of the ones that's harder for us to judge is the price rises that have been put through in Norway in September. I wonder if you could just talk about how you see the competitive environment and price rises boosting growth from Q4 onwards. Patrik Hofbauer: Andrew, thanks for the questions. I can start with Finland. I think, Eric, you can take Norway then, so we divide a little bit here. Starting off with Finland first. I mean, the most important part is actually the customer satisfaction, which we have been invested quite heavily in. So we have upgraded our network and then several activities that we're now seeing is paying off. Then on top, we also had some good execution here, especially in the consumer side to turn these trends around. And we are not at all disrupting the market. I don't know what that is coming from. We are very disciplined, but we have good offers in the market together with a good network and good services overall. And then we have also a consumer operation that is more efficient every day. And remember, we have said clearly that we are accepted to lose market shares in Finland for too many years now. And we said clearly, we want to stabilize that, and that is what we're doing. So we see good development in Finland when it comes to the consumer business. Still, we have a lot more to do. And then also on the SME side, on the small and medium enterprise segment, where we have a clear underrepresentation versus our total market share, where we are focused on and having good also development on. So I think this is not -- I think it's a healthy operation. We are improving, and we will continue to improve during 2026 as well actually to defend and stabilize our market share. That's actually what we're doing. So I think good done by the whole team in Finland. Eric Hageman: Yes. With regards to Norway, so very encouraged by preliminary results of those price rises. Obviously, the market is, as per your Finland question, is never to disrupt, but certainly to defend our position. So let's see what that does to our churn numbers. I think the main thing when it comes to Norway is, as we said last quarter, it will take some time for this to turn around. One, we haven't quite lapsed the wholesale loss, that ICE revenue was an impact of SEK 150 million on our revenue in the quarter. So we're working on that. We've made some management changes in the organization. We're fixing fixed, as Patrik just talked to in this slide, and that will take a bit of time. So we guided again for what is likely to be another soft EBITDA quarter for Norway, but hopefully slightly better on the service revenue because they are slightly easier comps. Operator: Our next question comes from Fredrik Lithell with SHAB. Fredrik Lithell: I have two of them. You have, on earlier calls, talked about that service revenue should be a bit slower, both in Q2 and Q3 and then to reaccelerate a little bit in Q4. And I think, Eric, you alluded to that in your part of the presentation. If you could sort of stack up and rank the important part for the improved service revenue growth in Q4, that would be interesting to hear. And then also the CapEx, the lower CapEx from SEK 14 billion to SEK 13 billion on a booked level versus your raised free cash flow of SEK 1 billion down and SEK 0.5 billion up. Could you sort of walk us through a little bit what movements you have that support your free cash flow raised guidance would be interesting. Patrik Hofbauer: I can start with a comment on the service revenue. And right, you said that we said that Q2 and Q3 will be a bit softer, but then we'll see an improved situation in Q4. And we do expect better growth in Q4 than in Q3 with especially Sweden to continue to look solid, and we expect more project-based revenues to step up here in Q4, and that is the main reason. Erik Pers Berglund: It's mission-critical, as I said a few times. Eric Hageman: Yes, on CapEx, it's very simple. We sort of never felt we're going to do the SEK 14 billion, right, when we guided for less. We're very happy with the progress that we've made as an organization on a profitable growth, which ultimately drives our free cash flow growth. And then when you go through 9 months of the year, where you then feel is this the moment where we have that visibility. It's pretty clear when you do almost SEK 7 billion of free cash flow that an upgrade was necessary. And on the CapEx, yes, we have good visibility for where we will land for the year and also where that will trend going forward as per the first question we got. So very happy with how that goes through. And yes, let's see where we land for the full year when it comes to free cash flow. Patrik Hofbauer: If I may add a clarification, Fredrik. We never plan to invest SEK 14 billion. It was always below, right? So it's not a SEK 1 billion downgrade as such, but yes. Operator: Our next question comes from Erik Lindholm with SEB. Erik Lindholm-Rojestal: So maybe a follow-up to Andreas' very clearly worded question. Just thinking of the current trends here, it looks like you will exit the year at about 4.5% perhaps EBITDA growth rate approximately and the comparisons seem to get a lot tougher from Q1 and onwards. I'm just thinking of the outlook here for '26 and beyond. I mean, do you think you need to clearly accelerate cost savings to reach your targeted EBITDA CAGR of 4% between '25 and '27? Patrik Hofbauer: I think the answer will be pretty much in line with Andreas' question. So we -- I mean, when we set the plan, the 3-year plan of the 2% and the 4% then related to EBITDA, as you know, we were clear on that, okay, this is a rightsizing that we did with Project Sprint. It was an internal name on it that we did last year, the minus 3,000, and we executed on them. And then we need to continue to take out cost, and that will be in every aspect and every area of the cost base. So this is work ongoing. So I don't -- and I don't want to be more specific on how we'll do that, but we will show you quarter-by-quarter that we are able to take out cost to defend because we want to -- we are fully committed again to deliver on the 4% CAGR growth on EBITDA. Then we need to -- because that's a combination of service revenue growth and cost out to be more efficient. Eric Hageman: Yes. Maybe to add from my perspective is, as time goes on, now having done 9 months, SEK 7 billion of free cash flow, the upgrade that you've seen, it gives us more confidence as a management team that we are on the right path to deliver what we promised, not just the 2% service revenue and the 4% EBITDA in the coming years, but also the free cash flow that we've promised for 2027 of at least SEK 10 billion, right? The combination of profitable growth, good CapEx discipline leads to better free cash flow. The visibility that we have gives us confidence that we're on the right path to deliver on that promise of SEK 10 billion plus by 2027. Operator: Our next question comes from Maurice Patrick with Barclays. Maurice Patrick: For me, just a question on Sweden, please. So yesterday, it was interesting to hear Tele2 talking strongly about the increase in pricing or cost of the open fiber networks, the dissatisfaction about delays on regulation. Just curious for your insights in terms of these kind of key trends, the increase in wholesale pricing on open networks, upcoming regulatory changes and delays and how that impacts you. I was intrigued that Tele2 sort of talked about how they were going to push fixed wireless access more, which sounds probably more like grabbing headlines than reality. But again, curious for your insights in terms of how you see that in the context also of you delivering a pretty solid broadband number this quarter and last. Patrik Hofbauer: Yes. I mean, coming back then to the access cost for local networks. I mean, we have seen the high cost for the local networks access for several years. It's nothing new. So -- and that is driven basically by ourselves growing service provider in these local networks and then also higher access prices. So we haven't seen any recently that increase. This has been going on for a while. So I don't know exactly what happened there. And so yes, and also on our own networks, we have made very modest increase in our [indiscernible] business, a couple of percentage points only. So I'm not -- I don't recognize really the whole situation from a new thing. This has been going on for many years. So that, yes, around regulation... Erik Pers Berglund: Yes, regulation has been postponed as you know again -- so we'll see what happens when we eventually get there. But I think you're right, that's probably what brought the topic up this quarter. Eric Hageman: But maybe overall on Sweden, we are incredibly happy with the performance there. As you saw, very good service revenue growth, perspective of even more service revenue in Q4, as we indicated, very strong cost control leading to good EBITDA growth. So yes, we hear what others are saying, but we are very happy with our developments in the Swedish market. Erik Pers Berglund: And I think you also mentioned the broadband intake, Maurice. It's a good work over a couple of quarters. As we mentioned, this is some delayed registrations from last quarter as well. Good anti-churn measures after the price increases we did in the beginning of the year. So that's working. And so overall, we're happy with that. Patrik Hofbauer: And continues to perform -- TV continues to perform well and not a surprise. I mean, we have the best product in the market. And obviously, customers are appreciating it. And for the fourth year now, we have got the best feedback from the customer surveys on TV. So all in all, happy with the performance. And again, remember that we have seen a more household perspective on the consumer market in Sweden rather than looking each for the products because our easiest win here is actually to sell more products to existing customers, and that is actually paying off in the strategy. Operator: Our next question comes from Ajay Soni with JPMorgan. Ajay Soni: My one is just around leverage and shareholder returns. So obviously, you're below your target at the moment. We have some acquisitions coming maybe in the next few months. But it feels like you'll still end up below your target range of 2 to 2.5x. Do you see an opportunity to maybe distribute some of the proceeds from the TV and Media sale as buybacks or extraordinary returns? And if so, when would this -- when would you approach this decision with the Board? Eric Hageman: Thank you. Good question. We're very happy with the direction of travel. As a team, we've worked very hard because it's one of the building blocks of the value creation plan is having a healthier balance sheet, one, because we pay less interest than on the debt that we have outstanding, which helps our free cash flow growth, which is the other pillar of our value creation. So that's a benefit from that. Secondly, we are a simpler organization to run based on all these divestments. We're very happy with the progress that we're making. We have that final building block, which is doing, as I said earlier today, coming right on progressively growing dividend, next year is when we'll come back to that. And the beginning of the year is when we will set out our store with regards to the guidance is when we have our conversations with the Board. So we will come back to that. Maybe the last point is, we obviously also use our balance sheet to strengthen our business. We've done the announcement of Bredband [indiscernible]. So it's important for us that we have the flexibility to be able to do that as well. So -- but we know it's an important pillar of our value creation plan, and we'll come back to that at the beginning of next year. Operator: Our next question comes from [indiscernible] from BNP Paribas. Unknown Analyst: I had a question, please, on Finland, where you've delivered strong EBITDA improvement over the last sort of 3 to 4 quarters. You're now talking about how you're seeing underlying improvements in your commercial trends as well. Could you maybe share some thoughts on how you see your Finnish profitability evolving over the next couple of years, say? And then just a quick clarification around the Norway CapEx, I'm sorry if I missed this. Does this at all change your thinking around the FY '27 free cash flow target of SEK 10 billion plus? Or is that reflected in this? Patrik Hofbauer: So I can start with the later one with the CapEx. No, it's reflected in the figures and will not impact our 2027 target. So to be super clear, it's in the envelope of that. And then Finland? Eric Hageman: Yes, with Finland, maybe a step back, a big part, and we talked about it today in the voice over as well of the analyst presentation, which is margin expansion was a very important part of what we talked about in the investor update last year for all countries. If you look at the Q3 results, you see that apart from Norway because of the loss of the wholesale contract, but all other countries, you see the margin expansion coming through. And what is that? It is our discipline around the programs of doing more with fewer people, but also the ancillary costs that we have. We have a very, very clear plan, and that underpins that delta between the 2% service revenue and the 4% EBITDA growth that Patrik mentioned earlier in his answer to the first question. That is still very, very high on the agenda. So you should expect more margin expansion, including in a market like Finland in the coming years. Patrik Hofbauer: Can I just add also Finland? And don't -- to build on what Eric said, don't also forget to look into the ARPU development that we have in Finland, which is 4% up on the mobile postpaid, which is also very positive. And that has been driving the agenda to run price increases, but also a better mix in the portfolio. So all these activities are actually paying off at the moment. But we're still a way to go to be where we want to be in Finland, to be clear. Operator: Our next question comes from Keval Khiroya with Deutsche Bank. Keval Khiroya: I've got two questions, please. So at the CMD, you showed a target for mission-critical revenues to more than double from '23 to '27. You've been quite clear on this as a source of support for Q4. But can you comment on how we should think about the mission-critical growth in '26 compared to the growth in '25? It's obviously a bit difficult for us to model. And then secondly, on Norway, you've talked quite clearly about the moving parts. But can you comment on when you actually expect Norway to stabilize EBITDA? Patrik Hofbauer: Yes. I'm not sure I understood the first question on mission critical. But I can give you -- I mean, we have a clear -- I mean, we said it will double rightly, as you said, for the coming years, and we see that it's coming into now to our books and orders and also that's the reason why we will see a comfortable increase in Q4 in Sweden. So that's part of it. And this will continue, but they are a bit more lumpier, these revenues. So we will see it continue in the coming years as well. But we have not been explicit more than say that we will double from where we came from. And we will still stand with that. We are delivering on what we have said and on the expectations. So no surprises coming in. Eric Hageman: Yes. With regard to Norway and sort of the negative EBITDA that we've seen, we've guided already for that for Q4, as you heard earlier today, that will take a couple of quarters. We're still not quite out of the impact of the wholesale revenue. We've seen some increase in energy costs there. We typically have salary inflation in our countries as well that we have to work with. So we do see great opportunities to turn around that business, fixing fixed, making sure we stem the losses we have on mobile. TV is back on after the outage that we had, but it takes us a couple of quarters. So as we said last -- at the half year results, we need a bit of patience before we also, from an EBITDA perspective, turn around this business. Operator: Our next question comes from Viktor Hogberg with Danske Bank. Viktor Högberg: So just a question on the new free cash flow guide. Just a clarification maybe. Given the assumption of SEK 650 million in spectrum CapEx annually included in the guide for this year, would you say that you still expect the real free cash flow that is including the higher spectrum CapEx to still cover the dividend this year as we're getting close to the FY results? Just want to make sure that we're all speaking the same language. That's the first question. Erik Pers Berglund: Thanks, Viktor. It's Erik here at IR. We don't guide for free cash flow, including the real spectrum cost as you might understand, simply because we're not able or allowed to speak about spectrum CapEx ahead of the auction. So we have to stick to the normalized spectrum when we talk about free cash flow guidance. But maybe it's worthwhile to add a comment to that. So SEK 650 million is kind of a rough average for what it's been over a decade. Last year was lower than SEK 650 million. This year, we know it will be higher because we have already the SEK 780 million from the 2023 auction to pay plus, let's see about the SEK 1,800 million in Sweden. Next year, we don't have any big auctions coming up. So it goes up and down. But yes, that's where we are. Viktor Högberg: Okay. Fair enough. On the second question, just another clarification, maybe if you were talking about the group or just Norway on Q4 group EBITDA growth, the trend being in line with Q3. Was that for the group or for Norway, so below 5% that is for Q4. Patrik Hofbauer: So Eric said in his presentation that the EBITDA growth for the group is expected to be roughly the same in Q4 as in Q3. So that's for the group. And for Norway, we expect EBITDA improvement to take a couple of quarters, as Eric said. So we need some more patience for Norway specifically. Operator: Our final question comes from Siyi He with Citigroup. Siyi He: I have two actually. And my first question is on Finland. I mean, the ARPU development is quite encouraging. I'm just wondering if you can share with us how you think about your price increase strategy because I think you so far haven't really followed the security added tariff changes that put through by 2 of your competitors in Finland. And my second question is on service revenue growth in Sweden. And I just want to ask about how we think about 2026 and '27, given that the price is still doing quite well and have lower legacy drags and mission-critical revenues should also come through. Do you think it's fair to assume that the top line trend is next year and year after could be better than what we have witnessed this year so far? Patrik Hofbauer: So I can take the first question on Finland. I'm a bit surprised that we get the question all over and over again regarding the package, the security package. Look back in Finland, we have been driving the price increase raise there and the value creation agenda for many, many years. And remember, our position, we are the #3 mobile operator in the market. And if we look at the ARPU levels, they are very similar to each other. And we should be the challenger in the market, not the responsible leader in the market. So look at our position, I think, we are looking into different ways of driving price increases, i.e., ARPU increases. And we don't need to follow what our competitors are doing all the time. We have our own agenda that we are running and that we're looking into to make sure that we continue to grow and defend the position that we have in the market. And that you will see going forward as well. And I don't want to go into commenting on every package and price, et cetera. So we have our agenda. We are running that. We are #3 in the market. We should be the challenger. We have been too much more -- too responsible as a #3 player and acting like we were the incumbent almost in Finland or the leader. So I think we are well positioned. We have done a good quarter and good improvement during the year, and that will continue. I expect that will continue in the next year as well. Erik Pers Berglund: And to add a little bit, I think that our main way to drive ARPU is probably not that different from the competition. We look at the subscriber base cohort by cohort as certain cohorts exit a certain tariff or contract, then we can move them up to a higher value, higher price level, and that's how you work through the subscriber base with different prices. And that's giving the results. You can see there. I think the 4% is roughly in line with the competition. So even though we don't do exactly the same thing on security add-ons. Eric Hageman: Yes. With regards to Sweden or specifically service revenue in Sweden, very encouraged by what we saw in Q3, the first 9 months performance and what we're expecting for the full year. A little bit like our answer on CapEx, that's not something that changes overnight, right, when you have certain momentum. And clearly, we're guiding for a stronger Q4, driven by what we're doing in mission-critical, particularly, but also just the underlying business in broadband, in TV, the convergence play is really working well for us. And on top of that, some price increases. So we expect that momentum to continue. Said in a slightly different way, if you think about a medium-term guidance, the 2% and the 4%, that would not be possible without Sweden delivering that, right, because it's roughly half of our business. So again, we feel comfortable with that medium-term guidance, and we're very encouraged by the performance that we're seeing in Sweden. Operator: There are no further questions. Erik Pers Berglund: All right. Thank you very much, everybody, for calling in. Many good questions, and we look forward to continuing the discussions over the next quarter. Thank you, and goodbye.
Unknown Executive: Good morning, and welcome to TGS Q3 2025 presentation. My name is Bård Stenberg, Vice President, Investor Relations and Business Intelligence in TGS. Today's presentation will be given by CEO, Kristian Johansen; and CFO, Sven Børre Larsen. Before we start, I would like to draw your attention to the cautionary statement showing on the screen and available in today's earnings release and presentation. For those of you on the webcast, you can start typing in questions during the presentation, and we will address those after management's concluding remarks. So with that, I give the word to you, Kristian. Kristian Johansen: Thank you, Bård, and welcome, everyone. So I'll start with the Q3 highlights. And before I go through the numbers, I just want to say I'm very pleased that we have a solid recovery after a very weak Q2, and I want to thank all our employees for pursuing sales opportunities aggressively in a challenging market and at the same time, being extremely focused on our cost base, which you will see from the numbers that we have a solid beat on EBITDA and EBIT due to lower cost in the quarter. So starting with the numbers on the top line, we had revenues of $388 million. That compares to $308 million in the second quarter of this year. So sequentially, that's a 26% increase. As I said, our EBITDA was strong at $242 million. That's a 62% profit margin and again, driven by a very strong cost focus of the organization. We had a Q3 EBIT of $105 million. So it's the first time in several quarters that we're over $100 million in EBIT, and that represents a 27% profit margin. We had an order inflow of $436 million, and that takes our total order backlog up to $479 million -- sorry, total order backlog of $473 million at the end of Q3. Our cash flow was strong, and that means that with a free cash flow of $81 million and $30 million dividend payment, we managed to reduce our net debt from $432 million or down to $432 million, and this compares to $479 million in Q2 of 2025. We're maintaining our dividend of $0.155 per share, and we have also adjusted our CapEx guidance down. So that's been reduced to $110 million versus previously $135 million. So overall, strong numbers and strong -- slightly stronger than we expected for Q3, which is always good after, as I said, a very disappointing Q2. On the business update, and I'm not going to cover all the projects that we had in the quarter, but what you can see here is that Q3 is usually dominated by a strong North Sea season. So we have almost half of our assets working in the North Sea during the summer season and into Q3. You see we had 2 vessels in Brazil, and we're probably going to keep vessels in Brazil for the time being due to strong interest for data acquisition and even our existing data library. We also have OBN operations, so 2 OBN operations in the U.S. Gulf. And then you see we have 1 vessel in Egypt and 1 vessel in India during Q3 of 2025. I'll also cover the business units. So starting with multi-client. We had multi-client sales of $226 million in the quarter that compares to $277 million in Q3 of 2024. And the difference there is pretty much explained by higher transfer fees in Q3 that we -- in last year than we had in Q3 this year. Multi-client investments of $86 million this quarter compared to $129 million in the same quarter of last year. And again, that corresponds to a sales to investment for the last 12 months of 2.1. That's similar to what we had last year. But again, it's above the historical average of about 1.9. So very pleased about continued strong sales investments of our multi-client data. In terms of new awards and key projects that we were executing in Q3, we had PAMA Phase II offshore Brazil. This is a streamer survey in the Equatorial margin area. And then we had another project in the same area called Megabar Extension Phase I. And it was a pleasure for us and for TGS, Petrobras and Brazil to see that Petrobras finally got environmental approval to start drilling in this area. And this is an area where TGS has been acquiring lots of data over the past 12 to 18 months. So again, extremely excited to see that things are moving on. And for those of you who remember the last lease sale in Brazil, you also saw companies such as Chevron and Exxon picking up blocks in that area. So this is a --probably one of the last frontiers and one of the most exciting frontiers in Brazil for sure. So great interest from clients on both surveys that we've been carrying out for, yes, over the past 18 months. Then last but not least, we had a project called Amendment West 1 in the Gulf of America in the quarter. So this is an ultra-long offset OBN survey over legacy streamer data, and this is a TGS-only project with no partners. If we move on to the historical multi-client performance, just to put the quarter in the perspective, and this looks at -- last 12-month sale is a light blue and then dark blue is investments. And then the line there, the gray line is last 12 months sales over investments. And you see it's coming up from about 1.9 in the previous quarter to about 2.1 now. So really where we want to be in terms of profitability of our multi-client business, which historically has been yielding returns of somewhere between 1.9 and 2.0. Our internal goal when we start a new multi-client project is always around 2. Marine Data acquisition, relatively weak quarter as we expected, and we guided the market after Q2 that Q3 would be relatively low in terms of activity level, and then we came in slightly above what we expected. We had contract revenues for OBN of $87 million versus $127 million last year. Our streamer contract revenues in the quarter were $127 million, and we had total gross revenues of $215 million. And as you see, a strong EBITDA margin of about 36% for our assets in Q3. In terms of new awards and key projects executed during the quarter, we had -- we were awarded a streamer contract in the Mediterranean, as you all know, commenced acquisition of that in Q3. And then we have secured a large streamer contract offshore Indonesia in the quarter, and this is scheduled to start in Q4, has a duration of 8 months. It's a big contract. And again, it's mostly 3D, but the last month of the 8 months is going to be a 4D over some existing production. We've also been awarded a streamer acquisition contract in Africa. So this is a Q4 start, and it has a duration of about 50 days with some options to extend. And then we have an OBN contract in the Gulf of America. This is also due to commence in Q4, and it has a duration of 4.5 months, a quite large contract for our OBN crew in the Gulf of America. In terms of our new Energy Solutions business, we had contract revenues of $18 million. It's up from $16 million in the same quarter of last year. Multi-client revenues of $5 million versus $3 million last year. So total revenues of $23 million, which is up from $19 million in Q3 of 2024. And again, as with the other business units, a stronger EBITDA margin year-on-year as compared to Q3 of 2024. We've been awarded a UHR-3D contract offshore Norway. This commenced acquisition in early July, and we were acquiring that data going into Q3. We acquired also a CCS contract offshore Norway. And then we continue our collaboration with Equinor through our --subsidiary, Prediktor through something called Prediktor Data Gateway solution, and this is delivered to Equinor's Empire Wind Project. Also happy to see that Imaging & Technology continues a strong growth with good margins. So on the gross imaging revenues, we're $32 million versus $26 million last year. But if you look at the external imaging revenues, they are about $20 million. So it's a doubling of revenues compared to last year. And you've seen that we've been on that kind of growth track for quite some time. We have a -- yes, $20 million this quarter. We're going to be slightly short of $80 million for the year. And again, next year, our goal is for imaging to be above $100 million in external revenues with strong EBITDA margins. So we continue to take market share in the Imaging & Technology space. And part of that -- part of the reason for that is a strong strategic focus on the external market. TGS used to be more focused on the internal market and processing of multi-client projects. But now we made a strategic choice that we're going to go after the external imaging market, and you see the results of that with significant growth and good margins. We see a significant reduction of HPC costs from added scale. So TGS is a big customer of the big cloud compute providers such as Google, AWS, et cetera. And we see obviously great benefits and synergies from the combination of TGS and PGS in that regard. So again, as I said, we expect continued growth in external imaging revenues, and you've already seen a substantial margin improvement on the imaging side. With that, I'm going to hand it over to Sven Børre, and then I will be back talking about the outlook shortly. Thank you very much. Sven Larsen: Thank you, Kristian. Good morning, everyone. It's always a pleasure to report strong financial numbers. So although the revenue numbers are not that strong in a historical perspective, highlighting the upside potential in the longer term, they are quite strong in a relative perspective and relative to where we've been in -- particularly in Q2, of course. But more importantly, we have a very strong performance on all other parameters, including cost and cash flow parameters. So we are very, very pleased about that. So let me take you quickly through the numbers. On the revenue side, we came in at $388 million. That consisted of $217 million of multi-client revenues and $171 million of contract revenues. The multi-client revenues were particularly strong in the quarter, mainly driven by strong sales from the Vintage library. The prefunding of new projects were actually lower this quarter than we have seen in some of the previous quarters. So library sales, very strong in the quarter. Then going to net operating expenses. I'll come -- go into more detail on that on a later page here. So let me just mention that the net operating expenses were $147 million versus $221 million in the same quarter of last year. So a significant reduction there, of course. Depreciation and amortization. Depreciation, $61 million continues to be reasonably stable, around plus/minus $60 million, as you can see on a quarterly basis. Amortization was quite low in the quarter. The straight-line amortization is stable, whereas the accelerated amortization is quite low in the quarter. That's partially explained by the lower prefunding rate, as I talked about, but I'll -- and also, of course, explained by the mix of the different types of projects that we have in the portfolio right now. This gave us an EBIT of $105 million in this quarter, corresponding to an EBIT margin of 27%, slightly ahead of the operating result in the same quarter of last year despite having significantly higher revenues last year. Then as I promised, I'll go -- in more detail through the cost base and how the cost has developed during the quarter and how it is likely to develop going forward. On the chart here on the left-hand side, you see Q3 specifically, this Q3 compared to the Q3 of 2024. So as you can see on the left-hand bar in both those 2 charts, you see the gross operating expenses. And you can see it's at $217 million is significantly down compared to the $289 million we had last year. It's -- the decline is particularly visible, obviously, on cost of sales. And it has to do with several factors. First of all, of course, we have gone through, as we have talked about in previous presentations as well, we've gone through quite a bit of efficiency -- efficiency projects internally. We have realized a lot of cost synergies, of course. And also, after the integration project has been more or less completed, we have continued to look at different efficiency gains, and we've been quite successful in that. But I also have to admit it's also, of course, partially related to lower activity, particularly on the OBN side, where utilization of the crews that we got is a bit lower in this Q3 relative to the Q3 of last year. And finally, there is also some, call it, nonrecurring items in the quarter, which reduced the cost of sales by a little bit more than $10 million. It's probably-- it's not genuinely nonrecurring items. They are nonrecurring in this quarter, but it's -- most of it is a reversal of costs that have been expensed previously. So over time, it's not a nonrecurring cost, but in this particular quarter, it is nonrecurring. And as you can see, if you compare to the same parameters of last year, we are significantly down even when adjusting for the one-off costs we had related to the merger integration process in last year. So you see that last year, we had $162 million of cost of sales. There were no merger integration costs in that number. On personnel cost, we had $95 million, where we had $11 million approximately of merger integration-related costs. So the underlying costs in that quarter were $84 million, still well -- still well above the $69 million we have in this quarter. And on other operating costs, we had approximately $5 million of -- or $6 million of merger integration-related costs. So the underlying cost there was $25 million in the previous quarter. So we're actually a little bit up this quarter compared to last quarter on an underlying basis, and that has to do with compute. We are using more high-performance compute resources now than we did last year. And that obviously has to do with higher imaging activity and more use of AI and machine learning and algorithms that require more high-performance computing, and that's an -- a deliberate development, of course. If you look at the right-hand chart or the right-hand side of the page, you see a chart showing the cost development on a last 12-month basis over time here. And as you can see, the last 12 months as of end of Q3, we had $982 million of gross cost. Our guidance remains firm at -- around $950 million for the year as a whole. So you see the trend there. We have come significantly down, and we expect to come further down in -- when we report Q3 -- Q4. In fact, we -- if anything, we expect to be below $950 million and not above. So we're quite happy with the development on the cost side, and you can also see the evolution of our guidance through the year on the right-hand side of the chart there with the dark bar where we have -- where we're down basically $100 million relative to the original gross cost guidance. So we have done a lot on the cost side, which is obviously helping us quite a bit in terms of delivering a strong EBITDA in this quarter. Looking at the profit and loss statement, we had $388 million of total revenues consisting of $217 million of multi-client revenues and $171 million of contract revenues. I've talked about cost of sales, personnel costs and other operating costs, which already. This gave us an EBITDA of $242 million compared to $280 million in the same quarter of last year. Straight-line amortization was $60.5 million, where its roughly where it has been on the --on the previous quarters. As I mentioned, accelerated amortization, quite low this quarter related to the mix of projects we were doing and a lower prefunding rate. We had a small impairment on one of the multiclient projects that we do. That's not uncommon. As you can see, we had something similar in the same quarter of last year. And depreciation of $61 million, which gave us this operating profit of $105 million. We had financial income of $4.3 same level as last year. We had financial expenses of $19.4 million, which is slightly above last year, which may surprise people because we did a refinancing that reduced the interest cost quite significantly in Q4 of last year. However, bear in mind that we took a lot of that interest saving in the PPA. So we wrote up the PGS debt in the PPA, which reduced the interest charge in the PPL -- P&L already ahead of the refinancing. So that's the main explanation for that, call it, not so intuitive development. And this gave us a result before taxes of $85 million compared to $97 million in the same quarter of last year. Cash flow, as Kristian alluded to, quite strong in the quarter. We had cash flow from operations of $242 million in the quarter, almost the same level as the $265 million we had last year when you subtract the multi-client investment and CapEx and adjust for timing and working capital movements. We had cash flow from investment activities negative by $94 million compared to $59 million in the same quarter of last year. And then -- if you then subtract the cash flow items related to financing of $97 million, we end up with a net change in cash and cash equivalents of $50 million in this quarter compared to $82.6 million -- or $83 million in the same quarter of last year. So looking at cash flow in a slightly different way, looking at the evolution of our net debt, you can see that we reduced that quite significantly in this quarter. So the cash flow before dividend, which is a key measure that we are looking at internally was $77 million in this quarter. We paid the dividend of $30 million, which helped us reduce net debt from $479 million to $432 million at the end of the quarter. Let me -- and this is to be compared with our net debt target of $250 million to $350 million. That's the range we are aiming at, and we're getting down there. It takes a little bit longer time than we initially planned for, and that has to do with the market development, but we are still firm in our belief that we will get there in -- in due course. Let me also mention that in Q4, you should expect a somewhat negative development in net working capital items. So it's a seasonal thing. And so you shouldn't expect the cash flow after net working capital adjustments to be as strong in Q4. Balance sheet, not many significant developments worth mentioning here. The only thing I'm going to mention is the goodwill. You can see that it's down by $4 million. That has to do with the PPA adjustments that we did. So when you do an acquisition as we did with PGS, you can do PPA adjustments up until 12 months after the acquisition closed. And -- and what we have done here is that -- we have increased our long-term receivables by $4 million and reduced the goodwill by a corresponding number. And apart from that, the balance sheet, of course, remains very strong and even stronger than it was at the end of Q2, given the net debt development. This allows us to continue to pay a dividend of USD 0.155 per share, corresponding to NOK 1.56 per share in this quarter. The ex-date is 1 week from now on the 30th of October, and we will pay the dividend to the shareholders on the 13th of November. So by that, I'll hand the word back to you, Kristian. Kristian Johansen: Thank you, Sven, and we're going to touch on the outlook, and I'll start with a slide that we find very interesting, but it's a bit challenging to understand. So I'll take you through it very slowly. But if you start on the left-hand side, you see the chart there, you see that the light gray color shows the current decline curve. So that is debated whether it's 8% as we show here, and these are numbers from IEA or whether it's 15%, which is Exxon's number that they publicly state that the real decline curve is. But anyway, if you use 8%, 8% is then equivalent to losing more than the current production from Brazil and Norway every year for the next 10 years. It's quite steep even at 8%. But then in order to satisfy demand going forward, then the big question is how much do we need to invest and how much does the E&P sector need to invest? So if I take you to the right-hand side and you go all the way to 2025, you see that we as an industry or the E&P industry globally invest around $600 billion in CapEx. That's a total CapEx of the entire industry. And that's been pretty much the average. It's just -- right now, it's about $575 million, and it's been $600 million pretty much on average for the past 3 or 4 years. If you take that information, the $600 billion and you take it back again to the left-hand side, you see that $600 billion is the second blue color from the top. That's where it's going to take us in terms of continuing to invest at today's level, which basically is flat. It's a flat demand compared to today. So today's or the current investments are probably going to satisfy a flat demand development going forward. But if you think that demand for oil and gas is going to continue to grow in the future, we need to invest more. And we actually need to invest probably somewhere around $750 million because that takes us up to the expected demand going forward. So it's a very powerful slide in terms of understanding that today's investment level is not sufficient to satisfy any growth in demand. And I think most of you and most other readers would argue that there will be growth. There will be continued growth in demand. We've seen that, and we've been wrong several times. Demand has surprised on the upside, and it will continue to do so. So again, today's investment level from the industry is not sufficient in terms of satisfying any demand growth going forward. And that is further backed by the second slide we have. So last week, I attended something called Energy Intelligence Forum in London. And I think 8 out of the 10 -- 8 CEOs of the 10 largest oil companies in the world were there. And I just included some quotes from 4 of the CEOs that were there and attended the conference. And the first one from Darren Woods who said that the oil market oversupply is likely to be short term with demand from emerging economies set to make meeting global energy demand more challenging in the medium to longer term. I mean, Nasser was very clear that we had a decade where people didn't explore. It's going to have an impact. If it doesn't happen, there will be a supply crunch. And then Patrick Pouyanné from TotalEnergies, this non-OPEC supply, which today is impacting the market from Brazil, Guyana and shale oil will plateau. There is a limit to this growth. And then finally, Vicki Hollub from Occi said that discoveries have gone way down. Investment in exploration has gone way down, but it's not just investment that's a problem. We just aren't finding big resources anymore. So very much backing the statement that we had on the first slide that the industry needs to invest more if you believe in demand growth for oil and gas and I think most of us are now convinced that there will be continued growth in demand for both oil and gas. Going more to the micro level in terms of streamer contract tenders, it's down, and it's down for 2 reasons, mainly the fact that there's been quite a few awards recently. So TGS has been awarded a couple of streamer contracts quite recently. And also on the OBN side, we have announced 2 contracts recently. But the market is not great. There is nothing that indicates that 2026 is going to be a great year for contract tenders. I have to be honest and state that. But keep in mind that this does not include multi-client. And we have big projects in Brazil. As I said, we have 2 vessels in Brazil as we speak, probably going to keep those 2 vessels there for the time being. And we have -- we see great -- or a great uptick in activity in Africa in terms of multi-client. So the fact that multi-client is not part of this means that this slide gives a very skewed picture in terms of how the market for TGS actually is. So I feel like with the recent increase you've seen in our order backlog, which is mainly and very much driven by multi-client prefunding, I think we see a future that is far brighter than this slide will indicate. On the OBN market development, 2025 will be back to 2023 level in terms of activities or total revenues for this sector or segment, and that is down from 2024. So that significant growth trajection that we saw in 3 years that has stopped and has come down slightly. This is partly due to some big projects in Brazil that have been awarded, but they have not been acquired yet. So they haven't started yet. And these are big projects that TGS was unsuccessful in winning and some smaller competitors won big projects in Brazil that again has not yet started. So we’ll wish them good luck on that. In terms of the guidance for the 2025, obviously we're entering the last quarter of the year. So our multi-client investments, we keep our guidance of $425 million to $475 million. We're probably going to be in that kind of mid-range of that investment guidance. We're going to have approximately 70% of the investment expected to be acquired with our own capacity. In terms of CapEx, as we've said a couple of times today, we're reducing our CapEx guidance from $135 million to $110 million. And on the gross operating cost, we again target $950 million for the year. So that's unchanged from the previous quarter. In terms of utilization, we expect improved utilization year-on-year of our 3D streamer fleet and again, partly helped by multi-client. And then we expect lower OBN acquisition activity, which you have seen, especially over the past quarter or so. So that will be down compared to 2024. And to give you slightly more flavor on that, so we'll start with the order backlog and inflow. So again, as you see, the order inflow was strong this quarter at $430 million -- or above $430 million and that leads to a backlog of $473 million. Again, very weak numbers in Q2 this year, but a relatively solid comeback in Q3, where you see quite significant growth in the order inflow with the resulting increase in the total order backlog. And then you see on the right-hand side, you see the pie chart, and you're obviously familiar to that, and it gives you some guidance in terms of expected timing of recognizing this backlog as revenues. We also provide you with a summary of our booked positions. So basically, this is where our fleet and OBN crews are booked for the next 2 quarters. So you see on the streamer side, you see that we have about 16 months booked for Q4 and you see the composition of contract versus multi-client. And again, as I alluded to you see more multi-client there than contract. And again, if I look into the 2026, that's probably going to be the case. It's going to be more than 50% as we can tell today on multi-client because of good prefunding and a healthy backlog in terms of some of our big multi-client projects, particularly in Brazil. And then on the OBN schedule, you see that we're just short of 2 crews working for Q4, and it's going to be approximately the same for Q1, and it's pretty much 1 crew for multiclient and 1 crew for contract, and it's close to being fully utilized for 1 quarter. In terms of geomarkets, we're going to have contract work for our streamer fleet in Africa, Asia and then multi-client in Brazil. For the OBN, we're going to have contract work in Gulf of America and we're also going to have 1 crew working multiclient in the Gulf of America. We expect total multiclient investments in Q4 of $120 million and utilization, as I said on the left-hand side, you see pretty much how it's going to be for the next quarter. And then obviously, there is still time to book more capacity for Q1 of 2026. So with that, I'm ready to summarize the presentations. Again, pleased to announce solid performance on financial key figures. We had net debt reduced to $432 million based on a free cash flow of about $80 million and $30 million paid in dividends. We've been very disciplined in terms of cash outflow, meaning that we're reducing our 2025 CapEx by $25 million, and this has been reduced several times during the year. So the latest number now is about $110 million for the full year. Obviously, there is -- the short-term market development is sensitive to oil price, but the long-term market outlook, as you've seen from this presentation, remains very positive. And we're maintaining a dividend of $0.155 per share. With that, I want to bring Sven up here and the Bård is going to take you -- take us through some Q&As, and we'll take it from there. Thank you very much. Unknown Executive: Thank you, Kristian. We have a nice audience here in Oslo. So we can start with questions from the audience. Yes, John? Unknown Analyst: Yes. May I ask a little bit of detail on Sven Børre on the OpEx. You mentioned that the gross OpEx is $217 million was $217 million in Q3. And if I add the $10 million that you mentioned as nonrecurring, it will be $227 million. But what did you say -- were there any merger costs included in that $227 million? Sven Larsen: No, no. The merger costs I talked about were just for the comparable ‘24 number. Kristian Johansen: Right. Unknown Analyst: And going forward, what's still the running quarterly cost base in TGS? Is it $227 million? Sven Larsen: I mean we've guided for $950 million annualized. Unknown Analyst: That includes higher OpEx in the first quarter. What's the running on the quarterly basis? Sven Larsen: Yes, it's a bit lower than that. And it will depend a little bit on the activity level. But if you take a little bit lower than $950 million and divide by 4, you should be at an approximately right level. Unknown Analyst: It's not too far away from $227 million then? Sven Larsen: No, it should be reasonably representative. Unknown Analyst: And then a question on multi-client sales in the quarter. You want to specify or give an indication of the transfer fee? Did you book a transfer fee for the Chevron Hess deal in Q3? Kristian Johansen: No, we're not allowed to be specific on which transfer fees we booked, but I think the market has been pretty right in terms of there were a big transfer fee this quarter, and that was related to one transaction. We probably had 2 or 3. We have transfer fees in every given quarter, but there was one that was particularly large. I think the market has speculated that in total, we had transfer fees around $25 million, $30 million. So that's pretty much where it was. Unknown Analyst: And that means that other late sales were probably not too bad either. So I just wonder the key driver -- I assume one of the key drivers in Q3 was the U.S. Gulf -- the American -- the Gulf of America lease round in December. Is that correct? And also more specifically, did you see all the sales that you expect or most of the sales that you -- late sales that you expect in connection with the December round, did they come in Q3? And was there a significant impact on that? Or will you also see it in Q4? Kristian Johansen: Yes. There were a couple of drivers. And number one, you're right. I mean, our late sales was pretty strong regardless of whether you adjust for transfer fees or not. And our transfer fees were far lower in Q3 this year than they were last year, where the transfer fee was very high. I think one driver of the strong late sales in Q3 was a weak late sales in Q2. And I think that's a reminder to the market that when you looked at it, particularly late sales, but overall, the multi-client performance of TGS, you probably have to look at it in a slightly longer perspective. So if you look at the average of Q2 and Q3, you're more back to normalized level and Q2 was embarrassingly low and Q3 is back where we should be. So that was one driver is that Q2 was very low. Transfer fees, we've been discussing that. And the third one, yes, we had impact from the lease sale in the U.S. go that is coming up in Q4. Was that significant? Not really. I mean we're talking 10 to 20 rather than 40 to 60, right? Is there more to be sold? Absolutely. But we don't know when that's going to happen, and we don't know if it's going to happen. I mean it's obviously uncertainty around that. Sven Larsen: What we can say to add to that is that in the licensing round in '23, most of the sales related to that round happen after the round. So the dynamic around this is a bit uncertain, of course. Kristian Johansen: And we have talked about that multiple times that the licensing round, particularly in the U.S. haven't really had the same impact as it used to have. So now we do more of the sales beforehand. So we have much higher prefunding of the surveys that we do in the U.S. GOM today than we used to have historically. And then as Sven Børre said, we have some of our sales after the round is taking place rather than lining up for the licensing round. So it's probably more evenly distributed now than it used to be. In the past, it was always you shot without prefunding and then you had a significant kicker at the -- before the licensing round. And then after that, there was nothing. Unknown Analyst: And my final question before I give the word to somebody else. You mentioned that it's too early to expect a great year for contracted streamers in '26. What do you think it will take? What kind of oil price levels do we need to see to see a great year for streamers in seismic? Kristian Johansen: We've been doing some internal analysis in that regard and looking at the dilemma of an oil company today or an energy company today is that they have this dividend obligations, they have buyback obligations and then they have CapEx and seismic is obviously part of that discretionary CapEx. And with the oil price dropping from $70 and down to $60, although it's higher today, then you obviously put a lot of strain on that kind of dilemma. So are they going to cut the dividend? Probably not. Are they going to cut back on the buybacks? Potentially, yes. Total has already announced that. Are they going to start spending more on exploration? Well, if you listen to what they say and if you listen to what they told me last week, they are, but we haven't seen it yet. And I think with the current oil price, we should be a bit cautious expecting that to kick off in 2026. So we're planning for a market that is going to continue to be quite challenging in that regard. But saying that, when we talk about the contract market, and it is important to say that we should be using at least 50%, perhaps up to 70% of our fleet on multi-client projects. And that's where I'm probably more optimistic today than I was 3 months ago in terms of the backlog that we see building up on the multi-client side. So we're not too concerned about the utilization of our fleet in 2026. But obviously, if you look at the contract market per se, it's not great. There is no reason to question that. Unknown Analyst: And what oil price is needed to change that? Kristian Johansen: We've been saying that you probably need somewhere between $70 to $75 to see a significant increase in exploration. But again, back to what I heard from the CEOs last week and the oil price was $60 at the time. They're saying that we have -- we've been -- we've done a terrible job in terms of exploration, and we need to get better and we need to spend more. Yes Lukas. Unknown Analyst: You said that multi-client performed better than what you expected in Q3. So I guess you had a view on the transfer fees. So what exactly was better than what you expected? Kristian Johansen: You know how it is when you get really beaten up like we did in Q2, you set expectations slightly lower for Q3 and I think that was partly what happened. And we pretty much knew the range of the transfer fee at the time. And obviously, there are always tough discussions on -- and it goes back and forth in many, many iterations before you end up with a number. But that pretty much came in as we expected. I think the market probably estimated that to be bigger or more significant than it was, but we pretty much came in where we thought we would be. Unknown Analyst: And what are your expectations related to the licensing round in Brazil? Kristian Johansen: Yes, there was one yesterday with five-blocks where we had data in most of those areas. And obviously, we see some opportunities related to that. I think the news of the environmental permit to Petrobras is very good for TGS. I mean this has been the area where we have invested more than anywhere else in the world over the past 18 months. Obviously, we've taken some risk on that environmental assessment. And obviously, it's great to see that, that had a positive outcome. So I think -- yes, I think that's as specific as I can be. Okay. Unknown Analyst: And your EBITDA margin on the contract business was nicely up. Is that better pricing, lower costs? Sven Larsen: Yes. We probably don't see better pricing. I think that's fair to say. It's not significantly down either, but it's not kind of the right environment to increase pricing to put it that way. So it's cost control and cost efficiency and obviously also partially these reversals that I talked about in this particular quarter. But that has to be seen over time where it's basically mostly related to costs that have been charged previously. Unknown Analyst: And you are cutting your other CapEx guidance with $25 million. What is that... Sven Larsen: No, we've been working constantly on our cost base and our cash outflow base, so to speak, during this year. And CapEx obviously has been under a lot of scrutiny to try to work that down. At the same time, we need to invest in the business, and we need to be maintaining our fleet well and keep it up to the highest standards, and we need to replace streamers. But we have worked on that streamer replacement program and how we can maintain the current streamers in a better manner and keep them longer and or push or spend more time on that replacement program than we initially planned for. That's essentially what's doing it. And of course, there are a lot of -- we are cautious on all other types of CapEx spending for the time being. Kristian Johansen: There's not a lot of peers to TGS in the streamer space. But if you look at the peer or peers, you will see that our CapEx is far higher. And it's been a reason for that. But of course, there are things we can do in terms of getting that down, and that's what we've done. Unknown Analyst: And if you break down the $110 million between streamers, computing power, vessel maintenance and other, what would the split be? Kristian Johansen: Almost half is related -- purely related to streamers. Unknown Analyst: Can I ask on the CapEx? What should we expect going to '26? Is it fair to assume the same level? Sven Larsen: Yes, we will come back to that when we guide in February. But our ambition is to continue to keep that at a lower -- significantly lower level than what we initially guided for this year, of course. Unknown Analyst: Yes. And did I see an offshore wind contract that you're going to do in July? What vessel will you use for that? Is Ramform Vanguard still going to be stacked? Or do you think you will take that out to do that work? Kristian Johansen: Yes. We haven't made that decision. And again, we stacked it and we're going to stack it and keep it stacked until we see improvements in the market, and we have 6 vessels who can do the job if we need to. But that's something we consider at any point of time, and we're not ready to make that decision today. Unknown Analyst: And one last technicality about how you allocate your streamer vessels. You talked about at least 50% doing multi-client and then also maybe up to like 17%. If you can help us a little bit in '26. What’s… Kristian Johansen: It's too early. What I mean by saying that is that we have that flexibility, and we're not totally dependent on the contract marketing for our fleet. We should be in a position to use at least 50% to 75% on multi-client. We will guide you on -- on a rolling basis for two quarters going forward, but we're not going to give you any more clarity than that. Unknown Executive: Okay. We have a couple of questions from other people on the web. Jørgen Lande in Danske Bank. You mentioned prefunding was a bit lower. Do you expect prefunding levels to trend downwards compared to what you have indicated? Sven Larsen: Probably not a trend, but we are -- we have had, call it, quite high prefunding levels over the past quarters, and it's probably almost naturally high for -- some periods. So I would think that we're -- yes, we think it will be at that 80% to 90% level over time, give or take, but it may vary from quarter-to-quarter depending on the mix of the different projects that we're doing. Kristian Johansen: It also has a lot to do with how much risk do we want to take in terms of if we believe that we're at the bottom of the cycle, and we believe that these CEOs who talk about the need for more exploration. Is this the time to go out and do some frontier work with lower prefunding. I mean that's discussions that we have with the Board at any point of time. And similar discussion to what all companies have in terms of are they going to invest more in exploration for the long-term. Yes. So we have those discussions, and that will obviously have an impact on the prefunding rate. But there is no indication in the market that it's harder to get prefunding than it's been before. Not at all. Unknown Executive: And we have a question from Mick Pickup in Barclays. You talk of advanced multi-client levels, yet consensus that you supplied has investments down in '26 versus '25. This doesn't seem consistent. So without giving guidance, can you talk directionally about '26 multi-client investment levels? Kristian Johansen: Yes. I'm not going to do that. But of course, the consensus is not -- we don't make consensus. We just collect consensus. So if consensus is lower in '26 than it's '25, it doesn't necessarily represent what we plan to do. But it's too early for us to say what we're going to invest for '26. We're in that period right now where we're looking at our investment level. I would be very surprised if it differs significantly from what it does this year. And especially on the downside, I would be very disappointed if we see a much lower number. Unknown Executive: Next question comes from Ole Martin Rødland in Pareto Securities. While order intake was good this quarter, backlog is still at low levels. Based on best expectations, do you assume lower external streamer and OBN revenues in 2026? And will that possibly be offset by higher multi-client investments and revenues? Kristian Johansen: Yes, it's too early to say. What we have been saying today is that we have that flexibility, and we can do it -- if we need to. And the beauty of our business model and the beauty about being fully integrated as we are, and we're the only company in our space that can claim that is that we have the flexibility at any point of time to switch between contracts and multi-client. And there's been speculation as to our price is down in the contract market, how bad is the contract market, et cetera. Well, if it is bad and if pricing is down, then we just do multi-client if we can get funding for multi-client projects. And I think we've delivered today, and we've shown you today, and we even showed you in the past four or five quarters that we generate a return of 2x on our multi-client project. So if pricing is low and if we see that we sacrifice too much on our margins by doing some of those contracts, we don't do that. Sven Larsen: And another point to bear in mind in our multi-client investments in 2025, we have – we still have quite a bit of external investments where we're using external vessels and external providers. It takes -- following the merger, it takes a little bit of time to in-source everything. So you should probably expect more or less 100% of the capacity that we source to be internal in '26. So even if you, for the sake of argument, assumed flat multi-client investments, you could see higher utilization of our own assets on multi-client. Unknown Executive: Okay. Then we have another question from Steffen Evjen in DNB Carnegie. Do you have any leads to sign more OBN contract work over the winter season on top of the current book positions that you disclosed today? Kristian Johansen: Yes. I mean the sales cycles in OBN are longer than streamer. We like to say they're typically 5 or 6 months at least. So that gives you an indication in terms of when you will see new contracts. We have a number of leads. Some of these leads are related to single contracts and some of the leads are related to what we call capacity agreements or bigger long-term agreements with some of our customers. So there are negotiations going on. And obviously, we're going to announce that to the market as soon as we have contracts to announce. Unknown Executive: We don't have any further questions from the web. Any last questions from the people here in Oslo? If not, that concludes the Q&A session. So I give the word to you, Kristian, for your concluding remarks. Kristian Johansen: Yes. Thank you very much for your attention today. And again, as I said initially, it was a relief to come back with better numbers than we had in Q2. We were obviously as surprised and disappointed as you were in Q2, and it's good to see not only that we have a revenue growth of 26% compared to the last quarter, but we see a very strong profitability and all key metrics are very positive compared to previous quarters. So I wish you all the best and looking forward to see you at our Q4 presentation. Thank you very much.
Operator: Good day, and welcome to the Blackstone Third Quarter 2025 Investor Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Weston Tucker, Head of Shareholder Relations. Please go ahead. Weston Tucker: Thanks, Katie, and good morning, and welcome to Blackstone's third quarter conference call. Joining today are Steve Schwarzman, Chairman and CEO; Jon Gray, President and Chief Operating Officer; and Michael Chae, Vice Chairman and Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation, which are available on our website. We expect to file our 10-Q report in a few weeks. I'd like to remind you that today's call may include forward-looking statements, which are uncertain and may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the factors that could affect results, please see the Risk Factors section of our 10-K. We'll also refer to non-GAAP measures, and you'll find reconciliations in the press release on the Shareholders page of our website. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund. This audio cast is copyrighted material of Blackstone and may not be duplicated without consent. Quickly on results. We reported GAAP net income for the quarter of $1.2 billion. Distributable earnings were $1.9 billion or $1.52 per common share, and we declared a dividend of $1.29 per share, which will be paid to holders of record as of November 3. With that, I'll turn the call over to Steve. Stephen Schwarzman: Good morning, and thank you for joining our call. Before we begin, I want to take a moment to acknowledge the horrific shooting that occurred at our New York City offices on July 28. The random attack resulted in multiple deaths, including our beloved colleague, Wesley Lepatner. Wesley was a wife and mother and a dear friend and mentor to many within and outside of our firm. We will greatly miss Wesley. Will continue to honor her legacy. We're also grateful for the bravery of our building security team, along with the New York Police Department who responded that day and who put themselves in harm's way every day to protect others. Turning to our results. Blackstone reported an outstanding third quarter. Distributable earnings increased nearly 50% year-on-year to $1.9 billion, as Weston mentioned, underpinned by a 26% growth in fee-related earnings and a more than doubling of net realizations. Inflows reached $54 billion, the fourth consecutive quarter in excess of $50 billion and totaled $225 billion for the last 12 months. Our fundraising success lifted assets under management to a new industry record of $1.24 trillion. And looking forward, I believe our prospects for growth are strong today is at any point in the firm's history. The structural tailwinds driving the alternative sector are accelerating with Blackstone as the reference firm. More investors are being introduced to the benefits of private market solutions than ever before, with growing adoption across the vast private wealth and insurance channels. And following the U.S. administration's recent executive order, we expect the defined contribution market to open to alternatives over time as well. In these areas, the powerful advantages of our brand, scale and breadth of capabilities are even more pronounced. At the same time, institutional limited partners are increasing their allocations to alternatives in multiple areas, and they're consolidating relationships with the best performing managers who can provide comprehensive multi-asset solutions. Meanwhile, in terms of deployment, the scope of where we invest continues to expand significantly as we scale our platforms in digital and energy infrastructure, private credit, Asia, the secondaries market for alternatives and other key growth areas. We are in the early innings of penetrating markets of enormous size and potential. In addition to these secular forces, we're also now seeing the deal cycle turn, creating another significant tailwind for the firm, the combination of a resilient economy, declining cost of capital and equity markets at all-time highs is leading to a resurgence in capital markets activity, including global IPO issuance, which more than doubled year-over-year in the third quarter. Notwithstanding the current government's shutdown, more conducive capital markets should lead to greater realizations for Blackstone, which, in turn, support fundraising and deployment. In the last 3 months, we executed 3 successful IPOs. And our IPO pipeline for the next 12 months, if converted, would translate to one of the largest years of issuance in our history. Despite all these positive developments, over the past several weeks, there's been a significant external focus on the implications of certain credit defaults in the market. These events have been erroneously linked to the traditional private credit market as a result of misunderstandings and misinformation. Importantly, the defaults and focus resulted from bank-led and bank syndicated credits, not private credit. Moreover, these situations are widely believed to involve the fraudulent pledging of the same collateral to multiple parties. The traditional private credit model is characterized by direct origination in the context of a long-term hold strategy, with due diligence performed by sophisticated institutional managers and rigorously negotiated documentation. For Blackstone, our $150 billion-plus direct lending platform is comprised of over 95% senior secured debt, with low loan-to-value ratios of less than 50% on average, meaning there is significant borrower capital subordinate to our positions in nearly all cases from companies backed by financial sponsors or public companies. And in the private investment-grade area, we've concentrated our activities in multitrillion-dollar markets where Blackstone is often a leading player, including data centers, energy infrastructure and real estate, with our loans secured by underlying assets of excellent quality. Our long-term, highly disciplined approach to investing in credit is the foundation of the strong results we've produced in this area as with every business at the firm. Our non-investment grade private credit strategies have generated 10% returns annually, net of all fees since inception, nearly 20 years ago. In direct lending specifically, we've experienced annual realized losses of only 1/10 of 1%, including through the global financial crisis. And our investment-grade focused private credit platform in BXCI has experienced zero realized losses to date. Of course, as the cycle progresses, it's reasonable to assume we'll see some increases in defaults. But we believe our structural advantages will continue to produce superior results. Performance has powered our growth in private credit. And we believe it will continue to power our growth in the future. Stepping back, this month, we celebrate Blackstone's 40th anniversary. It's been, I can assure you, an extraordinary journey. The firm has grown from a start-up in 1985 to the largest alternative asset manager in the world today and one of the 50 largest public companies in the United States. Importantly, we achieved almost all of this growth organically, which is quite distinctive among large firms in our industry. We are business builders at Blackstone, not business buyers. And while it's harder to build a business than buy it, over the past 40 years, we methodically planted seeds that would grow into major market-leading platforms in nearly every area in which we operate. What we've achieved over the past 4 decades would not have been possible without the efforts of three extraordinary individuals, who worked alongside me to either start the firm or to take it to the next level. Pete Peterson, my co-founder, gave us the necessary credibility that provided the launchpad for our growth. He was joined in 2002 by Tony James, who helped professionalize the organization and led us into many new business areas. Jon Gray took over in 2018 and has done a remarkable job managing the firm and pioneering a plethora of new business lines and products. Jon also redefined our investment approach to emphasize thematic positioning, resulting in our concentration today in data centers, where we're the largest in the world; energy and power, logistics, private credit and India, among other winning areas. Jon as did Tony and Pete during their time at Blackstone, demonstrates an unstoppable work ethic and profound care for the firm, its reputation and its people. Each of them changed the destiny of the firm and have been the best partners for me that I could have imagined. I owe them all an enormous debt of gratitude. Looking forward, what's been built at Blackstone is ideally designed for the environment we see before us and to capture the generational shifts underway in the global economy and markets. In terms of where we raise capital, we believe Blackstone is the partner of choice to bring the best of private markets to a rapidly expanding universe of investors. In terms of where we invest, the future requires massive capital solutions across all forms of equity and debt capital to power the AI revolution, to develop the infrastructure needed to meet the rising global demand for energy, to fund the extraordinary advancements in drug development in the life sciences area, to partner with large investment-grade-rated corporates, who are increasingly looking to private credit to meet their objectives; to help India meet its incredible growth potential and to drive forward other transformative megatrends that will define the investment landscape for decades to come. Alternatives will play a vital role in this future. And we see Blackstone leading the way with the largest and broadest platform and the deepest investment capabilities, underpinned by the power of our brand. The firm has achieved much in the past 40 years. But I strongly believe the best is ahead. Thank you to our shareholders for joining us on this adventure. The adventure continues. With that, I'll turn it over to Jon. Jonathan Gray: Thank you, Steve, and good morning, everyone. What Steve has done to both create and continue to drive this firm for 40 years is the stuff of legend. I'd also like to emphasize what Steve said about Wesley. She was an extraordinary woman, colleague and dear friend, simply the best of the best. We will miss her a ton. Moving to the quarter, this is an exciting time for the firm and our investors. The deal dam is finally breaking, and we have a bunch of secular tailwinds driving us forward as well. I'm going to focus my remarks specifically on the growing sources of capital inflows at the firm. In corporate and real estate credit, we crossed the $500 billion milestone, up a remarkable 18% year-over-year. In private wealth, our AUM in the channel grew 15% year-over-year to nearly $290 billion. And in our institutional business, we're seeing strong momentum across numerous areas in our drawdown and open-ended vehicles. Diving into credit, private credit markets are expanding from their origins in noninvestment-grade corporate credit and direct lending to become a key mechanism for financing the real economy, including commercial finance, consumer and residential finance, fund finance and of course, infrastructure. Blackstone is tremendously well positioned to lead this evolution as the largest third-party investment manager in credit globally, alongside our continuous innovation. Notably, our infrastructure and asset-based credit business grew 29% year-over-year to $107 billion, one of the fastest-growing areas at the firm. Our scale gives us access to what we believe is the broadest set of opportunities across the risk spectrum, which we can offer holistically to clients. As a result, we're seeing robust demand for multi-asset credit solutions across our 3 I's, institutions, insurance companies and individual investors. Another important development underway in credit market -- markets is the rising opportunity to partner with large investment-grade rated corporates, which we've discussed previously. Fortune 500 companies with substantial funding needs are increasingly looking to private credit for customized long-duration capital solutions, which are difficult to replicate in public markets. Scale and reputation are key. And Blackstone has established ourselves as a partner of choice, following our landmark transactions with EQT Corp and Rogers Communications. In the third quarter, we executed another major partnership, a $7 billion investment we are leading in a venture with energy infrastructure company Sempra, to support construction of a liquefied natural gas project on the Gulf Coast. These corporate partnerships provide our clients with access to high-quality, directly originated investments in a sector where we have high conviction, as always, without taking on balance sheet risk. Meanwhile, in the insurance channel, our AUM grew 19% year-over-year to $264 billion across IG private credit, liquid credit and other strategies. Our open architecture, multi-client approach is a major advantage. Our platform now includes 33 strategic and SMA relationships, and we continue to add more. Importantly, in the past 12 months, nearly 2/3 of our clients have expanded their relationship with us, the strongest testament to the value we deliver for them. In our IG focused area overall, we generated over 170 basis points of incremental spread year-to-date versus comparably rated liquid credit. Our farm-to-table model, which brings clients directly to borrowers, is designed to produce a structural premium to liquid markets, particularly vital in an environment where spreads and interest rates are tightening. Turning to private wealth, where our platform has grown to nearly $290 billion, as I mentioned, up threefold in the past 5 years. To put our scale in perspective, a recent Goldman Sachs research report highlighted that Blackstone has an estimated 50% share of all private wealth revenue among 9 major alternative firms. To put our momentum in perspective, we raised over $11 billion in the channel in the third quarter, more than double year-over-year, to the highest level in over 3 years. BCRED led the way, raising $3.6 billion and is on pace for a strong Q4. BXP raised $2.1 billion in the third quarter, bringing its NAV to $15 billion in only 7 quarters. BREIT generated healthy sales of roughly $800 million in the third quarter, while repurchases continued on their downward trajectory to the lowest level in 3.5 years. Finally, BXINFRA raised over $600 million in Q3 with its NAV exceeding $3 billion only 3 quarters after launch. In private wealth, as with every business at Blackstone, it all comes back to investment performance. BCRED has achieved 10% net returns annually since inception nearly 5 years ago. BREIT has generated 9% net returns for its largest share class for nearly 9 years, a 60% premium to public real estate markets, including approximately 5% net for the first 3 quarters of the year. BREIT's exposure to data centers, now almost 20% continues to be extremely helpful in driving its results. And BXP has delivered a 16% annualized net return for its largest share class since inception. Our investment performance powers our fundraising along with our ability to innovate. Looking forward, we expect 2026 to be our busiest year yet in terms of product launches with a significant focus on multi-asset opportunities. We're also broadening distribution in several major markets around the world and moving deeper into key subchannels, including the RIA channel. With these developments alongside our strategic alliance with Wellington and Vanguard, our partnership with L&G and the U.K. wealth and retirement markets and the massive potential in the U.S. defined contribution channel over time, the opportunity in private wealth continues to expand for Blackstone. Moving to our institutional business, which has grown by 64% over the last 5 years and has strong momentum across multiple areas. In infrastructure, our dedicated platform grew 32% year-over-year to $69 billion, including over $3 billion raised in the third quarter. The commingled BIP strategy has generated remarkable 17% net returns annually since inception. Our multi-asset investing business, BXMA, grew 12% year-over-year to a record $93 billion, again driven by performance. Q3 represented the 22nd consecutive quarter of positive composite returns for BXMA's largest strategy. Investors are responding favorably, with BXMA generating year-to-date net inflows of over $5 billion, the highest in nearly 15 years. In our drawdown fund area, it was another quarter of fundraising. We held additional closings for our new private equity Asia flagship, bringing it to over $9 billion as of quarter end, already significantly larger than the prior $6 billion vintage, and we expect to meaningfully exceed our original $10 billion target. We also raised additional capital for our next life sciences flagship, bringing it to $3.3 billion already more than 2/3 the size of the prior $5 billion -- I'm sorry, already more than 2/3 the size of the prior $5 billion vintage. In credit, we held an initial close of $1.6 billion for our new high-yield asset-based finance strategy, targeting $4 billion. In secondaries, we finished raising the largest ever infrastructure vehicle at $5.5 billion, and we're now raising our next PE secondary flagship, targeting at least the size of the prior $22 billion vintage, with the first major close expected in the fourth quarter. Also in Q4, we expect to launch fundraising for the fifth vintage of our private equity energy transition strategy with a prior vintage already approximately 70% committed only 16 months after starting the investment period. Other drawdown strategies we are raising include opportunistic credit, tactical opportunities and GP stakes. Overall, we believe investor confidence in Blackstone is as high today as ever, which, as you've heard, is translating to growing capital commitments across many areas. In real estate specifically, investor sentiment is starting to improve following the downturn. We remain firm believers in the sector's recovery and that flows ultimately follow performance. Commercial real estate values bottomed in December 2023 and since then, have been slowly improving. We think they're now approaching a steeper point in that recovery curve. The cost and availability of capital have been steadily strengthening and transaction activity has been increasing, including by 25% year-over-year in logistics, U.S. logistics in the last 12 months. In a market driven by supply and demand, the dramatic decline in new construction starts, including to the lowest level in over a decade in U.S. logistics and apartments, our largest sectors in real estate; should be very positive for values over time. As we stated before, we believe Blackstone is the best positioned firm in the world to benefit from the recovery underway in real estate markets. In closing, the firm is in outstanding shape by any measure, a cyclical resurgence in transaction activity alongside multiple secular growth engines should be very positive for our shareholders. And with that, I will turn things over to Michael. Michael Chae: Thanks, Jon, and good morning, everyone. Over the past several quarters, we've highlighted how the scaling of the firm's platforms in key growth channels is driving robust momentum in fundraising, assets under management and FRE. In addition, we've outlined a path of accelerating net realizations over time as capital markets strengthen. The third quarter was an excellent illustration of these dynamics of work and reinforces a favorable multiyear picture for the firm. Starting with results, AUM continued to advance to new record levels. Total AUM rose 12% year-over-year to $1.242 trillion, while fee earning AUM grew 10% to $906 billion. Management fees increased 14% year-over-year to a record $2 billion, underpinned by continued double-digit growth in base management fees, including 23% growth in base management fees for the private equity segment, 18% for credit insurance and 15% for BXMA. At the same time, transaction and advisory fees for the firm nearly doubled year-over-year to $156 million, with our Capital Markets business reporting one of its 2 best quarters in history, following a record Q2. While we expect a lower baseline of these revenues in the fourth quarter, the expanding scope of the firm's investment activity is widening the aperture of activity in our capital markets business. Fee-related performance revenues grew 72% and year-over-year to $453 million in the third quarter, generated by 9 different perpetual strategies, including BCRED and multiple other vehicles across the credit complex, BREIT and real estate BXP and private equity and BIP and infrastructure. Overall, total fee revenues for the firm grew 22% year-over-year to $2.5 billion in the third quarter. Fee-related earnings increased 26% year-over-year to $1.5 billion or $1.20 per share, one of the three best quarters of FRE in our history, driven by the growth in fee revenues along with healthy margin expansion. With respect to margins, as we stated before, it's most informative to look over multiple quarters given intra-year movements. On a year-to-date basis, FRE margin was 58.6%, reflecting expansion of over 100 basis points versus the prior year comparable period. While we expect FRE margin in the fourth quarter to be sequentially lower due to seasonal expense factors, for the full year 2025, we are tracking favorably against the initial view of margins we provided in January. Distributable earnings increased 48% year-over-year to $1.9 billion in the third quarter or $1.52 per share, powered by the strong double-digit growth in FRE alongside a significant acceleration in net realizations. We generated $505 million of net realizations in the quarter, more than double the prior-year period and up 55% sequentially in Q2. The largest single realization in the third quarter was the sale of an interest in the GP stakes portfolio within our secondaries platform at the end of September. We also completed the full exit of Hotwire, sales of certain U.S. energy assets and a number of other realizations across the private and public portfolios. Looking forward, in terms of fund dispositions, we have a robust pipeline of processes underway amid the improving transaction backdrop, and we believe we're moving toward acceleration in 2026, the concentrated in private equity with expanding contribution from real estate over time. And the firm's underlying realization potential is significant. The net accrued performance revenue on our balance sheet, our store value, stood at $6.5 billion at quarter end or $5.30 per share, while performance revenue eligible AUM in the ground has reached a record $611 billion. Turning to investment performance, our funds delivered healthy returns overall in the third quarter. Infrastructure led the way with 5.2% appreciation in the quarter and 19% for the last 12 months, reflected of broad-based gains across digital infrastructure, including continued notable strength in our data center platform, along with gains in our power and transportation-related holdings. The corporate private equity funds appreciated 2.5% in the quarter and 14% for the LTM period. Revenue growth at our operating company strengthened to 9% year-over-year in the third quarter, while margins have remained resilient, supported by labor market conditions that are in balance and continuing to moderate. In credit, our noninvestment-grade private credit strategy reported a gross return of 2.6% in the quarter and 12% for the LTM period, reflecting healthy underlying credit performance. Default rates across our noninvestment-grade holdings overall ticked up slightly but remained minimal. In our direct lending portfolio specifically, realized losses were only 12 basis points over the last 12 months. BXMA reported a 2.9% gross return for the absolute return composite in Q3 and 13% for the last 12 months. Notably, BXMA has delivered positive composite returns due to the past 30 months, which is leading to strong inflows in the segment's fourth consecutive quarter of double-digit AUM growth in Q3. In real estate, values were stable overall in the third quarter. The core+ funds appreciated modestly, driven by the third straight quarter of positive performance by BREIT. The opportunistic funds declined slightly in the quarter with positive overall appreciation in the underlying real estate offset by the negative impact of foreign currency movement. In total, our real estate platform remains well positioned, 3 of our highest conviction sectors, which are supported by very positive long-term fundamentals, data centers, logistics and rental housing; comprise approximately 75% of the global equity portfolio and nearly 90% of BREIT. Overall, our investors have continued to benefit significantly from the firm's position with leading platforms to address many of the most important market opportunities globally, including the largest data center business, leading energy infrastructure platform, the largest third-party focused private credit business, one of the largest private market secondaries platforms, a leading life sciences business and what we believe is the largest alternative business in India. These platforms have powered our investment performance and our growth, and we expect will continue to do so in the future. In closing, Blackstone is exceptionally well positioned, supported by both cyclical and secular tailwinds. The breadth and diversity of our global portfolio is a source of strength, while the firm's culture of innovation continues to drive us forward, leading to outstanding financial performance for shareholders. With that, we thank you for joining the call. We'd like to open it up now for questions. Operator: [Operator Instructions] We'll take our first question from Dan Fannon with Jefferies. Daniel Fannon: I wanted to follow up just on the private credit market given all the headlines and uncertainty. Can you just discuss in more detail any changes in credit quality across your portfolio? And then potentially also just in terms of what you maybe have done differently here, given some of the news and the recent bankruptcies we've seen in recent weeks? Jonathan Gray: Well, I would go back to the idea that this really isn't private credit story that what occurred here were bank-led, bank originated, bank syndicated credits. It also was a bit idiosyncratic as it appears that there was at least according to the reporting fraud involved. So I don't think there's much look through to private credit per se. None of these are what happens -- these are not directly related to the private credit market. And given the idiosyncratic nature, I don't think it really speaks to credit overall. I'm not sure anything really changes in our model. Steve spoke about the way we underwrite in private credit, which is doing deep due diligence, underwriting, what we're doing to hold. In terms of defaults today, they remain minimal realized losses date still almost nonexistent at these levels. You would expect as you get deeper in the cycle, you could see a little more over time. But when we look in aggregate at our business and what we think we'll deliver to our investors, we think it will continue to be quite strong. So I would say, given the underlying strength of the economy, what we've seen with margins we just don't see a lot of credit issues out there. Operator: We'll take our next question from Craig Siegenthaler with Bank of America. Craig Siegenthaler: Hope everyone is doing well, and congrats on the 40-year anniversary. This is the first quarter following President Trump's executive order for privates and 401(k)s. And just last week, I saw that you launched your defined contribution business. So I wanted to ask an open-end question. What are your plans? And do you do this alone? Or can you leverage your partnership with Vanguard and Wellington? Jonathan Gray: Well, we're obviously starting to move. I think the announcement was important. We were already heading in that direction, building up our capabilities, but we thought it was important to have a dedicated group of senior people focused on it. And between Heather, Tom, Paul, the individuals we announced, we've got a great lineup of people. I think this is an area where we will work with others. It's a broad market. You've got a lot of constituents involved. Certainly, there are large corporate plan sponsors where we already have deep relationships. Some of this will be done through some of the large financial institutions, who have platforms. There's going to be a range of partnerships here. Yes, we would intend to work with some of our existing partners. But it's still early. Obviously, this has been announced by the administration. There needs to be the rule making, Of course, with the government shutdown, that's been slowed. But I think everyone's expectation is that individuals and retirement who are in defined contribution plans, should have the opportunity to invest in alternatives just like their counterparts and defined benefit plans have. And we continue to believe, given the scale of our offerings and the breadth of our offerings, we can really provide holistic solutions. So I would say it's an area we're going to spend a lot of time on. Obviously, it will take some time to build. But again, the benefits of returns and diversifications, I think will really resonate with plan sponsors with consultants once the right legal frameworks in place, we will do this. And yes, I think we'll work with others along the way. Operator: We'll take our next question from Michael Cyprys with Morgan Stanley. Michael Cyprys: Wanted to ask about your brand strategy and how that's evolving as you extend further into the private wealth channel. Globally, understand you had, I believe, your first TV advertisement in Japan. So I was hoping if you could talk about your approach to marketing, advertising, brand, how that's evolving as you pursue opportunities from 401(k) to private wealth globally? And might we see a Blackstone stadium anytime soon? Jonathan Gray: I don't expect a Blackstone stadium anytime soon. What we do is fairly targeted, of course, we did do a launch in Japan, which we think is a very important market. I think it's the country in the world with the second most in savings. And the leadership there has done, I think, a really terrific job of pivoting just their citizenry from being savers to being investors, and they've opened up alternatives, both offshore and onshore and that's really important. Because Steve, going back 40 years, has thought about Japan as a key market. We've got a really strong brand there, made a big difference. He was recently there. There's a lot of enthusiasm, I believe, for Blackstone and our products. And making it more top of mind does make sense. Doing advertising, I think, for us, will be targeted. Obviously, we're pretty focused on who we're talking to in private wealth, financial advisers and customers who these products are appropriate for. So I think you will see us with a broader footprint over time. It makes sense as we grow to hundreds of thousands of customers. But at the same time, I think we'll do it in a targeted way in markets and in sectors where we think we can have a real impact. What's promising is just the growth in the private wealth area. The fact that we had this doubling in fundraising in the third quarter year-over-year and that the number of products we have, where we're going to expand to is very promising. So when we look out, we love our positioning in this space. And yes, we're going to do it on a global basis. And yes, it will involve a little more advertising versus what we've done historically. Operator: We'll take our next question from Bill Katz with TD Cowen. William Katz: Okay. Thank you very much. I apologize for the hoarse voice here this morning and our condolences for you loss as well, tragic. Just thinking about -- maybe Michael, a question for you. As you think about the interplay between the margin outlook ahead and also what seems to be a pretty healthy pipeline for realizations. Any thoughts on how we should think about the comp within the FRE versus the comp on gross realizations? Michael Cyprys: Bill, thank you, and thank you for your remarks. No, I think in terms of what the overall FRE margin dynamics, obviously, they continue to be healthy, Bill, and I think the bottomline is, over time, we'll continue to see operating leverage. We're obviously pleased with our year-to-date performance. With performance revenue fee margins, especially it relates to carry, as you know, those comp ratios can vary quarter-to-quarter based on sort of the mix of realizations, vintages of realizations. And overall, in terms of the relationship between the two, I think we've said before that, that we're happy with our basic approach. We have the ability and some control on a year-to-year basis to allocate compensation between the two in a way that we talked about before. But so while we have that lever, I think the overall approach is one, we're going to stick with. Operator: We'll take our next question from Brian McKenna with Citizens. Brian Mckenna: So I had a question on wealth. Retail investors today, they have access to a number of different strategies within private markets. But there are some parts of the market where the risk rewards are better than others. So for example, lower base rates and spreads are a bit of a headwind for direct lending. Returns are likely moving lower there, but it's generally a positive for private equity and real estate and performance should be accelerating there, all else equal. So I'm curious, how much time is being spent with your counterparts on education, just in terms of what you view as the proper allocations within private market portfolios through the cycle? Jonathan Gray: Well, we spend a lot of time at the home offices and in the field and then large-scale Zoom calls talking about how we see the markets. What we try to remind our wealth clients is that they should think about this similar to institutional investors. And it shouldn't be, "Hey, I'm going to just flip from here to there." If you went to a large state pension fund or a sovereign wealth fund, they would have allocations to real estate to private equity, to credit to infrastructure. They may modulate them a bit, but they take long-term approaches. And we think that is very prudent. Yes, there are moments in time where certain asset classes outperform relative to others. But we think all of the areas today actually look pretty good. You mentioned private credit. Yes, we have seen -- we're in an environment where base rates are coming down, but the premium relative to liquid credit, that endures, that is a real value to investors when they think about incremental return, so valuable, the farm-to-table model. And yes, in our equity-oriented strategies, there's a benefit lower rates, no question in real estate, in private equity, in infrastructure. But I think the biggest message to our investors is take a long-term approach, have a balanced portfolio so that you get the benefit of diversification and then the long-term compounding from each of these asset classes. Operator: We'll take our next question from Ben Budish with Barclays. Benjamin Budish: One of the questions we get a lot on your investing strategy around data centers is how do we know we're not in the bubble. So just curious your response to that question. And then maybe you could help us understand a little bit, what are the key drivers of returns for that strategy? Is there a cash flow component? Is it valuations? I know you talk a lot about supply and demand dynamics. To what extent might cap rates matter? So that would be helpful just to get a sense of what is sort of driving the excellent returns we've been seeing there. Jonathan Gray: Yes. Well, I think the key thing for us in our data center business is how we do the business. The vast majority of our investing and the vast majority of return comes from building, developing, leasing these data centers. We do it now in the U.S. We do it in Asia. We do it in Europe. We have leading platforms around the globe. And the key to what we do from a risk standpoint is we make sure we have an investment-grade counterparty. Today, I would say, in general, the largest companies in the world with roughly $1 trillion to $4 trillion market cap, and we get lease terms of 15 to 20 years. And that's when you start to deploy capital at real scale. And to us, that seems like a very prudent way to do this. The returns come from the differential between the cost of doing those projects and then what their worth is stabilized assets. So when you have a high investment-grade company and a long-term leased asset, that is quite valuable. So I think this -- when you think about what's happening in AI, the demand for compute, I think this is a very good sector to be in. I think it's also worth noting that the demand for data center space continues to grow. In fact, in our portfolio, in Q3, we saw a doubling in our leasing pipeline globally versus Q2, to give you a sense of the acceleration we're seeing. Obviously, some people may be concerned about that, but compute power and compute needs are going up. The key for us on behalf of our investors, primarily in real estate and infrastructure where this exposure sits; is to make sure we do this in a prudent way, long-term leases, credit tenants, we continue to do it that way. And by the way, similarly, we're doing this at scale on our credit business. There, we're also lending to entities where there's equity, plus they have these long-term leases as well. And so this is a huge need. It's one of the reasons why private equity and alternatives as a segment are growing so much this reindustrialization, the AI infrastructure requires large-scale capital, and we as a firm who does this on the debt and equity side with real expertise has a big competitive advantage. So I think this will continue to grow, but we'll keep doing it in a very disciplined way. Operator: We'll take our next question from Alex Blostein with Goldman Sachs. Alexander Blostein: Jon, I wanted to go back to the wealth discussion for a second, and I apologize for the two-parter, I guess, on this. So on credit, totally hear your point around the relative premium to liquid markets. But how important is the sort of 10-ish percent gross return to the retail channel? So does the point you make, does that resonate or it's really viewed as an absolute product? And any sort of color you can give us on the ground today, what the response in either gross sales or redemptions has been to BCRED's dividend cut from a couple of weeks ago? And then zooming out, I was intrigued by the multi-asset comment you guys made around launches for next year. Could you maybe just expand on that, what that could look like, what parts of the market you're trying to attract with these vehicles? Jonathan Gray: Sure. So I think, Alex, the key, of course, is relative returns. When we launch BCRED now, I guess, 5-plus years ago, we were targeting, I think, 8-plus percent returns given where base rates were and the product has done very well. As we go from a 5.5% short rates to now low 4s, probably a year from now low 3s. I think what investors will be looking at is how does that size up relative to what I can get in other forms of fixed income, particularly liquid fixed income. It could have some impact. But I think generally, the key will be this relative premium. To date, we've continued to see healthy gross sales. This quarter to date on pace in BCRED in a good way. We have not as of yet seen any sort of elevated redemptions, we haven't seen material changes. And I think the key is we continue to deliver for customers, deliver that relative premium, have a healthy portfolio from a credit standpoint. I think if you do that for investors, that's what matters. And by the way, it's not just in the wealth channel. Think about our growth in insurance. There actually, as rates come down, there's some spread compression, the need for private assets, comparable risk, investment-grade comparable risk, but with higher returns becomes even more important in that context. So I think the key for us is to deliver premium returns over base rates, be they long rates or short rates. If we do that, I think our private credit business will grow a lot. Michael just about multi-asset credit. Let me just quickly hit that. Our multi-asset I would say what's happening in the wealth channel is we have a scale now where we can do some interesting things. We obviously have the collaboration with Wellington and Vanguard. And if we do something there, it would be not surprising that involve potentially multiple of our products. We have the ability, we have some of our partners who are seeking things with different mixes of products based on incoming growth. And so creating those offerings is something that's pretty unique to Blackstone because we're not just in private equity or infrastructure credit or real estate. We can offer I think, unique combinations, unique solutions to investors. And as this industry matures, those kind of comprehensive offerings, I think, will be more attractive. Sorry, next question. Operator: We'll take our next question from Brennan Hawken with Bank of Montreal. Brennan Hawken: I wanted to circle back on Alex's question. So totally get, Jon, that this is not a private credit issue that we've seen public markets have a tendency to overreact and certainly, we've seen that. But curious about, you guys just recently had a dividend cut in BCRED. What I'm really curious about is what is the feedback you're hearing from the wealth management channel, given the big reaction in the public markets around some of this? Are you seeing -- are you hearing similar things from the ground within your wealth management counterparts and partners? And what can you tell us about the flows since October began and how they're looking in the credit vehicles? Is there any sort of pullback with the dividend cuts and maybe some apprehension around credit, albeit misplaced? Jonathan Gray: Well, we expect strong flows in BCRED in November. So that's all we know as of today. I would say the reaction in the wealth channel is a realization that these products and credit are 97% floating rate. So by definition, when rates come down, that impacts yield, and they want us to be responsible managers in terms of where we set the dividend level. So I just think that's the reality of the world we live in today. And again, the key is a relative premium over what you can get in liquid credit, and that continues to be enduring. And so I think the conflation of declining short-term rates with credit issues supposedly from these three nonprivate credit-related situations is odd. And I think investors understand that with floating rate products as floating rates come down, that has an impact, but you're still getting that meaningful premium I keep talking about. Operator: We'll take our next question from Glenn Schorr with Evercore ISI. Glenn Schorr: So the big banks and brokers are all giving very supportive cover for you on the forward M&A and IPO calendar that's upon us, you were able to replace whatever you monetize with some more accrued carry. So $6.5 billion, as you mentioned, I think 80% of it is across private equity and secondaries. So I guess my question is, if the deal calendar comes to fruition over the next handful of quarters the way just about everybody is saying it's going to be, how does the maturation of your assets fit? Meaning, should we see an incremental pickup in line with overall volumes? Is it more IPO dependent? Because it's pretty spread across all your products. Jonathan Gray: I don't know if -- we certainly don't want to get in the business of forward projections here, but I would say, Glenn, just directionally that as M&A markets pick up and as IPO markets pick up, our ability to monetize a crude net carry goes up. And you certainly saw some of that this quarter, you would expect as you move into '26, you'll see more of that. So directionally healthier markets, more liquid markets, better credit markets, better IPO markets; that's healthier for realizations, and it does accelerate the time frame. That being said, it takes time to get IPO it's done, it takes time to get sales processes done. But the overall outlook, which you keep hearing from us is getting better. This deal dam is breaking, and it should lead to more realizations over time. Operator: We'll take our next question from Brian Bedell with Deutsche Bank. Brian Bedell: Great. Great. You answered a lot on the private credit, but maybe just -- Jon, but maybe just one more area. And that would be like just the competition that you're seeing with banks or seeing banks. Are you seeing banks become more competitive in the direct lending business, how is that impacting spreads? And then related to that, obviously, credit insurance has been a huge growth driver from a fundraising perspective, accounting for more than half of your fundraising over the past 2 years. Do you see that dynamic continuing? And then if I could just squeeze in one more to Michael, and that's just the outlook for base fee growth for 4Q on a year-over-year basis, just wanted to -- I think you may have talked about that earlier, but just wanted to reaffirm that. Jonathan Gray: You got a lot in there, Brian. So on banks, the banks I think, are feeling healthy. They are in the marketplace. There is this sort of constant set of choices, should you do a bank-led deal or direct lending deal. That's been going on for a long time. And even for us on the private equity side, each deal is a little bit different. So to me, that dynamic is a little more of a constant. I would point out one of the benefits of the market is getting better as deal volume goes up. So you need, I think, both the private credit and the bank market because I do expect that volumes, certainly next year in the deal business, will go up, which creates a healthier supply-demand balance for capital. On the insurance front, there, it's pretty limited in terms of the number of people with an open architecture model not competing in the insurance space and who can do this at real scale. And that, I think, has been very beneficial for us. I think that's why you continue to see our rapid growth. I would say the momentum we have in our insurance business is pretty exceptional today. Clients are recognizing that this is a favorable risk, return trade-off that they have long-duration balance sheets and getting an average of 170-plus basis points of incremental return on investment-grade credit makes a ton of sense in doing with us, with our scale and our brand and our open architecture model really works. So that is an area where I think you will continue to see a lot of growth. Michael Chae: And Brian, on the management fee outlook, I mean, I would just step back and reiterate that we've been talking for some time about how the launching and scaling of our platforms in these for key growth areas is leading to an expansion of firm's earnings power. And you certainly saw that in the results this quarter and third consecutive quarter of double-digit base management growth. As it relates to Q4, we'd expect continued top line momentum, That would note, we expect slower year-over-year base management fee growth in Q4 versus Q3, primarily given multiple private equity flagship step-ups in the prior-year period and some sequential slowing in real estate. But in terms of that and the outlook for 2026, we're very positive. Operator: We'll take our next question from Steven Chubak with Wolf Research. Steven Chubak: So I wanted to ask on the real estate outlook. The performance indicators admittedly have been a bit mixed. On the positive side, monetization revenues tripled sequentially. Performance has also improved, but the pace of fundraising has moderated and the absolute return still remains tepid despite the interest rate tailwinds. So I was hoping you could speak to the performance outlook, both for opportunistic and core+ in 4Q and looking ahead to next year And just thoughts on the timing of an inflection in real estate fundraising and what would inform that expectation. Jonathan Gray: Well, we've been pretty consistent. We said at the beginning of '24, we thought real estate was bottoming. We said it would be a slow non-V shaped recovery. That has certainly been the case. It's hard to say exactly when things turn, but a number of the tumblers are falling into place for real estate. First off, we've seen cost of capital come down pretty meaningfully. The 10-year back down here at 4%. Spreads have come down quite a bit. That is very helpful for the sector. The CMBS market, volumes they are picking up. I think they're up about 25% year-to-date. We're also seeing this very constructive decline in new supply, which you heard about in our prepared remarks, which starts to set a foundation for cash flow growth as you look out over time. I would tell you, qualitatively, we are seeing some good signs in the sense that in the last couple of weeks, we announced 2 large transactions, big office building here in New York City, and then that we were selling and then we sold some logistics in the U.K. to a public company. These sort of transactions were very hard to get done 12 months ago. And I would note that during one of a recent transaction we've been involved in, I got multiple calls from buyers asking if they could be positioned to win. And I joked internally that was the first time in 3.5 years, that has happened. So I think we're at a point here, the combination of a capital markets recovery and a sharp downturn in construction sets the groundwork for getting closer to that inflection point. And I think when you see that, obviously, it will be very helpful to our business given the exposure we have. And that's why you see us trying to deploy capital at scale to capture this before people start to feel more comfortable. I will also say the sentiment amongst global investors. I was in Europe, in Asia in the last couple of weeks; is definitely moving to a better spot. But in general, investors want to see a little more positive performance, and that will make a difference. Now in BREIT, we've had 9 months of positive performance. I think that will begin to have an impact there on flows. So it will take some time. But at some point, I think investors will recognize, "Wow, this is a sector that's been out of favor." It's not going away. People are still going to live in apartments. They're going to order logistics. These things are long-term asset classes, and I can invest in them at discounts to replacement costs at attractive prices. I think that will start to make a difference. And I definitely think we're getting closer to that point. Operator: We'll take our next question from Ken Worthington with JPMorgan. Kenneth Worthington: You talked about a greater focus on the RIA channel for wealth. Maybe to help level set us, what is -- or how much of your wealth AUM is RIA sold at this point versus the broker wirehouse channel. And is this focus about adding more in different sales personnel? Or does the product need to be adjusted as well in terms of fees and structure? Jonathan Gray: So Ken, I don't know -- I don't think we disclose or have certainly not the information here now, about where the different forms of distribution. But I would say the RIA channel is very large, but it's harder to access, as you know. I mean, at the bigger wirehouses, you can work at the top of the house, it can get distributed out. One of the advantages we have as a firm is having 300-plus people on the ground, and that enables us to go out there and talk to people. And I think for us, we recently put -- brought in a new senior person to run that area for us. And we're really trying to do a concentrated outreach. Obviously, the marketing, the advertising, those things matter when you're going to a more distributed market. But the underlying pricing of the product, that doesn't really change, but it requires a lot of effort. I will say we did create an interval product in multi-asset credit, which was our first rail interval product, which we launched in the RIA channel specifically. So I think for us, it's about going after it. It's a little bit like foreign markets, where you have to put a concentrated effort, if it's Japan or Australia or Canada, Asia, it's the same sort of thing here. And again, given the track record of our products, the performance we've delivered, the strength of our brand, if we put the right resources on the ground, I think we can build big relationships and large AUM in the RIA channel. So I think that's an area of major opportunity for us. Operator: We'll take our next question from Patrick Davitt with Autonomous Research. Patrick Davitt: A different angle on Brian's question. Maybe it's a bit too early to know, but had some wobbles in the bank loan market, to your points earlier, seen some deals pulled and/or reprice which I think you could argue was actually good for direct lending dynamics. So curious if you're seeing any signs of the banks are rethinking how aggressive they've been in that channel potentially getting less competitive because of what's happened and/or any sign new origination spreads could get a little bit wider on the back of those bank loan blow-ups. Jonathan Gray: The bank market obviously has to be sensitive because they're in the distribution business. So when you see what happened in the last couple of weeks, not a surprise, you could see a little bit of hesitancy. But I think market participants have concluded that this was pretty isolated and it is not a sign of something bigger. And as a result, I don't think we would say today, we're really seeing any sort of pullback from the banks. Operator: We'll take our next question from Crispin Love with Piper Sandler. We'll take our final question then from Arnaud Giblat with BNP. Arnaud Giblat: In credit and insurance, your dry powder has close to doubled in the last 12 months. I was wondering if that was the case as well in direct lending, private debt, given how tight the spreads have become and lose the covenants or with the competition with both in the syndicated loan market? And specifically, if I could just follow on that specific point into BCRED, how do you see capacity developing? I mean is it -- if conditions remain really hot and tight, do you start worrying perhaps a bit about capacity and the speed at which you're deploying capital, assuming that flows remain strong? Jonathan Gray: Well, I'll just comment -- Michael can comment on where the dry powder sits in credit. But I think there's a bit of mischaracterization here as to how hot the markets are overheated. Loan-to-value that we originated in our direct lending in Q3 was at 38% loan to value. That's probably half the level it was if you went back to '06, '07. So -- and spreads are sort of in line with historic levels. So yes, it's a business that has grown a lot, but it's taken a significant amount of share. And we just haven't seen sort of the erosion of credit standards. And we actually have had a very strong deployment year. I think we've had a record year this year, first 9 months in terms of deployment. So we feel good about the business. In terms of... Michael Chae: And Arnaud, I just want to point out, dry powder, as you probably know, is largely about drawdown funds. And our direct lending capital obviously sits in a lot of different vehicles, including perpetual ones. So direct lending, just sort of structurally, is a smaller fraction of our dry powder. Operator: Thank you. With no additional questions in queue. At this time, I'd like to turn the call back over to Weston Tucker for any additional or closing remarks. Weston Tucker: Great. Thank you, everyone, for joining us today and look forward to following up after the call.
Operator: Good morning, and welcome to World Acceptance Corporation's Second Quarter 2026 Earnings Conference Call. This call is being recorded. [Operator Instructions]. Before we begin, the corporation has requested that I make the following announcement. The comments made during this conference call may contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that represent the corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Statements other than those of historical fact as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will and should or any variation of the foregoing insular expressions are forward-looking statements. Additional information regarding forward-looking statements and any factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements are included in the paragraph discussing forward-looking statements in today's earnings press release and in the Risk Factors section of the corporation's most recent Form 10-K for the fiscal year ended March 31, 2025, and subsequent reports filed with or furnished to the SEC from time to time. The corporation does not undertake any obligation to update any forward-looking statements it makes. At this time, it is my pleasure to turn the floor over to your host, Chad Prashad, President and Chief Executive Officer. Chad Prashad: Good morning, and thank you for joining our fiscal '26 second quarter earnings call. There are a lot of great things to report in the portfolio. But before I get into those, I want to spend some time discussing a few unusual and one-off events that impacted this quarter, and then we'll open up to any questions you have. First, we had a $3.7 million onetime expense from the early redemption of our bonds. This is approximately a $0.57 earnings per share impact after tax within the quarter. Second, even though we discontinued and disposed of our Mexico operation years ago, we had a $1.3 million discrete tax-related expense this quarter. There are no additional items related to our prior Mexico operations that we expect to impact any future business or financials. But this $1.3 million expense represents approximately $0.26 per share after tax this quarter. We had the most new customer growth in the last 4 years this quarter, and this growth primarily in new customers, which are our riskiest customer segment, resulted in a new customer portfolio at the end of Q2 that is 35% larger year-over-year. This marginal increase in provision is solely due to the increased new customer base is approximately $5 million, solely due to new customers in the portfolio at the end of the second quarter. This represents approximately $0.78 per share after tax. These 3 unusual events in this quarter have a total impact of around $1.61 per share after tax on the quarter. Additionally, our long-term incentive comp changes make for year-over-year comparisons rather difficult. Last year, we reversed around $18.1 million in long-term comp from a prior plan, which benefited that quarter. Conversely, this quarter, we expensed around $5.8 million of long-term comp plan, which is about a $23.9 million net increase in our long-term incentive comp expenses when you're comparing year-over-year quarters. As you think about future quarters, the long-term incentive expense is front-loaded and will remain around $5.8 million for the third quarter before reducing by around $2 million in the fourth quarter and the following 2 quarters before reducing further. All right. That covers the major one-off and unique impacts within the second quarter. Now turning to the portfolio. Our new customer origination volume is up around 40% year-over-year at the end of the second quarter. Year-to-date, our new customer origination volume is up 35% and back to pre-COVID levels, actually in line with the first half of both fiscal year 2019 and 2020. This is a remarkable feat given the last few years of shrinking reduced growth. Additionally, the first pay default rate, slow file or delinquency rate of these new originations are in line with our fiscal 2019 and 2020, new bar originations. We're very grateful for all of the hard work by so many folks within our teams and very pleased with these results. They are able to return to healthy growth with good credit quality, maintain low first payment default rates while also increasing our portfolio yield by over 130 basis points year-over-year. When we include our returning former customers and look at all non-refinance originations, originations increased 15% year-over-year in the second quarter, making it the highest volume second quarter on record with the exception of fiscal year 2020 -- 2022. Year-to-date, the first half of the fiscal year had 14% higher loan volume than last year. Again, the highest volume on record for the first half of the fiscal year with the exception of fiscal year 2022. This is especially important for our portfolio of health as our repeat customers are lower credit risk, have a lower cost of acquisition and servicing and help with overall retention, yield and lower delinquency. All of this has helped us grow the portfolio nominally by 5.5% more this year relative to last year. We ended the second quarter with our portfolio up 1.5% year-over-year, compared to a starting position of being down 4% at beginning of the year on April 1 year-over-year. Other great improvements to our capital position include, as we previously mentioned, this quarter, we repurchased and canceled the remaining $170 million of our bonds and stood up a $175 million warehouse facility. Also in the quarter, we completed a new credit agreement, increasing commitments to $640 million and allowing for stock repurchases of up to 100% of net income which is an increase from 50% of net income in our prior agreement, and an additional $100 million of upfront repurchase allowance in addition to the 100% of net income, which begins January 1, 2025. For that repurchase potential, we've already repurchased 9.1% of our shares so far year-to-date, which is around $80 million, with additional capacity repurchased another $77 million this year, or approximately 8.6% of outstanding shares at yesterday's price for a total potential repurchase of around 17.7% of outstanding shares, again at yesterday's share price. We're excited about the current portfolio and this trajectory, which includes substantial customer base expansion, strong loan growth, improved loan approval rates while maintaining credit quality, stable and improving delinquency, lower cost of acquisition, improving yields, declining share count and ultimately returning enhanced value to our shareholders through strong EPS growth. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you may have. Operator: [Operator Instruction]. And your first question comes from John Rowan with Janney. John Rowan: My apologies, the phone broke up -- my phone broke up a little bit when you were talking about the 3 discrete items, I got into $0.26 from Mexico, but what were the other 2 to get to the $1.61? Chad Prashad: Yes. So we had $0.26 in Mexico. We had $0.57 due to the $3.7 million early redemption of our bonds and approximately 78% -- or $0.78 EPS impact from around right at $5 million increase in our provision solely due to more new customer growth this second quarter than last second quarter. John Rowan: Okay. So I just want to make sure I understand a little bit more about the -- some of your operating expenses going forward. So you had $25 million, an increase of $25.4 million in personnel expense because of the grants, right? But I'm assuming that that's up $25 million versus the $18.5 million reversal last year. So is it safe to assume that there's like $6.9 million, the net difference of that in personnel expense this year -- this quarter, going down to $5.8 million next quarter and then down to $3.8 million a quarter, for that $1.8 million a quarter after that. Does that sound correct? Chad Prashad: Yes. Sounds good. John Rowan: Okay. And then kind of 1 last housekeeping question. So obviously, you had a GAAP loss for the quarter. I'm assuming the diluted share count is just the basic share count. Can you tell me what the -- but the period end diluted share count was? Or the period end share count and then what the dilution is, we can maybe get an idea of what the diluted share count is with positive earnings? Chad Prashad: Yes. So the quarter ending share count is up $4.8 million. And the dilution usually runs in the 100,000, 200,000 shares, depending on obviously where the share prices and other factors. Operator: Your next question comes from Kyle Joseph with Stephens. Go ahead. Kyle Joseph: Just want to get your sense for the health of the underlying consumer and kind of any changes since the last time we talked. Obviously, there's been a lot of headlines, primarily in the auto space and concerns about the consumer. And I recognize you guys have some portfolio mix shift going on. But just stepping back and talking about the health of the underlying consumer and how that's impacting both demand and credit? Chad Prashad: Yes, it's a great question. So we do track how our consumer is performing on other loans. And yes, we have seen the same sort of weakness that you're reading about the papers, especially in the auto loans. However, for us, we haven't seen any major signs of weakness. We have proactively tightened our credit box for new customers multiple times so far this fiscal year, very marginal tightening typically on the very low end. Nothing really substantial in terms of overall approval volumes. But in terms of performance, we haven't seen anything major that would impact the portfolio today. Kyle Joseph: Got it. And then you guys talked about originations growth and new customers and just kind of want to get an update on marketing efforts that have been driving that and where you guys have been having success in kind of an update on the competitive environment as well. Chad Prashad: Yes. So on the marketing side, we've done a number of things that have, I think, been very successful. We are very much a test-and-learn sort of environment. We have brought some modeling in-house on the -- for solicitation models, propensity to respond and couple those with overall performance expectations. We have a couple of very successful tests this past quarter that have dramatically reduced our cost of acquisition for pre-approval campaigns, primarily new customers. This fiscal year, we have made some substantial changes to the way that we market to our former customers in order to increase our repeat business. We've seen substantial reductions in overall cost of acquisition here as well. Now with that being said, we haven't anticipated returning back to the $20 million-plus sort of marketing budget that we used to have in marketing. We're, for now, looking to aim for modest growth, somewhere in the mid to low single digits on the portfolio side, which is mid to high single digits on the customer base side. So all that is kind of tailwinds in terms of growth, but we're still maintaining sort of smaller budgets on the marketing front. We are seeing increased demand and sort of increased application volume from customers in general. So maybe that's also helping to fuel our lower cost of acquisition. Kyle Joseph: Got it. Very helpful. Thanks for taking my questions. Operator: There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Prashad for any closing remarks. Chad Prashad: In closing, I want to thank our absolutely amazing team across the country as well as those here in Greenville. I'm very grateful for their commitment to their customers and to our team members every day. They are helping our customers to establish and rebuild credit while meeting their immediate financial needs. Thank you for taking time to join us today. This concludes the second quarter earnings call for World Acceptance Corporation. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Linda Hakkila: Hello all, and welcome to follow Konecranes' Q3 2025 Results Webcast. My name is Linda Hakkila. I'm the VP, Investor Relations here at Konecranes. And with me today, as our main speakers, we have our President and CEO, Marko Tulokas; and our CFO, Teo Ottola. Before we proceed, I would like to remind you about the disclaimer as we might be making forward-looking statements. Here, you can see our agenda for today. We will first start with a presentation from our CEO, and he will give us a market update and guide us through the group performance. After that, our CFO, Teo Ottola, will guide us through the business area performance and talk about the balance sheet topics. Before we start with the Q&As, our CEO will still summarize the main points of the quarter. But now, without any further comments, I would like to hand over to our CEO. Marko Tulokas: Thank you very much, Linda. I'd like to start by saying that I'm extremely pleased with our performance in quarter 3 and throughout the year 2025. Konecranes' team delivered a very strong quarter in continuation to our solid half year performance. Under the prevailing market conditions, this is an excellent achievement. This is -- with this kind of market uncertainty, an order intake, a growth of 23% year-on-year is a very good starting -- start for the quarter 3 or is a very good quarter 3. Our demand environment has remained stable despite the market uncertainty and our sales teams have been able to close well despite the timing-related hesitation. Our orders are up now by 23% year-on-year in comparable currencies and our order increased more than 7% -- order book increased, sorry. The order intake increased in all business areas. Our sales amounted to nearly EUR 1 billion in the third quarter. This means a decrease of 5.5% year-on-year in comparable currencies. Despite the decrease in sales, we reached a record high EBITA margin of 16.7%. That is an increase from second quarter level of 14.3%. Our profitability in the third quarter was supported by good execution, as well as some one-off items. We will go through the performance by business area later in this presentation. The next, I will again go through some words to our general market environment. Let's start with our Industrial segment. In general, our demand environment remained good despite somewhat weaker macroeconomical data. The capacity utilization rates are the best macro indicators that describe these conditions for Industrial business area. And from the data, we can see some weakening year-on-year, but still our order intake in Industrial Service and Industrial Equipment grew in quarter 3. That was really driven by good activity in our standard equipment business, as well as some significant modernization and process crane projects. At the same time, within our industrial customers, we have seen somewhat cautious behavior, both in timing of new orders, as well as delay in project delivery acceptance. Our operating environment continues to be impacted by geopolitical tensions and volatility, especially related to tariffs. Now let's then talk about the market environment for Port Solutions. And in Port Solutions markets, we continue to see good activity. The Container Throughput Index, which is the main indicator here, continued at a strong level in the third quarter compared to the historical readings. It is now up by 3% year-on-year. And as we say in our demand outlook, the long-term prospects related to container handling or container traffic remain good overall. Now we will now next take a look at our sales and order intake development. In the third quarter, the group order intake grew by 23% year-on-year in comparable currencies, and that is an increase in all 3 BAs. Looking at geographical markets, we saw some improvement in our order intake in Americas and APAC region, as well as some weakening in EMEA. Our sales in the third quarter decreased both in reported terms and comparable currencies, which was mainly driven by the lower order book in Port Solutions. And in the third quarter, we saw a decrease in net sales for Industrial Service and Port Solutions, but very strong delivery performance in Industrial Equipment after a less strong quarter 2. On a group level, we saw a decrease in net sales in all regions. Moving on to the order book. And our order book reached its highest level since quarter 1 of 2024 and amounted to over EUR 3 billion at the end of the third quarter. We saw an increase in Industrial Equipment and Port Solutions, while there was a decrease in Industrial Service. Our book-to-bill has been positive throughout the year. And looking back to our long-term performance, our order book continues to be on historically good level. And then finally, looking at the EBITA margin development, which reached also a record high level. In the third quarter, we generated EUR 165 million of EBITA. This translates to very strong EBITA margin of 16.7%. And this performance came from really solid execution, as well as some one-off items. And EBITA margin increased year-on-year in all BAs. Industrial Equipment reached its all-time high margin of 14.1% in the third quarter. And Industrial Service and Port Solutions also had very good margins of 22.7% and 11.8%, respectively. Then let's move on to the performance towards our financial targets. Last year was very good for us, and our performance has continued strong also this year. This graph shows the rolling 12 months figures for our sales and EBITA margin and progress towards our long-term financial targets. Our group sales remained flat whilst our comparable EBITA margin increased when comparing the last 12 months to full year 2024. The group profitability in the rolling 12 months, we are at the lower end of our profitability target range of 13% to 16%. Of course, we consistently continue to work towards those targets. While increasing our EBITA margin, we also aim to continue to grow our sales faster than the market. In Industrial Service, our steady progress over the last 5 years continues and the sales in the rolling 12 months remained relatively stable, but our EBITDA margin increased to 21.5%. We are already today well in line with our target range, but naturally still closer to the lower end of the bracket. And in Industrial Equipment, sales in the rolling 12 months remained flat. And also our EBITA margin for the same period decreased compared to full year 2024. That is mainly due to the weaker H1 and particularly the weaker quarter 2. While the quarter 2 performance for Industrial Equipment left room for improvement, our performance in quarter 3 was, in turn, exceptionally strong. Also here, we will continue to work to strengthen the over-the-cycle performance of the Industrial Equipment business. Then moving on to the Port Solutions. We have continuously improved our financial performance during the last 3 years, as you can see from the graph, and we will also continue to so in -- we continue to do so in quarter 3. Our sales increased in the rolling 12 months compared to 2024, which is already a very good year. And our EBITA margin for quarter 3 remained at a high level, which resulted in an EBITA margin of 10.8% for the rolling 12 months. Needless to say that I'm very pleased with this progress. Now, I will hand it over to Teo Ottola, our CFO, for some time, and then I'll return back in a moment. Teo Ottola: Thank you, Marko. And let's move on in the presentation. Actually, before going into the business area numbers, so let's take a look at the comparable EBITA bridge between Q3 of this year and Q3 of last year. As we have seen, the margin improvement is large in a year-on-year comparison. And when we take a look at the euro, so this turns into EUR 22 million improvement. And if we unpack this next a little bit. So first, starting with pricing. So our prices were somewhere between 2% to 3% higher than a year ago, maybe closer to 3% than 2%. But nevertheless, this improvement or increase in prices is somewhat less than what we have been having in the beginning of '25. When we combine this price increase to the fact that our sales declined more than 5% in a year-on-year comparison. So actually, we are looking at quite a significant underlying volume decline in the third quarter in comparison to the situation a year ago. And this, of course, creates a negative operating leverage impacting the profits as well. But there are then several positive things supporting our profits. First of all, net of inflation pricing, so that was slightly positive in a year-on-year comparison, even though the positive impact comes primarily as a result of tariff-related price increases, so we have increased prices in line with the tariffs. But then as a result of the inventory turns being slow, so actually, the benefit comes first and then the cost will be flowing in a little bit later in terms of material consumption. In addition to that one, we had a clearly better mix now than a year ago. But the biggest explanation of all is very good execution that we had. So the performance of the business was excellent, particularly in the project execution, which is visible primarily in the ports, but also in the other business areas. When we combine into this one that our fixed costs actually were lower than what they were a year ago, we were able to create this improvement in the EBITA despite lower sales. When we take a look at the performance a little bit more in detail, so we can note that our performance this time was helped by some one-off type of levers, things. One of them was that we actually received an R&D grant in Finland in the amount of roughly EUR 4 million that was booked in the third quarter. This is, of course, visible in the fixed cost, and that is one of the reasons why fixed costs are now lower than what they were a year ago. I already mentioned the tariff-related price increases and the tailwind that we got there. So that was less than EUR 5 million, but several millions anyway. And then we had also some provision releases within the Industrial businesses. And altogether, these are, let's say, roughly EUR 10 million or so. Then the next one I'm going to discuss is not like a one-off topic. It's normal business practice. But as a result of the good project execution within Port Solutions, in particular, we were able to release provisions and that impacted positively our result in the third quarter. So normal business as such, but this quarter was better than average definitely from that point of view. So they are some of the topics explaining the profitability and the profits within the third quarter. Let's then move into the businesses and start with Service, as usual, maybe here worth noting that exactly as in the second quarter, so also here, the FX impact is quite big. So let's more focus on the numbers with the comparable currencies. In Service, order intake grew by almost 9%, 8.7%. This is clearly higher growth than we have had in the first half of '25. This growth was actually supported by some large modernization orders that were already mentioned by Marko as well. But even if we excluded those ones, or the delta as a result of the modernizations, we still would be having growth even if the majority of the growth is created by these modernization orders. When we take a look at the field service, so actually, our order intake declined in a year-on-year comparison. And in parts, it was an increase. Then taking a look at the regions, we had increase in the Americas and EMEA, but a decrease in APAC, and it's worth noting that the modernization deals took place primarily in the Americas. Agreement base continued to grow more than 5% with comparable currencies and order book was slightly lower than what we had a year ago. Net sales grew only by 1.2%. And this is, of course, less than the price increases have been. So the underlying volume actually was lower than what we had a year ago. There, the reason is basically the slowness of order intake in the field service, and we had a decline in sales in field service within the Service. Spare parts were basically stable in a year-on-year comparison. And then from the region point of view, stable in EMEA, whereas decrease in the Americas and Asia Pacific. Comparable EBITA margin improved by more than 1 percentage point to 22.7% despite the somewhat sluggish sales development. This was primarily driven by very good cost management within the Service business, but to some extent, also by pricing, which was partially in relation to these tariff-related price increases and the timing tailwind there. So then Industrial Equipment, very good order intake, close to EUR 350 million. That is as much as 26% growth in external orders when comparable currencies. When we take a look at this by the business units, so we had actually growth in process cranes and components, but we had a decline in standard cranes. And then of the regions, decrease in EMEA, whereas the other 2 regions saw growth. Then the sequential picture, which is important as well. So in comparison to the second quarter, actually, we saw sequentially a significant increase in process crane orders. Components were more or less flat in a sequential comparison and standard cranes declined slightly. Order book is higher, clearly higher than what we had at the same time 1 year ago. Sales grew very nicely, 6.3%, again, with external sales in comparable currencies after a little bit, let's say, lower first half. We had increase in standard crane and component sales, but a decrease in process cranes, which then also, at the same time, meant that the product mix was somewhat better than a year ago. Then when taking a look at the margin, so excellent EBITA margin, 14.1%, a very big improvement in a year-on-year comparison, of course, driven partially by volume. So the underlying volume improved here in Industrial Equipment quite a bit. There were also some of the one-off items that we already discussed. For example, the R&D grant is mostly visible in the Industrial Equipment. But then also good execution otherwise, as well as the optimization program that we have been running has been giving benefits also for this quarter. And the mix also was slightly better than a year ago. Port Solutions, good order intake or excellent order intake here as well, more than EUR 450 million, that is 36% growth in a year-on-year comparison. We had very good order intake in yard cranes. This would mean primarily RTGs and ASCs. If we take a look at the regions, Americas and APAC improvement, EMEA, a decline. And here also, again, taking a look at a little bit of the sequential topic, but also the so-called short-cycle product categories within Port Solutions. So lift trucks, there we had year-on-year growth in the order intake, but sequentially down. And then from the port service point of view, we had growth both year-on-year as well as sequentially. Sales was clearly down by almost 19%. This was, of course, known from the point of view that the order book was lower for the third quarter than a year ago. So order book overall is in good shape, 10% higher than a year ago, but the same thing continues now for the fourth quarter as we had for the third quarter as well. So we have less order book for the fourth quarter now than what we had 1 year ago for the fourth quarter. So the order book is more beyond this year or beyond the current year than what we had the situation 1 year ago. Comparable EBITA margin developed very well, 11.8%, 2.2% improvement. This is, obviously, not driven by volume because the volume declined very much, but primarily because of the very good execution, supported by some of the provision releases, like I said, and then also the product mix, particularly in Port Solutions was clearly better than a year ago. Then next, a couple of comments on the net working capital, cash flow. We actually had net working capital of only EUR 285 million at the end of the third quarter. That's only 6.7% of rolling 12-month sales. This is very well in line with our target of being below 10%. If we take a look at the, let's say, delta to the situation a year ago, it is primarily inventories where the decline has come. And then in sequential comparison, it's maybe more accounts receivable. This net working capital development, together, of course, with the good result meant a very good free cash flow on record levels, this one as well, more than EUR 200 million, which is then, of course, consequently leading to this slide where we now actually, during the third quarter, have moved from being in net debt situation to being in net cash position, not much, but negative gearing anyways at the end of the third quarter. On the right-hand side, we can then see the return on capital employed, which is 21.7%, and this is a comparable number, but also the reported number is more than 20%. We have added actually a slide on the U.S. tariffs as well because that, of course, continues to be a relevant discussion topic. On the right-hand side of the slide, we have the Konecranes exposure. So these are the numbers that we have already given earlier. So the internal volumes from Europe to the U.S. is EUR 180 million or less than EUR 180 million. And then on top of this internal volume, we obviously then also have deliveries of fully assembled port cranes and lift trucks. We are, of course, subject to the normal reciprocal tariffs of 15% in, for example, in the complete cranes. But then many of our components, particularly spare parts are also subject to so-called steel derivatives where we are then subject to a 50% tariff. And also the tariff codes added now to the steel categories in August was impacting us as well so that we have now more components and parts within the 50% category than what the situation was before. What we have done is that, we have increased prices, more or less, in line with the tariffs. We are, of course, monitoring the situation. We are monitoring what the competitors are doing, how the customer demand is developing. We are discussing with the suppliers to be able to define the steel content of the components because, of course, that can help us to, in a way, get the tariff, particularly the steel derivative tariffs on the right level if we can prove that what is the share of actual steel in the components. So all in all, we have been able to manage the pricing well. This most likely will become somewhat more challenging going forward so that maybe not all of the tariff increases are possible to put into the customer prices. We do not expect this to be having any major impact on the margins, but the situation may be in the future, a little bit more tighter than what it has been so far. This actually was the last slide that I had, and now I invite Marko back to the stage. Marko Tulokas: Right. Yes, let's see how this works. So we had some issues with the first slides earlier. So now this should be now working again. So now let's look at our demand environment, demand outlook. So our demand in the industrial customer segment has remained good and continues on a healthy level. However, the demand-related uncertainty and volatility, due to these geopolitical tensions and trade policy tensions remain, particularly in North America. This translates into higher uncertainty, both in the timing of the order, as well as some postponement of maintenance activities within industrial customers or Industrial Service customers that, of course, may impact also the delivery performance or delivery acceptance of customers. Our sales funnel remained on a strong level and funnel development during the quarter was stable. Comparing against the previous quarter, the numbers of new sales cases is slightly down. Then to our port customers, the global container throughput continues on a high level and long-term prospects related to global container handling remain good overall. And our pipeline of orders is good and contains projects of different sizes. And I'll reiterate our financial guidance for this year. Our net sales is expected to remain approximately on the same level in 2025 compared to 2024. And we continue to expect that our comparable EBITA margin is -- to remain approximately on the same level or to improve in 2025 compared to last year. Now, before we start the Q&A, I'd like to go over 3 themes that we are leveraging to build on our strong foundation and to -- continue to drive the long-term profitable growth. Historically, looking at in the long-term -- long run, these have been and are the fundamentals behind our success, and they are the ones that are still very relevant today and will continue to provide us further runway also into the future. First of all, our Konecranes customer base is diverse and global. Our dual channel market approach gives us the most comprehensive access to customers globally and to different segments. Our broad product and service life cycle offering continues to give us an advantage when catering to the customers' wide needs and create stability against customer segments demand volatility and helps us to address specific customer segments within those markets. This approach to the market, our offering and our customer excellence culture is critical, but personally this -- but it's also personally something that I'm passionate about and I want to continue to foster. And then secondly, I would like to emphasize the life cycle approach of Konecranes. Developing a service and life cycle approach over decades has been and is very much in the Konecranes' DNA. We are not only providing equipment to our customers, but also taking care of them during the lifetime. That long-term customer relationship and focus on servicing all makes and moves -- feeds our service -- sales funnel continuously with equipment and service products. That -- this cornerstone in our operating model has served us well, but it continues to provide us further runway for growth and efficiency. The life cycle approach is naturally our way of doing business, but it's also the only sustainable way to operate in today's world. And thirdly, it is the technology leadership. So Konecranes has been the innovator in this market and reinforcing our technological leadership continues to be crucial. So focusing on technology innovation and development allows us to differentiate our offering versus our competitors. It creates more value to our customers and helps us to leverage the life cycle approach even more in the future. So in conclusion, we have a strong foundation and great teams in place to build on our success and drive for expansion and growth. And I thank you very much for your attention. Now we move on to the Q&A. So Linda? Linda Hakkila: Thank you, Marko, for the presentation, and thank you, Teo also. So now we are ready to start the Q&A session, and we will first start taking questions through the conference call lines. So, operator, we are ready to start taking questions. Operator: [Operator Instructions] The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I want to ask on 2 things. First, I guess, starting with the growth in Industrial Equipment, given you mentioned sort of like the capacity utilization figures in the beginning, which haven't sort of yet started any big recovery. Can you talk about sort of what drove -- was there any particularly -- particular verticals? Was there some prebuying on the components? Or what has -- or market share gains or something, what has kind of caused really the strength there and how sustainable you see that going forward? That's first. And I'll ask the other one after. Marko Tulokas: Yes. I mean, maybe the key reason there or the main point is to say -- you refer to the segments or the verticals. And, of course, that is -- although the general capacity utilization may not be yet more on the contraction, not reinvestment level, but there are several verticals that are quite strong at the moment and drive demand. I'd just name a few. The obvious one, I guess, on everybody's lips is the defense segment. So that has been, of course, a topic for quite a while already. And in the third quarter, we not only saw more opportunities in the funnel, but we started to also see quite a few actual orders in that segment. That is a clear example. There are other areas where the long-term investment trend for other reasons than just productivity or capacity utilization are strong and maybe aviation is another example of where there's quite a lot of investment activity. And there are a few others. And that, of course, is one of the key reasons why we continue to have a solid order intake there. And then, of course, finally, I would also say similarly in the Port segment, when we talk about larger investments or bigger projects, particularly in the process crane side, they tend to take quite a while to decide and for the customers to make the investment decision and then place the order. And therefore, it is not always exactly easy to forecast or predict. And secondly, not always exactly in line with the macroeconomical indicators. Daniela Costa: And the second one just on Port Solutions. I think in many calls before, you've talked about sort of the opportunity or on the whole STS situation in the U.S. with replacement of Chinese cranes and tariffs there. But the U.S. is just proposing an even bigger scope of what they could be putting in terms of tariffs on China. I know about a year ago, you said that you were building the supply chain domestically there for the STS. Can you talk a little bit about, let's assume, this 100% on STS and the 150% in the remaining port equipment would go through? Where do you stand now in terms of building the capabilities to supply and to get a share of this opportunity domestically? And are there any side effects elsewhere in the world where you're seeing any increase in competition from the Chinese? Just give us a picture of how this has changed given the scope seems to be changing of what will be included there? Marko Tulokas: Maybe I'll start and then you complement in case I forgot some part of the question. First of all, the recent development in those tariffs that was early -- announced in early October, they're, of course, not yet, in our understanding, completely clear on what is the scope of application. And secondly, what is actually how much tariffs are being applied. So there is a certain uncertainty and, of course, what will be the final solution. And that, of course, is for us and also the market, something that needs to be and must be clarified in the end. But that doesn't take away the essence of your question, which was that have we been preparing? And the answer is that, yes, we continue to prepare for the possibility to manufacture in the States. And we have been looking, mainly based on subcontractors and utilization of our own existing facilities and the industrial team that we have in the States, which is more than 2,000 people today in several manufacturing sites. So we have an opportunity to explore that, too. But that is the local U.S.-made scope. There is that, let's say, gradual up parcel or move to that direct -- to that eventual outcome, which means that there are products that would be manufactured in Europe or other parts of Asia. And there, we have even more activities going on and readiness for supplier as it is already today. I recall that your last part of your question is that, do we see increasing activity elsewhere? Then to some extent, might be the right answer, and that is maybe more towards the other parts of Asia as well as in the Southern Hemisphere. Teo Ottola: Yes. Maybe to add on this competition elsewhere topic that, of course, if we talk about the STS', so we will need to remember that the market share for the Chinese competitor is also globally very high. So that this, of course, in a way, it may increase the competition elsewhere, but the market share already is there for the competition also outside of the U.S. And then if one takes a look at the RTGs, so there the situation is that the, let's say, our relative market share in the U.S. is significantly bigger than what it is for STS'. So there, on the other hand... Marko Tulokas: And it would be the same elsewhere also. Teo Ottola: Yes, and would be the same elsewhere. So that these 2 products are from this geographical split point of view, a little bit different. Marko Tulokas: Yes. Operator: The next question comes from Panu Laitinmäki from Danske Bank. Panu Laitinmaki: I have 2. Firstly, on the margin outlook. So, obviously, Q3 was strong and had some one-off positives that you mentioned, and it was above your long-term target. But how should we think about kind of Q4 and going forward, given that you kept the guidance where the low end of having margins at the same level as last year would imply quite, let's say, lower margin for Q4, if I would read it kind of directly? So, yes, could you explain how should we expect margins to develop going forward? Marko Tulokas: Maybe you start with this, Ottola. Teo Ottola: Okay. I can. So, yes, the short answer to the question that do we expect the fourth quarter margin to be equal to the third quarter margin? So no. So we are expecting fourth quarter to be lower than the third quarter. Third quarter was high. And, of course, there are these topics that we were discussing, there is about EUR 10 million or so, let's say, clear one-offs, one can say the product mix was very good. So this is maybe not a one-off, but doesn't necessarily repeat itself as such. And then the productivity or efficiency or execution, whichever word we want to use, was particularly good in the third quarter. So maybe from that point of view, Q3 was a little bit of exceptional. Other than that, of course, unfortunately, other than what we have in the guidance and what now concluded between, let's say, our expectation on Q3 versus Q4, we are not -- or we have -- we do not communicate more on that, unfortunately. Panu Laitinmaki: Okay. Maybe another one is on the order intake outlook. So, I mean, it's a bit mixed if I listen to you, you say that there are less new cases coming to the pipeline and you flagged increased uncertainty in the market. But on the other hand, we saw pretty good orders in Industrial Equipment and you mentioned these strong verticals. So, I mean, what should we expect going forward? So is it kind of driven by these strong verticals better than the macro implies? Or are you seeing some pressure from macro going forward? Marko Tulokas: Yes. Of course, when we look at these new sales case trends and so forth, that tends to fluctuate a bit month after month, so that's maybe something not to put too much attention. But generally speaking, the -- and it's good to remember that we operate in so many customer segments that quite well kind of evens out these fluctuations in the different segments. And now we are held with certain strong segments that are making up for that, let's say, general somewhat more fluid picture. But what can just be simply said that our sales funnels in the industrial side, and I understand you were more referring to that are stable and they are on a good level on average. Teo Ottola: And maybe to build on that one, I mean, like you pointed out, so the sales funnels are basically stable and the number of new cases is slightly down. I mean, if there's nothing major there. But actually, the average size of the case is slightly up. And that's why the funnel as a whole looks fairly stable despite all macro discussion and topics that there are. Operator: The next question comes from Antti Kansanen from SEB. Antti Kansanen: It's Antti from SEB. A couple of questions from me as well, and I'll start with something that Teo, you said on the EBITA bridge that you flagged that you had maybe a temporary benefit from tariff-related price hikes. So I didn't fully understand what you mean by why would you benefit first? And what were you referring then on the cost impact that might come later? So a bit more clarity on that one, please? Teo Ottola: Yes. The reason is that, when we are increasing the prices at the time when we start to import the goods to, for example, in this case, to the U.S. So first of all, we have old inventory in the U.S., which is with the old prices. That's one thing. And then the other thing is that, when you are using average price in the inventory, so it tends to be so that the material consumption comes through at a different time when the sales number actually comes. And this may create a mismatch, which we are here also seeing. So that's good when it works like this. But then the reality is that, as we have not tried to gain anything on the tariffs as such. So, of course, the disadvantage will be coming a little bit later. It can take a while, depending on the component that we are talking about. In Service, it will come quicker. In Equipment, it will come a little bit later, but it will balance itself over time. Antti Kansanen: Okay. But it doesn't sound like this would be a kind of a major driver for any margin fluctuation that we're seeing, for example, on the Industrial Equipment side, which was obviously a big step-up from the second quarter and maybe there will be a bit of a step down, but this is not a massive driver on the margin? Teo Ottola: The overall number, like I said, is less than EUR 5 million, and it is split basically between Industrial Equipment and Service. So from that point of view also, it's not a massive driver. Plus it will not probably vanish in 1 quarter. Marko Tulokas: Right. Teo Ottola: So it will take a little bit -- it's like a rolling in a way, impact because of the average price that we, in practice, have from the inventory management point of view. Antti Kansanen: Okay. And maybe a second kind of clarification, the EUR 10 million or so that you're kind of flagging as say, EBITA one-offs this quarter. That's mainly on Industrial Equipment, impacting mainly the Industrial Equipment division. Am I correct? Teo Ottola: That is correct. So actually, the tariff-related price tailwind that we just discussed is more in Industrial Equipment than in Service, exactly because of this thing that the impact comes through quicker in Service and slower in Industrial Equipment. And the R&D grant, which is the other big topic is primarily within Industrial Equipment. Antti Kansanen: Okay. And then the second question, maybe this is a similar topic, but project execution on the port side. If I remember correctly, I mean, the previous quarter margins on the ports were very good as well compared to the history. I didn't remember that you flagged mix back then, but that was also kind of a good execution and now continues on the port side. Is there something that we should maybe see as kind of a structural improvement, something that we can extrapolate going forward? Or are we still kind of wait and see whether this is sustained? Marko Tulokas: Well, I'll start again then. First of all, in the ports execution, I mean, always one thing that happens, these are big projects. And when you deliver a big project, of course, you make certain provisions for that project risks. And this execution in this particular quarter, some of those provisions were released. And hence, that's also relative to the sales. So the volume impact wasn't as big. It has some mix impact. But the underlying reason is the same that our project execution has been on rather conditions. There isn't or hasn't been recently any significant, let's say, difficult projects. That, of course, in the nature of the business cannot guarantee that that would not happen at all. But I think our project management capabilities already over the last few years have been improving kind of consistently. And in that way, we are kind of confident that we can do that quite well now. But it doesn't remove the fact that, I mean, in that sort of business that there is some risk involved also. Teo Ottola: Yes. The main point from our point of view is, of course, to be able to have this improvement trend so that, of course, every now and then a quarter is better and then maybe also worse. But when the trend is in the right direction from the project execution point of view, so then things are good from our point of view. From the mix point of view, there probably isn't anything structural that would need to be taken into consideration. We have, of course, consistently been saying that we want to grow more in port services than in other areas there. But as long as we have good order intake from the Equipment point of view, so this will not be visible in 1 quarter or maybe even in 1 year so that this is a much longer sort of project to change that structure. Antti Kansanen: Okay. Then last one for me is on the order side. I mean, I guess there was a couple of bigger ones that you flagged both on Industrial Services, on the process crane side, obviously, on the ports as well. Was this a bit of an active quarter in terms of big projects? And is there something explaining the timing? Or am I just reading too much into it? You also mentioned that the average case size is growing. So was this a particularly active big project quarter for some particular reason or just a coincidence? Marko Tulokas: I mean, coincidence is maybe not the word that I would use, of course, it's part of a consistent and continuous work and working on the funnel and the timing of the orders because the customer-related reasons sometimes, of course, happens. It's not entirely under our control for sure. Maybe I'll answer that mainly related to the process crane business, and you see that the process crane business orders particularly was good. And in that case, I'd say that we had, in the same quarter, several quite successful larger projects, whether it is in power or aviation, or to some extent, also elsewhere. So that is maybe a slightly larger than usual quarter, but that doesn't take away that both in the ports and in the industrial process crane side, there are still further opportunities in the funnel also. This is just timing-wise, particularly in process crane good quarter. Teo Ottola: I would say that it would be a little bit difficult to find the connection between the decision-making timing and something that has happened in the world from the macro point of view or even from the macro point of view to us so that coincidence is not the right word, but there is probably not a big scheme behind that would explain this timing. Marko Tulokas: If you find, please least let us know. Antti Kansanen: I'll do that. Operator: [Operator Instructions] The next question comes from Tom Skogman from DNB Carnegie. Tomas Skogman: This is Tom from DNB Carnegie. Sorry for asking about the margin guidance, but I mean, the January to September margin is already 1 percentage point higher than it was 1 year ago. So is there any reason you did not change the guidance in group that we should be aware of as a risk element for Q4? Marko Tulokas: Maybe, Tom, since they asked the previous related question also, you can start on this, too. Teo Ottola: There is -- we are not expecting anything dramatic in the fourth quarter that would be somehow deviating from the normal course of business significantly. I guess that it is rather that we would be saying that the third quarter was a little bit on the higher side because of the topics that we have been discussing. So fourth quarter -- this year's fourth quarter, like many other years' fourth quarters as well. So it is a combination of primarily of mix and then, of course, the underlying volume. And this balance is then, of course, very important from the margin development point of view as well. Tomas Skogman: Okay. If then looking at kind of building blocks for 2026, I would just like to get a bit of clarification when I do my own EBIT bridge. So to my understanding, there is no cost-cutting kind of program ongoing for next year. So what do you -- what would you like to guide when it comes to fixed costs? And this modularization of products, is that kind of rather a negative or a positive next year as you have indicated you have both the new and the old generation of products in manufacturing next year? Marko Tulokas: I didn't quite get the last part, so I'll let Teo answer that. But the first part when it comes to the fixed things, we first -- we don't guide the fixed cost per se, but there is some tail end of this industrial restructuring program also remaining. And, of course, when it comes to fixed cost, we are closely observing the demand environment. And we have also, during this year, made adjustments to the organization as needed based on the demand environment. Teo Ottola: I guess the other question, if I understood Tom correct, was that is the product renewal/launch in Industrial Equipment going to be a positive or a negative for '26 in comparison to '25? Marko Tulokas: Sorry, Tom, I didn't quite get that. So yes, first of all, those launches are now progressing basically to the second launch year. And during this year, the launch has been towards the second half proceeding all the time better. So I mean the amount of products that we are converting is catching up is probably a good way to say it. So that is proceeding quite satisfactorily, I would say. And now we have in all 3 regions, the new viral posts available also. So in that sense, the readiness is there. It is -- as I think I explained also last time when you have a new product, you run in manufacturing for some time, you will run 2 products in parallel. And that, of course, has the tendency to increase manufacturing cost. And secondly, you have some product cost, variable cost-related timing to catch up with the old legacy product that has been in the market for quite a while. In both accounts, we have still next year, some costs on the new product that are higher than the existing product. But we are moving ahead quite well on that, and we are -- we have been kind of preparing for that for the most part. So I wouldn't take that as a very significant consideration. Tomas Skogman: Okay. And then the big tariffs on RTG cranes, I don't understand why we discussed so much the STS cranes. I mean, isn't the RTG crane the big opportunity for you in the U.S. I mean, that is much more high-margin products than STS cranes and the Chinese companies have been very strong there as well. And in that product, you have already set up to deliver quickly basically. Marko Tulokas: Yes, that is true. At the same time, it is -- although we don't exactly comment on the competitors' market share in the region, but the Chinese competition in this case is not as big on the RTGs as it is on the STS. That's maybe the main reason to your -- or the main answer to your questions. Tomas Skogman: But do you expect kind of a clearly increased market share in RTG crane orders in '26 and '27 if the current tariffs are holding up basically? Marko Tulokas: No, I think, like I said, the Chinese competition where this is facing, of course, is not big on RTGs in the same way as they are on STSs. That's probably as much as we can say on that market topic. Tomas Skogman: You don't want to disclose at all what -- I understood that the Chinese have not 50% of the market, but 30%, 40% of the market in the U.S. Isn't that right? Marko Tulokas: Not in the RTGs. Not on the RTGs. Tomas Skogman: Okay. Then finally, on electrification, it's like a big theme. Do you have -- all companies that operate within electrification show pretty good growth at the moment. But what of these ones are big end customers to you that you see that they are expanding and ordering cranes from you? Marko Tulokas: Did you say -- I think the line is a little bit bad. Did you say what are the big customers... Tomas Skogman: Electrification -- just generally, electrification is a very strong sector when we look at the engineering. And you have a lot of sales -- I mean, it could be Hitachi, it could be ABB or Siemens or whatever, but what type of products do you see strong demand? Marko Tulokas: Okay. So you're asking our demand from that segment that benefits from the electrification. Sorry, I misunderstood. I understood our electrification of the products now I heard that, of course. Yes. I mean, of course, that is one demand driver that when the whole world is more moving towards electrification, automation and in that way, more sustainable, then that drives demand in different ways, more directly and indirectly. And this indirect demand that is coming from the investments to the more sustainable machines and so forth is driving also demand in these customer segments. They are, however, generally speaking, not as large or as big crane users as many others. But it is true that we -- you can see that positive demand in also in those segments and in some cases, also quite large pieces of equipment. So, I guess, the answer to your question is that, yes, that is certainly a one demand driver also. Tomas Skogman: And what about gas turbines? They are investing massively at the moment, for instance, the gas turbine manufacturers. Marko Tulokas: Gas turbines is one way, of course, I mean, besides wind and nuclear and hydro and a number of other things are one way of generating the electricity. We have seen it historically also that demand moving from one technology to others. And now it is more maybe on that gas and, of course, the wind and nuclear and so forth. So that is true. But on the other hand, it is then being -- there is a reduction on the other side at the same time in the other technologies. And those are typically the users for those sort of equipment for gas turbines, there are other large pieces of equipment or bigger projects because of the technology involved. Operator: The next question comes from Mikael Doepel from Nordea. Mikael Doepel: Just a follow-up on the order intake here. So, I guess, what you're saying is that you had a few big orders in the quarter across the key segments -- basically across all segments actually. But you're also saying that you have a fairly good pipeline of projects, both in Ports and Industrial. Just trying to get my head around looking at the numbers in Q3, EUR 1.1 billion, how would you describe that? Is that normal in your view? Or is it exceptionally strong? Or how should we think about the level of orders in the quarter and when we think ahead from here? Marko Tulokas: I mean, you're referring to quarter 3 now or the following quarter… Mikael Doepel: Yes. Exactly. Marko Tulokas: Yes. I mean that was the same topic that we discussed a moment ago. So I would maybe reiterate, first of all, the really strong funnel is maybe not what we said earlier. So we have a stable funnel and there are opportunities, large opportunities also in the funnel as there has been on the first half of this year. So that hasn't per se changed. And it's a timing question when those actually realize. That is not something extraordinary. They have always existed there and it's just more -- are kind of timing-related topic that when they actually mature and so forth and now particularly for the industrial side of things. So it is -- it was a good quarter also from a bigger project point of view and hence, the large order intake. But as it was stated by Teo also earlier, we had a rather stable order intake in the other -- very stable order intake in the other areas, broadly speaking, too, and growth in the agreement base and growth in basic service, too, which is in that way, many way, the very important thing also or most important thing. Mikael Doepel: Okay. And on that topic, actually, I missed what Teo said in the beginning on Industrial Equipment when you talked about the sequential order intake increase. If you just could repeat that, please, in Industrial Equipment? Teo Ottola: Yes. Sequentially, we actually had a very big increase in process cranes. So in the heavier side, we were more or less flat on the components. So -- and then the standard cranes were slightly down. So standard cranes were actually down both sequentially and year-on-year, whereas then process cranes this time have done well in the third quarter. So it was up both year-on-year as well as Q-on-Q. Marko Tulokas: With not a very good year last year. Teo Ottola: With -- maybe against easier comparables, that is correct. And components, which is maybe the most important one, taking a look at it from the demand point of view, has been, let's say, up year-on-year and flattish sequentially. So, I mean, very hard to conclude anything significant from that one either. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Linda Hakkila: Thank you very much for all your questions. We have covered a lot of different topics, but I would still have one question left here in the chat. So, can you please talk about the ship-to-shore cranes opportunity? Where can you produce outside of China? And do you need any additional CapEx to start new production? Or is it possible to use the existing plants? Marko Tulokas: Well, for the STS cranes, we have and we have had also the possibility to produce those products also in this time zone in several places. And there are 2 locations in APAC and Southeast Asia, where we have also working on a subcontracting-based model to produce STS cranes. So that is nothing new as such. So that is a typical thing for us that we have to make sure that we have several kind of channels in place all the time. Now because of this situation, we have been, of course, accelerating those activities or those projects to find the subcontractors. Linda Hakkila: Thank you, Marko. I think this concludes our session today. So I want to thank you all for following our webcast, and I want to thank Marko and Teo and wish you all a lovely evening. Thank you. Marko Tulokas: Thank you very much. Teo Ottola: Thank you very much.
Operator: Good morning, and welcome to the Q3 2025 Annaly Capital Management Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead. Sean Kensil: Good morning, and welcome to the Third Quarter 2025 Earnings Call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our third quarter 2025 investor presentation and third quarter 2025 financial supplement, both found under the Presentations section of our website. Please also note, this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David. David Finkelstein: Thank you, Sean. Good morning, everyone, and thank you all for joining us for our third quarter earnings call. Today, as usual, I'll briefly review the macro and market environment as well as our performance for the quarter, then I'll provide an update on each of our 3 businesses, ending with our outlook. Serena will then discuss our financials before opening up the call to Q&A. Now starting with the macro landscape. The U.S. economy remained resilient in the third quarter, with GDP likely to be on pace with that of Q2. Growth was supported by healthier consumer spending as well as AI-driven business investment despite lingering uncertainty around tariffs and the immigration. Inflation remained elevated near 3% during the quarter, though the anticipated uptick in goods inflation resulting from higher tariffs has been more muted than expected thus far. Labor market conditions did weaken with hiring slowing to a mere 30,000 jobs per month over the past 3 months, while sentiment around future hiring deteriorated. Although the unemployment rate has moved only slightly higher, the Fed's 25 basis point cut in September and forward guidance was supported by an outlook that suggests growing downside risks to its employment mandate. Yields fell modestly during the quarter, and the curve steepened given the market's expectation for modestly lower policy rates going forward. The treasury market also benefited from a shift in issuance towards the front end of the yield curve and strong tariff revenue, the combination of which helped ease concerns about long-term debt issuance. This led to lower term premium quarter-over-quarter and a 6 to 9 basis point widening in swap spreads relative to their forward implied levels, which benefited our returns. The precipitous decline in interest rate volatility during the quarter also provided meaningful support to our portfolio by lowering convexity costs and fueling much of the Agency spread tightening that occurred. We generated an economic return of 8.1% for the third quarter and 11.5% year-to-date, notably recording a positive economic return for 8 consecutive quarters, exhibiting the benefits of Annaly's diversified housing finance strategy. Our portfolio's earnings power remains strong with EAD of $0.73 per share, out-earning our dividend each quarter since we increased it at the outset of the year. Also to note, we raised $1.1 billion of accretive equity in Q3, including $800 million through our ATM program. We also reopened the mortgage REIT preferred market with Annaly's first preferred issuance since 2019 and the first residential mREIT issuance in multiple years. Now turning to our investment strategies and beginning with Agency. Our portfolio ended the quarter at just over $87 billion in market value, up 10% quarter-over-quarter, as the majority of the capital raise was deployed in Agency MBS considerate of attractive relative returns. Total growth of our Agency portfolio was $7.8 billion in market value with about 15% of that increase coming from Agency CMBS and a similar share coming from market value appreciation. While the primary driver of Agency performance was lower interest rate volatility, also noteworthy is that the supply and demand dynamics in the Agency MBS market continue to improve. Specifically, fixed income fund inflows were more than 50% higher than the average over the past few quarters and an additional indication of favorable technicals is that CMO demand has been heavy with production running at over $30 billion per month, which has helped distribute MBS supply to a wider audience of investors. Overall Agency spreads tightened by 8 to 12 basis points to treasury in the quarter with intermediate and lower coupons outperforming higher coupons. Early in the quarter, we added Agency in line with our capital raise across coupons. And ultimately, as higher coupons began to look more attractive given cheapening into lower mortgage rates. We shifted purchases to specified pools in 5.5% and 6%. Our holdings and higher coupons have been methodically constructed over the past few years to mitigate prepayment risk, which gives us flexibility to add in areas that provide the best expected return. And on the hedging side, we had less need to intervene this past quarter, as realized volatility was somewhat muted but we did maintain our disciplined approach to rate risk management, as we added hedges alongside new asset purchases with a bias towards swaps in the front end of the yield curve. And as we mentioned previously relative value and the superior carry of swap hedges has informed our overweight and swaps, which added meaningfully to our economic return this past quarter. Shifting to Residential Credit, our portfolio increased to $6.9 billion in economic market value, representing $2.5 billion of the firm's capital. Investment-grade Residential Credit assets tightened during the quarter with new origination, non-QM AAA spreads ending Q3, 15 basis points tighter, providing a supportive backdrop for securitization issuance. Non-Agency gross securitizations have totaled $160 billion year-to-date, which is already the second largest annual gross issuance since 2008, and will end up being second only to the 2021 vintage. Our Onslow Bay platform closed 8 transactions for $3.9 billion in the quarter, generating $473 million of high-yielding OBX retained securities for Annaly and our joint venture. Year-to-date, we've now priced 24 transactions, representing $12.4 billion of UPB, solidifying Annaly as not only the largest nonbank issuer in the residential credit market but a top 10 issuer worldwide of asset-backed and mortgage-backed securities. We also redeemed OBX 2022-NQM8 during the quarter, exercising the transaction's 3-year call feature and we expect there to be significant embedded value in our late '22 and '23 vintage NQM issues, given current mortgage rates and securitization economics. With respect to our correspondent channel, we achieved record-setting quarterly volumes across both locks and fundings while remaining disciplined in our approach to credit. The channel locked $6.2 billion in whole loans and funded $4 billion in the third quarter with our quarter-end lock pipeline representing a 765 weighted average FICO, 68% LTV and over 96% first lien. Now with respect to the underlying housing market, as we foreshadowed on previous calls, the market is now experiencing relatively flat year-over-year HPA nationally, as consistently elevated mortgage rates weigh on affordability. There is potential for further depreciation in the winter seasonals as available-for-sale inventory has increased, although we do expect cumulative depreciation to be modest given the longer-term positive fundamentals of the housing market. Nonetheless, in light of softer housing, we remain focused on maintaining a high credit quality portfolio with a continued emphasis on manufacturing our own proprietary assets through our market-leading correspondent channel. And approximately 75% of our Residential Credit exposure is now comprised of OBX securities and residential whole loans, providing full control over both the acquisition and management of the assets. Now moving to MSR. Our portfolio increased by $215 million in market value to $3.5 billion, comprising $2.9 billion of the firm's capital. We purchased $17 billion in UPB across 3 bulk packages in our flow network during the quarter as well as committing to purchase an additional package for $9 billion in UPB subsequent to quarter end. Our MSR valuation multiple decreased very modestly quarter-over-quarter, driven largely by lower mortgage rates. Our portfolio remains well insulated as the aggregate borrower is approximately 300 basis points out of the money and the portfolio continues to exhibit highly stable cash flows as it pays sub-5 CPR over the past 3 months. The fundamentals associated with conventional MSR remain positive as evidenced by our portfolio of serious delinquencies being unchanged at 50 basis points. The competition for deposits remaining strong, resulting in better-than-expected float income and subservicing costs decreasing given increased technology investments across our servicing partners. Also to note, we announced a new partnership with PennyMac Financial Services subsequent to quarter end, adding another industry-leading mortgage originator and servicer to our existing set of best-in-class subservicing and recapture partners. As part of this new relationship, we purchased $12 billion of low note rate MSR whereby PennyMac will handle all subservicing and recapture responsibilities for the portfolio sold. Now shifting to our outlook. Our investment strategies are well positioned for the balance of the year given declining macro volatility, additional Fed cuts expected and healthy fixed income demand. While Agency spreads are tighter, the sector remains compelling as spread compression has been achieved through lower volatility and a steeper yield curve, thus improving the fundamentals of the asset class. Furthermore, a more accommodated monetary policy should continue to support a strong technical backdrop for Agency MBS, not to mention the likelihood of regulatory reform and the potential for greater bank demand for the sector into 2026. Our Residential Credit business should further benefit from the growing private label market with our Onslow Bay correspondent channel and OBX securitization platform being clear market leaders. And our MSR portfolio stands out as the lowest note rate portfolio out of the top 20 largest conventional portfolios in the market, providing highly predictable, durable cash flows with limited negative convexity. Lower note rate MSR remains our preferred positioning, as investors are compensated more for selling convexity and Agency MBS. We also expect MSR supply to remain healthy as we maintain ample excess capacity to opportunistically grow our portfolio. Now this diversified housing finance model has delivered proven results, having generated a 13% annualized economic return over the past 3 years since scaling each business. And while we maintain our positive outlook, we've carefully built our portfolio to guard against uncertainty, and we remain flexible in the current investing climate with historically low leverage and significant liquidity. Now with that, I'll turn it over to Serena to discuss the financials. Serena Wolfe: Thank you, David. Today, I will provide a brief overview of the financial highlights for the quarter ended September 30, 2025. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. As of September 30, 2025, our book value per share increased 4.3% from $18.45 in the prior quarter to $19.25. After accounting for our dividend of $0.70, we achieved an economic return of 8.1% for Q3. This brings our year-to-date economic return to 11.5%. We generated positive economic returns for the quarter across all of our businesses. Our performance was driven by strong results in our Agency business, which benefited from spread tightening, leading to gains across the investment portfolio. These gains were partially offset by losses on our hedge positions in light of marginally lower interest rates on the quarter. Earnings available for distribution per share for the quarter were consistent with Q2 at $0.73 per share and again exceeded our dividend for the quarter. We maintained our EAD levels by generating average yields of 5.46% compared to 5.41% in the prior quarter, and our average repo rate improved by 3 basis points to 4.5%. Our Resi Credit business contributed to increased yields this quarter, driven by record securitization and loan purchases with average yields rising to 6.29%. Net interest spread ex-PAA increased again this quarter to 1.5% and net interest margin ex-PAA is comparable with the prior quarter at 1.7%. Turning to our financing. In conjunction with deploying the proceeds from our capital raised during the quarter, we added approximately $8.6 billion of repo principal at attractive spreads. As a result, our Q3 reported weighted average repo days maintained a healthy position of 49 days, comparable to the prior quarter and a modest economic leverage ratio of 5.7x, one tick lower than at the end of the second quarter. As of September 30, 2025, our total facility capacity for the Resi Credit business was $4.3 billion across 10 counterparties with a utilization rate of 40%. Our MSR total available committed warehouse capacity is $2.1 billion across 4 counterparties as of September 30, 2025, with a utilization rate of 50%. We continue to explore additional funding relationships as we invest in our credit businesses and add new facilities in anticipation of future business growth. Annaly's financial strength is further demonstrated by our $7.4 billion in unencumbered assets at the end of the quarter. This includes cash and unencumbered Agency MBS of $5.9 billion. In addition, we have roughly $1.5 billion in fair value of MSR pledged to committed warehouse facilities that can be quickly converted to cash subject to market advance rates. Combined, we have approximately $8.8 billion in assets available for financing, which is up $1.4 billion compared to the second quarter, in line with our asset growth and represents 59% of our total capital base. Finally, touching on OpEx. Our efficiency ratios improved significantly during Q3, decreasing by 10 basis points to 1.41% for the quarter and now standing at 1.46% for the year-to-date period. Using period end equity as of September 30, our OpEx-to-equity ratio was 1.34% for the quarter, highlighting the efficiency and scale of our diversified model. This ratio is one of the lowest in the mortgage REIT sector despite having 3 complementary businesses on the balance sheet. Now that concludes our prepared remarks, and we will now open the line for questions. Thank you, operator. Operator: [Operator Instructions] The first question comes from the line of Bose George with KBW. Bose George: First, just in terms of returns, the Agency returns took down a couple of points just with tighter spreads. Can you talk about how that compares now with -- like in terms of your preferred area for investment, is it more parity now with agencies and some of the other areas? David Finkelstein: Sure. From a capital allocation perspective, as we came into the third quarter, we obviously felt like Agency warranted an overweight, and that certainly came to fruition. As spreads have come in, Agency still looks very attractive, particularly because, as I mentioned in the prepared remarks, both fundamentally and technically, the sector has healed quite well from 2022 and 2023. Fundamentally, we have lower volatility. Fed cuts are going to continue, and we have slope to the curve. And also, equally as important from a technical perspective, the demand base has broadened quite a bit. Money managers are adding. Obviously, a lot of money is coming into fixed income, as I talked about. REITs are adding. And we haven't had banks in overseas as strong of a participation. But as the Fed does continue to cut and potentially bank deregulation occurs, we do expect more demand to come from that sector. So we feel good about the market. Spreads are tighter. We're still overweight Agency, even more overweight, which benefited us. We'd like to get our Resi and MSR weightings back up to a combined 40%. We're patient to do so. And we feel good about how the portfolio is positioned. But nonetheless, we would like to increase those 2 sectors from a near-term capital allocation perspective. Bose George: Okay. Great. And then actually, just following up on that. The MSR, you guys noted the bulk supply is up, I think, 50%. Where is that coming from? How is the pricing looking? And could we see the MSR increase as a result of that? Ken Adler: Yes. Thanks, Bose. This is Ken. Yes, the bulk supply has been coming from large participants. Several of them have not previously been sellers. So that is encouraging for future bulk supply. Pricing has been relatively stable throughout the year. So we're pretty much encouraged by that like the return profile. And we opportunistically added through the quarter, as you can see. David Finkelstein: And subsequent to quarter end, Bose. Operator: The next question comes from the line of Doug Harter with UBS. Douglas Harter: As you look at the Agency returns, can you help break down kind of how you see like OAS returns versus how much of it is coming from the swap spread and how that makes you think about the risk of the position? V.S. Srinivasan: Sure. I mean, the spread to swaps versus treasuries is running around 35 to 40 basis points. So if you're fully 100% hedged to swap, spreads are about 35 to 40 basis points wider than what they would be hedged to treasuries. And let's say, 35.5% we see to our hedge ratio, we're using about 35% swaps -- 65% swaps and 35% treasuries to our mix of hedges we see a blended yield of about 160 basis points, which is just shy of a 17% ROE. Now finally if I don't have a fair amount of option costs. I would put the option cost somewhere in the 60 to 65 basis point range. But depending on what kind of specified pool you buy and what -- how much you allow your duration to drift, you can substantially decrease the hedging cost. What has really helped over the last quarter is how low realized volatility has been. Realized volatility has been running below implied volatility. And that has really helped with hedging costs. And we think we are in an environment where volatility will remain subdued at least relative to what we saw in 2023 and 2024. Does that help? Douglas Harter: That's very helpful. And then if you could just provide an update on how book value is faring quarter-to-date? David Finkelstein: Doug, as of last night, book pre-dividend accrual was up in upwards of 1%. And if you add the dividend accrual, 1.5% to 2% economic return. Operator: The next question comes from the line of Harsh Hemnani with Green Street. Harsh Hemnani: So this quarter, it seems like you rotated up in coupon continued that rotation, but focused primarily on specified pools. Could you sort of talk through the puts and takes of how you're thinking about, given the rate backdrop we're in right now, weighing those higher coupon specified pools versus perhaps rotating into lower coupon to get some of that prepayment protection in that way? V.S. Srinivasan: Harsh, so we are constantly looking at what is the better way to get prepayment protection, either move down in coupon or kind of buy specified pools. What happened in the last quarter is as rates rallied to the lowest level in over a year, prepayment expectations on generic higher coupons went up materially, and this caused the duration to shrink and negatively impacted their carry profile. So not surprisingly, there was a big shift in demand to lower and intermediate coupons. And by our metrics, it looked like lower and intermediate coupons got rich relative to where higher coupons were trading. So this gave us -- so when you look at specified pools, the pay up to a cheap asset made the pay-ups are actually quite strong, but it's just that the TBA had underperformed materially. And so that made the specified pools look cheaper. The big advantage of specified pools are these are options that we own for a very long time. It's not like these options expire in 6 months or 9 months. Once you buy a loan balance paper, it doesn't matter how long it takes for rates to rally. Eventually, when they do, you still have the option in place. So the length of the option is what makes specified pools so much more attractive than going down in coupon or buying general collateral and trying to hedge the convexity. Harsh Hemnani: Got it. That's helpful. And then maybe one on the MSRs. So it seems like the purchase this quarter was fairly low coupon perhaps inline with your existing portfolio. But given the increase in supply we've seen perhaps over the last quarter, how is that sort of breaking down between the lower coupon MSRs and close to production coupons. Ken Adler: Yes. Thank you very much for the question. And just a follow-up to what Srini said, we have the opportunity to look at OAS valuations in both MBS and MSR. So when we price convexity and opportunities, we're taking convexity on the MSR side by purchasing the lower note rates. And when we do the valuations, we see more opportunity there and to participate in the higher note rates in the form of Agency MBS. So that's a big part of our strategy. And as a follow-up to the other point about the increase in bulk supply, what's going on is rates have come down and mortgage origination is at a much higher level. And as mentioned previously, the industry just can't afford to retain all the MSR that's created in a high-volume environment. David Finkelstein: And Harsh, just to jump in here, Ken brings up a very important point in terms of we'd rather take negative convexity risk in MBS and pass-throughs and the TBA market than in the MSR market because it's cheaper there. Now your question to both Srini and Ken, from a big picture perspective in terms of how we manage convexity in both, we have a fair amount of options, and we look at everything on a portfolio basis. So first of all, diversification outside of Agency MBS in the form of Resi Credit and MSR is the biggest, most powerful way to reduce our negative convexity. In fact, in the Resi market, every time we do a securitization, we're buying an option essentially with the call option for a down rate type scenario. So we're buying both from that standpoint. And again, we pick up a better convexity profile by buying low no rate MSR, which has very little negative convexity exposure to it. And then within the agency market, obviously, Srini talked about pools and how for years, we've built what we think is a very durable portfolio from a convexity profile, but also Agency CMBS, which we added over $1 billion this past quarter, which has virtually no negative convexity. So the point being is that there's a lot of options for us to mitigate our convexity risk. And I think we look at everything on a total portfolio basis and come up with the most efficient way to do it. Operator: The next question comes from the line of Jason Weaver with Jones Trading. Jason Weaver: With your outlook you put out, with mortgage spreads now back at the tight, would you expect for the pace of lock volume and securitization issuance sort of towards and into year-end remains elevated despite the usual seasonal pressure? Michael Fania: Jason, this is Mike. Thanks for the question. In terms of where we're at in mortgage spreads, we've actually been tighter. In the beginning of the year, AAA spreads were 115 to 120 over the curve. Right now, I think that just given the supply that we've seen over the last 2 to 3 weeks and to your point, broader supply within the market, we're probably closer to that 135 area for generic issuance. What I will say, though, is that non-QM continues to make progress in terms of market penetration. There's market share that's being created. If you look at Optimal Blue, in the month of July, they said 8% of all outstanding locks were non-QM and DSCR, which is the highest percentage that we've ever seen. If you went back 2 to 3 years, I think that number is probably closer to 2% to 3%. So I think in terms of mortgage spreads, the fact that they've been in a range, mortgage spreads, AAA spreads, they've been in the kind of the 130 to 145 range. So maybe they're slightly wider than the beginning of the year. But the fact that they've been stable has allowed us to be very active. It's allowed the market to continue to grow. And I think that when you look at the last half of the year, at this point, we've done $60 billion of non-QM issuance last year in 2024. The entire year was $47 billion, $48 billion. I think we'll end up, call it, $65 billion to $70 billion. And from our perspective, we actually had our most active month in September. We did $2.3 billion of locks within non-QM and DSCR, we did over $6 billion on the quarter. So I think that securitization may be a little bit slower than what we just did within Q2 and Q3. A lot of that is what you're mentioning. It's seasonal. It's the holidays. But I think that just the market penetration of non-QM continues to grow, and we do think it could be close to 10% of the market. So over long periods of time, we think it will continue to increase. Jason Weaver: Got it. That's helpful. And then maybe more on the agency side. There's some talk that Governor (sic) [ President ] Logan is proposing shifting the Fed's primary policy tool to target tri-party repo away from Fed funds. Any sense on the likelihood there and if or how that might ultimately influence MBS repo? David Finkelstein: Well, it's President Logan, not Governor Logan. But to answer the question, so in a speech, she did discuss that tri-party GC was a better indicator in terms of short-term rates relative to Fed funds. And the fact of the matter is the Fed has to evolve as the market evolves. And the Fed funds market is just not as good of a barometer of financing rates as repo is, and that's simply a reflection of that. I wouldn't read anything more into it than the Fed thinking about rates that are most impactful to markets and making sure that they have all the best information to evaluate financing markets and conduct policy. That's simply how I would read it. Operator: The next question comes from the line of Eric Hagen with BTIG. Eric Hagen: This is kind of a big picture question. There's a point at which mortgage REITs, including Annaly applied more duration to their portfolio. And then the taper tantrum in 2013, disrupted some of that since then, the mortgage rates have basically hedged out all the duration in their portfolio including yourselves. I mean, do you envision ever getting back to a point where a duration gap is part of the conversation again? Like how do you weigh the effect of like raising leverage versus letting your duration drift out a little bit more in order to create alpha? David Finkelstein: Sure. So obviously, we have 3 risks, primary risks that we take, spread basis risk in Agency, credit risk and duration risk and we evaluate those risks based on the most attractive and place our bets where we think it has the highest risk risk-adjusted return. Now as far as a duration gap, it's absolutely the case. We've been running at close to a 0 duration gap for the recent past. And I think it's justified by virtue of the amount of uncertainty currently in the rates market. Look, I can give you arguments for lower rates, and I can give you arguments for higher rates. In terms of the catalyst for lower rates, obviously, the Fed is cutting rates, and we'll likely continue to do so. The deficit prognosis is better, so less long-term issuance than we might have just thought QT is coming to an end. There's very strong demand for fixed income in the market, and that could accelerate with lower cash yields, deregulation for banks could add demand for fixed income and the labor market is weakening, certainly. And all of these would suggest lower rates. However, on the other side of the equation, rates do look full currently, 5-year real rates right around 120, 10 years around 170, nominal rates, inflation breakevens. They look a little snug in the low to mid-2s. And globally, rates in the U.S. are a little bit low relative to the rest of the G7 and inside of 90 basis points on that average. So the market doesn't look cheap. And inflation hasn't gone away. We'll get some more data this week, fortunately. The Fed will cut next week. But beyond that, it is uncertain. You had 8 committee members -- actually 9, I believe. 9 committee members that said 1 or 2 cuts to come this year, and there's some hawks on that committee. So the market's been priced pretty aggressively in terms of cuts. We're through neutral by the end of next year in the eyes of the market, and the Fed is 50 basis points above that. So to us, we get the fundamentals and what's going on that could lead to lower rates, but there's also the potential for higher rates. And the way we want to play it is something could break either way and the best approach for us right now is to not take a lot of risk in the rates market. And fortunately, volatility has been low and we've been able to manage our duration with minimal cost to the portfolio. And until we get a better sense of where things are going, we'll probably remain that way. Now relative to the longer-term business model REITs taking duration risk and levered maturity transformation. There is, at times, carry in taking rate risk. When the yield curve is quite steep, you are paid in carry -- near-term carry for taking rate risk at 52 basis points on 2s, 10s, it's positive, but it's not all that attractive. And so at some point, I'm sure we'll take a longer duration approach. But right now, we feel being very close to home is where we want to be. Eric Hagen: Yes. Got you. That's really helpful. I mean there's lots of speculation right now around the GSEs being buyers of Agency MBS again, certainly in a more meaningful way. I mean how much of that potential catalyst do you think is priced in to spreads right now? And more generally, I mean, do you think their presence in the market would have an impact on the MSR market or valuations in any sort of way? David Finkelstein: Well, a couple of points to note. There has been a lot of talk about the GSEs having entered into the market, but that's been very limited, and I wouldn't read too much into it. The market does have some expectations that they could be more active buyers as we're talking about this privatization potential and the fact that they do have capacity and the portfolios are relatively low. So there is a little bit priced into the market. But the demand for MBS has been broad and it's been strong. REITs have obviously been buyers of MBS. And again, the money flowing into fixed income funds and 1/3 of that money on average goes to mortgages. That's been the real driver. And speculation around the GSEs is not something that we want to bank on but it could materialize. And does it warrant consideration from a policy perspective? It certainly could. Back pre-financial crisis, the GSEs were very powerful stabilizers of spreads and that lowered spread volatility. And as a consequence of that, you ended up at a lower baseline spread. So from a policy perspective, if the government does have this desire to get spreads tighter, giving the GSEs some capacity and acting somewhat as guardrails so long as it's very well regulated and they don't get out over their skis or anything like that, it could have some benefit, but it's very difficult to navigate that path and it could be a slippery slope. So it has to be looked at very carefully. But nonetheless, as stabilizers, they could be beneficial. Operator: The next question comes from the line of Rick Shane with JPMorgan. Richard Shane: And there have been a lot of thoughtful questions and answers on this. So just one quick one. When we look at the NII adjusted for PAA. It's been really stable over the last 4 quarters. You guys have done a good job managing asset yields and funding costs. I'm curious at this point, how confident you are that it will remain stable over the next couple of quarters? And how do you sort of manage that given the uncertainty? David Finkelstein: So the question you're asking, I'll start from a big picture standpoint, and then Serena can get into the accounting. But look, at the end of the day, the portfolio has been very stable from the standpoint of low leverage, and we haven't had a lot of volatility associated with the hedged returns from an EAD perspective. It's been $0.72, $0.73. And that's how we feel about this quarter. We expect to earn EAD consistent with where we were this past quarter. Another point to note that I think helps the stability is the swap portfolio. So in terms of runoff, we have about $1.25 billion running off in the first quarter of next year. Then we don't have any runoff until Q4 of 2026. So the swap portfolio should stay relatively stable. And the Agency portfolio, the average price of the portfolio is very close to par. And so the runoff doesn't have too much -- add too much volatility to the overall accounting aspect of it. So we'll see. We can't forecast too far out. But this quarter, we feel good about out earning the dividend and overall, the portfolio is in a stable place. Anything to add, Serena? Serena Wolfe: No, I think David covered it. Look, obviously, we have been doing really well at increasing yields as we are deploying additional capital, and that is showing up in the NII. From an accounting perspective, obviously, we lock in those yields. And so we should expect to continue to benefit from those. And obviously, as David mentioned, we do expect future Fed cuts. So we will benefit on the cost of fund side of things. So I think that all things equal, I don't have a crystal ball, we should continue to see some good levels of NII going forward. Richard Shane: Got it. Yes. The point about increasing yields, but not increasing premium is really the big takeaway for me on that comment. David Finkelstein: You bet. Thanks Rick. Operator: The next question comes from the line of Kenneth Lee with RBC Capital Markets. Kenneth Lee: And this is just a follow-up from a previous one. Fair to say that the risk appetite has been tempered down a bit. Just looking at the spread and rate sensitivity, they both declined a bit quarter-over-quarter. So I just wanted to check to see if that's reflective of Annaly taking a little bit less risk there. David Finkelstein: Yes, it's a good question, Ken. So on the rate side, there's a little bit more negative convexity in the portfolio with current coupon spreads, I think, 28 basis points lower. And so that does lead to what looks like a more deleterious outlook on both sides of the equation and the duration is hovering close to flat. And to the earlier question, we're not looking to take a lot of rate risk right here. In terms of spread exposure, also that decline in mortgage rate does reduce the spread duration of the portfolio. And so that's kind of occurred organically. And we were a little bit lighter coming into the quarter on MBS. We do have a little bit of dry powder. I'd say our risk posture is not overly conservative. But we -- to the extent we see an opportunity, we could add to the Agency portfolio or an MSR or Resi package over the near term locally. So our risk view is not more negative at all by any stretch. We do just have a little bit more dry powder. Kenneth Lee: Great. And just one follow-up. I think you touched upon this, EAD looking around consistent to the third quarter's levels. Any updated thoughts around dividend coverage, especially just given the current macro rate outlook? David Finkelstein: Sure. So again, this quarter, we have line of sight into and we'll see what happens into 2026, but we feel very good about the dividend. It's at a healthy level. It's a little over 13% yield, close to 15% yield on book. And it feels perfectly ample, and we feel like good place. And we also feel like when we look at the forwards and also the Fed doesn't cut as much as the market, we still feel like the dividend is safe. Our hedge ratio is 92%. So there's a lot of protection around the income stream, and we're perfectly comfortable with where things are at, and we'll see what happens into 2026. Operator: The next question comes from the line of Trevor Cranston with Citizens JMP. Trevor Cranston: Question on the non-Agency portfolio and I guess, particularly the OBX securitizations. Can you comment on kind of what you guys are seeing there in terms of refi responsiveness as mortgage rates have come down recently? And more generally, if you could also just comment on kind of what the return sensitivity is on the subordinate positions if we do indeed see faster prepay speeds within that portfolio? Michael Fania: Sure. Thanks, Trevor. This is Mike. In terms of prepay protection and what we have been seeing within the OBX portfolio, 2023 vintage, the majority of those deals that are outstanding, they're between, call it, 8% and 8.5% gross WAC. Those deals are paying in the low 30s CPR, which I will say is a decent amount slower than we would have anticipated. Non-QM rates as we sit here today for the type of credit that we're underwriting, call it, 6 and 7, 8. So 100 to 150 basis points in the money, and it's only paying modestly above where we would where we would put at the money loans and where the market convention is, which is 25 CPR. So I think we've been pleasantly surprised by the convexity profile of the underlying. Part of that is driven by prepayment penalties that we see within our investor loans. Investor loans are about 50% of the loans that we buy and about 3/4 of investor loans have prepayment penalties. So the S-curves associated with those assets are significantly flatter than what you would see within the Agency conforming market. It's also significantly flatter than what you would see within the jumbo market as well. So I think the portfolio and the broader market has been in pretty good shape in terms of prepay speed.. Regarding the level of variability within our returns, as you see within the presentation, we've kind of been in this 13% to 16% ROE range. That is referencing OBX retained securities. That's forecasting what I'll say, a base speed of, call it, 20 to 25 CPR for at-the-money loans. So I will say that the actual return profile has been higher within our retained transactions because speeds have been slower than anticipated. But yes, there is a lot of embedded IO that we are taking once we securitize these assets, given that we are retaining the excess. But I will say at this point, it's actually been a large positive as we've outearned our forecasted assumptions. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks. Thank you. David Finkelstein: Thank you Costas, and thank you, everybody, for joining us today. Enjoy the fall, and we'll talk to you real soon. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.